Let me start by stating that, by numerous traditional measures and metrics, equities are as expensive as other market tops (e.g. March, 2000).
Yet, somehow this registers with few investors.
Warren Buffett's favorite valuation indicator, stock market capitalization vs. GDP is at a record high.
Another, the price to sales ratio is at an all-time high:
Here is a very specific and important example of that overvaluation - the median non-financial small cap trades at an EV/EBIT multiple of nearly 45x. That valuation towers above prior market cycles. Moreover there are more speculative public companies than ever before, with 37% of domestic small caps losing money over the last 12 months:
The stock market's reaction yesterday to the Soleimani attack and even more so to the tweet storm from Washington astonished me.
The stock market is supposed to reflect the future prospects for the profitability of the companies that are listed.
It is hard for me to see how the recent geopolitical events would be positive - yet markets haven't seemed to care.
As a minimum, corporate costs for the security of American interests will be rising, perhaps materially, around the world and the places U.S. citizens are welcome and can safely go to conduct business will likely be reduced.
The President's improvisation and, arguably incoherent policy coupled with his continued disregard of his advisers, is deeply troubling. His threats to Iran's cultural institutions will win no friends - and Secretary of Defense Mark Esper is backing off of Trump's statement already.
An Iranian response is inevitable. Its scope and effectiveness adds another level of uncertainty which is usually unwelcome to markets of long dated assets.
As I have frequently noted, this has come at a time when sentiment figures overwhelmingly reflect greed rather than fear.
So the initial market response to sell off on Friday made sense.
However, I do not understand the subsequent recovery and further advance on Monday. Stated simply, yesterday's reversal surprised me.
The stock market has been Trump's strongest positive achievement and he refers to it constantly.
Is there something else going on?
Could the government in some way be an active buyer of stocks?
After all, other countries, like Japan does it.
Or perhaps it is, as many argue, just about massive liquidity being injected into the financial system.
We all know that the Fed has been effectively monetizing the market for a long time in many forms. And that infusion of liquidity has accelerated over the last 3-4 months as the Fed is funding with the repo and "not QE" money.
However, yesterday's action (and upside reversal) could be a trap.
To me, the reversal illustrated the investing (and general) public's profound ignorance of geopolitics reinforced by a long string of circumstances that insulated them from any negative impact from geopolitical events such as Russia's invasion of Ukraine, the collapse of Syria and resulting European immigration crisis, etc. A war with Iran would be on a whole different level but people can't conceive of it. Thomas Friedman wrote that 9/11 was due to a "failure of imagination" and that's true of most crises - they happen because we couldn't imagine they could ever happen.
Today people can't imagine we could go to war in a way that will impact them back home (wealthy people generally don't send their children to fight) or can't imagine the market going down again. Sooner or later the limits of their imaginations will become painfully clear to them.
More likely, the entities the Fed is funding with the repo and "not QE" money are the buyers, but it's the same (absurd & ultimately ruinous) effect.
(This commentary originally appeared on Real Money Pro on January 7. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)
