Stock market flashing red at an overvaluation of 68 percent: Looking at Crestmont, Cyclical, Q Ratio, and S&P Regression all suggest market is in for an upcoming correction.
The stock market continues to make record highs even though profits do not warrant current valuations. Looking at four standard valuation models we find that the stock market is highly overvalued relative to earnings. For most Americans with little stock ownership, this is merely a sideshow as to what is unfolding in the real economy. Based on an average of four popular valuation models we find that the S&P 500 is overvalued by 68 percent. Typically you want to see earnings justify current valuations but something else is going on here. Either stocks are being priced at very optimistic future levels or hot money from the Fed is flowing into the stock market to avoid the slow erosion brought on by inflation. It is interesting to see some people falling for the myth that inflation is muted when housing values are up, college costs are soaring, energy costs are high, and healthcare costs continue to go up. Of course the CPI measure tends to understate inflation so it might be the case that market participants are diving into the game even with high valuations because they realize underlying inflation is much higher than what indicators are noting. One thing is certain and that is the current stock market is highly overvalued.
Nonworking America: Those not in the labor force up by 12,000,000 since recession ended, a growth rate of 15 percent while the overall population is up 4 percent.
After World War II the U.S. saw the birth of the biggest middle class the world has ever come to know. The birth of the baby boomers and prosperity for all seemed to be the new norm. Of course, part of this was brought on by the fact that Europe, Japan, and China were in ruins or in massive social upheaval and trying to gain a foothold in the new economy. Factory jobs for a small generation paid middle class wages. More importantly, jobs were plentiful and most required little in the way of a college education. Today, that is no longer the case. The world is hyper competitive and massive banks are largely in control of policy in many nations around the globe. In the U.S. since the recession ended in 2009 we have added 12,000,000 people to a category labeled as “not in the labor force.†This is a 15 percent growth rate in this category while the overall population has increased 4 percent during this same period. Many Americans have dropped out of the labor force because they are unable to find work in this current economy and many younger Americans are simply enrolling in college at higher rates and with higher debt. We have a system that really does a poor job of measuring the economic well-being of most people. For example, GDP contracted in Q1 of 2014 yet somehow, the stock market continues to make new highs and those not in the labor force continue to expand.
You are too broke to own a home in America! The typical American household making $50,000 a year cannot afford to purchase the typical $200,000 median priced home without straining their budget.
People continue to scratch their heads as to why regular home buyers in America are unable to enter the housing market. Prices are up but this is mostly because of investor money that is obsessed with chasing yield in a low yield environment orchestrated by the Federal Reserve. The reason home sales figures continue to be weak sans investors is that U.S. households are too broke! We now hear people moaning and complaining that lending standards are too tough because they actually have to document their income and put some skin in the game. Unfortunately, most Americans are living paycheck to paycheck and are using access to debt to live in denial that their standard of living is truly declining. The latest sales figures show that the median priced home in the U.S. is selling for $201,000. This is too high for a household making $50,000 a year (the typical American family). Since the recent increase in prices was largely driven by a voracious demand from investors, regular home buyers are wondering why they are unable to partake in the American Dream of owning a home. First of all, the big American Dream was having a strong and healthy middle class which is quickly shrinking. The reason homeownership is falling in America is that current home values put real estate out of reach for most Americans unless they go into massive levels of debt. Many are too broke to own a home!
A global crisis of young adult unemployment: 12 countries in Europe have an unemployment rate of 20 percent or higher for adults ages 25 and younger.
The elections in Europe may go unnoticed by the U.S. media but the underlying current speaks very loudly. Europeans are very angry. We see this through gains being taken on by far more extreme groups. There are many reasons for this voting trend but one glaring one is young adult unemployment and underemployment. In the European Union, 12 countries now face an unemployment rate of 20 percent or higher for those 25 and younger. Little relief has come to this group. Many are with a college education but no employment market to practice what they have learned. The recipe of course is one where discontent grows and we saw this with the latest voting results. You also see a similar trend in the U.S. where a historically high number of young adults are living at home late into adulthood. This is partly due to the low wage employment market they are entering but also, the incredibly high levels of student debt many students exit college with. While global stock markets seem to have recovered, young adult unemployment is mired in problems.