EDITOR'S LETTERMerryn Somerset Webb
China’s cheap and happy
The US economic recovery isn’t perfect and it may not be long-term either. As Bill Bonner points out, a large part of the improvement in the statistics simply involves Americans heading back to the economic structures that have served them so badly for so long. Borrow, spend. Borrow, spend.
The same can be said for the UK – see Matthew Lynn for more on this. But that hasn’t stopped the bulls extrapolating it forever and making a case for a new secular bull market in America. We’d like to believe this (we have huge faith in new technology) and we are happy to be convinced on the growth bit. But we can’t quite see ourselves coming round to the secular bull market bit.
Why? Price. Look at the cyclically adjusted p/e ratio (Cape) of well over 20 times (the long-term median is around 15) and the US looks both horribly overvalued and more expensive than almost any other global market. You can make some arguments that it isn’t a bubble, but they all seem a bit contrived. As we pointed out last week when we looked at the backlash against the Cape, when people start finding ways to undermine traditional valuation techniques, it is a pretty sure sign a bubble is building. So we aren’t mad for US stocks at the moment.
Instead, we are looking around for places that offer us cheap-ish stocks and that might deliver positive surprises.
• Read the full editor’s letter here: China’s cheap and happy