Shiller PE Problems: CPI And GDP Growth

I would like your opinion on an original  issue I have with the Shiller PE10 index.  I wrote a blog post on that subject (and I merely did it to get feedback):

I had seen too many Shiller PE10 indices, and investment decisions which depend on it (last one being the GMO Capital “13th Labour of Hercules” White Paper). Found here: 13thLabourofHercules

In a nutshell: P/E10 is used where the denominator is inflated by official CPI-U, which has changed definition over time, with a wide convergence compared to the inflation indicated by a historic (1980, 1990) CPI-U index definition.

If you recalculate the Shiller PE10 with earnings inflated with “real inflation” (which I did in my post), you get 17 instead of 22 for today (roughly).

My post on PE: http://volatilitysmirk.blogspot.fr/2012/12/an-issue-with-shiller-pe10.html

John Chew’s reply: I applaud your efforts to correct a distortion but any government aggregate is flawed. See article on the CPI below.  Your adjustment may be less flawed but still you may not have a worthwhile tool/indicator. I mostly focus on individual companies and disregard discussions on market P/E.  First the P is distorted by the FED and the Earnings are distorted by GAAP accounting.  I would rather spend time on understanding the quotation (under the cartoon) on the stock market.

Hint: I highly recommend that you read this book: Stock Market, Credit, and Capital Formation

The above book is crucial to understanding the credit cycle’s influence on the stock market!

I don’t have a clue on how to advise you. However you go here and read Crestmont’s discussion on adjusted PEs.

http://www.crestmontresearch.com/

PE Report Oct 2012 Revised_Crestmont,   Secular Bull Markets in perspective PE,   Secular PE Bear Market, and   Siegel s Shortfall on PE

Also, any aggregate number is distorted–see comments on the fantasy of using Gross Domestic Product as an indicator for economic growth.

Should we believe in GDP?: http://mises.org/daily/3843

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What is wrong with the CPI http://mises.org/freemarket_detail.aspx?control=368

Via csinvesting.org