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Culmination of Fed Interventions Inflates Historic “Everything Bubble”

February 27, 2021

Culmination of Fed Interventions Inflates Historic “Everything Bubble”

Culmination of Fed Interventions Inflates Historic "Everything Bubble"

via HistoryDaily

We reported on last year’s partial deflation of the “everything bubble,” aided in part by the COVID-19 pandemic and erratic response to it.

But it could be a bit premature to consider that partial crash a singular event, followed by another period of economic recovery.

In fact things seem a lot worse economically, and this time in the worst way possible. At The Hill, Desmond Lachman describes how the U.S. may have reached the end of the economic road:

Herb Stein famously said that if something cannot go on forever it will stop. He might very well have been talking about today’s everything bubble in U.S. and world financial markets, which has largely been fueled by the Federal Reserve’s extraordinarily easy monetary policy.

The “everything bubble” Lachman refers to is easy to see in the current Shiller Price Earnings Ratio. It’s higher than the 1929 Depression, and on a trajectory towards “dot-com bust” levels from 2000. You can see for yourself on the latest Shiller PE chart below:

Everything Bubble: Shiller Price Earnings Ratio Chart

Schiller PE measures the price to average earnings from the past ten years. Today, on average, an investor pays $34.87 to secure $1 annual earnings.

Both of the past economic peaks, the Great Depression and the Dot-com crash, were “everything bubbles”. Today’s Shiller PE ratio has already surpassed Black Tuesday‘s…

You’ve seen charts before – why care about this one? A few reasons: its inventor, Robert J. Shiller, won the 2013 Nobel Prize for economics (and a bucket of other prizes). He’s been on the list of 100 most influential economists in the world since 2008. His book Irrational Exuberance came out in March 2000, warning that the stock market was in a bubble. (He was right.) Almost exactly one year before Lehman Brothers collapsed, Shiller authored a prescient warning – here’s the summary:

…click on the above link to read the rest of the article…

 

A Financial Professional’s Perspective

November 15, 2018

ShedConnect.com

A Financial Professional’s Perspective

What’s the current market volatility signalling?

Given the recent volatile gyrations of the markets, we thought it an opportune time ask a full-time financial advisory firm whom we respect for their take on the current environment.

As most PeakProsperity.com readers are aware, we highly advise investors to work in concert with a professional financial advisor whose strategy takes into account the “Three E” macro risks highlighted in our foundational series, The Crash Course.

If folks experience difficulty finding such a professional, we refer them to Peak Prosperity’s endorsed financial advisor: New Harbor Financial. The folks at New Harbor have been mindful of our analysis — as well as that of other experts we admire, such as John Hussman — for over a decade now.

We aked them for their latest evaluation of the current situation in the markets, how they’re positioned right now, and what guidance they’re offering to their clients.

Here’s what they have to say:

Environment

Risk in global stock markets is exceedingly high at the present time in our opinion. Much of the work that we do in evaluating risk levels in the stock market at any given time is derived from valuations, and other key market metrics like stock market breadth, sentiment, and technicals.  Valuations, measured the way that we think they should be, have never been higher. Both the cyclically adjusted price earnings (CAPE) ratio developed by Robert Shiller, and the margin-adjusted CAPE, as developed by John Hussman, are at or near historic extremes.  Valuations cannot be used to precisely time the short-term movements of stock indices, but over the long-term of 5 to 10 years or more, valuations have a very high correlation to actual realized returns over those timeframes.

…click on the above link to read the rest of the article…

Bubbles and Zombies

October 2, 2018

Bubbles and Zombies

They say nobody rings a bell at the top of the market. But whether this is the top or not, two prominent market observers and historians, Robert Shiller and Edward Chancellor, are expressing concern.

First, Shiller warns readers not to take big increases in earnings too seriously because earnings are volatile.

