We did not need to wait until the Dow Jones Industrial Average hit 10,000. It has been clear for some time that global equity markets are bubbling again. On the surface, this looks like 2003 and 2004 when the previous housing, credit, commodity and equity bubbles started to inflate, helped by low nominal interest rates and a lack of inflation. There is one big difference, though. This bubble will burst soon.
So how do we know this is a bubble? My two favourite metrics of stock market valuation are Cape, which stands for the cyclically adjusted price/earnings ratio, and Q. Cape was invented by Robert Shiller, professor of economics and finance at Yale University. It measures the 10-year moving average of the inflation-adjusted p/e ratio. Q is a metric of market capitalisation divided by net worth. Andrew Smithers* has collected the data on Q, a concept invented by the economist James Tobin.
Cape and Q measure different things. Yet they both tend to agree on relative market mispricing most of the time. In mid-September both measures concluded that the US stock market was overvalued by some 35 to 40 per cent. The markets have since gone up a lot more than the moving average of earnings. You can do the maths.
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could someone interpret this article for me.I took economic at uni yet I find the lingo confusing and difficult to understand.The markets overvalued a busts coming period.Thats all folks
ReplyDeleteHi. Yes, I agree that the main point is that "the markets overvalued a bust coming period". And people overestimated themselves. The whole US has been living in debt for a long time, so sooner or later this had to happen. And I agree that the housing "bubble" which triggered the collapse of economy wasn't the last one, so we can expect another ones.
ReplyDeleteTake care,
Elli