I love this chart from Jame’s Montier’s latest missive, In Defense of the “Old Always.” We learn that major events occur quite regularly, while P/Es fluctuate fairly constantly . . .


Graham & Dodd P/E, 1881-2010

click for ginormous chart


In Defense of the “Old Always” (PDF)
James Montier
GMO, 12/22/2010

Category: Psychology, Valuation

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.

15 Responses to “The Only Constant Is Change (1881-2010)”

  1. Petey Wheatstraw says:

    Even if the chart showed a smooth rise or fall, the headline would be true, so constant change is a truism. Two of those periods of change in the chart stand head and shoulders above the rest. I don’t think our most recent massive bubble is finished popping.

  2. not-affiliated-with-Wall Street says:

    It looks like the S&P G&D P/E is almost where it was prior to the 1987 crash. Combine that with the chart you posted a few days ago with the S&P hitting the channel line drawn from the 1987 top, and what have you got?

    Probably just a coincidence.


  3. Gloomy says:

    Ditto the above 2 posts. Yeah-I think stocks are a great idea right now! LOL!!

  4. Jo says:

    What? The Brit Empire ended c1895?

    Wishful (mmmmmerican) thinking, I fear.

  5. TerryC says:

    Agree with Jo-

    Almost all of the points on the graph are actual dates, but End of the British Empire about 1894? Where did he pull this date out of? I believe they peaked in WWI, still had lots of colonies for another 50 years. Loss of Indian Subcontinent was about it for them.

    Maybe this is when the Pound Sterling peaked against other major currencies?

  6. barbacoa666 says:

    Looks like PE compression has a ways to go

  7. Lyle says:

    Actually the chart and discussion prove that J.P. Morgan (the banker not the Bank) was right when he predicted that the market would fluctuate. A lot of the fortune telling of the market on CNBC and the like could be replaced by tea leaf reading. Or if one wants to be roman about it harspex, using say chickens to provide the entrials that are consulted. These methods are about as good, since it seems there is one person who says the market will go up and another who says the market will go down. No one knows what will happen, it would be better IMHO for all these surplus financial types to be laid off and CNBC to just broadcast musical interludes.

  8. mathman says:

    Hey, Happy Day people! Freulich Gesundheit and all that.

    Market, schmarket. Sleep in, eat hearty, play a lot, relax and enjoy the day, mates.

  9. constantnormal says:

    Great chart!

    Applying that old Keynesian maxim that “the markets can remain irrational longer than you can remain solvent” to the recognition that things are in some sort of an equity bubble at this point (whether one believes that or not is another matter entirely), and one can gaze upon the wild fluctuations in PE over the years and see just how far up things might go in this Fed-backed equities enthusiasm .. quite a bit, it would appear. I think the PE compression for the last downturn is over, and we are headed upwards to (nearly) infinity and beyond …

    Just some recognition that even the bears will see merit in playing along for a while … when to get out is always an uncertain question.

    And I do expect this insane global mess to drive fluctuations to new historic extremes — in both directions — before it is concluded.

  10. JimRino says:

    Look at this: Drought’s in China too…

    Russian drought did $15,000,000,000 of damage.

    And the US Ongoing Drought conditions…

    And you thought Global Warming isn’t Real, or was going to be “nice”, or not cost anything.

    Funny how the Chinese Communist Government can react Better And Faster then a Democracy, with an Embedded Oil and Coal Monopoly controlling our Legislature, from Congress to the Supreme Court.

  11. JimRino says:

    Isn’t it hypocritical for Ms. Palin to be complaining about Food Price Inflation, and at the same time to be a Climate Change Denier? Not if you Follow the Money.

  12. JimRino says:

    Isn’t it hypocritical for Ms. Palin to be complaining about Food Price Inflation, and at the same time to be a Climate Change Denier? Not if you Follow the Money.

  13. mark says:

    Please add an arrow with the text “China sneaks in an interest rate hike on Christmas Day” to the end of the chart.

  14. Bill W says:

    The most important arrow on that chart is “Greenspan Era Begins.” That was the start of the Greenspan/Bernanke put under the equity markets. With the exception of about a month, during the depths of the Financial Crisis, the PE has never been lower than when Easy Al first became FED Chairman in 1987. That’s incredible.

    Is it as simple as “Don’t Fight the FED?” I don’t think so. If the FED was omnipotent, there would never have been a Financial Crisis. But certainly, the FED is pretty good at juicing the equity markets, and has made no bones about the fact that they intend to do so in the future. That’s my bullish argument.

    My bearish argument is that the PE ratio was in the single digits during the 1930′s (deflation), and also during the 1970′s (inflation). So whether you are a deflationist or an inflationist, the PE ratio is currently too high. Also, single digit revenue growth, and higher business expenses caused by rising commodity prices and borrowing costs, should equal lower PE ratios.

  15. etcetera says:

    Most people don’t even know the Russians had a revolution in 1905, I know I didn’t until now. But everyone knows about the 1917 one where the Bolsheviks took over. That would have been a better choice, especially since it seems unlikely the 1905 one, leaving the Tsar intact, would have impacted markets nearly as much as the second.