While poor results from countless retailers like Staples and restaurants like McDonald’s remind us just how most businesses and consumers are responding to QE, equity market sentiment remains at historically extreme bullish levels. We could go on for hours about anecdotal evidence like the ebullience in social media and 3-D printing stocks and other signs of euphoria. We read that even Goldman Sachs has joined the chorus of those, like us, who look at the historic math and simply state that on the key metric of price to sales equities are pushing the envelope.
Last week Dallas Fed President Richard Fisher, who happens to have experience in asset management, unlike many of his colleagues, said: “I fear that we are feeding imbalances similar to those that played a role in the run-up to the financial crisis. With its massive asset purchases, the Fed is distorting financial markets and creating incentives for managers and market players to take increasing risk, some of which may result in tears. And all this is happening in uncharted territory. We have aided creation of massive excess bank reserves without a clear plan for how to drain them when the time comes.”
He also mentioned that “stock market metrics such as price to projected forward earnings, price-to-sales ratios and market capitalization as a percentage of GDP are at eye-popping levels not seen since the dot-com boom of the late 1990s.”
We agree!
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