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Denial Is Not A Trait Found Among Great Investors

Excerpted from Artemis Capital Management letter to investors,

Global equities are dependent on monetary expansion to justify elevated valuations in the regime of the Prisoner’s Dilemma. US stocks achieved the highest median price-to-earnings ratio in postwar history earlier this year and timetested valuation metrics like 10-year cyclically adjusted PE ratios, enterprise value to EBITDA, market value to replacement value, and price-to-sales ratios are on par with pre-crash periods like 2000, 2007 and 1928

Last year 95% of corporate earnings were spent on share buybacks which increased stock prices but did nothing to encourage fundamental growth or create middle class jobs. This is the only multi-year bull-market in history whereby trade volumes are declining rather than increasing.

Some investors claim stocks are in a new paradigm, an age of central bank omnipotence, where long-term valuation metrics no longer matter.

We have heard this fluff before, in 1928, in 1999, all the way back to 1716 with John Law in France – the original quantitative easing expert long before Bernanke, Yellen, Draghi, and Kuroda. It’s different this time works very well if you need to rationalize how to beat your return benchmark next quarter or win an election.

Denial is not a trait you find in great investors.

Beginning in 2012 a sharp divergence emerged between the performance of commodities and global equity prices (see red vs. green arrow in graph).

From the date of Bernanke’s Jackson Hole speech the CRB Commodity index is down -38.6% while global equities are up +28.6%.

The truth is that central banks cannot manipulate raw supply and demand the way they can financial assets. The global commodity super cycle is broken due to slower global growth, but risk assets continue to rise, showing an ominous divergence between the real economy and the surreal economy.