haha
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Here is a recent quote from Andrew Smithers, one of my favorite Cassandras (you may remember, Cassandra was right):
I have encountered two different and equally invalid approaches to forecasting future returns. One is to assume that dividends per share rise in line with GDP and the other is to assume that returns from any level of the stock market will equal the long-term average. The assumption that dividends per share will rise in line with GDP is held in the teeth of hard evidence to the contrary and in the absence of any theoretical reason why they should. Over the past 100 years, the real dividends per share have risen in the US by 0.6% p.a. and in the UK by 0.4% p.a., which in each case is far less than GDP. Another approach assumes that equities will give high returns because they have done so over the very long-term. This would only be justified if returns followed a random walk – an idea which is, in academia at least, more than 30 years out of date. Bad forecasts are very dangerous, because the power of compound interest is so strong. If, for example, a portfolio fails to grow in value while the liabilities that it is designed to match grow at 7% p.a., there will after 5 years be a shortfall equivalent to 40% of the initial value. As many funds start with deficits and returns could easily be negative, the potential problem for pension funds is far worse than the current estimated level of deficits suggests. Stock markets today are thus much more risky than they have been in the past. Expectations of equity returns are irrationally high. If, as must be probable, they fail to meet these expectations, pension deficits will balloon and the value of companies will fall in a vicious self-reinforcing circle. When this occurs investors, including pension funds, will probably panic. When markets start to look bad investors are usually advised not to panic. They would be better advised to panic now rather than later. -Andrew Smithers
You can get the whole depressing story at
http://www.smithers.co.uk/newsdyn.php?pgtype=news&pgnm=article&pgmime=&pgndx=61
Mikey
I have encountered two different and equally invalid approaches to forecasting future returns. One is to assume that dividends per share rise in line with GDP and the other is to assume that returns from any level of the stock market will equal the long-term average. The assumption that dividends per share will rise in line with GDP is held in the teeth of hard evidence to the contrary and in the absence of any theoretical reason why they should. Over the past 100 years, the real dividends per share have risen in the US by 0.6% p.a. and in the UK by 0.4% p.a., which in each case is far less than GDP. Another approach assumes that equities will give high returns because they have done so over the very long-term. This would only be justified if returns followed a random walk – an idea which is, in academia at least, more than 30 years out of date. Bad forecasts are very dangerous, because the power of compound interest is so strong. If, for example, a portfolio fails to grow in value while the liabilities that it is designed to match grow at 7% p.a., there will after 5 years be a shortfall equivalent to 40% of the initial value. As many funds start with deficits and returns could easily be negative, the potential problem for pension funds is far worse than the current estimated level of deficits suggests. Stock markets today are thus much more risky than they have been in the past. Expectations of equity returns are irrationally high. If, as must be probable, they fail to meet these expectations, pension deficits will balloon and the value of companies will fall in a vicious self-reinforcing circle. When this occurs investors, including pension funds, will probably panic. When markets start to look bad investors are usually advised not to panic. They would be better advised to panic now rather than later. -Andrew Smithers
You can get the whole depressing story at
http://www.smithers.co.uk/newsdyn.php?pgtype=news&pgnm=article&pgmime=&pgndx=61
Mikey
