Submitted by Eric Peters, CIO of One River Asset Management; as excerpted from his latest weekend notes.
Squiggles
Chase and I squinted. A narrow line traced the progression of S&P 500 real earnings per share from 1950 through today. Such a calculation strips out the distortions of inflation and stock buybacks. For four decades, from the 1950s through the 1992 recession the line squiggled up and down, sideways in a range, so that 1992 real earnings/share were no different from 1955. But ever since, the squiggles turned upward. And in the 2.5 decades to today, real S&P 500 earnings/share have quadrupled. It’s been a far better time to own companies than work for them.
“Let’s map this real earnings chart onto P/E ratios,” said Chase.
The Shiller P/E ratio (based on average inflation-adjusted earnings from the previous 10yrs) squiggled its way from 16.0 in 1955 to 24.0 in 1966, down to 7.4 in 1982 and up to 19.8 in 1992. From there, the Shiller P/E went straight to 43.8 in 2000, squiggling down to 15.2 in 2009, and now sits at 31.8; higher than at any time in history but for the Dotcom bubble. It’s been a good time to own stocks. But of course, few people really do. And those poor folks left behind have taken notice.
“Let’s look at the most boring chart in the world,” I said.
Naturally, Chase pulled up the US consumer price index. From 1955, it rises from lower left to upper right, inexorably, from 27 to 250, a 926% rise, lifted by mankind’s antigravity machine, the printing press. There’s only one little squiggle in 2009, when the index fell 0.35%.
It’s the exception that rather dramatically proves the rule.
In response, global central banks printed $15trln to buy many things, but mostly bonds. And this in turn lifted everything, spectacularly, except for real wages.
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