A Lost Decade Looms: ‘Cheap By Proxy Isn’t Actually Cheap’

A Lost Decade Looms: ‘Cheap By Proxy Isn’t Actually Cheap’

"Lost decade" warnings are becoming ubiquitous. In some respects, the rationale behind calls for a prolonged period of low returns across multiple assets is so simple as to be barely worth mentioning. Everything is expensive. All else equal, when everything is expensive, common sense dictates the odds are skewed against additional large gains. While it's most assuredly true that stocks are relatively attractive, it sometimes seems lost on market participants that two things can both be expensi
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5 thoughts on “A Lost Decade Looms: ‘Cheap By Proxy Isn’t Actually Cheap’

  1. This re-surfaces a question that’s haunted me for the past 18 months: how does one generate returns during a lost decade? Where to invest capital when yields are at the floor and equities are sky-high?

    1. You should invest capital in the things that society needs to move forward. The world needs to move away from fossil fuels. It needs investment in clean transportation and a reworking of cities to enable operation with drastically reduced resource use. The third world needs investment in all sorts of areas to make those societies more self-sufficient and less fragile (investment without corruption). The entire world needs investment in cybersecurity. On and on. but if you’re cynical, and think that the world will not make organized investment in these areas, then you should invest in farm land and other real estate in areas that will be spared the worst effects of climate change. And maybe invest in defense industries and weapons manufacturers.

  2. OTOH, how has market EPS evolved over the last 30/40 years? IIRC, the PE or PS ratios for the market are rather elevated but not necessarily out of all logic… especially when you consider Revenue/Earning growth…

    I’m not making the argument the market’s cheap. And, all things considered, rising rates/bonds creating vol. is bound to affect equity prices. Still… if sales and/or earnings are higher than and growing faster than historical precedent, it should be taken into account…

    1. Perhaps, but in the long run no firm can grow faster than its peers or faster than the economy as a whole for too long. It’s just math. Eventually, every firm settles into the real growth of the economy and half of all industries and the firms in them will perform more poorly than the economy … again it’s just the math.

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