Shiller - S&P 500 may reach 1430 by 2020

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Adrian Nenu
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Shiller - S&P 500 may reach 1430 by 2020

Post by Adrian Nenu » Sat Jan 01, 2011 1:03 am

http://www.cnbc.com/id/40862634

Before someone replies with the obligatory "Why should we care what Shiller says?", be advised that Shiller predicted the collapse of the tech/dot-com bubble and of the real estate bubble. Jack Bogle recently predicted 7%-8% average annual returns for the next decade. Shiller's number works out to 1.3% average annual appreciation from the current 1258 of the S&P 500 index. Add 2% dividend yield and we end up with about 3.3% average annual return minus fees and taxes. The Vanguard Total Bond Market index yield is currently 2.69%, which is a pretty good indicator of future returns unless interest rates go up a whole bunch. A 50/50 TBM/TSM portfolio would have average annual returns of about 3% over the next 10 years. If Shiller is wrong and Bogle is right, about 5% - 5.5%. Maybe a little higher if we use the global index + REITs and small caps.

Good luck to all in 2011! :wink:

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Post by gofigure » Sat Jan 01, 2011 6:57 am

With market volatility seemingly such a factor in any mid-near term forecast, how accurate an approach is it for him to use 100 year growth and PE averages to predict performance 10 years out, especially given that the market's been flat for ten years?

The article goes on to mention declining real estate prices which will likely be a drag on growth. Would that be a better basis on which to build his prediction?

What about corporate profits and expanding global markets?

OTOH...I should argue with Bob Shiller? :lol:

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Post by Call_Me_Op » Sat Jan 01, 2011 8:03 am

My gut tells me they are both low. We'll know in 10 years.
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Post by RadAudit » Sat Jan 01, 2011 8:18 am

Thanks for the post.

The interesting thing about ten year forecasts is those ups and downs between here and there. Ought to be an interesting and bumpy ride.

Happy New Year.
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Post by SpringMan » Sat Jan 01, 2011 8:23 am

Call_Me_Op wrote:My gut tells me they are both low. We'll know in 10 years.

I agree, it sounds low to me too. Today the S&P 500 is already at 1258, it could reach that level much sooner IMO.
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Post by cjking » Sat Jan 01, 2011 8:27 am

I had a quick look at the article.

I'm sure Shiller would be the first to say that for the purposes of personal financial planning we should assume the figure will be somewhere between half and double any number he (or anyone else) gives, assuming we agree with the number in the first place. It suits journalists to only look at central predictions rather than the range.

Having got that out the way, I think his prediction is a perfectly reasonable assessment of where the index ought to be in 2020. Where it will actually be is unknowable. Knowing where it ought to be, i.e. the trend value, is still potentially useful information.

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Re: Shiller - S&P 500 may reach 1430 by 2020

Post by bob90245 » Sat Jan 01, 2011 11:15 am

Re: Shiller - S&P 500 may reach 1430 by 2020

A very safe bet, if you ask me. :lol:
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Post by DblDoc » Sat Jan 01, 2011 11:26 am

Another data point by dart throwing. I'm seeing numbers ranging from about 3-5% real so I just plug in 4% to guesstimate the return of my portfolio. If it is better great, if not it is already factored in.

DD

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Post by jeffyscott » Sat Jan 01, 2011 12:01 pm

Shiller said..."We're talking ten years out. So I'm going to go back to 100 years. The growth of real inflation directed earnings is surprisingly low. From 1890 to 1990 it was only 1.5 percent a year,"

Not quite sure what "inflation directed" is, but he seems to be saying it would be 1430 in today's dollars. So the figure of ~3.3% would seem to be the real return and nominal would be about 6%.

He says this is based on a P/E of 15, which translates to earnings of $95 in 10 years. Using 1.5% real growth would mean he has current earnings at about $81.
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Post by HawkeyeMike » Sat Jan 01, 2011 12:03 pm

Gee- And I'm picking 1465.78 for the S&P Bogelhead Contest for 2011

I'm not waiting till 2020, what fun would that be.

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Post by Ed 2 » Sat Jan 01, 2011 12:08 pm

Call_Me_Op wrote:My gut tells me they are both low. We'll know in 10 years.


1+. let's keep this secret :wink:
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Post by exigent » Sat Jan 01, 2011 12:20 pm

I agree with bob90245. The S&P will almost certainly reach that level by 2020. And then some. :)

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Post by nisiprius » Sat Jan 01, 2011 12:31 pm

jeffyscott wrote:Not quite sure what "inflation directed" is...
A transcription error for "inflation COrrected," I'm sure.

But, talk about experts disagreeing on plain facts. Shiller says "The growth of real inflation [cor]rected earnings is surprisingly low. From 1890 to 1990 it was only 1.5 percent a year." Yet Jeremy Siegel, in Stocks for the Long Run, 4th edition, refers to "the extraordinary stability of the real return on stocks over all major subperiods: 7.0 percent per year from 1802 through 1870, 6.6 percent from 1871 through 1925, and 6.8 percent a year since 1926."

So, what's going on? I do find it disturbing if the basic raw facts of past performance are in dispute... and disturbing to think that Siegel could have been using bogus figures through four editions of the book without ever correcting them or being called out on it. If the data Siegel is using is that controversial, it is unconscionable not for him to have mentioned it.

Is it just that Siegel is in fact cherry-picking his periods... and is Shiller, what's the opposite of cherry-picking, choosing the sour grapes? No, it can't be.

