Author Archives: Chris Hunter

     

 

 

Popular Myths and a Shrinking Work Force

It’s not just voters who buy into popular myths. Many investors do too. Few have wider appeal than the myth that central banks can create economic growth via the printing press.

What central bankers and their supporters seem to forget is that growth comes from living, breathing human beings.

It often sounds a lot more complicated than it really is. But genuine economic growth comes from two things: the number of workers in the labor force and the productivity of those workers.

 

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That’s a problem for the US. Because according to a recent report in The Economist, its potential labor force is set to grow at less than one-third the 0.9% rate we saw between 2003 and 2013.

Making things worse, many of America’s boomers – the first of whom qualified for Social Security in 2008 – are opting out of the labor force. Instead of looking for jobs, they are choosing to live on benefits.

This helps explain why the percentage of working-age adults looking for jobs in the US has fallen to below 63% from about 66% when the global financial crisis struck.

And it’s not just Americans who are getting older on average.

 

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Is the Shiller P/E Broken?

By Chris Hunter, editorial director Bonner & Partners 

One of the water-cooler conversations at Bonner & Partners is whether the Shiller P/E – the valuation ratio popularized by Yale economist Robert Shiller – is worth a damn. If you’re not already familiar with the Shiller P/E, here’s a quick introduction…

The standard price-to-earnings ratio looks at a company’s share price compared to its per-share earnings. And it either looks at per-share earnings from the last four quarters (known as the trailing P/E)… or from the expected per-share earnings for the next four quarters (known as the forward or projected P/E).

The Shiller P/E works a little differently. Instead of dividing stock prices by per-share earnings over the preceding 12 months… or using per-share earnings estimates for the next 12 months… it divides stock prices by the inflation-adjusted earnings over the preceding 10 years.

According to Shiller, his measure (also known as the CAPE, which stands for “Cyclically Adjusted Price-Earnings”):

 

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A Strange Lack of Corrections

Corrections are normal features of stock markets. The current rally on Wall Street is an outlier. It’s seen an usually low number of corrections… and what corrections there have been were unusually mild.

From Andrew Lapthorne, a quant working at investment bank SocGen:

 

“The number of 1% down days for the S&P 500 in any given year has averaged 27 since 1969; the S&P 500 has seen just sixteen 1% down days over the last 12 months. It has now been 468 days since a market correction of 10% or more, the fourth longest period on record, and, as we show below, the annualized peak to trough loss has only been 5% compared to typical annual drawdown of 15%.”

 

The following chart from SocGen says it all. It shows the maximum peak-to-trough losses for the S&P 500 incurred over a one-year period going back to 1970. As you can see from the far right of the chart, volatility is far below normal.

 

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