Submitted by Mish Shedlock
US large cap stocks are the most overvalued in history. Let’s investigate six ways.
Crescat Capital claims US large cap stocks are the most overvalued in history, higher than prior speculative mania market peaks in 1929 and 2000.
Their 25-page presentation makes a compelling case, with numerous charts. It’s worth your time to download and investigate the report.
Six Ways Socks Most Overvalued in History
- Price to Sales
- Price to Book
- Enterprise Value to Sales
- Enterprise Value to EBITDA
- Price to Earnings
- Enterprise Value to Free Cash Flow
Here are a few snips from the report.
It is my sincere desire to provide readers of this site with the best unbiased information available, and a forum where it can be discussed openly, as our Founders intended. But it is not easy nor inexpensive to do so, especially when those who wish to prevent us from making the truth known, attack us without mercy on all fronts on a daily basis. So each time you visit the site, I would ask that you consider the value that you receive and have received from The Burning Platform and the community of which you are a vital part. I can't do it all alone, and I need your help and support to keep it alive. Please consider contributing an amount commensurate to the value that you receive from this site and community, or even by becoming a sustaining supporter through periodic contributions. [Burning Platform LLC - PO Box 1520 Kulpsville, PA 19443] or Paypal
-----------------------------------------------------
To donate via Stripe, click here.
-----------------------------------------------------
Use promo code ILMF2, and save up to 66% on all MyPillow purchases. (The Burning Platform benefits when you use this promo code.)
Bear Market Catalysts
There are many catalysts that are likely to send stocks into bear market in the near term. A likely bursting of the China credit bubble is first and foremost among them. Our data and analysis show that China today is the biggest credit bubble of any country in history. We believe its bursting will be globally contagious for equities, real estate, and credit markets. The US and China bubbles are part of a larger, global debt-to-GDP bubble, which is also historic in scale, and the product of excessive, lingering central bank easy monetary policies in the wake of the now long-passed 2008 Global Financial Crisis.
These policies failed to resolve the debt-to-GDP imbalances that preceded the last crisis. Now, easy money policies have created even bigger debt-to-GDP imbalances and asset bubbles that will precipitate the next one.We are in the very late stages of a global economic and business expansion cycle with investor sentiment reflecting record optimism typical at market peaks, a sign of capitulation at the end of a bull market. Crescat is positioned to profit from the coming broad, global cyclical market and economic downturn that we foresee. We strongly believe that our global equity net short positioning in our hedge funds will be validated soon.
Cyclical PE Smoothing
It is critical to use cyclical smoothing to accurately gauge market valuations in their current and historical context when using P/E.Yale economics professor, Robert Shiller, received a Nobel Prize in 2013 for proving this fact so we hope you will believe it.
The problem with just looking at trailing 12-month P/E ratios to determine valuation is that it produces sometimes-false readings due to large cyclical swings in earnings at peaks and valleys of the business cycle. For example, in the middle of the recession in 2001, P/Es looked artificially high due to a broad earnings plunge. P/Es can also look artificially low at the peak of a short-term business cycle, which can produce what is known as a “value trap”, such as in 2007 during the US housing bubble and such as we believe is the case today in China, Australia, and Canada.
Shiller showed a method for cyclically-adjusting P/Es using a 10-year moving average of real earnings in the denominator of the P/E. Shiller’s Cyclically-Adjusted P/E, called CAPE multiples have been better predictors of future full-business-cycle stock market returns than raw 12-month trailing P/Es. Shiller showed that markets with historically high CAPEs lead to low long-term returns for long-only index investors. Shiller CAPEs are fantastic, but they can be improved by including an adjustment for corporate profit margins which makes them even better predictors of future stock price performance and therefore even better measures of cyclically-adjusted P/E for valuation purposes.
.Shiller’s CAPEs simply need an adjustment for profit margins because margins are a key element of earnings cyclicality. We can understand this by looking at median S&P 500 profit margins in the chart below. For example, even though profit margins were cyclically and historically high during the tech bubble, they are even higher today. In the same spirit of Shiller’s attempt to cyclically adjust earnings to determine a useful P/E, CAPEs need to be adjusted for cyclical swings in profit margins.
When we multiply Shiller CAPEs by a cyclical adjustment factor for profit margins (10-year trailing profit margins divided by long term profit margin), we get a margin-adjusted CAPE that is not only theoretically valid but empirically valid as it proves to be an even better predictor of future returns than Shiller’s CAPE!
