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> “Don’t buy stocks when the P/E ratio is over 20” was a good lesson to learn from the 1970s when interest rates were 7%, the Fed hadn’t yet learned what it’s c

> “Don’t buy stocks when the P/E ratio is over 20” was a good lesson to learn from the 1970s when interest rates were 7%, the Fed hadn’t yet learned what it’s capable of, and most businesses were cyclical manufacturing companies vs. asset-light digital services. Is it relevant today? At a broad, philosophical level, yes. In practical terms, probably not. In the same sense, buying stocks at all seemed like nothing but speculation in the 1920s because corporate disclosures were so opaque. By the 1970s that had changed, and you could begin to make rational, calculated long-term decisions that put the odds in your favor. The funny thing is that exactly this kind of talk was all the rage leading up to both the 2000 and 2008 crashes. The boom makes it impossible to imagine what the bust will look like, and vice versa. Most people are utterly incapable of seeing 180 degrees through the business cycle. They simply can't do it and rather extrapolate current conditions to infinity. This is a big part of boom/bust cycles. They are spaced out by just enough to entice a new group of greenhorns who ever more loudly beat the new paradigm drum. Then this new class learns that the business cycle is in fact immortal. But for many, it's a short-lived lesson. And that part about making "rational, calculated long-term decisions" is amusing. Because it's during the boom that companies start to engage in accounting shenanigans. The book-cooking will all come out in the next bust, just like it always has. 100x + price-to-earnings multiples will cover a multitude of sins. As Warren Buffet allegedly said, it's only when the tide goes out that you find out who's been swimming naked.

