There were four massive stock bubbles in the 20th Century: 1901, 1929, 1966, and 2000. During each of these bubble peaks, the S&P 500 neared or exceeded 25X on professor Robert Shiller's cyclically adjusted P/E ratio.* After the first three of these peaks, the S&P 500 PE did not bottom until it hit 5X-8X. We're still in the middle of the last one.
The most recent bubble peak, 2000, was by far the most extreme we have ever experienced. In 2000, the S&P 500 by prof. Shiller's measure exceeded 40X (it had never before exceeded 30X). With the S&P 500 hitting 700 today, the PE has now fallen back to 12X. (See chart above.)
Three major bubbles are not enough historical precedent to confidently conclude where the S&P 500 will bottom this time around, but it seems reasonable to conclude that the trough will be in line with--or below--the preceeding lows (Given that we just had the highest peak in history by a mile, it doesn't seem absurd to think that we might be headed for the lowest trough in history by a mile.)
So where are we now?
Based on Professor Shiller's latest numbers, we're at about a 12X P/E. (Prof. Shiller's last update was at 805 on the S&P 500, which produced a 14X P/E. Plugging in today's 700 on the same earnings number, we get about a 12X P/E). The 12X PE compares favorably to the long-term arithmetic average of 16X, but it's still way above the historical troughs of 5X-8X.
Incidentally, if you think that people still have a vestigial view of housing as an investment asset rather than a consumption good with residual value, this implies that housing will substantially undershoot as well. Right now, what consensus there is on the housing market thinks that it will fall just about half again as far as it has fallen, to the historical average. But if it follows a stock-like pattern, you should see it plunge to about 50% of the historical price-to-rent ratio, which has generally stood around 1.1. That implies prices well below where they were in the 1990s.
A ratio of 0.55 seems too low, but 0.8 doesn't seem out of the question. With rents falling, that means housing prices would drop at least another third if they overshoot badly on the downside.
According to Henry Blodget?
The bottom has just been called.
What were interest rates at those other bottoms versus today? Especially for the price/rent ratio? The extremely low interest rates of the 2000s have really messed with most ROI measures that don't directly include them.
After all, if your bank is paying 2% on CDs, a P/E of 30 on stocks isn't unreasonable. Back when banks were paying 5% on checking accounts and up to 9% on long CDs, a P/E of 15 was insanely high.
Megan:
Why do you bother to listen to Blodget? He made a name for himself by ignoring reality and knowing the only way to get noticed was to be more outrageous than the other guy.
I am not saying he is wrong. A broken clock is right twice a day.
I am just saying that quoting him cheapens your blog.
Instead of trying to predict the stock market, look at some individual stocks. There are some trading well below their net cash.
DOW 3600. James Glassman will still be well respected and well paid.
Stocks are crap. Stock are the ugly stepchild of the capital markets. Stocks are primarily a speculative vehicle. Real capitalists buy bonds or actually buy a business. With bonds you actually have some claim on assets. With bonds you have a quantifiable expected return on investment. Stocks are for wankers. Bonds have now outperformed stocks over a very very long time period. The stocks rise 10% a year thing was a pure lie. Pure propaganda in the hands of the Glassman's of the world.
Glassman will remain well respected. He is out on the hustings now warning against socialism. Paid moderately well we can assume.
Anthony,
The interest rate-P/E correlation doesn't hold up if you go back more than a few decades. For example, at the tale end of the secular bear market that began during the Great Depression (around 1950, when the next secular bull market finally started), trailing P/E multiples on the S&P 500 were around 7x*, and interest rates were low (I think the Fed Funds rate was around 1.5%).
*Regular methodology, not Schiller's.
Right now, what consensus there is on the housing market thinks that it will fall just about half again as far as it has fallen.
The state of the housing market is generally misunderstood, as is the scale of of the effect of the impact of home prices per se on the economic fall and bank solvency (as opposed to it's original "trigger effect" through highly leveraged derivatives.)
The data show losses are concentrated overwhelmingly in only four states.
Home prices rose in 28 states during 4th quarter 2008, according to the OFHEO State House Price Indexes.
Links to data sources.
