The economic and financial risks that arise from the U.S. current account deficit (...) have not been exaggerated. If anything, they have received too little attention.
Bubble warning: Markets are too dependent on unsustainable government stimulus. Something's got to give.
The American market is nearly 50% overvalued on the best long-term measure.
Investors still have plenty of reasons to worry. The current combination of high asset prices, low interest rates and massive fiscal deficits is unsustainable.
It looks to me a bit like a bubble again.
The red-hot stock market is being supported by an unsustainable earnings mirage.
Now, before you open that 13th floor window, please note that none of these remarks are particularly recent.
The warning about the current account deficit, incidentally one of current president Trump's pet peeves, was printed in Foreign Affairs in 2005, three years before the Lehman Brothers bankruptcy made the stock market nosedive. And still ... if you took heed of the caution from authors Brad Setser and Nouriel Roubini, you would have missed a total dollar return of 146 per cent in the MSCI World Index, or 208 per cent in Norwegian kroner – corresponding to a compound return of 9.1 per cent.
“At any point in time there is an abundance of doomsayers, much like a couple of thousand years ago there were several competing claims to being the new Saviour or perhaps just Brian. ”
The bubble warning? The Economist, January 2010. Since then, the World Index has delivered an annual return of 10.6 per cent in dollar terms or 15.0 per cent in Norwegian kroner, meaning you would have tripled your money and then some. The following comments on valuation and reasons to worry must be credited to the same issue of the magazine.
How about that bubble vision? Professor Robert Shiller, quoted in Financial Times in September 2015. And the earnings mirage? Legendary investor Carl Icahn, a couple of weeks later, in a video titled "Danger Ahead". Missed compound return: 13.5 per cent in dollar terms, or 11.9 per cent in Norwegian kroner.
If the moral of the story isn't obvious by now, let me spell it out: At any point in time there is an abundance of doomsayers, much like a couple of thousand years ago there were several competing claims to being the new Saviour or perhaps just Brian. Their arguments may be impeccable, just like I truly believed my own arguments were convincing when I wrote a similar warning in August 2007. And sooner or later, one of them will chance upon a strikingly well-timed admonition. Celebrity guaranteed.
Most of the time, though, the driving force behind returns on your capital – i.e. profit generation in actual companies – is so strong that the market tends to keep climbing, bumping along. And when, occasionally, it does nosedive, little time tends to pass before it starts picking up steam again. If you got out before the fall, chances are you never got back in.
In the mean time: Have a wonderful, relaxed summer!