What would justify such high stock prices? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 22 May 2014
What would justify such high stock prices? A  A  A

Baltimore, Maryland

The Dow posted a big 158 point gain. Gold sank to $1,288.

What does that tell us about what is coming down the pike? Nothing.

But even without knowing anything about the future, we grow nervous. The more we look, the more we see dangerous distortions and illusions caused by central bank meddling.

Page one of yesterday's Wall Street Journal:

"Debt rises in Deals Despite Warnings."

Regulators deem 6 times leverage (putting in $100...and borrowing $600 more...to do a $700 deal) to be the upward limit of what is 'safe.'

But the WSJ reports that 40% of US private equity deals are leveraged beyond that level. That puts private equity debt at heights not seen "since the pre-financial crisis peak of 52% of buyout loans in 2007. Such lending all but disappeared during the crisis but has risen each year since 2009."

Then, over on page C1 "Riskier Fannie Bonds are Devoured."

Fannie would have gone broke in 2008. Instead, the feds stepped in with enough new cash to rig the mortgage market to a whole new level. Do we know that the US property market is softening? Un un. Do we know that interest rates will go up and Fannie will go down? Nope.

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Most economists and investment advisors make their forecasts on the basis of what they know. We rely on what we don't.

Go ahead, ask us what is ahead for the US economy. 'We have no idea,' is the quick and ready answer.

And when will QE end? 'Hey, what do take us for...some sort of psychic?'

Will stocks go up or down? 'If we knew the answer...do you think we'd tell you?

No, dear reader...ignorance is more valuable than knowledge. Because it is far more accurate and reliable. We don't know what will happen in the property market...or to mortgage interest rates. But that doesn't stop us from trying to understand the facts in front of us right here...and right now. What does Fannie Mae do? Why does it exist?

You'll recall that Fannie stands at the left hand of the US government...and that the government's aim is always to reward the elite who control it, while keeping the mobs more or less under control. Fannie helps do both. It creates a quasi monopoly in mortgage finance - with rich rewards to the financial and home building industries. And it lures the lumpenproletariat, into another fatal illusion.

The typical voter hallucinates that he controls the government. The typical investor imagines he is on a level playing field with Goldman Sachs. And the typical homeowner believes he actually 'owns' the house he lives in. What really happens is the financial industry borrows at near zero cost in order to make mortgage loans. Aided and abetted by Fannie Mae, it became landlord to 44 million Americans. The poor 'homeowner' is turned into a mortgage slave. He is stuck for life - or longer - making payments on a house that cost the financial industry nothing.

What will happen next? We're too fascinated by the here and now to care.

For example, we look out at the US stock market and we are amazed. The Dow is near a record high. And the S&P, too, trading at a Shiller P/E of around 20.

What would justify such high prices stock prices? Not current earnings. The current dividend yield, too, implies foreknowledge. At barely more than 2%, it is barely half the current level of consumer price inflation, as measured by MIT.

Meanwhile, we notice that a dollar's worth of dividends from Gazprom costs only half as much. In terms of company earnings, you get more than 10 times as much.

Why the big difference? Investors must know something. But what? Will Putin do something that further suppresses capital values in Russia? Will Obama? Again, we know as little about the former as the latter... All we know is that you get a lot more for your money in Russia than in the US.

Draw your own conclusion.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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