There's a big difference between 1.5% real and 7% real. It can't be that uncertain, and I don't believe it can depend that much on endpoint choice. A twofold change in the endpoint value over 100 years is only 0.7% per year; that is, whatever the figure for 1907-2007 is, choosing 1907-March 2009 as the endpoint would cut the annualized return by less than a percent.
Last edited by nisiprius on Sat Jan 01, 2011 12:38 pm, edited 2 times in total.
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Post by Imperabo » Sat Jan 01, 2011 12:33 pm

exigent wrote:I agree with bob90245. The S&P will almost certainly reach that level by 2020. And then some. :)


I'd say it's 100% certain that the S&P will reach 1430 by 2020. In fact, I'd say it will reach there by 2007.

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Re: Shiller - S&P 500 may reach 1430 by 2020

Post by grayfox » Sat Jan 01, 2011 12:58 pm

Adrian Nenu wrote:http://www.cnbc.com/id/40862634

Before someone replies with the obligatory "Why should we care what Shiller says?", be advised that Shiller predicted the collapse of the tech/dot-com bubble and of the real estate bubble. Jack Bogle recently predicted 7%-8% average annual returns for the next decade. Shiller's number works out to 1.3% average annual appreciation from the current 1258 of the S&P 500 index. Add 2% dividend yield and we end up with about 3.3% average annual return minus fees and taxes. The Vanguard Total Bond Market index yield is currently 2.69%, which is a pretty good indicator of future returns unless interest rates go up a whole bunch. A 50/50 TBM/TSM portfolio would have average annual returns of about 3% over the next 10 years. If Shiller is wrong and Bogle is right, about 5% - 5.5%. Maybe a little higher if we use the global index + REITs and small caps.

Good luck to all in 2011! :wink:

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Maybe 1430 is the mean or expected value.

But what is the 95% confidence interval? Just guessing, but maybe it's minus 50%/ plus 100%? So somewhere between 715 and 2860?

It's useful to estimate the expected value, but the range of possible outcomes is going to be so wide that hanging your hat on one number is foolish. The wide range of possibilities is what makes stocks a risky asset class. [I'm a sure Shiller knows this and probably is not really predicting 1430 as is implied in the article. I suspect the journalist is leaving that out for sensationalism.]

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Post by nisiprius » Sat Jan 01, 2011 1:33 pm

Image
With all due respect to professors Shiller and Siegel... WTF? This is from Siegel's Stocks for the Long Run, 4th Edition. The highest number I can possibly read for stocks for 1890 is maybe 700. What the heck, let's say is 1000, as it's definitely under that. The smallest number I can possibly read for 1990 is maybe 200,000, let's say 100,000. And the chart is supposed to be total real return, i.e. corrected for inflation, and I think it is because I can see the flat spot from 1965-1982 which is invisible in a nominal chart.

A 100-fold increase over 100 years is a 4.7% real return, not the 1.5% Shiller talks about. (Actually it looks like at least a 200-fold increase = more than 5%).

What's going on here? The discrepancy between 5% on Siegel's chart and the 1.5% Shiller mentions can't be explained as endpoint choice or chart-reading error.

Maybe I really ought to reach John C. Bogle's Don't Count On It, huh? :)
Last edited by nisiprius on Sat Jan 01, 2011 1:43 pm, edited 1 time in total.
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Post by jeffyscott » Sat Jan 01, 2011 1:42 pm

Shiller did not say stocks had real returns of 1.5%, he said real earnings growth was 1.5%.
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Post by fishnskiguy » Sat Jan 01, 2011 1:58 pm

jeffyscott wrote:Shiller did not say stocks had real returns of 1.5%, he said real earnings growth was 1.5%.


OK, but how in Hanna can earnings grow by 1.5% per year and stock prices grow by 5% per year over 200 years??? Can't attribute that to growtth in PE.

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Post by George-J » Sat Jan 01, 2011 2:17 pm

nisiprius wrote: .... What's going on here? The discrepancy between 5% on Siegel's chart and the 1.5% Shiller mentions can't be explained as endpoint choice or chart-reading error.

Maybe I really ought to reach John C. Bogle's Don't Count On It, huh? :)

I share your puzzlement and concern on how Shiller got his number or what it really means.

Hopefully someone more astute than I can get to the bottom of it. :?

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Post by bob90245 » Sat Jan 01, 2011 2:21 pm

fishnskiguy wrote:
jeffyscott wrote:Shiller did not say stocks had real returns of 1.5%, he said real earnings growth was 1.5%.

OK, but how in Hanna can earnings grow by 1.5% per year and stock prices grow by 5% per year over 200 years??? Can't attribute that to growtth in PE.

Nothing is computing.

Chris

Looking at the Gordon Equation, you have Earnings Growth plus Dividend Yields contributing to Total Return. (Excluding effects of starting and ending P/E changes.)
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Post by exigent » Sat Jan 01, 2011 2:21 pm

Imperabo wrote:
exigent wrote:I agree with bob90245. The S&P will almost certainly reach that level by 2020. And then some. :)


I'd say it's 100% certain that the S&P will reach 1430 by 2020. In fact, I'd say it will reach there by 2007.


Touché. :)

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Post by Imperabo » Sat Jan 01, 2011 2:23 pm

fishnskiguy wrote:
OK, but how in Hanna can earnings grow by 1.5% per year and stock prices grow by 5% per year over 200 years???


Dividends? 5% is the annual real return.
Last edited by Imperabo on Sat Jan 01, 2011 2:39 pm, edited 1 time in total.

