McCulley: Fascinating question, and the short answer is no. You can't have another boom in financial asset returns without having a period of hell first, which is a long, long period of the stock market doing nothing and becoming cheap. Put another way, a period of the P/E multiple coming down and down and down as earnings continue to move up, but stock prices don't.
Over on the bond side, you'd need to have a period of upside for inflation, and therefore higher yields, before you could have a period of disinflation. So I think the answer to your question is that you can't really have another boom from here.
But I think Bill was right in that you can only have a disinflationary boom in asset prices when you have room to disinflate, and there is no room to disinflate now. There's only room to deflate. And that's the last thing that we want to do because deflation is absolutely nefarious for corporate solvency, as well as corporate return on capital.
We're in that situation that you can't get to a boom from here. You have to go somewhere else to start, and between here and somewhere else is a period of purgatory for financial asset returns, if not hell. It was a journey, not a destination, and I think that's usually important for investors to recognize, that disinflation is not a destination. Only during the journey do you make extraordinary returns on stocks and bonds. Once you get there, actually, there is nothing happy about price stability from the standpoint of returns on stocks and bonds.
As a quick aside, when you go back to the period you're talking about in the '50s, you had a re-rating of stocks versus bonds that helped stocks do well versus bonds. Effectively, P/E multiples on stocks went up relative to what would be implied by bonds, or put differently, you had a secular fall of the required dividend yield.
Simonoff: One last point. You seem to talk about deflation and feel that it's synonymous with a depression.
During the last 30 years of the 19th Century, a period of phenomenal technological change, the U.S. economy experienced significant deflation, and I think the price levels fell something like 30% over 30 years. You had phenomenal growth.
That was an extraordinary, exceptional time in economic history, with many booms and busts. But isn't it possible that deflation in a more mature economy like America today could be more manageable?
McCulley: I think it's manageable in some sectors. Technology, obviously. It probably would be more manageable if you hadn't had the preceding bubble in debt. The thing that's really nefarious about deflation is that it increases debtors' real debt burdens .
Japan has been managing in that environment, and they haven't had a depression on the order of the 1930s in Japan, but certainly, they've had a lost decade. So the deflation risk is not a canned green peas and small firearms scenario, but a lost decade scenario.