16 ms·

The stock market is the cheapest since 1980

120 points by dankul1 6y ago

dpc_pw 6y ago
I would like to see this metric but where instead of substraction they should use division.
- shabda 6y ago
  Subtraction makes sense here as you are trying to find the excess yield of equity over dividend. A yield of bond: 0.5, equity 4 vs bond: 1, equity: 4.5 doesn't change his argument, but changes the ratio significantly.
d0gbread 6y ago
My favorite line from the article is "There are simply no alternatives" as people build cash reserves and buy stores of value like gold and Bitcoin. People are hungry for an alternative, but yes I suppose if you only consider stocks and bonds this article has a point.
- SigmundA 6y ago
  This, I want an alternative, high interest savings accounts and CD used to be a good safe place for some savings, now your losing value relative to inflation. A mixed portfolio makes no sense. Nobody has a pension, everyones retirement is in the market, none of this seems good to me long term, all very fragile. Either your in stocks or Bitcoin at this point or your at negative rates relative to inflation.
  - bgorman 6y ago
    What about real estate? Unlike stocks, land/buildings have some inherent value
    - jordache 6y ago
      who is going to predict the post covid future of commercial real-estate market?
      - scarmig 6y ago
        Well, if someone predicts accurately the future of commercial real estate, that who is likely to be a fair bit richer than they are today.
    - nightski 6y ago
      Stocks have inherent value as well, due to dividends. Price growth is not the only way to make money in the market.
      - nerfhammer 6y ago
        also, book value, though it's usually much smaller than market cap. if a stock ever fell below its book value you could buy it out and liquidate its assets to make money, so the book value should be a price floor for the stock.
        sgerenser 6y ago
        This is extremely uncommon these days, but back in the dark days of the 1980s buying stocks below book value was a common way that people like Warren Buffet made a lot of money.
    - jcpham2 6y ago
      I'm in real estate (rental properties), an IRA spread across 5 growth funds, and maybe 10-20% bitcoin at this point. Edit: Exited my stock positions this year
      - programmertote 6y ago
        As a novice to bitcoin investing, could you share the best (most secure/trusted) way to buy bitcoin? Thank you!
  - marvin 6y ago
    What you'd really want is a machine you can buy that provides you useful goods and services at almost-zero maintenance cost. The stock market is sort of a proxy for this wish: You have excess capital, and you want to invest it in something that yields a return. Maybe that's a machine producing goods you can sell, maybe it's a machine that produces food and gives medical aid to you, the owner. You don't want to operate such a machine (if it is available at all), so you outsource the responsibility for a percentage of your return. It seems almost absurd that the world can end up in a state where it is impossible to invest capital in a way that provides any significant return at all. All is relative, but people still want to eat and get shelter from the rain.
    - dv_dt 6y ago
      The stock market is increasingly disconnected from investments in real-world improvements of productivity and even if they manage to invest there in some tiny measure, it's not delivered to most people in the economy. That's the highest risk item in this whole discussion.
      - marvin 6y ago
        I've had the sense that growth investments are almost completely closed to the public in the United States. This trend has been gradually solidifying ever since the dot-com bubble, and has reached its logical conclusion today. The only IPOs happen when companies reach 100-billion dollar valuations, and sometimes not even then. IPOs seem more likely for private companies that have lost their growth potential. There's certainly some potential for growth and returns still available when companies reach this stage, but the lion's share is taken out already. The index funds are also often at the ass end of this phenomenon, buying in only at very high valuations. The most absurd example happening a week ago, with Tesla entering the S&P500 as the sixth biggest company. I'd like the possibility of investing in a fund of unlisted companies. The growth sector that's not represented in the major indexes is far too big to ignore. I try to compensate by having a portion of my wealth in "small cap" companies, but there is still a very significant sector that's completely missing.
        6y ago
  - raiyu 6y ago
