(Note: apologies to Shakespeare for my blog title)
We can certainly see a 2008-like market crash because “the bigger this bubble gets, the bigger the burst…I am looking at a bubble that is almost sure to pop at some time and I don’t know when it’s going to happen, but I know it’s going to happen. – this quote and the one below sourced from Zerohedge.com
The Fed and the U.S. Treasury (via its Working Group on Financial Markets) – collectively known as the Plunge Protection Team – have created both stock and bond market bubbles of unprecedented magnitude. I think the only market professionals who refuse to acknowledge this are the highly inappropriate hosts and Wall Street guests that have infested the media like ebola has infested West Africa.
But a constant source of irritation for me is the fact that analysts, and even respected market professionals like Julian Robertson, erroneously reference the current stock market (S&P 500) p/e ratio in comparison to historical points in time. The latest example is Roberston’s appearance on Fox Business.
Robertson’s commented about the bubbles that have been methodically blown by the PPT:
The thing that worries me the most are the twin bubbles [stocks, bonds] that are developing, certainly the Federal Reserve, the people that run their Treasury operations, are trying to create a bubble in bonds and they are doing it.
In reference to Robertson’s comments, Zerohedge asserts that the current forward GAAP p/e for the S&P 500 is 21x. No. It’s not. In order to make historical comparisons we have to implement comparable accounting measures. The GAAP accounting used in 1999 is not the same as the one used in 2007 and the GAAP used in 2007 is not the same as the one used currently.
Every change made to GAAP has enabled U.S. corporations – especially the banks – to use highly questionable accounting gimmicks in order to increase GAAP-reported net income and earnings per share. By now everyone knows about the nefarious non-cash accruals like “mark to market” mark-ups of highly illiquid fixed income holdings which load huge non-cash gains into GAAP-reported net income. There have been likewise liberalizations of GAAP standards which benefit non-financial companies as well.
These accounting changes are not just ludicrous – they enable outright fraud. All bubbles/Ponzis are engendered with massive fraud.
Having said that, and without going through the arduous task of translating current S&P 500 earnings into 2007 or 1999 or 1929 equivalents, it is beyond any possible doubt that the current S&P 500 GAAP-reported earnings per share would be significantly lower using historical GAAP standards. The current “Shiller” S&P 500 p/e ratio is said to be 27.2x. However, my best guess would be that if 1999 GAAP standards were applied to the current “Shiller” S&P 500 trailing earnings, the current p/e ratio would be well in excess of 50x (vs. just under 45x in 1999).
That being the case, the current stock market has – by far – the highest p/e ratio in history and is therefore – by far – the most over-valued in history. I just wish highly visible market participants like Julian Robertson or Marc Faber or Peter Schiff would reiterate the facts I just presented. Because currently EVERYONE who is using the commonly cited comparison metrics is using fraudulent numbers.