Asset Bubbles

February 6, 2010

A friend’s email:

According to the author of this article Shawn Tully, stocks are a current bubble and can expect a 29% drop to reach their historic average P/E of 14. That puts the Dow right back at 7000 where I maintain it should be.
But this guy did miss the 5th bubble: The Art Bubble. Maybe that comes after these other 4 burst.

My reply:

Not sure why, but I want to disagree with you. Maybe wishful thinking on my part.

On the other hand, above are Schiller’s S&P data going back to 1871 and up through Sep 2009. I may be misreading his data (because they seem hard to believe), but on a real basis Sep 2009 S&P 500 earnings were about what they were in 1899 (and 1935 and 1947). I know that’s sounds impossible, but that’s what’s in column J.

If that’s correct, then it is also correct Sep 2009 earnings are down 75% from a year ago. So, if you accept the current situation as the new baseline, and the S&P grows 3% a year from Sep 2009, the US economy will get back to where it was n Sep 2008 around the year 2050.

Could be, but I think earnings will recover faster than that, barring nuclear war, plague, or Obama winning another term. How does this jibe with Tully’s analysis? He mentions S&P growth mirrors GDP. If my assumptions and math are correct, then at the moment S&P earnings must be trailing historical GDP growth by a phenomenal amount, as real GDP growth is probably a lot more than zero since 1899 or 1947. So, if his analysis going forward is correct (S&P growth matches GDP), then his analysis going backwards is wrong (S&P growth lags GDP), which means his theory is in contradiction with itself.

As I said earlier, I have a hard time believing some of these numbers, but I can’t figure out where I’m wrong. Maybe someone else can.




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