Just look at those bubbles. By my count, we're working on our third stock market bubble in one decade. Just how many does it take?
Let's use the average ratio of 1.18 to generate a trend line for the following chart.
The trend line represents the wages and other labor compensation times a fixed 1.18 to come up with some sort of reasonable fair value estimate for the stock market. If this theory has any merit, then the value of equities and mutual funds were 41% overvalued in the 4th quarter of 2009. The S&P 500 is up another 7% since then.
I wonder what would happen if we actually spent some time below that trend line to offset some of the time we spent above it? That's what makes an average after all.
The New York Times: Stocks Are Back. So Are the Books.
The nation’s publishers bring out a new crop of investing books, as they have started to do recently.
Among the new books, at least two are intriguing.
The first, by a couple of Yale professors, calls for investors — especially young ones — to borrow or go into debt to buy stocks, to have a longer investing timeline.
The second, by the best-selling author Phil Town, says it is virtually impossible to become wealthy by buying mutual funds, so you should concentrate your investment efforts on finding the best individual stocks.
That just figures.
Update:
Hussman Funds: Weekly Market Commentary
Over the past 12 years or so, I've been repeatedly astonished at the tendency of investors to do things that they should have known to avoid simply with the use of a calculator and basic arithmetic. We've used numerous metrics during this period to show that the estimation of long-term market returns (7-10 years and beyond) doesn't require calculus or statistics, but fairly direct methods to normalize earnings, plus a bit of arithmetic. Rich valuations are predictably followed by sub-par returns. As a result, investors have earned an average annual total return of just 2.4% in the S&P 500 over the past 12 years, while enduring two separate instances where they have lost about half of their money as part of the ride. Essentially, we have gone nowhere in an interesting way. At present, investors have priced the market at a level that makes a continuation of this experience likely for several years to come.
See Also:
Real Estate vs. Wages
A Grand Unified Theory of Malinvestment
A Grand Unified Theory of Small Business Malinvestment
A Grand Unified Theory of Stock Market Malinvestment
A Grand Unified Theory of Real Estate Malinvestment
Trend Line Disclaimer
Source Data:
FRB: Flow of Funds
Mark,
ReplyDeletegoing to have to call you "The Professor" as the posts keep getting better and more revealing.
Stag,
ReplyDeleteI wonder what would happen if we actually spent some time below that trend line to offset some of the time we spent above it? That's what makes an average after all.
I think it might "matter" more than most believe. There's more at stake than just a return to the mean.
http://en.wikipedia.org/wiki/Antimatter
"Furthermore, mixing matter and antimatter would lead to the annihilation of both..."
Three bubbles in one decade - glorous!
What about dark energy?
ReplyDelete"The first, by a couple of Yale professors, calls for investors — especially young ones — to borrow or go into debt to buy stocks, to have a longer investing timeline."
ReplyDeleteSpeaking of dark energy...
Event Horizon ahead!
ReplyDeleteGYSC,
ReplyDeleteWasn't the professor trapped on an island after the weather started getting rough?
Antimatter? Dark Energy?
ReplyDeleteWhat happens when credit meets "The Anticredit"?
Our economy demands more "lifeblood". Place the savers upon the sacrificial altar!
Are you using median wages, average wages, or richest 20%?
ReplyDeleteAllanF,
ReplyDeleteInteresting link. Thanks for posting it.
I'm using the very same "average" wages that Bernanke sees.
These charts would clearly look even worse if income inequality was factored in. I've done quite a few posts in the past trying to show why income and savings inequality really do matter.
An economy is in far worse shape if those with the income also have all the savings and those with little income have all the debt. Can't see it in the "average" data though. It just all blends together.
Stag,
ReplyDeleteThis looks like one of your charts!
http://www.bloomberg.com/apps/news?pid=20601109&sid=a3GXq1W_Uixg&pos=15
A picture is worth a thousand words, and billions and billions in banker bonuses!
p.s. click on the "graphic" box at the top of the article to see the chart.
mab,
ReplyDeleteFrom your link...
The dramatic imbalances are re-occurring.
I see that oil is once again rising faster than the stock market today (at its usual 2-1 ratio pace).
From Yogi Berra...
This is like deja vu all over again.
You can observe a lot just by watching.
Stag,
ReplyDeleteI know the stock market is cookin with gas, but real estate is still all but "dead". Check that, real estate is no longer "all but" dead. Dead must now be included - literally. Here's why:
As I was driving today, I saw a new and completely unique twist on the "open house" CONcept. Somebody built this enormous mausoleum complex two towns over. I'm guessing it has a few dozen individual crypts that look to be as big as small houses - no joke. Then there is a giant multi family crypt building. And to top it off, they have acres and acres available for further expansion. It's a gated development, completely enclosed by a sturdy steel security fence. I totally understand the expensive fence. Nobody would ever mortgage their entire future without some very serious iron clad security.
Anyway, what really caught my eye was the huge banner advertising an open house this Saturday. I wish I could make the open house, but I'll be busy re-arranging my sock drawer. I'm sure the realtors were fighting over the listings. Nothing like getting a 6% commission on a McCrypt!
Stag,
ReplyDeleteCheck out this chart I stumbled across:
http://research.stlouisfed.org/fred2/series/IQ12260
I have no idea what it means, but steep cliffs like that are way beyond my climbing comfort zone.
I do know that when the 1970s inflation failed to CONtinually spiral out of CONtrol that gold got crushed - Nasdaq style!
It is different this time. After being burned by inflation expectations in the 1970s, gold bugs now believe that a stagnating CPI will compell people to trade their dollars for record high gold.
mab,
ReplyDeleteWe're desperately trying to inflate, much like the person running from the monster in a formula horror movie?
1. Panic.
2. Run fast.
3. Look backwards instead of forwards.
4. Stumble and trip often.