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What’s Wrong With Record High Stock, Bond And Real Estate Prices?

Published 04/29/2021, 12:02 AM
Updated 07/09/2023, 06:31 AM

When you pump $12.3 trillion (and counting) into an economy, things are going to inflate.

Global Monetary And Fiscal Stimulus Feb 2020-Mar 2021

For example, commodities are going to be more expensive. Take a look at the vertical leap in prices for copper.

COMEX Copper Chart

And lumber.

CME Lumber Chart

Home prices themselves become bubbly. Home prices have not been this out of whack with rent since the 2008 real estate catastrophe.

Case-Shiller National Home Price Index

Indeed, when you drop dollars from the sky into people’s laps, and when you inject trillions of dollar credits into a financial system itself, the prices of everything increase dramatically. Stocks. Bonds. Real estate. Commodities. Collectibles. Cryptocurrencies.

Unfortunately, corporations may not be capable of earning enough in the way of profits to justify the prices that people are paying. Stock prices relative to corporate earnings per share have rarely been this far above average price-to-earnings (PE) ratios.

US Trading P/E

In fact, nearly every measure of stock valuation has catapulted into “never-have-we-ever” land.

Valuation Metrics

Many may wonder, “What’s wrong with record high stock, bond and real estate prices?” After all, doesn’t this imply that people are wealthier than ever?

The problem is that the asset price inflation is not sustainable. Bubbles are not sustainable. And, eventually, all bubbles pop.

Regardless of the catalyst, prices are destined to implode. Perhaps sooner than later. Sadly, if the collapse were to occur soon, it would happen at a time when households are overexposed to stocks.

GWIM Equity Allocation

Keep in mind, the last time earnings yields (E/P) were as low as they are today, the 2000 tech bubble exploded. NASDAQ 100 investors watched portfolios lose 80% in value.

Cyclically Adjusted Earnings Yield

Not surprisingly, then, some folks are ready to pounce. Short seller interest has risen to levels not seen in a number of years.

Building Shorts

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