Monday, May 12, 2014

The 67% Overvalued Stock Market

We once again find that our path comes across this dead horse and thus, let us flog it one more pointless time.

As you know trillions of baby boomer dollars have been flooding the stock market since the advent of 401k-esque retirement plans.  Mindless lemmings, making their monthly contributions to their IRA's and 401k's on auto pilot never stop to think about the ramifications of this because...well...that'd mean they'd have to think!  And independently no less!

No no, much better to believe "Tee hee!  My 401k is up over 30% this year!  Tee hee!"

So, as these trillions of dollars chase a limited number of stocks, the price of said stocks go up and beyond what the underlying profits warrant.  And thus the PE ratio is driven to highs that are approaching the 1929 stock market bubble, indicating that the stock market is overvalued by 67% (source Robert Shiller).

Now, I know, I know.  We all love it when stock prices go up because "Obama."  We think we're rich and that it's good when stock prices go up. 

Well, that's if you already own stock.  But if you're like most Americans, especially younger ones, you don't own any stock.  All this means is that you get to pay 67% more than what historically has been the "mean price" of stocks. 

So ask yourself would you like to pay:

$5.50 for a gallon of gas?
$700 for the new XBox One?
$10 for a Big Mac?
$325,000 for a law school?

And realize that it's the same proposition if you were to invest in the stock market today.

Enjoy the decline!


Southern Man said...

Well, mu retirement plan is based on stocks so they need to keep on going up until I'm old enough that I can pull my money out (in a decade or so). So keep it up, USA, and thank you for your cooperation.

Anonymous said...

I don't mind it when you beat this dead horse. It's really more like beating the elephant in the room. It must be discussed.

Ras Al Ghul said...

I think you're underestimating the amount stocks are overvalued.

Looks more like 300-400%

Black Poison Soul said...

Thanks for pointing that out Cappy. I came to this conclusion long ago - and we have the same situation in New Zealand. Our (forced) superannuation is "rammed" into the stock-market, artificially inflating prices and causing the few dividends paid to be less than attractive to a potential owner.

leeholsen said...

i'm curious to see what happens on the day the govt cant pull another bailout out of its hat for the company or person wanting it.

Goober said...

So WTF are we supposed to do?

Use your retirement money to start your own business, and you're putting all of your eggs into one basket, which we've all been told is a stupid, stupid thing to do.

Invest in real property? That turned out real well.

The boomers have royally screwed everything up so much that we are left with nothing. I've got money to invest, and I already own a business. What should I do with it?

Goober said...

Leeholsen - Open a history book. It has happened enough times at this point that I'm relatively certain that no new permutations of what will happen can possibly exist.

Will we print money and send inflation out of control like Weimar or Zimbabwe?

Will we shut everything down and ensure stagnation and misery for the next several decades, like the Great Depression?

Will the rich and powerful hoarde everything they can get hteir hands on while the plebes starve, and then revolt and behead every one of them, like the French Revolution?

Will we try to hide the stagnation, find someone else to blame it on, and perpetuate it for 60 plus years until the sham can no longer be upheld, and we throw our hands up in the air and quit, like the Soviets?

Will we learn from our lessons and slowly free up the economy and regulations, like the Chinese are doing?

Will we learn our lesson, allow failed business models to fail, and let the free market take care of itself, as it is intended to?

THose are your options. It could be any of of them.

Most of them will not be bloodless.

That totally sucks.

But remember, the decline of Rome took over 400 years. We likely have several more generations before the truth is unmasked and we can no longer uphold the scam.

Anonymous said...

I agree that the OVERALL stock market index looks toppy. But as my neighbor who runs a hedge fund says, there is always something to do. And in this environment, why not buy a few shares each month in a company which does the investing for you - where (1) management owns a lot of the stock (2) the company will only invest in new projects when it sees bargain prices (3) the assets of the company will do well if inflation gets worse and (4) the company has an excellent track record. Brookfield Asset Management is one example.

Anonymous said...

The House always wins gentlemen. Unless you have insider secrets you're truly disadvantaged in the stock market game.

HSNormal said...

Well-written post. For those that want to delve further into skyrocketing asset valuations, or haven't had their daily dose of gloom and doom, Zero Hedge is a good site.

Short summary of what to do: Acquire 'productive assets', whatever those are by your definition. For me, this has been some carefully selected rental properties in high-rent neighborhoods.

Anonymous said...

A more in depth discussion:

Anonymous said...

