In my previous two missives, I have written about short to intermediate term cracks which are appearing in the market and global economy. But in order to understand the big picture, it's important to also have a longer-term perspective. For this article, I present 5 freaky Friday the 13th charts.
Chart 1: Forward Returns
The first chart comes from John Hussman. It is an assessment of forward returns for the S&P500 and utilizes key valuation data such as Price/Earnings ratios and Corporate Profit margins, both of which are way above historical norms. According to Dr. Hussman, at current market levels, the projected return for the S&P500 will be around 4.1% per year, which is not the level at which secular (generational) bull markets begin. To put it in perspective, the two major bull markets of the 20th century began with implied returns of 20% per year for stocks. Low returns on U.S. equities have also been discussed by others such as Jeremy Grantham of GMO.
(Click to enlarge)
Source: Hussman Funds
Chart 2: Equity q
This chart represents stock market valuation versus net worth measured by replacement cost. Q is one of two valid long-term valuation methodologies for the market (the other is cyclically adjusted P/E which is incorporated in the Hussman chart). As such, both should give similar answers as to how overvalued the stock market is - and they do. Over the long-term the average value of q is around 0.63. According to the most recent q, the stock market is currently over 50% overvalued.
(Click to enlarge)
Source: Smithers & Co. Ltd
Chart 3: Velocity of M2 Money Stock
Monetary velocity can be thought of as how often the money supply (in this case M2) turns over. Slowing monetary velocity is often associated with recessions. What makes this chart incredible is that it is happening in the face of copious money printing by Ben Bernanke. It suggests that the Fed's actions are not spurring real economic activity. Kenyes called this phenomenon a "liquidity trap."
(Click to enlarge)
Source: St. Louis Fed
Chart 4: Debt Deleveraging
I am sure many of you will appreciate this chart. To me it shows that despite all the talk of "austerity," we have only just begun to peel the onion on actual debt reduction. This is not just a U.S. problem, but rather, it's endemic among most "advanced" economies. And of course, much of that reduction has come on the back of corporates and households while the government levers up like a Las Vegas gambler.
(Click to enlarge)
Chart 5: Unemployment Duration
Quite frankly it's stunning and sad. We have a permanent under-class in America. This can be fixed but not without a lot of sacrifice from all the stakeholders (cue political rant).
(Click to enlarge)
Source: St. Louis Fed
Conclusion:
The long-term picture doesn't look great. Whether it be market valuation or economic prospects, the answer comes out the same. At the same time, as an investor, I would caution to not get too fixated on long-term doomsday charts. Each and one of these charts can (and has) been presented by others for the past 3 years, yet we have seen 100%+ rally in U.S. equities. One can argue as to the legitimacy of factors behind the rally, one can opine about "manipulation," but the fact of the matter is that it has happened. When it comes to beating the house, I prefer to focus more on the here and now, and for the most part that will be reflected in the content you see from me.
Disclosure: Long XLU, XLP, GLD, EMLC. Short EEM, IWM for slight negative net market exposure.
