How High is High?

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Finanza Operativa di Finanza Operativa 13 Marzo 2017 | 13:30

A cura di Walter Snyder, Swiss Financial Consulting

Since the last Newsletter stock quotations have risen yet further with the DJIA hovering under the 21,000 mark with a P/E ratio of 21.3 while the S&P 500 is still around 2,370 with a P/E ratio of 26.5.The markets are waiting for the FOMC meeting of 15th March 2017 (the Ides of March, an ominous date) while the next rate rise of 25 bps is practically certain.

The assumption that the stock market bubble may yet further expand, even though it is near the bursting point, is warranted by the use of the phrase “animal spirits” employed by some Wall Street pundits to explain the bull market. This is typical of a speculative bubble where it seems that stock prices will continue going up and nothing can stop the momentum. This is similar to the atmosphere reigning in 1999 before the disaster of 2000 and the optimism in 2006 before the crash of 2007 and the low point reached in 2008. The same holds for the crash of 1987.

In all these cases it was the exuberant Americans who were responsible for the situations that were created. It should be noted that in the past there was a reasonable global debt level and not the overindebtedness that now prevails not only in the US but almost everywhere else with few exceptions. This Newsletter has already commented on excessive debt.

The problem at the present time is that central banks will not be able to do much to fight against an economic recession when it comes, and it will come since it is improbable that the current boom will go on forever. The warning signs are already signaling danger ahead. The Fed is planning on raising interest rates while the ECB goes on buying any bond in sight. The PBoC is striving for stability and willing to pay for it while the BoJ does not know what to do with enormous piles of debt. The gold price is manipulated while price discovery in the bond market is hard to find as the market starts having higher yields and lower prices. Wise investors will take heed and not be taken by surprise when the crunch comes.

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