Stock market overvalued? Not at all. What we currently see is a flight to so called "quality" and the quality left out there are stocks. Bonds have lost their attractiveness due to an indebted government so all that is left to invest is stocks. The stock market will go much higher from here. No crash to be expected in the short run.

Anonymous said...

Please, more hard hitting economic articles like this. You have a way of explaining complex economic concepts in a way that makes sense. Economically speaking, there has never been a time when corruption was this ubiquitous in the world economy; basically the operating norm. Things are starting to unravel, and it will speed up. There is so much at stake right now, arguably more than the lead-up to WW2.

Anonymous said...

Hi Captain, this is Mr. Asswipe speaking,

So ask yourself would you like to pay:

"$5.50 for a gallon of gas?"
I walk, I refuse to pay for gas.

"$700 for the new XBox One?"
I don't have an XBox, I refuse to waste money on video game consoles.

"$10 for a Big Mac?"
If it comes with a large fries serving and a large coke. And only once in a while would I indulge myself.

"$325,000 for a law school?"
I study programming and math by myself with books. I will not pay for bogus programs. College is a scam.
But I will pay for trade school. I want to become a machinist.

Your dream is having a mustang GT, My dream is owning my own machine shop and working hard all day long making complex metal parts.

So instead of stocks, I will invest in precious metals and trade skills. Got it, thanks for the advice.

-- Asswipe out.

Anonymous said...


Everybody is putting all their eggs in one basket: Money.

Everybody thinks of wealth in terms of money. Everybody, when they invest in stocks, funds, precious metals etc. they all want an eventual return on their investment in terms of more money.

If you are invested in stocks, bonds, mutual funds, precious metals and even a business, you are not diversified because the game plan is money and more of it.

If you really want to be diversified and not put all your eggs in the same basket you will need a farm, wind mills, solar panels, fresh water well, some machines to make your own stuff.

I never understand the super rich. Money is good but only up to a certain point, after which it would be wiser to invest in your own means of production.

If you have 10 Millions, you're rich, if you have 100 Millions your very rich, if you have 1 Billion or more, you're stupid.

At some point holding on to money or a lot of precious metals is not a wise decision because it is what I call dead capital.

You need real capital that have a market value, such as means of production, but which can also produce additional wealth for you while you are owning them.

Money requires a market and if the shit hits the fan well you will be in a tight spot if all you have is a lot of money.

If you have means of production, you can produce with yourself even under extreme conditions and under normal conditions or optimal conditions your means of production still have an important market value.

You need dual purpose capital.

I am not going to put all my wealth in money. I want my own means of production.

-- Mr. Asswipe out

Anonymous said...

Hi Cap,

This response is regarding this post and the question you asked your students (BTW,are you still teaching at a college?)at the begaining in your "There's No Such Thing as Greed, Only Theft" post.

While many of the respondents to your TNSTAG,OT post fingered the FED, and they are right, there are other reasons as well.

You wrote a post back in 2012 called "The "Less Sucky Economy" Bubble" where you hit the nail on the head. Even though things in the USA are a mess, in many places around the world things are even crazier. France has an outright commie as the head of state, all over the EU there are talks of bank bail ins. In England they are already saying they have the right to take money from peoples back accounts without any kind of due process. China has spent massive amounts on mel-investment (cities without people and such)and is coming in for a crash. Russia's millitry is on the move and China is saber-rattling with Japan and other Asain countries. Japan is debasing the Yen faster then the FED is debasing the dollar. So money from around the world is flooding into the USA because it is the least bad place, and is unlikly to be invaided.

Not only that but pention funds have to move money into stocks because they can't make enough in bonds due to low intrest rates.

The US stock market my be over-priced in regard to it's history, but what about in regard to right now? I do think that in a couple years time, investers will be able to buy the Dow or S&P for much lower then today's price, but saying that, I don't think the US markets have topped out yet. There are still tons of commitators in the media who have been calling for a major pullback or a crash in the US markets. They have been saying that for years. They have all been wrong so far. It just keeps slowly moving higher. When everyone gets bullish, that is when to sell. There has yet to be a crazy takeoff move like we saw with the Japanese market in 1989, Dot Coms in 1999, or with silver in 2011. I think that at some point that there will be, and that is when I plan on selling.

aerodawg said...

I quit contributing to mine some time back on the premise it was better to eliminate debt and invest in real assets (gold, land, etc) than paper. Once I reach my debt and property goals I may start investing again just to get the company match...