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How fragile is today’s stock market and do you feel current valuations are real and sustainable?

Robert Wiedemer
October 6, 2015
Video Transcript

There's two elements to valuing stocks. One is the earnings and the second is what value put on those earnings. It's called a priced earnings ratio. So for a year's worth of earnings, lets say you make a million dollars, I'm willing to pay you $25 million. Okay. That valuation can change in a heart beat. Lately, it's been going up. We're paying more money for the same earnings in the stock market.

Now, nobody in the stock markets think that earnings could go down, but of course, what if they did? What if you had a recession? What if you had an aftershock? Earnings go down and the amount I'm willing to pay you for the earnings goes down lets say from $25 to $10 million? It can happen. It can happen when people are worried, nervous, interest rates go up, anything like that. The stock market valuations are very fragile and we've certainly seen that before. The only reason they are not fragile now... printed money. Printed money helps keep those prices up. We've never done that before. We've had stock markets that have gone nowhere even though the economy has grown like in the 70's. We had pretty good growth in our economy in the 70's. Stock market went nowhere. We've had other markets that have bubbled up like Japan that have soared and then when their bubble burst they fell 80%, but the Bank of Japan didn't come with a lot of printing money to save them. In fact, that market stayed down 80% for decades because Bank of Japan didn't print money. What we're doing in the U.S. now, very, very unusual. We're not driving our valuations based so much on earnings, but on high valuation of those earnings and massive amounts of printed money to keep pumping up those prices, and I might add stock buy backs. A lot of that being borrowed money and some of that borrowed money being brother corporations who are buying corporate bonds, but it's not a normal market driven system. It's a very, very much, well, we can call it “fairyland” system, but it's non-market and ultimately that means fragile. It may not look fragile, but that's because everybody has faith in the Fed to keep it up. Once we lose that faith that fragility will show and it can down very, very fast, not because there's so many sellers, but because there's a lack of buyers. When you lose the buyers, the market falls.

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