Cape Fear? S&P Peak PEG ratio At All-time High, Shiller CAPE Ratio At Second All-time High As Dow Pierces 26K Mark

Yes, the stock market is on a roll with the Dow recently piercing the 26,000 mark. And the S&P500 index has pierced the 2,800 mark. Of course, the massive Federal Reserve intervention (along with other global central banks) has certainly thrown gas on the fire.

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Looking at price levels alone is not meaningful. So, let’s look at two stock market adjusted indices.

First, there is the S&P Peak PEG ratio.  It is a price to peak-earnings multiple, adjusted for long-run trend growth. It is at the all-time high.

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Second, we have Bob Shiller’s CAPE (Cyclically Adjusted Price-Earnings) ratio that is now at the second highest peak (after the Dot,com bubble) and above the notorious Black Tuesday of 1929.

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But it is not just the stock market that may be overheated. How about home prices … again?

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And if we adjust home price growth by hourly earnings by the majority of the population, we see that home prices YoY are growing 3 times faster than hourly earnings YoY.

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This might help explain why The Fed is so timid about unwinding its balance sheet.

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Did someone mention fear?

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Hysterianomics! Focusing on M2 Money Growth Is Misguided (Deficits and Debt Are What Is Scary)

I attended an investors presentation last week. Having given presentations to investors in the past, I thought I knew what to expect. I was dead wrong. The presentation was one chart, M2 Money Stock, and why the US economy is doomed because of rampant inflation. The sales pitch was to buy gold and other precious metals because the world is ending!! I just rolled my eyes.

Here is the chart (not their chart, but the same one from the Federal Reserve of St Louis).

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M2 is a measure of the money supply that includes all elements of M1 as well as “near money.” M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits.

To be sure, The Federal Reserve has ramped-up M2 Money Stock, particularly starting with the Clinton Administration and Alan Greenspan’s Fed. I suggested plotting M2 Money growth and population growth on the same chart.

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But if we look at the same chart in Year-over-year (YoY) terms, you will see that US population growth has declined from 1992 to today. Yet starting in 1995, M2 Money Stock growth soared (although it has been declining over the past year).

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But what about M2 Money VELOCITY (M2 Money/GDP)? M2 Money VELOCITY peaked shortly after Greenspan’s Fed started to rapidly expand M2 Money Stock. But M2 Money Velocity has kind of died (lowest in recorded history).

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What about the “runaway inflation”? He made it sound like The Weimar Republic is coming next! I requested that he plot M2 Money growth YoY on the same chart as Core PCE Prices YoY (core inflation). M2 is growing at 4.7% while Core PCE Prices are growing at … 1.5%.

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Besides, if one is worried about inflation, you can purchase Treasury Inflation Protected Securities (or TIPS).

And The Dow just broke 26,000 for the first time!

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The real problem is the growing Federal Budget deficits.

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With exploding healthcare costs (as in Medicare), spending is rapidly diverging from tax revenue.

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And with over $20 trillion in public debt, the US is facing hard decisions on spending and taxation.

M2 Money growth is NOT causing Weimar or Venezuela like inflation. But Gold is still a good alternative to Fiat currency.

Children playing with stacks of hyperinflated currency during the Weimar Republic, 1922

Has The Fed Lost Control? VIX (Stock Vol) Falls Below 10, TYVIX (T-Note Vol) Falls Below 4

Are markets out of control due to The Federal Reserve keeping rates so low for so long?

The VIX just hit an all-time low.

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The VIX (Chicago Board Options Exchange SPX Volatility Index) has fallen below 10 and the S&P500 index has soared with massive Federa Reserve stimulus (aka, the punchbowl).

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The TYVIX (CBOE CBOT 10 year U.S. Treasury Note Volatility Index) has fallen below 4 despite Fed rate increases and their lame unwinding of their prodigious balance sheet.