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Post by Jack » Sat Jan 01, 2011 2:30 pm

nisiprius wrote:What's going on here?[/b] The discrepancy between 5% on Siegel's chart and the 1.5% Shiller mentions can't be explained as endpoint choice or chart-reading error.

What's going on is you keep comparing apples to oranges. Siegel is talking about total return including dividends. Shiller is talking only about company earnings growth, you know, the E in PE. They are not the same thing.

Roughly, using the Gordon equation, you would expect that total return is the sum of the dividend yield and the dividend growth. This is what Siegel is talking about.

Next assume that dividend growth is about equal to earnings growth. So now you have the link to Shiller. He is talking about just the dividend growth piece of the Gordon equation. So to get from Shiller to Siegel, you have to add the dividend yield. In recent years the dividend yield has been around 1.5%. In the past the dividend yield was about 4.5%.

So Shiller says that the growth rate is 1.5% and add to that a historical yield of 4.5% and you get a historical real return of about 6%.

Today the dividend yield is only about 1.5% and to that add another 1.5% for dividend growth and you get an expected total return of 3%.

The decrease in dividend yields is just another way of saying that prices are high. Therefore you expect lower returns.

So Shiller and Siegel don't really disagree with each other. They are just talking about different things. Shiller is talking about just a piece of Siegel's total return.
Last edited by Jack on Sat Jan 01, 2011 2:34 pm, edited 1 time in total.

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Post by dave.d » Sat Jan 01, 2011 2:33 pm

Nisiprius and fishnskiguy --

I know a possible explanation for at least part of the discrepancy: search for threads where I've previously mentioned Ilya Dichev. As I understand his work on long-term investor returns in stocks as a group, about 1.5% of long-term returns result from companies favorably timing the market by when they issue and buyback shares. E.g., lots of shares issued in 1999 when stocks were very expensive. If you are a long-term holder you benefit from that along with the companies doing it. I think of this as an additional term in a Gordon equation model.
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Post by nisiprius » Sat Jan 01, 2011 2:40 pm

jeffyscott wrote:Shiller did not say stocks had real returns of 1.5%, he said real earnings growth was 1.5%.
Jack wrote:
nisiprius wrote:What's going on here?[/b] The discrepancy between 5% on Siegel's chart and the 1.5% Shiller mentions can't be explained as endpoint choice or chart-reading error.

What's going on is you keep comparing apples to oranges. Siegel is talking about total return including dividends. Shiller is talking only about company earnings growth, you know, the E in PE. They are not the same thing.

Roughly, using the Gordon equation, you would expect that total return is the sum of the dividend yield and the dividend growth. This is what Siegel is talking about.

Next assume that dividend growth is about equal to earnings growth. So now you have the link to Shiller. He is talking about just the dividend growth piece of the Gordon equation. So to get from Shiller to Siegel, you have to add the dividend yield. In recent years the dividend yield has been around 1.5%. In the past the dividend yield was about 4.5%.

So Shiller says that the growth rate is 1.5% and add to that a historical yield of 4.5% and you get a historical real return of about 6%.

Today the dividend yield is only about 1.5% and to that add another 1.5% for dividend growth and you get an expected total return of 3%.

The decrease in dividend yields is just another way of saying that prices are high. Therefore you expect lower returns.

So Shiller and Siegel don't really disagree with each other. They are just talking about different things. Shiller is talking about just a piece of Siegel's total return.
I emailed Shiller before seeing these replies... and he replied basically confirming what you both said.

:oops: Yeah, I need to pay attention to exactly what terms have been used and what they mean.

Shiller also seemed to be saying that he assumes that low dividends will continue and will not necessarily automatically be offset by increased growth.
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Post by DiscoBunny1979 » Sat Jan 01, 2011 2:45 pm

nisiprius wrote:Image
With all due respect to professors Shiller and Siegel... WTF? This is from Siegel's Stocks for the Long Run, 4th Edition. The highest number I can possibly read for stocks for 1890 is maybe 700. What the heck, let's say is 1000, as it's definitely under that. The smallest number I can possibly read for 1990 is maybe 200,000, let's say 100,000. And the chart is supposed to be total real return, i.e. corrected for inflation, and I think it is because I can see the flat spot from 1965-1982 which is invisible in a nominal chart.

A 100-fold increase over 100 years is a 4.7% real return, not the 1.5% Shiller talks about. (Actually it looks like at least a 200-fold increase = more than 5%).

What's going on here? The discrepancy between 5% on Siegel's chart and the 1.5% Shiller mentions can't be explained as endpoint choice or chart-reading error.

Maybe I really ought to reach John C. Bogle's Don't Count On It, huh? :)


--------------

In my opinion, it doesn't matter. I've read that the market is in about 18 year cycles. Therefore, we are half way through this current cycle. The market is not going higher it'll be going sideways.

In addition, the chart assumes an ever progressing upward price movement in U.S. Index investing. That's a false assumption. WHY? Because it's based upon believing that there there are no boundaries and that exponential growth will last forever. It doesn't, and it can't.

