Successful encore

John Hussman’s weekly missive of April 28 is useful for the charts and information he presents on Price/Revenues of S&P 500 companies – average and median. Median Price/Revenue ratio is now above levels reached at the height of the stock market bubble of the year 2000.

One cannot get more unambiguous than this:

The central message to investors with unhedged equity positions and investment horizons shorter than about 7 years: Prospective returns have reached zero. The value you seek from selling in the future is already on the table today. The future is now. [Link]

This reminds me of what I read in an article last month – an interview of James Moniter of GMO in the Swiss newspaper, ‘Finanz und Wirtschaft’. This Q&A, like the one above, sums it all up rather too well:

James, are you able to find anything in today’s financial markets that still has an attractive valuation?
Nothing at all. When we look at the world today, what we see is a hideous opportunity set. And that’s a reflection of the central bank policies around the world. They drive the returns on all assets down to zero, pushing everybody out on the risk curve. So today, nothing is cheap anymore in absolute terms. There are pockets of relative attractiveness, but nothing is cheap or even at fair value. Everything is expensive. As an investor, you have to stick with the best of a bad bunch. [Link]

Central banks that are responsible for financial stability cannot feel proud of driving investor behaviour such as this:

Companies with low credit ratings learned a valuable lesson this week: investors will queue up to lend to them, and expect relatively little in return.

The midweek sale of €7.9bn of junk bonds by French telecoms and cable operator Numericable did more than break the record for a single sale of riskier debt: it revealed how financing for international companies with fragile balance sheets is conducted six years after the financial crisis.

Numericable, which has businesses in several countries, and parent group Altice offered a $21.8bn combination of loans and bonds in several maturities and two currencies, with yields on the bonds ranging from 4.875 to 6.25 per cent. The package was a hit, attracting $100bn in orders from investors spread over 700 accounts across the world. [Link]

Without creating meaningful jobs or incomes, the Federal Reserve has created an asset price bubble of epic proportions – more epic than before. US Household net worth went up by almost USD10.0trn last year because of gains in home prices and stock prices. The recovery in US house prices, since the crash of 2008-09, has been the fastest of all housing cycles. You can check it out yourself here. We all know the beneficiaries of this fastest and strongest recovery in asset prices. It is not the median American family.

The jobs created in the twelve months to March 2014 have mostly been in the low-wage and long hour categories. That has maintained the pattern since the ‘recovery’ began in 2009. This is what I wrote in my MINT column recently about the US economy’s ‘job creation’ record (or, the lack of it):

Five years after the interest rate was dropped to zero and after three rounds of QE, job creation in the US is confined mainly to low-paying sectors. In the 12 months to March, the US created around 2.24 million jobs. Jobs created in the services sectors were 2.04 million. Of these, 1.48 million jobs were created in retail trade (315,200), administrative and waste management services (423,600), education and health (334,000) and leisure and hospitality (406,000). Under leisure and hospitality, food services accounted for 323,000 jobs.

Despite claims of a much vaunted revival of US manufacturing, only 72,000 jobs were created in the sector in the last 12 months whereas 151,000 construction jobs have been created. No surprises then that, in the last 12 months, participation rate and the employment to population ratios for those who have completed high school or less have gone up whereas these two ratios have declined for those with a college or associate degree and a bachelor’s degree or more.

At the same time, with interest rates at rock-bottom levels, even the slightest increase in yields appears adequate to send borrowers into a tizzy and activity to contract. This risk too has been flagged before. As we flood the body with pain-killers and pain suppressants, its natural ability to withstand pain and stress withers and becomes utterly incapable of even the smallest increment in stress and pain. Economic systems are not exempt from this natural law. That is what we are witnessing now.

So, for the third time in less than two decades, asset prices have de-coupled from fundamentals. In the year 1999-00, it was not Fed inspired entirely. In 2007-08, it was a stock market and housing bubble, orchestrated by the Federal Reserve but other players had their roles to play too (such as SEC, the Federal government). This time around, the Federal Reserve has the lion’s share of the blame (or credit).


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