CAPE
DoubleLine Shiller CAPE U.S. Equities ETF
stock NYSE ETF

Meh, this post is just trying to 'fix' the lagging ten years. I.e., "let's make sure that the 2016 earnings in the denominator are properly compensating for the current state" - that can be tax codes or whatever you want.
I brought up the dotcom analogy only because it's useful context. I agree with some of what you said, but again, it goes beyond the scope of what the chart is trying to do. If you want to really debate me, you have a lot of catching up to do, and you'd have to actually read the posts (I don't expect this, but again, don't try to argue past the scope of what I've presented without further context). Here's an excerpt from the post that directly aligns with something that you've said:
>If we can get away from temporal CAPE comparisons, we can actually make more informed forecasting decisions. A CAPE of 7x in 1980 vs 38x today doesn’t really tell us that much. Forward returns will be lower today, sure, but if bonds were yielding 1%, a 38x CAPE doesn’t really look that bad. So the better comparison set is against alternative investments.
>
>I highlight this because the more adjustments we make to the Shiller PE through time, ***the more likely we are to miss something material - in one period or another - that would be essential for maintaining comparability across the full data set.***
In regards to "the one that deflates the bubble most is the one that contributed to it the most", I would say that it's not a bubble if the deflator is structural. If the government doubles the money supply, then earnings are expected to double...that's permanent and not indicative of a bubble (unless they plan to undo that element later). And it makes something like the Shiller PE look like a bubble when its most likely not.
In terms of valuation, I agree I guess. But again, it's beyond the scope, and I have several articles that I can share, but I won't start from scratch trying to explain my way through it in a reddit comment section.
None of this is meant to be offensive, but you're arguing against the two paragraphs I've written here, but I've already put a lot of thought and effort into why these are reasonable adjustments. And I've already shared those with the world. I certainly welcome the critiques, but I can't step through it here with you from scratch.

I would disagree, and I am talking about the methodology and the significance. The actual value whether it is above or below to Dot com or not is irrelevant.
The question to answer is - is the stock market index fairly valued?
That is a straight forward question - price to earnings is one metric. But for that to work - the base currency must be the same and the earnings measured must be the same.
Then I could say that I would prefer pre-tax total corporate earnings. But there is a trap - the corporate earnings methodology has evolved over time. - that is the first adjustment to be made - it brings the different time period on the same calibrated weighing scale as an analogy.
This CAPE should be the reference for seeing if the market is fairly valued or not. Everything else, you can say more or less cancels at the numerator and denominator, except when the currency has depreciated significantly against a basket of currencies and the total corporate earnings is largely earned abroad. With a strong and fairly stable currency, that is not the case with US Stock Market.

As an investor, whose goal is to evaluate if the market is a bubble or not, I would say that this is more than enough.


If the goal is to find what fueled a bubble, then one needs to dig deeper, start with hypothesizing different factors which may have contributed to a bubble. A policy maker may try to identify the factor by adjusting the CAPE against each potential factor - the one that deflates the bubble most is the one that contributed to it the most.

I am not sure, if adjusting for stuff does not help.
The primary question is that is the stock market an asset speculation bubble. CAPE captures this question in its raw form.
Unfortunately, there are several factors which blow up the bubble, such as the M2.
Then looking at each CAPE adjusted for each factor, tells the most significant factor - the one which deflates the peak of the CAPE.

CAPE ratio of 41

As a crude rule of thumb, when CAPE ratio gets over 30-35, it's likely the market will underperform 10-year Treasuries. This is pretty well established and not too controversial in the finance industry. It's why Vanguard and some of the other big brokerages in the last few years have recommended people consider boosting their bond allocation, even when younger. If US stocks average 3-4%/year until 2035-ish and bonds average 5-6% for the same period, you might want more bonds than stocks. This type of thing happened 2000-2012, and some other periods of time as well.
But there's a major difference between forecasting out 10-15 years, and 30 years.

