Share the Wealth – August 7, 2017
Registered Investment Adviser Caleb Lawrence
The major averages begin the week with small gains on little real news, consumer credit comes out later today and geo political tensions subsided somewhat in Asia over the weekend.
Valuations are the most important determining factor from a historical perspective with respect to investment return. Put another way, buy low and sell high. With the major averages seemingly unconcerned it’s worth noting that valuations are painfully high from a historical perspective. As an aside you know things are out of whack when the 18 months ending in June, saw companies that had no earnings, and were losing money, outperform those that were making money. John Hussmann recently pointed out, as have many others, that valuations are dangerously high. Noting that the Median Price to Revenue is higher for all deciles than 2007 and has reached 90% of the level achieved in 2000 that saw the creation and destruction of the most overvalued markets in history. Some will say of course that it is different this time, and there is a certain amount of truth to that. In 2000 excessive valuation was primarily concentrated in technology and bio-technology, 2007 saw it concentrated in finance. 2017 overvaluation is extremely widespread brought on by the reckless policies of the Federal Reserve and other Central Banks who, credit where credit is due, have done an amazing job of reflating dangerous asset bubbles, largely with cheap and easy credit. On that note, official margin debt on the NYSE or New York Stock Exchange stands at a near record 539 billion as of June 2017. Of late the major wire houses, Merrill Lynch, Morgan Stanley, Goldman Sachs etc., etc. have gotten into the securities backed loan business as well providing clients with loans backed by their portfolios. The regulators don’t track these loans, despite warning about them, and data is hard to come by. As of the end of 2016 the three banks previously mentioned have extended some 90 billion in these loans to clients and they are by no means alone in this department. Stagnant corporate earnings, record or near record valuations plus record or near record leverage in margin and portfolio loans combined with high and rising political risk and a weak economy featuring no wage gains and in fact small real declines, what could possibly go wrong.