Everyone knows that stock prices have risen dramatically since 2009. A $100 investment in the S&P 500 in 2009 has grown to nearly $400 at the end of August 2018. But Shiller reminds us that earnings have grown dramatically too. In fact, “real quarterly S&P 500 reported earnings per share rose 3.8-fold over essentially the same period, from the first quarter of 2009 to the second quarter of 2018,” according to Shiller. Prices, in fact grew a bit more slowly than earnings since the end of the crisis.

So should we think stocks are reasonably priced since earnings have grown at the same pace as prices? Not so fast, Shiller says. Earnings, the difference between two other data sets — revenues and expenses, are volatile, and cyclical. Rapid rises in earning are often followed by a return to long term trends or subpar levels. Such episodes have occurred more than a dozen times in U.S. stock market history.

Earnings can grow dramatically from things like “panicky demand” for U.S. goods from Europeans at the beginning of World War I. This led to political calls for “wealth conscription” or a heavy taxation on war-related profits. At that time stock prices didn’t follow profit advances as investors seemed to realize those gains would be short-lived.

In the “Roaring ‘20s,” however, emergence from a “war to end all wars” and a spirit of freedom and individual fulfillment spurred stock prices by Shiller’s lights. And this, of course, led to a crash at the end of the decade.

…click on the above link to read the rest of the article…

Robert Shiller: Look For One Final Surge In Stocks Before The Crash

September 14, 2018

Robert Shiller: Look For One Final Surge In Stocks Before The Crash

It seems like only yesterday that Robert Shiller, a Nobel-Prize winning economist (and esteemed member of the Yale School of Management’s faculty), was telling anybody who would listen that the US equity market was headed for a vertigo-inducing correction.

But with stocks once again hovering near record highs, it seems that Shiller – the co-creator of the Shiller P/E ratio – has become the latest CNBC stalwart to throw in the towel. While sell-side banks (most recently SocGen) are increasingly focusing on the fallout from the Trump trade war, Shiller has pivoted to an analysis of other Trump economic policies like the Trump tax cuts and his rollbacks of regulation, which, taken together, have provided an unprecedented level of support to corporate America, per Bloomberg.

Shiller

While he once lambasted President Trump as “totally unbecoming and unfit”, Shiller demonstrated a newfound reverence for Trump and his policies during his latest interview (we can only imagine why).

Shiller’s focus instead is on President Donald Trump’s support for corporate America, which he says is driving sentiment and market strength. The S&P 500 Index has climbed almost 9 percent this year, with the total return to investors running at an annual rate of more than 14 percent. It closed Thursday less than 0.5 percent from its August record high.

“It has something to do with our president, who is an exceptionally business-oriented president and who wants to deregulate and favors lower taxes,” he said. “That has an effect on the market but it goes beyond the rational, logical effect – it has something to do with our animal spirits. The U.S. is just doing great right now in terms of the strength of the economy and the stock market. That seems to be built around the Trump story at this point in history.”

…click on the above link to read the rest of the article…

A Stock Market Panic Like 1987 Could Happen Again

October 19, 2017

A Stock Market Panic Like 1987 Could Happen Again

Oct. 19, 1987, was one of the worst days in stock market history. Thirty years later, it would be comforting to believe it couldn’t happen again.

Yet that’s true only in the narrowest sense: Regulatory and technological change has made an exact repeat of that terrible day impossible. We are still at risk, however, because fundamentally, that market crash was a mass stampede set off through viral contagion.

That kind of panic can certainly happen again.

I base this sobering conclusion on my own research. (I won a Nobel Memorial Prize in Economic Sciences in 2013, partly for my work on the market impact of social psychology.) I sent out thousands of questionnaires to investors within four days of the 1987 crash, motivated by the belief that we will never understand such events unless we ask people for the reasons for their actions, and for the thoughts and emotions associated with them.

