The Pragmatic Capitalist quoting an RBS research report:
For a counter consensus look at just how rich equities actually are if we are right about the economy, and how far they can fall, look at Robert Shiller’s 10-yr real adjusted P/E ratio on the S&P500, which uses ten year smoothed earnings. We have used this as our marker for proper (unbiased) long-term valuations for many years – and is freely available to all investors to look for themselves on his Yale website – and it sits at 20.0. One pillar of our framework is that sometimes it is right to buy equity; sometimes it is right to sell equity. And call us old fashioned, but we will buy at low PEs, and sell at high PEs. So a PE now of 20, sits very uncomfortably right at the TOP of its range if we take out the pre-first great depression spike in 1929 and Nasdaq 2000 spike. We argued in 2007/08 pre crunch that we would buy equities again when they looked cheap, which would be at 6-8 PE on this metric. That is an equity fall of 60-70% from here. Fine, call us mad with such big numbers if you desire, and say we will miss the big equity rally on a structural view (what rally, having been short for 10 years, S&P500 total return since 1Jan2000 is actually -8.1%!). Meanwhile an investment in 30yr USTs has returned you +126%. You do not have to see -60-70% off risk assets to be cautious here, we are just suggesting this is what the numbers say are attainable if certain circumstances prevail, using a 120 year snapshot. The big turnover in the US economy will lead to dramatic turns down in valuations we suspect – and may finally destroy the world’s worst cult: the cult of the equity, which has no basis in fact, or history, but yet seems universally accepted.
Today, TPC offered this graph which helps illustrate why the U.S. economy seems so sluggish despite the extraordinary fiscal and monetary stimulus: most of it has gone into financial sector profits, with relatively little of it hitting the real economy:
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