A new generation is upon us and I know this not only because of common sense and basic demographic information, but because there's been a recent spat of college age/20 somethings who have critiqued my earlier work about the stock market being overvalued. Naturally, my criticisms go back to even before the financial crisis, but this was when most of these finance-majoring DudeBros were all of 10 years old. And now, equipped the little, microscopic, and misleading information that comes with a degree in finance today, these know it all FinanceMajoringDudeBros are going to set the ole Captain straight about how his predictions have not come true, and that they are going to somehow be smarter and better than their baby boomer and Gen X bailed-out bankster counterparts.
So let's beat this dead horse one more time.
There are two measures we use to gauge whether a stock is worth the price. Price to Earnings (or the "PE" ratio) and the Dividend Yield.
The PE ratio is simply that - the price per share divided by the earnings per share. It shows you what you are paying in stock price per dollar in earnings. The higher it is the more overvalued a stock is and vice versa.
The dividend yield is the same concept, except we flip the numerator and denominator AND replace earnings with dividends (because you technically only receive dividends, not the total earnings per share of the company). Instead of a ratio (like the PE) you get a "yield" or "percent rate of return" on your investment.
And so when we look at both you can PLAINLY see that the market is severely overvalued.
The historical average PE for the S&P 500 has been 15. It is now trading at 27. If you are a DudeBroFratBoyGoldmanSachsFutureBailoutRecipient, ask yourself a simple question. Is it worth paying nearly $800 for the PS4? Is it worth paying $7/gallon in gas? And is it worth paying $50,000 for a new AVERAGE sedan? Because paying a PE of 27 for a share of stock is no different.
The dividend yield is even worse. The historical average for the dividend yield has been 5%. You could expect to receive a 5% annual rate of return in the form of dividends. Today it is 1.8%, a 277% overvaluation.
Now your PS4 costs $1,108.
A new average sedan $69,000.
And a Big Mac $12.50.
Of course, before we pick on future DudeBroFratBoysofAmerica we have to look at ourselves in the mirror. For while the DudeBroFinanceMajorsofEternalDudeBroness merely parrot what they're told by their charlatans posing as business professors, at least they're not investing in the stock market because they're poor college kids.
The same cannot be said, however, for the millions of obedient, conformist, non-thinking Americans who year after year throw trillions of dollars into their precious 401k and IRA retirement programs. For they are the financially-illiterate zombies that do not take their advice from the likes of Shiller or Schiff, but the 24 year old HR generalist who "strongly recommends" investing in the company's 401k plan *tee hee!* And in doing so inflate the stock market beyond all sane and reasonable measures of valuation, not to mention price out younger generations (if they are smart enough to read articles such as these).
The point is that there are three major things driving stock prices higher than their fundamental warrant.
1. Quantitative Easing
With the Fed printing off money so it can buy treasuries, mortgages, and other unwanted securities off of the banks' hands, the recipient banks of these monies invariably invest said monies in the stock market driving up prices.
2. Fed-Induced Low Interest Rates
With interest rates very low, it becomes profitable for corporations (ie-shareholders and executives) to borrow at these low rates and repurchase the company's shares. This drives the value of their shares up more than the interest expense the company would have to pay on its debts. Of course, this leveraged buyout ignores whether it's worth paying a PE of 27 for its own shares, further fueling the bubble, AND it ignores what would happen if the economy were to tank while they have so much debt on their books, but hey! We drove the stock price (and thus our stock options) up another 200%, and that's all that matters!
3. Retirement Plans
This is the deadest piece of the horse I've beating since 2004. Why, oh why, did the government just magically decide it was "the stock market" that would serve as the primary vehicle for 300 million Americans' retirements?
Why not property?
Why not private businesses?
Matter of fact, what business was it of the government's to provide tax incentives for people to invest for retirement anyway?
Pfa! Who cares, it was "well intended" and that's all that matters. Distortion of the stock market be damned.
In the end, the same mentality that occurred in 1998 for the DotComs, in 2006 for the housing market, an in 2009-present for the education bubble is reappearing again today in the stock market.
"The market keeps going up!"
"You can't afford NOT to be in this market!"
"You need to save for retirement!"
"What do you mean 'earnings'?"
"What do you mean 'dividends'?"
and my all time favorite
"This time it's different."
And while yes, this time it is different (as the Fed has now made the stock market a place that is a viable long term hedge against inflation, NOT a place to invest in an actual company), let us be clear. It's precisely the exact same shit that happened before. And the reason it keeps happening so frequently is because the exact same people it happened to before are too damn ignorant and uneducated about economics, not to mention stupid, to learn from their past experiences.
It drives nearly every real economist in the world to pour a glass of scotch and enjoy the decline.