The Shiller P/E Ratio Near 40

The Shiller P/E ratio has only been this high on three other occasions. The 1929 market crash, which resulted from an overly exuberant market. The 2000 bubble and crash, which resulted from an overly exuberant market.  And now, during a global pandemic, fueled by bond buying and massive monetary injections plus zero percent interest rates flooding the market with liquidity and a lot of ‘free money’.

If only that were so….

Like the saying goes, there’s no such thing as a free lunch. And there is no such thing as ‘free money’.

Shiller PE ratio near 40

We should all remind ourselves about something I learned in an economics class in the 70’s. In fact, as I recall, it was the first lesson of the class.

There is no product, service or commodity that is free. Everything has a cost. If someone gives you a ‘free’ sandwich, someone else paid for it. And something gave up something for it. Even a plant loses something when it’s output is exctracted to feed us. And everything takes energy, to grow, to harvest, to transport, to store, to distribute….

Everything comes from something else and entropy tells us that the ingredients in that sandwich required payment from somewhere else. Consider the ingredients of a sandwich, required energy from the sun, which is measured in calories. Those calories are absorbed by plants. Those plants needed water that is either attained via natural process fueled by environmental energy systems, or piped in my manmade extractions.

Think about the harvesting, done by hand or machine does not matter. Humans consume energy calories so we can expend those calories in our labor to harvest; just as a tractor uses caloric energy stored in the Earth from millions of years ago in the form of fossil fuels.

There is always energy consumption, usage. There is always a trade off. I suppose the most relevant question is when will we get the bill.

History has demonstrated that when the Shiller ratio gets this high, the bill is coming soon.


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