US Money Market rates may soon reach negative returns; Stock market investors (Dow 30 near 8800) are priced at a trailing PE (stock price divided by stock earnings) of ~13 to 15x 2008 reported earnings; 15x earnings is arguably the long term historical norm.
Another, Different and CRUCIAL View is in comparing the "P/E’s".
The “PE” of money markets are about 100x (100 divided by the current near 1% US Treasury bill yield); 10 year bonds are approaching 40x. (100 divided by 2.7%).
Stock investors are pricing the equities market at 25 to 30x or more based upon declining expected 2009 earnings.
The critical difference:
Money markets instruments guarantee return OF principal;
Stock investors hope for a return ON principal.
Who’s right, if either?
IMHO, neither is right – it’s about signals – and the Money Market investors are by definition more careful; yet both asset classes are overpriced at least by historical measures.
Job Losses are REALITY
Every job cut is an amputation from the body; the US consumer juggernaut of yore which used to make up well over two thirds of US GDP. Jobs and more importantly workers do not magically reinvent themselves overnight; they retrench, spend less (not more) and save for tougher times ahead; worse often wind up not paying their debts (mortgages, credit cards, cars, toys, gambling) save booze, smokes or smokes and booze; whatever the need for the preferred fix du jour.
Risk transfer provides another view – the exchange of a day’s labor for a paycheck and job security is broken; especially in industries colored by non-market forces for decades;
The global conscience recognizes (yet may not be ready to admit or implement) that much business activity is hollow i.e. not nearly as value added as transacted. What is the fully loaded accounting of the value added of many of the products and or services whose ENORMOUS sums starting with fees earned for M&A advisory fees in particular or investment banking in general? And who benefits the most from these deals?
Would it be better to answer (rather than continue to ask) the question, would the world be a better place – if we as global stewards of the earth and its current and future citizens – would devote a fraction of our resources to the basics – food, shelter, health care for those less fortunate and to act in the best interests of the environment for the benefit of future generations?
US Dollars – past, present and future
Too many dollars (yes Elizabeth, there are a few too many dollars especially those whose ink is still wet) have to find a home – and they often find them in the stock markets based on notions (although promulgated as "theories") which are dislocated from today’s REALITY; see below.
It is acknowledged that the US consumer has enjoyed, rather overstayed its place at the head of the table of the world's consumers due to a debt-induced buzz; aided by the overlooked, undervalued and imprudent risk transfer inherent in securitization since the early 1980s.
The future of the US Dollar, interlinked global currency and trade exchange mechanisms is as currently practiced untenable. Unless and until the inputs of labor, land (natural resources and rents), capital and entrepreneurship / innovation / intellectual capital / human rights / environmental obligations signals are openly priced and align with demand and recycle in alignment – we may experience persistent disruption.
Mr Kashkari - misplaced and or misguided LOYALTY?
Perhaps I may be wrong, I hope so, however during Mr Kashkari’s testimony today before the House finance committee showed that he was not crystal clear on an implied fact – that is this: he is Under Secretary of the US Treasury i.e. his paycheck comes from and on behalf of the people.
IMHO he needs to vigorously respond to the question of whose interests he represents and act accordingly; communicate with Congress (the people) before he acts and DEMONSTRATE a transparent, prudent investment process and an ARMS-length relationship with borrowers or else as one congressman suggested he could or should step aside.