On Fri, 5 Jan 2001, Doug Henwood wrote:
> C. G. Estabrook wrote:
>
> >Dean Baker of the Center for Economic and Policy Research was the first
> >economist to work through the arithmetic of this "bubble" market
>
> Ahem. December 1998:
>
> <http://www.panix.com/~dhenwood/AntisocInsec.html>
>
> >Stock answers
> >
> >But let's take the 1.4% growth projection and apply it to the stock
> >market, that cornucopia of wealth that's supposed to replace the
> >public pension system. Privatizers typically assume an average real
> >stock market return of 7% a year, from the combined increase in
> >prices and the cash dividends. How the stock market is supposed to
> >grow five times as fast as the economy is a mystery that's rarely
> >noted, much less investigated. To achieve those stock returns, the
> >ratio of stock prices to underlying corporate profits --
> >price/earnings (P/E) ratios, a fundamental measure of whether stocks
> >are "expensive" or "cheap" which goes out of fashion at enthusiastic
> >times like these -- would have to rise to astronomic levels.
> >
> >The stock of all U.S. corporations is worth roughly 26 times their
> >collective profits -- the highest since 1945, and twice the
> >historical average, meaning that stocks are very expensive by stodgy
> >old measures. But today's P/Es would be nothing compared to
> >tomorrow's, if stocks truly were to return that 7% for the next 77
> >years (4% in price appreciation and 3% in cash dividends) while the
> >economy was growing at 1.4%. If profits grew in line with GDP while
> >the stock market were growing at five times that pace, P/E ratios
> >would rise to 33 by 2010, 71 by 2040, and 178 by 2075. But wait!
> >Dividends can't grow any faster than the economy, can they?
> >Constraining those to the 1.4% assumption too means that stock
> >prices will have to rise even faster to compensate for the lower
> >growth in dividends over time. That would give us a P/E of 138 by
> >2040 and 764 by 2075. When you work for the Cato Institute, you're
> >never called upon to defend your preposterous reasoning.
>
> But then again, I'm not an economist.
>
> Doug
>