Rosenberg's Comments and the Puzzlement of These Markets
David Rosenberg developed a reputation as a virtual perma-bear a few years back. It wasn't deserved. He was just calling the markets as he saw them. Indeed, he switched from bear to bull as stocks rose and did well by his firm's clients. Since I've only occasionally read his stuff, I'm not sure how his former logic that markets were overvalued managed to justify his bullish stance, since valuations - by traditional measures - have remained fairly high for years now. But he did and he was right in the end.
So here's a guy who seemingly has a mind that's not locked into a "rigid" interpretation of market values and price trends. He's been able to roll with the punches - the point being he's not a perma-bear. With that in mind, this headline grabbed our attention recently:
ROSENBERG: The excesses in markets are practically unlike anything we've ever seen
Now let this sink in: "practically unlike anything anything we've ever seen." (You can read the entire piece HERE.) While the "practically" qualifier hedges a bit, it does seem that this man is seeing things he's not seen over the course of a long and distinguished career. I bring this up because he's only the latest of the analysts we follow who have made similar remarks. They're seeing things they haven't seen before and it's causing them to have to scramble to make sense of what's going on.
(Of course, those who are perma-bulls have not had to scramble. They've managed to interpret the price action of the markets, as well as the economic data, exactly as they have over the course of their careers: Everything looks good!)
How do the rest of us interpret all this? Well, here's my best shot from a more or less professional viewpoint:
All that stuff about valuations you learn as you develop your professional credentials really hasn't added up very well lately. The only way it makes any sense is to overlay the Fed's suppression of interest rates and the extraordinarily low yields we've had in the government and corporate bond markets. With yields this low, there's a way to justify extraordinarily high valuations. And, I suppose, that more or less explains why, despite all the chatter about bubbles (from some quarters) and impending crashes (from other quarters) don't amount to a hill of beans, as the old saying goes.
Back to Rosenberg: His article offers several charts worth reviewing. The highlights of the data he's scanned are as follows:
Re the increase in "paper" wealth due to the rise in stock prices, "The US economy has never before been so dependent on asset inflation for its success. The ratio of household net worth to disposable income has soared to a record 673%, taking out the 2006-2007 bubble high of 652% and even the dotcom peak of 612% posted in 1999."
The thing about paper wealth is that, in many ways, it's not worth the paper it's written on.
Re the percentage of financial assets vs. total household assets, "Financial assets now comprise a near-record 70% of total household assets. Past periods of such excess in the late 1960s (Nifty Fifty) and late 1990s (tech mania) did not end well."
Re the equity share of total U.S. financial assets, "The equity share of U.S. financial assets is now up to over 36%, surpassing the prior cycle peak of 34% back in 2007."
Not only did the equity share drop after the collapse of 2008-2009, but the percentage of the financial sector vs. the rest of the S&P dwindled as well. The financial sector had been blown up by extreme speculation. At the time, we thought things would get back to normal. But our "normal" was pre-1990, before financial markets began to take over the economy, compared to "real" things like Industrials and Materials. But who would have thought the Fed would intercede as it did and blow up the whole financial sector again after 2008. While it's not up in the low 20s as was the case in 2007-2008, it's far above the 6%-10% range before 1990 - not even close.
For some perspective on this, check this series of charts from Bespoke:
Bespoke.comhttps://www.bespokepremium.com/think-big-blog/sp-500-sector-weightings-historical-and-current/.
The financial sector, having been restored by the Fed now continues to dominate both the action of the markets and the economy. Is this "normal"? I suppose it depends on what you consider normal. If it's normal to you, you'll have no trouble investing your money in these markets. If not, you'll be a bit more cautious about where you deploy your cash.
As for the economy, if normal, the economic data is telling you that the economies of U.S. and most of the rest of the world are now in a virtuous cycle of growth - even strong, long-term growth - after being slapped around in 2008. And, of course, if not normal, the current growth numbers have been engineered by Fed policy and the expansion of the financial sector.
Whatever you decide to do with your money, we can only wish you luck.
So here's a guy who seemingly has a mind that's not locked into a "rigid" interpretation of market values and price trends. He's been able to roll with the punches - the point being he's not a perma-bear. With that in mind, this headline grabbed our attention recently:
ROSENBERG: The excesses in markets are practically unlike anything we've ever seen
Now let this sink in: "practically unlike anything anything we've ever seen." (You can read the entire piece HERE.) While the "practically" qualifier hedges a bit, it does seem that this man is seeing things he's not seen over the course of a long and distinguished career. I bring this up because he's only the latest of the analysts we follow who have made similar remarks. They're seeing things they haven't seen before and it's causing them to have to scramble to make sense of what's going on.
(Of course, those who are perma-bulls have not had to scramble. They've managed to interpret the price action of the markets, as well as the economic data, exactly as they have over the course of their careers: Everything looks good!)
How do the rest of us interpret all this? Well, here's my best shot from a more or less professional viewpoint:
All that stuff about valuations you learn as you develop your professional credentials really hasn't added up very well lately. The only way it makes any sense is to overlay the Fed's suppression of interest rates and the extraordinarily low yields we've had in the government and corporate bond markets. With yields this low, there's a way to justify extraordinarily high valuations. And, I suppose, that more or less explains why, despite all the chatter about bubbles (from some quarters) and impending crashes (from other quarters) don't amount to a hill of beans, as the old saying goes.
Back to Rosenberg: His article offers several charts worth reviewing. The highlights of the data he's scanned are as follows:
Re the increase in "paper" wealth due to the rise in stock prices, "The US economy has never before been so dependent on asset inflation for its success. The ratio of household net worth to disposable income has soared to a record 673%, taking out the 2006-2007 bubble high of 652% and even the dotcom peak of 612% posted in 1999."
The thing about paper wealth is that, in many ways, it's not worth the paper it's written on.
Re the percentage of financial assets vs. total household assets, "Financial assets now comprise a near-record 70% of total household assets. Past periods of such excess in the late 1960s (Nifty Fifty) and late 1990s (tech mania) did not end well."
Re the equity share of total U.S. financial assets, "The equity share of U.S. financial assets is now up to over 36%, surpassing the prior cycle peak of 34% back in 2007."
Not only did the equity share drop after the collapse of 2008-2009, but the percentage of the financial sector vs. the rest of the S&P dwindled as well. The financial sector had been blown up by extreme speculation. At the time, we thought things would get back to normal. But our "normal" was pre-1990, before financial markets began to take over the economy, compared to "real" things like Industrials and Materials. But who would have thought the Fed would intercede as it did and blow up the whole financial sector again after 2008. While it's not up in the low 20s as was the case in 2007-2008, it's far above the 6%-10% range before 1990 - not even close.
For some perspective on this, check this series of charts from Bespoke:
Bespoke.comhttps://www.bespokepremium.com/think-big-blog/sp-500-sector-weightings-historical-and-current/.
The financial sector, having been restored by the Fed now continues to dominate both the action of the markets and the economy. Is this "normal"? I suppose it depends on what you consider normal. If it's normal to you, you'll have no trouble investing your money in these markets. If not, you'll be a bit more cautious about where you deploy your cash.
As for the economy, if normal, the economic data is telling you that the economies of U.S. and most of the rest of the world are now in a virtuous cycle of growth - even strong, long-term growth - after being slapped around in 2008. And, of course, if not normal, the current growth numbers have been engineered by Fed policy and the expansion of the financial sector.
Whatever you decide to do with your money, we can only wish you luck.
Comments