I am looking at exactly the chart you referenced… PE in 1955 looks like ~18x? Over the next 10-yrs I believe total return was >150%. Sure dividend yield was 1% pt higher than it was today. So… maybe total return over the next 10-yr is 125% instead?

It makes 0 sense to look naively at two 100-year charts and try to draw conclusions… nothing is (or should be correlated). It makes no sense to include the depression 10-yrs in the “avg PE” or any analysis of interest rates. Do you understand what life was like in the depression? Do you understand what life was like in 1900, 1910? The comparison is silly.

Dont you find it interesting that PE bottoms at exactly the point where 10-yr yield tops? 1981, 82? Combine that with ANY logical understanding of debt/equity financing choices… think for 1 minute. Open eyes. (Check other markets… PE often bottoms where rates top. Argentina, Mexico, etc)

Finally, there are two major mistakes we want to avoid:
1) Buying at tops, when everything looks perfect but value is 2x overstated
2) Not buying at moderate prices into recovery and growth periods

I find your logic and analysis would’ve made mistake #2 consistently since 1985 (and in 1955). Missing those runs is impossibly painful. S&P500 was roughly $50 in 1955. It was roughly $150 in 1985. It was $500 in 1995. Why use empirical analysis that consistently misses on #2?

What mistake are we more worried about today #1 or #2?

“Inverted yield curve is exactly the harbinger and driver of the first Great Depression.”

We aren’t just talking about this time period, what I said is also true for the time after WW II until around 1960. Where the yield curves inverted then, too?

“The current “prime rate” of 3.25% is the LOWEST it has been since 1955 (a very good time to buy stocks!).”

Around 1950 was a good time to buy stocks. P/E-ratios were in the single digits and dividend yields were high. Nevertheless, treasury yields were very low. Right the opposite of what you are claiming regarding the alleged relationship between treasury yields and dividend yields.

“The data you showed illustrated the perfect correlation of yields with PEs since 1975.”

You seem to like to found your views on spurious, only temporary correlations and sample-size-one-statistics.

rc

http://www.usgovernmentspending.com/downchart_gs.php?year=1930_2015&view=1&expand=&units=p&fy=fy11&chart=H0-fed&bar=0&stack=1&size=l&title=&state=US&color=c&local=s

Note the inflection point: 1981.

YES. Inverted yield curve is exactly the harbinger and driver of the first Great Depression. The Fed raised rates into the downturn (classic austrian / gold bug stupidity) and short rates were as high as 5% in EACH of 1929, 1930, and 1931. By then the debt-deflation cycle had set in and the rest of the decade was lost (no surprise rates were very low against low P/Es when the E was on the decline).

The current “prime rate” of 3.25% is the LOWEST it has been since 1955 (a very good time to buy stocks!).

The data you showed illustrated the perfect correlation of yields with PEs since 1975. With very high rates in 1975… and a steady decline to lower and lower rates since. This is the exact mirror of PEs. One can look at other countries whose rate structures peaked at different times and find the same mirror image with P/Es lowest at the peak of interest rates. Further, it is only logical… since if E/P is greater than Baa financing… buy outs and PE transactions become self-financing and print billions (esp into growing E). But hey… not knowing / seeing this would only cost you LOTS of money since 1980. Keep thinking about it however you want.

Finally… any comparisons of the “stock market” with that of 1910 or 1900 is super silly. Do you understand what it meant to “invest in stocks” back then? No phones. No planes. No computers. No transparency. Less than 1% of people were probably invested in stocks. Its just a non-sense comparison. Modern financial markets have essentially transformed about every 10-years. Understading fundamentals of “cash-flow” and “financing” are probably more important than broad 100-yr or even 50-yr comparisons.

“I cannot help you. This is 100% INCORRECT. Why just look at 10-yr yields? Why not 5-yr? Why not bills?”

Please! Are you claiming now 5-yr treasures and bills delivered higher yields than 10-year treasuries over the long-term stretches of history during which dividend yields (with a mean of about 5%) were even significantly higher than 10-year treasuries (lower than 4%, or even 3%)? Check your logic!

There is no correlation between treasury yields and dividend yields. If you claim otherwise, show us your data. I have showed mine (not really mine).

And what about the other point, the P/E-ratio, which, you claim, increases in time, because of wealth and capital stock increases, to rationalize higher P/E-ratios nowadays? The Case-Shiller index doesn’t show anything like it. It only shows a still high-priced stock market, if one takes the mean and variability of the long-term time series before the extremes of the last two decades as a comparison.

rc

I completely agree. A comparison with Baa corp yields is very valuable. It is also the case that leveraged PE and conglomerate purchases will drive some equalization here. (I.e. If I can “buy out” equity and finance it favorably… then this will drive price higher. Exactly what happened in the 1980s, 90s, and 00s… ‘leveraged buyouts” and PE transactions created many billionaires.). We seem to see steady $20B/week of M&A deals right now.

I also think it is overlooked that the broad “index PE” is overstated. It combines some companies with large losses, either 1-time or persistent (AIG, C). These lower the E and increase the index PE across other companies that NEVER HAVE A LOSING Q (msft, wmt, aapl, hpq, pg, etc). However… are these other companies really worth LESS because AIG had some massive loss? (Answer – NO!). So its a helpful check to just looks at 10 of the largest companies and check the “PE” and the “net of excess cash PE”. In this environment… we have alot of 10-12-14x numbers on our largest companies.

MSFT – 14-15x (despite holding 20% cash)
HPQ – 11-12x
PG – 16-17x
XOM – 11-15x
GS – 8-10x
PFE – 8-9x
AAPL – 17-19x (despite holding 25% cash)

Again… point is simply that large concentrated losses in single companies (AIG) or a single sector (financials) mislead one to think the “E” is lower than it is…

“There were long stretches in history when treasury yields were equally low or even lower, but the dividend yields were significantly higher than today”

I cannot help you. This is 100% INCORRECT. Why just look at 10-yr yields? Why not 5-yr? Why not bills?

“As society increases in wealth and capital stock… risk-free rates decline and PEs increase.”

And since when is this relationship supposedly valid? Since the 90s? Or are you claiming, wealth and capital stock hadn’t increased until then? I can’t see the trend you claim in the time series of the P/E-ratio. I only see a big, big bubble for the last two decades:

http://www.multpl.com/

According to this, stock valuations are still near the maxima of previous cycles.

Dividend yield has trended down since about the 60s. Before this, no visible trend, only variability around about 5%:

http://www.multpl.com/s-p-500-dividend-yield/

And there isn’t any inverse correlation between P/E-ratio and treasury yield, or any correlation between dividend yields and treasury yields found in the long therm data, either. There were long stretches in history when treasury yields were equally low or even lower, but the dividend yields were significantly higher than today:

http://www.multpl.com/interest-rate/

So your arguments look pretty much like a rationalization why the current valuations are supposed to be the new normal and why we shouldn’t worry and go long in stocks for the long term now. (Actually, I am long, but only about 20% of my portfolio for short term trading).

rc