Let's take world population growth for instance. Many are under the impression that the world's population is getting out of hand by getting larger each decade:

Year: Total World Population (Ten Year Growth Rate)
1950: 2.556 Billion (18.9%)
1960: 3.039 Billion (22.0%)
1970: 3.706 Billion (20.2%)
1980: 4.453 Billion (18.5%)
1990: 5.278 Billion (15.2%)
2000: 6.082 Billion (12.6%)
2010: 6.846 Billion (10.7%)*
2020: 7.584 Billion (8.7%)*
2030: 8.246 Billion (7.3%)*
2040: 8.850 Billion (5.6%)*
* Projections by the U.S. Census Bureau International DataBase

In fact, by percentage over the next decades, population might by declining. The world can only sustain so many folks and natural forces will decide what that number is.

This world growth rate downward in the future doesn't mean the world will have a negative growth rate eventually, but maybe something that sustains a certain level of population . . . kind of a bell curve but on the right side leveling off to the downside.

In my opinion, the same will happen with Gas production. There is a limited source of Petro. Humans can drill, drill and drill, but eventually the well will run dry. Supply and Demand will create a market place for higher oil prices. But this doesn't mean that there is exponential value for eternity. The rise of gas prices will happen along with the limited resource, but eventually it will taper off as no one will be able to afford it.

The same for the stock market. There are limits to the "value" or perceived value of companies that make up any Index. 100 years of upward stock prices doesn't mean that the future holds the same. Exponential growth has a limit.

For instance. . most folks that want Indexes to return an average of 7% per year will have there money double every 10 years. Minus dividends, that would mean that the value of the stock indexes must double every 10 years. Is that really realistic?

If a 7% average yearly return over the next 40 years is not realistic, then why invest in the stock market and not be compensated for that risk? For the pure hope that it will?

If the expectation of return over the next 10 years will be something like 1.5% or 3% or 5%, what does the return have to be in the 10 years to compensate for such low results to get that 7%? does that mean the following 10 years has to be going gang busters? And if so, what will that outperformance be based on?

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Post by fishnskiguy » Sat Jan 01, 2011 2:49 pm

bob90245 wrote:
fishnskiguy wrote:
jeffyscott wrote:Shiller did not say stocks had real returns of 1.5%, he said real earnings growth was 1.5%.

OK, but how in Hanna can earnings grow by 1.5% per year and stock prices grow by 5% per year over 200 years??? Can't attribute that to growtth in PE.

Nothing is computing.

Chris

Looking at the Gordon Equation, you have Earnings Growth plus Dividend Yields contributing to Total Return. (Excluding effects of starting and ending P/E changes.)


OK, I'll buy that.

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Post by dnaumov » Sat Jan 01, 2011 2:57 pm

DiscoBunny1979 wrote:In addition, the chart assumes an ever progressing upward price movement in U.S. Index investing. That's a false assumption. WHY? Because it's based upon believing that there there are no boundaries and that exponential growth will last forever. It doesn't, and it can't.

If you want to talk situations where oil and other resources are so expensive basically noone can afford them, we also need to start talking situations where we have colonized multiple bodies in the solar system.

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Post by Eric R » Sat Jan 01, 2011 3:11 pm

Jack wrote: Roughly, using the Gordon equation, you would expect that total return is the sum of the dividend yield and the dividend growth.


How does this equation account for return of non-dividend paying stocks?

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Post by Jack » Sat Jan 01, 2011 3:13 pm

DiscoBunny1979 wrote:In addition, the chart assumes an ever progressing upward price movement in U.S. Index investing. That's a false assumption. WHY? Because it's based upon believing that there there are no boundaries and that exponential growth will last forever. It doesn't, and it can't.

Let's take world population growth for instance. Many are under the impression that the world's population is getting out of hand by getting larger each decade:

Year: Total World Population (Ten Year Growth Rate)
1950: 2.556 Billion (18.9%)
1960: 3.039 Billion (22.0%)
1970: 3.706 Billion (20.2%)
1980: 4.453 Billion (18.5%)
1990: 5.278 Billion (15.2%)
2000: 6.082 Billion (12.6%)
2010: 6.846 Billion (10.7%)*
2020: 7.584 Billion (8.7%)*
2030: 8.246 Billion (7.3%)*
2040: 8.850 Billion (5.6%)*
* Projections by the U.S. Census Bureau International DataBase

In fact, by percentage over the next decades, population might by declining. The world can only sustain so many folks and natural forces will decide what that number is.

Don't equate population growth with economic growth. Productivity growth means that we are able to produce more for each hour worked. The economy grows even if the population does not grow. Also, energy efficiency continually increases. We produce more per unit of energy than in the past.

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Post by Jack » Sat Jan 01, 2011 3:25 pm

Eric R wrote:
Jack wrote: Roughly, using the Gordon equation, you would expect that total return is the sum of the dividend yield and the dividend growth.


How does this equation account for return of non-dividend paying stocks?

1. Return = dividend yield + dividend growth.

2. Dividend growth = Earnings growth.

If you substitute the second equation in the first you get

3. Return = dividend yield + earnings growth.

From equation 3, for a company that has zero dividend yield, the return is about the same as the earnings growth. Presumably, a company that doesn't pay dividends invests the money for faster earnings growth.

Some companies pay dividends and some retain their dividends which increases their earnings growth. The missing dividend shows up in the earnings growth part of the Gordon equation. So for the aggregate Total Stock Market or S&P 500 you capture the total return by combining the aggregate dividend yield with the aggregate earnings growth.

