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Guy, here is some food for thought.....
Harlan Cadinha wrote in his recent newsletter..........
"The recent performance of stock and bond markets has made interesting
headlines. For every positive article, one can find a contrary one as to why
the market is too high. Current worries are typically focused on historical
benchmarks of value.
A constant fear of FRB tightening seems to raise its ugly head often causing
extreme volatility.
To make a determination of fair value for markets, one must ignore many props
and rules of the past in order to have a clear view of our current economic
landscape. As it took centuries to realize the earth was round, it is taking
decades to realize that economic growth without inflation is indeed possible.
Current value determinants must be adjusted to this emerging reality.
What is the value of a 5% return without inflation? To achieve that same
after inflation rate of return in 1981, one had to realize a nominal return of
about 19%. Today, an investor can arrive at the same result with a mere 5%
plus return. Is it any wonder that many are rushing to stocks and bonds that
produce returns higher than 5%? Under a "no inflation" scenario, what is the
appropriate price to pay for a company that is growing predictably at 15% per
year? Obviously, that kind of growth will fetch a lofty premium in our "no
inflation" world. So much for the benchmarks that helped determine value in
the inflationary enviornment of the 50's through the 80's.
The technological revolution has unleashed a productivity enhancing prosperity
that can only compare with the industrial revolution. So long as productivity
increases at a faster rate than wages, there will be no wage inflation.
Corporate earnings growth may slow because there is no pricing power in our
system. Companies that have had to rely on price increases have
underperformed those who are increasing earnings through productivity
enhancement. Lastly, our dollar has reasserted itself on the currency scene
after more than a decade of devaluation. A strong dollar is a buffer against
inflation.
Now, all you have to do is ask, how high is high? While the answer is not
readily apparent, what is apparent is that past benchmarks are of little
determining value today. However, there is political risk both in the U. S.
and globally that must be monitored."
This is pretty much in keeping with questions you asked. Hope you do find
some value in it.
Jerry
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