An article on inflation from the Economist two weeks ago has been freaking me out. By now, with the biggest experiment in loose monetary policy the world has ever known, we should be happily inflating our way out of the overleverage aftermath of the 2008 crisis. Yet here we are with core inflation at 1.4%, 1.2% and 0.8% for the G7, US and the Euro zone respectively.
It seems like the air is coming out of the balloon faster than the central bankers can fill it. An article in today’s FT pointed out that real incomes in the average US family are less today than they were in 1989. No matter how much the central bankers want us to go back to the Mall and shop our way out of the current climate, there is something that just doesn’t add up.
Against the background of loose monetary policy and weak underlying fundamentals, I am becoming more convinced that the stock market is overvalued today (which doesn’t mean it will necessarily stop going up!) with the Dow topping 16,000 and S&P500 nearing 1,800 at a PE of 20 (& 15 times 2014 estimated earnings) and the Shiller PE at 24.7.
With my thanks to Fast Eddie, here are some articles on valuations that I have been reading which provide food for thought:
GMO November letter by Ben Inker & Jeremy Grantham
Chumps, Champs, and Bamboo by John Hussman
and the thought provoking
The paradox of wealth and the end of history illusion by William Bernstein