This chart can tell you a lot about bull and bear markets in the long run:
The source of the chart is an article by Jurrien Timmer of Fidelity Management & Research. Do read the whole thing, it's interesting throughout.
The above chart provides a perspective that is rather similar to our own, as computed by our flagship application, Robot Investment Calculator:
Note that we use CPI-unadjusted returns, unlike Jurrien Timmer. Still, the overall picture of relative valuation is not very different. (RIC does not go that deep into history, but we could see a similar pattern if it did.)
Unlike Jurrien Timmer, we do not use a long-term exponential regression curve. Instead, we work with MZM, which is a money supply aggregate that includes instantly liquid money.
In the short run, our MZM-based valuation indicator can hint to overvaluation or undervaluation of the market. The COVID19-related monetary expansion made the market significantly undervalued until June 2020. Through August, however, the market grew more than 10 per cent into the 'overvalued' territory. This may signal an increased risk of a correction. (No more ground-shaking events on the horizon, though.)
Since the end of February 2020 until the end of April, more liquid money was added to the U.S. money supply than there was outstanding in August 1992.
In relative terms, the recent monetary inflation is second only to that of 1983 -- note that 1983 saw the highest monetary inflation ever. A 24.8 per cent y-o-y money supply growth is pretty respectable.
While most economists are worried about CPI deflation risk, a double-digit 20+ per cent monetary inflation can hardly fade away without side effects. Or can it? That would be the first time in history.
In short: their predictions are worthless. This is just a short selection of their mistakes:
Why should I pay any attention to stock market pundits when there is a much more dependable tool? The Robot Investment calculator was right when the gurus were wrong. This is what it was saying on the same day John Hussman predicted a 40-55 per cent market meltdown:
Let that sink in.
The delinquency rate on business loans keeps falling. This is clearly a good news:
Better yet, the delinquency rate on all loans has been falling since Q4 2009. The next recession is not in the making yet.
It's easy: socialism happened.
And this is what happens to bad governments that experiment with socialism, wage wars, or otherwise ignore the laws of good governance and sound markets:
Why is the notorious P/E ratio useless? Simply because it fails when you need it most.
Think of it:
Is it a good idea to adjust stock market indices to inflation? Well, why not. However, there's a glitch. The most usual inflation measure -- the Consumer Price Index -- is an awkward tool for this purpose. Asset prices should not be conflated with consumer prices. Equities are assets, consumer goods are not.
Discounting asset prices with the CPI is methodologically wrong. Do not expect any meaningful results if you combine the CPI inflation with equity prices, corporate earnings et cetera.
Is there a better approach? Yes. Using monetary inflation -- or money supply growth -- is the correct way to go. In other words, the question is "how would the stock market index look like if money supply remained constant?" (It's money supply, not consumer prices what matters to investors.)
The answer to the above question is as follows -- and it's a surprising chart indeed!
The takeaway of this exercise is, among others:
This is the most comprehensive US stock market index adjusted for inflation. The inflation is defined as the growth of liquid money supply (MZM, Money Zero Maturity aggregate.)
Is the market overpriced or cheap? Make your own conclusion.
Five. For the time being.
Households and Nonprofit Organizations; Net Worth, Level/Gross Domestic Product
No comments needed except for one question: what will the next recession do to the Euro area total debt?
Why have Canadian property prices grown so steeply since 2000?
This is why:
How long can the Canadian mortgage boom last? I dare not say.
If your economy's money supply grows like this...
... and debt expansion goes on like that...
... don't expect property prices to remain cheap.
American households are wealthier than ever:
And what is your household's net worth?