Or McCrum smackdown watch…
Here is an extract from a recent FT Short View that looked at predictions for stasis implied by different market measures:
European stock prices provide further perspective. The equity risk premium is the return that investors demand over and above that available from safe government bonds. Over time, the average equity risk premium has been 3.5 per cent, and Goldman Sachs uses that figure to estimate the long term rate of earnings growth embedded in stock prices. Historically, earnings grew by 5 per cent a year, but the implied rate of real growth for earnings has fallen steadily, and is now negative. On that basis, stock prices imply that earnings for European companies will decline substantially over the long term.
The final report from Smithers & Co has landed, as the septuagenarian scourge of “stockbroker economics” eases into retirement.
We are assured that he’ll still be blogging for the FT, but the regular research output will cease. The valedictory note is, as you might expect, on the bearish side of things:
The US equity market is overvalued to an extent only experienced five times before in the past 212 years. On two occasions, however, it has risen well above the current degree of overvaluation.
This is an abridged version of a post by Andrew Smithers for his FT blog, one that lays out why using next year’s PE ratio to value the stock market is absurd. Taking the Fed Chair to task for her language, it is also ripost to the critique of long term valuation measures we have also featured.
Janet Yellen, the Fed’s head, rather bizarrely used the prospective price/earnings ratio, one of the weakest of all measures, to justify a statement that Wall Street was not overvalued. (This was doubly strange since her husband, George Akerlof, co-wrote a book with Robert Shiller, who has championed a much better measure…
I quote from a recent Buttonwood column in The Economist. Calling Ms Yellen’s comment “strange” seems very kind. Many people would rate the use of bad data in preference to better as irresponsible rather than strange, particularly when it carries with it the authority of the US Federal Reserve. Read more
In the latest from Andrew Smithers, our eye was drawn to a line in his gloomy state of the world summary, that the UK economy is driven by an unsustainable fall in household savings.
What it turns out we had not been paying attention to lately is the fact that the UK household saving rate is the worst among the developed economies apart from Japan, where a dip into negative territory has some investors nervously (gleefully?) eyeing the sovereign debt load. Read more
So yes, the Cape measure of long term valuation might have some flaws, but don’t expect them to keep a good bear down. The latest from Andrew Smithers provides some more (over) valuation points to chew on. Read more
As Izzy said recently, ‘deficit’ continues to be a dirty word in the US (despite *those* findings…) which makes this paragraph from Andrew Smithers either raunchy or worrying:
As retained profits of corporate business in Q2 2013 amounted to 2.3% of GDP, it seems likely that they would fall to near zero if the CBO’s forecast for the fiscal deficit were to prove accurate and such a fall is likely to be accompanied by large falls in dividends.
By Neil Collins
It’s not the banks, it’s the bankers Read more
Economist and market watcher Andrew Smithers has focused in his latest client report on the disparities between equity returns in fast-growing emerging markets and more mature economies to argue for caution and international diversification of equity portfolios.
Citing what he sees as a widespread assumption that equity returns in rapidly growing economies should be higher than those in mature economies, he notes that investors are often encouraged to “overweight their portfolios to favour shareholding in emerging markets”, arguing: Read more
Economist and uber-pundit Andrew Smithers is on a roll, having drawn attention in the financial media this week with his latest report contending that the US stock market is 40 per cent overvalued.
Smithers – who regularly opines on everything from Japan to the US stock markets and UK monetary policy – also has central bankers firmly in his sights with his new book, “Wall Street Revalued: Imperfect Markets and Inept Central Bankers”. Read more
Andrew Smithers, of London-based research house Smithers & Co, is not a man who has any truck with nonsense. Particularly when it comes from the mouths of stockbrokers.
In his latest report, The US Stock Market: Value and Nonsense About It, he takes to task those who claim US equities are still cheap: Read more
Speaking of quantitative easing, as FT Alphaville just has in a neat scene-setter for a Tuesday speech by Bank of England governor Mervyn King, Andrew Smithers of Smithers & Co warns in his latest world market update that asset prices are likely to fall after central banks end their QE programmes.
Like others, Smithers argues that the rise in prices of shares, bonds and gold has been largely due to massive QE programmes in the US and UK, and the outlook for asset prices when this policy ends is poor. Altogether, he says, QE programmes have seen $800bn injected in the US and £120bn in the UK, equivalent to 5.3 per cent and 8.2 per cent of GDP respectively. Read more
He is no longer Fed governor but Alan Greenspan, now a highly prized commodity on the international conference circuit, still attracts eager audiences. On Friday he became the latest to weigh in on the US economic debate, changing his tune from the kind of bearish view that shook markets in February when he suggested the US economy might fall into recession by the end of the year.
Now, he believes the odds against a US recession are only 2 to 1, he said in a video address to an investors’ conference in Singapore, Reuters reported. Read more
Whether the US economy weakens or stays on a robust course, the outlook for US profit margins is at best, flat and at worst, bleak, according to Andrew Smithers in his latest client report from Smithers & Co.
In typically counter-intuitive style, he argues, US profit margins are strongly mean-reverting and strongly correlated with changes in post-tax profits. Right now, as profit margins are high, the prospects for US earnings are poor. This is why: Read more