Bubble

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Asset prices are high across the board. Is it time to worry?

IN HIS classic, “The Intelligent Investor”, first published in 1949, Benjamin Graham, a Wall Street sage, distilled what he called his secret of sound investment into three words: “margin of safety”. The price paid for a stock or a bond should allow for human error, bad luck or, indeed, many things going wrong at once. In a troubled world of trade tiffs and nuclear braggadocio, such advice should be especially worth heeding. Yet rarely have so many asset classes—from stocks to bonds to property to bitcoins—exhibited such a sense of invulnerability. 

Dear assets are hardly the product of euphoria. No one would mistake the bloodless run-up in global stock markets, credit and property over the past eight years for a reprise of the “roaring 20s”, or even an echo of the dotcom mania of the late 1990s. Yet only at the peak of those two bubbles has America’s S&P 500 been higher as a multiple of earnings measured over a ten-year cycle. Rarely have creditors demanded so little insurance against default, even on the riskiest “junk” bonds. And rarely have property prices around the world towered so high. American house prices have bounced back since the financial crisis and are above their long-term average relative to rents. Those in Britain are well above it. And in Canada and Australia, they are in the stratosphere. Add to this the craze for exotica, such as crypto currencies (see Free exchange), and the world is in the throes of a bull market in everything.

 DYI:

There are two assets that are reasonably priced – gold – and money market funds or short dated bonds.  As the article states everything else is grotesquely over valued to point future returns – go to sleep like Rip Van Winkle – wake up in 10 to 12 years returns will be sub atomic at best and worse negative.  DYI’s sentiment chart positions our four major asset categories – stocks, long term bonds, gold (precious metals mining companies) and cash (MMF or short dated notes). 

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency
Max-Pessimism *Market Bottoms* Short Term Bonds
Depression MMF
Hope Gold
Relief *Market returns to Mean* 

Smart Money buys the Dips!
Optimism
Media Attention
Enthusiasm

Smart Money - Sells the Rallies!
Thrill
Greed
Delusional
Max-Optimism *Market Tops* U.S. Stocks
Denial of Problem Long Term Bonds
Anxiety
Fear
Desperation

Smart Money Buys Aggressively!
Capitulation

When you’re on top of the mountain no matter which way you go is down.  Short term I have no idea which way the market will move as market participants could very easily “jack up” this market further.  Yesterday Shiller PE¹⁰ closed out at the nose bleed level of 31.14 driving down future returns.

Shiller PE10 as of 10-05-17 is 31.14

So…Hold onto your hats and cash better values are ahead!

DYI