The Story of Our Times

Dow up 180 points on Thursday. Gold rose $16, once again breaching the $1,200-an-ounce mark. The first number measures the value of America’s business. The second measures the measure.

We watch the two, but not closely. Most often, nothing important happens. There is no information content in the numbers. Just “noise.” Then, occasionally, they say something…

Many investors and analysts spend their time trying to figure out what the numbers will say next. That is like trying to guess what will come out next from the mouth of a raving lunatic.

 

6-blind-men-hansInvestors busy figuring out where things stand …

Cartoon by Hans Moeller

 

Instead, we try to figure out what Mr. Market would say… if he had some sense. Would he say that “all is well” and America’s businesses are becoming more valuable? Why would he?

Companies compete with each other for whatever sales are available. Some win market share; some lose market share. Overall, the value of businesses should rise along with the rest of the economy – that is, along with GDP.

 

corporate equity to GDPThe ratio of non-financial corporate equity to GDP: in terms of this measure, the stock market is now at its second highest valuation in history. Only the peak of the late 1990s technology mania still towers above the current level. Similar results are obtained with practically every other method of gauging the market’s valuation (except for the valuation of the median stock, which sits at an all time high) – click to enlarge.

 

But for the last 30 years, the value of equities has risen much faster than GDP. In raw numbers, the Dow is up about 12 times. GDP is up only about three times. How is that possible?

That is the story of our times … and our lives. Most of our adult lives have been spent in this world, where strange things have happened… and been taken for normal.

And now we live with stock prices – and also bond prices and real estate prices – far higher than economic performance would predict. What gives? And what would Mr. Market say about it?

 

Trouble in the Bond Markets

It doesn’t make sense for asset prices to run so far ahead of the economy that supports them. There are only so many sales to be had… only so much business… and only so many profits. “Oh… but interest rates are lower!” you might say …

Yes, but that is not a permanent condition. That is only a temporary – and profoundly cyclical – situation. Mr. Market will have something to say about that too. And although he has been mumbling and grumbling, one interesting thing has slipped from his lips: “Bonds have topped out.”

At least, that’s what we thought we heard. About two months ago, nominal bond yields dropped to such strange levels – negative in many cases – that it must have caught Mr. Market’s attention and offended his delicate sensibilities.

Since then, bond prices have dropped. This has pushed up yields. Here in France, for example, yields on the 10-year French government note quadrupled in just 60 days. This could be more than noise. It could be the end of the whole thing …

Stay tuned …

 

France, 10 year yieldA wild ride in euro area government bonds – after declining relentlessly from their 2011-2012 crisis peaks, yields have suddenly spiked as investors begin to revise inflation expectations – click to enlarge.

 

Image captions by PT

 

Charts by:  St. Louis Federal Reserve Research, BigCharts

 

The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

 
 

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