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Post by gkaplan » Sat Jan 01, 2011 5:39 pm

Why should we care what Shiller says?
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Post by nisiprius » Sat Jan 01, 2011 5:51 pm

DiscoBunny1979 wrote:I've read that the market is in about 18 year cycles. Therefore, we are half way through this current cycle.
Fantastic! It's the magic key I've been looking for! I'll just put my investments onto an 18-year cycle and wealth, health and happiness will be mine!
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Post by Lbill » Sat Jan 01, 2011 6:33 pm

Consistent with Hussman's models:
On the valuation front, the consensus estimate from the strongest models we track indicates that the S&P 500 is most likely priced to achieve 10-year total returns averaging about 3.6% annually.

When you get a 90% return from stocks in just 18 months, returns going forward are likely to be rather anemic. That 3.6% is nominal return, including dividends. Take out inflation and welcome to Son of Lost Decade.

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Post by Valuethinker » Sat Jan 01, 2011 8:39 pm

gofigure wrote:With market volatility seemingly such a factor in any mid-near term forecast, how accurate an approach is it for him to use 100 year growth and PE averages to predict performance 10 years out, especially given that the market's been flat for ten years?

The article goes on to mention declining real estate prices which will likely be a drag on growth. Would that be a better basis on which to build his prediction?

What about corporate profits and expanding global markets?

OTOH...I should argue with Bob Shiller? :lol:

http://www.charlierose.com/view/interview/1720


Remember it's easier to forecast 10 years out (a number based on valuation, and the tendency for corporate profits to revert towards mean trend rate, and GDP to do the same, and also PEs) than it is to forecast one year out (where none of those assumptions hold).

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Post by Valuethinker » Sat Jan 01, 2011 8:53 pm

Morgan wrote:
dnaumov wrote:
DiscoBunny1979 wrote:In addition, the chart assumes an ever progressing upward price movement in U.S. Index investing. That's a false assumption. WHY? Because it's based upon believing that there there are no boundaries and that exponential growth will last forever. It doesn't, and it can't.

If you want to talk situations where oil and other resources are so expensive basically noone can afford them, we also need to start talking situations where we have colonized multiple bodies in the solar system.


It's a long way off before we really actually run out of those mineral resources. There's a enormous difference between a production peak and an end of production. Manufacturing cars has been winding down in America for decades for example.


No. US car production reached an all time peak in 2007 I believe. Yes imports were 30% of the market, but the market expanded so much. Car demand was about 17 million from memory (11 million now) and about 4 million imported.

(one has to be careful. The biggest source of imported cars, and the biggest destinations for exported ones, are, of course, Canada (and Mexico)).

More importantly, devising methods of producing mineral resources from algae and other biological mechanisms is genuinely on the cards, as well as the idea of exploration of asteroids, bringing billions of tonnes of metal to Earth. Every piece of metal in the world used to be inside an asteroid, so it's not exactly far fetched when enormous blocks of the stuff is meandering past our solar orbit all the time.


If you look at the energy costs, then you are confined to using nuclear weapons to do it (to get there in size and payload, and to bring them back). If you detonate a nuclear bomb on an asteroid, it could well fragment and you might wind up hitting the earth.

Maybe there are long term possibilities with Skyhooks (earth to orbit elevators built on the Equator), with solar sails and/or with magnetic catapults (but you can show the heat generated if used in the Earth's atmosphere, might be prohibitive-- maybe if we build them up the side of K2 in the Himilayas and depressurise them).

But it's more likely we will mine the oceans (with solar power, or nuclear fusion) first.

Of course these depend on future technologies, but then again, that's how *all* technology is invented, there is a demand/supply curve for invention in the same way as there is for any other product. Necessity is the mother of invention.


Yes but there is serendipity too. Invention doesn't proceed in nice smooth curves, but in highly erratic jumps. And sometimes backwards as well as forwards-- the ancient Chinese invented almost everything that was 'current' in the mid 18th century, about 1400 years before. The Romans knew at least as much about steam power as the early 17th century Cornishmen who invented the steam engine.

For an invention to be adopted there has to be a favourable social and economic environment for its promulgation. The time has to be right.

It is obvious that high energy prices incur pressure on scientists and engineers to come up with solutions, that's how it's always been.

I foresee a bright future, many challenges, many solutions. I don't know exactly what's going to occur, but then again nobody else does either. Don't let anybody convince you the End of the World is coming. All those people have an agenda that was never particular about its alignment to reality.


But so to the cornucopians. Technology (and capitalism) provide the answer to all questions, etc. etc. Nothing must stand in the way of Progress, least of all the rainforest, etc. etc.

We are more likely to wipe ourselves out due to our various effluents and the collateral damage on the ecosystem (that John Christopher novel: the Condition of Grass- a mutated weed wipes out all seed grains) via things like species extinction-- accidentally destroy some piece of the tree of life that happens to be critical to our survival. We don't price these effluents, therefore there is no incentive to stop them...

than we are to run out of things.

But don't ignore bottlenecks. And lags. Civilisations have died because they ran out of land, of water, of food. I vaguely remember there is one we are fairly sure it's because they ran out of selenium in their soil.

The Hotelling Model of an exhaustible resource is the standard economics model, and it shows that price will rise to infinity as the resource is exhausted.

There is scarcity value in the pricing of an exhaustible resource. We tend to invent substitutes but that can take time.

On energy in particular, James Hamilton wrote a paper for Brookings Institution, about last year-- that's really the paper you want to read on oil prices: causes and impacts.

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Post by Valuethinker » Sat Jan 01, 2011 8:56 pm

Eric R wrote:
Jack wrote: Roughly, using the Gordon equation, you would expect that total return is the sum of the dividend yield and the dividend growth.


How does this equation account for return of non-dividend paying stocks?


