We heard at the market lows in March 2009 that the stock market had sunk to Armageddon levels. We have often thought about that because we can certainly understand that at the 2.0% lows on the 10-year Treasury note yield, we had gone to a place we had not seen in over five decades. Also, with Baa spreads north of 600bps, we could see that corporate bonds had moved to levels not seen in seven decades as well.
But this notion that we had moved to Armageddon lows in equities does not seem to hold water. After all, the forward P/E multiple on the S&P 500 at the lows was 11.7x. That was not a multi-decade low or some massive standard-deviation figure — we were actually lower than that at the October 1990 lows when the multiple was 10.5x and frankly, coming off the 1987 collapse, the forward P/E had compressed to 9.8x. As it now stands, the multiple is back very close to where it was at the October 2007 market high, when the multiple had expanded to 15.0x. The range on the forward P/E over the last quarter-century is between 9.8x and 21.8x (excluding the tech bubble), so at 14.5x currently, it is hardly the case that this market can be viewed as a bargain.
On a trailing earnings basis, the P/E multiple has actually widened, from 17.0x at the lows to 23.3x currently, a huge multiple expansion. At this stage of the 2003 recovery, the multiple hardly expanded at all, earnings were driving the rebound; coming off the October 1990 lows, the multiple expansion four months into the rally was closer to 2x and the powerful surge in the post-1982 recovery saw a 3x multiple point expansion at this juncture — not 6x!
As an aside, with the U.S. government now putting its fingers into more than one-third of the economy (health, finance, autos, energy, housing), one would expect that the fair-value multiple in the future will be lower than it has been — given the implications for productivity and the potential non-inflationary growth potential.
Also, Matt Taibbi is slowly emerging from the post article vacuum: his first written interview since the GS piece, compliments of Wall St. Cheat Sheet. Some excerpts:
Damien: The last word I wrote after I finished reading “The Great American Bubble Machine” was ‘Leviathan’. Since you’ve done some great research covering Wall Street and Washington, do you know of policy tools we can use to dismember what you affectionately called the “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”?
Matt: I interviewed a government regulator for my previous piece [“The Big Takeover”] who said state regulators already have enormous power. The state banking commissions or insurance agencies, SEC, or the Office of Thrift Supervision can simply write a letter to these banks and say, “You won’t exist tomorrow unless you …” or, “You’re not going to get government funding unless you do this.”
So, they already have enough power to correct all the problems people are worried about. The problem is getting the appropriate people to staff those bureaucracies. If enough people put pressure on members of Congress and the President to appoint the appropriate people, then we should solve most of these issues. I’m not sure what new policy initiatives would be needed. I just think we need new people.
Damien: Do you believe the citizenry can put enough pressure on our legislators, or are we the sheeple who are too confused, ignorant, or entertained to affect change?
Matt: The real problem is people aren’t organized enough to make it worth the while of politicians to pay attention to ordinary people. The disadvantage the average Joe has against Goldman Sachs is Goldman can concentrate its campaign contributions in its favor. The typical politician is not going to upset or alienate the five most powerful investment banks because he knows realistically he will jeopardize 30% or 35% of his next election cycle’s contributions. On the other side, there isn’t a way for the average person to organize and deny these politicians the money they need to get reelected. So, until we solve the campaign contribution problem, we won’t have the legislative tool to rebalance the power.
Damien: So are we living in a Catch-22 where we have to choose between the Goldman Leviathan sucking the world’s wealth from loopholes or the omniscient eye at the top of the governmental pyramid which becomes the one crown reigning over us all?
Matt: It’s pick your poison. But before we can even worry about the international government question, we have to start at home with our own country. We have to start by protecting the citizens of our country. Even in the United States, Goldman is allowed to get away with things they shouldn’t be allowed to get away with. If we can tighten up and enforce the rules here, we will be much better off before even looking at the international issue.
Damien: Most powerful institutions such as the Federal Reserve and Vatican dismiss most criticisms as “fringe conspiracy theory.” Why should the average citizen not dismiss your claims against Goldman as fringe conspiracies about bankers or Jews?
Matt: That was the tactical criticism I got from Goldman who said to the media, “Next thing you know he’s going to blame us for the Kennedy assassination and say we faked the moon landing.” But if you pay attention to all the criticisms they are leveling, it’s what we call in this business a “non-denial denial.” When people respond by calling names and changing the subject, it means they don’t have any issue with the factual allegations in the article. So, in response to being called a conspiracy theorist, the fact is they are resorting to the rhetorical non-denial denial shows they don’t have any real basis to criticize the facts in the article. The article speaks for itself and the fact they don’t have substantive issues with the piece is highly revealing. In fact, before the article went to print I was extremely nervous we had gotten something wrong and Goldman would come out with a whole list of things they’d say we made mistakes about. But the fact that they didn’t come up with a single thing greatly emboldens me to think we got it right.
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