Subject: Re: OT Cash balances keep soaring
I do, too. 10-12 years as well. Many indicators are saying that: forward returns vs P/E, P/S, CAPE, market cap/GDP, non-farm market cap/gross value added (Hussman), non-farm equity/debt (https://fred.stlouisfed.org/gr...), GMO's proprietary model, etc. All of these are forecasting zero to negative stock market returns.
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True, but having tracked many of those metrics myself for quite some time, I can attest that these indicators have been predicting this for many years while the market continues to rise. How much longer could that continue? Another 5 years? Another 10? More?

I think there is perhaps a useful distinction to make.

Prices are extremely high on any metric these days. But future market valuation levels are extremely hard to predict--as noted, they could be outrageously expensive for an indeterminate amount of time.

So, on the one hand, you should EXPECT low returns, since that's the sensible assumption. Plan your pension funding accordingly. You have a low cyclically adjusted earnings yield.
On the other hand, don't do anything that ASSUMES that valuations will be around (or below) their historically typical levels any time soon.

Be prepared for low returns, but don't wager hard money on it happening at any given time.


This advice sounds sensible, but it doesn't tell you whether to buy or sell the index. Does moving to cash constitute gambling on lower prices some time soon? Only sort of, but you can't hold your breath forever if you need a positive real return. My personal solution is to avoid the index: hold only those things that I consider individually not too painfully expensive given their prospects.

Jim