Markets
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 &
Peak Prosperity
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.
Chart 2
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.
European Union
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.
USD: Bitcoin 2013
Chart 3 - Source: XE.com
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 member states.5
Greece
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
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 Q3.
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…
Footnotes:
1
http://www.zerohedge.com/news/2013-11-18/jeremy-granthams-gmo-sp-approximately-75-overvalued-its-fair-value-1100
2
http://www.zerohedge.com/news/2013-10-31/david-einhorns-advice-how-trade-equity-bubble-spoiler-alert-dont
3 2013 Year in Review, David Collum
4 Eurostat: http://epp.eurostat.ec.europa.eu/tgm/table.
do?tab=table&language=en&pcode=teilm020&table Selection=1&plugin=1
5 Eurostat:
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-22012014-AP/EN/2-22012014-AP-EN.PDF
6 Ekathimerini.com:
http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_03/11/2013_526081
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