5 ms·

> The other half of the story is low interest rates/high asset prices. A year ago federal funds rate was ~2%; today it's ~0%. Yep! S&P 500 reaches pre-COVID le

by devy 6y ago

> The other half of the story is low interest rates/high asset prices. A year ago federal funds rate was ~2%; today it's ~0%. Yep! S&P 500 reaches pre-COVID level record high again recently all thanks to U.S. Fed's UNLIMITED Quantitative easing (QE) policy. The aftermath and the side effects[1] are going to be serious concerns now. [1]: https://en.wikipedia.org/wiki/Quantitative_easing#Risks_and_side-effects https://en.wikipedia.org/wiki/Quantitative_easing#Risks_and_...

JMTQp8lwXL 6y ago
Even with all the stimulus and lowered lending rates, today's PE ratios were dwarfed by the dot-com bubble. We're at 31, max was 44. https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe
- judge2020 6y ago
  A fun outlier is Tesla :) > PE Ratio (TTM) 984.55 https://finance.yahoo.com/quote/TSLA https://finance.yahoo.com/quote/TSLA
  - MichaelDickens 6y ago
    If you want to look at individual companies, there were lots of publicly-traded companies in 1999 that not only had negative earnings, but didn't even have revenue.
    - debian3 6y ago
      Like NKLA? With a market cap of $16B
    - owyn 6y ago
      Ha yes I worked for a company that went public in 1996 with approx 75k of revenue for the previous year.
- cm2187 6y ago
  But I'd argue the economic forecasts look a lot more bleak than in 1999.
  - grumple 6y ago
    In the short term, sure. But we have a more skilled, more educated population with more knowledge and better technology than ever before. We have challenges ahead of many sorts, but in terms of economics we’re pretty well equipped globally. You could argue the US is poorly equipped for manufacturing but that’s only one part of the economy.
    - fallingfrog 6y ago
      Sorry but this is not the state of things if you are under 50 years old. If you are under 50, you are probably better educated but have much less wealth than your parents did at the same age. Your health suffers from years of having no health care. Your teeth are bad. Climate change is going to change your life imminently, and nobody in a position to do something about it cares. You are putting off having kids, or choosing not to. You’ve seen three economic crises in your lifetime and expect more. You’re not so much hoping for things to get better as much as you’re waiting for the other shoe to drop. There is just little reason to be optimistic right now.
      - lotsofpulp 6y ago
        I don't know why this comment is downvoted when the income/wealth data supports it. So much of the US economic engine after WW2 up to 2000 was driven by the fact that people were having lots of kids, and the taxpayers back then were borrowing from future taxpayers. That works if you continue to have lots of kids, but now that that has slowed down, plus the increase in labor supply via women in workforce, and outsourcing to other up and coming countries, plus decrease in demand of labor due to automation, makes for a bleak future outlook for many (as opposed to a growth outlook in the decades after WW2). This is ignoring climate change and its effects. Which can only be remediated with reduced consumption. Which would also cause a reduction in demand for labor.
- nine_zeros 6y ago
  I mean, we know how the dot com boom ended. With the current state of the economy, I'm not expecting anything better after a bust.
  - throw0101a 6y ago
    > With the current state of the economy, I'm not expecting anything better after a bust. As someone who has another couple decades until retirement, a drop in asset prices would be great for me personally (though I'm sure it would be painful for many Baby Boomers). For better or worse I wasn't very liquid when the stock market indexes tanked in March. Another lessons learned: invest in bonds at least a bit, not only to reduce volatility, but also because you'll have some 'dry powder' available to be able to rebalance when you equities take a hit. Though total returns on bonds isn't too bad: > The Nasdaq 100 ETF (QQQ) is up an astonishing 25.5% this year during a pandemic and that’s including a 29% peak-to-trough drawdown. But the long-term treasury ETF (TLT) is up 27.3%. * https://awealthofcommonsense.com/2020/08/why-would-anyone-own-bonds-right-now/ https://awealthofcommonsense.com/2020/08/why-would-anyone-ow...