From this perspective, I believe a rough analogy for that 1987 market collapse can be found in another event — the panic of Aug. 28, 2016, at Los Angeles International Airport, when people believed erroneously that they were in grave danger. False reports of gunfire at the airport — in an era in which shootings in large crowds had already occurred — set some people running for the exits. Once the panic began, others ran, too.

That is essentially what I found to have happened 30 years ago in the stock market. By late in the afternoon of Oct. 19, the momentous nature of that day was already clear: The stock market had fallen more than 20 percent. It was the biggest one-day drop, in percentage terms, in the annals of the modern American market.

…click on the above link to read the rest of the article…

Fighting the Next Global Financial Crisis

May 18, 2016

Fighting the Next Global Financial Crisis

NEW HAVEN – What do people mean when they criticize generals for “fighting the last war”? It’s not that generals ever think they will face the same weapon systems and the same battlefields. They certainly know better. The error, to the extent that the generals make it, must operate at a more subtle level. Generals are sometimes slow to get around to developing plans and ordnance for those new weapon systems and battlefields. And just as important, they sometimes assume that the public psychology, and the narratives that influence the morale that is so important in achieving victory, is the same as in the last war.

That is also true for regulators whose job is to prevent financial crises. For the same reasons, they may be slow to change in response to new situations. They tend to be slow to adapt to changing public psychology. The need for regulation depends on public perceptions of the last crisis, and, as George Akerlof and I argued in Animal Spirits, these perceptions depend heavily on changing popular narratives.

minting money

Central Banking’s Final Frontier?

Anatole Kaletsky weighs the views of Raghuram Rajan, Adair Turner, Stephen Roach, and others on how far today’s increasingly exotic monetary policies can and should go.

The latest progress reports from the Financial Stability Board (FSB) in Basel outline definite improvements in stability-enhancing financial regulations in 24 of the world’s largest economies. Their “Dashboard” tabulates progress in 14 different regulatory areas. For example, the FSB gives high marks for all 24 countries in implementing the Basel III risk-based capital requirements.

But the situation is not altogether reassuring. These risk-based capital requirements may not be high enough, as Anat Admati and Martin Hellwig argued in their influential book The Bankers New Clothes. And there has been much less progress in a dozen other regulatory areas that the FSB tabulates.

…click on the above link to read the rest of the article…

Fraud, Fools, and Financial Markets

September 21, 2015

Fraud, Fools, and Financial Markets

Adam Smith famously wrote of the “invisible hand,” by which individuals’ pursuit of self-interest in free, competitive markets advances the interest of society as a whole. And Smith was right: Free markets have generated unprecedented prosperity for individuals and societies alike. But, because we can be manipulated or deceived or even just passively tempted, free markets also persuade us to buy things that are good neither for us nor for society.

This observation represents an important codicil to Smith’s vision. And it is one that George Akerlof and I explore in our new book, Phishing for Phools: The Economics of Manipulation and Deception.

Most of us have suffered “phishing”: unwanted emails and phone calls designed to defraud us. A “phool” is anyone who does not fully comprehend the ubiquity of phishing. A phool sees isolated examples of phishing, but does not appreciate the extent of professionalism devoted to it, nor how deeply this professionalism affects lives. Sadly, a lot of us have been phools – including Akerlof and me, which is why we wrote this book.

Routine phishing can affect any market, but our most important observations concern financial markets – timely enough, given the massive boom in the equity and real-estate markets since 2009, and the turmoil in global asset markets since last month.

As too many optimists have learned to their detriment, asset prices are highly volatile, and a whole ocean of phishes is involved. Borrowers are lured into unsuitable mortgages; firms are stripped of their assets; accountants mislead investors; financial advisers spin narratives of riches from nowhere; and the media promote extravagant claims.


