Tag: Federal Reserve

Federal Reserve Interest Rate Increases: Too Little, Too Late

It’s a bit too little and too late for the Federal Reserve.  Do they really believe that a 3% year-end Fed Funds rate will tame 8% “official” inflation?  Maybe inflation will “naturally” drift back down (though there’s no empirical data to support that view).  The Fed can hope, though.  They can try a little prayer if that’s still ok.  Maybe a stock market crash will do it, who knows.  But powerful inflationary forces are just beginning to warm on their way to a boil.

The Fed has been horribly wrong about almost everything for at least a decade now.  They locked the forever money printing presses in the on-position.  They thought they could grow the money supply to the moon, right out of the modern monetary theory textbook, without any adverse consequences.  “Targeting” two percent inflation, for years these smarter-than-us helmsmen were puzzled that money printing just wasn’t producing inflation.  They “tamed” it.  Their mantra was inflation is no risk.  And they slept on.  But then the lion roared, and they seemed shocked that massive asset price inflation was followed by massive every other type of inflation. Continue reading “Federal Reserve Interest Rate Increases: Too Little, Too Late”

The Housing Price Boom is Unsupportable – A Major Correction is Coming

The extent of the housing price boom can’t be understated.  It is an order of magnitude worse than the previous housing price boom at its peak in 2007.  The Federal Reserve’s decade-long wild and irresponsible money printing, including hundreds of billions of dollars poured directly into the housing market, has been the fuel that caused this explosion.  All of this and more is about to reverse, and a major housing price correction is at our doorstep. Continue reading “The Housing Price Boom is Unsupportable – A Major Correction is Coming”

Equity Market Valuation Is Way Too High – At An Historical Extreme

Life’s experience is a template for recognizing life’s extremes.  There are so many things out of place in U.S. financial markets that one almost doesn’t know where to begin.  But here’s one that’s a good indicator that equity market valuation is way too high.  Generally speaking, the growth in equity market capitalization – using the S&P 500 as the measure for market capitalization  – should bear a relationship to the growth in the U.S. economy as measured by GDP.

Equity Market Valuation and Buffett’s Favorite Indicator

Warren Buffett called the relationship of market capitalization to GDP “the best single measure of where valuations stand at any given moment.”  So let’s take a look at it through the lens of history.Equity market valuation

Over the last two years, the relationship between S&P 500 market capitalization and GDP became unhinged.  Market capitalization reached 110% of GDP in 2018.  By the second quarter of 2022, the ratio exploded to almost 170% (the prior all-time high was 120% right before the dot-com crash over 20 years ago).

But then add the value of private equities to the S&P 500 market capitalization.  Look at the ratio between this total equity valuation to GDP.  What do we see?  Previously, the all-time high in the ratio between total equity capitalization to GDP was 180%.  This occurred immediately prior to the dot-com crash (data goes back to the early 1960s).  In 2020, the ratio reached an all-time high of 200%.  Now, that ratio is approximately 280% of GDP.  It is 40% higher than the all time high.

The Federal Reserve shoulders most of the blame for equity market valuation reaching such lofty levels.  There is a big price to pay for what the Fed has done over the last 14 years.  That’s worth more than one other discussion.

But for now, a dramatic break to the upside in these ratios means this.  Equity market valuation has grown much faster than the U.S. economy.  In fact, it has de-coupled from the growth of the economy.  That makes no sense.  It can’t continue.  And it won’t.

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