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PE Ratio – Mania v Panic

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PE Ratio 2007-2016

Hi Mr. Armstrong,

Some of your readers, me included, wonder how the Dow is going to get to 23,000 or more, especially as we go through an economic slowdown. This would suggest a P/E of around 23 or higher. Is the common thinking that would accompany such a move similar to past manias (tulipmania, south sea bubble)? Is mania thinking also cyclical?

Thanks as always,

ANSWER: With all due respect, you have to look at this, not as a mania of speculative fever, but as a panic in government with a collapse in confidence. That is when money just seeks safety; not profit. A mania is a speculative boom where profit is the motive. What we face is the opposite. When capital is just trying to break even, the P/E Ratio rises to historical highs. Above is the P/E Ratio on the S&P 500 since the 2007 high. It rose to over 120 during the crash. This is why we warned that the market would make new highs and while Barrons reported that forecast, they were probably doing so tongue-in-cheek.

PE Ratio 1871-2016

Ghost BustersNotice that even looking at the annual average of the P/E Ratio in the S&P 5oo, the year 2009 is the historical high – SO FAR! Even the 2000 Dot.COM bubble produced an annual average of almost 50:1. That still did not compare to the 2009 Panic. When banks and government are in trouble and you are just trying to protect what you have, who you gonna call? This reminds me of the movie “Ghost Busters” with the theme song punch line – Who You Gonna Call?

That is the difference between a collapse in confidence in government (public to private shift) and a speculative mania. When I say the Dow can go to 40,000 if it exceeds 23,000, this is not the speculative boom-type rally. It is a panic of how to preserve what you have. There is a huge difference.

We have absolutely everything I could ever get my hands on from a data perspective in a computer that I taught TO ANALYZE. It comes back with very pointed and detailed analyses, of which 99% of humanity never bothered to check on. So open your mind. Leave the cage in which you live created by society to control and contain you. We are embarking on a new journey that will shake the foundations of reason.




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