Deutsche Bank: “Global Asset Prices Are The Most Elevated in History”
The comments above & below is an edited and abridged synopsis of an article by Tyler Durden
In a report by Deutsche Bank’s Jim Reid, the credit strategist looks at the next financial crisis and what may cause it, when it may happen, and how the world could respond. Reid says that we’re in a period of very elevated global asset prices—possibly the most elevated in history.
Nominal and real GDP growth rates have been trending down and unless equity returns slow relative to the past, then valuations will rise. However, over the longer term, this should be mean reverting, as profits can’t permanently outstrip nominal growth. There is evidence that in the US, for various reasons, actual earnings have outstripped nominal growth.
However, history suggests this is mean reverting over the medium to long term. The US, which has the most developed history of equity data, including the longest series of earnings data throughout history, has longer-term issues with equity market valuations.
The US CAPE ratio was only higher before the 2000 equity bubble bursting, and ahead of the 1929 crash. CAPE analysis cyclically adjusts earnings by using the average of the last 10 years; in order not to be concerned, you would have to believe that the last decade’s higher earnings represent a new paradigm.
Deutsche Bank’s conclusion: “While there are no obvious triggers for historically high global asset valuations to correct, while they remain this high there is always a risk of a sudden correction that could be destabilizing to a financial system and global economy that seems to require such elevated asset prices.”