nly 5y ago
The problem is we're all now dependent on stock market performance to make retirement feasible. Employer guaranteed defined-benefit pension schemes are dead. My uncles pension scheme was structured to pay out 1.5% of his final salary, inflation adjusted for the rest of his life, for each year he'd worked. He worked at one company his whole career, from age 18 to age 55, when he retired. Factoring in his mortgage, which he paid off prior to retirement, his disposable income never even dropped when he retired. Exact figures don't matter too much, but to achieve that with a defined-contribution pension you need to invest something in the range of 15%+ of your gross salary for 30 years and achieve a 7% above-inflation annualized investment return. And it won't be final salary but career average. Most people aren't doing this so are fucked
- kristjansson 5y ago
  One wonders about the actuarial assumptions made by your uncle’s former employer and how, or if, they expected to meet that obligation.
  - djbebs 5y ago
    If history is any indication the answer to both of those were "they were wrong" and "caused severe financial issues to the company, if it didn't bankrupt them entirely"
    - kristjansson 5y ago
      Exactly, the point of the comment being that generous defined benefit pension schemes probably aren’t some paneceal solution that capital is now withholding, but that they were at best a burden and at worst a lie.
      - actually_a_dog 5y ago
        How are individuals supposed to have it any easier, though? Should people just be forced to work until they drop? Or does everybody now need to be some kind of financial genius in order to make retirement work?
        rhizome 5y ago
        Tax the zillionaires, pay the individuals more, and the executives less. "Robber baron" used to be an insult and a sign of disapproval. It was a popular term.
        underdeserver 5y ago
        In much of the western world, people set aside ~10% of their paycheck to a pension fund, which then invests it in relatively solid options (stocks, real estate, bonds, with a risk profile that adjusts over time as the worker ages). If you do that throughout a career - keeping the same fund between employers - you have an independent source of income for retirement. By giving significant tax benefits to not withdrawing this money early, most people who worked most of their careers will be set for retirement.
Mc91 5y ago
Yes. The current p/e ratio of the S&P 500 is 29.59. Prior to November 1998 it never hit that high in the prior century. So what has the S&P 500 history been since then? It kept climbing from November 1998 until the dot-com crash started in spring 2000. By Jan 2003 it hit 29.59 on the way down and went down to 17.46 in April 2007. Then the subprime boom started really going and it climbed to 27.58 by July 2008, hitting 122.39 in May 2009. By October 2009 it was back down to 20.33 and by September 2011 it was down to 13.01. Then it started its climb again. It was at 22.04 October 2019, before they were talking about Covid even in Wuhan. It hit 39.26 in December 2020 and is now back down to 29.59. As the poster says, in 1999 and 2000 and in 2007 and 2008 we were hearing about how we were in a new paradigm unmoored from the old reality and so forth. At the end of the day, the economy always came crashing back to earth. In October 1999, the book Dow 36,000 was published echoing a lot of this sentiment. The Dow was 10336 the day before the book came out, then it went down to 7591 by September 2002. In February 2009 it was at 7062. We just finally hit 36,000 DJIA this month (before going down again).
spaetzleesser 5y ago
The 2000 and 2008 blowups were pretty bad but back then there were still things that could be done like running deficits or lowering interest rates. We now have huge deficits and almost zero interest already during the boom. What can the Fed or government do during the next downturn? I don’t see them having any tools left to reinflate the bubble.
- Kye 5y ago
  UBI Really. Just give people money. It generates more benefit than it costs. Look how well billionaires did when unemployment benefits were buffed up. Now imagine if they were taxed reasonably to capture some of that toward covering the cost. People still looked for work, but they could afford to hold out for better jobs.
  - jbay808 5y ago
    I agree, and when governments are worried about deflation, UBI / helicopter money, which goes to people who need it and will rapidly spend it, seems much better than lowering interest rates, which mainly inflates asset prices and benefits the top 1%. I'm not sure why it's not more commonly employed. Of course, we're in an inflation scenario right now, but part of the reason for that appears to be that central banks are so terrified of deflation that they're way more comfortable erring in the other direction.
    - corpMaverick 5y ago
      My only worry is that a lot of that money goes to housing. Rents go up immediately and also house prices. So we need policies to increase housing supply/density in most cities to counter this effect.
      - jbay808 5y ago
        I think the trick would be to increase interest rates (deflationary, mostly for assets) and implement UBI simultaneously (inflationary, mostly for consumables). The increasing cost of debt will sink asset prices, houses most of all, while the UBI cancels out the systemic deflationary forces that result from that. I think the net effect of this would drive investment into more productive and less rent-seeking areas, incentivize a lot more innovation, and also significantly reduce the wealth gap. But that's just me.
ItsMonkk 5y ago
> They simply can't do it and rather extrapolate current conditions to infinity. This is what I think more people should be paying attention to. I keep seeing the FIRE(financially independent; retire early) people talk about the returns they have gotten the past 100 years, not taking into account that the first 50 of those years saw tremendous growth, and the last of those 50 years saw tremendous stagnation and debt that doesn't seem sustainable. The world's first billionaire was Rockefeller in the early 1900's. By 1970 the world's richest man was Hughes, who had amassed a fortune of $2.5 billion. In 70 years the number doubled. Since then in the next 50 years the world's richest man is now Musk, with a wealth 100x that of Hughes at $290 billion. In 1970 the minimum wage was $1.70 compared to today's $7.25, an increase of 4.2x. 100x vs 4.2x. When you extrapolate that growth out another 50 years, the world's richest man ends up at $25 trillion. Minimum wage would grow to $30/hour. Another 50 years further, $2.5 Quadrillion, minimum wage is now $125/hour. It's ludicrous. Have we been boiling frogs the past 50 years? If the wealthy at those price levels tried to sell even 1% of their wealth/year the system would crash. So it's clear from my standpoint that those growth levels will simply not happen. How does it break? Does it break with minimum wage growth? Does it break with everything going to 0? Something else happens? What happens when interest rates are unable to fall further? Are we already at the end of the ball? How much higher can it go?
- ricardobeat 5y ago
  The value of USD is not constant. Either you adjust the 1970 values to today’s dollar, giving you $17B for Hughes’ fortune, or you index the $100B by the minimum salary giving you 23B vs 2.5B, a less than 10x increase. Not unreasonable considering the global scale business can have today.
  - strogonoff 5y ago
    Notably, when adjusted for inflation, the minimum wage in the US has actually dropped since 1970, at which point it was almost 9 in today’s USD.
- kortilla 5y ago
  I don’t understand the obsession with comparing the wealth of the furthest most point of the distribution tail to minimum wage, it makes absolutely no sense. Who cares how much Musk or Bezos have? Have the government seize literally everything from them and everyone in the US could have $1k once. Despite being at the top, their wealth is irrelevant on a societal scale.
jbay808 5y ago
Absolutely. Here's a recent quote from John Hussman that really changed my perspective: > "There's this notion that low interest rates justify high valuations. You have to understand what people are saying there. So let's say that I've got a security that is going to pay $100 a decade from now. And I want to get, let's say, a 6% annual return. I can say well, for that return, I would pay $55.80 for that. > Now if I'm willing to get a return of only 2% annually, I'll be willing to pay more than $55.80; I'll be willing to pay $82. If I'm willing to get a zero return, I'll be willing to pay $100 for that security today. If I'm willing to accept a negative return, I'll pay a price over $100. That's the way valuations work. The higher the rate of return you're going to bargain for, the lower the price you have to pay. > So when people say low interest rates justify higher prices, what they're really saying is that low interest rates justify low returns on stocks. > So to say that interest rates are at record lows, therefore these record high valuations are OK, is identical to saying that interest rates are at record lows therefore the expected returns on stocks should also be at record lows. > But that's not what people actually are thinking. They're thinking, no, justify means I'm going to be OK, that I'm going to earn normal returns. Oh no you're not."