Microsoft used to be like Google, a very fast growing company that paid no dividends.

Now it's one of the better payers in the index.

What happens is companies mature, and they start doing share buybacks, particularly to offset the impact of executive options (which dilute shareholders) and sometimes they start paying dividends.

The argument of how much to adjust the Gordon formula for the greater prevalence of share buybacks rages. One critique is that share buybacks tend to be a lot less stable than dividend payouts-- it's not a reliable return of cash to shareholders.

The estimates I have seen suggest that the S&P500, adjusted for buybacks, would have a yield 0.5-1.0% pa higher than otherwise, ie to compare its yield now to say 40 years ago when buybacks were very rare.

This effect is generally lower in other countries.

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Post by Valuethinker » Sat Jan 01, 2011 9:06 pm

nisiprius wrote:
DiscoBunny1979 wrote:I've read that the market is in about 18 year cycles. Therefore, we are half way through this current cycle.
Fantastic! It's the magic key I've been looking for! I'll just put my investments onto an 18-year cycle and wealth, health and happiness will be mine!


This doesn't apply to stock market cycles perhaps but it does to human institutions generally.

They have 20 year cycle, because after 20 years, the leaders who were sufficiently senior enough the last time (middle managers) to remember the mistakes made, have generally retired by 20 years.

This is very true in banking. Most of the egregious mistakes were made before (in the late 1970s, the US and European banking systems nearly went broke having lent many times their capital in loans to Third World countries, which then went bust-- the theory was that widespread syndication made those loans safe, but of course all you did was diversify the damage over more banks-- sound familiar?).

It may also apply to militaries in that they have a strong tendency to fight the last war. WWII was predicated by the Japanese and others on huge naval battles between dreadnought battleships (they ignored the rise of the carrier and the torpedo carrying bomber). The French and British were well prepared to refight a brutal trench war, etc.

Data that contradicts the predominant institutional view (eg the bloody trench slaughter in 1904-5 of the Russo-Japanese War) gets ignored, particularly if it involves people far away, people of different racial character, or if you are not the loser. So the British did learn something from the Boer War of 1899-1903, when a bunch of Dutch Boer farmers handed them their metaphoricals on a plate. Similarly the Germans rethought the bloody trench battles of 1914-1918 in preparing for WWII-- as the loser they had every incentive to do so.

By Vietnam in the mid 60s you get a bunch of generals victorious in large scale armoured battles in WWII Europe, and in relatively positional, artillery intensive battles in Korea, trying to fight a guerilla war in a jungle.

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Post by Valuethinker » Sat Jan 01, 2011 9:20 pm

Morgan wrote:
In fact, the "end of growth" world view is actually based on a political fallacy, a semi-religious doctrine.


In its modern versions, it tends to be based on the analysis that we have not figured out what to do with all the effluent.

It's worth reading Matt Simmons on the Club of Rome Report. What he found when he dug into it was that 1). most of it dealt with time periods after where we are now (ie 40 years after it was published) 2). it was surprisingly accurate in some respects. You can link to his comments either via the Energy Bulletin (about 5 years back, maybe 6-7) or via the Simmons & Co website, I think.

Just on automobile propulsion. We have the answers now: compressed natural gas, electric cars etc. We'd have to make concessions on convenience, performance etc. (particularly if we cannot find enough lithium) and we're not willing to do that-- yet.

But the technologies for non petroleum propulsion of cars (but not yet trucks or planes) exist now.


With respect to energy, it takes a great deal of faith to imagine we're not going to come up with a viable energy solution to high oil or gas prices.


Indeed in the sense that along came shale gas. For how long we do not know, but it has changed the picture on extractible natural gas.

And there's coal bed methane. And more than enough coal to drown us in the pollution we would create converting it into vehicle fuel.

That gets us to the second half of the 21st century, and by then our cars will almost certainly be electric, and in some sense solar (either directly via solar cells, indirectly via biofuels or, who knows, maybe by nuclear fusion).

There is a kaleidoscope of energy production systems where once we had only a few. At least one of them will come out ahead and massively succeed as the standard. That's how every technology event has occurred.

The majority of those problems are completely imaginary. Once one starts to use benchmarks to measure things, you begin to find this.

I don't think I can change your mind on this issue, it's never succeeded before, it seems practically genetic, but know that at least one person thinks you're dead wrong in the most irrevocable sense possible, and is willing to bet on it.


Don't ignore the transition problems. The lags are huge.

Vaclav Smil is annoying in that his books seem to be rewrites of each other.

Nonetheless he's one of the few readable authors I have seen tackle the actual quantities of energy production.

He points out how slowly we actually change methods of producing energy. Since 1945 nuclear has appeared (about 8% world electricity generation or c. 3% world energy consumption). Natural gas has gone from very small to about 15%.

Oil rose very quickly to something like half of all energy consumption, and has fallen back to about 35% from memory (all transportation).

But that's it. The world is basically powered the way it was in 1945.

So in 2050 I expect to see the big 3 as oil, gas and coal. Just as they are now. Wind and solar will be significant-- perhaps 20-30% of all electricity production (when the wind is blowing hard, Spain apparently can get 50% of its electricity by wind: that's extraordinary for an industry that hardly existed in 1998). Nuclear will be about the same (big shifts in which countries) as the wave of reactors in places like China is offset by the shutdown of the reactors in the west and old Soviet bloc.


EDIT

I should note also that it's almost certain there will not be 'one' winner.

