This is the worst chart on the internet. It stinks.
It’s a worthless economic cliché. Actually, it’s the constantly recurring Shiller P/E (CAPE) ratio chart.
It is special because Bob Shiller won a Nobel Prize five years ago, and he uses a cyclically adjusted P/E ratio that includes inflation from the previous 10 years.
Here it is:
Yes, it looks like this chart is high. If you believe in regression to the mean, it would suggest we will be headed back to 15 or so.
On the other hand, as a trading tool, it’s worthless. Shiller P/E has called the 1929 and 2000 tops. Black Monday is lost in the noise, as is the top in 2008. Sure, the market is expensive, but if you sold now you could give up a third of your gains for the cycle.
Furthermore, there are very good reasons the P/E ratio is high. In many ways it is supply and demand.
In 1997 there were 8,090 listed companies in the U.S. Now there are 4,331 — i.e., less supply…
Publicly listed companies in the United States:
Over the past 20 years, companies were merged, bought out, or went bankrupt.
Shares Shrinking…
On top of this, the number of shares in companies is shrinking. Companies have been buying back shares. You would expect that with population and GDP growth, the number of shares listed would grow…
And it did for years. In January 2007, the market cap of the NYSE listing stocks was $17.1 trillion, with 415 billion shares outstanding. This grew so that in September 2014, the market cap was $19.7 trillion, with 465 billion shares outstanding.
That was the top in terms of shares outstanding. In October 2016, the market cap was $18.7 trillion with 447 billion shares.
But shares have started to tick back up with the resurgence of IPOs. As of June 2017, the market cap of the NYSE was $21.3 trillion with 453 billion shares outstanding.
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Supply and Demand
On the demand side, there is the relentless and constant demand from 401(k)-type savers. Think about half the population putting 6% of their paycheck into the market. And these people make more money than they did 20 years ago. GDP per capita was $31K in 1997; it is now $57K.
Upside remains because the number of people who own stocks remains low in the wake of the Great Recession. Only 54% of American households own stocks, down from 62% before the financial crisis, according to Gallup.
These people, as well as younger people who haven’t invested yet, will be suckered in by the current bull market. I am fairly confident that the current bull market will eclipse the 1990s bull market in terms of P/E ratio and number of households that own stocks — acts of God aside…
Russian Gas
You don’t have to buy expensive stocks, as there are still bargains to be found in this market.
Take, for example, Gazprom (OTC: OGZPY), the huge Russian natural gas company. My readers own it in Bubble and Bust Report. It is up 32%, and there is a lot of upside to come.
The company sells most of its gas to Europe. Due to the shutdown of nuclear and coal power plants as well as a growing economy, the EU is demanding more gas. EU gas consumption jumped 40% last year.
Germany is now burning a record 53.4 billion cubic meters (BCm). Turkey imported 29 BCm (18% growth). France totaled 12.3 BCm (7% growth). To meet this demand, Gazprom increased production by an outstanding 52 BCm/year.
More Tubes
Despite U.S. sanctions on Russia, the Nord Stream 2 pipeline project is moving forward and is expected to be finished in 2019.
Gazprom is starting to move off its lows. Part of this is due to the rising price of Russian natural gas, which has climbed from a low of $4.04 in May 2016 to $6.60 today. Part of it has to do with increased demand.
Buy some and get a 5.44% dividend while you’re at it.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
