and now, a brief rant about historic valuation

Sorry, have to get this off my chest.

One of the dumbest thing’s I’ve seen this entire summer (no small feat) is this thing where Deutsche Bank says that the combination of stocks, bonds and real estate haven’t been as overvalued as they are now in 200 years.

It’s all here if you need to see it:

DEUTSCHE BANK: We examined 200 years of data and concluded stocks, bonds, and housing are at ‘peak valuation’ (Business Insider)

I’m sure the DB researches are smart guys and that they mean well, but comparing stock and bond and real estate valuations to 200 years ago (or 100 years ago) is as meaningless an endeavor as you can think up. Because a hundred years ago, there were no investors. Just speculators and the company founders who owned the majority of the shares. There was no such thing as retirement, nor were there portfolios or IRAs or 401(k)s. Therefore, of course valuations for these assets had lower baselines in general. There wasn’t a need for hundreds of millions of people to hold onto trillions of dollars’ worth.

You know what your retirement plan was a hundred years ago? You fucking died.

And don’t even get me started on the valuations of two hundred years ago. I know of the guys who originally put this data together. They’re geniuses at the London Business School (Dimson, Staunton and Marsh). Even they would tell you, these historic indices weren’t exactly carved into stone tablets and left in a storage locker somewhere. All of this stuff had to be pieced together and pulled from hugely varying sources with all sorts of restorative methodologies. We have a good approximation of what historical prices were and even some sense of earnings, book value and revenue – but an approximation is not a fact.

Even today we don’t know what real earnings are. 20% of the S&P 500 is made up of tech companies and about half of them play games with GAAP on a regular basis. They pretend that employee and executive comp can be expensed as an item that may or may not appear in future quarters. Cisco does it. Google does it. Anything that might lower reported EPS is treated like a non-recurring freak accident of some sort. And then bathtubs full of stock options are handed out and they do the same thing 90 days later. And then there’s goodwill, and tax-advantaged write-downs and all sorts of other fun stuff that wasn’t going on even a decade ago. And you’re going to tell me you feel good about the PE multiples of railroad monopolies from the fucking Civil War era?

Stop it.

And I won’t even get into the massive differences in profit margins between a company like Facebook, which makes millions of dollars per employee, and the S&P 500 of the 1970’s, which was dominated by steel companies and oil companies and mining companies and other low-margin, capital-intensive “filthy” industries.

200 years ago, there was no indoor plumbing or electricity, kind of like present-day Camden, New Jersey. Married couples had eleven children each with the expectation that only three or four of them would make it to junior high school, after which they’d become chimney-sweeps or horse-dentists or whatever the hell you did in those days.

No planes. No cars. No guac.

No similarities with the modern era.

Historical context is excellent for understanding financial markets. But let’s remember that the numbers on a spreadsheet don’t exist in a vacuum. They are a function of what’s happening in the world, as progress steadily mows down the economic realities of the past.

This post was originally published on September 8th, 2015.


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