Developed equity markets tended to rise significantly in
value in 2013, as the MSCI Equity Index shows (see chart 1). However,
whether this is a sign of QE policies kick-starting the global economy, or
just a temporary over-valuation of shares, is a matter of debate.
Chart 1, Sources: Bloomberg &
Economist David Zervos is convinced that signs of growth
are there. He says he feels sorry for bears as they are living in the dark
ages of monetary policy theory. “They are stuck thinking like witch doctors
rather than modern doctors,” he believes.
Casting doubt over this assertion though is the
observation made by Forbes that “More than 100% of equity gains since
January 2009 have taken place during the weeks the Fed purchased Treasury
bonds and mortgages.”
Added to that, the S&P 500 price/revenue ratio finished
2013 at 1.6, which is twice as expensive as the pre-bubble historical norm.
To put that into context, the ratio at the S&P 500’s peak in 1987 was at
below 1.0. Another indicator, the Russell 2000 price/earnings ratio, is
estimated to be at 40 when counting 2014 earnings, yet at 60 when previous
earnings are taken into account instead.
Those with large amounts of money at stake tend to agree
with the over-valuation conclusion: Jeremy Grantham reckons the S&P 500 is
around 75% over-valued1 and Cliff Asness, looking at a
60% stocks 40% bonds portfolio, believes that prices have been cheaper than
they are now 98% of the time. David Einhorn claims that the S&P 500 expanded
so much in 2013 because of multiple expansion - “The index is no longer
cheap, particularly considering that we are now almost half a decade into an
economic expansion and earnings growth is unexciting.”2
This is not just the case for the US - developed market
stock prices look overpriced on a global-level too. Whilst the
aforementioned chart shows prices rising last year, world GDP is still on
the way down. Some individual stocks are showing symptoms of a bubble:
Tesla’s market capitalisation is USD 20 billion but its sales at just 35,000
p.a., meaning its market cap per car is over USD 500,0003.
Amazon.com’s share prices finished 2013 at 60% higher than in 2011 but their
revenues have fallen by 50%. Another indicator is that margin debt is rising
rapidly - so traders are purchasing equities greatly on margin. Chart 2
shows just how margin is estimated against the real value of the securities.
If all that isn’t enough of a warning, the example of
online currency Bitcoin really opens the eyes. It began 2013 with an
exchange rate of 1 Bitcoin to USD 1, shot up 100% in its first 15 minutes on
the market and then increased 100 times over the following ten months.
Another indicator is that margin debt is rising rapidly - so traders are
purchasing equities greatly on margin. The fact that Bitcoin is a virtual
currency brings back unpleasant memories of the Dotcom bubble or maybe its
South Sea or tulip predecessors.
On the face of it the economy in the European Union is
improving: unemployment is down and government debt as a proportion of GDP
is down. Does this make for a rosier 2014? Not necessarily.
The stark reality of the numbers shows that any recovery
is barely significant. Unemployment figures in December 2013 were only 0.2%
lower than in January 2013.4 Spain, the member state
with the highest level of unemployment, improved by a mere 0.7% to 25.8% by
the end of the year. The proportion of government debt to GDP was also down
in Q3 of 2013; however, this was the first drop since Q4 of 2007 and the
figures are still alarming: 92.7% for the Eurozone and 86.8% across all 28
The local joke that Greece is a poor country with rich
people needs some modification: it is now a very poor country with a few
very rich people. The unemployment rate was at 27.6% in Q4 of last year; 58%
of those under 25 looking for work did not have a job.
Several big players on the Greek banking scene have
collapsed, 2-3 branches are closing each day and the four main banks that
remain collectively expect to reduce the number of branches by 1,000 between
the end of 2013 and 2017.6
Chart 3 - Source: XE.com
Many blame the IMF for its austerity measures and it has
frequently become the target of protestors on the streets of Athens.
However, this is to ignore the reasons why austerity was required in the
first place. One crucial factor is public sector debt: Greek government debt
measured nearly 172% of GDP in Q3 of 2013, that figure was 20% up on 2012
Some commentators have taken to making cracks about the
wisdom of the ancients and mythology but, frankly, it’s not funny anymore.
Next week: Spain, France, Germany & Cyprus…
3 2013 Year in Review, David Collum
4 Eurostat: http://epp.eurostat.ec.europa.eu/tgm/table.
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