Inflation adjusted:

http://forums.pelicanparts.com/uploa...1318427752.jpg

Is that really an apples to apples comparison? What did you get on a 1980 911 compared to what you get today? Today's cars are loaded with high tech emissions, safety and more creature comforts than ever which only adds to the price of the car....and they have more power too?

SP500 P/E (on 2011E) is 12.3X.

Build yourself a simple DCF model for SP500. Assume earnings = free cash flow, which is a reasonable simplification over time. 10 year yield is 2.2%, use a simple discount rate of 2.2% + equity risk premium. To simplify again, assume earnings growth for the terminal period is zero. So we only have two variables: equity risk premium and earnings growth for the forecast period (10 years).

See what you have to do to those variables to get a 12.3X.

Here is one way to get there: ERP +5% (roughly the historical mean), forecast growth -3%. Another way is forecast growth
+2% and ERP +7.5%. Do those sound reasonable?

Does the longer term chart clarify? Look at the recent bull run (1980-2000), compare to prior bull runs. Look at the current stagnation (2000-), compare to prior stagnations. Better to look at real (inflation-adjusted). Better yet to look at a broader index, SP500 or Wilshire 5000.

The other real issue with this graph is that it's a version of the "Oh boy" curve. That's where the graph makes something look worse than it is because the perspective is skewed by the way the data is presented.

When the DOW is 10,000 and it moves 1,000 points, it moves only 10%. In the 50s when it was 1,000, 10% was 100 points. So the increase between 1980 and 2000 is magnified compared to the same percentage changes earlier that involved smaller absolute numbers.

The market did increase by a factor of 10 between 1980 and 2000, but increased by a factor of 10 between 1945 and 1965 too. In real terms it sank perhaps 25% between 1965 and 1980, so the run up after 1980 was partial inflationary, partially catch up, and partially an increase on a larger base, which makes the swing look magnified on a chart like this.

The economy is probably a hundred times bigger now than in the 60s, access to the markets is many times what it was. The trend chart does not predict disaster.

Well, the concept was that the economy would continue to grow if we could just continue to expand at a 3% growth rate, and continue to consume energy at a 3% increase as well. Ever wonder why we went to Iraq ? It is all part of the New American Century, something you may have heard Mitt Romney mention in the last few days.

Question is, how long can we continue to consume at ever increasing levels ?

http://upload.wikimedia.org/wikipedia/commons/3/3b/USDebt.png

This chart seems to explain it. It won't upload for some reason.