Caleb Lawrence – KPIG-KPYG Radio – Share the Wealth – February 6, 2017
The major averages struggled into the final hour with small losses on little real news. Black Knights latest Mortgage Monitor report shows that the 2007-2009 financial crisis led to 7.4 million homes being lost to foreclosure nationwide, and after 6-years of steady declines and rising prices foreclosure starts and sales have more or less returned to their pre-crisis levels. That said the crisis pushed the homeownership rate down some 6 points from 69% in the pre-crisis period to just 63% today a 5-decade low serving to underscore the economically and socially destabilizing effects of financialization and debt based bubble economics.
After bashing Goldman Sachs and other banksters on the campaign trail, Trump then proceeded to fill his cabinet with Goldman Sachs Alumni. 2-short weeks in office later and Goldman Sachs is already backing away from the Trump administrations shoot from the hip rhetoric, hastily written and poorly considered executive orders that have led to a firestorm of public and corporate opinion and more than a few legal challenges. In the meantime, the markets jumped in the elections aftermath as volatility disappeared hitting near record lows. More than a few pundits seized upon the moment to float the idea that the modern digital age meant higher profit margins and that it was different this time etc., etc. Margins are essentially the same and I can assure you that it is not different this time, as it never is. There are many ways to measure valuation one of those is the ERP or Equity Risk Premium, the amount an investor can expect to earn over a relatively riskless investment like the 10-year Treasury. Put another way it measures the amount of increased investment return expected with stocks as an example over the 10-year Treasury. Calculated by subtracting the yield on the 10-Yr from the earnings yield (E/P), by the end of 2016 this had fallen to just 1.2% as interest rates jumped, meaning there is little investment return premium to gain by investing in stocks and taking a lot more risk. I have pointed out repeatedly the dangers of valuation, margin debt and questionable economic and business cycle conditions, all point to markets that are an accident waiting to happen.