Author Archives: philosophicalecon@gmail.com

Profit Margins: Accounting for the Impact of a Changing Financial Share

In a prior piece, I argued that that the frequently-cited macroeconomic expression “CPATAX/GDP”, shown below in maroon (FRED), is a flawed way of measuring the aggregate profit margin of U.S. corporations. When a U.S. corporation earns profit from foreign operations, … Continue reading

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Why A 66% Crash Would Be Better than a 200% Melt-up

Suppose that you’re a middle-aged professional with a 30 year retirement time horizon. Your portfolio is 100% invested in U.S. equities–it consists of 100 shares of the S&P 500, worth $187K at current market prices.  Assuming that the fundamentals remain … Continue reading

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Profit Margins: The Death of a Chart

In the debate on profit margins, two different types of charts frequently appear.  The first chart is a chart of the aggregate profit margin of the S&P 500. Valuation bulls tend to prefer this chart because it undermines the view … Continue reading

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Wal-Mart’s 1974 Annual Report: Sometimes You Get What You Pay For

On Thursday, October 3, 1974, the S&P 500 closed at 62, the definitive closing low of the brutal 1973-1974 bear market.  The trailing twelve month PE ratio for the index at the time was 6.9.  The yield on the 10 … Continue reading

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Profit Margins: The Epicenter of the Valuation Debate

James Montier of GMO, whose work I deeply respect and enjoy reading, recently put out a white paper defending the Shiller CAPE from some of the attacks that have been waged against it.  He offered a number of strong arguments. … Continue reading

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The U.S. Stock Market is Expensive, and It Should Be

Is the U.S. stock market expensive?  To answer the question, we need to get precise about what we mean by “expensive.”  Expensive relative to what?  When valuation bears say that the stock market is expensive, they usually mean “expensive relative … Continue reading

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A Conservative Estimate of 10 Year Total Returns for the S&P 500

In prior pieces, I’ve stated that I think the S&P 500 at around 1775 can return between 5% and 6% per year over the next 10 years, a number that is significantly more attractive than the yield offered by the 10 year … Continue reading

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The Shiller CAPE: Addressing the Responses

In this piece, I’m going to address three responses to my earlier piece on the Shiller CAPE. First, a response from Peter Atwater of Financial Insyghts.  Second, a response from John Rekenthaler of Morningstar.  Third, a response from Bill Hester … Continue reading

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Valuation and Stock Market Returns: Adventures in Curve Fitting

My prior piece on asset supply has received significant interest, and so I feel an obligation to clarify.  The title, “The Single Greatest Predictor of Future Stock Market Returns”, was something of an intentional exaggeration, chosen not only to draw attention to … Continue reading

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The Single Greatest Predictor of Future Stock Market Returns

Consider the following chart, which shows the average investor portfolio allocation to equities from January 1952 to December 2013: The metric in this chart takes no input from any variables traditionally associated with valuation: earnings, book values, profit margins, discount … Continue reading

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