While we all sit back and watch the train wreck that is Greece prepare to default (or whatever posh name they will come up with in due course) the UK goes on happily borrowing money at the rate of £17.4 billion for the month. That’s £17,400,000,000 in a month. What’s concerning me is that servicing our debt now takes 8.5% of government spending. That’s more than the complete tax take from corporation tax (page 6 here). All I can say is that the future generations will not be pleased. I’m just a simple Average Joe but it really just doesn’t seem right asking children who are not yet born to pay for our lifestyle today.
As this all unfolds we’ve seen stock markets around the world decrease in price in recent times. I actually have no idea what moves prices (that’s why I don’t trade) but I can’t help feel that Greece is having a good impact but also we shouldn’t forget good news like this from China.
What I do know is that my Retirement Investing Today strategy has helped me out over this period. This is because in addition to a standard buy diversified asset types, hold, rebalance periodically, reduce risk as I age strategic asset allocation I also tactically alter my asset allocation based on the cyclically adjusted PE values (CAPE or PE10) of the S&P500 and the ASX200. To put some meaning behind this were I using just strategic asset allocations the total target equity (UK, Australia, International, Emerging Markets) allocation for my portfolio would be 61%. Currently because of the relatively high PE10’s the tactical portion of my portfolio forces this down to 54%. So with a falling market I am losing less than I would have otherwise. Of course I mustn’t forget the opposite occurs in a rising market.
With all that in mind it’s appropriate to update the FTSE 100 cyclically adjusted PE (FTSE 100 CAPE) which I show in my first chart today. As of the 01 June 2011 (all previous data points are from the first trading day of each month for consistency) we were sitting at 13.6 against a long run average (well since 1993) of 19.7. If I replace the 01 June price with the current price as I write this post of 5747.8 the PE10 lowers to 13.2. That is a long way below the 20th Percentile for the dataset of 16.3 while the 80th Percentile is 23.5. The correlation between the FTSE 100 PE10 and the Real (inflation adjusted by the CPI) FTSE 100 Price remains a strong 0.68. In comparison the PE ratio is sitting at 11.3.
My second chart shows that real earnings are doing nothing special and are running about on trend.
Finally as always I must point out that I am not yet using the FTSE 100 PE10 as a base for determining UK equity asset allocations and buy/sell decisions in my portfolio. This is because I believe that a dataset only going back to 1993 is not sufficient however over time as this dataset becomes more statistically significant I will at some stage switch to it. Today I am using the S&P 500 PE10 where I have data back to 1881 courtesy of Robert Shiller. Not perfect but I’m relying on the close correlation of Equity markets around the world.
As always do your own research.
Assumptions include:- May 2011 price is the 01 May 2011 market close.
- UK CPI inflation data from May and June 2011 are estimated.