- omgwtfbyobbq 6y ago
  One other thing that makes comparison hard is the changes in the tax code. PE ratios in the past were based on certain corporate tax rates, which have been reduced significantly. Something like after tax PE ratio might level the field when comparing PE ratios across time.
  - 2arrs2ells 6y ago
    Earnings are already after tax. That's why EBITDA is EBITDA (earnings before interest, tax, depreciation and amortization).
    - omgwtfbyobbq 6y ago
      Thank you! For some reason I thought they were pre-tax. Edit - It seems like adjusting for whatever the fed funds rate is might provide a more accurate comparison. https://www.suredividend.com/interest-rates-valuation/ https://www.suredividend.com/interest-rates-valuation/
Dylan16807 6y ago
It's something to keep an eye on, but it doesn't seem like we're going to have issues from too much inflation in the immediate future. We could stand to do better about wealth inequality...
- TearsInTheRain 6y ago
  The Fed is a driver of wealth inequality by inflating asset prices and backstopping risk. Inflation hurts the poor and middle classes the most.
  - deleted 6y ago
    [deleted]
- puranjay 6y ago
  I really feel there are going to be big political ramifications of all this. The inequality is, honestly, not just unjust now, it's humiliatingly so. Expect more angry people electing even angrier people into important posts. There is some incredible short-termism in all this policy.
- baconandeggs 6y ago
  Inflation is wealth inequality. It benefits disproportionally the rich, and when done as part of QE it goes straight into assets like AAPL.
  - Nasrudith 6y ago
    Technically it benefits those with share of productivity be it income or assets or in enough debt that the diminishment of existing value helps them more than it hurts. The people that applies to may be largely rich in any given instance in practice but this bit of pedantry is important as "rich" are not homogenous in their interests.
  - perl4ever 6y ago
    What is your explanation for single-digit P/Es the last time the US saw real inflation?
lr 6y ago
I do believe Apple's stock has also increased almost 20% since they announced their 4 for 1 stock split (less than a month ago).
throw0101a 6y ago
> Yep! S&P 500 reaches pre-COVID level record high again recently all thanks to U.S. Fed's UNLIMITED Quantitative easing (QE) policy. I question the validity of this hypothesis, at least in so far that it has a predominant or even major effect: * https://www.youtube.com/watch?v=K3lP3BhvnSo&t=8m50s https://www.youtube.com/watch?v=K3lP3BhvnSo&t=8m50s The video cites an US Fed paper on the subject (see Section 3): * https://www.federalreserve.gov/PUBS/ifdp/2014/1101/ifdp1101.pdf https://www.federalreserve.gov/PUBS/ifdp/2014/1101/ifdp1101.... It's mostly "policy shocks" / surprises that cause changes in bond rates, which may have knock-on effects to other asset classes. Indexes have gone up and up and hit all-time highs regularly over the decades on their own: there's no need to throw QE magic pixie dust as a cause. Further, in the past, a much smaller percentage of the population probably had equity ownership: as pensions have given way to private retirement funds (401(k) in the US), and so you have people buying the S&P 500 in their Vanguard accounts. On the flip side, you have a large population cohort (Baby Boomers) entering retirement age, and they want safer asset classes so are going after bonds, driving down yields. With yields getting lower, anyone who wants returns is stuck with equities. So you have one group of people bidding up equities for growth towards retirement, and another group bidding down bonds for safety in retirement.
- microcow 6y ago
  I'm not confident about the 2008-present effects of QE, but I think it's more likely to affect stock and bond prices than Baby Boomers retiring. The announcement of the most recent round of QE is one of the "policy shocks" of the kind referred to by the 2014 Fed paper. Prior to the announcement, Apple, S&P 500, and bond funds were at 1-year lows. This month they are at all time highs.