Credit goes to John P. Hussman, Ph.D. for the idea and method to adjust Shiller CAPEs for swings in profit margins.As we can see in the Hussman chart below, margin-adjusted CAPE, shows that today’s P/E ratio for comparative historical purposes is 43, the highest ever! The 1999 peak P/E was 41 and the 1929 P/E was 40. Once again, we can see that today we have the highest valuation multiples ever for US stocks, higher than 1929 and higher than 1999 and 2000!
Margin-Adjusted CAPE
It’s easy to discard such talk, just as it was in 2000 and 2006. People readily dispute CAPE, concocting all sorts or reasons why it’s different this time. The most common reason is interest rates are low. We also hear “stocks are cheap to bonds” which is like saying moon rocks are cheap compared to oranges. I do not know when this all matters. And no one else knows either. What I am sure if is that it will matter.
How?
I don’t know when, nor am I sure “how” it happens. It could play out as a crash or stocks can decline over a period of 6-10 years with nothing worse than a 15% decline in any given year, accompanied with several sucker rallies leading people to believe the bottom is in.
History Lesson
Some might ask: If you don’t know when or how, of what use is such analysis.The answer is that history shows this is a very poor time to invest in stocks. That does not mean, they cannot go higher(and they have).
History also suggests that people who invest in bubbles, start believing in them. People believe in bubbles because they have to, in order to rationalize their investments. Others know full well it’s a bubble but they think they can get out in time. Historically, few do because they are conditioned to “buy-the-dip” philosophy, and keep doing so even after it no longer works.
Yesterday, I noted Oppenheimer Predicts PE Expansion, Most Bullish S&P Forecast Yet.So if you are looking for a reason to stay heavily invested in this market, you have one. But don’t fool yourself, this is the most expensive market in history.
Investing in anything is more about patience and risk to reward than about winning the trade. Unfortunately, because stocks are so easy to buy and sell now, most people invest more for emotional reasons than to actually make money.
As was said by Jesse Livermore “Most of my money was made in sitting and waiting”. Unfortunately, most people reading this, that have had gains up until now, will probably leave most of their profits fully invested rather than be cautious (to not be left behind, whatever that means anyway), and use good proven money management techniques, and scale out of most positions to the point that they are small enough to not cause major harm to a portfolio if things come to a screeching halt and reverse.
The difference between “smart money” and “dumb money” is not the size of the wealth, that is simply a by product of good management (not counting TBTF banks of course). The difference is that the “smart money” knows when things are too good to be true, and is satisfied with their return, whereas the “dumb money” wants to continue to push the envelope, emotionally attempting to predict and justify to themselves why this should continue.
In 2008, the “dumb money” was the Wall Street banksters. They thought they were invincible. They got bailed out though. Remember, you and I won’t be bailed out, and the above may be more “doom and gloom” and the usual argument can be made that “bull markets climb a wall of worry” however, remember that investing should not be emotionally driven but fact driven, and the above presentation, along with the biggest being that the world CB’s are unwinding should be some good reason to lighten up and be cautious. Who cares if the markets keep going up, you made yours, now convert it to cash, and sit back knowing that eventually all of the gamblers are going to be giving away their stock just to break even….
If it was the banks that lost all the money why was the middle class crippled as their assets went down by over 50%?
I don’t think “banksters were dumb money” adds up. That class of parasites is not separate, distinct, from gov. That class owns & wields gov. That class writes the “legislation” that their courtier pols “enact.” That class “creates” – *is* – gov.
That was true even before Jekyll Island. It has always been true. Take a look at the legislation & financing, the people involved, that underscored the building of the transcon rr, for example. Or take a look at what Hamilton & crew did regarding national debt generally, & the nationalizing of states’ debts specifically. Repeatrepeatrepeat ∞.
That class – lets use goldman sachs as posterchild representative, revolving back\forth between dc & wall street – screwed everybody, not least it’s own “fiduciary responsibility” clients, Serially-serially-serially. And when the screwed lesser screwers had been screwed unto corpses, it still worked – like fertilizer – for the GS set.
The GSE’s, the ratings agencies, the realtors & mortgage brokers, the fed – all colluded in fraud (just as gov-wielders always do). And the serfs were, just as always, collateral for all of it. And still are. Countries are bond(age)s – the serfs are the clipped coupons…who are propagandized they have wings – which have also been clipped.
