“If you sold every share of every company in the U.S. and used the money to buy up all the factories, machines and inventory, you’d have some cash left over. That, in a nutshell, is the math behind a bear case on equities that says prices have outrun reality.
The concept is embodied in a measure known as the Q Ratio developed by James Tobin, a Nobel Prize-winning economist at Yale University who died in 2002. According to Mr. Tobin’s ratio, equities in the U.S. are valued about 10 per cent above the cost of replacing their underlying assets – higher than any time other than the Internet bubble and the 1929 peak,” wrote Lu Wang and Jennifer Kaplan for The Globe and Mail last Monday May 18, 2015.
Wang and Kaplan continued, “Acceptance of Mr. Tobin’s theory is at best uneven, with investors such as Laszlo Birinyi saying the ratio is useless as a signal because it would have kept you out of a bull market that has added $17-trillion (U.S.) to share values. Others see its meaning debased in an economy whose reliance on manufacturing is nothing like it used to be.”
Read the full article here.
Raymond Matt, CFP, CLU, TEP, CHS
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