I understand your points, though I am not sure if they fully counter the trends that concerned the analysts in the WSJ article.
“Tax cuts are not monetary stimulus. Monetary stimulus is increasing the money supply, like the Obama Administration did with quantitative easing.”
Not only the Federal Reserve but the banking system itself - the way it operates, can increase the money supply. Why? It only has to have 10% of what it owes depositors in its reserves. A depositors account of $100 will still read that it has $100 dollars in it, even though the bank has loaned out $90 of those dollars to someone else. The bank has converted $100 to $190 dollars in the M2 money supply. That’s Ok when the M2 monetary supply grows with the economy, and not more than the economy.
Companies also have big bank deposits. And for many companies their cash herd has grown.
So it is no mystery that with the tax cuts and in spite of the Fed raising interest rates the GDP has grown about 5% since December 2016, while the M2 money supply has grown more than 6%. In other words the M2 money supply is growing faster then the GDP. That is monetary expansion, and as the Fed is off its stimulus now and increasing interest rates, that monetary expansion is not being caused by the Fed, but by the banking system itself; flush with more deposits especially from corporations; deposits loaned out with only 10% of the deposits in its reserves - more money out than what came in; monetary expansion.
“The Net Present Value of that additional stream of earnings should be incorporated into stock prices. The Cyclically Adjusted P/E itself, needs to be adjusted to this new baseline.”
First there is no “baseline”. The P/E is what the P/E is - share price versus earnings. Yet, I understand what you seem to suggest - that the current tax cuts mean that some semi-permanent rate at which earnings compared to share price ought to be expected to be “O.K.” ought to be higher than in the past. I think that expectation defies the long market history of charting the P/E through all the tax, Fed and economic changes for nearly a century. I think the reason for that is all affects of big changes (like tax Fed or other policies) and booms, depressions, recessions and growth play themselves out in time and the market settles into its historic norms once it stabilizes as neither too much of a bear or too much of a bull.
But whether your “adjustment” suggesttion happens or not will depend on whether or not expectations of continued growth in companies exceeds actual growth, boosting current overvalued shares even higher and instead of correcting the P/E ratios turn them even more skewed than they are now. You see that happen all the time in all kinds of markets - “good news” breeds excessive good news that everyone wants in on, and the run up to a head and shoulders condition begins.
“Government revenues have set records (they strongly tend to go up when taxes are cut, and this tax cut was particularly efficiently designed). Debt to GDP declined last quarter.”
Only slightly, and the rate of growth of government debt will require far more revenue growth than than the tax cuts will deliver. Why? Without some big spending & entitlement cuts, deficits will outpace revenue growth. The current federal debt to GDP ration is at 105% of GDP, not very far below its all time high in December 2016 and about 164% higher than where it stood in December 2008. The current economy has been handed debt levels it may not be able to grow us out of. The outlook is not favorable in that regard, without drastic federal spending and entitlement changes.
“The re-orientation of manufacturing supply chains back to the USA from China, can be as big of an effect as it was going the other way - and it can happen more quickly. A generational shift, compressed into 5-10 years.”
That is known as “reshoring” and it has not been seen as big at any macro level yet. Also, some analysts think that if consumer demand picks up it will remain more cost effective to boost the offshore supplies (in manufacturing) in order to keep pace with the higher demand, and that will nullify some boost in reshoring by some manufacturers. So, most market analysts are not betting on a lot of reshoring right now. If end of 2018 data shows a radical change, they could change their mind. The tarrifs are a factor in that and right now they are creating more uncertainty than immediate change, because it is clear that they are really a negotiating tactic for trade concessions with no certainty how long the tarrifs will last. There is a lot of wait and see going on, in reshoring as well.
Yes, you are right, on energy (fossil fuels). It is clear that sector is a bigger element in the domestic economy now with stability in that regard, and growth in exports from it, expected for the long term. That will keep more of our energy dollars in, and coming back into, the U.S. domestic economy. Right now the total energy sector is not greatly overvalued. However companies that are strictly in the sub-sector of just oil and gas production alone are presently above any bubble range, with a P/E for that subsector of about 95. That is not atypical, as that subsector is hit the most with boom or bust trends. It’s share prices follow the same boom and bust extremes of the work of that subsector, which is sensitive to global demand changes.
Tax cuts are not monetary stimulus - they are explicitly fiscal stimulus. No need for gymnastics.
Monetary stimuli are: Interest rate reduction, Reserve rate reduction, and Open market operations being net buyers of Government debt, or raising the interest rate on bank reserves.
The relationship between P/E, or CAPE P/E, (using trailing earnings), to gauge fair market value (which is rationally based on future earnings), is going to change when there is a change to expected future earnings.
If you want to judge the fair price, use the best estimate of earnings.
Higher expected earnings, higher price, same ratio. It is useless to wait ten years for historical data to accumulate with the new baseline (structural) level of profit reflected. Tax cuts are explicitly quantified, direct additions to earnings - they justify higher prices (which would look overvalued if using lower historical earnings).
It boils down to using trailing earnings vs. future earnings. Usually, future earnings projections are relatively unreliable, but tax cuts are a reliable (virtually unavoidable) effect. This is the year that change happens, and assessments of fair market value should rationally adapt.
“First there is no “baseline”.” P/E is a snapshot, CAPE (Cyclically Adjusted P/E) is based on the prior ten year baseline data.