No. That class knew it would bail itself out (the class leaders at least, knew it). Token sacrificial lambs – which is to say hind wolves – sacrificed? Sure. Always. It is a trope. The routine. The formula. The same old story. Low man on totem pole is closest to the termites…which also follow the leaders givens, continuously, Pavlovian salivate style. (Buy an American dream home – trust us, it’s an investment {no, it’s an expense}. Then, if one is good, several must be better. Buy houses with no doc & “ninja” loans, flip ‘em, repeat until bust. Fractal short time preference fools, top to bottom, 1st link to last…are default…before, during, & after default.)
“They thought they were invincible”? Look, will ya’, they were invincible – & knew it. They still are – & know it. And they will remain so, right up to Ozymandias time – which cannot be timed…no matter what Elliott Wave Turn 4 oracles are pitching.
This class does not trade, or gamble. Any more than Vegas does. The skin in the game is not theirs. This class is the heads we win, tails you lose made guys. Mafioso. Livermore’s bucket shops not only never went away, there has never been anything *but* bucket shops pushing endlessly rephrased variations of 3-card monte. There’s rubies in them thar rubes. If killing them to get at the rubies is what it takes, so what?
As for “valuation” models…meh. Valuing in valueless fiat currency is even more addled than my house for a tulip bulb. At university (talk about my house for a tulip bulb), finance degree, the meh was even then chewing my face. I got into some trouble, in fiat grades terms, with the head of the department, over that recognition. Fraud, fraud, everywhere, including university, “education.”
“Man’s gotta know his limitations” is good advice. Knowing the limitations built into cell block A(merica) is good to know, too. Colonialism, plantation system, slavery has never skipped a beat. If that just hasta’ be hyperbole – cuz it discomfits “identity” so – read Perkins economic hitman book\s. Try & find the line that demarcates the Caligula & Nero shit the neocolonialists have done, are doing, across the rest of the globe from founding fatherland. If you believe you can see that line, you’re submerged in denial. And that, as much as anything, makes you ripe for continued gangbang mindfucking…& that’s amore, American style. Read some Mises – reed basket building info – Moses, build yer Kon-Tiki & float on outta there. And maybe change yer name to Thor.
Another good read is Melville’s “The Confidence-Man: His Masquerade.” I needed a companion volume, can recommend “The Wake of the Gods: Melville’s Mythology” by Franklin.
by the Cowsill(ie)s
O’course, changing the name don’t change the man….
I think something else is involved and conventional metrics don’t apply. “TINA” has a lot to do with it. With millions of 401K and IRA accounts needing a place to park funds and with ‘alpha’ almost impossible to find stock indexes and ETF have captive buyers. Central Banks interest rate suppression has made bank CDs and bonds unattractive and alternative investments, say starting your own or investing in a new small business, increasingly difficult to do because of corporate penetration into even the smallest niches of the economy capital, of necessity, flows into the equity markets. THERE IS NO ALTERNATIVE.
This was a good read.
It does seem like we are at or near the top, and it is PROBABLY time to take some profit while sellers can still be found.
But, there is always this feeling of “being left behind”.
I’ve been talking to some college buddies about the market, and the majority of them are kinda depressed about their portfolios, because after 2008, they have stayed on the sidelines, they feel: left behind
on the other end of the spectrum are my boss and his circle of business owners who are fully invested, damn proud of all the gains they have made since 2012, and you could say: they believe in bubbles because they have to, in order to rationalize their investments.
I guess it’s time to ignore feelings, get ready to exit, and set up some shorts to cash in on the MAYHEM that will inevitable be at our doorsteps.
here is a good place to start with profiting off of a downturn:
https://www.tradermike.net/inverse-short-etfs-bearish-etf-funds/
There are many ways to make the case in any direction. Most articles seem to be on the doom side of the table. The other side is that the smart money confidence levels are still not excessive (source: SentimenTrader.com), the NDX and the SPY have broken convincingly above their bull market trends, the other indices are also breaking out and holding above multi-year bull market lines, there have been multiple Dow Theory bull signal confirmations, etc. I agree with all of the fundamental analysis out there about the level of this market, but it is price that pays in the end. Right now, the technical indicators say price is going up in the short to mid-term. The best time to have been long this market was back in 2010, but that doesn’t mean it’s time to get out yet.
Jesse Livermore’s quote above (Trader Jim) is adapted from the book “Reminiscences of a Stock Operator” and was referring to his ability to sit and take advantage of a trend rather it be up or down. Right now, that trend is up. Someday it will be down, but not this month.
Then again, that book was written in the 1920’s!
You might say we are in unchartered shark-infested waters. Printing to prosperity…it is as simple as that. All you need is a counterfeiting machine like the Fed or Bank of Canada. All that green paper will be used ultimately to light stove fires. Let the good times roll.