Graham and Doddsville -- Value Investing In The New Era Message Board

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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era

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To: Freedom Fighter who wrote (91)	3/19/1998 11:44:00 PM
From: porcupine --''''>	Read Replies (2) of 1722

<< If ROE returns to more average levels (above the long term average but lower than now) all bets are off. Returns will be lower and PEs should fall. Similarly, if rates and inflation rise PEs should fall and earnings will decline a little. If both should return to average levels: let's say ROE 15%-16% and inflation to 3%-3.5%, an efficiently priced market would tumble in a major way from here. (IMO) >> I have read that the historical norm for real interest rates is, roughly, 1/2% to 1% at the short end and 1-1/2% to 2% at the long end. Inflation is currently 1% to 1-1/2%, making real rates 4% to 4-1/2%. If the Market is not sufficiently pricing in risk, as Alan Greenspan says, how high should they be? If real interest rates return to historical norms, wouldn't that more than justify real earnings yields of 6% to 7% (which, as you know, is the norm for the real earnings yield, the norm for inflation being 3%)?

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