Rosenberg: Everything Today Is Eerily Similar To 1987
by Tyler Durden
ZeroHedge.com
Thu, 03/08/2018
The Strategic Investment Conference 2018 kicked off in San Diego with a keynote speech from David Rosenberg of Gluskin Sheff titled, “Year of the Dog: Will It Bark or Bite?” (Spoiler: The latter). Rosenberg began by running through a list of his own metrics: forward P/E, price/sales, price/book value, enterprise value/EBITDA. Not surprisingly, and as shown here previously, all of them pointed to record-high valuations.
Looking at normalized charts over time, they’re now at the 83rd percentile or higher. Price/sales is at the 99th percentile. The bottom line: it’s an ugly picture if you are looking for value in equities.
Rosenberg shared a scary quote from Howard Marks:
“Most valuation parameters are either the richest ever or among the highest in history. In the past, levels like these were followed by downturns. Thus a decision to invest today has to rely on the belief that ‘it’s different this time.’ I’m convinced the easy money has been made.”
Rosenberg pointed out that even the Fed admits that valuations are high. Our policymakers themselves believe this can’t continue for long. In fact, the Shiller CAPE ratio now stands at its second-highest level in decades. History shows that high P/E ratios are usually followed by years of low returns in equities. In fact, even the San Francisco Fed now predicts that equity returns over the next decade will be, at best, 0%, to wit:
Current valuation ratios for households and businesses are high relative to historical benchmarks. Extending the analysis by Campbell and Shiller (1996), we find that the current price-to-earnings ratio predicts approximately zero growth in real equity prices over the next 10 years.
Later, Rosenberg moved on to monetary policy and picked up on the Federal Reserve’s 2% inflation policy. To paraphrase:
“On what planet does 2% annual inflation constitute price stability? Prices can’t be rising and stable at the same time. This makes no sense. Furthermore, why 2%? Why not 1%? Whatever the inflation target, the Fed has proven unable to hit it, so maybe it’s time to rethink this whole idea.”
Rosenberg also pointed out that the composition of the Federal Open Market Committee had vastly shifted since 2017. At the beginning of 2017, there were no hawks in that group. Between departures, additions, and voting rotation, now it’s four hawks, one dove, and one unknown, by Rosenberg’s assessment. This should not comfort anyone who hopes the Fed will pull back on tightening and balance sheet roll-offs.
The Rest…HERE
