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From reading Greenblatt's books and interviews over the years, I think one of the main points of his formula approach is to follow the data even in cases where there are concerns regarding individual equities in terms of the sustainability of earnings, etc. I read the G&D interview to basically extend that philosophy to the market overall ... so while earnings seem to be at unsustainable levels as a percentage of GDP and as a percentage of sales, perhaps this is part of the "wall of worry" that could propel stocks higher over the next few years.

I may be misinterpreting the formula approach or the G&D interview entirely but that's how I read it.

While I respect their opinions, I don't think their underlying assumptions make sense:

1. Margins are at new base levels higher because wages are new base levels lower. I see no indication that wages, even when sent overseas, stay low. In fact, I think China is finding that low cost workers are demanding and getting higher wages. The major factor in lower wages is business reluctance NOT to increase employment under ZIRP and the threat of recession. That should regress if/when unemployment decreases.

2. Looking back do we believe that interest rates can remain this low, and that devaluation will continue even with tremendous pump priming. This entire argument rhymes with those made with housing as people argued against a bubble. PLUS, eventually even with devaluation, the price devaluation of equities should decrease too.

3. I see no way that earnings overall can continue to rise tremendously faster than GDP. How does that work? Who is the last person in Brazil or some emerging country that must buy something before the model breaks down internationally.

I beginning to like this article by James Montier more and more every day.

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