Warning signs at the punchbowl

They conjure up marvellous euphemisms in financial markets. The latest is "tapering".

"Tapering" was the culprit for last week's 11 per cent rout on the Nikkei and a 4 per cent slide in the local share index.

Some poor numbers out of China didn't help either, but it was the sheer dread that the chairman of the US Federal Reserve, Ben Bernanke, might be impudent enough to whisk away the punchbowl that really spooked the punters.

The punchbowl is "QE" - or quantitative easing, another superlative euphemism that means the US government has been busy buying its own debts to the tune of $85 billion a month. The mere suggestion that this money-printing program might be "tapered" by some indeterminate amount and at some indeterminate time was enough to send markets into a tailspin.

The tailspin was merely a reality check in a bubble-market bull run. Yet the savage reaction every time there is a hint that QE might end seems enough to dissuade policy makers from ever stopping the presses.

If they called it "printing money" instead of QE, Wall Street might not have been scaling "fresh record highs" for the past few months. Share valuations, both in the US and here, look too high vis-a-vis economic fundamentals.

This reporter is not averse to pointing out when the market represents good value, as we noted last July when the ASX 200 was around 4100 points.

It has since put on 1100 points, then it handed back 200 this month. For investors, the easy 20 per cent gain has gone. It has already been made.

Australian shares have risen about 9 per cent a year for the past 20 years, on an accumulated basis counting fully franked dividends and ignoring transaction costs.

But this has been fuelled by a historic rise in household debt, indeed global debt, which is no longer sustainable.

So valuations are stretched. We now have bank PE ratios at 12 to 15 times 2013 earnings (ANZ at 12 and CBA at 15). Granted, banks are now explicitly backed by government, but the traditional bank multiple used to be closer to 11 times.

Consumer services stocks such as Invocare, Crown and Dominos Pizza are trading on PERs above 20. Perennial blue chip performers Coke, Origin and Amcor are changing hands on 17x, 19x and 20x respectively and premium healthcare offerings CSL and Cochlear trade on 24x.

Resources giants Rio Tinto and BHP are above long-term multiples too, at 11x and 14x 2013 earnings despite the pull-back in demand from China and commodities' deteriorating outlook.

Overall, the market PE ratio is 17x, just too high to be justified by the fundamentals, let alone factoring in the time bomb of QE.

Money printing, which has also been going on furiously in Britain and Japan, may well have fired up markets, but its ultimate purpose had been to fire up the economy and create jobs. So, while financial markets have quickly become addicted to the punchbowl, growth is still faltering and slow, even five years out from the financial crisis. In recent weeks, US jobless claims have been on the rise.

The Fed's monumental injection of cash was supposed to have led companies to expand and create jobs. But rather than spending money on new plants, many are buying back their own stock and issuing special dividends. Some $US102 billion has been sent offshore to boot.

This has been great for Wall Street, great for shareholders, and terrific for executives and their bonuses. But the trickle-down has been a big disappointment.

For now, we are stuck with a global economic policy that is barely working and for which there seems no credible alternative, and no way out without a monumental market meltdown.