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Generational Dynamics Web Log for 24-May-2011
24-May-11 News -- Multiple financial crises in Europe affecting stock prices

Web Log - May, 2011

24-May-11 News -- Multiple financial crises in Europe affecting stock prices

Tobin's Q and Shiller's CAPE show market overvalued by 60-75%

Multiple financial crises in Europe affecting stock prices

There was a pall over the usually bubbly financial analysts on Monday. It's not that I heard anyone say that financial disaster was imminent, though some hinted at that. It's that pretty much everyone I heard was painting an ominous picture, especially over what's been happening in Europe.

Tobin's q and Shiller's CAPE indexes (Smithers & Co.)

Tobin's q and Shiller's CAPE indexes (Smithers & Co.)

And the bad news just poured out of Europe:

Greece: Probably the only person in the world now saying that Greece will pay off its debt and never default is Prime Minister Georgios Papandreou. Nobody else seems to be saying that any more, especially after French Finance Minister Christine Lagarde hinted at default over the weekend.
Papandreou's government though appeared to be getting panicky on Monday. According to Kathimerini, the government finally approved the first wave of privatizations, after stalling for months. As far as I can tell, it's not a big deal: Greece will sell a 10% stake in the phone company and a 17% stake in the power company, as well as a 34% stake in the post office, all by the end of the year. I'm guessing that this won't require in any public sector layoffs.
At any rate, the bond market wasn't impressed with the announced privatizations: The yields (interest rates) on Greece's two-year notes rose another 0.6% to 26.1%.

Italy: As we've reported, S&P's rating service changed Italy's outlook to negative, according to Reuters. The Italians are furious.

Belgium: This country was next in line. Belgium's debt rating outlook was lowered to negative by Fitch Ratings on Monday, according to Bloomberg. Belgium's problem is that it has no government. Belgium is two countries in one. There are 6 million Dutch speakers in the flat, northern lands of Flanders (the Flemish), and 4 million French speakers in the southern region of Wallonia (the Walloons). Last June's parliamentary elections were indecisive, and it's been impossible to get the Flemish and the Walloons to form a government.
So Fitch pointed out that Belgium has the euro area's third-highest debt load, and the political deadlock makes it unlikely that they'll be able to reduce it.

Spain: Spain's regional elections on Sunday were a rout for prime minister José Luís Rodríguez Zapatero's ruling Socialist party. When Spain's huge real estate bubble began to crash, Zapatero got help from economists Joe Stiglitz and Paul Krugman to create a program of gradual spending cuts, according to the Guardian. When that didn't work, Zapatero instituted substantial civil service cuts, resulting in an umployment level over 21%, with almost half of young people unemployed. This resulted in the nationwide protests that are still ongoing.
But it's not the change in government that's bothering investors about Spain. It's the fact that the huge, angry anti-government protest vote means that Zapatero's austerity program will be curtailed, and that means that Spain could be on its way to default, just like the other countries.

Judging from commentary I heard on Monday, a lot of people expected Greece to default over the weekend. That didn't happen, but several people were saying that Greece could default any day now, and if not, Greece would still have to default within two years at the most.

China's economy facing inflation and sluggish growth

Europe isn't the only place with economic troubles. China's National Economic Accounting and Economic Growth Research Center issued its annual report on China's economy, and found that China is faced with both inflationary pressure and the risk of sluggish growth. China needs to prevent stagflation by controlling the gross unbalance in the current stage, according to the report. Xinhua

Tobin's Q and Shiller's CAPE show market overvalued by 60-75%

The S&P 500 Price/Earnings ratio is currently at 16.58, according to the Wall Street Journal, well above the historical average of 14, and indicating that the market is way overpriced. I've written about this many times. (See "6-May-11 News -- Crash of silver prices may signal further market plunge.")

The web site of the UK firm Smithers & Co. provides information about two other indexes.

Tobin's q ratio is computed by dividing the market value of a company (as determined by stock prices) by the replacement value of the book equity. Robert Shiller's CAPE (cyclically adjusted P/E) is considered by some to be more accurate than the traditional P/E ratio.

The graph at the top of this report show the q and CAPE indexes up to December 31,2010. At that date the S&P 500 was at 1257.6 and US non-financials were overvalued by 70% according to q. Quoted shares, including financials, were overvalued by 63% according to CAPE. As at 10th March, 2011 with the S&P 500 at 1295.11 the overvaluation by the relevant measures was 75% for non-financials and 68% for quoted shares.

These figures are consistent with my own computations, based on historical technological forecasting trends. (See my Dow Jones historical page.)

Stocks fell sharply on Wall Street on Monday, and investors are blaming it mainly on the debt crisis in Europe, according to AP. The European debt crisis just goes on an on, and officials can only hope that the credit bubble will return and all the debt will disappear. Generational Dynamics tells us that there'll be a major financial crisis long before that happens.

This has certainly been, and continues to be, one of the most amazing times in history.

(Comments: For reader comments, questions and discussion, see the 24-May-11 News -- Multiple financial crises in Europe affecting stock prices thread of the Generational Dynamics forum. Comments may be posted anonymously.) (24-May-2011) Permanent Link
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Generational Dynamics Web Log for 24-May-2011 24-May-11 News -- Multiple financial crises in Europe affecting stock prices

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China's economy facing inflation and sluggish growth

Tobin's Q and Shiller's CAPE show market overvalued by 60-75%

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24-May-11 News -- Multiple financial crises in Europe affecting stock prices