Fire or Ice

Some say the world will end in fire; 
Some say in ice. 
From what I’ve tasted of desire 
I hold with those who favor fire. 
But if it had to perish twice, 
I think I know enough of hate 
To know that for destruction ice 
Is also great 
And would suffice.

– “Fire and Ice” by Robert Frost

Cat, an old friend and new reader, recently posted this comment:

Hi Preston,

I read yesterday that Bush was moving into Preston Hollow in Dallas. Suddenly, I wondered, “What happened to Preston Poulter?” I was pleasantly surprised to see that you had a blog and had even run as a Libertarian for Texas Rep.

I enjoy this blog and the Libertarian perspective. You write plainly and with great focus. You write without much malice. It’s nice to find a blog that is about a person’s passion for betterment rather than an attention grab or a vehicle for invective.

I hope your find the Argentinian’s words interesting. He’s living the best he can in a world that went from prosperous to dangerous gradually. So that’s a mild blessing — economic collapses don’t often happen to an entire population overnight. You can kind of see them coming if you’re looking. This gives you time to spread your message about how to prepare for a period of increased self-reliance.

Aside from economic collapse, I am concerned about infrastructure collapse for various reasons. Avian influenza (H5N1) is probably on a collision course with mankind. It’s endemic in bird populations now. Every farmed chicken/duck/turkey that is raised and consumed is a living flu laboratory that is gradually mutating the virus into something that can potentially be transmitted to humans. Once that happens, we will likely see a global pandemic that cripples our import markets and results in critical supply shortages as people become reluctant to leave their homes.

This is a decent book to read about bird flu: Take note of his personal affiliations with animal rights groups as a potential conflict of interest. The science and history of pandemic influenza as he describes them are still sound (if a bit simplified). I found it to be a good primer. Everyone’s obsessed about the economy while this monster slumbers somewhere in the world.

Either way — economic collapse or influenza like in Stephen King’s The Stand, people have much to gain by preparation for harder times.

Thank you for the kind wishes. I hope my chatter isn’t clogging up your blog. I enjoy having intelligent people to talk to.

– Cat


I did not know Bush was planning on moving to the Preston Hollow division of Dallas, Texas but apparently it is so. As for my running for Libertarian State Representative in the last election, you can read about my experience here. As for the Argentinean’s experience with hyperinflation, it’s interesting to hear that gold jewelry became a currency and that all gold was treated as scrap gold on the black market.

In my book, “What Do You Mean My Money’s Worthless?”  I recommend that people purchase and keep a fair number of Silver Eagle’s on hand. They are each verified to become ounce of 99.9% pure silver which makes them a known quantity should we have to deal with a black market scenario and, as they have roughly comparable value to a $20 bill, they represent the right amount of wealth to go shopping.

As for your concern regarding Avian Flu, you aren’t the only one to be worried about that. In James Howard Kuntsler’s book, The Long Emergency he discusses the likelihood of a epidemic that wipes out a large portion of the population as well as the famines that he feels are inevitable given how expensive energy is going to be. Kuntsler’s hypothesis is that we have exceeded the carrying capacity of the planet and that we are going to start see the human population forced to shrink by various means in the next few decades. 

I don’t spend any time worrying about scenario’s like that. I feel that being a being a Wall Street bear takes up enough of my time, so I really don’t have time to worry about other scenarios such as disease wiping everyone out. And the real problem with that kind of thinking is that it seems there’s not much that can really be done about it. If the “Spanish Flu” really does make a come back, there’s not much that can be done about it. Being a Wall Street bear, on the other hand, means you can take steps to protect yourself and profit from market declines. Then you can make fun of permabulls like Ben Stein and Jeremy Sigel. 

Speaking of, the Dow finished down today 2.72% while the stock of Barrick Gold (ticker symbol=ABX) went up a good 1.83%. That’s what I like to see as a bear market investor: stocks down, gold up. That’s a trend I’d like to see continue. I talk about the ratio of the Dow Jones Industrial Average to the price of an ounce of gold in my book and how certain I am that that ratio is going to decline in the near future. When I wrote that book, the ratio was at 17. Today it’s roughly 11.3. In the next couple of years, we should see it decline all the way to three or lower, and that’s a lot of profit to be had. And making money off of economic downturns if far better than making them off of market upswings because it means you’ve got money when everyone else is broke, which is what we bears fantasize about.

Answering Nono’s Question

Just this morning, a reader posted this comment:

In 1999 I plotted the trailing PE ratio for the DJ30 back to 1925. I have not updated it. But a quick look at the graph shows the average to be close to 15. Only two periods, once for 3 years and once for 4 years, had PE ratios below 10. So I think you are wrong.

I also made a correlation plot of PE ratio vs. following year market performance. There was not a significant correlation. In other words, forget about PE ratio when trying to decide what the market will do in the next year.

