Next 4-5 years Because it takes years to work off the excesses of the largest bull market mainia in history
Because we are still overvalued historically
Because we are going to have a recession
Because we are going to have a financial panic
I'll bite on this one.
1. The excesses of the bull market mania have been largely worked off in the past 13 months. Inventory excesses have been by and large worked off. The, in some significant cases, gross misallocation of capital into things like $95,000 CSCO routers selling for $4,500 today at auction have not been worked off - the excesses in the long-haul telecom biz - yes there are excesses that will take time. 4-5 years? For most of tech, I doubt it, because you are ignoring product and technology life cycles. Bull market or not, a huge whack of the tech equipment produced in 2000 will be economically obsolete by 2003.
2. W/r/t historical valuations, it is important to adjust those by the then-prevailing risk-free interest rates. When you have double digit Treasury rates, as we did during much of the 70's and 80's, of course P/E's will be a lot smaller than if you have 5% Treasury rates. For low-risk stocks, "fair" P/E's now would be about double what they were when T-bonds were over 10%. Where your point is valid, IMO, is that the market stills needs to put more risk premium (i.e. price discount) on many of the techs. The prevailing assumption that tech earnings could never go down, a fallacy built into many P/E's, still needs adjustments. Historical P/E's reflected both the baseline "risk-free" interest rates, and risk premiums for stocks, since we are in a different interest rate environment you can not blindly use those (although as noted part of your point is valid.)
3. We are having a recession. It started December 1, 2000 (my guess based on quarter by quarter GDP deceleration). It will probably run about a year to 18 months. The market will begin to anticipate the end of the recession when the rate of economic deceleration decelerates (Gawd, sounds like Greenspeak.) We are not there yet. Watching trends in stuff like Book/Bill ratios is important. They may stay under 1 for awhile, but as and when there's a trend improvement, Mr. Market will perk up.
4. For all his many miscues, our central banker is flooding the system with liquidity. I do not see a repeat of the panic of 1897, or 1929. Some may say that running the presses only delays the day of reckoning, that is not necessarily true if there is a prudent "work-out" program undertaken by lending institutions. I can guarantee you that the vast majority of lending institutions were a ton less reckless in the past 2-3 years than prior to any other recession in my lifetime. (Now, having said that, junk credit does find a market, and there are bagholders aplenty amongst vendor financing providers and various debt and equity holders.) But to get a good old fashioned financial panic, you really need the banking sector to seriously suffer. They are in not even close to the situation they were in in say 1989 after the real estate boom and bust. I read the "Credit Bubble Bulletin" too on Prudent Bear, and while it is certainly entertaining, it is way overstated put into perspective. The real dumb-ass stuff, like Euro lenders financing the $103B of 3G license fees, will, as per usual, get bailed out by various governments. (Not willingly, but when the big hurt gets transferred from the telcos to their lenders, you will all of a sudden see governments and central bankers get a whole lot more concerned about adjusting the license terms.)
DOW ~8300, NAZ ~1350, my SWAG on the worst it gets. |