Read more at https://www.project-syndicate.org/commentary/government-intervention-financial-crises-by-robert-j–shiller-2015-09#1pbaxOEsUVWLuRvm.99

 

“Bernanke & Greenspan Have Destroyed America” Schiff & Maloney Warn “People Don’t Realize What Is Coming”

June 3, 2015

“Bernanke & Greenspan Have Destroyed America” Schiff & Maloney Warn “People Don’t Realize What Is Coming”

Ali and Frazier, Laurel and Hardy, Mayweather and Pacquiao, Liesman and Santelli, and now Schiff and Maloney. Peter and Mike join clash of the titan-like to discuss their investment strategies and expose the charts the government doesn’t want you to seeas “people like Bernanke are taken seriously still and the people that did predict [the crisis] are dismissed as lunatics half the time.” The wide-reaching conversation covers everything from gold and stocks to The Fed and The Dollar – Bernanke “took the coward’s way out because all he did was exacerbate the problems to postpone the day of reckoning.” The air is coming out of the bubble, they warn, “Bernanke and Greenspan have absolutely destroyed America. People don’t realize what is coming…”

 

Full transcript below:

Mike: I was in Puerto Rico a little while back and Peter Schiff invited me over to his house and we were just amazed at how we are exactly on the same page when it comes to everything economically. And so he just made a trip out to California near my offices and we decided we’d get together and discuss some of this stuff. So on your travels Peter lately you were just at a show you were speaking. Where were you at?

Peter: I was in Las Vegas. It’s great to see you again Mike. I was speaking to a very main stream audience of hedge fund managers at an annual conference there. And what was very interesting is even though the audience was, as I said, very main stream, and I was on a panel with a lot of very high profile, main stream individuals, the only person that really got applause was me.

…click on the above link to read the rest of the article or view the interview…

 

We’re In Uncharted Economic Territory

May 30, 2015

We’re In Uncharted Economic Territory

We’re in uncharted territory …

For example, this is the first time in history that most central banks worldwide have printed money during the same time period.

And one of America’s leading economists (Nobel-prize winner Robert Shiller) just said that – unlike 1929 –  this time, stocks, bonds and housing are ALL overvalued:

This time around, bonds and, increasingly, real estate also look overvalued. This is different from other over-valuation periods such as 1929, when the stock market was very overvalued, but the bond and housing markets for the most part weren’t. It’s an interesting phenomenon.

There’s a connection between the two unprecedented events …

Money printing sucks money out of the real economy, and throws it at the wealthy … who use it to speculate on stocks, bonds and housing.

Indeed, the central banks have consciously been focusing all of their efforts on blowing asset bubbles …

But the bigger they come, the harder they fall.

 

Robert Shiller: Unlike 1929 This Time Everything – Stocks, Bonds And Housing – Is Overvalued

May 29, 2015

Robert Shiller: Unlike 1929 This Time Everything – Stocks, Bonds And Housing – Is Overvalued

Robert Shiller is a professor of economics and finance at Yale University. He is the author of Irrational Exuberance, which in 2000 predicted the collapse of the tech bubble and is now in its third edition. He was awarded the Nobel Prize in Economic Sciences in 2013 for his work on asset prices and financial market behavior.

In the attached interview he observes that the recent equity run-up seems to be driven more by fear than by exuberance, as a lack of confidence in the future prompts investors to save more and thereby bid up asset prices.

Below is an interview he gave to Goldman Sachs’ Allison Nathan

Allison Nathan: Are US stocks overvalued today?

Robert Shiller: I think that compared with history, US stocks are overvalued. One way to assess this is by looking at the CAPE (cyclically adjusted P/E) ratio that I created with John Campbell, now at Harvard, 25 years ago. The ratio is defined as the real stock price (using the S&P Composite Stock Price Index deflated by the CPI) divided by the ten-year average of real earnings per share. We have found this ratio to be a good predictor of subsequent stock market returns, especially over the long run. The CAPE ratio has recently been around 27, which is quite high by US historical standards. The only other times it has been that high or higher were in 1929, 2000, and 2007—all moments before market crashes.

…click on the above link to read the rest of the article…

 

 

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