Author Archives: philosophicalecon@gmail.com

The World’s Best Investment For the Next 12 Months

Suppose that you’ve been given $1,000,000 of cash in an IRA to manage.  Your task is to invest it so as to generate the best possible risk-adjusted return over the next 12 months. You don’t have to invest it immediately–you can … Continue reading

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Fiscal Inflation Targeting and the Cost of Large Government Debt Accumulation

“You know, Paul, Reagan proved that deficits don’t matter.  We won the mid-term elections, this is our due.” — Vice President Dick Cheney defending a second round of tax cuts against the objection of Treasury Secretary Paul O’Neill, shortly after … Continue reading

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The Trajectory of a Crash

It’s amazing to think that just last Monday, August 17th, the S&P 500 closed at 2102.  Today, it closed at 1868, falling 11.1% in 6 trading days.  The shocking speed of the decline has injected a level of fear into … Continue reading

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Profit Margins in a “Winner Take All” Economy

The following chart shows the aggregate net profit margin of the S&P 500 using earnings data updated through the 1st quarter of 2015 (75% complete): With yet another quarter now on the books in which profit margins have remained steady … Continue reading

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Capital Recycling at Elevated Valuations: A Historical Simulation

Those who expect U.S. equities to deliver poor returns going forward can cite two compelling reasons in defense of their expectation: (1) Equity prices are significantly elevated relative to underlying earnings fundamentals.  The S&P 500’s trailing price-to-earnings ratio, for example, … Continue reading

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A New-and-Improved Shiller CAPE: Solving the Dividend Payout Ratio Problem

A common criticism of Professor Robert Shiller’s famous CAPE measure of stock market valuation is that it fails to correct for the effects of secular changes in the dividend payout ratio.  Dividend payout ratios for U.S. companies are lower now … Continue reading

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Using Total Return EPS to Decompose Historical S&P 500 Performance: Charts from 1871 to 2015

In this piece, I’m going to do five things: First, I’m going to clarify the purpose of Total Return EPS, what it’s trying to accomplish.  In a single sentence, the purpose of Total Return EPS is to convert dividends into … Continue reading

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Introducing the Total Return EPS Index: A New Tool for Analyzing Fundamental Equity Market Trends

In late December of 2010, with the S&P 500 pushing through the mid 1200s on the heels of QE2 exuberance, my favorite financial economist–the great Robert Shiller–made what will likely turn out to be a very inaccurate prediction.  To be … Continue reading

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Janitor to Multimillionaire? Not In This Market

Last week, CNBC profiled the inspirational story of Ronald Read, a gas station attendant and janitor from Vermont who amassed an $8MM fortune simply by investing portions of his small salary into high-quality, dividend-paying U.S. equities. Judging from the familiar … Continue reading

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Technology and Finance: Drivers of a Profit Margin Explosion

In this piece, I’m going to show that the profit margin expansion seen in the U.S. corporate sector over the last two decades has been driven largely by gains in the financial and technology sectors.  I’m then going to examine arguments … Continue reading

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