Philosophical Economics

Let's not forget the good old Single Greatest Predictor ( https://www.philosophicaleconomics.com/2013/12/the-single-greatest-pre… ), which hit an all-time high in Q4 2025 ( https://fred.stlouisfed.org/graph/?g=1Wc2g ).

According to this article [1] money available for investment can be in stocks, cash, or bonds. The market goes up when people prefer stocks, down when they prefer cash and bonds. At present, the allocation to stocks is already higher than it has ever been, since 1950. Chart from FRED [2]. So if this theory is correct trouble is not far off. [1] https://www.philosophicaleconomics.com/2013/12/the-single-greatest-pre… [2] https://fred.stlouisfed.org/graph/?g=1Wc2g My own theory is that at present inflation makes bonds unattractive. At some point a recession will kill inflation (and profits) and make bonds look better relative to stocks.

I saw the underlying theory discussed years ago, in a series of articles on a very serious economics blog, coming to very different conclusions: https://www.philosophicaleconomics.com/2016/05/passive/ https://www.philosophicaleconomics.com/2016/05/followup/ https://www.philosophicaleconomics.com/2016/05/indexville/ https://www.philosophicaleconomics.com/2016/05/passiveactive/ Looks like the blog stopped in 2020, unfortunate....

This method seems to work pretty well: https://www.philosophicaleconomics.com/2013/12/the-single-greatest-pre… Unique in that it seems statistically verified. Here’s an up-to-date version of the projection: https://financial-charts.effingapp.com/

A signal I've stumbled upon recently: http://www.philosophicaleconomics.com/2013/12/the-single-greatest-pred… https://financial-charts.effingapp.com/

There are much, much better ones: 1) Philosophical Economics' stock/bond/cash preference model: http://www.philosophicaleconomics.com/2013/12/the-single-greatest-pred… https://financial-charts.effingapp.com/ 2) John Hussmann's non-financial market cap to gross value added: https://www.hussmanfunds.com/category/comment/ https://www.hussmanfunds.com/comment/mc210715/ But as the sibling comment and all the sources above say, those do not predict the path, only the destination (which is a decade or more in the future). It would be completely consistent with such macro valuation models if, for example, the general prices doubled or even quadrupled over the next year or two, why not. Stay safe out there :)

I found an article on the topic [0] quite interesting. Taking its mapping of ratio to future returns and using the latest data [1], we should expect ~2% return over the next 10 years. [0]: http://www.philosophicaleconomics.com/2013/12/the-single-greatest-pred… [1]: https://fred.stlouisfed.org/graph/?g=qis

I read an analysis of technical trading that demonstrated that the theoretical best return is buy-and-hold in a bull market, and only do technical trading in a down market. [1] http://www.philosophicaleconomics.com/2016/01/gtt/

Here's a good article that goes in detail on this, written in January before the top. http://www.philosophicaleconomics.com/2018/01/future-u-s-equity-return…

The US stock market is very highly priced when compared to historical prices from all other periods. There's a lot of room for US stock prices to go down and little room for stock prices to go to up. It might be fine to put money into the US stock market if one is prepared to leave it there for a very long time in the event that market prices crash, but it sounds like the OP was talking about time horizons of months not decades. http://alephblog.com/2018/03/14/estimating-future-stock-returns-decemb… http://www.philosophicaleconomics.com/2018/01/future-u-s-equity-return…

There is a way on how to time a recession, that is able to indicate it right before it happens, see: http://www.philosophicaleconomics.com/2016/02/uetrend/ And it is also possible to have a slightly better ROI than buy and hold, even if you don't have the timing of future recession dates. See http://www.philosophicaleconomics.com/2016/01/gtt/ In that last article, you also see that "perfect recession timing" (looking backwards instead of to the future) actually doesn't have that much improvement over buy and hold. So for me, it doesn't seem like the return is worth the effort, so I just buy and hold.

In the same blog as your reference [1] you can find one of the more thought provoking essays I have read in the last little while. It's a discussion about how easier stock market diversification should lead to permanently higher multiples on earnings. http://www.philosophicaleconomics.com/2017/04/diversification-adaptati… Highly recommended.

The Schiller P/E has historically been pretty useful, but it's not a great tool for comparing pre 2001 and post 2001 market valuations because of changes in GAAP. Check out http://www.philosophicaleconomics.com/2013/12/shiller/ for a more in depth explanation.

> Isn't there a danger that if not enough people actively manage their money, the market won't 'correctly' set prices? If this stuff interests you, I recommend reading the previous post (http://www.philosophicaleconomics.com/2016/05/passive/), which discusses this exact topic.

Here is a much more thought out analysis from a generally excellent econ blog: http://www.philosophicaleconomics.com/2015/05/profit-margins-in-a-winn…

If you want a little more reading on the subject, there's a neat writeup here: https://www.philosophicaleconomics.com/2013/08/the-great-rotation-asse… "(1) For every share of every asset in existence, someone must willingly hold that share at all times. If no one can be found who wants to hold a share, its market price will fall until someone is found. (2) The total “amount” or “supply” of a financial asset is the total market value of it in existence: the number of shares outstanding times the market price. Asset “amount” or “supply” is therefore flexible for all assets except cash, whose market price is always unity. If there is more financial wealth that wants to be allocated into an asset than exists of that asset, the market price of each share of the asset will rise, which will expand the supply of the asset so that the demand can be satisfied." "Money is not something that can go into or come out of assets; rather, it itself is an asset that is traded for other assets. The offered rate of exchange is the price. Changes in the price can create the perception that money is moving, but, in reality, nothing needs to be moving at all. Any movement that does occur is incidental to the underlying process. Likewise, investors cannot leave or enter any asset class. All they can do is fight with each other over who will hold each asset class, offering to exchange money at various rates in exchange for the…

