During the Dotcom Mania days and the successive crash, I was somewhat concerned that with 401k's, IRA's and the bevy of other retirement programs out there that these programs would incentive people (namely the Baby Boomer generation) to flood the stock market with retirement dollars, artificially driving up prices only to crash when the Baby Boomers retire and start pulling their money from the stock market. I noted this as the S&P 500's P/E ratio has never been below it's historical average since 1928 of 15 ever since the Baby Boomers entered their prime earning years in the late 80's. The S&P 500 P/E ratio didn't even drop below its average after the stock market crash suggesting there was a lot of excess cash floating around.
However, what amazes me is that even with this excess cash in the market AND the recent bull market, I would have sworn when I updated my charts that the S&P 500 P/E ratio would have skyrocketed again as America went back to mindlessly flooding the stock market with their retirement dollars. But no such thing has happened. Actually, the S&P 500's P/E ratio suggests the markets are accurately valued, borderline sane with the P/E ratio hovering around 16, just a smidge over the historical average.
With a bull market driving prices sky high, mathematically the only culprit that could be keeping the P/E ratio down is profits, and sure enough that's what it is.
Corporate profits in America have reached an all time high as a percent of GDP of just over 10%. This not only provides merit to the recent bull market, giving it some underlying value, but also suggests that a "Baby Boomer Crash" may not ensue as the Baby Boomers start to retire and switch their investments from equities to bonds. Corporate America, evil and vile as it may be, might just be able to keep the profits up making the stock market a viable and wise long term investment and making sure millions have the money in their retirement accounts.
Of course, I'd be curious to see what would happen to corporate profits when we enter a recession triggered by a housing bubble. But that certain isn't a possibility now is it?
There is not going to be a recession caused by the housing bubble, because the bubble is not really in housing, it is in house speculation. Whenever you have a cable TV program called "Flip This House" you know there is a bubble out there, but it is in house speculation, not in homes people actually use as their primary domiciles.
ReplyDeleteCapt Bogs
The whole problem started with the liquidity associated with the nearly nonexistant interest rates the Fed had in response to 9-11 and the economic crisis in 01-03.
This led to more people being able to buy houses, which quickly led to higher prices since the only thing home buyers really care about is the monthly payment (artifically lowered by the interest rate.)
Prices got way too high and the Fed targeted housing speculation with higher interest rates. The baby in this bathwater are the homebuilders, (which are a great short.)
With stable interest rates and lowering prices, housing will start picking up as wage inflation makes houses (that people live in) more affordable. Congress, dominated by the Dems, who are always looking for ways to buy votes with my money, will make up some federal program to rescue the idiots who financed their homes with variable interest rates and negative ammorization loans. Eventually, this whole thing will disappear with a few people in Wall Street (like that Bear Sterns guy who put together those hedge funds with subprime loans) looking for new jobs.
I sense a slight recession coming on. A high enough percentage of the population has been living on debt incurred through pulling all the equity out of their houses. You throw in high gas prices and those living on the margins are going to stop spending. At least give me a lower economic growth rate of around 1.5%.
ReplyDeleteIf only Europe had such problems. 2006 was the only year Germany had a growth rate of over 1.5% in the current decade! And you dare to be dissatisfied with a little bit less growth for one year, mayhaps only two quarters?
ReplyDeleteFor us Europeans, the USA is a rocket ship flying away to Mars while we still sit on earth, trying to find out how to put fuel in our cars wihtout going broke!
The only way Europe is ever going to catch up again is when the US double Welfare/Social Security spending, implement trade protectionism against China, raise their taxes over 40%, and bury the Wall Street under red tape...
Wait, who's governing your country from next year on?
Hey Captain, I read recently that foreign governments are looking to shift more of their investments into private assets like stocks instead of going after government bonds. Good news for the stock market I guess, but do you think it could be enough to overcome the effects of a bazillion old people retiring and taking their money out of the stock market to pay for their retirement?
ReplyDeleteI've been warning my friends that the stock market on average isn't going to perform as well as it has been once the baby boomers start retiring and taking all their money out of it, but this has me thinking. China throws a ton of dollars around for investments, and if they switch to stocks instead of continuing to finance the money-hole that is the US government, it might not be so bad to go along for the ride. Unlike old people, China isn't going to retire any time soon.
Anyway, in response to Anonymous, I don't think it really matters whether the speculative bubble is in the houses that people live in, the houses they bought as an "investment", tulips, or whatever. It seems to me that spending will drop as a result of the bubble bursting regardless of exactly what the bubble is. Other than that, I think you're right on.
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