You cannot make this stuff up!! Oh wait that’s all you can do with this stuff. Janet Yellen, bless her that sweet little lady, has officially lost the plot. It is no longer even arguable. Today Janet was asked whether the market is overvalued, in bubble territory, given all the tangibles suggesting yes of course it is. But Ms. Yellen comes back with a resounding, no chance! According to the models they look at to determine valuations this market is in no way overvalued. That’s right you heard her correctly. This market is well within the bell curve of market valuations.
Now if you look at other models of valuations such as TTM P/E you see we are in the 89th percentile of historic valuations. Is that in the bell curve, statistically it would not be. But what if we look at the Total Market Value/GDP model? Well we see we have the second highest valuation to GDP since this has been recorded. So that would suggest a bubble also. What if we look at Price to Sales? Again we see bubble territory. Hmmm this is getting a bit mysterious now. I mean what ‘valuation model’ does the Fed look at to determine if we have an undervalued, over valued or normal market valuation? Perhaps bonds to equities? Nope those show bubble also. I might have to give up here. Seems as though every standard market valuation model is indicating an equity market bubble, yet Janet just told us that the market is absolutely nowhere near bubble territory. And Janet has no reason to lie to us, does she??
I mean, what would happen if the Fed came out and said, yes woah geez, this market is way overvalued! Well obviously the one and only (touted) parameter of victory by the Fed over the laws of economic realities, i.e. the market, would no longer be a shiny trophy in all its wondrous glory. That’s right it would sell off and the Fed would have absolutely nothing to point at to suggest they won the battle. That their incredibly brave and intellectually overwhelming actions of printing $5T and participating in a global coordinated effort by central banks to literally purchase equities (to the tune of $29T, yes 45% of gross world product) did not get us anything but further in debt and less purchasing power for USD i.e. reduction is both disposable and real incomes. So I say, it is a bloody good thing sweet dear Janet, bless her, gave us the straight up good news that the market is very much within a normal pricing valuation and not only that but the economy is absolutely rebounding! Two birds one stone.
And fortunately market participants no longer think they simply react in upward delight and surprise when Janet gives us the good news once a month as though they thought she might not. This is quite a little system we now have in place of a real market. I’m not sure what one would call this financial system but it sure feels good. And in the end, isn’t all of us feeling good despite horrific realities what we all want? What good is there in knowing realities if they don’t make us happy? What harm could come from little white lies about the state of the market or the economy?
Sure a few retired folks I know are talking about cashing out some annuities to push into the market despite the market being at all time highs, with real (U6) unemployment around 12% and debt for households and the nation at ridiculously high levels and the world beginning to rebel against the USD. But why wouldn’t they cash out their future income streams which is to be their life lines for the rest of their retirements? I mean Janet just told the nation that despite the facts and the accepted valuation models that her ‘model’ suggests valuation are quite moderate, historically speaking. That the economy, despite negative growth last quarter and negative real growth coming this quarter, is rebounding. So yes we should all, based on Janet’s comments today cash out all of our savings (given they are generating negative real interest rates anyway) and shove it all in the riskless bastion called the US stock market. Oh yes, nirvana has finally arrived my friends. The only bubbles in heaven pour from a champagne bottle.