The current state of the US stock market

Generally speaking, and simplifying as much as possible the concept of valuation, when you buy common stock, you are purchasing a claim on the future stream of earnings from that stock. Thus the very important metric of EPS (Earnings per Share).

The price you are willing to pay for the future stream of earnings supposed to be generated by that common stock is the Earnings Multiple or P/E.

Any stock market index, being the sum of its constituents, will necessarily have a P/E as well. When you buy a stock or an index, you are paying a price that might be low, fair or expensive based on a variety of metrics like the P/E we just discussed. Other commonly used metrics used while analyzing a company are P/B (Price to Book), PEG (Price to Earnings Growth) and the DDM (Dividend Discount Model). While no valuation method is perfect, utilizing all of them at the same time will certainly paint a clearer picture.

Up until here, everything we said is very rational, intuitive, and easy to study on all Finance 101 books. Then, there is fantasyland and market distortions.

The reason why I say that we might very well be in fantasyland when it comes to value stocks and aggregate indexes, is because Central Banks have distorted the money supply and bond yields so much that money has been forced to find its way into stocks and other riskier assets even in the face of nose bleeding valuations.

If the S&P 500 index would be trading at say a P/E ratio of 10, what it really means is that it would take 10 years of earnings (produced collectively by all of its constituents) to recover the original investment.

While it has little to no meaning comparing current P/E to say P/E values of 50 years ago, because too many things have changed, I believe it is reasonable to instead use a recent 10-year average to draw comparisons.

The recent average P/E for the S&P 500 index is roughly 19.5. Today, as of this writing, we are trading close to 35. All things equal, it means that if you invest $1,000 today, it will take 35 years to make back the original investment.

Forget what you read and studied in school. Until this cycle and monetary experiment completes, we can no longer utilize valuation metrics to help us select investments. This is a very reckless statement, however it is the truth.

If I am intellectually honest, I cannot justify paying these prices for almost any stock. Let's talk about a popular example: TESLA. Its current PE is north of 1,600. It means it takes 1,600 years of earnings to make back the original investment. Clearly on paper is absurd. That said, we could have made the same argument for years while its price continued to move up.

In reality TESLA is very likely to continue to appreciate and become a much bigger Market Capitalization company in a relatively short term. Why? Because there is lots of money chasing it. Easy money that has originated by reckless printing by the FED.

To sum up, I wanted to present the framework of my opinions and state that even if I recognize the absurd valuations in front of us, I also recognize that the almost unlimited supply of money chasing assets makes valuing such assets much more difficult.

In a nutshell, excessive fiat printing and artificially low interest rates will translate into higher stock prices, higher commodity prices, higher Bitcoin and lower US $

When I then say a stock or an index looks attractive, I simply mean from an appreciation point of view and not from an intrinsic value point of view.