Long Term Downside Forecasts

[freddyv]

We do have the ability to create wealth through technological advancement on massive scale that could cause major investment opportunities before the larger trend reasserts itself.

I disagree. Humanity only progresses so fast. If we get too much of a good thing we end up...well, where we're at, and you shouldn't expect us to now do anything but tumble to the bottom of the hill and then make all the same decisions we made last time we took a good tumble. We'll get overly conservative and shun anyone who even suggests playing around with derivatives, house-flipping or any stock with a PE over 15. "The trend is your friend" and the trend is down and will stay down until we are all taught a very valuable lesson, IMO.

The generational dynamics that you read about here are much more likely to "create" wealth. Look at how "wealthy" we all became over the past two decades. This wasn't because of computers or the Internet, it was because we were playing games with our money; creating wealth by flipping houses and stocks as they became ever more expensive...and now they have become too expensive along comes a nice bout of deflation to take care of that. The computer was the tool that helped us to create the incredibly complex instruments of destruction, and they may be what makes this crash even worse than that of the 1930's.

--Fred

[freddyv]

I am forecasting that the P/E ratio of S&P 500 will be down to below 10 within the next two to three years, because that is a case of history repeating itself. If the P/E ratio goes to below 10 then share prices will at least halve from current levels because company earnings are unlikely to increase, the oposite being more likely.

In a period of inflation stock prices will eventually inflate along with everything else; this is a basic principle I understood way back in the early 80's even without any formal training in economics and it always amazed me how nobody else seemed to grasp that basic principle. Yes, the policy of the FED with respect to inflation is bad for stocks and other investments begin to look more enticing but eventually stocks will come back into favor with a vengance.

But deflationary times will see the market fall while earnings also fall, so even as the market goes down, down, down, PE ratios may stay high and even book value will not drop as quickly as you expect, after all, what is the book value of a company after it goes bankrupt?

I believe that we are likely to see PE ratios for the S&P 500 stay in the upper teens or higher, (PE for the S&P 500 is now about 17, according to Standard & Poors website, based on trailing earnings for the 3rd qtr of 2008) even after the bottom comes.

See the following chart to see how high PE's stayed during the Great Depression:
http://www.valueline.com/pdf/valueline_2006.pdf

--Fred

[The Grey Badger]

Straws in the wind --- all they are is straws in the wind--- check this sucker out!

http://www.wired.com/culture/culturerev ... 8/11/found