I shudder to think how many families have been devastated by Suze Orman's and Dave Ramsey's disastrous advice over the last decade to shun annuities (which provide guaranteed floors) and stick with no-load mutual funds which average a 10% to 12% annual return.
See video of Megan embarrass herself with adults-in-the-room, getting a new asshole chewed...
in her interview with Dean Baker. Read the comments, too.
http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=02&year=2009&base_name=post_2
Here is my comment:
A libertarian analyzes the world based on reason, not emotion. But, before anyone say that that is a good thing, imagine the emotion-less activity of BTK, the serial killer. Reason, without emotion, is sociopathology, verging on psychopathology (ie, BTK and Ayn Rand, and the "person" of The Corporation).
In the interview, don't Megan's sentences and arguments sound disjointed, similar to output from an AI prototype? That is because only emotion allows us to humanely organize our language output, something AI machines cannot yet do. Through emotion, we can poetically organize our thoughts by properly feeling where each word should go, and which argument should follow next,..we are efficiently measuring each and every meaning, putting everything in its proper place. Megan, apparently, is emotionally constrained, or handicapped, to put it mildly.
So, the WPA built many good things, but also extended the lives of many people who, otherwise, would have died. This latter point, Amity Schlaes, nor Megan McArdle, would understand, because they are just dusted off, articulate and salaried sociopaths, or psychopaths, of course, similar to the modern day corporation.
@JVS - annuities are guaranteed... by whom? Insurance companies. Who provide those payments by? Investing in equities, corporate bonds (mainly financial firms), and other activities. That doesn't sound like there might be a problem at all! It's not like a major Dow component is going to fall from 23.71 to 1.23 in a year....
@rapier - yes stocks suck bonds rock... how are corporate bods trading recently? Do you like your GMAC, GM, C, or GE paper? There needs to be an IQ upgrade on commenters here.
So let me get this straight. Instead of making some judgement about the actual value of stocks you are going to try to make some prediction about how much people will undervalue the market? THis is crazy. There just is no way you can confidently make these predictions.
MM writes: "Right now, what consensus there is on the housing market thinks that it will fall just about half again as far as it has fallen, to the historical average."
AWK x 1000
Why would you presume that housing will undershoot the price/rent ratio in the way stocks apparently have done the P/E ratio in the past? I have a difficult time believing the price/rent ratio would ever be substantially below 1. Has it ever gone below 0.9? Ever? 0.95?
DaveinHackensack - that's not quite the point I was making. It would be more interesting to see a chart of S&P500 P/E ratios adjusted relative to the fed funds rate or some other semi-independent interest rate (preferrably one available to small or medium investors), and see what sorts of P/E ratios we get in bull markets versus bear markets over historic time, then compare that to recent market activity.
Right now I'm too lazybusy to do the research.
Craig. The term value is meaningless for a financial asset. There is price, only price. Value is a term of art. Value is subjective.
The term value was used relentlessly, almost exclusively, in regard to stocks and real estate and every other asset you can thing of. There is a specific reason why this was so. Because if you say value instead of price you can hide, mask or ignore that asset prices were inflating.
If the price of an asset rises at a rate consistently above the GDP growth rate then that price is inflating. However if their 'values' are rising then there is a cognitive association in most people that leads them to conclude that the price is justified on some grand macro scale. Or some such, the words escaping me right now.
When buying anything but especially an asset for investment never think in terms of value, only price. If you just have to have that Mickey Mantle rookie card at XXXX dollars then buy it if it has an value to you. In this case value is put in its proper perspective. One of emotion. If you love your stocks your in big trouble.
MM,
do everyone a favor, and show Suze Ormond the way, give up on "Market Forecasts/Advice".
the world would be much improved if you, merely, substituted cooking tips/recipes in their stead..
The I bonds (U.S. Savings Bonds) I bought in summer '01 are doing quite nicely. Inflation plus three percent . . .
For the love of all that is holy in equity valuations, can we please use the E/P ratio instead of P/E so we don't get meaningless divide by really small number numbers?
The term value is meaningless for a financial asset. There is price, only price. Value is a term of art. Value is subjective.
