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Politics : Ask Michael Burke

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To: Richard Nehrboss who wrote (67064)	9/1/1999 12:13:00 PM
From: Mike M2	Read Replies (1) of 132070

Richard, the trouble with rationalizing current PEs based upon earnings projections is one can justify any PE level if you assumptions are optimistic enough. I believe history is a much better guide. At the market peak in 1929 the PE on the Dow was 16 I believe. One important fact that is conveniently overlooked is the comparison between the growth rate of reported earnings and the growth rate of EBITDA . take out the transient factors of the dramatic decline in interest rates, lower tax rate, and a reduction in depreciation charges due to a prior reduction in capital spending and the profit miracle of of the ninties loses its shine. If memory serves this accounts for approximately half of the growth in earnings. search Barron's 1996 ? Martin Barnes of the Bank Credit Analyst for the story. BCA also covered this in their april 1999 issue. This current economic miracle pales in comparison to the 1920s . There was a time when the health of an economy was judged by its rate of savings and investment, productivity, and balance of trade. In the 20's our savings rate was 10%, productivity averaged 6% per year, the US ran a trade surplus and was the world's leading creditor. In addition, the US gov't had a balanced budget that was truly balanced not a mythical balanced budget that Clinton and his enablerers in the media crow about. During the 20s the national debt was reduced by 1/3 . Currently our national debt continues to rise but yet the spin doctors tell us the budget is balanced. With respect to GE - GE Capital has been a major profit source for GE and the long decline in interest rates has been a major help. I'll have to double check the numbers but in 1929 there was $ 2 of debt created for every dollar of GDP growth recently we have run as high as $5 with the greater portion coming from non bank sources and not captured in the monetary aggregates. Simply put, the economic miracle is based upon unprecedented excesses in credit growth to finance speculation. In 1929 the debt to GDP ratio was 140% we are now at 260-70 %. Mike

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