The 2003 bounce came when stocks were not cheap – they traded at a multiple to cyclical earnings of about 21, according to Prof Shiller, when at the bottom of previous bear markets this multiple had fallen below 6. So it looks as though cheap money stopped markets taking all the medicine they needed. Similarly the current rally began with stocks trading at a multiple of 13 times the previous 10 years’ earnings. This was the cheapest in 21 years but still double the lows seen after previous great sell-offs, implying cheap money had once again saved prices before all speculative excess had been cleaned out of the system.
– John Authers, “A Risky Revival”
It’s the last game of pass the parcel. When the tech bubble burst, balance sheet problems were passed to the household sector [through mortgages]. This time they are being passed to the public sector [through governments’ assumption of banks’ debts]. There’s nobody left to pass it to in the future.
– David Bowers, Absolute Strategy Reseach, quoted in “A Risky Revival”
Atlas knows that if he shrugs, the world drops to the floor. That is why China U-turned on plans that would have prevented smaller banks from increasing loans without raising equity. It is why President Obama is in trouble over healthcare because US voters will not accept what they see cannot be paid for. It is why central bankers in euroland and the UK talk of ending stimulus measures but know that if they do, the recovery ends.
How far are governments able to meet their social promises, and how and when will they settle or partially default on their IOUs?
At stake is whether governments spend the next five years reacting to externally imposed crises, eventually bringing us all, via another great bust in the 2010s, to ground zero, or whether they seize the small chance of change now.
As an investor, responsible for the socially useful function of protecting and increasing the capital of savers, I will not bank on it. I will hedge.
– Crispin Odey, “Insight: Bubble or Recovery?”
Two interesting pieces from the Financial Times on the question of if this stock market rally is another bubble:
“A Risky Revival”, John Authers, The Financial Times, September 25
“Insight: Bubble Or Recovery?”, Crispin Oden, Founder, Odey Asset Management, The Financial Times, September 22