No. The price, by itself, is meaningless. Only the price of the stock related to expected earnings gives you some idea of what it's worth. Its value, one could say.
"According to Henry Blodget?
The bottom has just been called."
I'm starting to suspect the same thing. I don't think that there will be an actual recovery for years if ever, but a rally is definitely possible. I do agree with Megan that you can't get a real recovery until housing bottoms, and there's a long way to go, maybe I'm just predicting a temporary halt to the slide.
The fundamentals remain completely shitty however.
"The I bonds (U.S. Savings Bonds) I bought in summer '01 are doing quite nicely. Inflation plus three percent . . . "
Too bad the CPI dramatically under-reports inflation. You're actually only getting about 1 percent. But hey, that beats the shit out of the DJIA lately.
To see the real CPI numbers, visit:
shadowstats.com
Reality Check,
Nowhere did I imply that God himself has come down from heaven above to guarantee payments by annuity/insurance companies. Nor is it necessary for my point to stand.
All that is necessary for my point to stand is that annuities provide protection against market risk, while mutual funds do not. Some guarantees are always better than no guarantees.
Besides, what alternatives do you have in mind. Mutual funds? If the underlying securities take enough of a nose dive to endanger the insurance companies, then mutual funds won't help, and do not offer the added bonus of mortality credits.
Equities or corporate bonds themselves? Same deal applies.
FDIC-guaranteed instruments? I'll take my chances with the AA and AAA rated insurance companies, thanks. The reserves they are required to post under state regulations, and guaranteed by the states (up to certain face amounts) are steeper than those FDIC requires of banks.
My point stands.
I'm also failing to see how the price to rent ratio would go much below 1.0. While transactions costs are not zero, and owner equivalent rent is not a precise science (http://www.bls.gov/cpi/cpifact6.htm) a ratio of 0.8 still seems to say that people would rather spend $1000 on rent than 800 bucks on a mortgage. That doesn't make much sense for an agregate population.
Forget Orman and Blodget, if you want real insane advice go Cramer and Kudlow.
Funny how Larry can't actually come up with that proper tax rate on his Laffable curve. Lower= Good no matter what.
"Funny how Larry can't actually come up with that proper tax rate on his Laffable curve. Lower= Good no matter what."
Please don't interpret this as a defense of that idiot Kudlow, but why the hell is maximum government revenue a worthy goal to shoot for?
The ideal tax rate is zero.
Anthony,
Google up Vitaliy Katsenelson's thesis on secular range-bound markets and see what you think. He's looked at the data and found that multiple compression in secular bear (or, range-bound) markets isn't explained by interest rates.
"Forget Orman and Blodget, if you want real insane advice go Cramer and Kudlow."
If memory serves, Orman puts her own money in insured municipal bonds. I wonder if she read Buffett's comments about insured munis in his annual Berkshire Hathaway shareholder letter.
And in defense of Cramer, he did get on TV last fall when the Dow was at 11,000 and tell everyone that, unless they were willing to let their money ride for the next five years, they should pull their money out of stocks. He got some heat for that at the time.
The bottom of this crash will be between 4000-4500, mark it down.
"The ideal tax rate is zero. "
In a perfect Libertarian world where we are all rational and everything is perfect.
Sorry, doesn't work that way. You want military, police, fire, roads etc., you pay tax. Otherwise move to a country with no government like Somalia and grow your own food while fighting off the paramilitary.
The Jeffersonian dream is nice and good luck with that.
@ Dave
The Bear Stearns comments are a big black mark on his record (Cramer)
Willing to cut Orman pretty big slack since she was never a real market tout and was more of a financial planner.
Yeah. She's more of a "planner." I guess that makes it ok to be stupid.
What kind of planning is she doing for her own estate, in order to protect her life partner from getting raped by estate taxes?
That tells you what kind of planner she is.
Was just trying to separate her from the ultra stupid Cramer and Kudlow.
And the lesbian crack is stupid.Who really cares?
What "lesbian crack?"
Or do you think that the absence of an unlimited spousal exemption to estate tax is not relevant to estate tax planning?
Uh the "Life Partner" comment.
