2007 All Over Again, Part 6: Stock Market Valuations Enter “Crash” Territory

by John Rubino

The Trump stock market rally has taken valuations beyond a point that, in the past, has signaled trouble. Market indicators have hit extreme levels last seen before plunges in 1929, 2000 and 2008.

2007 All Over Again, Part 6: Stock Market Valuations Enter “Crash” TerritoryToday’s market is made up of companies with actual earnings—not dot-com companies—so it might be safe to discount 1999 and use the rest of the chart for comparison, in which case current equity prices look extremely dangerous.

Today, debt no longer seems to matter; the US, after doubling the federal debt in a single presidential administration, has chosen a new president whose platform calls for massive increases in borrowing and spending. There are no limits on how low interest rates can go or how many and what kinds of assets central banks can buy with newly created currency.

The Japanese and Swiss national banks are already huge buyers of equities. If the Fed joins them, it’s not clear whether P/E ratios will continue to matter. The unlimited printing press is definitely an argument for “this time is different.”

Lately the bond market has begun to show signs of stress. What will happen if governments respond to bond market turmoil by creating even more currency and buying up all the long-term bonds, as Japan is currently doing in its own market? The pressure will shift to the foreign exchange markets, because no one will want to own fiat currencies that are being created at rates far exceeding the growth of the real economy.

Fiat currencies are the one thing governments can’t buy up with newly created money. All are currently falling in relation to artificially inflated stock and real estate prices. But let a soaring money supply translate into rising general prices (something the bond market is now signaling) and it’s game over. Governments will face rising instability without tools capable of managing it.


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