Generational Dynamics World View

[John J. Xenakis]

** 3-March-2019 The Macroeconomic charts that dare not be shown

Following up on a discussion in the Financial Topics thread:

If you watch CNBC or Bloomberg TV, then you've seen thousands of
charts, graphing all kinds of obscure stuff. But they never show a
historical chart of price/earings ratios, which is what stock
valuations are all about. They talk about stock valuations
constantly, but amazingly, a historical stock valuation (P/E ratio)
chart is forbidden, a chart that dare not be shown.

I haven't updated the following chart since 2015, but it shows the
situation:



The blue line shows the historic average, around 13.9. The P/E ratio
has been above the historic average, sometimes way above, since the
1990s. By the Law of Mean Reversion, it will have to fall an
equivalent amount below the historic average to maintain the long-term
average. It fell to the 5-6 range three times in the last century, in
1917, in 1949, and in 1980. That's going to happen again with
absolute certainty, and that means that the Dow Jones Industrial
Average will fall below 3000, from its current level of 26000.

This would have happened starting with the financial crisis in 2008,
if it hadn't been for something that I certainly didn't anticipate.
The Federal Reserve joined with other central banks around the world,
including the UK, the EU and China, to flood the banking system with
printed money by means of quantitative easing and near-zero or even
negative interest rates of government bonds. This tsunami of printed
money has been made available to banks, hedge funds, and high-end
investors, though rarely to ordinary people. It's permitted high-end
investors to sell stocks back and forth between each other, creating a
Ponzi scheme that's been artificially boosting stock prices. Stock
prices now are far into bubble territory, and bear no relation to the
actual value of the underlying business, as they used to do before the
1990s bubble.

The current value of the S&P 500 Price Earnings ratio, as of Friday,
March 1, is 20.77, far above the historical average of 13.9.
http://www.wsj.com/mdc/public/page/2_3021-peyield.html

The second chart that dare not be shown is the Velocity of Money.
Long-time readers will recall that I first started writing about
inflation in 2003. Almost everyone was predicting inflation or even
hyperinflation. I said that inflation was impossible because we were
entering a period of deflation, like the 1930s.

I got into one argument after another with people, especially in this
forum. This was particularly true after quantitative easing began in
2009. People would say that all this money is being printed, so there
would have to be inflation.

That's wrong. Inflation depends on two factors -- the amount of money
in the economy and the velocity of money. If the Fed prints money and
it sits in a bank, then it won't contribute to inflation. In order to
be inflationary, it has to be used to purchase things or to hire
people and pay them salaries. Velocity of money represents how much
money is actually being used, rather than just sitting in bank
accounts.

The following chart hasn't been updated since 2017, but it shows the
situation:



The velocity of money has been falling almost steadily since the late
1990s, and has come to almost its lowest point in history. If you
want to play around with this chart on the St. Louis Fed web site,
then use this URL:

https://fred.stlouisfed.org/graph/?categ..._id=366117

You'll see that the velocity of money began to level off in Q3 2017.
This possibly reflects a greater public willingness to spend money as
a result of the Trump tax cut. However, there is some data that the
public spending rate has slowed in December, and so the Velocity of
Money may be starting to fall again.


Both of these charts are economics 1.01, and yet of all the thousands
of different charts that are shown every day, these are never shown,
because they disprove the common narrative. What I don't know is how
many of the "experts" know that what they're saying is crap, versus
how many of them actually believe that the crap they're saying is
true.