Stocks Are Poisonously Cheap?
By Staff News & Analysis - January 24, 2012

Stocks Are Cheaper Than They've Been in Two Decades … U.S. stocks are trading at their cheapest levels since at least 1990, according to such commonly used valuations as price-to-earnings and price-to-book ratios as well as dividend yield, Bespoke Investment Group says. This realization will lift the S&P 500 Index by 11 percent to 1,400 this year or maybe more, according to the research firm's 2012 outlook report. "The S&P 500 is currently trading below its historical average P/E and P/B ratios, and these ratios are also at their lowest levels in the careers of a large percentage of money managers," wrote strategists Paul Hickey and Justin Waters. – Fast Money/CNBC

Dominant Social Theme: Now is a golden buying opportunity!

Free-Market Analysis: OK, stocks are cheaper than they've been in 20 years. But cheaper than what?

This is actually a kind of power elite dominant social theme, in our view. We used to believe in the myth of the ever-abundant stock market but not anymore. Nonetheless, equity drummers keep pounding away. Stocks are just like any other widget. Sometimes they're expensive according to historical indicators and sometimes they're cheap. When they're cheap you buy. When they're expensive you … hold.

In the wonderful world of brokerage, the wisest customers never sell. In about five years from now – if the current system survives, and we doubt it will – there'll be a virtual flood of articles about the few brave souls who managed to hold onto their equity positions for the past 15 years without flinching.

Now, we'll be told, they'll reap the rewards. Their stocks are up! Their patience has been rewarded. What we won't read is the information about the lost opportunities, the funds tied up in failing stocks for a decade-and-a-half, the lack of capital to participate in gold and silver as both metals rose tremendously in value.

The rhetoric never changes. We remember the euphorias of the late 1990s and mid-2000s. Stocks, we were told, were like heirlooms. If you owned Kodak (oops) you never sold it. Or GM (oops), etc. You were supposed to pass these certificates down from generation to generation, like silverware. Here's some more from the article:

The S&P 500 is already on track to reach or exceed this forecast, up more than four percent in 2012. Better-than-expected economic data and an emerging bailout solution in Europe are behind the gains.

To start 2012, the benchmark had an earnings multiple of 13, the lowest since 1990 and below the 80-year average of 15, according to Bespoke. It would take a move back to 1,484 to get the benchmark back to this long-term mean P/E.

The price-to-book ratio is 2.05, below the average since the late 1970s of 2.43. To get back to that average P/B, the benchmark would need to increase to 1,491.

So trading multiples are low and so is price-to-book. Sounds exciting but even the most trustworthy and historical numbers can lie. In this case, we'd point out, the analysts are looking at statistics instead of the larger business cycle.

It's the Austrians who helped invented business cycle analysis, FA Hayek and Ludwig von Mises, and everyone who's anyone on Wall Street is well aware of it. Central banks print money and generate stock-market bubbles. Then the markets and the bubbles collapse and the cycle starts all over.

But really, that's not the whole truth because there are cycles within cycles. From at least 1980 to 2008, for almost 30 years, the US Federal Reserve in particular inflated the economy at the first sign of a slowdown.

Alan Greenspan did much of this by raising and lowering short-term interest rates gradually. But the result was a steady inflation of the US (and the world's) economy. Of course, that can't go on forever. What such endless amounts of monetary inflation do to an economy is entirely poisonous. They destroy it.

Sooner or later, larger economic forces reject the extra money sloshing around in the economy. Too much has been built, too much created, too much excess capital has been misplaced and mis-allocated. The economy collapses and central bankers rush to inject yet MORE money.

It's the reason the banking sector (central banks' distribution arm) is probably the largest or at least most important industry in the world right now. No matter what happens, banks aren't allowed to fail.

The same cannot be said for the stock market. No matter how the powers-that-be try to prop up the stock market, the larger equity marts reflect the larger economy. When that slumps, so do stocks in aggregate. And it's a fact that large economic slumps are an inevitable result of central banking monetary "crack."

Today, and really for the past decade, the world has been in the grip of a fiat-paper bear market. It was most seriously affected during 2008 when the dollar reserve system basically collapsed. The chances are in our view that the fiat-money bear market may last several more years – even as many as four or five more.

Of course, we're on record as wondering if this market cycle will go that far. We have a feeling that as gold approaches its higher-highs, the powers-that-be will have had enough. The dollar reserve system (which is basically no more, in our view) will be replaced by something else. Some sort of gold standard, we figure.

Of course, we likely won't be in a favor of it. A potential new monetary standard, whatever it's supposed to be, will no doubt be suggested and perhaps implemented by the same group that has saddled the world with 100 or more central banks.

This Anglosphere power elite will NEVER let the market have its way. They are determined to impose their will on human events at the expense of whatever human suffering is necessary. We can see them lining up the options already – a state-mandated metals money or perhaps the IMF's SDRs, supported by a larger basket of currencies.

Of course, whatever happens over the next few years will be reflected in the stock market. If the world does end up with a new monetary system, we can't imagine that will be bullish in the short-term for equities. The market is no fan of uncertainty.

And for this reason, we return to our initial question – stocks are cheap, historically, but cheaper than what? Different "investments" are valued differently at different times during the artificial central-banking business cycle that we must function under.

In this case, we would argue, stocks are more likely reflecting potential chaos to come than a buying opportunity. Sure, there may be rallies during this fiat bear market but they should be considered within the context of the larger trends.

What bothers us most about these kinds of analyses is that if you mention the reality of the business cycle to many people on Wall Street, they'll grant its existence and influence. But then they'll go right back to banging the drum for equities as if the market can be evaluated solely on its own. (True, if pressed, they'll suggest a government or corporate bond during a downturn.)

Likewise, regulations have been created without taking business cycle economics into account. Most SEC regulations tend to narrow the strategic richness of the opportunities that people have to invest just when they are needed most. What regulations do, therefore, is to create an even more artificial and brittle marketplace where everyone is investing the same way – or trying to leave through the same door.

The regulators and the brokers are really two sides of the same coin. Stubbornly, neither will recognize the REAL business cycle or the culpability of the larger central banking system in its too-often ruinous behavior. With all the emphasis on risk, disclosure and asset diversification, this refusal to recognize the obvious is a little bit like ignoring the elephant in the room.

Of course, more and more investors are "getting it" these days, thanks to all the information available on the Internet. It is the Internet Reformation – as we call it – that is increasingly driving people's investment behavior, and driving them away from mainstream equities as well.

As understanding about the real factors affecting the market continues to rise, we expect continued skepticism about mainstream stock markets and about the financial industry in general. Soon, we would not be surprised if the buying public begins to understand more about business cycle investing then the investment pros are willing to discuss. That will certainly make their jobs more difficult and lead to increasing confusion all around.

After Thoughts

On the bright side, however, the talk about treating stocks like heirlooms may subside once and for all.