Dear Nono,

I very well could be wrong in stating that the trailing PE ratio of the broad based American stock market is around 11, but I did not actually come to that figure. That is the figure that is being used by Bill Bonner, as well as an entire group of Economists that Henry Blodget follows. So, if I am wrong, I am at least part of an entire wrongheaded crowd. 🙂 

Seriously though, I’d encourage you to follow the link for the Blodget story and see if you can research the differences between your number and the 11 figure that is more commonly used. One noticeable difference would seem to be that you plotted the Dow Jones 30 whereas the others are looking at the far broader S&P500. Also, you stopped at the year 1999, which was the market top for PE as it turned out. If you go forward through the end of this year, I’m sure that would lower your average a bit. 

In regards to your claim that buying stocks at a lower PE does not impact the level of return you get, you are contradicting other economic study regarding stocks. In John Mauldin’s book Bull’s Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market he specifically says that “, the long-term returns you get from index fund investing are very highly correlated with the P/E (price to earnings) ratio at the time you make your initial investment.”

So those are the sources I am using. I have not done the math myself, but if you point me in the right direction in terms of where I can get the dataset, I may run the numbers myself to see what I get.

Jeremy Siegel Defrauds Investors by Calling Stocks “Dirt Cheap”

Dr. Jeremy Siegel wants you to know that know is a great time to buy stocks. In fact, he says he’d be surprised if you didn’t get a 20% return on your investment in the next twelve months. Of course, Dr. Siegel’s crystal ball is proving to not be all that great. In 2007 he predicted that 2008 would be a great year for stocks and that financial stocks should do particularly well. So much for that prediction.

To understand his latest argument, Siegel is putting a fair market value on the S&P at 1380. Since the S&P closed today at 930, you can see why’d he think now was a great bargain, but how did he arrive at that 1380 number? Well he says that the long term fair market value for stocks is to trade at a PE of 15 and he then conjures up a figure for what the next 15 years of earnings for the S&P should be based on the past 15 or so- which is equal to $92 a share. $92 x 15 = 1380. Voila. I could almost hear Dr. Siegel add, “Wil-E Coyote. Super Genius!”

This article struck me as a bit fishy, and not just because I’m a bear. For one, having been a avid read of Bill Bonner, I knew from books such as Financial Reckoning Day: Surviving the Soft Depression of the 21st Century that the long term PE for stocks is to trade at 11, not 15. So I was curious as to how Dr. Siegel came up with such figure. It turns out, he made a mistake. Bonner and the bears are correct in saying that the average long term trailing PE for stocks is 11, 15 is the average PE for earnings from four years ago, not next year’s projected. Currently, stocks are trading at a PE of 18 compared to trailing earnings, as Dr. Siegel himself pointed out in the article where he calls stocks “dirt cheap”, and a PE of 18 is not cheap when the long term average is 11. The upshot is that Dr. Siegel made an error and that stocks are actually expensive on the order of 40% compared to their long term PE ratios, not 40% the cheaper as he claims they are.

The other thing that Dr. Siegel doesn’t seem to understand is that the long term average of stock PE is just that- a LONG term average. There are many bull market years where the PE is trading above 11 and many bear market years where it is trading below 11. Furthermore, these periods of over and under valuation tend to be grouped together in the time line: we see stocks priced well over the long term average through the 1920s and then under during the Great Depression of the 1930s. So if we are continuing the bear market slide that started in 2000, then we should expect stocks to be trading BELOW their long term average. Which means, if the trailing average is 11, we should expect to start seeing stocks trading at PE levels of 8 to 10 as they did in the 1970s. You’d have thought that the author of Stocks for the Long Run might have studied up on the market a bit to see just how long the “long run” can really be.

Of course, all of this bull market analysis is based on the notion that the next 50 years of American history should be more or less akin to the last 50 years or so, and that’s a claim I take issue with. American has dominated the last 50 years of world events as a titan with unmatched military, industrial and economic power. Looking forward 50 years into the future, do we really expect to see that continue? Which brings us back to Dr. Siegel; clearly he is wrong in his analysis, but it he simply mistaken or did he aim to reach for a conclusion that would make other parties happy.

Don’t get me wrong, we all make mistakes. Perhaps Dr. Siegel put less time and effort into his Yahoo columns that I put into this blog and just doesn’t get a chance to double check his math, but I don’t think so. I think Dr. Sigel fudged the numbers to arrive at a rosy outcome. If so, it wouldn’t be the first time a Macroeconomist has gone through a rather dubious trick of logic and math to reach the politically desirable conclusion. Indeed, John Maynard Keynes’s The General Theory of Employment, Interest and Money is nothing but a intellectual fraud filled with straw man arguments, shifting definitions, and math based on dubious assumptions, but it is heralded as a classic largely because it came to the desired conclusion of the day: the free market was inherently unstable unless assisted by the power of government. Macroeconomists are task masters at fudging their numbers to support the conclusions that they feel are popular. Why should we think Dr. Siegel is doing any different here?