For an economy that is supposed to be on the verge of overheating, or at least moving decisively in that direction, there are an inordinate number of indications of a cyclical stall and termination rather than some beginning (or ripening). I’m not referring exclusively to economic indications, either, such as the Federal Reserve’s own industrial production figure that just showed up yesterday fully and completely within recession territory. A survey of even stock market indications suggest more end times and exhaustion than those that might occasion FOMC confidence.

From a valuation standpoint, many calculations have turned over given the August liquidations. Tobin’s Q, for example, fell from 1.04 all the way to .934. Some of that was due to the Fed’s revisions and updates in the Financial Accounts of the United States Z1 (formerly Flow of Funds) regarding corporate net worth, but given that Tobin’s Q peaked at 1.107 at the end of the second quarter of 2014 you can’t help but notice the “dollar” effect. In other words, outside of the major indices that increasingly move on fewer and fewer stocks, the broader stock market has hit a pause if not a wall (given that this sideways to lower activity has lasted now more than a year).

Even with that in mind, valuations remain at historical extremes. Just like the historic inventory imbalance that hasn’t been dented despite an obvious and deepening slowdown in production, the potential inflection in stock prices hasn’t yet reached serious enough (even away from the major averages) to quite yet bring down extreme valuations. In my modified Q ratio, where I subtract the market value of real estate from non-financial corporate net worth so that one bubble (real estate) does not support the valuation of another (stocks), that is perhaps most evident and clear. The crash in August, which remains the numerator in that ratio since the Z1 data is through the end of Q3, only brought the valuation level down to slightly above where it was at 2007’s peak – and -60% on the S&P 500 from there.

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