by devy 6y ago

JMTQp8lwXL 6y ago

Even with all the stimulus and lowered lending rates, today's PE ratios were dwarfed by the dot-com bubble. We're at 31, max was 44. https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe

judge2020 6y ago
A fun outlier is Tesla :) > PE Ratio (TTM) 984.55 https://finance.yahoo.com/quote/TSLA https://finance.yahoo.com/quote/TSLA
- MichaelDickens 6y ago
  If you want to look at individual companies, there were lots of publicly-traded companies in 1999 that not only had negative earnings, but didn't even have revenue.
  - debian3 6y ago
    Like NKLA? With a market cap of $16B
  - owyn 6y ago
    Ha yes I worked for a company that went public in 1996 with approx 75k of revenue for the previous year.
cm2187 6y ago
But I'd argue the economic forecasts look a lot more bleak than in 1999.
- grumple 6y ago
  In the short term, sure. But we have a more skilled, more educated population with more knowledge and better technology than ever before. We have challenges ahead of many sorts, but in terms of economics we’re pretty well equipped globally. You could argue the US is poorly equipped for manufacturing but that’s only one part of the economy.
  - fallingfrog 6y ago
    Sorry but this is not the state of things if you are under 50 years old. If you are under 50, you are probably better educated but have much less wealth than your parents did at the same age. Your health suffers from years of having no health care. Your teeth are bad. Climate change is going to change your life imminently, and nobody in a position to do something about it cares. You are putting off having kids, or choosing not to. You’ve seen three economic crises in your lifetime and expect more. You’re not so much hoping for things to get better as much as you’re waiting for the other shoe to drop. There is just little reason to be optimistic right now.
    - lotsofpulp 6y ago
      I don't know why this comment is downvoted when the income/wealth data supports it. So much of the US economic engine after WW2 up to 2000 was driven by the fact that people were having lots of kids, and the taxpayers back then were borrowing from future taxpayers. That works if you continue to have lots of kids, but now that that has slowed down, plus the increase in labor supply via women in workforce, and outsourcing to other up and coming countries, plus decrease in demand of labor due to automation, makes for a bleak future outlook for many (as opposed to a growth outlook in the decades after WW2). This is ignoring climate change and its effects. Which can only be remediated with reduced consumption. Which would also cause a reduction in demand for labor.
nine_zeros 6y ago
I mean, we know how the dot com boom ended. With the current state of the economy, I'm not expecting anything better after a bust.
- throw0101a 6y ago
  > With the current state of the economy, I'm not expecting anything better after a bust. As someone who has another couple decades until retirement, a drop in asset prices would be great for me personally (though I'm sure it would be painful for many Baby Boomers). For better or worse I wasn't very liquid when the stock market indexes tanked in March. Another lessons learned: invest in bonds at least a bit, not only to reduce volatility, but also because you'll have some 'dry powder' available to be able to rebalance when you equities take a hit. Though total returns on bonds isn't too bad: > The Nasdaq 100 ETF (QQQ) is up an astonishing 25.5% this year during a pandemic and that’s including a 29% peak-to-trough drawdown. But the long-term treasury ETF (TLT) is up 27.3%. * https://awealthofcommonsense.com/2020/08/why-would-anyone-own-bonds-right-now/ https://awealthofcommonsense.com/2020/08/why-would-anyone-ow...
omgwtfbyobbq 6y ago
One other thing that makes comparison hard is the changes in the tax code. PE ratios in the past were based on certain corporate tax rates, which have been reduced significantly. Something like after tax PE ratio might level the field when comparing PE ratios across time.
- 2arrs2ells 6y ago
  Earnings are already after tax. That's why EBITDA is EBITDA (earnings before interest, tax, depreciation and amortization).
  - omgwtfbyobbq 6y ago
    Thank you! For some reason I thought they were pre-tax. Edit - It seems like adjusting for whatever the fed funds rate is might provide a more accurate comparison. https://www.suredividend.com/interest-rates-valuation/ https://www.suredividend.com/interest-rates-valuation/

Dylan16807 6y ago

It's something to keep an eye on, but it doesn't seem like we're going to have issues from too much inflation in the immediate future. We could stand to do better about wealth inequality...

TearsInTheRain 6y ago
The Fed is a driver of wealth inequality by inflating asset prices and backstopping risk. Inflation hurts the poor and middle classes the most.
- deleted 6y ago
  [deleted]
puranjay 6y ago
I really feel there are going to be big political ramifications of all this. The inequality is, honestly, not just unjust now, it's humiliatingly so. Expect more angry people electing even angrier people into important posts. There is some incredible short-termism in all this policy.
baconandeggs 6y ago
Inflation is wealth inequality. It benefits disproportionally the rich, and when done as part of QE it goes straight into assets like AAPL.
- Nasrudith 6y ago
  Technically it benefits those with share of productivity be it income or assets or in enough debt that the diminishment of existing value helps them more than it hurts. The people that applies to may be largely rich in any given instance in practice but this bit of pedantry is important as "rich" are not homogenous in their interests.
- perl4ever 6y ago
  What is your explanation for single-digit P/Es the last time the US saw real inflation?

lr 6y ago

I do believe Apple's stock has also increased almost 20% since they announced their 4 for 1 stock split (less than a month ago).

throw0101a 6y ago

> Yep! S&P 500 reaches pre-COVID level record high again recently all thanks to U.S. Fed's UNLIMITED Quantitative easing (QE) policy. I question the validity of this hypothesis, at least in so far that it has a predominant or even major effect: * https://www.youtube.com/watch?v=K3lP3BhvnSo&t=8m50s https://www.youtube.com/watch?v=K3lP3BhvnSo&t=8m50s The video cites an US Fed paper on the subject (see Section 3): * https://www.federalreserve.gov/PUBS/ifdp/2014/1101/ifdp1101.pdf https://www.federalreserve.gov/PUBS/ifdp/2014/1101/ifdp1101.... It's mostly "policy shocks" / surprises that cause changes in bond rates, which may have knock-on effects to other asset classes. Indexes have gone up and up and hit all-time highs regularly over the decades on their own: there's no need to throw QE magic pixie dust as a cause. Further, in the past, a much smaller percentage of the population probably had equity ownership: as pensions have given way to private retirement funds (401(k) in the US), and so you have people buying the S&P 500 in their Vanguard accounts. On the flip side, you have a large population cohort (Baby Boomers) entering retirement age, and they want safer asset classes so are going after bonds, driving down yields. With yields getting lower, anyone who wants returns is stuck with equities. So you have one group of people bidding up equities for growth towards retirement, and another group bidding down bonds for safety in retirement.

microcow 6y ago
I'm not confident about the 2008-present effects of QE, but I think it's more likely to affect stock and bond prices than Baby Boomers retiring. The announcement of the most recent round of QE is one of the "policy shocks" of the kind referred to by the 2014 Fed paper. Prior to the announcement, Apple, S&P 500, and bond funds were at 1-year lows. This month they are at all time highs.