Remora

We recommend the Round Table in today's NYT Biz section. if you want a pretty good cross-section of Wall Street thinking about the economy. Limited Inc, of course, is not a consensus type of entity -- that the predictions of the three players interviewed average out to a Dow around 11-3 -- that in other words, the p/e will continue at around 23 -- seems incredible. However, the incredibility of a figure has never stopped Wall Street from hitting it. The question is, why should we care. There is something wierd going on in the economy, and everybody knows it. The weird thing is what, exactly, the equities markets are measuring. Here's a quote from one of the roundtable guys (Byron Wien) which should be plumbed slowly:

"You've got to look at what you're entitled to as an investor. In my view all you're entitled to is the profit growth plus the dividend. In the 20-year period from 1981 to 2001, that was about 10 percent. The market during that period gave you about 15 percent. So you got five extra percentage points of reward in relation to how much earnings were increasing. That left the market at a point where, particularly if profits are struggling, there could be some adjustment. And that's why the returns from the market may be below the long-term average of 10 percent."

Coincidentally, this is also the period in which the derivatives market exploded. Except that we don't think this is a coincidence -- we think the meta-investment structure, the market in indexes, options, and the whole bestiary of exotic financial instruments wielded by hedge fund managers is driving that extra five percent.