The European Central Bank has hardly started its quantitative easing program and we’ve already seen a big market reaction, provoking Societe Generale chief strategist Albert Edwards to pronounce Draghi the new ‘bubble-blower extraordinaire,’ stealing the crowd from Alan Greenspan, another central banker that Edwards doesn’t hold in particularly high regard.
“Mario Draghi and the ECB’s manipulation of asset prices makes Greenspan’s Fed look like a rank amateur,” writes Edwards in his latest Global Strategy Weekly. “More shocking though than the plunge in the euro, and more shocking even that 25% of sovereign eurozone bonds now trade in negative territory, is what has happened to eurozone equity valuations.”
Albert Edwards: Eurozone PE multiple have exploded (versus 2009)
Edwards points out that eurozone PE multiples have grown 220% against their own level six years ago, faster than Europe as a whole or the US have done in the last forty years. That’s a weird measure, and if he could make a similar statement about year-on-year PE expansion, presumably he would, but that doesn’t mean it’s pure data mining either. The six-year comparison measures against the end of the financial crisis, and shows just how far out of line prices and performance have become. With fixed income products not necessarily even paying you for holding them, investors have to put their money somewhere even if earnings don’t warrant it.
If you compare total returns to recent multiple expansion, it’s clear that eurozone stock markets are being driven by higher valuations to a greater degree than any other market. The disparity between France and Germany is also interesting because it highlights just how much variation there is between eurozone economies.
US entering longest bull market since WWII
Turning back to the US, the S&P 500 has recently become the longest bull market since the end of World War II, at least according to some academics, and we’ve gone 800 trading days without a 10% or larger correction – the third longest such streak after the dot-com bubble and the financial crisis, just recently pushing past the 1984 – 1987 streak that also ended fairly abruptly.
Edwards also brings up his November prediction that the Yen would reach 145/USD by the end of this month. It doesn’t look like that’s going to happen, but Edwards still thinks there is a good chance of the Yen depreciating rapidly in the current environment. It has already fallen below the 20-year trendline and is pushing up against the 25-year trendline. If that finally happens, it would put pressure on US profits that Edwards already sees as vulnerable.