Always thought the tax cut thing was a big blind spot for CAPE purists. You're basically averaging in earnings from a completely different tax regime and pretending it's the same thing. The M2 angle is interesting too, haven't seen many people try that approach but it makes sense in theory that more liquidity would push earnings up differently than just inflation would

In the past, I've played around with different ways to think about the CAPE ratio - it's considered a holy grail metric for many value investors (myself included) so it seemed prudent to try to think about it's flaws.
One obvious pitfall is ***changes to the tax code***. When Trump dropped corporate tax rates in his first term, that boost to earnings was a structural and permanent change that distorts the the Shiller PE ratio on a go-forward basis. In 2018, the traditional metric averages in earnings that were much lower than than the go-forward earnings were expected to be.
Another is less mechanical, but still intuitive I think - and that is ***using Money Supply as the deflator instead of inflation*** (which is currently used). The idea behind that is that more money equals more earnings, inflation may or may not have the same impact.
So I've created a chart that might be a useful supplement to the traditional Shiller PE. ***Let me know what you think.***
[***ADJUSTED CAPE CHART***](https://tools.riskpremiumresearch.com/metrics/shiller-adj/)
And here's some supplementary reading if you're interested in the methodology.
* [Fixing CAPE: Does Liquidity Matter?](https://riskpremium.substack.com/p/fixing-cape-does-liquidity-matter) \- rationale behind using M2 instead of inflation
* [Adjusting CAPE](https://riskpremium.substack.com/p/adjusting-cape) \- how to think about the impact of policy on the valuation metrics (especially CAPE)
* [ERN has a writeup](https://earlyretirementnow.com/2022/10/05/building-a-better-cape-ratio/) that also looks at the corporate tax rate, among other things.
In regards to ERN, I'm still not convinced that retained earnings and share repurchases should be thought of in the same way, but that's something that I will explore in the future.

Meh, this post is just trying to 'fix' the lagging ten years. I.e., "let's make sure that the 2016 earnings in the denominator are properly compensating for the current state" - that can be tax codes or whatever you want.
I brought up the dotcom analogy only because it's useful context. I agree with some of what you said, but again, it goes beyond the scope of what the chart is trying to do. If you want to really debate me, you have a lot of catching up to do, and you'd have to actually read the posts (I don't expect this, but again, don't try to argue past the scope of what I've presented without further context). Here's an excerpt from the post that directly aligns with something that you've said:
>If we can get away from temporal CAPE comparisons, we can actually make more informed forecasting decisions. A CAPE of 7x in 1980 vs 38x today doesn’t really tell us that much. Forward returns will be lower today, sure, but if bonds were yielding 1%, a 38x CAPE doesn’t really look that bad. So the better comparison set is against alternative investments.
>
>I highlight this because the more adjustments we make to the Shiller PE through time, ***the more likely we are to miss something material - in one period or another - that would be essential for maintaining comparability across the full data set.***
In regards to "the one that deflates the bubble most is the one that contributed to it the most", I would say that it's not a bubble if the deflator is structural. If the government doubles the money supply, then earnings are expected to double...that's permanent and not indicative of a bubble (unless they plan to undo that element later). And it makes something like the Shiller PE look like a bubble when its most likely not.
In terms of valuation, I agree I guess. But again, it's beyond the scope, and I have several articles that I can share, but I won't start from scratch trying to explain my way through it in a reddit comment section.
None of this is meant to be offensive, but you're arguing against the two paragraphs I've written here, but I've already put a lot of thought and effort into why these are reasonable adjustments. And I've already shared those with the world. I certainly welcome the critiques, but I can't step through it here with you from scratch.

I would disagree, and I am talking about the methodology and the significance. The actual value whether it is above or below to Dot com or not is irrelevant.
The question to answer is - is the stock market index fairly valued?
That is a straight forward question - price to earnings is one metric. But for that to work - the base currency must be the same and the earnings measured must be the same.
Then I could say that I would prefer pre-tax total corporate earnings. But there is a trap - the corporate earnings methodology has evolved over time. - that is the first adjustment to be made - it brings the different time period on the same calibrated weighing scale as an analogy.
This CAPE should be the reference for seeing if the market is fairly valued or not. Everything else, you can say more or less cancels at the numerator and denominator, except when the currency has depreciated significantly against a basket of currencies and the total corporate earnings is largely earned abroad. With a strong and fairly stable currency, that is not the case with US Stock Market.

As an investor, whose goal is to evaluate if the market is a bubble or not, I would say that this is more than enough.


If the goal is to find what fueled a bubble, then one needs to dig deeper, start with hypothesizing different factors which may have contributed to a bubble. A policy maker may try to identify the factor by adjusting the CAPE against each potential factor - the one that deflates the bubble most is the one that contributed to it the most.

I am not sure, if adjusting for stuff does not help.
The primary question is that is the stock market an asset speculation bubble. CAPE captures this question in its raw form.
Unfortunately, there are several factors which blow up the bubble, such as the M2.
Then looking at each CAPE adjusted for each factor, tells the most significant factor - the one which deflates the peak of the CAPE.

