by mannfm11 » Sun Jun 23, 2013 2:56 am
The reason the market is falling apart is not that Bernanke is going to stop QE. The banking system didn't need any more money before he started this latest round. Speculators need the buying pressure it creates, as more and more capital is trapped in cash.
In any event, various bubbles around the world are collapsing. China might be the biggest bubble in history, financed by loose credit in the USA and China. Bernanke will go down along side John Law and the late 1700's French inflationists as the author of one of the great monetary failures of all time. All Keynesian and monetarist economists deny the existence of bubbles until they break and they deny what causes them. I don't believe this is by mistake, but on purpose, as the primary theories come out of universities that were built and controlled by turn of the 20th century financiers. Financing the continual growth of debt provides bankers with growing income and a growing means to keep their loans solvent at the same time. That is until the bubble gets too big.
The past 5 years have been about hiding insolvency, not about economic growth. Bernanke can't influence the economy without destroying it. I don't believe we will enjoy the next 10 years or so, as this one will be worse than the last one. All the hidden trash will come out this time and maybe some of the culprits will go to jail.
There are 2 sides of owning stocks. One is dividends and the other is the theoretical growth in dividends. Capital gains, in general are not part of the equation, except as they relate to growing dividends. Thus a $1.50 dividend with a 3% growth in an 8% capitalization rate environment will bring $30 on the current market. The problems arise when excessive credit inflate the level of profits and the resulting debt begins to weigh on the system, ultimately destroying growth. It isn't that PE should be this or that. It is that without real growth, the market has to stand on its dividends. The risk free rate of return is 3% plus inflation, in normal times. In a 3% inflation environment, treasuries should return about 6%, meaning stocks, in order to take on the additional risk, should be priced to return about 9% or more. This requires a dividend in the range of roughly 5%.
But, we are at the current time, enjoying corporate profits roughly double normal. So, in order to duplicate the current price structure on a long term basis, time is going to have to pass to reorder the economy back to normal. On a real basis, it could take 50 to 70 years to return valuations to current levels. Sure, one can devalue the unit of trade and achieve numbers, but not value. It is not out of the realm of possibility that dividends could be split in half, as companies try to survive and the market could easily lose 80% or more. In fact, if you examine post bubble markets over history, you will find they have declined 80% or more. That is the norm, not the exception. The capacity to generate additional good credit, has reached and passed its limits
The reason the market is falling apart is not that Bernanke is going to stop QE. The banking system didn't need any more money before he started this latest round. Speculators need the buying pressure it creates, as more and more capital is trapped in cash.
In any event, various bubbles around the world are collapsing. China might be the biggest bubble in history, financed by loose credit in the USA and China. Bernanke will go down along side John Law and the late 1700's French inflationists as the author of one of the great monetary failures of all time. All Keynesian and monetarist economists deny the existence of bubbles until they break and they deny what causes them. I don't believe this is by mistake, but on purpose, as the primary theories come out of universities that were built and controlled by turn of the 20th century financiers. Financing the continual growth of debt provides bankers with growing income and a growing means to keep their loans solvent at the same time. That is until the bubble gets too big.
The past 5 years have been about hiding insolvency, not about economic growth. Bernanke can't influence the economy without destroying it. I don't believe we will enjoy the next 10 years or so, as this one will be worse than the last one. All the hidden trash will come out this time and maybe some of the culprits will go to jail.
There are 2 sides of owning stocks. One is dividends and the other is the theoretical growth in dividends. Capital gains, in general are not part of the equation, except as they relate to growing dividends. Thus a $1.50 dividend with a 3% growth in an 8% capitalization rate environment will bring $30 on the current market. The problems arise when excessive credit inflate the level of profits and the resulting debt begins to weigh on the system, ultimately destroying growth. It isn't that PE should be this or that. It is that without real growth, the market has to stand on its dividends. The risk free rate of return is 3% plus inflation, in normal times. In a 3% inflation environment, treasuries should return about 6%, meaning stocks, in order to take on the additional risk, should be priced to return about 9% or more. This requires a dividend in the range of roughly 5%.
But, we are at the current time, enjoying corporate profits roughly double normal. So, in order to duplicate the current price structure on a long term basis, time is going to have to pass to reorder the economy back to normal. On a real basis, it could take 50 to 70 years to return valuations to current levels. Sure, one can devalue the unit of trade and achieve numbers, but not value. It is not out of the realm of possibility that dividends could be split in half, as companies try to survive and the market could easily lose 80% or more. In fact, if you examine post bubble markets over history, you will find they have declined 80% or more. That is the norm, not the exception. The capacity to generate additional good credit, has reached and passed its limits