Hussman accounts for inflated margins in his peak P/E calaculation but he's too generous with his outlook, IMO.
I prefer using 10 year average earnings. Based on that metric, the market is fairly valued and set to provide historical average returns.
However, there are two problems with that statement, which I don't think Joe 6 Pack Baby Boomer understands.
First, it assumes you are holding stocks and not trading them and collecting a dividend which makes up 3.2% of your total return. The actual price of the market would then only be set to go up 6% per year.
Second, it assumes there is no further valuation contraction. I believe there is. Thus, total returns will be even lower and price returns will be on the order of 2% per year for the next 10 years if we're lucky.
Third it assumes that the inflation rate will be 3%. I am not so sure that's the case. If one believes TIPS pricing, 10 year inflation is set to be on the order of 0.5% per year with outright deflation in the first 3 years (now until 2012)...coupled with valuation contraction, it could mean 0% returns over the next 10 years (can you say Japan?).
Furthermore, given that the last 10 years have been a bubble of epic proportions, profit margins are still overstated. Short-term earnings will be set to disappoint through 2009, it's a near mathematical certainty.
There is no positive picture I can paint fundamentally for equities. I have been tempted and dipped my toe into high yield bonds about 2 months ago as the mid teen coupons were just too tempting. But bonds are higher in the cap structure than equities so if you're afraid of losses in corporate bonds, then you can't be bullish on equities.
So your treasuries aren't the worst investment in the world for 2009, mate!
If I were a pension manager, I'd also consider putting money with guys that take a hedged approach to investing. Why? You are basically guaranteed 0 returns in treasuries and equities. To the extent that one is willing to take SOME risk, there are POTENTIAL available returns in a hedged asset class executed by a strong manager.
This could mean hedge funds, fund of hedge funds, and guys like Mish (Sitka Pacific); a lot of fee breaks to be had with the first two. |
