Generational Dynamics Forum - New Site

Dear Fred,

freddyv wrote: > Here's an excellent video featuring Meredith Whitney:
> http://www.cnbc.com/id/28155366

Thanks for pointing it out. I always enjoy watching Meredith.

** Meredith Whitney lays out the template for financial crisis
** http://www.generationaldynamics.com/cgi ... 28#e080328

One very interesting think about the video you reference is something
I hadn't heard before: The "natural rate" of home ownership is about
64%, but during the real estate bubble it shot up, and it's now at
69%.

She says it will drop back down to 64-66%, but if 64% is the average,
then by the Law of Mean Reversion, it will actually drop down to
58-60% for a while. In fact, that's very likely to happen anyway, as
we enter the new Great Depression and have massive homelessness.

freddyv wrote: > It is absolutely amazing how one crisis after another keeps
> popping up and yet the moron talking heads keep to the same
> strategy that got us into this mess...BUY, BUY, BUY!!!

> Here is a link to video of 2 moro...well, I'll be nice and call
> them misguided fellows who suggested the worst was over in early
> September.

I agree completely. I listen to these people, and I can't stop
wondering what world they live on. These analysts just prattle on
and on with incredible nonsense.

The story goes that when the Muslims were approaching the center of
Constantinople for the final conquest of the Byzantine Empire, the
people of the Senate were having a lengthy political debate about
whether angels were male or female. They were still arguing when the
Ottomans reached them and killed them.

Sincerely,

John

John wrote:...I always enjoy watching Meredith.

** Meredith Whitney lays out the template for financial crisis
** http://www.generationaldynamics.com/cgi ... 28#e080328

One very interesting think about the video you reference is something
I hadn't heard before: The "natural rate" of home ownership is about
64%, but during the real estate bubble it shot up, and it's now at
69%.

She says it will drop back down to 64-66%, but if 64% is the average,
then by the Law of Mean Reversion, it will actually drop down to
58-60% for a while. In fact, that's very likely to happen anyway, as
we enter the new Great Depression and have massive homelessness.

John,

I thought exactly the same thing as I heard her make that statement.

We are in a unique position...well, I am, in that I am not an expert in any one field so I am able to closely watch experts, of which you, John, are one. I then try to focus on the big picture.

Each expert has weakenesses that I try to catch and then put this all together to come up with the most likely scenario. The key is to know who is blowing smoke up your trousers and who is not. People who know what they are talking about present evidence and data that can be verified. I must admit to being very attracted to your theories just on their face initially but as I read deeper I came to realize how much your theories are based on research with a real attempt to be objective.

There are a handful of people who I watch and listen to with respect right now, John, and you are moving up on that list almost daily. Your analysis of Whitney's interview was dead on and your insight into what she was not seeing was impressive.

John wrote:Here's where Whitney is wrong. She thinks that all these writedowns will occur over a period of months, everyone will "take their medicine," and then things will be back to "normal." What she doesn't understand is that she's laid out a very explosive panicked selling scenario.

I just wonder if you are dead right about all of this whether or not you will be recognized as the one guy who saw it all coming. I doubt it, but at least you will have had the unique experience of watching history play out before your eyes, almost as if you had written the script.

Please keep up the good work and know that there is at least one person who appreciates what you do.

--Fred

"I just wonder if you are dead right about all of this whether or not you will be recognized as the one guy who saw it all coming. I doubt it, but at least you will have had the unique experience of watching history play out before your eyes, almost as if you had written the script.

Please keep up the good work and know that there is at least one person who appreciates what you do."

Unfortunately, that's not usually how it plays out. People like John are typically blamed for perpetuating fear rather than getting things 100% correct. Decades later he might start to get some positive recognition. But a positive social mood is a prerequisite to accepting past reality. Until then it will be nothing but finger pointing.

A rather interesting article dealing with our lack of foresight in financial matters. Here's a quote:

"The bottom line is that financial leverage can grow almost without limit in times of financial expansion while any attempts to prevent or offset the efforts of financial markets to deleverage and restructure prove to be almost totally ineffective during periods of financial contraction."

The article is titled, "The World ius Curved" and may be found at:
http://seekingalpha.com/article/110498- ... ent-328291

I do not agree with some of the what is stated but it is an interesting read nonetheless.

IMO, the quote above puts into perspective exactly what each invester should be considering - just how much excess is there? - in order to predict where we are headed. It is easy to make the case that this is the larget speculative bubble in history, massively dwarfing that of the roaring twenties. If that is the case, what is our future?

