I had just gotten home from arguing with the in-laws about how they were idiots
for not buying gold instead of those stupid stocks and mutual funds, and their
laughter was still ringing distastefully in my ears when Eric Fry here at The
Daily Reckoning put up a chart of the P/E ratio of the S&P500 over the last
30 years since 1981.
Interestingly, in 1981 the stock market was in a kind of a funk and the
price/earnings ratio was hitting about 7, which is on the low side, whereupon
(thanks to congress authorizing tax-deferred retirement accounts in 1982) the
stock market proceeded for the next 20 years or so, in fits and starts, to rise
to, stunningly, a P/E ratio of almost 30 in 2000, whereupon it promptly turned
over and
has been falling, in fits and starts, for the last 10 years as the price of the
S&P went down. Wow! What a ride!
Of course, it has been an entire paragraph where I did not snarl at something,
or heap Mogambo Disdain And Scorn (MDAS) on the despicable Alan Greenspan, Ben
Bernanke and the whole worthless Federal Reserve, congress and Supreme Court,
so let me say that buying the S&P500 in 2000 for $1,600 to get a P/E of 30
was, if you are even fleetingly familiar with P/E ratios over the last century,
absolutely ridiculous, and the morons buying the S&P500, or recommending
it, at such stupidly overvalued prices should have their names and faces posted
somewhere in a database of "investing idiots and miscellaneous dangerous
lunatics."
I say this because the historical record is crystal-clear: When the P/E ratio
goes above 22 or so, it won't be long until the price of the stock falls enough
so that the ratio is back down in the upper teens in a bull market, and back
down to around 5 in a severe bear market, whereupon it won't be long until the
price rises again on its way to "overvalued" status. That's the nature of
cycles.
There are those who think that this historical record-stuff is just old
history, now rendered meaningless in an age of monumentally stupid governmental
deficit-spending, pandemic crushing debt, and a despicable Federal Reserve
always, always, always creating yet more, staggeringly more, tragically more,
catastrophically more excess money, which is what caused the problems in the
first place!
On the other hand, there are those who do NOT regard the lessons of a couple of
centuries of P/E ratios to be irrelevant, and who last think that Wednesday is
still considered "current events".
Like, for instance, my wife, who wanted to question me about where I was until
almost midnight last Wednesday, which is, I figure "the past" because I have
forgotten almost all of it.
So, I told her, "Hey! Hold on! That's ancient history! Why even bring up that
old, useless stuff unless you are spoiling for a fight with me, which leads me
to ask a question of my own, which is 'Hey! You want get into a fight with me?
Huh? Is that what you really, really want? Huh? Is it? Huh? Huh?"
Well, it was, alas, as she is one who also thinks there is valuable information
in old data, like what happened last Wednesday or, if you ask her, what
happened with this whole P/E thing. And she would be right, as I note that the
S&P500 is currently sporting a P/E of around 15 - which is surprising in
that we are in a recession and the S&P 500 is still 30% below its high of
over 1,500 in 2000, 10 years ago! Hahaha! Idiots!
So, with every stinking ounce of Unshakable Mogambo Certainty (UMC) I can
muster, I say that the price of the S&P500 will fall, in fits and starts,
until its P/E ratio gets down to less than 7, probably less than 5, and maybe
less than 4.
And this is assuming that earnings don't fall, which they will, and so I
wouldn't be surprised if the S&P500 fell to less than 200.
And, with special emphasis to in-laws everywhere, anyone buying a broad basket
of common stocks and bonds, but not buying gold, silver and oil to protect
themselves against the roaring inflation in consumer prices that will result
from an idiot Federal Reserve creating massive amounts of money so that the
government can deficit-spend those massive amounts of money, is a moron.
Surprisingly, buying gold, silver and oil is an investing strategy made
especially for us morons, because it requires no thinking and, "Whee! This
investing stuff is easy!"
Richard Daughty is general partner and COO for Smith Consultant Group,
serving the financial and medical communities, and the editor of The Mogambo
Guru economic newsletter - an avocational exercise to heap disrespect on those
who desperately deserve it.
(Republished with permission from
The Daily Reckoning. Copyright 2010, The Daily Reckoning.)
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