August 24, 2009 – With the US still in a deep economic contraction with rising unemployment, why is the US stock market rising?
The Pollyannas on Wall Street and the politicians in Washington would have you believe that the stock market is forecasting better times ahead. I have an entirely different point of view.
The stock market is not forecasting better times ahead. It is responding to the flood of dollars being created by the Federal Reserve. The stock market is doing what every stock market does in the early stages of hyperinflation – it climbs. And it keeps climbing for no apparent reason, and in the process it defies all prudent and time-tested historical valuation parameters.
For example, did you know that P/E ratio of the S&P 500 recently spiked to a record high of 144? Do you know that this P/E ratio is still presently trading at a sky-high 129?
The S&P 500 P/E ratio is presented in the following chart, which is from Chart of the Day. Here is how they describe this phenomenon: “Today’s chart illustrates how the recent plunge in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s). As a result of the recent plunge in earnings and recent stock market rally, the PE ratio spiked and just peaked at 144 – a record high. Currently, with 97% of US corporations having reported for Q2 2009, the PE ratio now stands at a lofty 129.”
Better economic conditions ahead? No way. Green shoots? Forget it. Instead, think hyperinflation.
Instead of having dollars sitting on deposit in a bank or owning dollar-denominated paper, one is better off owning stocks of commodity producers, energy companies, and other firms whose products will be in demand regardless what happens to the dollar. As long as the dollar continues heading toward hyperinflation – and there is no change of course in sight – then expect the stock market to continue climbing higher.
Well – chosen stocks are one way of protecting your wealth from the ravages of hyperinflation. But there is a better way.
As I have been recommending for years, own physical gold in preference to stocks. And continue to own it until one ounce of gold is equal in value to the Dow Jones Industrial Average. When they are the same price, it is time to spend your gold to purchase stocks to ride the next boom-bust cycle.