If you do something similar on bonds it will look the same. The next decade, perhaps 2 decades, are going to be awful for asset returns. This will have profound implications for the industryhttps://twitter.com/SoberLook/status/1460190968683147273 …
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is this methodology better than the other "asset are priced for terrible returns" methodology that I've been hearing for my entire career?
The chart above is particularly bad, since it plots 1 point per month for something which is averaged over ten years, giving a false sense of how strong the correlation is. The correct version of the plot should only have seven data points.
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Shiller PE is not correct either. It's about 25% lower than that accounting for corp tax and other changes to make it equivalent across time.
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Chart on the left - seven data points, statistically insignificant correlation. Chart on the right - each data point replicated 100 times with some noise, statistically significant (but very fake) correlation.pic.twitter.com/etlvFmk4ty
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How do you choose which 7 data points?
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Ahh, yee olde autocorrelation crime
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Stambaugh bias correction always a good check
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We have surprisingly very little financial data... barely 100 years. That's just 10 decades.
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How did
@hussmanjp tackle the overlap problem in these plots? -
See the discussion in the section titled "Ergodicity"https://www.hussmanfunds.com/comment/mc181101/ …
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