Asset inflation is often fueled by abundant money supply, which is why Wall Street incessantly clamours for it at the lowest interest rate possible in order to maximize its arbitrage

Asset inflation is a sustained, nominal increase in the market prices of financial and capital assets—such as stocks, bonds, real estate, gold, and derivatives—rather than everyday consumer goods and services.

Unlike consumer price inflation, asset inflation is not tracked by the Consumer Price Index (CPI) and is not a component of Gross Domestic Product (GDP). 

It is often fueled by low interest rates, abundant money supply, or cheap corporate and investor borrowing rather than direct production increases.

Rising asset values increase household net worth for owners (particularly higher-income groups), which can indirectly drive spending and fuel broader economic pressures.

Because asset prices can disconnect from underlying economic fundamentals or production capacity, sharp run-ups frequently carry the risk of a market correction or crash.

Just because it's a Tuesday, a lousy Tuesday.

 

 

  

 

Buffett Indicator in the news

 Wall Street on red alert as Warren Buffett’s favorite stock market gauge hits the worst reading EVER

... The so-called Buffett indicator divides the total value of all US stocks by the total economic output of the United States, delivering one simple number that sums up how investors are feeling at the moment.

Buffett said that a reading of 100 percent suggests markets are in balance - in other words, the stock market is worth about as much as the US economy produces in one year - while a lower figure means stocks are undervalued.

Right now, the index hit its highest reading ever - 232 percent - indicating that stocks are historically overvalued. ...

Right now, the indicator is well above its last two all-time highs: The 219 percent reading seen at the height of the 2021 pandemic stock market frenzy, and the 163 percent level at the 2000 peak of the dot com bubble. ...                                                                                                              

 

Using SPX tonight, instead of the Wilshire 5000 as Buffett does, we're at 224.8 vs. 1938-2019 mean level of 81!

The market has been obscenely overvalued way beyond the 1938-2019 experience for six consecutive years and counting, and investors keep keeping it that way by continuing to pour money into it. It won't unwind until they stop. And since they believe that the market goes only up, it will probably take a market-loathing mother of all economic disasters to change their minds and make them do so.

Meanwhile real return since August 2000 (139), the previous secular peak, is now 5.27% per annum through March 2026 (25 years, 7 months).

Real return from January 1975 to August 2000 (the previous 25 years, 7 months) was 11.19% per annum, 112% better because valuation was 61 in 1975 and falling.

Investing at high valuations by definition produces poorer results. Compare August 1965 (118) to August 2000 (139): 6.95% per annum real. 

(I need to update this chart for 2024 and 2025!)

 

 

Nosebleed valuations continue despite recent stock market declines

 It's a long way down to normal.

The 2022 lows got us back only to the 2000 high, and people thought it was the end of the world when all it was was a good beginning lol.

 

Nominal GDP in 1Q2025 is estimated at $29.9776 trillion by the BEA this morning.

$SPX closed at 5611.85 on March 31, 2025.

That yields a ratio of 187 vs. the historical mean of 81, or 131% overvalued. 

Guru Focus gets similar results from the Buffett Indicator:

 

Stocks remain wildly overvalued and seriously underperforming

 The S&P 500 averaged 5,792.32 in October 2024 (the all-time high was on 10/18 at 5,864.67).

Nominal GDP was updated on Oct 30th at $29.349924 trillion for 3Q2024.

That yields a ratio of SPX/GDP of 197.35 vs. median of 81.

Stocks remain wildly, obscenely, off-the-chart overvalued.

The formula is GDPx = SPX.

29.35(81) = 2,377.

The market would have to fall 3,415 points just to hit median valuation at current GDP, or about 59%.

You can see a similar analysis here, where the median is 79.7 vs. current 200.7.

Real return from SPX since Aug 2000 is now about 5.1% per annum vs. 7.4% before that (including the Great Depression, the depression of 1920, and every collapse before that going back to 1871), 31% worse.

We are living through developments echoing the lunatic era of the 1920s, which ended in tears.

Owe no man anything . . ..

 

 

 

Tell me, Bwana: What mean GDP, why important?

