Indeed, while many a Keynesian will point to the need for a government-led demand boost (see That 30s Feeling by Paul Krugman on page A25 of the NYT), the problem is that when the deficits and debts become structural, what is known as the “Ricardian equivalence” sets in and this means that the fiscal stimulus does more harm than good for the economy.
Unfortunately, while the bailouts saved insolvent banks (oh, we’re not Japan at all) the stimulus from this Administration involved a series of short-term quick fixes that provided no long-term multiplier impact. At least FDR put people to work — not merely to pay them to be idle. At least Eisenhower built highways -- with a long-run payback.
So, the consumer discretionary part of the stock market goes into the penalty box for a few years. It’s not as if re-regulation isn’t going to do the same thing to the financials! In the end, fiscal probity will bring back economic and financial stability. Bring it on.
STILL OVERVALUED
We often cite one of our favourite equity valuation metrics, the Shiller P/E ratio (we are fans of it as it uses a very long history, back to the 1880s and uses real-10-year earnings). At 20x, the Shiller P/E is pointing to a market that is 20% overvalued versus historical norms (our calculations).
A reader pointed us to two other metrics from Smithers & Co. They also use the cyclically-adjusted P/E (composed of Robert Shiller’s data) but by their interpretation of the data, the market is 46% overvalued. Another metric they calculate is the Tobin q (using historical data back to the 1900s and Flow of Funds data starting in the 1950s). Here this metric is saying that the market is 50% overvalued
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