Here is a link to the full report.
This is a robust defense of Shiller P/E which, at 30, is at it second highest peak in history; surmounted only by the Tech Bubble. Let’s for a moment consider that it would be unwise to expect the best performers of the last decade to be the best performers of the next decade. After all, it only makes sense when we consider the base effect. It is obviously more difficult to double from a market cap of $1 trillion than from $1 billion.
The problem with taking this conclusion at face value is you never end up investing in the biggest shares since there is no time when this historical comparison does not hold true. The second is that by concentrating on 10-year returns you ignore the very significant volatility in returns over shorter timeframes.
Perhaps the most important lessons to learn are that bear markets tend to be sharp but short lived compared to bull markets. The best buying opportunities arise after these major declines, so it is good to have some cash handy when those occasions are presented. It is also important to “trade the bubble” as George Soros says because that is where the most money is made quickest in high flying sectors. Then we have to be aware of monetary policy because central banks have killed off more bull markets than all other factors combined.
Decade-long bull markets experience medium-term corrections from time to time. The current move has had three if we treat the current 18-month range as a consolidation. It is when central banks withdraw the punchbowl that recessions occur. Predicting recessions has become a cottage industry of late which makes me wary of falling into line with the consensus particularly with major indices firming in the region of their peaks.
I believe the most likely scenario is this bull market is going to climax in a bubble before the valuation arguments propounded by value investors become truly relevant. There is nothing in the value work that says the Shiller P/E cannot move to a new all-time high. That is considered a maverick view right now, with the consensus concerned with a recession. However, with central banks lining up to cut rates and asset markets responding it is a more likely scenario than many realise. That is before we even begin to consider the ramifications for asset prices if more overt Modern Monetary Theory policies are enacted.Back to top