If I took it wrong, then my apologies, I thought it was a shot and shouldn't have assumed.
My point was she isn't in the Cramer/Kudlow class of duncery.
Respectfully
"In a perfect Libertarian world where we are all rational and everything is perfect."
That's why I used the word "ideal" Einstein.
"Sorry, doesn't work that way. You want military, police, fire, roads etc., you pay tax. Otherwise move to a country with no government like Somalia and grow your own food while fighting off the paramilitary."
I've had this conversation before. Somalia improved under statelessness. It was still shitty, but less so. If you want military, then you raise a volunteer militia or hire mercenaries. If you want roads, let people build them and charge tolls. If you want fire protection, then pay for it like you pay for any other service, voluntarily.
Taxes are theft. They neither moral nor necessary.
Sorry Spock, thought you lived in the real world.
My mistake, go back to tending your fields while fending off the government hordes.
For the love of all that is holy in equity valuations, can we please use the E/P ratio instead of P/E so we don't get meaningless divide by really small number numbers?
You are assuming that P will not approach 0. This is not justified at the moment. But I agree with the sentiment normally.
As for Jim Glass's Dow 36000. It has been a while since I read his book, but I don't recall a 2009 date for the 36000 level. It was, I guess, a vague 2020 sort of timeframe. All we need is some nasty inflation and we should get there. So it's in the bag.
"The ideal tax rate is zero. "
In a perfect Libertarian world where we are all rational and everything is perfect.
Sorry, doesn't work that way...
You are thinking of it being impossible to have zero government revenue in the real world. Zero TAX is quite possible, ask half the countries in the middle east, where oil revenue does the work.
"Sorry Spock, thought you lived in the real world.
My mistake, go back to tending your fields while fending off the government hordes."
I imagine that there were quite a few people shaking their heads at 19th century abolitionists, too. After all, the world had slavery for thousands of years. The "realists" advocated humane treatment of slaves, not freedom.
I have an autographed hardcover copy of Dow 36,000.
Dated 1 March, 2000.
:D
As for Suze Ormond, I absolutely put her in the dunce class of financial planners - well-beyond any idiocy I've ever heard from Cramer. Kudlow I don't pay attention to one way or the other. But may I gently suggest that if you didn't know where I was going with the estate tax exemption, you aren't exactly in a position to discern the good planners from the idiots.
Most professional advisors read Ormond for laugh lines.
Too bad the CPI dramatically under-reports inflation. You're actually only getting about 1 percent. But hey, that beats the shit out of the DJIA lately.
Current rate being paid on the ones I hold is 7.99%. Beats pretty much anything you can hold today, and pretty much as proof against economic vagaries as anything can be. Bought 'em explicitly as the "just in case the 1970s repeat" part of my portfolio.
(If the Federal Government starts defaulting on savings bonds, well, it would be nice to have gold instead. But in the more ordinary swing of things, gold's a commodity that can go up and down, while these bonds just go up . . . and Congressmen aren't going to piss off voting grandmas by defaulting on savings bonds except as the last resort.)
Bondholding Lunatic,
while Gold will fluctuate v. the U$D, no doubt, remember that your U$D-denominated Bonds, also, fluctuate. It does, truly, go both ways, in this instance.
Also, you might do well by comparing to the relative rates of return of Gold v. your I-bonds, over the term you've held them. something tells me that your ~8% will look weak--veracity of CPI, questioned or not..
and, to the too narrowly focused anmong us, learn that services like the Fire Department were, indeed, created by the Market, on a subscription basis, to Supply a, theretofore, unmet private Demand.
It was, yet, another innovation brought forth by Benjamin Franklin.
and, LSS:, it proved to be another Market-provided service to be hijacked by the State.
Then, in State-controlled 'schools' we get to learn that the State is invaluable in providing such services..
it's a nice racket..funny, they exempt themselves from RICO..
Taxes if used properly are necessary. It is the abuse of taxes that create problems. There are too many examples of pure greed on all sides of this argument, but the bottom line is that greed is the biggest problem, not taxes.
No. The price, by itself, is meaningless. Only the price of the stock related to expected earnings gives you some idea of what it's worth.
