Gyroscopic Investing

Economist has another interesting article in 2011-oct-15 issue on asset prices. 

http://www.economist.com/node/21532276

Part of the article notes how stock & gov sovereign/T-Bond yields are low compared to history, & this is bad because yield has been correlated with ~10 year real inflation-adjusted returns.

towards the article end "developed world can grow out of its debt burden, inflate the debt away or fall back into recession,"

& they imply savers must "bet" on an outcome
growth => stocks
inflation => commodities/real estate (we PPers would say gold)
deflationary recession: gov sovereign T-Bonds

I was thinking to myself: or you can't predict the outcome, so buy all 3 equally & rebalance!  It's amazing that the article gets 80% of the way there without missing the Browne/PPer conclusion :0

BTW, it states that US stock is still overvalued per the valuation measure of the Shiller 10-yr P/E10 is 19.4, vs the historic median of 16.4.  In contrast they claim the corresponding Eurozone P/E10 is 11.  I am surprised at this data.  I had assumed that the valuation would be roughly the same for stock markets, now that stock markets are so globalized.

http://www.advisorperspectives.com/dsho ... uation.php

In the US S&P500 history, 11 is the border of the 1st & 2nd quintile of P/E10.  This might suggest that for non-Euro PPers, a Euro stock index fund could be a good VP investment.  Or for prospective European PPers, that right now might be a great time to become a PPer. I would assume that Euro non-FIRE industry stocks are multinationals (like Nestle, Mercedes, Siemens, SAP) are going to be successful even if the Euro currency has a super crisis.

I would be curious to know if that Eurozone P/E10 is calculated with the Euro & Eurozone CPI, or with the USD & the US CPI.  I suppose to be apples-to-apples it would have to be calculated with the USD.

Thanks for posting the link. 

A very good review of where we are now, with all asset classes seemingly overvalued.

We are finely balanced between the printing of money and economic collapse, so will it be inflation or deflation.  Maybe some of each but in what order?

Have recently added to European stocks and may add some more later in the light of the article.

Thanks again.

I'd be incredibly wary of putting too much faith in the idea that the current low P/E10 of a euro zone stock index means that it represents good value. How much of the recent price correction is just due to large banks loosing 90% of share value? Is that huge fall in bank stock prices well merited because those banks are about to be recapitalised diluting existing stock by 90%? or wiping it out completely? Would you have wanted to buy Northern Rock or Lehmans stock in 2008? Remember short selling prohibitions have been in place for eurozone bank stocks and so they probably are not down to a realistic market value. Even if non-bank stocks such as VW or whatever are also currently cheap (I don't know whether that is true) they also pose a big risk. The eurozone crisis is a monumental transfer of wealth from the eurozone real economy to holders of the corporate debt of banks and to bank employees. You might hope (as a VW share holder) that VW will sell cars to China and so all the loss will be born by VW workers being bled to pay the SocGeneral corporate debt holders. But governments may try and also get VW to pay in the form of corporation tax or whatever.

Yes the pe and yield of European stocks must be distorted by the justifiable low rating banks so care needs to be exercised.

Being underweight in stocks and in Europe in particular, the Investment Trusts of interest (Fidelity European Values and Jupiter European Opportunities with limited exposure to financials) seem a cautious buy or at least top up.  Am not proposing overweighting Europe.

Thanks for the warning.

http://portfolio.morningstar.com/Rtport ... Entry.aspx
check the Morningstar X-Ray link to see how VGK ETF (tracks the MSCI Europe Index) breaks down by industry.  (Apparently unfortunately I can't link directly, but if you can quickly generate this page, by on the "Edit Holdings" page, for "Ticker Symbol" type "VGK", for "Dollar Value $" type "1".

If you look at the "Stock Sector" (industry) breakdown: Financial Services is 19.85%, Real Estate 0.98%.  The FIRE sector is under ~21% of the total market cap.

My random guesstimate is that at a PE10 = 11, even in the extreme case of the FIRE portion of VGK went to 0, the remaining non-FIRE sector stocks like Siemens MIGHT still be a good deal at PE10 = 11.

Stone makes a good point there is a possibility that bailouts of the FIRE stocks conceivably could harm the non-FIRE stocks like Siemens via taxation.  I'm not sure (obviously), but I would not think this FIRE bailout tax risk to these non-FIRE companies outweighs the upside of continuing to grow profits (even if the Euro currency ceases to exist or other supercrisis) to emerging nations like China, or even in some cases to non-Eurozone developed nations (for instance, SAP has a quasi-oligopoly in huge company business/enterprise software in the USA)

FYI, here's the nation breakdown of VGK
https://personal.vanguard.com/us/funds/ ... st=tab%3A2

United Kingdom 35.1%
France 14.3%
Switzerland 13.5%
Germany 12.2%
Spain 5.5%

UK is NOT in the Eurozone.  Off hand to me that is surprising that UK is so dominant, I would've thought that Germany would be the largest nation in this index, given Germany has the largest Euro economy, & also is a big trade surplus.

cabronjames, I hadn't twigged that you weren't meaning a more eurozone focused fund. Switzerland also isn't in the eurozone. I guess the VGK ETF's seemingly excessive weight to the UK might be because some of the companies listed on the London exchange have little to do with the UK or Europe. The London market has Kazakastan based miners etc. So the size of the London market is out of proportion to the size of the UK economy.

A banking crisis could manifest as a step change in the curency exchange rate. The 2008 crisis caused a 30% devaluation of GBP that has stuck. Perhaps because the euro is more of a reserve curency that is less of a danger but it certainly is something to be wary of. As a US investor you would certainly want to buy in after and not before any 30% devaluation.