Charts of the Week: Valuation Inflation

Mish

John Mauldin compiled a series of charts on valuation from a number of sources making a case this is one of the biggest bubbles in history.

Valuation Inflation is one of Mauldin's best "Thoughts From The Frontline" columns ever.

Mauldin posts charts from Jim Bianco, Peter Boockvar, Doug Kass, Tony Sagami, Jesse Felder, Ed Easterling,  Ned Davis, Doug Short, and Jill Mislinski.

Here are a few of my favorites.

Jim Bianco - 3 Year Forward PE

Mauldin picked that up from a series of Tweets by Jim Bianco.

Inventing a New Metric

The Price-Earnings ratio look so terrible the bulls invented a new metric, the 3-year forward PE that supposedly shows what earnings would be were it not for Covid. 

Tony Sagami

Much of the S&P 500 returns come from just 10 companies: Microsoft, Apple, Amazon, Google, Facebook, Visa, Mastercard, Nvidia, Netflix, and Adobe. As a group they are up 35% since the beginning of the year. As a group, the other 490 are down more than 10%.

The chart is Mauldin's post also comes from Twitter. 

Here is another one from Tony that was not in Mauldin's list.

Ed Easterling - Crestmont

10-Year PE Crestmont
10-Year PE Crestmont 2

The idea behind the 10-year smoothed PE is that earnings revert to the mean over time. They always look terrible at the bottom of the cycle and great (relatively) at the top.

This is a very expensive market. Advisor Perspectives comes to the same conclusion.

Maludin presented a chart from Advisor Perspectives, Jill Mislinski, Is the Stock Market Cheap?

PE 10 Rations by Percentile

Here is another chart and commentary from Advisor Perspectives.

PE 10 From Geometric Mean

PE 10 from Geometric Mean

Relative to the mean, the market remains quite expensive, with the ratio approximately 70% above its arithmetic mean and 84% above its geometric mean.

Wouldn't Valuations Be Much Lower If We Exclude the Financial Crisis Earnings Crash?

This is an often asked question, the assumption being that the unprecedented negative earnings of the Financial Crisis skewed the P/E10 substantially higher than would otherwise have been the case. While that may seem a reasonable assumption, a simple experiment shows that the earnings plunge did not dramatically impact the ratio. Let's assume that the December 2007 TTM earnings of 66.18 remained constant for the next 29 months, totally eliminate the collapse in earnings of the Great Recession. What impact does this have on the P/E 10? The mean (average) only drops from 16.6 to 16.5. The lower bound of the top quintile drops from 21.2 to 20.8.

The above excellent comments from Jill Mislinski.

Triggered Market

Mauldin comments "Overvalued markets don’t turn down on their own. Something usually triggers them. What could it be this time?"

While there is always a chance of an oil shock, Covid shock in this case, or some other shock triggering a decline, more often than not, sentiment suddenly changes and that is the trigger.

If you think back to 2006 people were standing in line for hours waiting to enter a lottery for the right to buy a condo. The next month, there were no lines at all. Builders offered massive discounts.

But the market advanced for more than another full year.

Mauldin commented "Back in 1999, I and many others thought there was no way the bull market could go on. Yet it did, with the Nasdaq actually doubling in 1999."

When Covid hit, many thought it would be like an oil shock only much bigger. Instead it triggered massive speculation in tech stocks.

As with the housing bubble that actually burst in 2006 (but stock kept running anyway) we did it again, only bigger.

This blowoff top pattern is not so unusual after all.

Sentiment is the Trigger

Think back to November of 2007 when the S&P 500 hit a then all-time high. Recession hit the next month.

What was the trigger? 

There was none that anyone can point to. Here's the "trigger" if you think carefully: The pool of greater fools ran out. 

People stopped buying houses a year earlier but commercial real estate and the stock market kept things humming for another year. 

Then sentiment changed. There was no other reason then or on 2000, or now.

What about jobs?

Over 30 Million People About to Lose $600 in Unemployment Benefits

Congress is debating on whether or how to extend Covid benefits. Note that Over 30 Million People About to Lose $600 in Unemployment Benefits. 

That's about $18 billion a week in benefits. 

Also note that Unemployment Claims Rise for the First Time in 4 Months

Unprecedented Recession Synchronization and What it Means

Please consider Unprecedented Recession Synchronization and What it Means.

In the article, I discuss comments by Lacy Hunt at Hoisington Management. 

He explains the deflationary consequences of the current global situation. 

I too expect a deflationary outcome based on demand destruction. Meanwhile, my other comments apply.

Unwanted Inflation Easy to Find

Actually, inflation is easy to find. Look no further than the stock and bond markets.

The Fed's balance sheet expansion coupled with trillions of dollars of fiscal stimulus (both unprecedented) has resulted in stock market speculation also at unprecedented levels exceeding the housing bubble boom in 2008.

Inflation is not where the Fed wants it.

The Fed can print money and Congress can hand it out, but neither can dictate where the money goes.