CAPE ratio of 41

As a crude rule of thumb, when CAPE ratio gets over 30-35, it's likely the market will underperform 10-year Treasuries. This is pretty well established and not too controversial in the finance industry. It's why Vanguard and some of the other big brokerages in the last few years have recommended people consider boosting their bond allocation, even when younger. If US stocks average 3-4%/year until 2035-ish and bonds average 5-6% for the same period, you might want more bonds than stocks. This type of thing happened 2000-2012, and some other periods of time as well.
But there's a major difference between forecasting out 10-15 years, and 30 years.

Always thought the tax cut thing was a big blind spot for CAPE purists. You're basically averaging in earnings from a completely different tax regime and pretending it's the same thing. The M2 angle is interesting too, haven't seen many people try that approach but it makes sense in theory that more liquidity would push earnings up differently than just inflation would

In the past, I've played around with different ways to think about the CAPE ratio - it's considered a holy grail metric for many value investors (myself included) so it seemed prudent to try to think about it's flaws.
One obvious pitfall is ***changes to the tax code***. When Trump dropped corporate tax rates in his first term, that boost to earnings was a structural and permanent change that distorts the the Shiller PE ratio on a go-forward basis. In 2018, the traditional metric averages in earnings that were much lower than than the go-forward earnings were expected to be.
Another is less mechanical, but still intuitive I think - and that is ***using Money Supply as the deflator instead of inflation*** (which is currently used). The idea behind that is that more money equals more earnings, inflation may or may not have the same impact.
So I've created a chart that might be a useful supplement to the traditional Shiller PE. ***Let me know what you think.***
[***ADJUSTED CAPE CHART***](https://tools.riskpremiumresearch.com/metrics/shiller-adj/)
And here's some supplementary reading if you're interested in the methodology.
* [Fixing CAPE: Does Liquidity Matter?](https://riskpremium.substack.com/p/fixing-cape-does-liquidity-matter) \- rationale behind using M2 instead of inflation
* [Adjusting CAPE](https://riskpremium.substack.com/p/adjusting-cape) \- how to think about the impact of policy on the valuation metrics (especially CAPE)
* [ERN has a writeup](https://earlyretirementnow.com/2022/10/05/building-a-better-cape-ratio/) that also looks at the corporate tax rate, among other things.
In regards to ERN, I'm still not convinced that retained earnings and share repurchases should be thought of in the same way, but that's something that I will explore in the future.

1. Shiller CAPE ratio is the second highest it's ever been
2. When the S&P 500 P/E is as high as it's been the return 10 year from now has almost always been below 2% which is not even beating inflation
Odds are decent paying down the guaranteed 6% rate is better than investing in an expensive stock market. The rule is to buy low, sell high. People would be buying high today at these prices (many don't seem to realize this though).

Yes I think you are right re equity share and inflation income. They also say a prolonged slump impacts success of 4% rule (not really a surprise) but it is something you need to ensure your portfolio or lifestyle can happen, especially with the current CAPE and near 30 year high bond yields requiring earnings to be higher to cover the higher discount rate.
Personally, I think bonds are becoming very attractive for retiree income but at same time want a big equity pillar as I get more into retirement to beat inflation.

I followed Aubrey Williams' model but there are different ways it can be done. He uses backtesting with FIRECalc. I'm sure there are some versions that weigh CAPE ratios. I haven't fully researched Income Lab's version as it is priced for financial advisors.
As I understand it, it is a relatively new model that is still being adjusted in terms of initial accuracy but allows for a much smoother path than a Guyton-Klinger style approach. All of that said, I don't have the level of math/statistics training as some. I'm just trying to convince myself of the best way to plan for withdrawals. I would love to hear any feedback once you digest the various options.

Post 2009 or so, it's outperformed. But for the first decade of this century (2000 to 2009) it was the opposite. The S&P 500 had a negative total return, while the VXUS equivalent had a positive return (as did bonds). For an entire decade VOO had an average annual total return of negative 1%, and people refer to it as the lost decade.
People are massively over-extrapolating the post GFC market as though it's a law of nature that the US equity market outperforms. Given that the current CAPE ratio for the US market is pushing its 1999 all-time high, I think it's foolish to be 100% US equities. Both international equities and bonds are now very attractively priced, and diversification is the only free lunch in investing!