With Casino Capitalism On The Rise: Stay Prudent

John Maynard Keynes : "When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done".

I did not come up with this on my own, but had help from James Mackintosh of The Wall Street Journal.

Nonetheless, following up on, in what we would consider to be a time of high risk (last Wednesday's blog), volatility spiked last Thursday as the political rhetoric between the US and North Korea heated up and slipped lower on Friday, yesterday and further today as it cooled down:

Traders and speculators (gamblers) have been whipped into a frenzy. They like volatility because it frightens the retail (individual investor) and they are keen to take advantage of those that get frightened by the wild market swings.

The problem, at these late stages of the economic cycle, is that investing (finding value in an asset for the purposes of receiving a future income stream or appreciation in that value), has little to do with what is transpiring in the stock market.

Reasonable value has long been taken out of stock markets (sometime in 2013) and expected future (12 month forward) prices, relative to earnings earnings are trading at about 17.5 times. Well above the 10 year average of  14 times (24% above).

In fact, with earnings over the next 12 months expected to grow at a rate of about 6.5% and the the price to earnings ratio 24% over its average, earnings would have to grow by an additional 30% to just meet the 10 year average P/E ratio.

In an economy that is growing at barely 2%, that is not likely going to happen.

Another of our metrics of value: Enterprise Value to EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) is at its highest levels since the dot com bubble.

With value out of the equity market in general, it is left to the gamblers to play the trading game to try to find a way to continue to build momentum for stocks to move higher.

Earnings growth is better now, but it was non-existent in 2015 and 2016, yet stock prices continued to rise. Now there is some residual growth, but it is not booming, just catching up. 

The new Trump administration gave hope and hype at the beginning of the year, but that is so far a bust.

Hope and hype and pretty mediocre earnings have fed the emotions of the buyers so far this year, but stocks are expensive and in the end they will return to the mean (average) values as all things do, eventually. Buying stocks at these levels would likely be less than prudent.

We will talk about this and other things financial, economic and wealth management related on our (new format, dialogue version) weekly client webinar today. The recorded version will be posted on our website. Feel free to tune in!