--Fred

freddyv wrote: IMO, the quote above puts into perspective exactly what each invester should be considering - just how much excess is there? - in order to predict where we are headed. It is easy to make the case that this is the larget speculative bubble in history, massively dwarfing that of the roaring twenties. If that is the case, what is our future?

--Fred

The bigger they are, the harder they fall.

Another noteworthy article, "8 really, really scary predictions" at
http://money.cnn.com/galleries/2008/for ... index.html

Nouriel Roubini, Bill Gross, Robert Shiller, Sheila Bair, Jim Rogers, John Train, Meredith Whitney and Wilbur Ross provide the dire predictions.

Robert Shiller states,
"In terms of the stock market, the price/earnings ratio is no longer high. I use a P/E ratio in which the price is divided by ten-year average earnings. It's a really conservative way of looking at it. That P/E ratio got up to 44 in the year 2000, which was a record high. Recently it was down to less than 13, which is below the average of around 15. But after the stock market crash of 1929, the price/earnings ratio got down to about six, which is less than half of where it is now. So that's the worry. Some people who are so inclined might go more into the market here because there's a real chance it will go up a lot. But that's very risky. It could easily fall by half again."

It seems to me that it is okay to use the ten-year P/E for determining an average but not to apply it to the current stock valuation, which should always be the current valuation based on the past years' earnings...or am I wrong? I must be right because his statement that the P/E ratio got down to 6 is not based on ten years but the current earnings for that year. Right now the PE ratio is around 20 for the S&P 500 and earnings are falling with little possibilty of going up, possibly for years.

So no, we did not have a recent PE ratio of 13, unless you used forward earnings, which is a BIG mistake in times like these. With earnings falling at an accelerating pace it looks like P/E will rise unless stock prices come down. All of this makes a prediction of a 25% or more drop in the stock market (from where we are) seem quite plausible, IMO.

This is what I advise other investors to do: be on a constant lookout for small but significant errors like this one. P/E ratios are very easy to play games with and I haven't heard a SINGLE person on CNBC or Bllomberg state the correct current P/E for the S&P 500...EVER! Despite that Bloomberg includes this info on their ticker each weekend.

There is a BIG difference between a 13 and 20 P/E ratio. The difference is between your stock portfolio dropping 50% or 70% if you expect a low P/E of 6 based on current earnings. One leaves you with $50k when starting with $100k while the other leaves you with $30k...a big difference that you should be aware of in accessing risk and determining your strategy.

--Fred

Dear Fred,

freddyv wrote: > It seems to me that it is okay to use the ten-year P/E for
> determining an average but not to apply it to the current stock
> valuation, which should always be the current valuation based on
> the past years' earnings...or am I wrong? I must be right because
> his statement that the P/E ratio got down to 6 is not based on ten
> years but the current earnings for that year. Right now the PE
> ratio is around 20 for the S&P 500 and earnings are falling with
> little possibilty of going up, possibly for years.

I guess if I were investing my own real money, I wouldn't think of
P/E1 versus P/E10 as an "either/or" -- I would look at both of them.

P/E1 might have been more appropriate in the internet age, when
you're looking for rapid growth among high-tech companies that didn't
even exist a few years ago.

P/E10 would be more appropriate if you're looking for solid stocks
and a long-term investment. If you plan to buy stocks and keep them
for ten or more years, then it makes sense to look carefully at how
the company did in the previous ten years.

In the early days of this web site, I used to talk about P/E10,
following Shiller's advice.

** 11% Solution - Adam Barth - Barrons
** http://www.generationaldynamics.com/cgi ... 0711eleven

Later, I switched to P/E1, mainly for expository purposes: To someone
who's unfamiliar with this stuff, P/E10 seems rather gimmicky, and
P/E1 is easier to understand.

The great fraud, as I complain about all the time, is the idiot
analysts confuse P/E1 with P/E-forward, where "forward earnings" are
bloated estimates.

** UBS AG analyst predicts a huge 53% stock surge in 2009
** http://www.generationaldynamics.com/cgi ... 04#e081204

Here's a P/E10 graph that I posted in 2005:



And here's a P/E1 graph that I posted in August, 2007:



One interesting difference between the two graphs is that the first
one shows greater equivalence between the 1920s bubble and the
current bubble, while the second graph doesn't make the 1920s look
like a bubble at all.

