This Time is Different

Monty Pelerin / Economic Noise

This time is different. The level of the stock market valuation is worse than most times when such claims are made to keep investors hooked.

Despite all the carnival barker promotion, government propaganda and CNBC cheerleading, no one can justify the current value of financial assets. That does not mean valuations cannot remain at these levels for a while or perhaps even increase a bit. However given historical metrics and an economy that seem broken and has been that way for about seven years, there is ample downside room with seemingly little upside. Even Alan Greenspan would likely be too embarrassed to understate the current situation as “irrational exuberance.” He is now far enough removed from the scene of the crime that he can speak bluntly about the current situation. Recently Brien Lundin described Greenspan’s current position:

In private conversation I asked him about the outstanding debts… and that the debt load in the U.S. had gotten so great that there has to be some monetary depreciation. Specially he said that the era of quantitative easing and zero-interest rate policies by the Fed… we really cannot exit this without some significant market event… By that I interpret it being either a stock market crash or a prolonged recession, which would then engender another round of monetary reflation by the Fed.

There is no hope of recovery given the economic policies in place. Everyone seems to be depending upon the “greater fool” theory as their justification for remaining in financial assets. This position appears to be maintained in spite of the Fed being exposed as less than the Wizard of Oz, at least with respect to being able to forecast or influence the economy. Jim Quinn suggests that the only thing that is different is the higher supply of fools:

We know for a fact that real median household income is still 7% below 2007 levels and sits at the same level as 1989. We know for a fact that wages have been stagnant since 2007. We know for a fact GDP has barely broken 2% since 2009. We know for a fact the price of healthcare, food, energy, tuition, rent, and a myriad of other daily living expenses are dramatically higher since 2009. We know mortgage originations are at 1997 levels. We know housing starts are 60% below the 2005 highs and at levels seen during the 1991 and 1981 recessions. Existing home sales are 30% below the 2005 high, only up 10% from 2012 levels, and sitting at levels reached in 1999 before the boom.

Choose whatever manipulated government statistics you want! No matter how contrived they might be, they are not high enough to justify the level of current stock market valuations. Absurdity, like everything else, has boundaries and life span. The absurdity in markets seems especially overblown and unlikely to continue much longer.

Read more at Economic Noise:

http://www.economicnoise.com/2015/05/29/this-time-is-different-2/