nly 5y ago

The problem is we're all now dependent on stock market performance to make retirement feasible. Employer guaranteed defined-benefit pension schemes are dead. My uncles pension scheme was structured to pay out 1.5% of his final salary, inflation adjusted for the rest of his life, for each year he'd worked. He worked at one company his whole career, from age 18 to age 55, when he retired. Factoring in his mortgage, which he paid off prior to retirement, his disposable income never even dropped when he retired. Exact figures don't matter too much, but to achieve that with a defined-contribution pension you need to invest something in the range of 15%+ of your gross salary for 30 years and achieve a 7% above-inflation annualized investment return. And it won't be final salary but career average. Most people aren't doing this so are fucked

kristjansson 5y ago
One wonders about the actuarial assumptions made by your uncle’s former employer and how, or if, they expected to meet that obligation.
- djbebs 5y ago
  If history is any indication the answer to both of those were "they were wrong" and "caused severe financial issues to the company, if it didn't bankrupt them entirely"
  - kristjansson 5y ago
    Exactly, the point of the comment being that generous defined benefit pension schemes probably aren’t some paneceal solution that capital is now withholding, but that they were at best a burden and at worst a lie.
    - actually_a_dog 5y ago
      How are individuals supposed to have it any easier, though? Should people just be forced to work until they drop? Or does everybody now need to be some kind of financial genius in order to make retirement work?
      - rhizome 5y ago
        Tax the zillionaires, pay the individuals more, and the executives less. "Robber baron" used to be an insult and a sign of disapproval. It was a popular term.
      - underdeserver 5y ago
        In much of the western world, people set aside ~10% of their paycheck to a pension fund, which then invests it in relatively solid options (stocks, real estate, bonds, with a risk profile that adjusts over time as the worker ages). If you do that throughout a career - keeping the same fund between employers - you have an independent source of income for retirement. By giving significant tax benefits to not withdrawing this money early, most people who worked most of their careers will be set for retirement.

Mc91 5y ago

Yes. The current p/e ratio of the S&P 500 is 29.59. Prior to November 1998 it never hit that high in the prior century. So what has the S&P 500 history been since then? It kept climbing from November 1998 until the dot-com crash started in spring 2000. By Jan 2003 it hit 29.59 on the way down and went down to 17.46 in April 2007. Then the subprime boom started really going and it climbed to 27.58 by July 2008, hitting 122.39 in May 2009. By October 2009 it was back down to 20.33 and by September 2011 it was down to 13.01. Then it started its climb again. It was at 22.04 October 2019, before they were talking about Covid even in Wuhan. It hit 39.26 in December 2020 and is now back down to 29.59. As the poster says, in 1999 and 2000 and in 2007 and 2008 we were hearing about how we were in a new paradigm unmoored from the old reality and so forth. At the end of the day, the economy always came crashing back to earth. In October 1999, the book Dow 36,000 was published echoing a lot of this sentiment. The Dow was 10336 the day before the book came out, then it went down to 7591 by September 2002. In February 2009 it was at 7062. We just finally hit 36,000 DJIA this month (before going down again).

spaetzleesser 5y ago

The 2000 and 2008 blowups were pretty bad but back then there were still things that could be done like running deficits or lowering interest rates. We now have huge deficits and almost zero interest already during the boom. What can the Fed or government do during the next downturn? I don’t see them having any tools left to reinflate the bubble.

