Unless you have been totally blinded by the current eight year long lasting bull market run, you can not help but notice that the present day stock valuations are insanely high across the board. Consider that the S&P 500 bell weather benchmark trades for an incredible 15 times its trailing 12 months earnings. This compares to a longer range average of only 15. In the best possible case, you can assume that future returns from this point have to be extremely limited.
Yet the real warning sign for investors ought to be the ridiculously low levels presently displayed in the market’s famous fear gauge known as the VIX. Just this past week, the Wall Street Journal co-published data with Yardeni Research to demonstrate that the numbers of bearish investors left standing who still feel that the market will decline is approaching its lowest levels since 1987.
In fact the VIX showed its historical low for the whole 27 years it has existed at 8.84 this past week. Contrast this with the 80 level seen at the depths of the Global Financial Crisis and Collapse in 2008. The last time the VIX neared this low was on December 27th of 1993 when the world was peaceful and prosperous under the blessedly uneventful Presidential reign of Bill Clinton. This 30 year VIX chart below says it all:
Is this present calm in the collective investor mentality and markets at all justified these days? Consider what the world is up against now—Black Swan events which threaten the market from every side imaginable. At the same time that North Korea cheerfully promises to carry out a nuclear attack the United States, debt levels have surpassed all-time highs and whole of European banking systems require enormous bailouts. If that were not enough to alarm you, in under 90 days the U.S. Federal government will exhaust its financial capabilities as it ramrods the debt ceiling again.
Fully eight impressive years into this tired and overstretched bull market in which stocks have been on a tear for nearly a decade, investors fear nothing worse than becalmed waters in the future. This is the second longest winning streak in the entire history of the S&P 500.
A true sign of the times is that investors will happily line up to give their money to junk bond-rated companies for only six percent interest. These represent the pitifully lowest quality firms which almost no analysts believe will still be in business in a few years.
Even technological-entertainment giant Netflix is an example of the current widespread abandonment of reason. The company is losing fully $2 billion each year, yet their stock price continues to notch one new high after another. Their stock trades at 240 times its earnings. Yet they were able to issue over a billion in new debt at only 3.625% interest. Even the venerable Amazon stock is trading at 190 times its earnings. This is the classic definition of insanity.
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Markets literally believe that these modern-day titans can not be successfully competed against with these ridiculous P/Es. Yet how many other times in history has this been the case where these turned out to be famous last words? Remember Xerox, Blockbuster, Polaroid, Yahoo!, and countless other firms that either no longer exist or are mere shadows of their former glories.
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