The market is now officially in the largest bubble relative to the economy in history according to the stock market capitalization to GDP ratio, which, incidentally, is Warren Buffett’s favorite means of valuing stock.
The original article has been edited here for length (…) and clarity ([ ]) by munKNEE.com to provide a fast & easy read.
Bill King of The King Report notes that based on this metric, stocks are now valued at 144.15% of US GDP, surpassing their previous peak set at the absolute top of the Tech Bubble in March 2000.
While some pundits may point to the economy or the Trump economic agenda for this move, the reality is that everything the markets have done since 2008 has been driven by the Fed creating a bubble in US sovereign bonds, also called Treasuries, and because these yields represent “the risk-free rate of return” for the entire financial system ALL risk, including stocks, adjusted accordingly.
…I am growing increasingly concerned about…what’s coming…We’re currently in “late 2007” for the coming crisis. The time to prepare for this is NOW before the carnage hits.
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…2017 provided many good times [but,] for worriers, the low volatility and steady gains of last year signal bad times are likely in 2018…[and] they have a point. It’s true that good times can’t last forever. [That being said,] it’s also true that we can spot when the good times have gone too far with this simple indicator.
Comparing the Trump and Kennedy rallies—as in the first chart below—I expect Trump’s market to build an even bigger slide.
US stock market valuations appear stretched, but history reminds us that this form of excess can endure and, with the U.S. economy posting ongoing signs of growth, the market’s upbeat profile of late has macro support. Nonetheless, it’s prudent to consider how performance stacks up in terms of history.
As the next crisis erupts, the mainstream media is going to respond with shock and horror but the only real surprise is that this ridiculous bubble lasted for as long as it did. The truth is that a market decline is way overdue.
Right now most people seem to have been lulled into a false sense of security, and they truly believe that everything is going to be okay but every time before when the market has looked like this, a crash has always followed, and this time will be no exception.
Valuations and sentiment play into future stock market returns…as valuations indicate what people are willing to pay for a dollar of earnings. During times of exuberance, investors overpay for earnings and, during times of fear, investors underpay for earnings. Currently, two measures of sentiment are sending cautionary signals that 2018 may not be as strong of a year.
The U.S. stock market has entered into the last stage, which I call the Super-Charged Tulip Mania. Not only are stock prices inflated well above anything we have ever seen before, but valuations are also reaching heights that are totally unsustainable. This next market crash will not resemble anything similar to what took place during the 2008-2009 U.S. banking and housing market collapse. When the markets cracked in 2008, EVERYTHING went down together. Instead this time around, as the markets tank the precious metals will surge to new highs.
Mark my words here: This third and final bubble (fourth if you count 1987) is now the biggest and most obvious bubble in this boom since 1983. It is as overvalued as at the top of 1929 and the fact that no one wants to hear about it is an ominous sign that it may well be peaking!
Treasury Secretary, ex-Goldman Sachs banker Steven Mnuchin, has threatened Congress with [a] stock crash if Congress doesn’t pass a tax reform Bill. His reason is that the stock market surge since the election was based on the hopes of a big tax cut. This reminds me of 2008.
Many people think that a huge crash is coming within the next 18 months. That being said, there are those who think that we will have a major ‘melt-up’ to 45,000 or 50,000 prior to a historical crash. Personally, I am uncertain which it will be and am waiting to discern what our Central Banks will do! Here’s why.
There has been nothing that has been normal about this economic recovery, and I don’t think there’s going to be anything that’s normal on how this all ends. For now, enjoy the melt-up, because this too will come to an end.
Take note: what’s going on today in the economy and in the markets is not unprecedented or extraordinary. Below are 6 charts to support said contention: