I received an email today from William "Bill" Bengen, the distinguished financial planner whose pioneering work on retirement savings withdrawal rates revolutionized the financial planning industry. His book Conserving Client Portfolios During Retirement should be mandatory reading for all financial planners.

Bill wrote:

Your current piece about the Regression to Trend suggests that the market could be considered valued 40% below trend if the alternative CPI is used for inflation adjustment. I imagine that's possible. That means prices would have to rise about 65% to get to fair value. But if that were to happen, with dividends constant, the dividend yield would decline from the current 2% to about 1.2%. That doesn't make much sense to me, even if dividend payouts are less than historical levels.

I believe that the non-adjusted chart is closer to being correct. It is verified by other measures of stock market value, such as the Q ratio. What do you think?

I think Bill makes an excellent point, to which I'd add that the official CPI is has been a key driver for Federal Reserve policy which in turn has had a dramatically positive influence on business operations in the US and elsewhere. The secular bull market from 1982-2000 would have been inconceivable had the alternate CPI measure of inflation (illustrated here) been accepted as reality.

For those unfamiliar with the Q-Ratio, it's is a market indicator developed in 1969 by James Tobin, who later received a Nobel Prize in Economics. Put simply it assumes that the combined market value of all the companies on the stock market should equal to their replacement costs. The Q-Ratio is the main indicator of secular bottoms in Russell Napier's outstanding book Anatomy of the Bear. Some readers may recall Napier's December 2008 Bloomberg forecast that the S&P 500 may plunge another 55 percent to 400 by 2014. For a more recent perspective on the Q-Ratio, including a chart, see this article by Robert Huebscher, Founder and CEO of Advisor Perspectives.