Bloomberg interviews economist Andrew Smithers, who called the correction in 2000. Smithers says U.S. stocks are 40% overvalued according to Shiller's cyclically-adjusted P/E ratio and the Q Ratio. Smithers says quantitative easing by central banks has fueled this asset bubble which won't be sustainable when that QE is reversed (HT: The Atlantic's Daniel Indiviglio).
Sounds reasonable to me.
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Isn't that a tricky call to make. What good does a call like that do? Would you really short it? When it traded at even higher levels off and on since 1998. Short it even though cash, bond yields, and other investment yields are at an all time low? Short it when there are probably more investors on the sideline and in bonds than ever? Tough call.
The market has traded at higher multiples during times of strong economic growth. How many economists are predicting that in the U.S. in the near future?
I wouldn't short the whole market. But I am shorting some individual stocks. And I am about to buy some DIA puts. I have a more sophisticated hedging strategy in development, which I will blog about later this year, but the DIA puts should suffice for now.
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