Zeev's Turnips Patch-No Politics (ZEEV)

[Rainier]

Adam Hamilton addressed the low interest rate environment with respect to PEs in one of his weekly theses last month. In short, he says bulls are making a mistake by only looking at the 20 year bull for data points.

Excerpt:

"The bulls argue, "Sure, valuations are high, but this is 'normal' now since interest rates are so low."

This particular bullish argument designed to ignore Long Valuation Waves is based on the so-called Fed Model of Valuation, which claims that "fair-value" valuations in equities are based exclusively off of the interest rates on long-term Treasury bonds. If you think that God created the world in 1980, this silly idea might make sense to you since during the early 1980s low valuations corresponded with high interest rates. But the moment you dig back deeper in history than only two decades or so the Fed Model rapidly implodes.

In the early 1950s, for example, the US stock markets traded at low valuations under 10x earnings and yielded dividends over 7%. Just as in the early 1980s these low valuations, a classic Long Valuation Wave trough, heralded a coming multi-decade major bull market. But, believe it or not, general interest-rate levels at the same time in the early 1950s were actually slightly lower than even today's incredibly low rates!

That's right, horror of horrors, very low equity valuations existed in a very low interest-rate environment! Since today we find ourselves suffering through the worst bear market since the 1930s, perhaps the bulls should consider valuations precedent farther back than merely 20 years ago."

http://www.gold-eagle.com/gold_digest_03/hamilton042803.html

Maybe digging up the P/Es, dividend yields and treasury rates at the five major market bottoms over the past 100 years would be worth the effort. If I have any luck, I'll post the results here.