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Yet Messrs Hausmann and Sturzenegger apply the same valuation ratio indiscriminately to bonds, equities, trade credits and bank loans on both sides of the balance sheet.That said, there remains a big gap in reported profitability between American FDI and FDI in America that risk alone cannot explain.
The payout ratio went to alltime lows, and the valuation ratio rose.
I use P/PeakE rather than the traditional price-to-earnings (P/E) valuation ratio because it is more stable.
It's important to remember that as soon as a valuation ratio hits some predetermined level, stock prices will not necessarily fall.
When the tech bubble burst, the valuation ratio peaked at a level of 148.5, almost 50% above the fair value line.
The chart beneath it is Warren Buffett's preferred stock market valuation ratio which is "total market cap to GDP". As you can see, in the bottom chart a reading above 100 (i.e. the red line) is considered overvalued.
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Of course, most people who buy or sell a home don't look at valuation ratios.
That analysis was based on "purchase dates, square-footage figures, rental, occupancy and capitalization rates, operating margins, valuation ratios, leasehold arrangements and other mortgage data," the reporters Caleb Melby and Richard Rubin wrote.
For a quite a while now, analysts who take seriously such valuation ratios as the price-to-earnings ratio and Tobin's "q" ratio (which measures the price of investment assets relative to their replacement cost) have been warning about a crack in the market.
But to be any more precise would violate this column's fairly strict prohibition on calling the market.*As well as reading the book, see "Valuation Ratios and the Long-Run Stock Market Outlook: An Update", by John Campbell and Robert Shiller.
Valuation ratios remain dangerously high.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com