Source: BofA Merrill Lynch & Bureau of Economic Analysis



I wanted to point you to a quick chart from Ethan Harris and his global research team at Bank of America Merrill Lynch. It addresses something I have referenced before — the idea that so many folks could be accurately spotting a bubble in real time with any degree of accuracy.

The argument I made is admittedly squishy, not relying on quantitative data or pricing. Several of you pointed this out, to which I pleaded guilty. So I started looking for more price-driven examples that might make the same case.

Hence, Harris’s chart above. When we look at the prior peaks, and the run that took markets there, it is pretty obvious in hindsight that prices had gotten stupid.

Which leads me to this question: What prices today are utterly stupid? What has run up with no logical explanation?

I see lots of asset classes that have had great runs, but nothing I can point out as insane. Even the 160 percent S&P 500 rally follows a 57 percent drop, and a 140 percent earnings gain from the lows. That’s somewhat above median, but not unprecedented.

Question: What specific prices are revealing of a bubble?

Category: Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

4 Responses to “What Stock Prices Have Gotten Stupid?”

  1. With all due respect, it’s BS to say earnings are up 140% from the lows as the lows were spikes down and included AIG losing $100Bn in a quarter and LEH and BSC going bust and losing tens of Billions and FRE and FNM dropping $100Bn, etc. THAT is the low earnings we’re talking about. Of course you can’t do that again – well I guess you could but it would be tough to match.

    So the comps are idiotic and you can’t (or at least you shouldn’t) use them to justify raised valuations when, in fact, the individual companies are earning LESS than they did in 2007, not more.

    • By your logic, then we must radically discount the run up prior tot he collapse as just as much nonsense.

      The BSC and LEH amd C and AIG earnings were all nonsense. So too were the homebuilders, and by extension, most of the retailers. Hence the boom AND the bust were gossamer fabrications of fraud.

      Now what Batman?

  2. ottnott says:

    My take is that prices alone just help you spot potential bubbles.

    We call them “bubbles” instead of “really high mountains” because there’s nothing but air supporting the price increases. You have to investigate and try to learn if the forces behind the price growth are primarily performance, optimism, or fantasy. What starts as performance-based price growth can transition through optimism into fantasy.

    In the housing credit bubble, even people with very modest incomes were getting large loans, because the underwriters didn’t require (or didn’t care about) income verification and the banks were offering loan terms with ridiculously low payments in the initial few years. One crazy loan type was the option ARMs that didn’t even require enough in payments to cover the low starting interest rates and allowed negative amortization even during the honeymoon period. Those loans were one of the many tells that US housing was experiencing a bubble.

  3. I agree with that, our models throw out spikes in either side if we don’t feel conditions will allow for repeats. To that end, you could argue that current financial earnings are of higher-quality than 2007 earnings were but then we have to take into account $85Bn/month of free money as well as continual adjustments to loan-loss provisions that have goosed earnings for the past few years.

    How will this market fly on it’s own and, of course, will this market ever be allowed to fly on it’s own again? The Fed deals a strange kind of heroin and the markets are well-hooked and constantly looking for the next fix.

    But, back to the point – we’re talking S&P earnings of whatever but that doesn’t mean WMT, who earned $16.4Bn in 2010 and $15.7Bn in 2011 and $17Bn last year and are on track for $17.2Bn this year should be PRICED (not VALUE) at 75% higher than they were in 2011. This is very 1999, where we use the idiotic valuations of some companies (TSLA, AMZN, NFLX) cause us to relax our standards on others and then, the index as a whole, after which we’re then using the index gains to justify the silly valuations we’re giving to the CMG, GMCR, PCLN, SBUX -tier companies (overvalued but something is arguably there).

    In short, it’s a slippery slope and I’d hate to see you go down that rabbit hole. It feels very, very 2008 to me at the moment – we’re ignoring a lot of big stuff and projecting future earnings in a World where nothing will go wrong for at least 3 years. Just the kind of market where reality can suddenly smack your right in the portfolio.