Monday, January 15, 2018

What. Could. Possibly. Go. Wrong?

This from Nomi Prins in a speech in Tokyo, mid 2017:

President Trump seems to be shying away from multilateral agreements and toward more isolationist ideas. The last time the United States did that was in the 1920s. In fact, isolationist policies were one of the reasons there was such a speculative mood in the United States in the 1920s, and that speculation led to the financial crash of 1929.

End quote.

To get a sense of the speculative mood in the 1920's, we can use the Shiller P/E ratio. From Wikipedia:
The cyclically adjusted price-to-earnings ratio, commonly known as CAPE,[1] Shiller P/E, or P/E 10 ratio,[2] is a valuation measure usually applied to the US S&P 500 equity market. It is defined as price divided by the average of ten years of earnings (moving average), adjusted for inflation.[3] As such, it is principally used to assess likely future returns from equities over timescales of 10 to 20 years, with higher than average CAPE values implying lower than average long-term annual average returns.

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Typically, the Shiller P/E moves around 16 or 17. You can find a charted updated regularly here:

http://www.multpl.com/shiller-pe/

The Shiller P/E ratio for the US stock market peek in 1929 was about 30, a tad high no? Now it is only mildly astronomical at 33.8. As Capt. Kirk might say: What. Could. Possibly. Go. Wrong?

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