In March 2009 Nouriel Roubini pronounced that the bounce-up from 666 on the SPX was a “Dead-Cat-Bounce-Sucker-Rally”. Later, all the way up to SPX 1200 the aficionados of CAPE and Tobin’s Q warned darkly that the “Lows of March” would be revisited just like the Ides of March.
He was wrong and they were wrong: Here’s an idea, perhaps there’s something wrong with those models?
Perhaps the model which said on the way down to 666 and then (repeatedly), on the way back up that those models were infected by the same “flaw” in “our” understanding of economics that Alan Greenspan famously used in his defense of the collective incompetence of mainstream economists, was a better model?
One thing you have to say is they don’t give up. On 6th September, after the indexes had fallen about 15%, we heard:
Starting in September Roubini said if he had large amounts of money to invest, he would “mostly keep it in cash,”
Looks suspiciously like Roubini is "doing a Bill Gross" all over again? Earlier; on 15th June, Professor Robert Shiller told the world that stocks which were then about where they bounced back to yesterday, were 40% over-valued; so presumably now they bounced, they are headed back to 850 SPX?
Andrew Smithers, the Tobin Q guru, was a bit more circumspect than he has been in the past, he said on August 22nd that there would be a 10% rally from the low, and then at that point the prudent investor should pile into cash, presumably because the lows of March 2009 would be re-tested soon after?
What was it that Einstein said about the definition of lunacy being to try the same thing over and over and each (new) time, to expect a different result? Here’s how the model that correctly predicted fifteen inflection points in the dynamics of the SPX and the DJIA since January 2009 works:
1: The “fundamental” or what International Valuation Standards calls the Other-Than-Market Value (what the price should be if there was no market disequilibrium), is determined by trend-line nominal (US) GDP divided by trend-line 30-Year US Treasury yields (that’s a sort-of rough-and-ready combination of Warren Buffett’s valuation approach with the “Fed-Model”). The R-Squared of that by-the-way going back to 1920 is 95%.
2: The market right now is still in a “post-bubble” valuation trough hangover from the 2000 bubble-pop, and is currently 15% to 20% under the fundamental, waiting for all the mal-investments to get wiped clean.
3: Reversals during the bubble-pop-hangover (after the index has gone down well below the fundamental), tend to be mild (10% to 20%), and fairly short-lived (three to six months)….based on historical evidence going back pre-1929.
4: Ten-year trailing P/E ratios tell you nothing, and in any case the average “E” of the market as a whole is not necessarily an accurate reflection of fundamental (i.e. long-term) value, mainly because of accountancy gimmicks designed to get around tax.
5: Book value or replacement cost, which are basically what Tobin’s Q is based on, either misses out huge swathes of value (intangible value of a brand, and intellectual capital for example), or is impossible to estimate accurately, particularly in aggregate.
6: If the rally was a dead-cat bounce (always a danger), the extent of the recent bounce, compared to the extent of the reversal, puts it well out of that category.
7: Expect modest gains over the next year, even if the US or the world economy tanks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.