By all accounts, the U.S. stock market is expensive. Not only is it hitting new nominal highs, its valuations are also off the charts. How can one tell?
Fortunately, there are several metrics to guide us. The Shiller’s Cyclically Adjusted Price Earnings (CAPE) ratio, for instance, is currently 27.5. That’s 65 percent higher than the CAPE’s long-term historical average.
What’s more, there have only been two occasions over the last 100 years that saw the CAPE at a higher valuation than today. One was during the late 1920s…right before the stock market crash. The other was the late 1990s…just prior to the popping of the internet bubble.
The Buffett indicator, which is a ratio of the total market capitalization over gross domestic product, also shows that stocks are significantly overvalued. The ratio currently stands at about 125 percent. A fairly valued market is a ratio somewhere between 75 and 90 percent. Anything above 115 percent is considered significantly over valued.
Obviously, the surefire way to make money in the stock market is to buy low and sell high. Conversely, buying high and selling low is a guaranteed way to lose money. Based on current valuations, buying U.S. stocks right now would be buying high.
Overvalued and Old
Perhaps one could buy high and sell higher. But this isn’t an advisable way to invest. Not unless one considers gambling to be investing.
Long term investing involves finding stock markets that are cheap. It also involves finding economies that are developing and growing, which can boost stock prices over several decades. These are the economies and markets where you can dip into their growing wealth flows and generate personal abundance.
Unfortunately, the U.S. stock market, like most western stock markets and the Japanese stock market, is overvalued and being propelled dangerously upward by central bank credit pumping. Similarly, the economies that these stock markets represent are comprised of an abundance of old people. Their days of booming economic growth have come and gone.
Here at the Economic Prism we like old people…even the grumpy ones. They have wisdom and experience. They have insights and anecdotes. But their most productive years are behind them…this is a fact.
Take our neighbor Joe. He worked as a high school teacher in Los Angeles public schools for 30 years. No doubt this wasn’t an easy job. Certainly, it was a noble endeavor. Joe’s been retired and living off a pension fund for the last decade. He’s a heck of a good guy. We like him. He’ll talk our ear off while we’re trying to cut the grass. However, he doesn’t contribute to economic growth.
How to Cash In On the Economic Sweet Spot
The point is, population demographics in developed countries are aging. People like Joe are stacking up against a smaller work force. More and more productive capital is being directed from savings and investment to supporting old people. Over time this results in a slowing, or even shrinking, economy.
The median age in Japan is 44. For most of Europe, including Russia, the median age is near or just over 40. In Australia it’s 37. In the U.S. it’s 36 and in China it is 35. On the other side of the spectrum, in Central Africa it is under 25. In South Africa and North Africa, the median age is 25 to 30.
The sweet spot, however, in terms of political stability and a young growing population appears to be in India – where the median age is 25 – and Brazil – where the median age is 30. Considering demographic trends and current economic prospects, the economies of Japan, Europe, Australia, the U.S., and China will slow over the next several decades…they already are. Conversely India and Brazil are poised to grow.
On February 27, the last date we could find data, the CAPE for the Indian stock market was at 21.7. The CAPE for the Brazilian stock market on this same day was just 8.8. On March 5, the Buffett indicator for the Indian stock market was at 78 percent. The Buffett indicator for the Brazilian stock market on this same date was just 39 percent.
What to make of it?
India is a younger economy. It’s stocks aren’t cheap…but they aren’t expensive either. Brazil, on the other hand is a little older…but still young. Yet its stocks are super cheap.
What to do?
Allocating a small and equal portion of your portfolio to each country’s broad market ETF and letting it ride for the next 15 to 20 years is a sensible way to cash in on the symbiotic trends of young growing economies and attractively priced stocks. You may want to consider the iShares MSCI India ETF (NYSE: INDA) and the iShares MSCI Brazil Capped ETF (NYSE: EWZ) as a way to play it.
If you like learning about unique and profitable opportunities like this, and would like to discover more of them, I invite you to pick up a copy of the invaluable Urgent Strategy Report called Wealth Capture Report: How to Dip into Wealth Flows and Generate Personal Abundance. Find out more, including how to claim your free copy here.
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