naked capitalism: Bill Gross Says Stocks May Not Be So Cheap
by Tom on December 2, 2008
in Market Musings
Gross focuses on the role of leverage versus deleveraging, as well as government intervention, in the prospects for stocks. He concludes that those two factors mean that stocks might not be so cheap after all. Note he first looks at measures like the famed Q ratio, which suggests stocks are a bargain, and then P/E ratios, which are only a tad below their mean for the last 100 years.
Key excerpts from his monthly missive (boldface his):
We will not go back to what we have known and gotten used to. It’s like comparing Newton and Einstein: both were right but their rules governed entirely different domains. We are now morphing towards a world where the government fist is being substituted for the invisible hand, where regulation trumps Wild West capitalism, and where corporate profits are no longer a function of leverage, cheap financing and the rather mindless ability to make a deal with other people’s money. ….
My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner. Dow 5,000? We don’t have to go there if current domestic and global policies are focused on asset price support and eventual recapitalization of lending institutions. But 14,000 is a stretch as well. One only has to recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well.
naked capitalism: Bill Gross Says Stocks May Not Be So Cheap.
Tom here – what’s Bill Gross talking about? It’s a different angle to something I’ve been thinking for quite some time….
We are going through a massive deleveraging in our economy. What does that mean?
- We finally met a loan we didn’t like. Our country has been living on borrowed money for a very long time and because of that we could spend more, buy more, invest more and it drove the prices on everything up.
- We’re in the process of coming to the realization that we can’t keep borrowing forever.
- When we don’t borrow money to buy stocks, it’s going to make the value of the stocks go down.
So, are stock prices cheap? I have no idea, but Bill lays out a very complex but convincing case that if all investing is done with cash, it will be harder to pay the current prices.
What do you think?
