By Cory
Data that should make investors nervous
This post caught my eye last night. It outlines many of the worrisome economic data from around the world that helps to understand how the stock market can be close to all time highs as economies continue to struggle. Low interest rates and high debt levels can cause massive missallocations of money. It’s just next to impossible to determine what the breaking point is.
Click here to visit the original posting over at Markets & Money.
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Looking Ahead to the ‘Greater Depression’
The way I see it, this is the current state of play:
The Dow is within a whisker of its record high.
The Cape Shiller P/E index (which measures the average earnings of the S&P 500 over 10 years in real terms) is registering a multiple that’s almost on par with the exuberance of 1929 (just before the Great Depression) and is only bettered by the manic period leading up to the dotcom boom going bust.
Sydney and Melbourne property markets are among the world’s most expensive (when measured as a multiple of average income).
Interest rates are at record lows.
Global debt levels — in both US-dollar terms and as a percentage of global GDP — are the highest in recorded history.
Trust me; I’m not making this up.
These are all established facts…readily available with a search engine and the click of a mouse.
If you accept these facts, you have to acknowledge that we are at extreme levels in asset pricing, debt loads, and the return on money.
Neither man nor machine can function at extreme levels indefinitely.
At some point, stresses inevitably take their toll.
History also tells us that financial systems also suffer from stress.
Without labouring the historical aspect too much, I’d like to give you a few examples of the stress fractures suffered by the financial system.
The Roaring Twenties gave way to the Great Depression; Japan’s 1980s miracle economy surrendered to 25-years of rolling recessions; the irrational exuberance of the 1990s was followed by a fairly spectacular NASDAQ nosedive; and, more recently, US property markets proved they can fall on a nationwide basis.
Can we agree that extremes create stresses?
Do we also have agreement on the law of physics — for every action, there’s an equal and opposite reaction?
These are both rhetorical questions, so please do not bother answering them.
That’s my logic.
If we take the logic to the next step, a financial system that’s at the most extreme level in recorded history must, at some point, suffer an equal and opposite stress fracture.
Is this not a reasoned and rational conclusion?
By the way, that’s not a rhetorical question.
Why?
Because your words and actions do not support my admittedly simple process of deduction.
Let me cite a couple of recent examples that have compelled me to send you this memo.
Yesterday, on CNBC, I read this:
‘[The] Fed released its meeting minutes from March which read: “Broad U.S. equity price indexes increased over the intermeeting period, and some measures of valuations, such as price-to-earnings ratios, rose further above historical norms… Some participants viewed equity prices as …read more
Source:: The Korelin Economics Report
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