Friday, June 6, 2014

Janet Yellen and hindsight value – by Andrew Smithers

“Janet Yellen, the Fed’s head, rather bizarrely used the prospective price/earnings ratio, one of the weakest of all measures, to justify a statement that Wall Street was not overvalued. (This was doubly strange since her husband, George Akerlof, co-wrote a book with Robert Shiller, who has championed a much better measure…” I quote from a recent Buttonwood column in The Economist. 
Calling Ms Yellen’s comment “strange” seems very kind. Many people would rate the use of bad data in preference to better as irresponsible rather than strange, particularly when it carries with it the authority of the US Federal Reserve. 
In my first blog I pointed out that, according to both the cyclically adjusted price/earnings ratio and q, the US stock market was overvalued more than 70 per cent and that these were the only valid measures of value that I had been able to find. I also remarked that using prospective PEs was, together with many other measures, demonstrably invalid.

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