1 August 2017     home | more politics

The Market is up, so what?

This morning (Tuesday) President Trump tweeted:

Stock Market could hit all-time high (again) 22,000 today. Was 18,000 only 6 months ago on Election Day. Mainstream media seldom mentions!

But savvy people don't see high Stock Market numbers as a sign of economic success, or coming success. People with money are bidding the price of stocks to new highs, and corporations with plenty of cash have been contributing to it by buying back their own stocks. Many people know that the high price of stocks relative to earnings — the price/earnings ratio do not foretell economic success. (A higher PE ratio for a particular stock indicates buyer expectations for that company, but I'm referring here to stock prices in general.)

According to the WallStreet Journal stock prices compared to earnings are at a new high: a PE value of 24.66, up from 14.77 on 1 Jan 2012. The price of stocks (which Trump is admiring right now) involves the bubble phenomenon, tiny bubbles and sometimes big bubbles. On 1 Jan 1914 the PE ratio was 9.01 and by 1 Jan 1929 it was 17.76. A bubble in stock prices was definitely taking place. The bubble burst, earnings plummeted and the Great Depression arrived.

Yesterday, Charlie Rose's interview with Jeremy Granthan aired on PBS. Grantham did not tell Rose of an economic collapse on the horizon, but he is not optimistic economic growth climbing to 3 percent.

Grantham told Rose something that I watched many decades ago when I was betting on stocks going up and down — trying for a better return than I could get putting my money in a bank savings account. Grantham told Rose:

Good news sells better, stockbrokers thrive on it. Investment houses thrive on it. To go out there in a bubble and talk about badly overpriced markets and downside risks is an invitation to get fired. They simply don't want to hear it as we found to our cost. We lost half our book of business in '98 and '99 as the great tech bubble rolled up.

So economic theory assumes that we're incredibly well-informed, that the buyers know just as well as the sellers, which is complete nonsense as everyone knows, and that we're rational and cool and keep a cool head.

As an investor, Grantham is interested, as he should be, in the long-term. He said many interesting things about what will keep the US economy performing less than President Trump or Republican market ideologues promise. An interesting point he made:

Debt is an accounting world. It's paper. The real world is the quantity and quality of your people, and the quantity and quality of your capital spending. Are you building new machines? Are you being inventive? Are you training your people? Is your high school system delivering the same education that it used to relative to the South Koreans, relative to the Norwegians? No it's not. We should worry more about the real world and less about the paper world.

The Grantham interview transcript is online: charlierose.com.

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