His analysis was based on The Q ratio, developed in 1969 by Nobel Prize-winning economist James Tobin. The Q ratio on U.S. equities has dropped to 0.7 from a peak of 2.9 in 1999, and reaching 0.3 has always signaled the end of a bear market.
The Q ratio for U.S. equities has fluctuated between 0.3 and 3 in the past 130 years. At the end of the four largest U.S. bear markets in 1921, 1932, 1949 and 1982, the Q ratio fell to 0.3 or lower, and history is likely to repeat.
The government’s efforts will eventually fail as ballooning government debt devalues the dollar, causes investors to flee U.S. assets and takes the S&P 500 to its eventual bottom in 2014, Napier said.
He said, the ratio shows the Standard & Poor’s 500 Index is still too expensive relative to the cost of replacing assets, while the 39 percent drop in the index this year pushed equity prices below replacement cost, history suggests the ratio must sink further as deflation sets in.
With deflation, the value of assets falls and the value of debt stays up, then equity get crushed. The results are always horrific. Bear markets always end for exactly the same reason, and that is the market begins to price in deflation.
Related Posts :
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- Bloomberg: Q Ratio Signals ‘Horrific’ Market Bottom, CLSA Says (Update4), December 10, 2008 16:15 EST
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