A High CAPE Ratio and What it Means

CAPE Ratio

In a period of very dumb takes about the economy, Neel Kashkari won in October 2020. I tend to avoid Twitter. But while researching the Federal Reserve’s views on inflation, I stumbled onto this Tweet from the Minneapolis Federal Reserve Bank head. Kashkari was responding to a question about the price of Apple phones. His answer was to ask a question that doesn’t deserve anyone’s attention.

Historically, technology is deflationary. But it’s just weird to see Kashkari deflect this question and then miss the fact that “existing models” are permanently lowered in price as Apple makes way for new products. There is an odd desire by central bankers to point to technological deflation. Yet, when it comes to the breakneck surge in actual inflation in food and housing, the argument is that inflation is “transitory.”

CAPE Ratio Level

The Federal Reserve has fueled an inflationary mess for the U.S. economy over the last decade. The continued effort to pump capital over and over into the markets has fueled a massive asset bubble that simply cannot be denied. The CAPE ratio – which measures the price-to-earnings ratios of the S&P 500 companies – is at its highest level since the dot-com bubble. It appears that we’re on pace to a reckoning in this market.

Source: CAPE Ratio

The Fed is going to have to stop pumping capital and buying assets at some point. It’s going to have to raise interest rates at some point. The euphoria can remain in place for some time. Still, when momentum breaks to the negative side and investors start to push capital into bonds or even the foreign markets – it’s going to a fast and furious decline.

My research shows that there is a straightforward way to avoid a crash. It’s an essential momentum investing system that allows you to exit equities long before a downturn and acts as a kill switch before a collision. So, while everyone else was running around with their hair on fire during the first two weeks of March 2020, my system exited equities in mid-February 2020.

We’ll be moving to replicate that success in the future. For now, stay vigilant With earnings season approaching and inflation rising at its fastest pace in decades, the pullback could come sooner than later. I want to be prepared for that moment. You should too.

Three Things on My Mind This Week

  1. Tomorrow, United Airlines will be talking about the return of the supersonic jet. When investors are putting big dollars into space tourism, they forget that trans-Atlantic travel remains a critical development. I’m not just interested in supersonic passenger travel. I want to see innovation in faster air freight. Can airline manufacturers deliver?
  2. General Mills reports earnings on Wednesday. We’re going to see how much food inflation and commodity price increases have affected the company. This is a bellwether event for other companies in the space like Kellogg and Post Holdings. Pay close attention.
  3. OPEC is meeting again this week. Goldman is saying that the market is short about 3 million barrels per day. I’m not sure that OPEC+ is going to increase output with this potential rise in crude acceleration. I expect that they’ll hold production in place until we see crude move above $80 per barrel. I don’t think that OPEC wants to give the markets any reason to shake out speculators. Now that people are throwing around the $100 per barrel estimate, there’s no reason to slow down the influx in capital and the prospect of higher prices.

I’ll be back tomorrow with some additional insight on crude oil.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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