Just to make things a bit clearer, I’ve adjusted Shiller’s “real price” by M1 money supply instead of the consumer price index, and graphed the values in terms of a standard deviation channel.
The key take-away is that we are not wildly overvalued, but rather slightly undervalued.
The market can always find a reason to crash, but I do want to point out that there is nothing from “price” that screams that it has to do so.
I’ve circled the current 2009-2015 real price movements to show that it’s more of a “baloney market” than a “bull market.”
The Fed did what it felt it had to do to fight deflation. But let’s not ignore how those massive increases in money supply distort prices.
Given all the Fed action, the market has done very little.
The most one can truly say about the market is that it stayed relatively flat in terms of actual value. This has been a long secular bottom.
No true bull market has even begun – yet.
And inflation? See all those gold commercials? What about that?
Well, if you create a standard deviation channel of M1 (money supply) divided by CPI (inflation), then you do see that we are wildly loose on money:
Normally when you hit 2 standard deviations you are due for a reversal.
Janet Yellen may be looking at something like this in her own calculations that – come hell or high water – quantitative easing must end. If it doesn’t, inflation is 100% certain (whereas now it is only 95% certain).
But the question remains: when? The more William Devane tries to sell gold, the cheaper it gets.
To answer that question we’ll go back to our old crystal ball, demographics. Using Ned Davis' observation that the real price of the S&P tracks the birth rate 46 years previous, I’ve noted a number of times that Ned’s model breaks in 2009 when quantitative easing was introduced.
But if we use M1 instead of CPI, as we are doing here, then his model stays intact:
The birth rate + 46 years is just a measure of how big the United States workforce is relative to the rest of the population (i.e. the average worker starts in the 20s and ends by the 70s). The market is the S&P divided by M1. Put both in a standard deviation channel and they match up rather nicely.
And yes (for all you doomsayers out there), this chart does indeed show that the market isn’t quite finished with its trouble. The demographics don’t start to improve until the end of this decade. We are due another bear in the next few years. But that bear will not likely be another 2000 or 2007 collapse. We are not wildly over-valued like we were then. Instead, the next bear – when it comes – will most likely be one of those annoying, but not apocalyptic, events.
Happy Days are not here again – not yet.
But the grand reign of market terror is done. And William Devane? None of this matters to him because he's not an investor; he's an actor. He isn't making money from gold, but from his advertisement fees. He'll be just fine, even while gold goes nowhere...