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Thoughts from the Frontline

Are Valuations Really Too High?

May 10, 2014

The older I get and the more I research and study, the more convinced I become that one of the more important traits of a good investor or businessman is not simply to come up with the right answer but to be able to ask the right question. The questions we ask often reveal the biases in our thinking, and we are all prone to what behavioral psychologists call confirmation bias: we tend to look for (and thus to see, and to ask about) things that confirm our current thinking.

I try to spend a significant part of my time researching and thinking about things that will tell me why my current belief system is wrong, testing my opinions against the ideas of others, some of whom are genuine outliers.

I have done quite a number of media interviews and question-and-answer sessions with audiences in the past few months, and one question keeps coming up: “Are valuations too high?” In this week’s letter…

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Don Braswell

May 16, 12:33 p.m.

Regarding “Are Valuations Too High?” - We often hear about “Seigniorage” with respect to the Dollar in the international exchange, and the added value that brings to the average US citizen.  Why don’t we hear about the same sort of effect regarding the US Stock Market? A sort of “Equity Seigniorage.” In a world of the blind, the one-eyed man, with blurry 20/400 vision, is king. 
Why?  It’s easy to buy US stocks from anywhere in the world (again aided by the US currency seigniorage), and if I had a million foreign dollars I’d want to buy US products.  How long can it go on?  Well, the Japanese market reached an P/E ratio of about 40 in the 1980/1990’s and has never really recovered.  At the time, Japan was all the rage to overtake the USA and were widely touted as the leading economic power. 
Hmmm - that almost sounds familiar - especially as our markets look downright healthy when compared to other markets. If all the markets had exactly the same problem, wouldn’t folks hop from one lifeboat to another, finally all landing in the US boat, and valuations skyrocket?  No it wouldn’t be rational - but the last crisis started here and spread out.  If the next crisis starts somewhere else - I would expect the dominoes to fall in reverse order, until they all collapsed around the US. 
Thoughts about Equity Seigniorage?

David Stahl

May 12, 4:46 a.m.

I wonder how much of earnings growth has been due to expense reductions vs. revenue growth.  There’s an upper bound on how much can be gained via outsourcing and automation.  With the world economy in kind of a funk, it may be valuable to factor that into earnings projections.

Tom Ervin

May 11, 2:21 p.m.

Easterling, not long ago, was a sworn believer in the importance of Consumer Spending, as the prime indicator of almost everything.  It was all about consumption.  I didn’t see it here; maybe I missed it.  Maybe he’s on a new track?

Henry Mortimer

May 11, 1:47 p.m.

In my opinion, this is not one of your best articles; everyone forgets the bond market. It’s time to think about where stocks would be valued in a “normal” say, 5% interest rate environment. The choices strike me as simple: either we will go to a “Normal” environment or we will have deflation. Either will be bad for the equity markets. The driver for the next few years will be debt and I am betting on deflation. That’s my analysis, but it’s also what the Central Bankers are most worried about.



jack goldman

May 10, 4:42 p.m.

Why are people so confused about the stock market? The stock market is up 6% a year since 1964 when real silver money was taken off the market. Silver dollars are up 6% a year in fifty years too. So are most prices. The Dow was 750 silver dollars in 1964 and is 750 silver dollars in 2014. This is all a counterfeit money bubble. Nobody cares.The middle class is being wiped out. Asset owners, bankers, and governments are expanding their power. Federal Reserve bank debt notes are debt. Debt has exploded. This will all end very badly as we saw in the glimpse of the future in 2008. Real estate dropped 40% for the first time since 1929. In 1929 real estate dropped 50%. Interest rates are lower than the Great Depression or World War Two. That does not make sense. I have to protect myself by getting out of the dollar that loses 6% a year for fifty years. This counterfeiting benefits the 1% and harms the 99% in a rigged system. Wall Street wins, Main street loses. This will end badly as it has in the past. Good luck to us all.