 Bureau of Economic Analysis this morning here:

3Q2023 nominal GDP, first estimate: $27.6235 trillion

Nominal increase year over year in 3Q: 6.27%

Compound annual growth rate since 3Q2000: 4.375%

Compound annual growth rate 3Q1947-3Q2000: 7.275%

Underperformance from post-war, last 12 months: 13.8%

Underperformance from post-war, last 23 years: 39.86%

Current S&P 500 ~ 4175

Current ratio of S&P 500 to GDP: 151

Median ratio of same 1938-2019: 81

Current overvaluation of S&P 500 from median: 86.4%

Current fair value of S&P 500: 2238   

Vanguard's long term Treasury fund, started in 1986, set a new all time low price record yesterday: What a coincidence

 VUSTX fell to $7.37 yesterday, October 19, 2023.

Until the bond debacle of 2022, the lowest price ever was set way back in 1987, also on October 19, aka Black Monday, when the S&P 500 crashed 20.47% in its worst single day ever.

2022's new all time low for VUSTX at 8.16 had occurred on October 24, missing the anniversary of the old all time low by just three days. Also a very odd coincidence.

The debacle has only continued in 2023, and VUSTX prices haven't seen $8 since September 22nd.

ZIRP since the Great Recession is ultimately to blame for the current mess in long term Treasury securities. The clamor it created for yield drove bond investors long, culminating in the highest nominal prices ever paid for long term UST in March 2020, and the lowest yields. 30Y UST yield crashed to 0.99% on March 9, 2020, 20Y to 0.87%. Yields across the board in 2023 for 2Y to 30Y have set records for this cycle in October. Yesterday 20Y demanded 5.30%, 30Y 5.11%.

No one wants that 2020 and prior junk now, so wherever it sits it's causing collateral problems, at banks, insurance companies, pension funds, et cetera. And on the Fed's balance sheet: As of October 18th the Fed has $1.503922 trillion of UST maturing in more than 10 years on its balance sheet. It basically has to keep it until it matures, and it pays it very little to return to the Treasury as it does.

Are prices done falling?

Confident pretenders said so a year ago this month, and now here we are with $TLT investors down another 12.22% since then.

Given the obscene overvaluation of stocks, and the demand for higher yields by bond investors, cash still seems the safest place to be. VMRXX, Vanguard Cash Reserves Federal Money Market Fund Admiral Shares, has returned 4.00% ytd. You continue to lose to inflation, however.

Nothing is ever perfect.

 

1987 high and low

2022 high and low to the left, all time high and low to the right

Trump Tower triplex overvalued by at most 272%, Instagram undervalued in 2012 by 14,900%

Trump's NY fraud trial is beyond stupid.

Trump Is Right on Asset Prices

Stuart Kirk, Financial Times

 

It's been a terrible year so far for investors in US Treasury securities because of the rising rate environment, but great for stocks

UST yields rose a net 1.31% in the aggregate week over week on 7/28.

DFF rises to 5.33% after the latest FOMC rate hike.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to date Treasury, Total Bond, Cash, and Total Stock performance using popular Vanguard funds:

VFISX +0.75% VFITX 0.90% VUSTX 1.58% VBTLX 2.05% VMFXX 2.75% lol VTSAX 19.99%!

Stocks have been the place to be, and cash has beaten even the total bond market.

Meanwhile stocks are obscenely overvalued at 169 using the latest report of GDP out Thursday:

 

The stock market remains obscenely overvalued

 On Friday it hit 167.

Off the chart.

Gold remains far more overvalued than US stocks, which is saying a lot

Gold is at least 167% overvalued relative to inflation since 1913. $600ish gold makes sense. $1600 gold does not, let alone $2067, the 2020 high.

Meanwhile stocks are off-the-charts overvalued, about 93% relative to the post-Great Depression median valuation of 81 through 2019, as of the latest GDP figures from late May.

Speculation in both gold and stocks, not to mention a host of other things, has been driven by Federal Reserve interest rate suppression since 2001.

How long elevated gold and stock prices can persist in the new higher interest rate environment is anyone's guess.

The Fed Funds rate still averaged a low 1.69% in 2022, so it's still early innings.

.

May 25, 2023

US homes were at least 84% overvalued in 2021

 Rounding out the Unholy Trinity of Big Ticket Asset Inflation, Housing joins Stocks and Bonds in similar overvaluation territory in 2021 at about 84%.

In Feb 2012 when housing bottomed after The Great Financial Crisis, a previous inflation-adjusted Case-Shiller home price index chart no longer updated for present years showed that prices had fallen into the top range of US house prices which had prevailed throughout the post-war from the 1950s to the late 1990s. Mind you, the top range of those inflation-adjusted prices.

