The

VOL. 1, No. 15

Real Returns Report

Non-Consensus, Data-Driven Analysis
APRIL 30, 2012

Contents This Week Value Map

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Contents From the Archives License/ Disclaimer

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This Week
This week marks the return of The Real Returns Report after a brief hiatus. I've given much thought to the type of information and commentary that is most useful for global macro-focused investors and asset allocators. I've got some exciting improvements in the pipeline that I'll be rolling out over the coming weeks, as I extend the coverage from equities across multiple asset classes. In order to give you a flavor of what is coming, I have added gold to this week's Value Map [Indian equities are missing this week, but they'll be back soon.] The indicators I provide are based on a careful analysis of gold prices beginning in 1970 (just prior to the collapse of Bretton Woods.) As is our habit at The Real Returns Report, the price and return series from which I derived the indicators are inflationadjusted. Store or latent destroyer? of value As you will quickly grasp from the table on the following page, gold's trajectory over the past decade has far outstripped its traditional function as a store of value. I'm quite comfortable asserting that gold is in a bubble now that much is certain (or very highly probable, at least; certainties are hard to come by in asset markets.) How long this bubble will last and how much it will inflate before prices return to reasonable levels is another matter altogether and altogether unknowable one, at that. Still, knowing not to be part of a bubble has got to be worth something. Don't let yourself become blinded by this shiny metal! Enjoy your week and, as always, I welcome your feedback you can reach me at the e-mail address above. 1

Alex Dumortier, CFA alex.dumortier@gmail.com

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Value Map
U.S. - Broad market/ Large-caps/ Small-cap stocks
Current value (04/27) Aggregate U.S. equities, Equity q ratio Russell 1000, P/E 10 1.01 % Above (below) geometric mean 53% % Above (below) arithmetic mean 42%

Series length 1945 2011

Percentile rank 90%

Standard deviation 0.26

18.9

2004 2012

35%

(8%)

(10%)

4.0

S&P 500, Equity q ratio

0.75

1871 2012

56%

17%

8%

0.25

S&P 500, P/E10 Small-caps: 2000, P/E10 Russell

21.9

1881 2012

84%

44%

33%

6.6

31.2

2003 2012

46%

4%

2%

4.0

Source: Federal Reserve Board of Governors, Robert Shiller, Russell Indexes, Standard & Poor's, The Real Returns Report

Precious metals
Current value (04/27) Gold, Real price Gold, Trailing 10-yr inflation-adjusted return (ann.) $1,662.8 % Above (below) geometric mean 162% % Above (below) arithmetic mean 136%

Series length 1970 2012

Percentile rank 97%

Standard deviation $337.8

1,542 bps

1979 2012

90%

929%

753%

150 bps

Source: Kitco, The Real Returns Report, The World Gold Council

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Notes Equity q = Market value / Net worth (estimated at market prices) This is a variation on Tobin's q. When it is calculated over all U.S. equities, it is a quarterly series since it depends on data from the Federal Reserve's Flow of Funds report. However, it's possible to calculate the ratio mid-quarter, as I have done, by adjusting the market value to reflect changes in equity market indexes. Here, I used the Wilshire 5000 full capitalization index, which is the broadest measure of U.S. equities' market capitalization and performance. P/E10: Also known as the cyclically-adjusted PE (CAPE) or "Shiller PE" after Robert Shiller of Yale. The P/E10 uses the average of the prior ten years' earnings, on an inflation adjusted basis, as its earnings input. The rationale behind this is the observation that earnings are too volatile on a year-to-year basis to provide reliable information on a company's (or a market's) true earnings power. By using a ten-year average, the P/E10 smoothes out earnings volatility and allows investors to better identify legitimate changes in risk premiums. The figures in this table are derived from Professor Shiller's data (available from his web page), which include series of monthly average prices for the S&P 500/ S&P Composite Index.

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From the Archives

Member of Stock Exchange. "DO TO BE IN CELANESE?

YOU HAPPEN

intermediate chemicals with 2011 revenues of $6.8 billion. Celanese began life in 1918 in New York as the American Cellulose & Chemical Manufacturing Company. 1

Lady (concealing slight embarrassment). "WELL, AS A FACT I AM; BUT I WAS THINKING OF CHANGING INTO SOMETHING WARMER." This cartoon is from the famous London satirical weekly, Punch (it was originally subtitled The London Charivari.) Punch was established in 1841, but this cartoon dates from the 1920s the woman's hairstyle and fashion is a bit of a giveaway. Incidentally, Celanese (NYSE: CE) remains an independent, publicly-traded company to this day. It is leading manufacturer of

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The Real Returns Report by Alex Dumortier is licensed under a Creative Commons AttributionNonCommercial-NoDerivs 3.0 Unported License. Permissions beyond the scope of this license may be available at longrunreturns.blogspot.com.

Disclaimer: This research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. This research does not constitute a personal recommendation. The price and value of the investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.

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