Feel free to post how low you think we are going, over what period of time and what factors will take us down.
I started to respond last night, but a combination of fatigue and time deprivation precluded an adequate response. To understand my current view it's necessary to understand where I'm "coming from". Scrutiny of these two summary posts will provide a framework.
Ref. I
investorshub.com
and Ref. II
investorshub.com
As can be seen from these posts, my principal difference from you is your belief that we have made a ’74 type low. Until we make a valuation low in the P/E 7 to 10 range, we haven’t (IMO) finished our initial Plunge off the mania peak. Currently, we have a long way to go to get to ’74 valuation levels.
zealllc.com
As discussed in the references above, I divide market price history into secular bear and bull phases. We have two complete cycles in the twentieth century from which to learn – the ’29 to ’48 secular bear, the ’48 to ’66 secular bull, the ’66 to ’82 secular bear and finally the ’82 to ’00 secular bull. In both cases if you consider inflation adjusted prices, there was a Plunge from a mania peak to a valuation low in the 7 to 10 range then a multi-year oscillation before an 18 year secular bull - culminating in another mania peak. Since I (and others) believe that these long (~35 +/- 2 year) cycles are demographically driven and since the demographics are in place for another such cycle, I believe little can be done to thwart that cycle. This implies that we’ll be in a secular bear market until ~2018 - see books by H. Dent and also
iht.com
and the link from this abstract
papers.ssrn.com
In Ref. I and II above, I discussed the variations in the secular bear theme played in the ‘30s and ‘70s. Recent statements by the FED (Greenspan et al), have convinced me that the Fed has decided that they like the ‘70s better. Moreover, the demographic profile of the nation more closely matches the ’66 Go- Go market mania peak. Hence, let’s consider first the inflation adjusted market profile of that era
dogsofthedow.com
Note that unlike the ’29 to ’32 straight line Plunge from a mania peak valuation to a depression low valuation, the ’66 to ’74 Plunge has a two tiered plateau between the ’66 high and the ’74 low. It is my contention that the reason for this plateau structure is the spending of the national demographic profile precluded the final fall until ’74. Note also, that after the ’32 valuation low, the market never got that low again in the ’29 to ’48 secular bear, but because of the effects of the sever double digit inflation of the latter ‘70s, the inflation adjusted value of the market in ’82 was lower than ’74.
Given that the Fed has all but said that they intend to monetize our current debt bubble, we can anticipate significant inflation. Since we cannot buy inflation adjusted shares Let’s now consider the non-inflation adjusted market
stockcharts.com
which exhibits the sideways price (but not value) chop of the ‘70s market. As I stated in my referenced posts, from demographic reasons, I expect we’ll make our Plunge valuation low in ’08. This will correspond to the ’74 low. Between now and then I expect something similar to the ’66 to ’74 type market.
There are a couple of things to consider. First – the mania in ’00 was much more sever than the mania in ’66. Secondly - we have yet to see how sever the inflation from the current attempt to thwart the secular bear cycle will be. Both of these factors will affect the market price profile of this current secular bear Plunge stage. During this Plunge, the bears will periodically “over play their hand”. This will provide the “tinder”. The Fed’s stated aggressive accommodation will provide the “spark”. The result will be violent (with many gaps) rallies.
As Ref I, Part III explained, at least one of these intermediate rallies can be of several years duration. The questions are when will such a rally begin?, from what level will it begin? how much will we rally? and how long will the rally last? Now of course I can only guess. The only answer I’m confident of is that the rally will not last beyond the end of ’06. My reason for this belief is again the national demographic profile that says (to me) that the final plunge to the valuation low will occur during ’07 – ending in ’08.
Some believe we have already begun our multi-year rally. They could be right, but I fail to see the necessary underpinnings for a multi-year rally and still believe that will occur next year. As from what level will the rally begin?, in my SWAG (Ref. I, Part III), I chose a Dow of 4900. This guess was made before the current Fed policy was announced. Now, I suspect it will be from a higher level. How much higher? Well, this is just a guess, but Carl Swenlin's (Decision Point) latest Dow forecast of 6700 for next year is about the highest that (IMO) could produce a multi-year rally.
That only leaves the question of how much will we rally? This answer is the most guesswork of all. On the one hand the severity of the ’00 mania dictates that we not approach those lofty levels again. OTOH the stated policy of the Fed could, if pushed to absurd limits, result in a level of inflation that could puff-up prices. My current “round number” guess is somewhere in the ~9000 range.
So to try to complete you question of how low you think we are going, based on historical precedent, I believe Dow 2900 in ’08. But remember that is an inflation adjusted number, and I expect a lot of inflation before ’08.
I’ve tried to respond to you with the thoroughness that you have consistently exhibited, but it is all
JMO
lurqer |