Kye 5y ago
UBI Really. Just give people money. It generates more benefit than it costs. Look how well billionaires did when unemployment benefits were buffed up. Now imagine if they were taxed reasonably to capture some of that toward covering the cost. People still looked for work, but they could afford to hold out for better jobs.
- jbay808 5y ago
  I agree, and when governments are worried about deflation, UBI / helicopter money, which goes to people who need it and will rapidly spend it, seems much better than lowering interest rates, which mainly inflates asset prices and benefits the top 1%. I'm not sure why it's not more commonly employed. Of course, we're in an inflation scenario right now, but part of the reason for that appears to be that central banks are so terrified of deflation that they're way more comfortable erring in the other direction.
  - corpMaverick 5y ago
    My only worry is that a lot of that money goes to housing. Rents go up immediately and also house prices. So we need policies to increase housing supply/density in most cities to counter this effect.
    - jbay808 5y ago
      I think the trick would be to increase interest rates (deflationary, mostly for assets) and implement UBI simultaneously (inflationary, mostly for consumables). The increasing cost of debt will sink asset prices, houses most of all, while the UBI cancels out the systemic deflationary forces that result from that. I think the net effect of this would drive investment into more productive and less rent-seeking areas, incentivize a lot more innovation, and also significantly reduce the wealth gap. But that's just me.

ItsMonkk 5y ago

> They simply can't do it and rather extrapolate current conditions to infinity. This is what I think more people should be paying attention to. I keep seeing the FIRE(financially independent; retire early) people talk about the returns they have gotten the past 100 years, not taking into account that the first 50 of those years saw tremendous growth, and the last of those 50 years saw tremendous stagnation and debt that doesn't seem sustainable. The world's first billionaire was Rockefeller in the early 1900's. By 1970 the world's richest man was Hughes, who had amassed a fortune of $2.5 billion. In 70 years the number doubled. Since then in the next 50 years the world's richest man is now Musk, with a wealth 100x that of Hughes at $290 billion. In 1970 the minimum wage was $1.70 compared to today's $7.25, an increase of 4.2x. 100x vs 4.2x. When you extrapolate that growth out another 50 years, the world's richest man ends up at $25 trillion. Minimum wage would grow to $30/hour. Another 50 years further, $2.5 Quadrillion, minimum wage is now $125/hour. It's ludicrous. Have we been boiling frogs the past 50 years? If the wealthy at those price levels tried to sell even 1% of their wealth/year the system would crash. So it's clear from my standpoint that those growth levels will simply not happen. How does it break? Does it break with minimum wage growth? Does it break with everything going to 0? Something else happens? What happens when interest rates are unable to fall further? Are we already at the end of the ball? How much higher can it go?

ricardobeat 5y ago
The value of USD is not constant. Either you adjust the 1970 values to today’s dollar, giving you $17B for Hughes’ fortune, or you index the $100B by the minimum salary giving you 23B vs 2.5B, a less than 10x increase. Not unreasonable considering the global scale business can have today.
- strogonoff 5y ago
  Notably, when adjusted for inflation, the minimum wage in the US has actually dropped since 1970, at which point it was almost 9 in today’s USD.
kortilla 5y ago
I don’t understand the obsession with comparing the wealth of the furthest most point of the distribution tail to minimum wage, it makes absolutely no sense. Who cares how much Musk or Bezos have? Have the government seize literally everything from them and everyone in the US could have $1k once. Despite being at the top, their wealth is irrelevant on a societal scale.

jbay808 5y ago

Absolutely. Here's a recent quote from John Hussman that really changed my perspective: > "There's this notion that low interest rates justify high valuations. You have to understand what people are saying there. So let's say that I've got a security that is going to pay $100 a decade from now. And I want to get, let's say, a 6% annual return. I can say well, for that return, I would pay $55.80 for that. > Now if I'm willing to get a return of only 2% annually, I'll be willing to pay more than $55.80; I'll be willing to pay $82. If I'm willing to get a zero return, I'll be willing to pay $100 for that security today. If I'm willing to accept a negative return, I'll pay a price over $100. That's the way valuations work. The higher the rate of return you're going to bargain for, the lower the price you have to pay. > So when people say low interest rates justify higher prices, what they're really saying is that low interest rates justify low returns on stocks. > So to say that interest rates are at record lows, therefore these record high valuations are OK, is identical to saying that interest rates are at record lows therefore the expected returns on stocks should also be at record lows. > But that's not what people actually are thinking. They're thinking, no, justify means I'm going to be OK, that I'm going to earn normal returns. Oh no you're not."