Aug 242011
For all folks who believe the stock market is the place to be, I recommend a research paper from the Federal Reserve Bank of San Francisco.
Bruce Krasting provides some of the salient points and his own summary:
The suggestion is that there is a 15-year bear market in front of us.Multiples will fall by 50%!! I loved the “good news” from the report, that stocks might be 20% higher than 2010, but we have to wait 20 years to see that improvement.
Major recessions/depressions usually cause P/E multiples to fall to the singled digits. What would your portfolio look like if “blue chip” stocks had P/E multiples of 6 to 8?
A link to the research paper is available at the Krasting link.
A few years ago, I spoke with an older gentleman with a finance background. I suppose today he would be pushing 80. At the time, google’s p/e ratio was something like 300 and he showed great surprise, saying that it used to be that you didn’t buy stocks unless it had p/e ratio of 4 or less. Problem is that inflation pushes money out of interest bearing into riskier assets which then pushes up p/e ratios which turn them into bubbles. But now, with excessive money creation, there is nothing that doesn’t entail high volatility and risk. It seems that the only thing that an investor can do is convert to gold and silver and bury the stuff in the ground for fear of the market. But that is called hoarding not investing.