Thanks to Democrats and Republicans, including Bill Clinton and Newt Gingrich, the American Dream, the nest of the American future, was turned into a mere commodity in the late 1990s, to be churned in the markets for profit.

Long-suppressed long term interest rates have conspired with commoditization to produce valuations which have exploded, making houses unaffordable as nests, which is why your kid is still living in your basement.

The chart below shows the nominal price figures, on an average annual basis through 2021. The blow-off tops in 2022 are even worse (the index topped 308 in June), and are not shown because the year ain't over, and prices are falling.

At an average index level of 260 in 2021, prices were inflated from 141 in 2012 by about 84%, not far below the overvaluation of stocks and bonds at 90% and higher.

 

 

 

 

The percentage holding full-time jobs through September 2022 held above 50%, disappointing the ubiquitous advocates of a Fed interest rate pivot

 Full time as a percentage of civilian population in September was 50.3%, and for 2022 through September averaged 50.15%.

Not bad, considering.

The Fed will see little evidence in this figure that its interest rate increase policy is harming employment.

Stocks on Friday collapsed after a head fake to start the week to within 1.5% of the 52-week lows set a week ago.

Long term investment grade bonds and US Treasury securities also revisited lows from 9/27/22, coming within pennies of those benchmarks.

30-year yield for UST is back up to 3.86%. It was 3.87% on 9/27. At the beginning of 2022, yield was a paltry 2.01% by comparison.

UK gilts are experiencing the same action despite the Bank of England intervening to buy bonds. 

The bond crisis is not over.

With yields soaring across the board no one wants to own the lower paying outstanding issues, which are legion, destroying their value.

But everything in the global economy is based on those, piled up in earnest after The Great Financial Crisis of 2008, and in orgiastic frenzy afterwards during the late pandemic.

Bond yields in 2022 are telling you that they are overvalued by 92%.

Stock market valuation is telling you a similar thing.

From 1938 through 2019 the median ratio of the S&P 500 to GDP is 81. In 2020 we averaged 154, or 90% overvalued.

This is the major deflationary headwind facing the world, the other side of the COVID-19 inflationary shock coin.

Push here, it comes out over there.

Modern central banking cannot escape this conundrum any more than the gold standard could.

The only thing the individual can do in this situation is to owe nothing and save everything, preferably in your hands.

Good luck.

 

 

 

 

 

 

 

 

 

 

 

 

The continuing crisis of housing bubble-itis

Housing prices in 2017 are overvalued north of 40%. The index commensurate with the pre-1993 period should be about 142 but is instead 203.

Adam Tooze notes US house prices relative to the rest of the world are low but still run ahead of Italy and Germany.

What would happen if 44 million German Americans and 17 million Italian Americans went back home looking for a bargain? 

Total Market Capitalization To Nominal GDP Ratios, Selected Years

I have used the Wilshire 5000 level at year end multiplied by 1.2 as a proxy for total stock market capitalization (except where noted by the month), and the latest summer revisions for calendar nominal GDP, in summer 2014 for the period back to 1999, and in summer 2013 for the period back to 1971.

A ratio close to 1.0 indicates the market is fairly valued relative to GDP. A ratio less than 1.0 indicates the stock market is "on sale" to some extent (for example, a ratio of 0.48 indicates the market is trading at a 52% discount). A ratio of more than 1.0 indicates the stock market is expensive and may be considered overvalued for investment purposes (for example, a ratio of 1.72 indicates the stock market is as much as 72% too expensive).

1971   .975

1981   .480

1987   .595

1990   .622

1994   .745

1997 1.296

1999 1.715
2000 1.420
2001 1.209

2002   .912

2003 1.125
2004 1.170
2005 1.147

2006 1.234

2007 1.228

2008   .740

March 2009   .676

2009   .962

2010 1.071

2011 1.019

2012 1.113

2013 1.410

March 2014 1.407

June 2014    1.446

Historically considered, valuation of the stock market by the end of 2008 made then a much better investing opportunity than was late 2002 and early 2003, almost 20% better. And valuations have remained reasonable throughout 2010-2012 and only became expensive in 2013. The four year period beginning in late 2008 has been an excellent opportunity for those with cash to invest.

I maintain that a primary driver of conditions in 2013 was the midnight hour 2012/2013 resolution of tax uncertainty, in the form of making the Bush tax cuts and alternative minimum tax rates permanent, ending the tinkering with Social Security, and reaching a compromise on capital gains tax rates.

