Hatching Godzilla
Do you think you know the Price/Earnings ratio of the stock market? Bet you don't.
Last time I went back to school, that time for certification as a financial planner, I looked critically at the P/E of the market (its price divided by its earnings).
EXAMPLE: If S&P 500 is priced (or is trading at) 1279, and its earnings are $76.25, the quotient, or P/E is 16.8. One way to interpret that number is, it will take you 16.8 years to recoup your investment at that price, with similar economic circumstances to last year.
A year into course study at UCLA, I realized that I was dividing the current price of the market by last year's earnings. That doesn't make any sense. Then, I noticed that The Wall St. Journal and Barron's did the same thing.
So, I started dividing last year's price by last year's earnings, and the current year price by next year's Standard & Poor's projected earnings. My numbers began to disagree with all but a few rarely-interviewed economists and professors. That was the germination of the spreadsheet godzilla I now use for macroeconomic analysis.
The next thing I noticed was the stock market reacting to every little piece of data..."Oh my GOD! MANUFACTURING IS SLUMPING!! SELL!!!" But, manufacturing was on an uptrend, and this number is; a) likely to be modified, and b) possibly an anomaly. The resulting reactionary little market blip was nothing but an opportunity to buy something, if its price fell enough.
So, I started monitoring Industrial Output, Capacity Utilization, Gross Domestic Product (back when it was called Gross National Product), Employment, Inflation, Output, Consumption and Leading Indicators, to see where we were in the economic cycle without having to listen to screaming young Italian-American floor traders (who, by the way, LOVE pasta. But I digress).
Then, monetary indicators. Then, sentiment. Then,...I had this massive spreadsheet that I used to draw my own macro conclusions.
It is more than a decade old now. If it were a kid, it would be in Little League.
I am reduced to reading only two economists. All the others work with data that differs from mine. Do they do it because everyone else does?
In their allotted 15 interview seconds, do they not have time to discuss that their premises are different from their peers? Is it easier just to do it the way it's always been done?
Critical thinking is becoming a casualty of the sound bite.
And I don't trust anyone but myself (and the Flying Spaghetti Monster).
Ramen.
Last time I went back to school, that time for certification as a financial planner, I looked critically at the P/E of the market (its price divided by its earnings).
EXAMPLE: If S&P 500 is priced (or is trading at) 1279, and its earnings are $76.25, the quotient, or P/E is 16.8. One way to interpret that number is, it will take you 16.8 years to recoup your investment at that price, with similar economic circumstances to last year.
A year into course study at UCLA, I realized that I was dividing the current price of the market by last year's earnings. That doesn't make any sense. Then, I noticed that The Wall St. Journal and Barron's did the same thing.
So, I started dividing last year's price by last year's earnings, and the current year price by next year's Standard & Poor's projected earnings. My numbers began to disagree with all but a few rarely-interviewed economists and professors. That was the germination of the spreadsheet godzilla I now use for macroeconomic analysis.
The next thing I noticed was the stock market reacting to every little piece of data..."Oh my GOD! MANUFACTURING IS SLUMPING!! SELL!!!" But, manufacturing was on an uptrend, and this number is; a) likely to be modified, and b) possibly an anomaly. The resulting reactionary little market blip was nothing but an opportunity to buy something, if its price fell enough.
So, I started monitoring Industrial Output, Capacity Utilization, Gross Domestic Product (back when it was called Gross National Product), Employment, Inflation, Output, Consumption and Leading Indicators, to see where we were in the economic cycle without having to listen to screaming young Italian-American floor traders (who, by the way, LOVE pasta. But I digress).
Then, monetary indicators. Then, sentiment. Then,...I had this massive spreadsheet that I used to draw my own macro conclusions.
It is more than a decade old now. If it were a kid, it would be in Little League.
I am reduced to reading only two economists. All the others work with data that differs from mine. Do they do it because everyone else does?
In their allotted 15 interview seconds, do they not have time to discuss that their premises are different from their peers? Is it easier just to do it the way it's always been done?
Critical thinking is becoming a casualty of the sound bite.
And I don't trust anyone but myself (and the Flying Spaghetti Monster).
Ramen.
posted by Kitty O'Keefe at 6:30 AM
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