S&P 500 Overvalued By 40%

Here is what the economist and president of research firm Smithers & Co. said in an Oct. 23 interview at Bloomberg’s Tokyo office:

Markets are very vulnerable to an end of quantitative easing. Central banks, they’ve got to stop some time and if that happens everything will come down. Quantitative easing has set off another sharp, and so far containable asset bubble. But if it gets too high and starts to come down then we’ll go straight back into a recession.

Declines are also likely because banks will need to sell more shares to raise capital and restore their financial health. A 40 percent tumble from the S&P 500’s price at the end of last week of 1,079.60 would take the gauge to 647.76, below its March low.

Asset purchases have doubled the size of the Fed’s balance sheet to $2.1 trillion since the start of the current financial crisis. The Bank of England has spent 175 billion pounds ($286 billion) over the last seven months to rescue the economy.