Oil is predominant in transport fuel (say 98%) but it is not predominant in power generation (that's coal) nor home heating and cooking (that's gas, biomass, and electricity).

Since the world will likely be all electric, or nearly so, then each of the multiplicity of electricity generation technologies has its own advantages.

You tend to get one solution when there is one common standard (the internet, the electricity grid. the Bell System) and ever rising economies of scale in production and use.

The economies of scope and scale in electricity production are not infinite. 5000 MW wind farms are not 50 times more efficient than 100MW ones. Nuclear power plants are unlikely to rise above 1600MW capacity, etc. Coal generating units (as opposed to plants) have been about 550MW since the 1960s.
Last edited by Valuethinker on Sat Jan 01, 2011 10:14 pm, edited 1 time in total.

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Post by matt » Sat Jan 01, 2011 9:21 pm

Shiller's predictions aside, why has Adrian been trash-talking stocks for the last few months while maintaining a 100% equity allocation. Cognitive dissonance?

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Post by Adrian Nenu » Sat Jan 01, 2011 9:52 pm

Shiller's predictions aside, why has Adrian been trash-talking stocks for the last few months while maintaining a 100% equity allocation. Cognitive dissonance?


Matt, those who know me and read my posts over the last 10 years on various forums know that I have always been an advocate for moderate risk by way of conservative asset allocations. Not trashing stocks, just being consistent about risk of loss. My change to 100% stocks is temporary in order to take advantage of the bear market.

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Post by tim1999 » Sat Jan 01, 2011 9:59 pm

Ehh. At least it's better than what CD's and money market accounts are paying now.

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Post by matt » Sat Jan 01, 2011 10:05 pm

Adrian Nenu wrote:
Shiller's predictions aside, why has Adrian been trash-talking stocks for the last few months while maintaining a 100% equity allocation. Cognitive dissonance?


Matt, those who know me and read my posts over the last 10 years on various forums know that I have always been an advocate for moderate risk by way of conservative asset allocations. Not trashing stocks, just being consistent about risk of loss. My change to 100% stocks is temporary in order to take advantage of the bear market.

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The bear market has long since passed. If potential return is so low going forward from today, which you seem to believe, it makes no sense to be 100% stocks. If you haven't gone back to 60/40 yet, when are you going to do it?

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Post by gofigure » Sun Jan 02, 2011 7:25 am

http://www.smartmoney.com/investing/sto ... n-riskier/


Short piece on risk and market volatility trends from Jack Hough..

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Post by nisiprius » Sun Jan 02, 2011 8:28 am

Valuethinker wrote:
nisiprius wrote:
DiscoBunny1979 wrote:I've read that the market is in about 18 year cycles. Therefore, we are half way through this current cycle.
Fantastic! It's the magic key I've been looking for! I'll just put my investments onto an 18-year cycle and wealth, health and happiness will be mine!
This doesn't apply to stock market cycles perhaps but it does to human institutions generally.

They have 20 year cycle, because after 20 years, the leaders who were sufficiently senior enough the last time (middle managers) to remember the mistakes made, have generally retired by 20 years.
That's more like a "time constant," not a "cycle." Although there is a terrible ambiguity to the way the word "cycle" is used in financial/social/economic discussions. I think it unfortunate that the word "cycle" can mean "pattern of feedback relationships" because in most cases it does not create a regular repetitive pattern of any particular size or duration. Not the sweet tone of a bowed violin, just the horrible screech of a fingernail on a chalkboard. Not the blast of a horn, just a blast of "musical" flatulence.

Certainly the human lifespan and career duration affect the pace of change. And to the extent that human subcultures will crystallize and lock in patterns, so that the changes, when they do occur, are apt to be fairly sudden tipping-point things rather than smooth gradations. Pressure accumulates to do away with Glass-Steagall, say, and then suddenly at one point there is the political will and it all changes at once.

If anything, the human lifespan, or "generation" period, or career duration just put a limit on how far one can predict, rather than a reliable prediction of repetition. As I've noted, preserving any sort of economic value over thirty years is different in kind from preserving it for a year, because all stores of value are essentially promises and in thirty years promises will have to be kept by a different set of people than those who made them.

But I do have a knee-jerk reaction to the word cycle when I think it is implying predictability. People looking at the "average bear market" without asking too many questions about what a bear market is--for example, cheerleaders for stocks customarily consider 1929 as the start of a three-year bear market because of a spectacular brief shining moment in 1931--and don't seem to understand that they are trying to calculate the average size of animals seen in clouds.

And, with apologies to Discobunny1979, the number "18" triggered a crotchety curmudgeon's reaction for two reasons:

a) it's crazy false precision of the kind that you are only going to see when people are putting calipers on the clouds;

b) worse yet, it is the length of a Saros period (the period over which eclipses repeat) suggesting that Discobunny's remembered source was probably some astrology-like theory.

Say, whatever happened to "biorhythms?" Biorhythms were hot a couple of decades or so, it just occurred to me that I hadn't heard about them in years...
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Post by DRiP Guy » Sun Jan 02, 2011 8:34 am

Morgan wrote:In fact, the "end of growth" world view is actually based on a political fallacy, a semi-religious doctrine.

The truth is that Capital Growth *is* exponential.

This is because of the Division of Labour principal.

With respect to energy, it takes a great deal of faith to imagine we're not going to come up with a viable energy solution to high oil or gas prices. There is a kaleidoscope of energy production systems where once we had only a few. At least one of them will come out ahead and massively succeed as the standard. That's how every technology event has occurred.


