EQUITY VALUATIONS
What I don’t like about US equities right now is that they defy logic, just as Japanese equities defied reason back in the late 80s. US valuations are not only out of whack with those of other equity markets around the world but also relative to past valuation levels:
Equity valuations in various countries
Source: Moody’s Investor Service, The Daily Shot
[comment: we know the market is a discounting mechanism. if the level of change in the world is increasing and economies are being valued on their ability to respond to change, perhaps the US is being discounted appropriately over the next 5-10 years by investors.
Certain places are going to have a much more difficult time making economic adjustments - e.g. much of Europe with unions and fixed labor markets, high taxes and weak banks.]
... zoom in on the wealth-toGDP
ratio, which is long-term constant. (Note: I don’t intend to go into any level of details
here as to why that is, but it is a major topic in my forthcoming book.) The US mean value
is 3.8, and I note that wealth is now in excess of 5 times GDP in the US; i.e. total wealth
will have to drop 25–30% for equilibrium to be reestablished.
[what if the GDP is being mis-measured on a qualitative basis? - i.e. is the nominal value of GDP in terms of the quality of the services being delivered mis-measured and we actually have a qualitative-value GDP better reflected in the values of the wealth represented?]
the structure of markets
favors stocks – fewer shares outstanding due to stock buybacks, 50% fewer public
companies today versus 20 years ago, few attractive fixed income alternatives, and ETFs
and other passive strategies hoovering up huge amounts of mindless capital.
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