As the market zigzags lower, many experts say we’re entering a recession as bad as 1982. As Nobelist Joseph Stiglitz pointed out recently (minute 19 and beyond here), we have little reason to have confidence in our policy makers.  So I continue to ponder the question of how low PE ratios might go (see here).  After adding more short positions on the S&P 500 SPDR ETF (SPY) Thursday afternoon, I read Mark Hulbert’s MarketWatch article on PEs, which surprisingly contains a major error.   

While I agree with Mark’s conclusion that PE ratios are still historically high, he grossly overstates how high they are.  He says, in referring to Robert Shiller’s (Yale) historical PE ratio studies,

So, the S&P 500 (SPY) is down over 40% from a year ago. All the talking heads on CNBC have their stories on what to do now. Scary times for sure, but what is the perspective that historical data suggest? Is it time to jump back in or do we have much further to fall? Should we go long on SPY, or short it?

The housing bubble has burst and we all buy into the idea that there’s another 10-25% to fall. Prof. Robert Shiller of Yale University has published historical data going back to 1890 (below) that shows a small variation in inflation adjusted home prices over 100+ years prior to 1995.  Variations in fundamentals like interest rates, population and building costs have no correlation to the tremendous ramp up in housing prices after 1995. Common thinking held that real estate always went up has been broken. The real estate tipping point is behind us.