The earnings of modern corporations are works of art in themselves. Corporate accounting having gone down the rabbit hole into a nonsensical world. That's before the deceit and fraud. Which however was not my point. It's price/earnings not value/earnings. Now the 'market', overall, 'values' earnings to a lesser or greater degree over time, or is said to. Which is a bunch of BS. stocks rise in price on the liquidity available to speculate in them. For the most part this is a monetary phenomenon. Every day or month or year the stock averages are saying 'show me the money". It isn't there now and there is little likelihood it will be for a long time. Stocks like most things are deflating.
As stocks go down, the percentage of bonds in the portfolio goes up. Yields of "good" stocks increase as well. If those companies which continue paying a dividend can weather the storm, then the recovery will be impressive. I'm 69 so that I have seen many ups and downs. This one is comparable to the "Big One". We knew it was coming, but we prefered ignoring the signs. And staying nonchalant with the "instant" guruhs the likes of Madoff.
JP
Spock, you aren't going to win any arguments with those who believe the way to go through life is hitting other people.
I dont know what Lesbian has to do with any of this.Is it someones Phsyco Babble or what.Get Real ( lesbian crack ) Dont be an idiot
a ratio of 0.8 still seems to say that people would rather spend $1000 on rent than 800 bucks on a mortgage. That doesn't make much sense for an agregate population.
It's the basis for real estate investment that you can purchase a place and rent it out for quite a bit more than a mortgage. In the population aggregate, not everyone has prime credit and 20% down which increases their mortgage, but their rents would stay the same. I'm not saying we'd go below 1.0 everywhere, but I wouldn't be surprised in Vegas or Phoenix.
You mean NotMyPresident is doing *exactly* what he promised to do and it's messing with the free markets?
Say it ain't so.
/snark
Why are you posting on a BabyKiller's blog, my doppelganger?
Ah, imposter, I missed you.
just dropping some knowledge on your murderous little butt, kiddo.
imposter.....imposter...where are you...did you run away? poor wittle baby.
Clearly starved of attention as a child; can't wait five minutes!
Didn't really answer the question, or have the stones to call out the host of this blog as you so bravely do on anonymous comments.
But hey - you're brave. How's the plan to egg Obama going?
Imposter, the truth hurts your murderous soul, I have nothing more to add.
2 whole imposters! this is impressive
11:31 imposter:
Yes, Megan is pro-abortion. However, she does not come into the forums to argue how wonderful abortion is, which sick little twisted killers like you do. I will continue to smack down any and all babykillers like yourself who try, with your empty morality and illogical conclusions, to promote this death.
It's a nice try by you---maybe you can get me banned, and fully take over the handle you appropriate wrongfully. Just like a liberal--whatever you want, you take, and then claim it as a right. Kill a child, impersonate another, its all the same to you---you can do whatever you want in your own mind.
You are a disgusting, filthy piece of human excrement.
11:33 imposter:
You support me, and yet you feel the need to be an imposter. Please grow up. Mimicking 11:31's actions will get you nowhere.
To those of you claiming I have pretended to be others, and therefore it is ok to pretend to be me:
Imposter has done this, off and on, for quite a while. Apparently, now she is obsessed with me, and does it all the time. I asked her to stop before, and Megan to stop her, and neither happened. So I felt that being an imposter was de riguer. I did it in retaliation---and only a snarky comment here or there, never a full on impostering, and it was quite clear I was being sarcastic.
But imposter Basic Fact has gone beyond mere snarkiness and is full blown stealing an online identity. It's beyond cheap shots and in the realm of mental disease what she is doing. There is a difference.
Obama is not my president.
I am embarassed to be an American because of him.
For the first time in my adult life I am NOT proud to be an American.
So you impersonated others, but want me banned for doing exactly what you have done, while you continue?
That's kinda doing what you want isn't it?
You shouldn't go so upset. If you have a heart attack, it would then only be me left posting.
imposter 11:47:
No, imposter, the difference is both degree and kind. When previously you used my name, it was for a cheap shot that was clearly not something I would say, and then you went back to whatever handle you use (probably SoV). While nasty, Megan did not stop you, so I figured it was de rigeur and did the same.
