05-27-2016, 04:05 PM
(05-27-2016, 03:26 PM)John J. Xenakis Wrote:JohnX Wrote:> A stock market crash like 1929? As I recall, when we discussed
> this ten years ago, you ridiculed the idea. Good to see you're
> coming around. But 1987 really wasn't much of a crash.
(05-26-2016, 10:03 AM)Mikebert Wrote: > I was in 2003. I argued that the
> first bear market of the secular bear market
> was ended, you thought we had more to go (all the way to 4000 on
> the Dow). I agreed with you that that the end of the secular bear
> market (which then I thought would be around 2018) we would see
> the single-digit P/E values you were looking for. The link shows
> a graph of a hypothetical secular bear market showing a series of
> ordinary bull and bear market cycle embedded within it. That
> figure was made in early 2003, and presents my thinking at that
> time.
Well, we had many, many discussions subsequent to 2003, all the way
until things went completely off the rails in 2008.
I did a quick search through some old files, and found a length e-mail
exchange we had in 2004, in which you said the following:
Quote:> I believe there is a difference between your views and mine. I say
> we don't go below 700 on the S&P500. And I back it up with my
> 401(k) stock allocation and have stated such in real time. I
> believe you have stated the S&P500 will go below 700 in the next
> few years. Is this true?
> At what point in time will you throw in the towel on your model if
> the S&P500 continues to stay well above 700? For example, suppose
> we get to 2008 and the S&P500 is much higher than it is today
> without ever going below 900 between now and then, will this
> invalidate your model?
> If not, then how is your view different than mine?
The mistake that I made was trying to assign dates to events.
Generational Dynamics uses MIT's System Dynamics applied to
generational flows to determine trends and events that MUST occur
(like a global financial panic and crash), and uses Chaos Theory to
determine what CAN'T be predicted (like election results). The two
come together particularly in something like this, where one can
predict there must be a global financial panic and crash, and Chaos
Theory says that you can't predict the date or event that will trigger
it.
By 2007 I was stating the prediction more accurately: that increasing
public debt was a trend that would not be reversed until there was a
global financial panic and crash.
What's happened in the meantime is truly astonishing. Central banks
around the world have pumped money into the stock market, during a
deflationary spiral while growth is flattening. This is creating huge
interlocking debts, such that a major bankruptcy will trigger a chain
reaction, and even the printing presses won't be able to keep up, as
they did after the Lehman collaps.
Today there are lots of people who recognize that the global financial
situation is so screwed up that it can't end up anywhere but in
disaster. And because of your reference to the 1929 crash, I assumed
that you were one of them, and had reversed your position in ten
years.
No, what I am predicting is in line with what I expected in 2003. I use a valuation tool called P/R. R(t) is the integral of real retained S&P500 earnings from for x = 1871 to t plus the real value of the index in 1871. R for any year can be converted to a nominal value using the CPI deflator. The ratio P/R then provides a valuation measure that resembles Tobin's q. Duirng a secular bear market P/R declines from a high value at the beginning to a low value at the end. Typically the starting value is about 1.2-1.3 and the ending value is about 0.25-0.3. Initial values have ranged from 1.1 to 1.5. The current secular bear began at 1.5. Typically P/R shows a downward trend, but over 1929-1932 it fell all the way down to sub 0.25, and the then bounced around for 17 more years until it began a new secular bull market from the 1949 P/R of 0.25.
Had we gotten 1929-like crash the S&P would have fallen to the 300's with a Dow around 3000, which is about what you were looking for. I believed that the Fed would throw a wall of money at any decline, preventing it full development, which is what happened. In 2008 the Dow did not reach the ca 4000 level consistent with P/R = 0.25. I am calling for a 10000 point drop in the Dow with the coming recession. This is also not a P/R=0.25 event. If we get a panic this time I do expect it to drop further in which the P/R=0.25 limit will come into play and we might see a Dow of 5000. That's a long way down, but still not the 3000 or 4000 you were looking for.
If we don't get the panic, then I would expect one more bull market/bear market cycle before the secular bear market / 4T ends, at which point P/R = 0.25 will correspond to about 7000.