Lemmings In Full Gallop Towards Cliff

It’s official…the stock market has broken above 23,000, and its valuations should now scare even the most mind-numbed carnival barker on Wall Street. The forward 12-month PE ratio is 18, compared to the 10-year average of just 14. The 12-month trailing PE for Pro-forma earnings, which takes into account non-recurring items that seem to recur ever quarter, is trading at 20 times earnings. But on a reported earnings basis–the number you report to the SEC under penalty of the law and according to GAAP standards–the 12-month trailing PE is 25.5 times earnings.

The S&P 500 was 666 in March of 2009 and it is trading at 2,560 today. It has risen to such an absurd valuation that it is now destined to absolutely crash.

The market’s incredible ascent is a direct result of central banks that have printed $15 trillion of fake credit since 2009; and are still printing at the pace of $120 billion each month. This has compelled investors to pile into passively managed ETFs that indiscriminately send the stocks contained within it higher regardless of the fundamentals.  But once central banks become sellers of those assets the exact opposite dynamic will become true. Those asset sales will cause massive ETF redemptions on the part of the investing public, which will send individual stock prices plummeting and push ETF prices into a death spiral.

Therefore, we should all be fully aware where all the inflation created by central banks ended up. This isn’t your typical 1970’s style inflation that drove up CPI to 15%. Instead, the inflation has settled into asset prices, and the scenario is such that makes the conditions leading up to the Great Recession seem tame.

The S&P Core Logic Case-Shiller National Home Price Index hit an all-time high in July; and this index is up 6.11% annualized over the last five years. Perhaps it is the unabated rise in home prices that has led Quicken Loans to recently offer a 1% down payment on home mortgages—as if offering mortgages to people with no skin in the game is a new and exciting idea.