Wow, really interesting read. Thanks for the link.

Only trouble is that once people find patterns like this, they have a habit of disappearing. Hopefully this one is based on solid enough fundamental market forces that it persists after its publication. It was published in 2013 so we won't know for sure until after 2023.

That "predictor" or monetary stock and flow theory that blog post describes is well over 100 years old now and very well known (pre-Keynesian and going back to at least Irving Fisher). It has also been studied in detail in academia for decades if anyone wants to look up proper research studies about it. The blog author maybe should have mentioned that this is already a well known and tested predictor, and if the author hadn't heard of before writing that blog post I would question that entire site.

There are also several companies that specialize in providing this exact cash/equity data research to financial firms to help them manage their trading strategies and offering more practical details in their data than FRED data offers. For example TrimTabs [1] (no affiliation) has been around since 1990 according to their website [1] trimtabs.com

One thing to keep in mind is that predicting a downturn in the short-term is different than predicting long-run performance over 10, 20 or 30 years. I think the website is trying to do the former and your article is talking about the latter.

After being receptive to this article at the outset, I've become much more skeptical after thinking about it some more, to wit:

1. Why 10 years as the forward return period -- would be nice to see the situation for other return periods, even close to 10 years. Granted, it is a round number and doesn't appear to be cherry-picked, but still.

2. Why 1952 as the starting point -- presumably because the data from FRED starts there, but can this not be extended further back?

3. Why an implausibly linear relationship between the equity allocation percentage, which is bounded (0%-100%) vs. the returns, which is unbounded on either side, over such a large range of values? What is the mechanism to explain this? In other words, what is the proposed model that transmits allocation percentage into a return, even if the directionality of correlation is at least likely? What happens around 0% and 100% allocation -- do the extreme cases make sense?

I'd like to run my own data before I believe this.

The idea definitely makes sense, but what is the use of this graph? It only shows past returns based on information we already know. Far more interesting is the realization, which is not news for people who observe these things, that prices cannot go down until there is a crunch on the money supply. After all, the allocation of stocks usually remains constant or goes up when prices are going up, so only money supply can change the dynamic of price escalation. The same happens on the way down, because prices are decreasing, the allocation naturally reduces, even if investors want to keep it constant. Only new money supply can reverse the trend of equity price declines.

In the same blog as your reference [1] you can find one of the more thought provoking essays I have read in the last little while. It's a discussion about how easier stock market diversification should lead to permanently higher multiples on earnings.

http://www.philosophicaleconomics.com/2017/04/diversificatio...

Highly recommended.

Thanks, it would be interesting to see how this has trended throughout this year. The FRED chart is only current to January 1 2017, despite the terms being updated quarterly.

I personally don't think the past 100 years are going to look anything like the next 100 as far as the stock market is concerned. But we will see.

Pure astrology

From eye-balling the chart, it seems to consistently lag. Am I mis-reading it, or is this not actually a predictor?

If I'm reading this correctly, the indicator is currently at 0.42? Somewhat above the lifetime average of 0.35, and well below the 0.50 mark which would indicate stocks are overvalued relative to other assets?

I believe that corresponds quite accurately with the assessment we are currently at the early to mid stages of a secular bull market in equities analogous to the runs during the 1950s and 1980s. But as others have pointed out, it doesn't say anything about the possibility of a correction in the near term. Be careful out there!

When the yield curve begins to dip, a flight to quality will begin into crypto's.