Pending Correction In VLG Index
I see excesses in many places; in housing prices, stock prices, traditional equity valuation metrics, margin debt, new stock issuance (IPOs), speculation activity, and so on. All based on confidence or faith that low-interest rates and fiscal and monetary stimulus will continue forever. My friends, who earlier had no interest in stocks, are now all in. And I am hearing quite often the alarming sentence, "this time it´s different". If history is any guide, then to me this smells like a bubble.
The chart below shows the Value Line Geometric Index, which I believe is the best gauge for the U.S. stock market. From the middle of January to the middle of March last year, the index fell 45,6%. Since then, it is up almost 100%. Keep in mind this is an equal-weighted stock index. The last time it rose that far away from its moving average line was at the start of the bull market in 2009. I think some type of a consolidation or correction is on the horizon, whether it takes place through price or time.
(Click on image to enlarge)
I am not familiar with "The Value Line Geometric Index", it sounds like an interesting concept though. What I do see is that free credit, interest-free borrowing, has reduced the need for running a business at a profit and allowed a large number of companies to keep on keeping on. And with those who can't run still in the race it gets crowded for those who can run well.
While the huge amounts of payments sort of keep things going, unfortunately the cash is being distributed fairly, so it goes to those in need and those with no need. Eventually the result will be either inflation or the rich getting much richer. So really it is a lose-lose situation approaching. Not my favorite kind of times.