The BIP Show
This week on The BIP Show, a discussion of what rocketing PE ratios mean for stocks, and whether indeed they actually matter any more, particularly with reference to the following chart:
Of course, one bad year of earnings (quite likely we're facing more than one) isn't the sole driver of market valuations.
Tune in here to listen (or click on the image below):
By the way, you can listen to the property market Episode that I recorded with the guys here.
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Unsurprisingly, an upbeat view...because low interest rates.
To me the salient risk is that if and when the US market drops it will bring Aussie shares down with it, regardless of prevailing valuations in Australia.
There are, of course, any number of macro valuations you can look at help determine broadly how 'cheap' or 'expensive' a market is.
Our preferred measure is the CAPE ratio - with a special focus on the US, which is by far the largest and most influential market for global equities - due to its strong correlation with expected 10-year returns and its accord with with the business cycle.
Here the Shiller PE, still running at about 30 into the eye of the recessionary storm:
CAPE isn't a market timing tool.
All it simply tells you is that from this point 10-year nominal returns are likely be poor at just a few per cent per annum, while history suggests that there's potentially (very) significant downside risk.
All it simply tells you is that from this point 10-year nominal returns are likely be poor at just a few per cent per annum, while history suggests that there's potentially (very) significant downside risk.
If you don't like CAPE - and, to be fair, some people don't - then here's a look at price to sales, which is steaming along the highest level since the dotcom, erm, bubble exuberance:
Ditto Tobin's Q...
...and ditto the Crestmont PE, which is now threatening even its 2000 peak:
And then there's the luring in of the army of Robinhood traders, and all the other behavioural red flags, with everyone from barristers to baristas asking about hot stock tips.
Back in Australia, as discussed on The BIP Show, Afterpay has more than 9-bagged since its lows of, *checks notes*, three months ago.
As discussed on the show Tesla is through US$285 billion having gone from $1,000 to blazing through $1,540 in a month, while analysts are openly discussing whether Tesla will hit a US$1 trillion dollar market cap before it's consistently turned a profit.
Meanwhile the US has sunk into its deepest recession since the Wall Street Crash and Great Depression, with an election looming large in November.
GLTAH.
