Popping the Great Bubble Myth

The Fed’s campaign to destroy the economy [Gilder's Daily Prophecy] July 14, 2022 [UNSUBSCRIBE]( | [ARCHIVES]( BOMBSHELL: James just stunned EVERYONE [Click here to learn more]( Available to the public for just hours... This just-released video is already causing quite a stir. That’s because James Altucher just went live on camera and dropped a BOMBSHELL on our readers that no one was expecting... If you do one thing today, take five minutes to see [this.]( You’ll be very happy you did. [>> Go Here Now <<]( Popping the Great Bubble Myth [Richard Vigilante]Dear Daily Prophecy Reader, Lurking in the background of the Fed’s campaign to destroy the economy in order to save it is the now decade-old myth of the Great QE (quantitative easing) Stock Market Bubble. This was supposedly caused by the Federal Reserve’s zero interest rate policy. This myth, like most, is sustained by a certain plausibility of cause and effect. The plausible bit is that investors generally spread their assets across stocks and bonds to balance volatility vs. return. If, however, the Fed succeeds in suppressing interest rates yield-hungry investors will flee bonds for stocks, inflating share prices and causing a bubble. This makes so much sense in theory that I expected it to happen. So did many of the smartest people I know. It never did. There was no bubble. Certainly, there is no bubble now. Measuring Bubbliness We can measure bubbliness by PE (price-to-earnings) ratios. During the 43 years of the Reagan Era, PEs have been systemically higher than in previous decades, a structural effect of the Reagan tax cuts. The tax cuts flipped cumulative, after-tax, inflation-adjusted stock market returns from negative for the 1970s into robustly positive ever since. Naturally prices rose, lofting PEs. From January 1, 1983, through January 1, 2022 the average PE of the S&P 500, based on 12 months of trailing earnings (TTM), was 22.2. By comparison, from 1950 through 1982 PEs averaged a mere 13.6. [chart] Now let’s look at the QE period. We’ll start from January 1, 2010 (TTM), not 2009. That’s because PEs can get weird during a crash if earnings fall even faster than share prices, making stocks appear more expensive. True to form the January 2009 TTM PE was almost 71, the highest in history. During the QE period the average PE actually dropped a bit to 21.6. No bubble there. Maybe we should sharpen the focus by not allowing any overlap between the two periods. The average trailing 12-month PE of the S&P from Jan 1, 1983, through Jan 1, 2008 was 20.6. The PE of the QE years was only one point higher. That’s no bubble either, especially considering that from 1983-1985 when Reaganomics was still taking hold, a very pre-Reagan average PE of only 11.1 prevailed. Excluding those early outlier years, the QE spread disappears. Ex-CIA Insider: “They are LYING about inflation!" [Click here to learn more]( One former CIA and Pentagon insider revealing the TRUTH behind the inflation numbers in America. A story so shocking it could bring the Biden Administration to its knees. [Read More]( Shiller to the Rescue Perhaps we should use the “Shiller PE ratio,” widely cited by those who argue the S&P has been in bubble territory for the past several years. This PE measure was created by Nobel Prize-winning Yale economist Robert Shiller to smooth out market volatility. The Shiller PE includes not only current earnings but the average of 10 years of earnings, adjusted for inflation, in the denominator “E”. Bob Shiller is an excellent fellow and a great economist even leaving aside the fact that he provided a generous blurb for Panic, the book Andy Redleaf and I wrote about the Panic of 2008. The Shiller PE ratio has many virtues. The ten-year base does smooth volatility. For the same reason, Shiller PEs go down, not up, during crashes, providing a useful buy signal. The Shiller PE does have a weakness. Because it is backward-looking it can miss recent structural changes in the market. That’s exactly what it’s been doing for the past several years. Let’s see how. For the entire Reagan era, December 31, 1983, through Dec 31, 2021, the Shiller PE, which is generally higher than the classic PE, averaged 24.4. During the QE period, however, it jumped to an average of almost 28, a 15% rise. Sounds, bubbly. [chart] Here’s why it’s not. All that increase came in the last years of the QE period. In the early years from 2010 through 2016, the Shiller PE averaged 23.2, a shade less than the 24.4 of the entire Reagan Era. Only beginning in 2017, through 2021, did the Shiller PE pop to 33 on average. It hit 37 in 2021. [chart] What happened in 2017? The Tax Cuts and Jobs Act was passed, which, starting in 2018 slashed corporate income taxes by 40%, from a top rate of 35% down to 21%. Like Reagan’s tax cuts this was another, if not as large, structural change in the market. A 40% tax corporate cut should be expected to loft future corporate earnings, making it reasonable for investors to bid up stocks in expectation. These expectations would not be captured by the backward-looking Shiller ratio. As it turned out, the expectations were right. Even corrected for inflation, 2018, 2020, and 2021 each set new record highs for S&P earnings. Earnings in 2021 were almost 60% higher than the previous record, set, as it happens, in 2017. [chart] Putting aside raised expectations, even based on actual earnings the ten-year-based Shiller PE would miss some (declining) portion of systemic market adjustments to lower corporate tax rates until fully catching up in 2027. To look at it another way, the actual Shiller PE based on earnings from 2012-21 is likely to be higher than it would have been in some hypothetical universe in which the tax cut took effect in January 2012. We can’t know for sure, but you can get an idea of this by doing your own “half-Shiller” PE using five years of earnings rather than ten. So, no bubble? Maybe a little one. Classic PEs, based solely on current earnings, also rose to 25.4, from the Reagan era average of 22.2. This does suggest investors anticipating future earnings somewhat eagerly. Possibly the future will show they overpaid. But such possible miscalculations have nothing to do with the Fed. And with the S&P down 20% this year, any little bubble already has been pricked. We’ve focused on the S&P and ignored the NASDAQ, with good reason. The NASDAQ is utterly dominated by high-fashion tech. The five largest firms in the index (counting GOOGL and GOOG as one) account for more than 40% of the index by market cap. The top 10, which also include Meta, Nvidia, and Broadcom; account for more than 50%. Mood shifts on this handful of stocks render the NASDAQ quite capable of irrational exuberance without any help from the Fed. No bubble from QE. Regards, [Richard Vigilante] Richard Vigilante Richard Vigilante is a senior analyst with the George Gilder Report The Top 7 Metaverse Stocks to Buy RIGHT NOW Wired Magazine reports: “The Metaverse is arguably as big a shift as the telephone or the internet.” Which is why a small group of Metaverse stocks have ALREADY been stacking up [3x… 5x… even 11x gains]( over the last two years. [Click here for the details on the top 7 Metaverse companies we’re recommending today. (Plus: FREE ticker revealed inside)]( [Three founders Publishing]( To end your Gilder's Daily Prophecy e-mail subscription and associated external offers sent from Gilder's Daily Prophecy, feel free to [click here](. If you are having trouble receiving your Gilder's Daily Prophecy subscription, you can ensure its arrival in your mailbox by [whitelisting Gilder's Daily Prophecy](. Gilder's Daily Prophecy is committed to protecting and respecting your privacy. 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