“I contend that we are both atheists. I just believe in one fewer god than you do. When you understand why you dismiss all the other gods, you will understand why I dismiss yours.”
- Stephen Roberts.
Given their role in the financial crisis, taking investment advice from investment banks is a bit like taking marriage guidance advice from convicted rapists. Nevertheless, as The Economist’s Buttonwood points out, Goldman Sachs and SocGen recently held investment strategy conferences that were poles apart. “In the Goldman world the forecast is for eternal sunshine; visitors to the SocGen world would need to carry an umbrella and a gas mask.” Which nicely summarises the lack of conviction at large in the investment world – perhaps 2011 will be a muddle-through year after all. One common theme to all the SocGen presentations was apparently the use of CAPE, the cyclically adjusted price / earnings ratio for the US stock market, popularised by economist Robert Shiller. As his chart below shows, stocks look overvalued by roughly 40% on this measure, trading at a level that SocGen analyst Andrew Lapthorne suggests has previously delivered average real returns of just 1.4% per annum.
To read more,
Download Wrong at the top of their voice
The problem with the CAPE or the Shiller PE or as it is correctly known the Graham and Dodd PE is that at least on the basis promulgated by Shiller, Smithers, Albert Edwards and all their camp followers at the FT, equities are now entering their third decade of being expensive on this measure....
Posted by: Mark T | January 31, 2011 at 05:03 PM
That may just be a coincidence of dates and the starts of decades, though ? There have presumably been times in the recent past (Q1 2009 springs to mind) when CAPE in developed markets has been cheap ?
Posted by: timprice | February 01, 2011 at 05:55 AM