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Let’s Not Fall Into The Gap: Balance and Harmony Pay Well Indeed
What were the biggest factors in the Crash of 1987, and how pertinent are they today?
1. Correction of overvaluation:
The market was selling at 23 times earnings, for a reciprocal earnings yield of 4.3%, below the 9.64% yield then available on Treasury Bonds.
Today the PE Price to Earnings ratio is 83.3 for an earnings yield of 1.2%.
Ten and Thirty year Treasury bonds offer more than three times as much yield at 3.522% and 4.222%.
Of course we now have $12 Trillion of Treasury Bonds, with a higher default risk.
It is not most years the market goes up 66% and stays there on a plateau of permanent prosperity. It took two years for the 1987 market to recover. It took 25 years for the 1929 market to recover in nominal terms, longer in real terms.
2. Washington DC:
In October 1987, Congress Ways and Means led by Rostenkowski were ready to eliminate corporate interest deductions on takeovers that had been driving the market higher. Takeover specialist Carl Icahn called that the match that lit the dynamite.
Today, having created record $1.4 Trillion dollar deficits last year and still not funded the $104 Trillion shortfall in Medicare, Social Security and other government agencies, Congress (House led by Pelosi) is halfway to nationalizing the $2.6 Trillion healthcare industry at taxpayer expense with another unread bill.
