The authors, Zheng Liu and Mark M. Spiegel have attempted to quantify the implications. Their principal conclusions:
We find that the actual P/E ratio should decline from about 15 in 2010 to about 8.3 in 2025.
The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021.
On the brighter side, as the M/O ratio rebounds in 2025 (BK: M/O = Baby Boomers die), we should expect a strong stock price recovery. By 2030, our calculations suggest that the real value of equities will be about 20% higher than in 2010.
These conclusions are just horrendous! The suggestion is that there is a 15-year bear market in front of us. Multiples will fall by 50%!! I loved the “good news” from the report, that stocks might be 20% higher than 2010, but we have to wait 20 years to see that improvement.
Bloomberg interviewed Spiegel about this report. There was one comment that I thought was telling:
“We do see it as something of a headwind as the economy is attempting to recover.”
This is worst kind of "Fed Speak" in my opinion. These deep thinkers have it completely wrong. They think that the key to having a stronger economy is higher stock prices. So they spend all of their efforts dreaming up ways to keep the S&P ramping up. I think it is the exact other way around. If the economy were to be growing, it is reasonable to assume that stock price might rise. It is completely false to assume that attempts to jigger stocks higher will lead to a stronger economy.
The dog wags the tail. The tail does not wag the dog.
This is what we get for having academics from Princeton running the show. They have the cause and effect backwards. No wonder the economy sucks.
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Makes me think that a new secular bull will be coming much sooner than that. They're bound to have this wrong, and then wonder why their academic model didn't work.
ReplyDeleteThat said, I do think the secular bear has quite some time to roam. But when did these kind of people ever get a stock market forecast correct?
It's perverse and infuriating for anyone under 40 to see the government explicit attempt to juice asset prices. It devalues our labor, our savings and hobbles the chances to build wealth.
ReplyDeleteI'm no fool. I know the macros and what margin of safety I need to start with in equities to see a reasonable return on risk. (We're nowhere close to that level) Most people do not and are shepherded to the wealth shearer, aka "stock market."
The Stock Market is an integral part of the Infinite Growth Ponzi and without the appearance of ever rising asset prices, the charade is up.
Bruce,
ReplyDeleteThis is off-topic, but it was too large to ignore:
http://www.dryships.com/pages/report.asp
A pretty significant jump. Where is it from? IIRC, you have contacts in the business, curious as to your take.
Regards.
Anon at 8:16
ReplyDeleteTks for this. I will ask around.
b
[Chicago Nobel Prize Winner] "Myerson Says U.S. Needs 8% to 9% Inflation for a Period"
ReplyDeletehttp://www.youtube.com/watch?v=y-eBASNGe7s&feature=BFp&list=WL307E4196FF4AA6F9&index=142
Kill the lawyers second.
This long-term prediction certainly meshes well with the time it took to recover from our last depression. The fact that it comes from from the Fed a) makes me suspicious, b) makes me suspect they might be being too optimistic, and c) makes me wonder if this is just a tiny part of a Fed campaign to build support for QE3.
ReplyDeleteSeems to me that folks in or near retirement are going to want to hold plenty of dividend paying stocks to provide income for them while in retirement. That ought to be bullish for good dividend paying stocks.
ReplyDeleteQE3 is a like black magic. Magic because no one understands what it does. The Fed says Quantitative Easing has no effect on the economy; nor does it cause inflation or increases the budget deficit. Even when gas and food prices go up, it is blamed on things other than QE. Now if that is not a black cloud hanging over our country, I don’t know what it could be. QE3 is like when Satan came up to Jesus and said, bow down to me and I will give you control. The markets want certainty, so it can get on with business. And it is swallowing the bait on a fish line to be reeled in by the Federal Reserve, these Fed article writers and other media worshippers of the Fed to save the economy. “We don’t want a depression”, “we don’t want lower stock prices” and so on, and the Fed is going to save the markets? That’s magically thinking. Markets go up and down due to the business cycle. Printing money is a big mirage to save Too Big To Fail. Wake up media! Wake up stockholders! The Fed won’t save you, only the banks.
ReplyDeleteSince stocks tend to move in 20 year up and down cycles, and this bear begain in 2000/01 - at least another 9 years is implied. Not to mentioun a terrible demographic economic depression scheduled for 2012 to 2025 - the forecasts in the reports above are in line with two strong indicators.
ReplyDeleteWhat the Fed Model may be missing is that there is a global market for corporate control. Lower valuations will inevitably result in US companies being acquired by companies7investors from creditor countries. Since teh ROCE of US listed comapneis is higher than teh ones you find around teh world I am surs the bisd will take palce at higher multiples.
ReplyDeleteExcellent post. I was checking constantly this blog and I’m impressed ! Very useful information particularly the last part :) I care for such information much. I was looking for this certain information for a long time. Thank you and good luck.
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