Hear, hear. The great thing about the 'energy problem' is that we already have a view into the future -- by way of our past!

I grew up in an era where nuclear power was just going from amazing discovery, through it's first practical applications, into the hubristic and frankly nutty ideas that come from naivete combined with a brand spanking new but largely untested technology, along with optimism and a real desire to change the world. This led to concepts that included everything from nuclear powered space outposts, to nuclear powered trains, planes, automobiles... individual homes... and blenders!

:lol:

While a lot of the 50's era nuclear bombast (no, I did not say "bomb blast!) was ridiculous as we look back now in the fullness of time, and today's political, environmental and safety sensibilities, the truth is we HAVE proven that the nuclear beast can be tamed. One only need look at a tiny corner of technological petri dish -- submarines -- to understand that exploiting the power of the the atom really can be done at scale, and under reasonable control, and with great effect towards a nation or societies interests.

So, look next at large scale civilian nuclear power:

France generates 75% of it's overall power requirements from nuclear power.

China gets less than 2% that way.

The world proportion is about 15%.

Do we think China and the world will grow, and require more energy? Do we think they will want to do it cheaply, efficiently, and in a sustainable way (at least after their initial 'cowboy' phase of the next 20 to 50 years, much as America went through around the turn of the century)?

What will that expansion of nearly free, nearly limitless energy do to economic growth and general prosperity? How will that ripple through the markets?


And this is just ONE example of a nearly endless range of possible inventions/improvements/changes/discoveries that will fuel our economic capacity in the decades and centuries coming up.
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Post by DRiP Guy » Sun Jan 02, 2011 8:37 am

nisiprius wrote: Although there is a terrible ambiguity to the way the word "cycle" is used in financial/social/economic discussions. I think it unfortunate that the word "cycle" to mean "pattern of feedback relationships" because in most cases it does not create a regular repetitive pattern of any particular size or duration. Not the sweet tone of a bowed violin, just the horrible screech of a fingernail on a chalkboard.


Thanks! You made the point, so I did not have to. As soon as I saw the word 'cycle', my eyes involuntarily rolled back in my head, with visions of the "Elliot Wave" theory on some white board somewhere....

Roy Batchelor and Richard Ramyar:

"The idea that prices retrace to a Fibonacci ratio or round fraction of the previous trend clearly lacks any scientific rationale."
"there is no significant difference between the frequencies with which price and time ratios occur in cycles in the Dow Jones Industrial Average, and frequencies which we would expect to occur at random in such a time series."

Benoit Mandelbrot:

"Wave prediction is a very uncertain business. It is an art to which the subjective judgement of the chartists matters more than the objective, replicable verdict of the numbers. The record of this, as of most technical analysis, is at best mixed."

David Aronson:

"The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story, and a compelling one that is eloquently told by Robert Prechter. The account is especially persuasive because EWP has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is made possible by the method's loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong."

http://en.wikipedia.org/wiki/Elliott_wave_principle

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Post by nisiprius » Sun Jan 02, 2011 8:58 am

DRiP Guy wrote:I grew up in an era where nuclear power was just going from amazing discovery, through it's first practical applications, into the hubristic and frankly nutty ideas that come from naivete combined with a brand spanking new but largely untested technology, along with optimism and a real desire to change the world. This led to concepts that included everything from nuclear powered space outposts, to nuclear powered trains, planes, automobiles... individual homes... and blenders!
Can't resist:
Light is generated (in the future home) by fluorescence which occurs around U-235 and is piped under the house through through transparent plastic sheets along the interiors of rooms," Langer said. "The household supply of U-235 is stored and used slowly in the chamber where plants are grown. Appropriate portions are delivered through a tube-distribution system to stations where they are needed to provide heat or power for machinery or cooking.... Families will travel short distances in automobiles powered by small chunks of U-235 in a water tank inside the car.... All long-distance travel will be by propellerless airplanes which will rise vertically and be independent of atmosphere to keep them aloft. [The process of power generation] results in the ejection of high-speed particles. Such a process can be used as a means of propulsion....
--One Dr. R. M. Langer, Research Associate in Physics of the California Institute of Technology, quoted in PM circa 1945.

I didn't become aware of such things until the 1950s via media such as "The Walt Disney Story of Our Friend the Atom." The high school general science teacher handed out a supply of comic books which GE provided for free, explaining "atomic" energy and the wonderful GE reactor at Shippingport and how just mumble ounces of uranium provided all the power for mumble-thousand homes.

"Atomic" bombs and the "peaceful atom" were going to be used to dig a sea-level canal through Nicaragua, and, of course, there was Project Orion, although I didn't read about it for many years later--don't know if there was much talk about it at the time--giant spaceships powered directly by dropping bombs out of its butt whose explosions would push it skyward on a column of fireballs. I guess it was supposed to be so big and heavy that the inertia would smooth out any small irregularities in acceleration.

I think that there was an attitude in those days that actually amounted to idolatry.

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Post by DRiP Guy » Sun Jan 02, 2011 10:47 am

nisiprius wrote:I think that there was an attitude in those days that actually amounted to idolatry.


I love the Simpson's little mini-cartoon within a cartoon that spoofs the Disney piece! I am left just mouth agape at how foolhardy we were, and thank God that we managed to survive our 'nuclear power infancy" more or less intact, as a society, albeit with some individual incidents that were downright hair raising, i.e. SL-1 incident:

http://www.youtube.com/watch?v=gIBQMkd96CA

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