After 50%+ declines in most assets, in March 2009 valuations hit a 12-year cyclical low and central bank easing was finally able to revive some bids and cautious optimism through moribund markets. Risk-blind, long and wrong through the 2007-08 peak however, most participants were illiquid, frozen and/or liquidating in horror just as investment prospects finally turned attractive. A very few, (like our firm Venable Park Investment Counsel), managed portfolio gains through the market crash and were able to deploy strategically stored cash into high yielding/lower risk securities by the spring of 2009.
By April of 2011 however, extremist policy interventions–most notably the suspending of fair value accounting rules (FASB 157) in April 2009 that allowed banks to value toxic assets on their balance sheet as they pleased, coupled with price-indiscriminate buying by central banks and indexers–drove asset values far past rational measures once more, and those with a value discipline began reducing risk and moving capital back to safer harbors.
Markets rationally began to mean revert their exuberance–falling into late 2012–before central bankers all over the world went full Kamikaze (quite literally) promising to squander whatever government resources necessary to push asset prices temporarily higher for a while longer. Par for this course, the last 4.5 years of ultra-low rates, superfluous liquidity and reckless abandon, have now locked in the necessity for another panicked reset cycle ahead.
Bailed out by the sharp ‘v’ bounce in 2009, today many of the same people and ‘players’ are back on top boasting about their non-existent prowess and skill and talking nonsense about how ‘this time is different’ and low interest rates and central banks justify present valuation extremes. Total bull (pun intended). The money business is full of lazy salespeople who don’t actually reflect or measure return prospects–because they are paid to sell buy and hold to the public, not manage risk. But math is math all the same, and when presently deluded masses become risk aware once more, they will stampede out of crashing long duration, risky assets for the security of cash and liquidity. Of that much we can be confident.
This updated chart from John Hussman shows a composite of the 5 most historically reliable valuation metrics for US stocks today versus the long-term mean (0 line below) since 1947. Back near the 2000 tech wreck peak for the second time in 17 years, there is only one way out of this monetary mess and that is way, way down. Those who are not cognizant and prepared, have everything to lose. See How to wind down a $4 trillion balance sheet:
“Investors should recognize that in data since 1940 and prior to 2008, U.S. interest rates were at or below present levels about 
15% of the time. During those periods, the average level of the Shiller cyclically-adjusted P/E was about -50% below present levels, and the average ratios of MarketCap/GVA, MarketCap/GDP and Tobin’s Q (market capitalization to replacement cost of corporate assets) were all about -60% below present levels. That’s roughly the same distance that current market valuations are from post-war pre-bubble norms, even regardless of the level of interest rates. Put simply, investors have vastly overstated the argument that low interest rates “justify” extreme market valuations. Indeed, the correlation between the two is weak, nonexistent, or goes entirely the wrong way in most periods of U.S. history outside of the inflation-disinflation cycle from 1970 to 1998.
In the not too distant future, we will have another opportunity to reflect on the destructive policies of this era, and devise wiser practices to follow. That will be hard won progress:
At some point, perhaps during the next financial collapse, the public may become willing to demand that policymakers support their behavior with systematic evidence of reliable correlations and substantial effect sizes linking policy actions to real economic activity. Instead, we know only one thing for certain, which is that, across history, extended periods of easy money, and the resulting frenzies of low-quality credit issuance and yield-seeking speculation that follow, have regularly unraveled into crisis and collapse. If one repeatedly learns that feeding a beast can briefly appease it, but predictably makes it more enormous, savage, and unstable, it is best to remember the lesson. Instead, central bankers have doomed the world to learn that lesson again.
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