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This market is priced to another depression, as I've outlined in prior posts. Implicit in market pricing is a massive wave of bankruptcies affecting as many as half the companies in existence today over the next five years, the result of a signficant contraction in economic activity on top of deadly (for debtors) deflation. The deflation is expected to last up to five years, while the a price level in 10 years is not expected to be any higher than it is today.To see how potentially wrong the market's expectations of deflation could be, just consider these charts. The Depression of the 30s was exacerbated by a Fed that allowed the money supply to contract. Fed Chairman Bernanke has vowed repeatedly that such a mistake is not going to occur on his watch. And he really means business: as the second chart shows, the Fed has sextupled the basic money supply (bank reserves) in the past two months. The Fed has created six times more raw, high-powered money in the past two months than it created in its entire existence! This simply breath-taking, for want of a better word.
And when people say credit markets have shut down, the facts contradict them. Non-financial commercial paper outstanding has been growing steadily for the past four and a half years. Companies are having no problem accessing the credit markets. All measures of the money supply and bank lending, for that matter, are at or very near all-time highs, as of the latest data available.
16 comments:
Very interesting and insightful site!
Scott,
Curious what your thought are about t-bill rates approaching zero once again in the last few days? Is this just a manifestation of generalized fear or is it telling us something important about the credit maket expectations.
I'm thinking that rates approaching zero sets off alarms throughout all the capital mkts and put the Feds efforts back in the ditch, Thoughts most welcome. Thx.
Scott,
In a market environment currently dominated by fear - your blog, with your daily dose of soundly reasoned optimism - is a much needed source of perspective.
And, "perspective" is something that seems to be in short supply nowadays.
Keep up the good work!
Huge and Vinnie: Thanks very much, glad you find this worthwhile.
j: The almost-zero rate on bills has to signify that fear is predominant. Fear of everything: defaults, depression, bad policies, etc. The dollar also shows strength which is consistent with people willing to pay a premium for safe havens. Gold fits into that category as well since it is definitely not cheap.
Scott,
I have a question for you: If I told you that the SP 500 earnings will be 60 in 2009, and 65 in 2010, what value would you place on the S&P today?
Thanks!
From this link (http://www.businessweek.com/ap/financialnews/D94IA0NG3.htm) you would think folks 25-35 were borrowing to much at the moment. Interestingly the BusinessWeek article doesn't reference what period of time the study covered. I doubt if last week was included :-)
Gene: I think the study is a few years old (2005). But in any event young people SHOULD be borrowing, not saving. Their income is expected to go up a lot, so they can afford it.
Mark: I'd say the S&P would be worth a lot more than it is today!
I have heard repeatedly that there is a liquidity crisis, that banks aren't lending, etc. Yet I haven't seen a quantitative proof statement of that. All I've seen is proof of higher risk premiums being demanded as the economy slows and highly leveraged areas get squeezed.
So, I agree with you :).
Mark,
Easy,
11 x 65 = 715
12 x 65 = 780
13 x 65 = 845
14 x 65 = 910
You get the picture. :)
Screener: the only evidence of a credit contraction is in financial commercial paper. But that is not too hard to understand, and the government is providing direct assistance to mitigate the associated problems.
Bob: I noticed you started at a multiple of 11 and got tired of typing at 14. If inflation is going to be hanging out around zero for a few years, wouldn't a more appropriate multiple range be 15-20?
Scott,
I just read a very interesting opinion by Andy Kessler in the WSJ stating that the Stock Market's actions should be ignored until February.
The reason according to him is that the volatility has more to do with forced selling than fundamentals.
What do you think?.
Here is the link.
http://online.wsj.com/article/SB122714126820842751.html
I hope Andy is right, and I usually find much to agree with regarding his observations on the market.
I have been trying hard to make the same point from another perspective: since valuations imply a catastrophic depression/deflation scenario, I think they can be explained only by resorting to fear and panic selling.
Mark,
I was actually being a bit of a smart alek. Sorry, tongue planted firmly in cheek.
The point was to ascribe any multiple you want to whatever S&P earnings seem the most realistic. This will give you a range of targets. Then pay attention to current events and upgrades and downgrades to those earnings. And remember that the market is forward looking so my spring/early summer we should be looking at 2010 earnings I would think.
I'm not so sure inflation will be hanging out around zero for several years.
Bob
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