Craig, while I agree that 1982 valuations were extremely low, it's worth noting that few thought so at the time. In fact, even when the bull was accepted (rather than the market upturn being dismissed as just another bear market rally) in '83, leading market strategists doubted that a PE of 15 on the fastest growing tech stocks of the day (companies with 30%+ earnings growth rates, without any proforma crap) was sustainable, if even achievable.
An important difference between then and now, however, is the level of interest rates and inflation (yes, I know you are expecting hyperinflation in the coming depression). As I'm sure you know, lower rates (assuming they are sustainable, within a range of Fed tinkering, because the prospects for renewed inflation are minimal) justify higher PEs simply because the "P" is the present value of future cash flows while the "E" is, at the time of measurement, a constant.
There is no absolute, "truly cheap" level for PEs. What level of PEs is "truly cheap" changes with interest rates.
Another factor that is overlooked by most commentators today is that the current "E" captured in the PE snapshot may or may not be representative of the long-term trend in earnings for a given company, industry or the market as a whole. As I said, the "P" is the present value of a stream of "E" while the current "E" may be temporarily above or below the long-term trend. Just as it is unreasonable to pay the highest multiples of abnormally high earnings (boom-time earnings on LU for example), it is unreasonable to expect very low multiples on abnormally low earnings.
Now, before you (or someone else) object(s) that no one can project next year's earnings reliably, much less long-term streams of earnings, remember that the market is a composite of the expectations of millions of participants. Some (most?) will be way off, some will be closer to reality, but that does not change the effects of interest rates or temporary disturbances in earnings trends on the question of what is a "truly cheap" PE.
Regards,
Bob |
