nothing in this that will surprise anyone here, but this is a good email I received from an acquaintance:
i believe that we are experiencing what some call an "echo bubble". the original bubble never fully corrected, imho, and the bullish mania that drove it is bruised but still alive and kicking.
the long term average P/E of the stock market is around 14 and the P/Book around 1.0. taking a peek at valuations at real stock market bottoms show P/Es below 10 and in some cases below 7 for the entire market, and the entire market trading below aggregate book value. i read, for example, that in Japan today, 60% companies sell for less than book. (for what its worth, i will mention here that i'm not crazy about book value for calibrating stock valuations, for a whole bunch of reasons but the main one being the extent to which BV can be, and often is, "massaged".) In the 1970s the US markets were trading at a P/E of around 7.0 and in 1949 arond 5.0.
by my estimation the market is about 50-60% above reasonable value, and could fall further than 1/3 to get to become cheap - and by cheap i mean prices being low relative to companies' real deliverable growth rates, not fantasy growth rates. This could take place by a gradual bleeding to death, or perhaps a sideways market for 10+ years until intrinsic value catches up with price. yet one hears and reads on a daily basis how cheap the market is and what a great buy it is. and, oh my goodness, how we should BORROW to invest in the stock market (dont get me started on that one). i'm completely failing to understand what planet the bullish analysts are living on. that said, i have been trading pragmatically on the long side since late march.
in addition, we still have a whole bunch of factors that are inflating the reported earnings - the accounting for stock options, and the liabilities due to underfunded pension plans being two of the largest ones.
now, take alook at the USD. the dollar is like Wiley E. Coyote in those Road Runner cartoons afeter he has run off the edge of the canyon, hovering in the air for a few moments until he realizes that there is nothing under him. i have been long the AUD (ie' short the USD) for nearly 20 months now and plan to continue holding the position.
in the category of "be careful what you ask for, you might get it", nnow's effort to get China to revalue their currency could be catastrophic if achieved. it is quite possibly the seemingly insatiable demand for dollars on the part of the asian mercantilist policy makers who are desparately trying to keep their currencies from rising that is keeping the US bond and agency debt market from imploding.
the ability to offload unlimited amounts of MBS to Asian central banks by FNM and FRE is fueling the housing bubble and allowing the homeowner to continue to use their house as a sort of ATM as they refinance pay off credit card debt. but the money that they are pulling out of their homes is ficitous value, reflecting only the ability of the GSEs to channel inflation through the home mortgage market, aided by the aforementioned Asian central banks.
the current world financial system, in which i have recently expressed that i have little confidence, allows the US to consume without producing, spend without saving, and pay for it all with dollars that we print at "no cost". as Fed Gov. Bernanke has become fond of pointing out in his speeches, in which he has promised that the Fed will do everything in its power to debase our currency. the global problem now is that all countries are trying to debase their currencies at the same time. as jim grant points out, the private sector is better at most things than governments, but when it comes to destroying their currencies, governments excel at that. |
