by Tyler Durden
Back in January, when European stocks were only starting their unprecedented QE ramp, we presented the “Driver Behind The European Stock Surge” in which we showed that ever since Mario Draghi’s “whatever it takes” speech in July 2012, European equity prices were up 50% (even higher now) even as corporate earnings had actually declined by 7%.
It is a take on the chart above that has sent Albert Edwards over the edge once again, and in his latest letter he presents another way of visualizing the data above, with the help of what he dubs the “WOW!” chart.
Edwards begins with the standard, and well-deserved, rant against central bankers who now merely need – and create – ever greater bubbles in hopes of preserving a system, which can no longer function away from a “bubble” state.
We have long fulminated against strategists who are unwilling to predict sharp market moves. The violent downmove in the euro over the last few weeks is a case in point. Mario Draghi and the ECB’s manipulation of asset prices makes Greenspan’s Fed look like a rank amateur. More shocking though than the plunge in the euro, and more shocking even that 25% of sovereign eurozone bonds now trade in negative territory, is what has happened to eurozone equity valuations. For, as we approach the sixth anniversary of the US cyclical bull market (a post-war record), the PE expansion of eurozone equities is simply off the scale. History suggests this will end very badly indeed. Ask Alan!
What is he talking about? Presenting Albert Edwards’ “WOW!” chart:
This extraordinary multiple expansion is most shockingly illustrated by the chart [above] showing eurozone trailing PEs expanding to the moon (on trailing PE, the eurozone now stands at 20x vs 18.5x in the US). The chart below shows developments for only the past couple of years – this time using the 12m forward PE. The interesting point here is how, despite a profit explosion in Japan, the Japanese forward PE is unchanged at around 14x whereas US and eurozone forward PEs have both surged.
While we agree with everything Edwards is saying, we don’t agree with his assessment that Japan’s epic clobbering of its currency is helping its corporations. Sure, there are benefits, mostly in the area of exports and a brief spike in profitability, which Edwards notes in detail…
The surge in Japanese company profits on the back of the yen?s devaluation since early 2013 is truly extraordinary, but this has not (yet?) fed through to a booming Japanese economy. Like QE, the liquidity surplus…………………………….