The Single Most Important Chart to Understand Where We Are Today

Fri, Jun 17, 2016 - 4:54pm

In Friday’s podcast with Financial Sense, Jesse Felder at The Felder Report shares the single most important chart for understanding today's overvalued market and how this helps explain why many big name investors like George Soros and Stan Druckenmiller are turning bearish.

Consider the "Everything Bubble":

Here's what Jesse had to say:

“This just shows the (un)sustainability of asset prices. I got this chart from...a former Fed insider who had spent 30+ years at the Fed and he came out and said after he retired recently that this is the single most important chart he's watching because it's just totally unsustainable.

Felder continues:

"Asset prices relative to incomes have never been sustained at these levels...and I think the reason it's so high this time is because it's not just stocks—it's stocks, bonds, every type of financial asset is very highly valued today and if we learned anything from the last couple of market cycles, that doesn't work out too well and it's not sustainable and despite the Fed's best efforts to perpetuate it, there's going to be consequences."

A possible warning sign that we are getting closer to this point is the recent large decline in stock buybacks, which, he said, has helped to propel the market to all-time highs as businesses diverted funds from long-term business investment and towards short-term financially engineered profits. Now that companies have pulled back, he believes the stock market may be in danger of doing the same.

Here is a chart Felder posted on his Twitter page showing US buyback announcements vs. the S&P 500 going back to the early 2000s:

When considering political or macroeconomic developments that could upset the market, Felder says most investors are currently fixated on the June 23rd Brexit vote. To him, however, the real risk is China: "it's just a ticking time bomb," he said, "and I don't think the markets are currently factoring in what a risk China could be over the next several months."

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