Without getting into a discussion on healthcare and its politics, one reality of our soon to be new system is the inevitable further rise in government spending that is headed to 25% of US GDP from its long term average of about 20%. In order to finance this, there will be a smaller private sector and as a result, there will be slower economic growth as nothing is for free. Should the average P/E ratio over the past 100 years of 15x still apply going forward or should there be a revaluation of the multiple paid for US corporate earnings? The one hope that can sustain average multiples over time is the growing mix of exports to earnings as long as the US can make things at a competitive price that the rest of the world wants. I digress, India’s Sensex fell 1% in response to Friday’s rate hike and the rest of Asia followed ex the Shanghai index. With Germany still unclear on what direction they will take with Greece, Greek bonds are down sharply.

Category: MacroNotes, Uncategorized

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

14 Responses to “in our new world, what multiple should be paid?”

  1. W T F says:

    Peter Boockvar wrote :”In order to finance this, there will be a smaller private sector and as a result, there will be slower economic growth as nothing is for free.”

    Peter you got some history to back up that claim? The US government was much smaller before WWII and grew dramatically after that war yet US growth accelerated. Medicare passed in 1965, the size of government grew again but US growth continued to accelerate.

  2. dead hobo says:

    To me, P/E multiples are only slightly more valid then the concept of sky hooks holding up airplanes and S&P levels. Statistically speaking, the are a fairly good comparative measure of performance, providing ones does the fundamental analysis to understand why a multiple is what it is.

    When an honest analyst says trailing P/E multiples are x.x and this is higher than the long term average AND nothing in the economy says they should be this high, then this is sign of hidden strength or an asset bubble, depending on the fundamentals. When a sell sider talks of multiple expansion or buying on projected higher multiples based on future fantasy earnings the market is discounting, you know you are listening to a fraudster.

  3. spencer says:

    WTF is absolutely correct. There is no reason to buy into this argument.

  4. Marcus Aurelius says:

    Dead hobo has a point.

    Earnings? In the traditional sense or those derived by using the “new” math, by which the answer to 1+1 is a matter of opinion?

  5. super_trooper says:

    I agree with W T F.
    the gut rarely provides you with great guidance unless it is about food.

  6. george matkov says:

    “With Germany still unclear on what direction they will take with Greece…” You’re kidding right?

    After what the Germans paid for bringing East Germany into the fold do you seriously believe they will do the same for the Greeks – and Spain, Portugal, etc…?

  7. theorajones says:

    This is abject nonsense. You’re making at least two major mistakes here: treating accounting fictions as objective reality, and believing blindly in the ideology that all public investment is bad/growth-killing and all private investment is good/growth-enhancing.

    On the accounting fiction, in 1998, the federal government had roughly $110 billion in foregone revenues because employer-sponsored health care benefits are tax deductible. By 2004, that was up to $188 billion, and by 2008, it was up at $225 billion. This is TWICE as large as the impact of the mortgage tax deduction.

    You’re seriously suggesting that subsidies to buy insurance impact our nation’s economy in a way that much larger deductions to buy insurance don’t? Because we account for them differently on the books?

    It’s not the accounting that matters–it’s the POLICY that matters. And on that note, your “government always sucks, private always grows” ideology is nonsense here, too.

    If government provides a necessity more efficiently than the free market does, then you have improved the nation’s productivity even if you’ve shifted the national balance slightly towards the “government is spending” side of the ledger. We have a more efficient economy with fire codes and fire departments than we did under the private fire insurance schemes of the late 1800′s. Even though we permanently moved “fire prevention and response” from the private to the public side of the ledger.

    Beyond efficiency, government spending can generate new returns for the economy. If government spending provides a positive sum benefit, then the economy is stronger even if there is more public spending. Building and maintaining the interstate highway system moved a LOT of spending to the public side of the ledger. But only a fool would suggest it didn’t enhance our nation’s economy. And spare me, it’s NOT the kind of thing that the public sector would have ever done.

    It’s just abject nonsense to say there must be a smaller private sector if a higher percentage of money is spent publicly. Economies aren’t zero-sum entities. If government spending is more efficient and/or positive sum for necessary investments, then you may have a smaller percentage of money being spent privately, but you will have MORE money in the private sector because you will have GROWTH. For the past 130 years, we’ve had a higher and higher percentage of our economy being spent publicly, but I would NOT want to live in the 1890′s instead of today! Because government programs like clean water helped our economy grow tremendously.

    Growth requires not just a private sector, but also a public sector that is adequately funded to do the job it needs to do. And that job changes as the economy changes. It’s stupid to argue that government should direct the investment of the lion’s share of capital, but it’s equally stupid to argue that an increase in marginal government spending is always bad and always to the detriment of our economy.

    And lately I’m thinking that we can quite easily move a small percentage of investment from the private sector side to the public one. In fact, I’m convinced it’s vitally necessary. Our private markets just spent 4 years thinking that the proper allocation of trillions of our nation’s capital was on can’t lose financial schemes based on home loans to deadbeats. At the same time, in our nation millions of kids didn’t get checkups and vaccinations, and our cities are using sewer infrastructure from the late 1800s and roads, bridges and schools built in the Great Depression. It is time to put down the children’s books and recognize that economies are much more complicated than the Fountainhead makes them out to be.

    Really, you want to play “who contributes more?” When it comes to spending our marginal dollars, I’d gladly put the stimulus bill up against Washington Mutual’s portfolio when it comes to investments that will enhance our nation’s GDP this year and for years to come.

