FT.com / Lex / Macroeconomics & markets - Valuation fundamentals .
Lex says:
Then there are equity markets. Here it is best to use long-run, adjusted earnings based valuations, or methodologies comparing prices to real assets, such as replacement ratios. On such measures, US stocks are now almost 50 per cent overvalued, according to Smithers & Co. Unfortunately historical data are less reliable for other equity markets, but most also look expensive on this basis, albeit to a lesser extent.
I agree. I have said so for a long time. As a write the market is at 5,340 - near the 2009 high. Put it 50% over valued and it should be 3,560.
I suggested even lower was right a while back - at around 2,900. Maybe I was a little cautious, but those pinning on their hopes on equities right now are simply heading to be losers in the next financial collapse.
And it won't be far off coming.
Richard,
The crux is when you were preaching Armageddon there were a lot of big global players whose shares were radcally undervalued – Rio Tinto, for example, was around £10. Now it is £30. The truth is that the market is always wrong and always moving, and if you say that we are due a crash for long enough you will be right from time to time.
But a steep fall in the markets is as unsustainable as a steep rise.
That said, I’d be astonished if the FTSE didn’t break 10,000 during the next decade. Historically, good decades follow bad and the FTSE is still around 25% down on where it was in late 1999. So if it hit 10,000 in 2020 that would be less than 50% growth in 20 years. Seems sustainable to me.
@mad foetus
Let’s look at fundamentals
The market is over valued now on these i.e. with regard to future potential profitability
Why is that profit going to rise threefold over the next decade?
Are you planning a massive reallocation of wealth from labour to capital?
Please let me know
It’s the only possible answer
Richard
Richard,
You know there are many ways of valuing companies, and that it takes 2 opinions to make a market. If I managed my own money I would be sitting in cash or near-cash at the moment, so I’m not bigging up the market.
But profits don’t need to rise that much – the market will go up as long as shares are perceived as offering a more attractive likely rate of return than other assets. With property and bonds looking weak and banks paying nothing, shares will be attractive.
And then we have Brazil, China and India to drive the world forward. And US consumers, they are more resiliant than we think. And as you always say, debt levels in the UK are nothing to worry about.
But here’s my prediction: the market will go up and down. You will occasionally blog that it is overvalued and due a correction. You will not blog that it is undervalued and due a rise.
I am fairly confident we will not see the FTSE below 4,000 during the next decade, but that we will see it above 10,000 at some point. I would be surprisedif it didn’t dip below 5,000 at some point. But it will continue to be a market for traders rather than long term buy and holders.
@ Mad Foetus
Great, so it remains a market where a bunch of traders with negligible social utility keep stealing from every fool invested in equities for the long term…. no change there then…
Does anyone who reads this blog think that’s a good thing?
The price of shares now is more closely related to fluctuations in the views of the value of money. We have seen chronic inflation (of the money supply M3/M4) in the US and UK. It’s only to be expected that demand for shares rises now house owners are looking to sell (especially with US bank-owned real-estate) and money continues to be created in escalating quantity. We’ve had money strongly “move into” stocks (1990s), housing, commodities, bonds, lately gold. As the currencies tumble in value, expect these major asset classes swings!
If you want to understand more about how inflation (of the money supply) plays out, the book “Fiat Money Inflation In France – How it came, what it brought and how it ended” (written in 1896) is a very informative historical account. http://mises.org/books/inflationinfrance.pdf
Basically, there is already enough money and economic imbalance around to trigger a sudden, acute loss of confidence in the currencies (USD, GBP). Whilst the asset markets rotate ever faster in a chaotic cycle, the obvious defence is to avoid cash. (I’d like to hear why cash is good during the extended period of exceptional inflation (of the money supply) and now 0% interest, madfoetus!).
Inflation is now “baked in” to the system. Just like in 1918 Weimar Republic. It took five years to annihilate the currency then. See “When Money Dies: The Nightmare of the Weimar Collapse” http://mises.org/resources/4016 . And remember, The Zimbabwe Stock Exchange (the ZSE) had the worlds best performing stock market in 2007 – up a whopping 322,111%, losing investors almost everything.
@JD
JD
That about sums it up…………..
And it is not a good thing
Socialy useless is, I think, the term
Richard
Richard/JD
The social utility is nothing to do with it. Richard made an observation that he thought the market was overvalued and I suggested that it was probably about right (though I see more downside than up at the moment) and will probably do very well in the medium term.
But here is the crucial point: the market exists. The only purpose of the market is as a giant casino. Richard has made this point several times, complaining about why the meaningless value of the FTSE is put on the daily news as if it is meaningful to anything other than inveterate city gamblers. I agree with him.
There is no point talking about the stock market unless you “play” in it. You wouldn’t talk about the merits of horses unless you liked a bet: the stock market is just the same. It goes up, it goes down, and very few people have any great ability to predict what it does next. But if some people can make money by dipping in and out, what’s the problem?
@mad foetus
There would be no problem if
a) This was not claimed to be wealth generating
b) It did not destroy real wealth generation
c) Our pensions weren’t based on it
d) Our value systems weren’t distorted by it
e) London ceases to have a viable economy because of it
And on and on and on
To say your comment was blinkered is being kind to it
Richard