by Graham Summers, Gains Pains & Capital:
Based simply on CAPE (cyclical adjusted price to earnings) the market is significantly overvalued with a reading of 23.
However, even this measurement understates the true nature of the bubble because one of the biggest drivers of corporate earnings in the post-2009 era is financials (they account for 16.8% of the S&P 500, second only to IT). And financials’ earnings are a complete fantasy derived via accounting gimmicks.
I’ll give you an example. One of the classic accounting gimmicks is to write off loan loss reserves.
Banks and other financial institutions are required by law to maintain a certain amount of capital to make up for loans that borrowers default on. No matter how hard a bank works to only lend to those who won’t default, inevitably a certain number of loans go bad.
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