Q.E. Infinity and Beyond!

The commentator in the clip below has not done his homework.



Wow, Dow 20,00 is a little bold and probably completely ignorant of the effects QE. Further still, profit margins are running 70% above normal because of the low saving rate in the government and household sectors. This, at some point, will end, and profit margins will come tumbling down with the reversion. Hence the measures cited, like PE and ROE, have no real bearing as point of comparison versus past time period. Just see the analysis from John Hussman below. It should go without saying I side with Schiff in the analysis.

The facts that savings equal investment and that the deficits of one sector must arise as the surplus of another are not theories. They are identities that must hold true by accounting definition. It does not matter how companies are deriving their profits (domestically or internationally). It does not matter how consumers are obtaining their goods (domestically or internationally). It does not matter how the government is financing its deficits (domestically or internationally). It is true merely and strictly by identity that savings equal investment, and that the deficits of one sector must arise as the surplus of another.

The exact way that this comes about is up for grabs, but the end result is not. It is also true empirically in decades of data since the 1940’s that the following aspect of that relationship holds quite robustly: variations in profit margins are essentially a mirror-image of the combined deficit of households and government. This is true not only of levels, but of point-to-point changes.

Corporate profit margins will contract as the combined deficit of households and government retreats (even moderately) from the record levels of recent years. The impression that stocks are “reasonably valued” relative to earnings is an illusion driven by profit margins that are 70% above their historical norm.