Present stock market valuations are a bubble waiting to burst, according to the fund manager at Phillips and Drew in 2000. The firm is well-known for their bearish views which have yet to be fulfilled.
Normal valuation methods, such as price earnings ratio and yields indicates that the US economy is valued at twice its long-term average. This means that it is overvalued by $8 trillion. Either the new economy has found a new source of wealth, or it is simply a bubble. He believes that these high values are sustained only by wishful thinking and over-optimistic forecasts.
The fund manager notes that all the features of past burst bubbles are in place:
- low inflation;
- above-average growth rates;
- a long bull market prompting belief that stock prices can only go up;
- changes in technology that excite public imagination; and
- the US private sector spending 4% more than its net income.
Not only investors should be careful. A bubble burst on this scale would have massive economic repercussions, possibly leading to political and social upheaval.
In a separate report, similar warnings were made by Ernst and Young, who say that Britain’s economy is looking good if you ignore the health warnings. In particular, the firm warns of:
- the threat to supply side economy through the Chancellor’s public sector largesse;
- consumers continuing to dig their heels in on prices, exerting a negative effect on company profits, in turn depressing employment and investment prospects;
- the switch from old economy stocks to the new, raising the cost of capital for old economy stocks;
- growth in the world economy which could give commodity prices (other than oil) another upward spur;
- the risk to sterling which remains vulnerable to large plant closures, bad trade figures and stock market collapse;
- the burden of personal tax, which is at its highest level for nearly 20 years.
[2000]