Well, there you have it. Warren Buffett believes the stock market is inexpensive at today’s valuation levels. Straight from the horse’s mouth.
“If these interest rates were to continue for 10 years, stocks would be extremely cheap now,” the chairman and CEO of Berkshire Hathaway. If rates normalize, stocks would be on the high side on a valuation basis, he said. “They’ve fooled me so far. So I’ve been wrong,” he said. “I would have thought by now you would have seen much higher rates than we have now, which is essentially nothing.”
Fair enough. Well, if we are to take this one step further and say that interest rates are zero or negative (which they almost are – inflation adjusted), we can then argue that the stock market valuation could be and should be INFINITE.
I would argue that Buffett’s mentors Graham & Dodd would not for a second believe in what Mr. Buffett is trying to preach. Today’s unusually low interest rates should not be used for valuation purposes. Investors should realize that we are at the bottom of a 35 year bear market in yields and that they will head higher as soon as the secondary bottom on a 10-Year Note is set over the next 2 years, at around 1.4-1.5%.
How fast will they surge thereafter? Once the bottom is in, any bull market in yields can be sharp. So much so that I wouldn’t be surprised to see yields at around 6% by 2020. And if that is the case, today’s valuation levels are not only high, they are in a bubble level territory.
