Juggling Dynamite

It’s a harsh reality of human behavior and capital markets: when assets are at deep discount and value and yields the best, would be ‘buy and holders’ who bought high have lost their shirt and are running for the exits. But when assets are obscenely valued with pitiful yields and years of zero and negative returns baked in, optimism is at cycle highs and those who ran at the lows, are finally rushing to put in every last bit of cash and margin debt they can borrow.

For those retired, a recent Gallup Poll finds stock market optimism at the highest since the market peak in 2000.

Just as US stock valuations have officially eclipsed their 2000 peak and are now priced for 12 years of negative returns from here.  See Bubble Mindset and an excerpt explaining below the chart.

“the chart …shows my variant of Robert Shiller’s cyclically-adjusted P/E (CAPE), which can be substantially improved, as measured by its correlation with actual subsequent market returns, by adjusting the multiple for its embedded profit margin. I originally used the ratio of Shiller earnings (the denominator of the Shiller P/E) to S&P 500 revenues as a measure of the embedded margin. Since freely available data on S&P 500 revenues is limited, the embedded margin is proxied here by the ratio of corporate profits to GDP (allowing the measure to be calculated back to the 1920’s h/t Michael Ritger).

Specifically, the CAPE (calculated here as the ratio of the S&P 500 to the 10-year smoothing of inflation-adjusted earnings) is multiplied at each point in time by a factor equal to the 10-year smoothing of corporate after-tax profits to GDP, divided by the historical norm of 5.4%. The resulting measure is similar to the S&P 500 price/revenue multiple, the ratio of market capitalization to corporate gross value-added, and other measures that share a correlation near 90% or higher with actual subsequent 10-12 year S&P 500 total returns in market cycles across history.

What investors presently take as a comfortable environment of pleasant market returns and mild volatility is actually, quietly, the single most overvalued point in the history of the U.S. stock market.”

As hurricane ravaged islands like Puerto Rico are making so obvious, the time to rebuild smarter energy structures that will be more resilient and self-sustaining was yesterday. New energy technologies are here to stay and improving faster than most imagine possible.

The rise of solar and other renewable powers is inevitable, not because they are ‘green’ but because on a full cost basis they are cheaper, smarter, sustainable and much more self-sufficient.  See Trump’s Coal Bet Faces a Tough Foe:  Moore’s Law:

[The] future will almost certainly be dominated by solar — not because it’s “green,” but because it’s cheap. Indeed, the authors’ data suggests that there’s a fifty-fifty chance that solar will become competitive with coal as early as 2024; there’s a good chance that could happen even sooner. Indeed, it already has in some countries. In the near future, it will likely be the coal industry that will need subsidies to compete with solar, not the other way around.

Danielle was a guest today on This Week in Money with Jim Goddard, talking about recent developments in the world economy and markets.  You can listen to an audio clip of the segment here.