I know you’re all tired of hearing me warn you about the level of stock prices, so today I’ll turn the microphone over to Mr. Ambrose Evans-Pritchard of the Telegraph:
Breaking my normal rule of discussing equity prices let me say only that the S&P 500 index of Wall Street stocks will not defy monetary gravity or the feedback loops of global stress for much longer. Half the earnings of US big-cap companies come from overseas, repatriated into a stronger dollar, and therefore worth less in reporting terms.
The index has risen at double-digit rates for three years, further inflated this year by companies buying back their own shares at a pace of $US130bn a quarter, often with borrowed money. The profit share of GDP is at a post-war high of 12.5pc (much like 1929), an untenable level as US wages start to rise and the balance of power swings back to labour. The S&P index measuring the price-to-sales ratio is higher today than at its pre-Lehman peak.
Expect a shake-out of 20pc comparable to the LTCM crisis in 1998 when the wheels came off in Russia and East Asia, though don’t be shocked by worse. Emerging markets are a much bigger part of the world economy today, and their combined debt ratio is a record 175pc of GDP.
So that makes a lonely handful us bears in the sea of fist-bumping, table-pounding bulls. (I share all of Mr. Evans-Pritchard’s concerns. My own big concerns are based primarily on valuation — stock prices are higher than at any time in the past 130 years except 1929 and 2000 — and Fed tightening.)
In case Mr. Evans-Pritchard’s logic has dented your confidence that 2015 will be another great year — and in case you want to restore your full bullishness — here’s Jeremy Siegel predicting that the Dow is headed to 20,000.
And I would be remiss in not pointing out that even Jeremy Grantham of GMO, who thinks there will be a mega-crash in the next year or two, believes the S&P 500 will ride the Fed’s free money and the Presidential Cycle all the way to 2,250 or higher before it tanks. So you can always try to hang on for that last euphoric blowoff…