P/E Ratio Vs. Age Ratio (M/O)

Mike Maloney shows how the P/E Ratio is correlated to the M/O Ratio.  The M/O ratio is the ratio of the middle-aged (40-49 year old) cohort vs. the old-age (60-69) cohort. The more old people there are in society, the lower the P/E ratio will become and the lower the stock market will be valued.

For the U.S. this age ratio will probably stay at around 0.5, which means stock valuations can’t go exorbitantly high like in the NASDAQ bubble of 2000. Also take into account that we live longer, so the higher age groups will be more populated in the future. I’d say the P/E ratio will average at 15-20. So keep your eye on these population pyramid charts and I invite you to look at charts from other countries as well and draw your own conclusions.

This is the chart for Europe, which looks worse than the U.S, because the baby boom generation is going for retirement.

And China, which has the same problem, but to a lesser extent as there are still many young people coming into the workforce.

Misery Index Vs. Forward P/E Ratio Vs. Gold

The misery index is the sum of the unemployment rate and the inflation rate. It can be very useful to predict the forward P/E ratio (price/expected earnings). The misery index has been falling since 2010 till 2015.

The lower the misery index (blue chart), the higher the P/E ratio (red chart), which means stocks get valued higher. A low misery index might explain why in 2014, stock prices were valued that high.

Another correlation is that between the misery index and gold. The more misery, the higher the gold price.

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Buy Emerging Market Stocks in 2014

One of the reasons I’m bullish on emerging market stocks is because they underperformed the U.S. in 2013. But most importantly, the P/E ratio of these emerging market stocks is at all time lows (P/E=11), while the P/E ratio in the U.S. is at 22. This is a valuation of more than double the emerging market stocks.

PE ratio

I think this underperformance in EM stocks is due to the underperformance of the CRB index as compared to U.S. stocks, which can also be seen here. Stocks went up (yellow line), but the CRB index (orange line) went down.

Stocks Vs. CRB Index

I believe the CRB index is now in a recovery phase. China’s power consumption has been steadily increasing.

China Power Consumption

That’s why I’m bullish on emerging market stocks. If you’re not convinced yet, don’t believe me, listen to Peter Schiff.

To read more, go here.

Correlation: P/E ratio Vs. Bond Yields

A few months ago I said that the P/E ratio would go up when bond yields go down. Apparently today, I read on Zerohedge that it is not black and white. This is only true for yields above 3%.

When we go lower than 3%, the correlation reverses. This is very interesting…

Chart 1: Yields Vs. P/E Ratio

Comparing the Dow Jones and Shanghai Composite against Europe

Over the last few years after the 2008 crisis, I want to give a performance update for the Dow Jones vis a vis the Shanghai Stock Exchange. The Dow Jones has gone up 50% after the 2008 stock market plunge (Chart 1), while the Shanghai Stock Exchange has gone up first, but essentially lost all of its gains in the period between 2010 and 2012 (Chart 2).

Indeed, many economists have pointed out that the U.S. stock market has outperformed almost every market in the world. Marc Faber pointed this out in a recent interview on Bloomberg Radio.

Chart 1: Dow Jones Industrial Average

Chart 2: Shanghai Stock Exchange Composite Index

I want to analyze this further. How can there be such disparity? It can’t be the exchange rate between the USD and the CNY, because the Chinese yuan has only gone up 5% against the USD between 2008 and 2012. So what are the reasons?

Let’s take a look at the basic market metrics: P/E, dividends, book value in the full version of this article.

Another Correlation: Interest Rates and P/E Ratios of Gold Mines

In the Peter Schiff Show on the 5th of April, Peter talked about how low the P/E ratios of the gold mines are, compared to the interest rate. He said: “the lower the interest rates are, the higher P/E ratios will be”.

This correlation is intuitively correct. As the interest rate is low, you won’t get any return by putting your money in treasuries or in the bank. So where do you put your money, if not in cash and bonds? You will put your money in the stock market where you get a higher return. That’s why stocks will have a higher valuation and consequently a higher price. A higher price will result in a higher P/E ratio. Conversely, when interest rates are high, the P/E ratio will be low.

For example: if the interest rate were 15% like in year 1981, investors will likely put their money in bonds with a 15% return per annum, rather than putting their money in risky stocks.

To show this correlation I will give historical evidence and show why Gold Miners are very cheap.
Go here to check out my analysis.