Now it is full blown identity theft, and attempts to mimic my arguments and thus confuse people. That is beyond the pale and ridiculous, you piece of garbage.
I'm sure these difference fly over your wee little head, much like the NYU protesters, because you are an insignificant little child who believes you can do whatever you want, but others must abide by the rules.
I thank you for your concern over my health, but I would worry about someone like you, who has the inability to discern the difference between themselves and others. That is a true mental disease.
I am embarassed to be an American because of him.
For the first time in my adult life I am NOT proud to be an American.
Are you saying that you actually stop one night stands by having sex with the man?
Identity theft of an anonymous identity, by means of posting obviously puerile comments.
Why would readers of this blog not distinguish between those posts and yours?
Why has the Obama boilerplate come back btw?
imposter 11:57:
"Are you saying that you actually stop one night stands by having sex with the man? "
---No idea what this means. Then again, you probably don't, either.
"Identity theft of an anonymous identity, by means of posting obviously puerile comments."
---It may be anonymous, but it is still theft. And you ruin the system here, which promotes the freedom for new people to post. You eliminate people from the board who are afraid that their comments, when unpopular, will be ripped up by someone pretending to be them.
"Why would readers of this blog not distinguish between those posts and yours?"
---Because you have deliberately tried to conflate them in many cases. Also, I don't expect other readers to studiously study another's positions on all subjects, thus your attempts go beyond mere snark and are attempts to confuse, considering you obsessively follow me around.
"Why has the Obama truisms come back btw?"
---FTFY
considering you have brought the level of discourse back to a new low, and Megan does nto ban you, and you do not stop, it comes back. If you start acting like a grown up, it goes away. But maturity is not in a liberal, I know, I know.
Obama is not my president.
I am embarassed to be an American because of him.
For the first time in my adult life I am NOT proud to be an American.
I think more people were annoyed by your idiotic boilerplate and by your brutal attacks on anyone who might disagree than by my inane dickery, but hey, that's only based on what people actually said.
I'm sure you have a window into men's souls.
four more years of boilerplate!
imposter 12:05:
Thanks for not bothering to explain your obsession with one night stands. I will assume that was another little voice in your head talking there, baby killer.
Obama is not my president.
I am embarassed to be an American because of him.
For the first time in my adult life I am NOT proud to be an American.
Joe Biden is NOT my vice-president.
I am embarassed to be an American because of him.
For the first time in my adult life I am NOT proud to be an American.
Hillary Clinton is NOT my Secretary of State
I am embarassed to be an American because of him.
For the first time in my adult life I am NOT proud to be an American.
imposter 12:08:
Thank you for admitting the truth.
timothy geitner is NOT my treasury secretary.
I am embarassed to be an American because of him.
For the first time in my adult life I am NOT proud to be an American.
No doubt imposter was one of those people who for 8 years stated that Bush was not her president, and is being deliberately obstuse.
Sean Penn is not my Best Actor.
I am embarassed to be an American because of him.
For the first time in my adult life I am NOT proud to be an American.
James Brown is NOT my Godfather of Soul.
I am embarassed to be an American because of him.
For the first time in my adult life I am NOT proud to be an American.
keep going, imposter, this is hilarious.
It seems that we're playing with fire and are now simply TRYING to talk ourselves into a depression. I say that b/c every economist seems hell bent on talking about how much lower the S&P can go and every republican seems hell bent on telling half the nation that we are GOING TO FAIL before we even try.
k1
ryanculver.blogspot.com
Baseball is NOT my national pastime.
I am embarassed to be an American because of it.
For the first time in my adult life I am NOT proud to be an American.
Damned designated hitter rule.
An easy way for the Price to Rent Ratio to significantly drop below 1.00 is to have no one able to get loans. If the markets won't loan you the money to buy it, then it doesn't matter how much you can afford to pay, you won't have a chance to get it.
How long the market would maintain such an upside down situation is questionable, but that's the most obvious way it could happen
DaveinHackensack, 'methodology' is the study of methods. You mean 'method'.