Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
  1.  we had some pretty heavy inflation in the 80's so some cap gains are not "real".  A dollar isn't really a dollar anymore, it's half a dollar at best.

  2.  With Republicans pushing ever harder to minimize taxes on cap gains vs dividends and regular income, companies have pushed hard to drive up share prices via buybacks rather than pay out.  Not to mention puffing for their bonus pools.

  3.  Coming out of the 60-70's when the stock market was horrible on return, investors were not as willing to pay for stocks so price/earnings ratios were lower.  If a money market is paying 10%, why settle for 15/1 on a stock with risk (6% basically)?   Even now p/e of the s&p 500 is not all that extreme -- 17 ish and coming down over the last few years to near the historical average.

http://www.lowrisk.com/sp500pe.htm  and


I agree that much of the pressure is money flowing into the market that used to go elsewhere, but a big reason for that is that safer investments don't return squat compared to inflation.  The Japanese and Greenspan have made borrowing way too cheap.

by HiD on Tue Mar 27th, 2007 at 04:43:55 AM EST
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I would only quibble with this point:
The Japanese and Greenspan have made borrowing way too cheap.
I think Greenspan has had very little to do with this.  There are major deflationary trends in the world today, with so much low priced labor in, for example India and China, finally getting a chance to work productively.  This is putting major pressures on prices and costs in the world economy, thus keeping inflation down worldwide.  and at the same time with all of this newly available productivity, the opportunity to invest and harness those resources is incredible.  Couple that with the ability for so many people to access information, knowledge and learning on the internet real time,,,,and you have a growth explosion.  All of the things needed to produce economic access,,,,,hampered only by some of the political risk from the Middle East accented by that area controlling so much of the oil.  so cost of capital has to be low, just given the worldwide situation and economics.

Japan, imo, is a one-off due to their unusual situation in demographics.  thus a stagflation for years,,,,,and a prelude for the world looking out 5--20 years.  ie, wonderful situations don't last forever.

by wchurchill on Tue Mar 27th, 2007 at 02:09:11 PM EST
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 but for 15 years!!!!!!!!!  Japan with nil interest rates is the fountain from which the carry trade flows.

As for Greenspan and Co, I just dont agree.  Our rates have been  dropping since about 1997.  I used to get 7% in a money market then and it got as low as 1%.  That forced a lot of folks into other riskier investments if they had to have the yield.  We just spent it on a house so that took care of our cash "problem".

We didn't need to go so low on rates but the liquidity was made available first for y2k and then after 9/11 to make sure the economy didn't puke.  Still, it has had some side effects of puffing real estate and other markets IMO.

The huge deflation in labor made it possible to keep these rates low without inflation.  But it was a bad bargain for many in the labor pool while making people like me richer.

by HiD on Tue Mar 27th, 2007 at 05:22:56 PM EST
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The huge deflation in labor made it possible to keep these rates low without inflation
from my perspective you have the cause and effect backwards.  Greenspan didn't keep rates low, they had to be low due to economic factors in the global economy.
  1.  markets opeing globally unleashed a huge labor pool of underutilized labor.
  2. A.  this put big downward pressure on labor costs.  and,
    B.  it opened up great opportunities for growth, as this labor was put to use making less expensive products.  Capital was needed to meld with the labor to create jobs.
  1.  I'd have to check economic history, but I think as long as monetary policy was well thought out, real interest rates have been between 2--3%.  So add that on top of 0--2% inflation, you get 2--5% interest rates.
  2.  so how could this not happen (sans horrible central banking policies).  underutilized labor, lower prices, negligible inflation, growing demand, supply side begging to work.  of course cost of captial is going to be naturally low, and working in concert with the other factors,,,,voila.

I'm not trying to argue Greenspan was perfect.  I'm just saying he is not a fundamental factor that has led to low inflation, strong economic growth, and low cost of capital.  He should get credit for being an adequate central banker, implementing policies consistent with economic principles of his time.  Obviously the Fed messed it up during the great depression (but I guess some of this knowledge was not available then.)

actually I think the boom would be far stonger in the euity markets without the terror issues in the MidEast.  There is a large risk premium on financial assets, imho, due to this factor.  these factors will make markets grow steadily since the risk premium is already there.  but if things ease in the mideast (and I doubt it), but if they do.  watch out, these equity markets will explode.

as to Japan, I think it's a prelude to the future.  the next 5 years demographically will be OK for them, so their markets will be OK.  but then it comes back, and begins to hit the western world as well.  I don't know if we have answers for this one yet.  (I know this is not accepted economic thinking, btw.)

by wchurchill on Tue Mar 27th, 2007 at 06:16:12 PM EST
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could be but I question whether if cheap capital weren't available could the investment in cheap labor markets have come so quickly?  

I don't think Greenspan did a poor job either btw.  I think he and the Japanese both did what they had to for the most part.  The drop to 1% seemed a bit overdone though.  But if I was that smart I'd be rich.

by HiD on Wed Mar 28th, 2007 at 04:09:26 AM EST
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well, these things are hard to call, even in retrospect.  economics is after all more social science than science.  business and investing as well.  but it makes it a lot of fun, imho.

btw, I find your comments and insight very valuable.  you're obviously a very bright guy, and I think come at things from a different experience base than mine.  one learns a lot from bright people with a different perspecitve,,,,that was a valuable lesson for me that I learned early in life.  Whew, at least I learned something early in life.

by wchurchill on Wed Mar 28th, 2007 at 04:44:19 AM EST
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