The Federal Reserve's Two Legged Stool
 John P. Hussman, Ph.D.

Quick Valuation Study: 2104 

Let’s assume that despite the weak economic growth at present, nominal GDP picks back up to a nominal growth rate of 6.3% annually from here. Given the present market cap / GDP ratio of 1.25 and an S&P 500 dividend yield of just 2%, what might we then estimate for total returns over the coming decade? 

(1.063)(0.63/1.25)^(1/10) – 1.0 + .02 = 1.3% annually. 

Since we use a whole range of additional measures, including earnings-based methods, to estimate prospective returns, our actual estimates are somewhat higher here, at about 2.4% annually over the coming decade. Tomato. Tom-ah-to. Keep in mind that these estimates assume a significant acceleration in economic growth. One can certainly quibble that the long-term ratio of market capitalization to GDP will have a somewhat higher norm in the future. But the present ratio is still 100% above its pre-bubble norm. It’s unlikely that this situation will end well.

DYI Comments: Our Aggressive Portfolio remains the same with high levels (45%) of cash [short term bonds].  The Great Wait continues awaiting better values ahead.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 04/1/14

Active Allocation Bands 10% to 60%

45% - Cash -Short Term Bond Index - VGPMX

25% -Gold- Precious Metals & Mining - VBIRX

20% -Lt. Bonds- Long Term Bond Index - VBLTX

10% -Stocks- Equity Income Fund - VEIPX

[See Disclaimer]

DYI