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"Because the future earnings of GE, and for that matter most U.S. corporations, are essentially the same today as they were two years ago.." Are they?

by tyn 18y ago

cameldrv 18y ago
Certainly not. The current earnings of the S&P 500 are down about 70% from 18 months ago. Obviously the market expects earnings to bounce back, since on a current basis, with the P/E of the S&P 500 about 28, stocks are a bad investment if you think things will continue. A dollar of earnings today is worth more than any future earnings, and near-term (five years or so), I think we can expect earnings to be less than they were eighteen months ago, so I don't think that the children have necessarily made out -- it's some combination of wealth destruction and wealth that was never really there.
- rationalbeaver 18y ago
  I suppose that 'future earnings' holds a pretty nebulous value. Still, to the writer's point, how long do you think today's children will be working/investing? My bet is that it's more than 5 years. IMO, now would be a good time to start a child's college fund.
  - cameldrv 18y ago
    The question is really that if you buy stocks now, what is the discount rate necessary to make the current valuations reasonable, and how does that compare to what the boomer generation enjoyed? The theory of the article is that the children who are buying stocks right now are going to enjoy a superior rate of return at the expense of the retirees. I don't think that's true. Corporate profits expanded to an unusually high percentage of economic output in the past decade and a half, and I would expect that to go down. Even if you anticipate that the corporate profit fraction remains constant, and that earnings will be twice their current level in a couple of years, the stock market still would have a 14 P/E ratio, which is historically a bit high. Even at the current depressed valuations, I think that you have to be a pretty big optimist to expect big gains in the market over the next decade or so.
- defen 18y ago
  Exactly. Significant amounts of wealth were never there (e.g Madoff, Stanford), and significant amounts of wealth were destroyed due to the fact that people/businesses made plans & investments that were based on a perception of reality that is now known to have been wildly off the mark. Think of all the half-done construction projects that are now sitting idle because they were intended to satisfy demand that no longer exists.

"Because the future earnings of GE, and for that matter most U.S. corporations, are essentially the same today as they were two years ago.." Are they?

by tyn 18y ago

"Because the future earnings of GE, and for that matter most U.S. corporations, are essentially the same today as they were two years ago.." Are they?

cameldrv 18y ago

Certainly not. The current earnings of the S&P 500 are down about 70% from 18 months ago. Obviously the market expects earnings to bounce back, since on a current basis, with the P/E of the S&P 500 about 28, stocks are a bad investment if you think things will continue. A dollar of earnings today is worth more than any future earnings, and near-term (five years or so), I think we can expect earnings to be less than they were eighteen months ago, so I don't think that the children have necessarily made out -- it's some combination of wealth destruction and wealth that was never really there.

rationalbeaver 18y ago
I suppose that 'future earnings' holds a pretty nebulous value. Still, to the writer's point, how long do you think today's children will be working/investing? My bet is that it's more than 5 years. IMO, now would be a good time to start a child's college fund.
- cameldrv 18y ago
  The question is really that if you buy stocks now, what is the discount rate necessary to make the current valuations reasonable, and how does that compare to what the boomer generation enjoyed? The theory of the article is that the children who are buying stocks right now are going to enjoy a superior rate of return at the expense of the retirees. I don't think that's true. Corporate profits expanded to an unusually high percentage of economic output in the past decade and a half, and I would expect that to go down. Even if you anticipate that the corporate profit fraction remains constant, and that earnings will be twice their current level in a couple of years, the stock market still would have a 14 P/E ratio, which is historically a bit high. Even at the current depressed valuations, I think that you have to be a pretty big optimist to expect big gains in the market over the next decade or so.
defen 18y ago
Exactly. Significant amounts of wealth were never there (e.g Madoff, Stanford), and significant amounts of wealth were destroyed due to the fact that people/businesses made plans & investments that were based on a perception of reality that is now known to have been wildly off the mark. Think of all the half-done construction projects that are now sitting idle because they were intended to satisfy demand that no longer exists.