That's because the 1920s bubble was primarily a stock market bubble,
with both stock prices and earnings in the same bubble. So the P/E
ratio didn't go up much when you're looking a P/E1. With P/E10,
you're comparing current stock prices with 10-year earnings, so the
ratio goes up much farther in a bubble.

In the 2000s, the bubble was caused by the credit bubble and the
creation of hundreds of billions of dollars worth of credit
derivatives, whose nominal value was poured back into the stock
market. Credit derivatives didn't help corporate earnings much, but
they helped stock prices a lot, so both P/E1 and P/E10 show huge
bubbles.

So the real moral to the story is this: You can use both P/E1 or
P/E10, but always make sure you're using them consistently, and don't
mix P/E1 and P/E10 results together.

freddyv wrote: > I just wonder if you are dead right about all of this whether or
> not you will be recognized as the one guy who saw it all coming. I
> doubt it, but at least you will have had the unique experience of
> watching history play out before your eyes, almost as if you had
> written the script.

> Please keep up the good work and know that there is at least one
> person who appreciates what you do.

StilesBC wrote: > Unfortunately, that's not usually how it plays out. People like
> John are typically blamed for perpetuating fear rather than
> getting things 100% correct. Decades later he might start to get
> some positive recognition. But a positive social mood is a
> prerequisite to accepting past reality. Until then it will be
> nothing but finger pointing.

I very much appreciate the comments. Some days they're the only
things that keep me going.

As I've mentioned several times before, I have a very dark feeling
about what's going to happen to me. I identify closely with the
mythical Cassandra, hated and disbelieved in her predictions, and
then reviled and raped and later killed when the predictions came
true.

Apollo fell in love with Cassandra and gave her the gift of seeing
the future. When she spurned his advances, he cursed her: She could
still prophesy the future, but nobody would believe her. She warned
people not to bring the wooden horse into the city, and predicted that
it would lead to disaster. When her predictions came true, and the
soldiers poured out of the Trojan Horse and massacred most of the
people in the city, Cassandra was reviled and raped.

After the war, Cassandra became a concubine of King Agamemnon.
Agamemnon's wife, who was having an affair herself, laid a trap for
Agamemnon. Cassandra warned him about the trap, but he ignored her
warnings and, as a result, both Agamemnon and Cassandra were killed.

I know that I'm truly one with Cassandra. I expect the worst, a very
dark future, and my only hope is that I don't end up being raped
myself. As it says in Ecclesiastes: "For with much wisdom comes much
sorrow; the more knowledge, the more grief."

Sincerely,

John

-- Earnings estimates fall again

Here's the latest summary from CNBC Earnings Central:

> Earnings Central Stats

> As of Friday, December 12th:

> The blended earnings growth rate for the S&P 500 for Q4 2008,
> combining actual numbers for companies that have reported, and
> estimates for companies yet to report, fell to 5.9% from 10% due
> in part to downward estimate revisions in the Financials and
> Materials sectors.

> On July 1st, the estimated growth rate for Q4 was 59.3%, and by
> October 1st, the estimated growth rate had fallen to 46.7%. (Data
> provided by Thomson Reuters)

> http://www.cnbc.com/id/15839135/site/14081545/

Here is the table of earnings growth estimates over time:


Date 4Q Earnings growth estimate as of that date
------- -------------------------------------------
Feb 6: 50.0%
Jul 1: 59.3% Start of previous (3rd) quarter
Oct 1: 46.7% Start of quarter
Dec 5: 10.0%
Dec 12: 5.9%


Isn't it absolutely astounding how this happens every quarter?

Sincerely,

John

An interesting graph, showing total US debt as a % of GDP since 1916:



John

OK John, you're scaring me a little bit with the Cassandra comparison.

I was thinking this morning that a lot of the "get rich quick" business people (i.e. multilevel marketing types) and, sadly, even preachers (i.e. send me $1000 and God will bless you one hundred fold) should excercise some caution.

In the bubble environment you could promise people the world and pick their pockets and they just go away frustrated and more mad at themselves than the guy who did it - because they were a sucker. But in a post-bubble world, after people have seen losses beyond what they ever could have imagined, I suspect that people will NOT suffer fools as passively. When these folks promise people the world, and those people out of sheer fear and desperation choose to believe them - and lose the last of what they have - there will be hell to pay. People will not just walk away mad at themselves.

But I don't see you getting backlash given that you accurately laid out a scenario that is unfolding just as you said. And even if people do want to smack the "prophets" I would hope there are a lot more highly visible people who would be targets than you. (I.e. I personally would like to slap Kramer when I listen to his "Mad Money" blather.)