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« Why the Market Multiple Will be Higher in 2011 | Main | Blogiversary Themes: Analyzing Earnings »

December 12, 2010



Jeff, with all due respect, I think one cannot model large scale risk, and such attempts are, ironically (as shown from the chart above) backwards-looking. I suggest you superimpose that stress chart over the S&P chart if that backwardsness is not instantly clear to you. One can often only sense risk, as so many PhDs, from those of LTCM, and before and afterward, have failed to do. I am sure you have vastly more mathematical training and investing experience than I have, but things now are just plain hinky. And the models always, always lie. I realize you are making essentially short-term technical-based predictions for 2011, and you know what? for 2011 you are right, and in fact I agree and I'm investing that way for 2011 and think P/E's will, rightly or wrongly, probably wrongly, move higher. But for a primarily long term investor like myself, what happens in 2011 is irrelevant. The Big Picture, of which I'm often not a fan, is on your blogroll; but these charts are mind-blowing to me. I care about whether in the long term we are living in a stone house or in a house of cards. In March 2009 it felt like there was little left to lose, rightly, or perhaps wrongly. The less there is to lose, the less risk there is, end of story. But now it is not that way at all. That is not anecdote. That is instinct. Numbers will never capture it. Lest we forget, the P/E and the P/B looked great for C and BAC in 2007, too. We know how that turned out. All that mattered was what was below the surface; only the fundamental basis for the E and the B really matters. The bubble was not in their stock prices at all. The bubble was in the deep engine driving their underlying earnings. Anyone looking at P/E or relative P/E was very shortly SOL. If the same is true now (and maybe it is not), then charts about relative P/E's between now and March 2009 are complete nonsense and tell nobody anything useful whatsoever. They are binary and one-dimensional. I realize instinct can be corrupted by past negative experiences, and maybe mine is (just as maybe I was only optimistic in 2/2009 because of past good experiences). But just don't pretend that your or anyone else's models, particularly as presented in the prior post, are anything more than hyper-simplified macro-economic cartoons, which are based on little more than a different set of instincts and/or assumptions, which themselves are all ultimately based to some extent on anecdote. I really do mean that with all due respect. I do enjoy your blog. But in short, I just am not buying it.

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