The bad smell hovering over the global economy
Don’t be fooled. China’s growth is the result of a surge in investment and the strongest credit growth in almost two years. There has been a return to a model that burdened the country with excess manufacturing capacity, a property bubble and a rising number of non-performing loans. The economy has been stabilised, but at a cost.
The upward trend in oil prices also looks brittle. The fundamentals of the market - supply continues to exceed demand - have not changed.
Then there’s the US. Here there are two problems – one glaringly apparent, the other lurking in the shadows. The overt weakness is that real incomes continue to be squeezed, despite the fall in unemployment. Americans are finding that wages are barely keeping pace with prices, and that the amount left over for discretionary spending is being eaten into by higher rents and medical bills.
For a while, consumer spending was kept going because rock-bottom interest rates allowed auto dealers to offer tempting terms to those of limited means wanting to buy a new car or truck. In an echo of the subprime real estate crisis,vehicle sales are now falling.
The hidden problem has been highlighted by Andrew Lapthorne of the French bank Société Générale. Companies have exploited the Federal Reserve’s low interest-rate regime to load up on debt they don’t actually need.
By this measure, the S&P 500 is overvalued by 72%
Going back to 1964, the S&P 500's market cap has been 57 percent of annual US GDP on average. If one excludes the tech bubble, that number falls to 53 percent. As of the end of March, however, the stocks contained within the S&P are collectively worth 99 percent of GDP, more than 70 percent above the average level.
DYI Comments: Except for the last six weeks during 1929 and the year 2000 this market is no doubt on the high end for valuations. The market continues to trace a long broad top testing one's patience. I've named this period of time "The Great Wait!" And indeed it is. DYI are NOT market timers. This blog is a valuation player and currently values are so high our formula has "kick us out" of the market and rightfully so! My expectations is for a run of the mill decline from peak to trough of 45% to 60%. Run of the mill? Yes! Valuations are simply that high.
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