Q Continuum

Via Felix Salmon, Bill Gross writes about the all-powerful Q:

The basic logic behind “Q” is that capitalism works. If the “Q” is above 1.0, then the market is valuing a company at more than it costs to reproduce it; stock prices should fall. If it is below 1.0, then stocks are undervalued because new businesses can’t be created at as cheap a price as they can be bought in the open market. In the short run, this ratio is volatile as shown below but it tends to be mean reverting, which is critical. As long as capitalism is a going concern, “Q” should mean revert to 1.0. If so, then oh, oh what a “Q”! Today’s Q ratio has almost never been lower and certainly not since WWII, implying extreme undervaluation.

Maybe I’m an idiot, but I feel like this explanation can’t survive a cursory glance at the chart. We’re looking at 56 years of data and the ratio has been below 1.0 for something like 46 of them. There’s no reverting to 1.0 here, it looks more like reverting to 0.6 or so by my eyeball.