While we’re on a ‘bearish roll’ we can’t help but point out that the indicator that Warren Buffett uses to gauge whether the S&P500 is expensive is trying very hard to tell you something. This “Buffett-Metric” is the total market capitalization of U.S. stocks relative to the GDP of the country. Today that metric sits at almost 139%, a number that has been eclipsed only once before in the entire history of the US stock market. That was at the peak of the tech bubble in 2000 when the “Buffett-Metric” hit 145%, and it only held that level only for a few short weeks before the great bull market of the 1990s came to an abrupt end. The chart below shows the peak of the “Buffett-Metric” in 2000 and the subsequent fall. If an all-time valuation high isn’t expensive then what exactly is?

One of the most consensus trades at the beginning of the year was a continually rising dollar. And why not?   Interest rates were headed higher in the U.S. while most other global central banks were still running a zero-rate policy.   Add in stronger growth in the U.S. than abroad and the ‘long US dollar’ trade was on! So why has this trade turned down and the ‘greenback’ been under such pressure? Sentiment indicators suggest that this was a fairly ‘crowded trade,’ meaning that the 50% rise in the trade-weighted dollar since 2014 had attracted a lot of attention and speculators had loaded up on this position.   Once the consensus becomes that strong, the trade often tends to go in the other direction. Also, while the U.S. Federal Reserve increased interest rates last December as well as March and June of 2017, the worry is now that they may not increase rates again anytime soon, especially since they also announced that they want to start winding down the US$4.5 trillion balance sheet debt they had accumulated during their Quantitative Easing programs. Economic growth in Europe and Japan have also been a bit stronger than expected this year, leading to some views that their central banks may also start removing some of the monetary stimulus of the past few years. That lead to some money flows into the Euro and the Japanese Yen. While stocks have grinded to new highs in the U.S., the dollar has given back all of its gains and more since the Trump election win. A weaker currency is clearly a warning sign in our view..

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