The ASX 200 cyclically adjusted PE ratio (ASX 200 CAPE or ASX200 PE10) – December 2010 Update

The Australian ASX200 is currently 4763. Let’s look at the usual monthly indicators that I monitor every month for this index. My first chart shows the cyclically adjusted PE ratio (ASX200 PE10 or CAPE) at 17.8 which is up from 17.2 last month. The P/E ratio on the other hand heads in the opposite direction, heading downwards from 18.6 to 16.4.

This year my strategy is not adding any value - My Retirement Investing Today Current Low Charge Portfolio – December 2010

This blog is not trying to sell you anything which means that I can freely share with you both the positives and the negatives of my strategy. Today though is neither really a positive or negative experience with my year to date Personal Rate of Return sitting at 8.6%, compared with my Benchmark Portfolio which has returned 8.5%. Of course given that I spend significant time maintaining my strategic and tactical asset allocations many would argue that if I calculated the cost of my time then I would probably be behind compared to the benchmark portfolio which would probably cost a maximum 1 hour of time per annum with a rebalance at the start of every year. The only defence I have is that my portfolio has had to pay some fees (Equity ETF, Pension etc costs), even if I do try an minimise them, and also has paid some tax (cash is taxed at 20%).

The FTSE 100 cyclically adjusted PE ratio (CAPE or PE10) – December 2010

Today’s first chart shows that with the nominal FTSE 100 price moving from 5694.6 (01 November) to 5642.5 (01 December) over the month, a decrease of 0.9%, the cyclically adjusted PE ratio (PE10 or CAPE) has also fallen from 14.1 to 13.9. These calculations are based on using the Consumer Price Index (CPI) to correct for inflationary effects. If I was to use the Retail Prices Index the PE10 would be 13.6. This is still well below the FTSE 100 PE10 20 Percentile for this dataset of 16.8 while the 80 Percentile is 23.7. The long run average is 19.9 for the dataset shown in the chart. The correlation between the PE10 and the Real (inflation adjusted by the CPI) FTSE Price remains a strong 0.69. In comparison the standard PE ratio is sitting at 11.6, down from 14.5 last month.

When Money Dies and Gold Priced in British Pounds (GBP) – December 2010 Update

With us living in a world where:

- governments around the world are in an apparent race to devalue their currencies the most through various policies including Quantitative Easing (or as I like think of it, money printing) if you are in the US or UK;

- Central banks in countries like the UK are running crazily low interest policies while allowing inflation to run a ‘little’ allowing the reckless, including the government, to inflate some debt away while thinking they can keep it all in control;

- Europe is implicitly promising to bail out every dodgy Euro zone economy which in my opinion will soon see them also heading down the money printing route to buy government debt; and

- many developed countries are carrying so much debt that it seems inconceivable that they will ever repay it and instead will attempt to inflate away the debt (or maybe forcing bond holders to take a haircut);

I thought it best to start understanding what happens in an economy when inflation rips and disaster strikes. I have therefore started to read the book “When Money Dies – The Nightmare of the Weimar Hyper-Inflation” by Adam Fergusson. This book charts the collapse of the Weimar Republic’s Mark which in 1923 had an exchange rate to the dollar of 4,200,000,000,000 Marks. This was a time when the “Republic was all but reduced to a barter economy. Expensive cigars, artworks and jewels were routinely exchanged for staples such as bread; a cinema ticket could be bought for a lump of coal, and a bottle of paraffin for a silk shirt.”