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Extreme Valuations?

Updated: Oct 31, 2023

It does seem that investors see some sort of “gap” between stocks “stalling” in December, but doing well in 2021. If this is consensus (it might well be), then investors are not necessarily positioned for a YE rally as I mentioned above.

Some Big Jobs data could be the next catalyst. I see someone smart flagging that Deutsche Bank is pointing out the usual “extreme valuations” of the S&P, where the cyclically adjusted pe ratio is at the levels preceding the 1929 crash and has only been higher during the bubble. Bla bla.

As an aside, what it fails to point out is that the velocity of M2 money supply is actually down 20% in the first three quarters of this year as people have had all these restrictions imposed on them, and as they return to work, the velocity of money will naturally normalise and, given the massive monetary expansion, the nominal GDP will absolutely too, and over time, go to a much higher level than pre-crisis, therefore reducing the multiple. In the meantime, the monetary expansion will continue to push into asset prices, lifting valuations even higher, reflecting the declining return on the monetary capital.

I again defer to my friend Chris Wood in Greed and Fear, when it comes to owning cyclical/value stocks his preference in recent months has been on the likes of auto-related, industrial metal-related and, of course, energy stocks (as has mine).

Clearly, financial stocks will also participate in any cyclical rally triggered by yield curve steepening, as has started to happen with the likes of European and Japanese banks (where Nutstuff most recent adds have been CITI and LLOYDS).

The longer-term issue for bank stocks is whether the Federal Reserve, and other G7 central banks, suppress that steepening by pegging bond yields in line with his longstanding base case. In the near-term investors are concerned that the Fed will announce an increase in purchases of longer-dated Treasury bonds at the FOMC meeting on 15-16th Dec, a move that will be interpreted as bullish for Treasuries in price terms. Bank stocks will be a natural beneficiary if the policy response to Covid-19 triggers the peaking out of the nearly 40- year-long deflationary era and the return of inflation.

A key signal that regime change may be afoot in the G7 world, in terms of a move from a disinflationary era to an inflationary one, has been the continuing surge in broad money supply in the G7 world which has in turn been driven significantly by guaranteed lending schemes.

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