All hail John Boehner.

Something about riskier bonds for Bob Brinker listeners to think about

Seen here:

"The sensitivity of a bond to interest rate increases is determined by the time to maturity, not its credit rating."

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Some of Bob Brinker's followers/critics think his recent move away from all bonds with durations beyond one year was a big mistake.

If there's a bond run, which becomes more likely when bonds are overvalued, which they arguably are, selling becomes more difficult than people realize. Steep losses would be almost certain, but it is also likely that the ultra short duration bonds would recover much more quickly, and perhaps not just because they are ultra short. People might actually plow into them as they did with bonds in general in the wake of the financial panic of 2008, boosting prices.

John Hussman: It's advisable to panic before everyone else does

From the irrepressible mind of John Hussman, here:

Market conditions presently match those that have repeatedly preceded either market crashes or extended losses approaching 50% or more. Such losses have not always occurred immediately, but they have typically been significant enough to wipe out years of prior market gains. ... On the basis of historically reliable measures, the S&P 500 would have to move slightly below the 1000 level to raise its prospective returns to a historically normal 10% annually. ... Regardless of whether the market’s losses in this cycle turn out to be closer to 32% (which is the average run-of-the-mill bear market loss) or greater than 50% (which would be required to take historically reliable valuation measures to historical norms, though most bear markets have continued to undervalued levels), it’s going to be difficult to avoid steep losses without a plan of action. In our view, that action should be rather immediate even if the market’s losses are not. However uncomfortable it might be in the shorter-term, the historical evidence suggests that once overvalued, overbought, overbullish conditions become as extreme as they are today, it’s advisable to panic before everyone else does.

How Speculators Redistribute Wealth: Find The Greater Fool

John Hussman, here:

It is certainly possible for any individual investor to realize wealth from an overvalued security by selling it, but this requires another investor to buy that overvalued security. The wealth of the seller is obtained by redistributing that wealth from the buyer. 

Both Shiller p/e and Tobin's q warn stocks are seriously overvalued

As reported by Brett Arends, here:

Smithers found that over the past century the Shiller PE had an R-squared to subsequent returns of 0.52, the “Pseudo-Indicator” one of 0.61, and the q an astounding 0.79.

So if the past is any guide, if you want to get a good estimate of the future returns from today’s stock market you should completely ignore the low yields on cash, certificates of deposit, or bonds. You should pay more attention to the Shiller PE, and you should pay the most attention to the Tobin’s q.

And what do these tell you? “As at the 31st December, 2013,” says Smithers, the “q indicated that U.S. non-financial equities were overvalued by 73% and CAPE indicated an overvaluation of 76% for equities, including financials.”

If profit margins were historically normal, the Shiller p/e would be about 29 here, not 24

So writes John Hussman, here, on Tuesday last:

Meanwhile, the current Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) of 24.2 is closer to 65% above its pre-bubble median. Despite the 10-year averaging, Shiller earnings – the denominator of the Shiller P/E – are currently 6.4% of S&P 500 revenues, compared to a pre-bubble norm of only about 5.4%. So contrary to the assertion that Shiller earnings are somehow understated due to the brief plunge in earnings during the credit crisis, the opposite is actually true. If anything, Shiller earnings have benefited from recently elevated margins, and the Shiller P/E presently understates the extent of market overvaluation. On historically normal profit margins, the Shiller P/E would be about 29 here. In any event, on the basis of valuation measures that are actually well-correlated with subsequent market returns, current valuations are now at or beyond the most extreme points in a century of market history, save for the final approach to the 2000 peak.

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You have been warned.

For What The Nation Earns Homes Are Still Overpriced (15%)

So says Bloomberg Businessweek, here:

"[H]ouses are overvalued. From 1988 through 1999, median home values averaged 2.6 times the median annual income. As the bubble kicked into gear, prices pushed up to almost four times income. With the crash, that ratio has come down—but not far enough, largely because incomes have been stagnant, if not declining, in recent years. Home values are now at three times the median income—that’s 15 percent higher than they have historically been, relative to what Americans earn."

From the point of view of the Case Shiller Home Price Index, a 15% correction to the current index value of 136 would imply 115.

In the post-war period, we have witnessed 115 on the index in December 1982, March 1975, December 1973, September 1968, and December 1952.