Interpreting the Ratio @ businessinsider.com
"The data since 1945 is a simple calculation using data from the Federal Reserve Z.1 Statistical Release, section B.102., Balance Sheet and Reconciliation Tables for Nonfinancial Corporate Business. Specifically it is the ratio of Line 35 (Market Value) divided by Line 32 (Replacement Cost). It might seem logical that fair value would be a 1:1 ratio. But that has not historically been the case. The explanation, according to Smithers & Co. (more about them later) is that "the replacement cost of company assets is overstated. This is because the long-term real return on corporate equity, according to the published data, is only 4.8%, while the long-term real return to investors is around 6.0%. Over the long-term and in equilibrium, the two must be the same."
As you can see some of the BEST buying periods of a lifetime were when the Q ratio was at or near a bottom of UNDER VALUATION, and some of the WORST times to buy were at periods of over valuation extremes as shown above....come to your own conclusions.
"The data since 1945 is a simple calculation using data from the Federal Reserve Z.1 Statistical Release, section B.102., Balance Sheet and Reconciliation Tables for Nonfinancial Corporate Business. Specifically it is the ratio of Line 35 (Market Value) divided by Line 32 (Replacement Cost). It might seem logical that fair value would be a 1:1 ratio. But that has not historically been the case. The explanation, according to Smithers & Co. (more about them later) is that "the replacement cost of company assets is overstated. This is because the long-term real return on corporate equity, according to the published data, is only 4.8%, while the long-term real return to investors is around 6.0%. Over the long-term and in equilibrium, the two must be the same."
As you can see some of the BEST buying periods of a lifetime were when the Q ratio was at or near a bottom of UNDER VALUATION, and some of the WORST times to buy were at periods of over valuation extremes as shown above....come to your own conclusions.
WHO is to say at what level the over valuation can go? late 90's to 2000 you can how that was maybe biggest stock bubble of our lifetimes. But the avg over valuation and what preceded MAJOR MARKET TOPS were Q ratios over valued in the 60% range.....certainly worth considering, and when you look at the past history going back to early 1900's.....the data is one I will take very seriously.
The President on John Stewart Show said the cost to American people of crisis (gov cost) was only "1% of GDP" but that would be inaccurate as a $14T economy 10% would be $1 Trillion....and it has cost much much more than that. ADD into the FED balance sheet growth and you see a more correct picture. (now I may not agree with Obama ADM, but he also said he ran on a platform and he tried to deliver what he ran on....I could hardly disagree with that)
I only wish the way to fix every balance sheet problem was to print more money. Because nothing substantial has changed in the banking and financial sector, and the huge losses are kept off the books and papered over by the GAO accounting policy change that allowed Banks to come up with their own value of their assets vs MARKET VALUATIONS......I love a good magic trick illusion......
D
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