@PortfolioPlus Perspective right there. Well said.

@Vandelay, pick your poison when it comes to historical measures for forecasting, they all produce scary numbers. To correct (or maybe clarify) the PEs you mentioned in your straw, the fall would be 1 - (15.97 / 19.71) = 19% decline (not 30%). But the problem here is that we're at historically high profit "E" (earnings) which are unlikely to be maintained (historically high earnings get wound back eventually by increased input costs especially labour, increased competition, debt/credit restrictions, increased interest rates, lowered subsidies, etc), so if we "mean revert" both on what we are willing to pay per dollar of earnings (ie we adjust what we see as acceptable PE ratios) AND on the level of earnings companies will generate, the numbers get scarier. I don't have easy access to Aust numbers, but here's some sleep disturbing numbers using S&P500. The Schiller CAPE (cyclically adjusted PE ratio), which uses average inflation-adjusted earnings from the last 10 years, is currently sitting at 30.50 (as of 10/6/22), and the historical average is 16.95 - implying a 44% decline to get to historical average. Or consider John Hussman's MAPE (margin-adjusted PE, involving a slightly more complicated earnings adjustment algorithm) which he has shown to be a slightly stronger predictor than the Schiller CAPE - in his latest article (https://www.hussmanfunds.com/comment/mc220601/) he reports his MAPE points towards a 65% decline needed to "mean revert". Or, more simply, he highlights that price/sales is a pretty good "sufficient statistic" for predicting overall market movements, and in his latest article he notes that currently PS is about 2.6 times historical average, suggesting a 62% decline needed to mean revert. And this is only assuming revert to average, not any level of overcorrection as you rightly indicate could happen. Of course, just maybe "it will be different this time" and we somehow stay above historical averages . . . but maybe not.

Hi Vandelay,

Happy margin call day by the way.

I hate to be negative nelly here, but I think this downturn could be bad, really bad. What worries me:

1) Inflation hasn't peaked, and is no where near central bank target. Despite the mayhem, Oil is up overnight.

2) US 2 & 10 year bonds are telling us that the US Fed will raise rates higher and faster. US 2 year is up 32 points, and the US 10 year up 21 points overnight. Listen carefully to Powell this Wednesday, he is likely to guide towards high for longer rates settings. High inflation means a high neutral rate setting - Interest rates may go higher than many are expecting.

3) Aussie dollar has fallen around 5% over the weekend, and looks like it is breaking down to lower lows. The Aussie dollar, being a commodities proxy, performs poorly in economy downturns against the USD. I'll be buying YANK on any Aussie bounces - max position size of 5% (it's leveraged).

4) Food shortages. We are already seeing food riots in Sri Lanka. Fertiliser supply & costs will begin to impact crop outputs in 6-12 months time. Russia continues to destroy Ukrainian food production / export capacity.

If anyone has read the Fourth Turning, this setup looks like it could be the great devaluation that occurs every saeculum. A summary of what I am talking about here.

Look out Strawpeople. Bad day ahead. After Wall St last night and Fri, we may be seeing the start of @Rapstar’s fourth turning!

Yeah I feel that this time things are worse. In previous cycles, the central banks and Governments had some dry powder -- room to lower rates, benign inflation and some relative budget strength. None of that seems true anymore. And we also have huge amounts of household debt.

Then again, the markets have a way of making predictions look absurd in hindsight. So who knows!

Whatever happens, survival is the name of the game I think. Hold assets that can endure without aggressive recapitalisations, and that have the potential top emerge out the other side in a strong position. Keep enough cash on the side lines to meet your living expenses, and try your best to keep an income coming in. Where possible, dribble some extra cash in where you can afford to (making a big swing in an attempt to time the cycle may not be the best move in my opinion).

Above all, try to avoid emotional decisions. Good luck out there.

No specific advice but if possible try and buy something today. Like everything else mastering your emotions is something you can improve with practice. If you have previously had a PT in mind for a stock that hits it today, practice filtering out the noise and buying a small amount.

@Winihas a point. On the emotional cycle of investing I think we are somewhere between fear and panic, possibly closer to panic. There will be very few buyers in the market this week.

Hi all,

I think it's easier to think of earnings yield. PE is the reciprocal of earnings yield. So a historical average PE of say 20 translates to a yield of 5%. I assume that excludes capital growth, so total yield could be say 10% for growth stocks. So the real question is are we going to get a forward yield of 5% on shares? What would the government bond rate (risk free rate) have to be for that and how likely is that given the level of debt out there? A recession may temporarily interrupt earnings but long term I'm assuming they will remain relatively constant.