Time to Buy Your Umbrella
Heavy weather barreled through Wall Street Monday — beneath the weatherman’s detection — and gave investors a savage drenching.
Squalling rains washed away 925 points from the Dow Jones Industrial Average… before relenting late in the day.
High pressure, high skies and high expectations were back yesterday. The Dow Jones reclaimed 536 points. It took back another 286 points today.
Once again… all is peace. Yahoo! Finance:
Just so. Yet, we are not half so convinced the weather will hold.
Conditions Are Too Good
The barometric pressure has risen to delirious levels, unsustainable levels. The pressure in the gauge cannot sustain.
Mr. Robert Shiller’s famous CAPE ratio for the S&P 500 goes at 38.19 — a near-record. 16 is about par.
Stocks were only pricier prior to the hell storm of 2000.
Not even the peak roars of the 1920s approached today’s extravagances. CAPE came in at 32.56 before the Crash of ‘29.
Again… today the CAPE ratio goes at 38.19.
The S&P — argues Mr. Shiller — is presently more expensive than in 96% of all previous quarters, 141 years running.
But might today’s valuations outdo even their 2000 records?
Even More Insane Than 2000
Mr. Fred Hickey, editor of The High-Tech Strategist, argues they do. But the Federal Reserve’s false fireworks blind the vision:
Insanity, we must agree, and absolute.
No Problem, Don’t Worry
Yet Wall Street’s drummers insist today’s obscene valuations are justified in full. That is because today’s obscene interest rates — obscenely low interest rates — warrant them.
Stripped to bolts and nuts, the argument runs this way:
Stock prices merely represent the current value of future cash flows. Lower borrowing costs — lower interest rates — raise earnings.
So long as rates remain frozen at low settings, today’s valuations are swell.
Yet analyst Charlie Bilello says have another guess. The theory finds little excuse in the facts…
Mr. Bilello has interrogated the data stretching to 1881. He finds:
Meantime, today’s interest rate… paralleling yields on the 10-year Treasury note… pegs along at 1.29%. More, please:
This Time Is Always Different
Yet the wish is the father of the thought. Wall Street wishes today’s slim interest rates authorize today’s obese valuations.
And so the thought has its father… in the wish.
But each stock market delirium runs to different themes, different narratives, all lovely, all logical — and all false.
They are all bound together by one common feature:
The fool belief that this time is different.
“Stocks have reached a permanently high plateau,” it was argued in 1929. “Markets are perfectly efficient,” it was said in the 1960s. “Earnings do not matter,” it was claimed in 1999. “Low interest rates justify high valuations,” it is blabbed in 2021.
Each previous narrative came to grief, wrecked upon reality’s hard rocks. We have every suspicion the present narrative will end upon the identical rocks.
Time to Buy Your Umbrella
We do not know when the great undoing will occur. Nor do we pretend to know.
We have forecast too many false tempests, too many false tornadoes, too many false typhoons.
Yet we are most alarmed by extended stretches of fair weather. That is when guards come down.
And when guards come down, ours goes up. It is presently up.
It is a terrible pity no one purchases an umbrella when it is most available, when blue skies stretch to the horizon.
Come the inevitable downpour, most are caught in the open, unprepared.
Perhaps this is the time to purchase your umbrella.
Many are available. And they are on sale…
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