Thoughts on market reaction to the Venezuela news.
tl:dr
The spigot in Venezuela waiting to be opened to flood the world with crude oil and lower its price has been broken for a while.
It will take several years to fix it.
2/5
Venezuela is a founding member of OPEC their official statistics show its production (blue) is down 71% from its 1998 peak.
Its sustainable capacity (max output in within 90 days and held for a year) is 1M barrels/day (orange).
Venezuela is at its maximum now.
3/5
Why the big production decline?
Socialist Hugo Chávez was elected in December 1998. He turned out to be a brutal dictator. Only to be replaced by an even more brutal dictator, Nicolás Maduro, when Chávez died in March 2013.
It is correct that the new home premium (green) above existing home prices (blue) has collapsed from 38% in 2013 to below zero today (the lowest in 54 years).
Why?
See new home prices (orange), they stalled.
3/7
Here is the average home price (orange) and the home's size (blue). The reason prices are falling is that builders are constructing smaller homes.
But as the bottom panel shows (green), the price per square foot is as high as ever.
I assume Marks is referring to the 1-year forward P/E ratio for the S&P 500, the standard Wall Street valuation metric (which is closer to 25 now, but was 23 a few weeks ago).
Here is a long-term proxy for that ... the Shiller Cyclically Adjusted Price/Earnings (CAPE) ratio back to 1881. It is a 10-year average of P/E/ ratios.
At 40, it is one of the highest readings ever, even higher than 1929.
It shows the NEXT (future) 1-year REAL (after inflation) return of the stock market on the y-axis.
The CAPE on the x-axis.
The red box is the returns when the CAPE is above 34. It's a mixed bag of positive and negative returns.
Restated, valuation is NOT a good timing tool.
3/4
But if the y-axis is extended to the NEXT (future) 5-year REAL (after inflation) return, then THERE IS NO EXAMPLE, OVER THE LAST 150 YEARS, OF THE STOCK MARKET BEATING INFLATION OVER THE NEXT 5-YEARS WHEN THE CAPE IS ABOVE 34.
Restated, valuation is an expectation tool. Unless one makes the case that corporate earnings are going to have their most significant surge in history, the stock market is destined to disappoint over the next several years.