Krugman Warns That the Run-up in Stocks Can’t Be Justified By the Fundamentals

“The market seems to be looking as if this is going to be an average recession, but it’s not,” said Paul Krugman, Princeton University’s Nobel Prize-winning economist.

Nouriel Roubini also thinks the forecasts of a recovery are “too optimistic.”

They’re almost certainly right.

Krugman goes on to warn that the run-up in stocks can’t be justified by the fundamentals: “It looks to me now as if the markets are now pricing in a rapid recovery, that they’re pricing in a V-shaped recession, which I consider extremely unlikely.”

Let’s review: stocks get expensive…then they become cheap. That’s just the way it works. Prices go up and down in long cycles. At the top of the cycle, they’re very expensive – over 20 times earnings. At the bottom, they’re very cheap, under 5 times earnings. At the top of the cycle you might need as many as 43 ounces of gold to buy the Dow stocks. At the bottom, one or two ounces will do the job.

At present, stocks are not cheap. In nominal terms, the Dow is 8 times higher than it was when the bull market began in August 1982. In terms of gold, it takes about 9 ounces today to buy the Dow. That’s a lot less than it took in 1998, when the Dow was 43 times the price of an ounce of gold. But it’s a lot more than you find at real bottoms. At the bottom of the cycle in 1982, you could buy the entire Dow for just one ounce of gold. And in terms of P/E ratios, you can buy a few stocks at very low price-to-earnings ratios today, but the majority are still above 15. When they get down to 5, we’ll talk.

There being no sign of a bottom in the stock market yet, nor even the seeds of a bottom, we’ll adjourn today’s session…and guess that the real bottom is still far ahead.

Time to sell the rally.

Until next time,

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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