Posted by
fschmidt on
URL: http://mikraite.155.s1.nabble.com/Investing-in-a-Globalist-World-tp2140p2143.html
fschmidt wrote
What of the argument that current the P/E ratio is too high? This misses a fundamental change in the world economy. We are headed into a dark age that will be poor and miserable. So investment returns in general will be poor for probably the next 1000 years. The lower P/E ratio simply reflects this fact. Stocks will not drop because nothing else will give better returns.
I want to clarify this in the context of this video by Ray Dalio:
https://www.youtube.com/watch?v=k0az-Za_eNYI agree with most of what Ray Dalio says here, but he is missing one important point when he says that the real economy has little impact on the financial economy. He is right in inverting P/E to E/P which is equivalent to a bond interest rate, namely the return on money. And he is right in saying that the increase in money drives up stock prices. The price of anything is determined by supply and demand. The demand side of stocks is determined by available investment capital which keeps increasing as money is printed. But what about the supply? This is ultimates determined by the real economy, and here is the connection he misses. As the real economy shrinks, the supply of stocks worth buying shrinks which also drives up stock prices.
All this is contrary to normal investment thinking. Normally when the economy slows down, stock prices fall. But this is basically a trade based on the assumption that the economy will recover. In a recession, the P/E ratio goes up because earnings drop, so investors sell and wait for the recession to end and then buy again. The assumption here is that the high recession P/E ratio will revert to the mean. But what if there is no recovery, no reversion to the mean, and earning are permanently impaired? Then selling make no sense because earnings won't recover. The P/E ratio will stay high because E/P will stay low.
My core point is that investment returns ultimately reflect human productivity. As humanity turns to shit, productivity will go negative, so real investment returns will go negative. And this means a secular bull market in stocks for a long time because real E/P will continue to drop meaning P/E will continue to rise.
One can understand this somewhat in the context of bonds. We had a long secular bull market in bonds over the last few decades as interest rates continually dropped. In other words, as real bond returns declined, bond prices rose. And now we have bonds with negative yields, something unimaginable in the past. The same will happen with stocks over the next few decades. In the case of bonds, the declining yields were driven by government policy. In the case of stocks, the declining yields will be driven by declining productivity as humanity turns to shit caused by loss of religion. But the end result is the same for the investor.
Of course P/E can rise without P rising, only by E falling. So why will P rise? Because the supply of stocks paying even the lower E will also fall, while the demand side of stocks will not fall. This is fundamentally because the most of the economic decline will hurt the poor, not the rich. The rich will continue to have money to invest, but increasingly little worth investing in. So it is also the increasing imbalance of investment money (of the rich) compared to the wealth of general economy that will drive up P.