In 2020, money has found a home in rampant speculation in stocks and bonds. In 2008 money primarily went into a housing bubble.

But bubbles burst. Thus, speculation too is inherently deflationary. 

Why expect anything differently this time? 

People will blame jobs as the trigger, but if that was the trigger it would have happened already. 

The Fed blew its third major bubble in 20 years. Bubbles always burst with deflationary consequences. 

They burst when sentiment changes. The pool of greater fools always runs out. 

Mish

Comments (33)
No. 1-11
Scooot
Scooot

Just to be devils advocate the PE on the 30 year Treasury is over 80. 170 for the 10 year.

ColoradoAccountant
ColoradoAccountant

Mish: Please stop pointing out the obvious until I am done buying a multi-generation supply of gold and silver.

Herkie
Herkie

The $600 federal unemployment benefit has expired THANK GOD!

Tens of millions are hurting, tens of millions were hurting last month, and last year. Disabled vets have a homeless problem, of course, a 100% disabled vet is compensated at $716 per week. That is good enough according to congress for your vets, so it is good enough for people temporarily sidelined by Covid. When they say we will give disabled vets $600 per week more then I will feel bad for the unemployed.

flubber
flubber

I always wondered about the inflationary aspects of continually rising stocks & bonds prices.

I go to the store and buy a pound of ground beef. Price has gone from $4/lb to $6/lb. Definitely inflation.

The price of Tesla stock goes from $500 to $1500. Inflation??

At least I can make a couple of burgers with my pound of ground beef.

Anda
Anda

Would be interesting to see if there is similarity somewhere with patterns like those in countries that find high inflation. There as far as I know the stock market rockets chasing inflation, but there must be a window between spending, government yields, retail prices, economic shock where it all goes awry, maybe in a certain order.

Point is people are chasing yields because the rest of the economy does not provide them, I'm on the deflation side of that except also that the economy can be understood as yield and that yield is the value of money, if there is no economic yield money becomes worth less, not more - you have to spend more to secure and prices go up even as demand goes down. The whole show would have to become unhinged to get there, as has happened historically occasionally.

Over to Spain and it just piles up for the country:

Bank of Spain says EU fund will provide only 10% of that needed over the next five years.

UK decides without warning that anyone returning from Spain from tonight will have obligatory quarantine. There goes most of any tourism left from UK.

France says strongly not to travel to Cataluña.

Cases in Spain are turning up. Numbers are opaque, for example only one in ten hospitalisations in Cataluña is being announced according to elmundo, or there is no official daily figure of new cases only moving targets that give lower headline.

Suggest anyone interested follow

twitter.com/matthewbennett

ToInfinityandBeyond
ToInfinityandBeyond

You have to love this Republican government.....

Over 30,000,000 unemployed, unemployment benefits ending, and the Senate majority leader says it could weeks to pass the next stimulus package. What the hell!!!

We have been living with this virus since February, we know testing is the key to getting it under control (despite what our clueless president believes) and we are still living with testing shortages. What the hell!!!!

This has to be the most incompetent elected US government ever. Much like Nero fiddling while Rome burned. How anyone can defend the Republicans response to this Covid outbreak is beyond me. Must be some mighty powerful Kool Aid!!!!!

ToInfinityandBeyond
ToInfinityandBeyond

Mish - would the Fed have a better chance of achieving “wanted” inflation if they were to deliver a massive amount of helicopter money straight to Main Street. If I remember correctly the $3.5T stimulus package would have translated into something like $15,000 per person in the US.

bradw2k
bradw2k

Mish states this thesis better than anyone, and I think it will be proven true again: bubbles end when sentiment flips, and sentiment of the masses can flip for surprisingly little "reason." Another way of looking at it: the house of cards of "reasons" for high bids on assets falls down very suddenly, exactly because the reasons were baloney all along. I expect it will continue to be obvious that the Fed has a floor under stocks and bonds right up until it's obvious that there's no floor at all. The Fed cannot buy the whole market.

Six000mileyear
Six000mileyear

1.) M2 velocity is falling. Bernanke's helicopter can't help Greenspan "push on a string". Deflation is well under way.
2.) Delaying eviction is more of a benefit to renters in urban areas than an extra $600/ week because back rent will never be repaid.
3.) Some sort of handout will have to be approved right before elections to buy votes.

CCR
CCR

Mish, what makes you think the stock an bond market inflation is unwanted by the Fed? It seems to be the inflation the Fed craves the most. Kinda find all the comments bullish, not that I disagree with the article, I don’t. Many looking for massive pullbacks, technicals are a bit wobbly, but not broke...yet. I own a lot of gold and silver physical and stocks, and the greater fools game has begun with metals I think. More to run for sure, but current demand seems unsustainable, beware of backwardation in gold / silver.

AshH
AshH

Excellent post, MISH. Thanks. Been wondering what could possibly be the trigger for the next leg down, but didn't consider that that there doesn't actually need to be a trigger.


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