To answer your question, I found this work [1] that uses yield curve information and a basic 200-day moving average. The rule it uses is simple: Go to cash if: (1) yield curve of 10-year treasury minus 2-year treasury has inverted and (2) S&P is below 95% of its 200-day moving average and (3) the next recession has not yet occurred. If in cash, buy if S&P is above 103% of its 200-day moving average. As can be seen, based on historical data from 1950-now the yield curve signal beats S&P 500 marginally (+110 basis points annually). However, I would not implement it as is, because this could be noise. Looking at the two tables above, the yield curve + 200MA strategy exhibits a problem commonly seen using these types of moving average strategies--whipsaws--which means buying in at a price and being forced by the strategy to sell at a lower price. In table 1, Buy in at at 65.24 and sell at 62.93 is an example of a whipsaw. [2] is an excellent resource if you are interested in learning more about these types of strategies. [1] https://seekingalpha.com/article/4183120-superior-investment-returns-c… [2] https://www.philosophicaleconomics.com/2016/01/gtt/

If you're looking for The Single Greatest Predictor of Future Stock Market Returns[1], here it is: http://www.philosophicaleconomics.com/2013/12/the-single-greatest-pred… This is a long read, but it's worth it. The metric can be calculated in FRED[2], and as a predictor of future returns, it outperforms all of the most common stock market valuation metrics, including cyclically-adjusted price-earnings (CAPE) ratio[3]. (Basically, the average investor portfolio allocation to equities versus bonds and cash is inversely correlated with future returns over the long-term. This works better than pure valuation models because it accounts for supply and demand dynamics.) [1]: http://www.philosophicaleconomics.com/2013/12/the-single-greatest-pred… [2]: http://research.stlouisfed.org/fred2/graph/?g=qis [3]: http://www.multpl.com/shiller-pe/

US Middle Class real median household income DOWN : https://research.stlouisfed.org/fred2/series/MEHOINUSA672N Cost of employees as percentage of sales down : http://www.philosophicaleconomics.com/2015/05/profit-margins-in-a-winn… Specifically : http://i2.wp.com/www.philosophicaleconomics.com/wp-content/uploads/201… labor bargaining power has weakened substantially amid globalization US citizens not as enthusiastic about more immigration as are the US elite: http://www.cnbc.com/id/100593528 as recently as 2012, 69 percent of those surveyed agree that "we should restrict and control people coming to live in our country more than we do now." The MSM often only presents one side of the story. There is NO evidence of US labor shortage. In fact, with stagnant to down real labor prices, the only logical conclusion is that there is a glut. Corporate and Academic control of more and more guest worker visas is not really a great idea.

Yeah I think the consensus is that 100% passive would be terrible. Jack Bogle's view was that if the market is 50%+ passive indexed that would be bad news. Some folks argue that the number is even more extreme, that passive indexing generally increases efficiency, and that as long as there are even a handful of active investors, the market will still be efficient: http://www.philosophicaleconomics.com/2016/05/passive/ The same author had another thought-provoking argument that the popularity of indexing has probably driven up stock valuations: http://www.philosophicaleconomics.com/2017/04/diversification-adaptati…

I think we aren't close to the margin where indexing is socially harmful. This article elaborates. http://www.philosophicaleconomics.com/2016/05/passive/

If I remember correctly, that was suggested half-jokingly by the author to demonstrate that any metric where the numerator is proportional to the stock market will tend to predict future returns (because of mean-reversion). Edit - here you go: http://www.philosophicaleconomics.com/2013/12/valuation-and-returns-ad…

Philosophical Economics has a thoughtful essay on this: https://www.philosophicaleconomics.com/2016/05/passive/ I’m going to argue that the trend towards passive management is not only sustainable, but that it actually increases the accuracy of market prices. It does so by preferentially removing lower-skilled investors from the market fray, thus increasing the average skill level of those investors that remain. It also makes economies more efficient, because it reduces the labor and capital input used in the process of price discovery, without appreciably impairing the price signal.

If the less informed shareholder move to passive allocations, the market actually gets more efficient: http://www.philosophicaleconomics.com/2016/05/passiveactive/

The previous post on the same blog debunks this. http://www.philosophicaleconomics.com/2016/05/passive/

Public tech company's price to earnings does look historically reasonable. And private companies are slowly going public at current valuations. Yet public tech company's earnings to revenue is unusually high. http://www.philosophicaleconomics.com/2015/01/explosion/ Open source doesn't fully explain this, as this alone is not a barrier to entry. As US rates slowly increase, I expect to see an increase in currency headwinds.

You don't have to wait until the bottom, but it's obviously better to buy assets when they are "cheap" rather than "expensive". Valuation and long-term future returns seem indeed related historically https://www.oppenheimerfunds.com/private-client-groups/article/asset-a… For a more detailed treatment: https://personal.vanguard.com/pdf/s338.pdf Of course this kind of arguments are not bullet-proof, see for example: http://www.philosophicaleconomics.com/2014/06/critique/ And one could have missed the last years of bull market applying these arguments already in 2013 (it doesn't mean that the conclusion was wrong with the 2023 horizon, though). Anyway, ignoring valuation completely doesn't seem the right thing to do and people try to forecast returns to make asset allocation decisions: https://www.researchaffiliates.com/en_us/asset-allocation.html I wouldn't call that market timing.