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This bring up the question: Has The Fed lost control of markets? This is important in that it may lead the Fed Open Market Committee (FOMC) to raise rates as a faster pace, as indicated by The Fed’s “Dot Plot.”

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Meanwhile, “inflation” remains subdued at 1.5% YoY.

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We will see if The Fed is speeding up their balance sheet unwind after today at 3pm EST.

Will there be a trigger event that will bring markets crashing back to earth?

Janet Yellen better start drinking a few Tequila Sunrises if that happens.

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Hysertianomics: S&P 500 Index UP 25% Since Trump Election As Fed Keeps Raising Rates (Krugman Said Markets Would Never Recover)

Nobel Laureate Economist Paul Krugman said on November 8, 2016 that markets will never recover from the stock market decline that occurred on November 7th, the day before the Presidential election.

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Never recover? The S&P 500 price index is UP 25.2% since November 8th (election day). While the Russell 2000 small cap index is up 29.2%. All this inspite of The Federal Reserve deciding to raise their target rate FOUR TIMES after the election (compared with only once increase during the 8 years of Obama).

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Meanwhile, stock market volatility has almost been cut in half since Trump’s election.

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Krugman made be right … eventually.  But as of the day after Christmas 2017, he sounds like a Hysterianomics Professor. Or on the Crazy Train with The Federal Reserve driving.

 

S&P 500 Dividend Yield FINALLY Above US Treasury 2Y Yield (10 Years Afer)

The last time that the S&P 500 dividend yield was above the US Treasury 2Y yield was in September 2008, just prior to The Federal Reserve launching their quantitative easing (mass purchases of Treasury Notes/Bonds and Agency MBS).

For the first time since 2008, the dividend yield on the S&P 500 Index and theyield on two-year Treasury notes are essentially the same. For years after the financial crisis, the gap between the income generated from holding equities relative to government securities bolstered the case for U.S. stock markets to climb to record highs. Now, with the Federal Reserve raising interest rates, the yield on short-term Treasuries is attracting investors like BlackRock Inc.

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But Ten Years After, massive monetary stimulus is finally going home. By helicopter.

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‘Twas The Week Before Christmas: US Dollar Swaptions Dive To Lowest Point Since 2005 As US Treasury 30Y-2Y Curve Lowest Since Sept 2007

‘Twas the night week before Christmas, when all through the (financial) house
Not a creature trader was stirring, not even a mouse;

With the exception being traders sending 2Y30Y Swaptions down to their lowest level since 2005. Not to mention sending the 2Y30Y Treasury curve down to 86 basis points, the lowest since September 2007.

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Meanwhile the crypto currency Bitcoin remains above 18,000 the week before Christmas.

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Merry Christmas, one and all! Except those renting housing.

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Retail Inferno! Hennes & Mauritz (H&M) Tanks (Sales Collapse), Stock Price Decline Resembles Macy’s!

Swedish retailer H&M, operating in 62 countries with over 4,500 stores and, as of 2015, employ around 132,000 people, suffered a downward sales shock leading to a decline in their stock price.

(Bloomberg Intelligence) — The scale of the revenue miss in this key fashion quarter should initiate more radical change at the H&M brand, as profit is set to be rebased lower. The excess level of inventory needs to be rapidly reduced so the company’s fashion schedule can be reset, ideally with more short-lead time merchandise in the mix. The portfolio of stores will need more radical pruning, as shoppers are spending more online. H&M’s belated integration of online and bricks-and-mortar retail is another action that needs to be accelerated.

H&M 4Q sales have been released ahead of more-detailed earnings scheduled for Jan. 31. 

Earnings for Swedish retailer H&M, with outlets in Europe, Africa and the USA, is not a positive sign (particularly for brick and mortar commercial real estate).

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B&M’s stock price decline closely mirrors that of US retail giant Macy’s.

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It is a retail inferno globally.

Here is a photo of George Mason University students showing off their H&M bling. Or it is a photo of them celebrating the end of final exams.

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