Copper Bounces Off The Lows

In a previous article, a couple weeks ago I discussed how copper's decline didn't mean you should get worried about the global economy. Sure enough, the price of copper, which you can see in the chart below, has rallied sharply back to where it started the selloff in October. Now some investors are claiming this rally is consistent with inflation increasing. Once again, I caution making prognostications based on the week to week price action in copper. This rally follows my narrative that inflation will pick up in 2018, but there needs to be more follow through than this. Increasing commodities prices and accelerated wage growth could be the combination that brings CPI near 3%.

Valuations Imply Caution

The Shiller PE recently passed the peak in September 1929. This means the market has only been more expensive in the 1990s bubble. The current Shiller PE is at 32.51. The mean is 16.80, meaning the market is nearly double the average. The maximum is 44.19. It was hit in December 1999. It's tough to determine what these valuations mean because there are such little data points to compare the market to. Even going back to 1880 only leaves you with the 1990s bull market.

The chart below aims to contextualize what such high valuations mean. As you can see, the number of small dots decline as you get to the bottom right where America is. This chart is over a year old as it has the Shiller PE at 30.3. With the Shiller PE at 30.3, the average price appreciation per year is from 0.8% to 4.6% in the next 10 to 15 years. With a higher valuation, you'd expect the returns to be a bit lower. Low returns on stocks combined with heightened inflation can be a problem. The scary part is that it doesn't look like there are any catalysts to bring the market down. The Shiller PE could get to 40 without a problem. The biggest catalyst that I see which could wreck the markets is if the crypto currencies' collective market cap doubles from the $612 billion valuation it's at now and then falls 80% in a short period. That would cause panic.