Data Stew Blabberings

Comment 1: How Lost Is Our Decade?
Spent a few minutes this morning looking over interest rate and economic data from Japan since 1984. There were several major Nikkei correction events: 1987, 1991, 1996-98, 2000-2002, and 2007-present. What's the one major outlier here? 1996-1998. The other correction events correlate with global slowdown/recession events, similar in duration to the U.S. economic cycles. (with the exception being 1987 which was arguably due to the first ever computer generated 'flash crash'). Keep in mind that 1996-1998 in Japan appears to have been characterized by economic stagnation- real GDP rising no more than 1.5% but at times posting slightly negative quaterly numbers. But- the key thing to distinguish here is what was happening in the region at that time: the Asian financial crisis, exclusive of Japan. Remember LTCM, the hedge fund that had placed 100x leveraged bets on Asian currencies. Once those speculative currency bets began to go sour, a great market disruption began in the region. As a result, Asian investors/traders sold off risk (regional currencies, and equities including the Nikkei) and purchased relative safety (the U.S Dollar, U.S. Treasuries and Japanese long bonds). The Japanese 10 year note went from 3.25% fresh off of Japanese Central bank QE or quasi-QE to 1.5% and below. The Yen greatly weakened -and- the stock market sold off by +30%. A few years later, the stock market nearly regrasped its former glory, only to head south as the tech bubble bursted in 2000. Overall, the story behind 1996-98 looks more like that of risk contagion run amok; not very similar to a traditional theory of a 1930's style depression prolongued or avoided. Does the U.S. face similar risks today? Is there a post-recession LTCM(s) waiting in the wings to blow up, that has been taking avantage of QE 1 and 2, and the ensuing USD carry trade? Notice the trend in currency movement in the U.S. that syncs closely with that of Japan in 1996-1998.

Comment 2: Is the Shiller/Graham 10 Year PE Still Relevant?
Point: Hussman forecasts that the SP500 will see a 3.5% annual gain over the next 10 years. He formulated this prediction based on moving averages, the shiller 10 year PE, interest rates, and sentiment ratios.

Counter-point: the Shiller PE was above 28 in the mid-90s yet the SP500 returned +10% annually over the next 10 years

Response: in the Mid 90's the ten-year T was near 7%, long run interest rates were expected to fall, and private debt was expanding. Today the ten year is close to 3.0% and private debt is contracting or stagnant. Rising interest rates will throw cold water on future PE ratio expansion. Also higher multiples can't be easily reached since widely available private credit won't be widely available [institutions and common folks won't be able to lever up on margin like they used to be able to do]. Perhaps the time tested average PE isn't irrelevant after all? Maybe the 24+ ratios of ages past (not mid-90s) are a harbinger of tougher times ahead?

1 year maximum: 1430
1 year minimum: 1225