Some doom and gloom for sure. I remember reading his "7 year famine" prediction when he said it a few years ago and it has always stuck with me. I'm definitely in a "raising capital" mentality for the next few years and trying to get every spare penny put away for the purchase of undervalued assets in the future. Even the spare money I get tutoring grade 8 math gets put in an envelope for investment down the line.
A really interesting observation about the hyper-depressed market and all these big losses followed by rallies after the hysteria calms:
Yet the S&P 500, unlike other global equities, has hung in and staged rallies whenever the bad news has eased.
Why? Well, 15 years ago, Ben Inker and I designed a model to explain (not predict) the ebbs and fl ows of the
P/E ratio. It had a surprisingly high explanatory power. We found that everything that made investors feel
comfortable worked. That is to say, it was a behavioral model. Fundamentals like growth rates did not work.
The two (out of three) most important drivers were profi t margins and infl ation. Well, today we have (remarkably,
even weirdly) record profi t margins. And by historical standards, stable and low infl ation. Because of this, the
P/E level that one would normally expect to have in these conditions has been way in the top 5% since 1925,
but today’s market (not to mention the lows of September) is well below the explained level. It’s depressed by
a very obvious reason: the cloud of negatives, which generally and surprisingly have historically had very little
effect individually on the market, but apparently do depress “comfort” when gathered into an army of negatives.
So, whenever the negative news cools down for a week or so, the market tries to get back to its “normal” level,
which is about 20% higher.
Yet the S&P 500, unlike other global equities, has hung in and staged rallies whenever the bad news has eased. Why? Well, 15 years ago, Ben Inker and I designed a model to explain (not predict) the ebbs and fl ows of the P/E ratio. It had a surprisingly high explanatory power. We found that everything that made investors feel comfortable worked. That is to say, it was a behavioral model. Fundamentals like growth rates did not work. The two (out of three) most important drivers were profi t margins and infl ation. Well, today we have (remarkably, even weirdly) record profi t margins. And by historical standards, stable and low infl ation. Because of this, the P/E level that one would normally expect to have in these conditions has been way in the top 5% since 1925, but today’s market (not to mention the lows of September) is well below the explained level. It’s depressed by a very obvious reason: the cloud of negatives, which generally and surprisingly have historically had very little effect individually on the market, but apparently do depress “comfort” when gathered into an army of negatives. So, whenever the negative news cools down for a week or so, the market tries to get back to its “normal” level, which is about 20% higher.
The other interesting part is his "no market for young men" thesis. He remarks about how the two bigger busts of the Greenspan era weren't allowed to run their natural course. Anyone know of any literature out there that talks about what happens to subsequent bubbles when previous bubbles aren't allowed to naturally burst?
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