    The suggestion that public spending moving from 20-25% of GDP must, by definition, be a bad thing, is lazy thinking. 5% going from private to public investment is not, in fact, a seismic shift from a market economy to a centrally planned one. If you want to predict the impact of this shift on the economy and on the financial sector that is, in theory, linked to its fortunes, then you need to do more than pretend a market economy is zero sum (!), and look at the facts!

    The impact of this 5% can mean more or less in real terms depending on how your spending numbers are influenced by accounting norms. When predicting its impact, more than “who is spending it,” it matters even more what that 5% is actually spent on! What are you investing in? Busy work digging holes and filling them up? Vaccinations for kids? Road improvement? Information tech for lagging industries? Graft for political cronies? Your answer will vary a hell of a lot more on these variables than on lazy “gobernment spent it so it must be dishtroying my economie” nonsense.

  8. farfetched says:

    I am more and more impressed with the thinking that goes on here at TBP.

    Anecdotally, I know of a patient that was suffering from what turns out to be a panic attack. A poor patient on the public dole. This patient was admitted to the ER and later to a room at the hospital for one day.
    Total stay? 1.5 days. Of course no computerized records so reinvention of the wheel and accompanying tests prevail. Total cost to taxpayers? $24,500.00.

    Cost for same patient to go to personal doctor? Even $500 (we all know that is extreme) would be a huge improvement.

    The efficiencies of the new plan in such cases will more than make up for what it costs outright.
    And we are already paying, just many hundreds to thousands percent more in emergency care.
    No Henny Penny, the sky is not falling.
    All that is happening is by moving the expense from one part of the ledger to another we are likely to garner better efficiencies and savings for services we already pay for.

  9. The Window Washer says:

    WTF, wtf.
    Took about 2 seconds to find an adjusted average of GDP growth from 1950-1980 2%.
    Sound like your “US growth continued to accelerate”?
    Now ask yourself why I would bother working up a century chart.

  10. Ned Baker says:

    Peter, you’re trolling us, right?

    In addition to the good points already made, I would point out that the new law requires 35 million Americans to enter the private insurance market.

  11. Mr.E. says:

    It’s a good question, but I agree with others that there is no indication that the “private sector” will net shrink. It may not grow as fast as it has in the past 50 years, but I see no evidence yet that it will shrink.

    As far as multiples go, I want cheap not average. What constitutes “cheap” depends on your time frame. Over a very long term (60+ years), PE < 15 is getting cheap. But, the cycles of ups and downs arround that very long term average are on the order of 30 years +/- (see Shiller's Online Data avaialble from his website). A key in these cycles is interest rates. So we are back to return vs. risk.

    During periods of increasing long-term interest rates PE~ 15 is the average (i.e., not cheap) — using Shiller's PE10 data the average from 1/1946 through 9/81 the average was 15.14 . In cyclic periods of decreasing interest rates the average goes up quite a bit – Shiiler's PE10 from 10/1981 through 2/2010 has averaged 21.9.

    Personally I beleive that sometime in the next two years (if not there already) we will see a turn in the long-term interst rate cycle from declining to increasing over the next ~ 30 years. In that environment I would not see PE10 ~ 15 as cheap, but average with a downside possibility of less than 10.

  12. Mr.E. says:

    Looking at average U.S. growth (i.e., GDP) can be misleading. As we all know GDP growth is highly cyclical, with the range of nominal GDP growth swings dependent upon inflation. Real GDP growth is also cyclical reflecting biz cycles. But, if you take an annual economic series of real GDP over the last 50 years (I’ll avoid WWI era and the immediate rebound), use a 3Y MA and regress that, an overall declining trend emerges. That regression gives a trend value of ~ 4.3% per year in 1960 and is down to ~ 2.6% in 2009.

    Use the same Nominal GDP 3Y MA series and compare the Y/Y change in the 3Y MA of GDP in $B to the Y/Y change of the 3Y MA of Federal debt outstanding plus total Federal revenues(i.e. d(3Y MA GDP)/d([3Y MA (Debt + Revenues)]) and another interesting picture emerges – a trend of decreasing GDP increase for every additional dollar of Federal debt plus revenue. Regress that series from 1960 and you’ll find that the regression gives a tend value of ~2.9 in 1960 down to 0.7 in 2008. For 2009, a dip below the regression line, the value was 0.3, i.e., for every additional dollar of Federal revenue +debt we saw GDP growth of 0.3 dollars (that’s a 3Y MA).

    The growth trend picture over the past 50 years is a real cause for concern. The recent very low values (i.e. recession) suggest we may be near a long term cyclical bottom. But that kind of turn will probably take some serious inflation to get things going.

  13. dza says:

    Wow, I’ll take the Boockvarian side of the argument and leave the monkeys to throw crap at eachother.

  14. kstills says:


    I cannot fathom how an innocuous comment like the author has made garners these responses.

    Ok, anyone making comparisons wrt the immediate post war period is not seriously looking at history. We expended quite a bit of ordinance making sure we would become the exporter of choice, so lets look instead to periods of history where 3/4 of the industrial world had not been bombed back to the 17th century to make our comparisons.

    Therojones, nice rant, however the author is making the point that there will be less money, percentage wise, in the private sector going forward. You might argue that the government spending has a higher multiplier then private spending, however you’ll be going up against folks who’ve studied the issue more then you have. Like Romer. So assume in aggregate government spending is less then 1, there will be a decrease of some amount in the investment in the private economy.

    So what multiple should be used to decide on valuations for stocks?

    Good grief, you like HC reform. We get it. You have about 20 years of feeling good about it before we turn into Greece. Enjoy the ride while you can.