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RE: Down goes the Dow

Ghost of Igloi wrote:


Here is a quote from economists Carmen Reinhart and Kenneth Rogoff from their book, This Time is Different (2009):

“Our immersion in the details of crises that have arisen over the past eight centuries and in data on them has led us to conclude that the most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that ‘this time is different.’ That advice, that the old rules of valuation no longer apply, is usually followed up with vigor. Financial professionals and, all too often, government leaders explain that we are doing things better than before, we are smarter, and we have learned from past mistakes. Each time, society convinces itself that the current boom, unlike the many booms that preceded catastrophic collapses in the past, is built on sound fundamentals, structural reforms, technological innovation, and good policy.”

“The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are something that happen to other people in other countries at other times; crises do not happen, here and now to us... If there is one common theme to the vast range of crises we consider, it is that, excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.”


the problem with the never say 'this time is different' argument is that it is often hard to know who can best wield that argument.

as Coach D and I have been saying, since 1990 valuation measures have been historically high. That's 26 years now. So we will say 'Hey Igy what makes you think this time is different? What makes you think stocks will fall now? Valuations have been in this neigborhood for 26 years and still the market is up 11% per year or some such number.'

So you have to go to 100 year averages or something like that, incorporating times of much lower valuations.

to me, trying to compare valuations of companies in 1953 to those of today is not sensible.

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