I went to see Robert Shiller and Brad DeLong speak last night at the New School. Shiller wasn’t a great speaker but he had at least a few interesting points. He likes the stimulus bill and likes a lot of the ideas behind the Obama mortgage plan announced yesterday which includes ideas he has been pushing for for a long time, one for 15 years. The guy loves data (as I do) and most of his 37 minute talk was spent with slides like the one above behind him. The most interesting one (I don’t think he’s posted the slideshow online) was a bar chart with the total value of US residential real estate at the peak in 2006 (~$20 trillion), the value now (~$14 trillion), and the size of the Obama plan to help solve the problem ($75 billion). He said it might not be enough… About the slide above, Shiller said that people think there is a strong relationship between stock prices and interest rates (the red line) but that that was really only true from about 1970 to 2000 and he doesn’t think it’s something worth paying much attention to. Brad DeLong spoke next (shockingly, he was charming) and after his prepared remarks he brought back up this slide of Shiller’s which he said we’re supposed to now call the Graham ratio (blue line) after Ben Graham who started using it in the 1930s (and who taught Warren Buffett). It shows the current market price divided by an average of the last ten years’ earnings. The picture above isn’t as updated as the one he used last night, which showed that the Graham ratio is now 13.98 (I think). So we’ve come a long way and because 13.98 is less than the long term average of 15, you might say US stocks are now cheap. As I said before, I think we’ll significantly overshoot 15 and as you can see above, the bottoms are all below 10. The bottoms were 4.78 in December 1920, 5.57 in June 1932, 8.51 in May 1942, 9.07 in June 1949, 6.64 in June/July 1982. (The highs were 32.56 in September 1929 and 44.20 in December 1999.) So, could the US broad market go up from here? Yes, but I think there is still significant risk to the downside.

I went to see Robert Shiller and Brad DeLong speak last night at the New School. Shiller wasn’t a great speaker but he had at least a few interesting points. He likes the stimulus bill and likes a lot of the ideas behind the Obama mortgage plan announced yesterday which includes ideas he has been pushing for for a long time, one for 15 years. The guy loves data (as I do) and most of his 37 minute talk was spent with slides like the one above behind him. The most interesting one (I don’t think he’s posted the slideshow online) was a bar chart with the total value of US residential real estate at the peak in 2006 (~$20 trillion), the value now (~$14 trillion), and the size of the Obama plan to help solve the problem ($75 billion). He said it might not be enough… About the slide above, Shiller said that people think there is a strong relationship between stock prices and interest rates (the red line) but that that was really only true from about 1970 to 2000 and he doesn’t think it’s something worth paying much attention to.

Brad DeLong spoke next (shockingly, he was charming) and after his prepared remarks he brought back up this slide of Shiller’s which he said we’re supposed to now call the Graham ratio (blue line) after Ben Graham who started using it in the 1930s (and who taught Warren Buffett). It shows the current market price divided by an average of the last ten years’ earnings. The picture above isn’t as updated as the one he used last night, which showed that the Graham ratio is now 13.98 (I think). So we’ve come a long way and because 13.98 is less than the long term average of 15, you might say US stocks are now cheap. As I said before, I think we’ll significantly overshoot 15 and as you can see above, the bottoms are all below 10. The bottoms were 4.78 in December 1920, 5.57 in June 1932, 8.51 in May 1942, 9.07 in June 1949, 6.64 in June/July 1982. (The highs were 32.56 in September 1929 and 44.20 in December 1999.)

So, could the US broad market go up from here? Yes, but I think there is still significant risk to the downside.

Notes

  1. mattlehrer posted this