|Better to suffer boredom than a bear market
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Sao Paolo, Brazil
First, what are we doing in Sao Paolo? Two things. We're checking in with colleagues, who research Brazil's economy and its stock market. And we're visiting a candidate for Miss Brazil, who just happens to be a friend's cousin.
We'll let you know more as things develop.
Meanwhile, US stocks were flat yesterday. Gold up $5. Nothing significant in that news.
For what it's worth, we think the stock market is poised for action. It could shoot up much higher...as dreams of QE Forever take hold of investors' imaginations. Or it could drop like a stone when they realize that QE doesn't really help the economy that the stocks depend on.
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Higher or lower. How's that for a forecast? We thought you'd appreciate it.
What we don't expect is stagnation and status quo. There's too much tension in this bow. Either it sends the arrow skyrocketing...or the bow cracks.
As the SEC might say, nothing in this, however, should be interpreted as a recommendation to buy or sell stocks. If you own US stocks, you've got a whole lot more confidence in the ability of the feds to control things than we do. If you don't own them, you're best advised to stay away. We say that not because we know anything about the future. But we know something about the past. Based on history, stocks at today's prices cannot be trusted to deliver decent rates of return. Here's our friend Merryn Somerset Webb, editor of the English magazine, MoneyWeek:
Here's a quiz for you.
So, there you have it. Stocks will either go higher or lower. Probably a lot, in whichever direction they take. They could go much higher, because the Fed is a buyer...bringing $1 trillion of new money into the market each year. This could make investors very excited.
The Nasdaq has just passed its pre-crisis high. It trades on an average price/earnings (p/e) ratio of around 25 times - with a tiny dividend yield of under 1.5%.
The S&P 500 index has risen nearly 27% so far this year. Into this market, 192 companies have recently issued new shares, raising a total of $51.8bn - a number not far off that raised back in the 2000 dotcom bubble. Based on last year's profits, the p/e ratio has risen from 16.4 times to 19.1 times over the same period. This is not about companies being worth more. It is about people paying more.
The index, as Christopher Wood of CLSA points out, is also trading on a cyclically adjusted p/e ratio or Cape - a measure which is based on the average of the last ten years' earnings - of 25 times. The long-term average is more like 16 times.
It's been higher, much higher - think 44 times in 2000 and 33 times in 1929. But it is, says Wood, "just exceeding the highs reached in 1901 and 1966". Nasty market falls - 20-year bear markets in fact - followed both of those peaks.
So here's my question: would you call this market: a) a bubble, b) pretty expensive, but not yet a bubble, c) different to any market that has gone before it in myriad complicated ways, or d) a stock picker's market?
If you are a normal person, you will have gone for a or b. If you are a fund manager, an analyst working for a stock-broking firm or someone who is hoping to be one of those things at some point in the future, you will have gone for c or d.
How do you justify a market that is clearly overpriced, on any conventional or historical measure? You announce that thanks to some change or another - demographics, accounting rules, technology, one-off crises, shale gas, the fact your kids' school just put the fees up by 9%, whatever - it should be henceforth valued in a new way.
On the other hand, investors could suddenly realize that there is something inherently dangerous about a market that is supported only by the authorities. The smartest investors might slip away from the theatre...and then call the fire department.
Either way, it should be breathtaking. And yes, dear reader, we know it's not much fun sitting around waiting for the show to start. And it will be even less fun if the market suddenly 'melts up,' as some analysts expect.
But unless you are a speculator with an asbestos portfolio, it is better to suffer boredom and envy...then suffer the heat of a severe bear market.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.
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