    But this is the issue with zero interest rates. There is no incentive to save, but alternatively, it also pushes interest rates on mortgages to near zero which increases the demand side by opening up home ownership to people that before couldn't afford it which pushes up prices. The same occurs with stocks, with no returns in other asset classes everyone floods in to stocks and pushes the prices higher. This is definitely the new normal going forward, because you can't increase interest rates without dramatically reducing purchasing power, which in turn leads to slow down across many areas of the market.
    - peteradio 6y ago
      Maybe investment in real but non-liquid assets would make sense. If stocks are bogus valued then the real money would be "in-the-know" asset purchases. Personally I am trying to get what I see is under-valued unique rural property in a locale favored by an apparently changing climate.
      - fzzzy 6y ago
        Better act fast, the rural property markets are on fire. Where I grew up I can always remember hundreds of for sale signs as long as I lived here because there just weren't any jobs. Now, everything sold last fall. It's unprecedented.
        Apocryphon 6y ago
        What do the property owners plan on doing with that land if there aren't any jobs? Or are there jobs there now?
        SpaceRaccoon 6y ago
        Remote work is my guess.
        bergie 6y ago
        Thanks to COVID there are now jobs everywhere where there is an Internet connection
  - derekp7 6y ago
    My concern is when retirement comes, and it is time to start selling off stocks. If there are more retirees than employees buying stocks via their 401k, won't that cause a price crash?
    - bostik 6y ago
      Annuity buy-backs, anyone? Someone at Wall Street must have thought of that and pitched the securitisation already. Think about it - large companies agreeing up front to spend a minimum of X billion a year buying back their stock. And then WS banks parceling both sides of the risk and exposure to investors seeking anything with non-negligible yield.
    - nerfhammer 6y ago
      slowly transition your assets away from growth stocks to bonds and dividend-issuing stocks as you age
    - sgerenser 6y ago
      Not really, because the process is very gradual. You don’t sell all your stocks the day you retire, you gradually wind down until you hit some reasonably conservative allocation in your 80s or so like 30% stock/70% bonds. This certainly can put some downward pressure on the stock market if the rate of this winding down is higher than the rate that young people are adding to their 401ks but it’s counterbalanced by many other forces.
    - imtringued 6y ago
      Retirees generally only liquidate a portion of their funds. They start withdrawing something like 4% per year roughly half a decade ahead (to avoid withdrawing during a crash) of retirement. As others said they also shift away from risky investments.
- chadash 6y ago
  Gold has terrible historical returns compared to equities. If you bought gold 30 years ago and sold now, you'd have about a 5x return. You would have done significantly better if you bought stocks 30 years ago and sold them at the bottom of the market in March. If you sold now, you'd have done more than twice as well. BTC might go up, might go down. But it's a risky asset and there's only so much money that can flow into a non-productive asset.
  - david927 6y ago
    You could have said the same in 1929. The last 30 years has had an expanding market. We're now facing a deeply contracting market. Equities will lose most of their value; gold will do the opposite.
- fredophile 6y ago
  Gold and bitcoin won't help you. When stock prices move down, correlations between stocks go up. If you look at the last couple downturns you can see that this correlation between assets and asset classes has increased. Stocks dropping leads to people selling their bitcoin and gold which causes those prices to drop. Falling prices make speculators get scared and sell to cut their losses which drives prices down further and the cycle continues. What you really want to find is an asset that is negatively correlated to the stock market while stocks are dropping.
  - pcdoodle 6y ago
    Please share an example of something that has this property.
    - jmalicki 6y ago
      For a long time timber (as in, owning a forest and letting people log it occasionally) has been one of the favorites of large endowments and hedge funds. https://investmentsandwealth.org/getattachment/cc0f7589-7411-41d8-82c2-f287892ac2da/IWM15SepOct-SeeingForestForTrees.pdf https://investmentsandwealth.org/getattachment/cc0f7589-7411...
    - fredophile 6y ago
      There aren't many examples. Volatility is the best one I'm aware of. However, if you're regularly buying volatility to hedge your stock exposure you're going to lose a lot of money that way.
    - reducesuffering 6y ago
      Long term US bonds are definitely the most prominent example for the last 40 years. Past 100 years though, not really. Check the ETF TLT compared to total US stock market, VTI, on https://www.portfoliovisualizer.com/backtest-portfolio https://www.portfoliovisualizer.com/backtest-portfolio or the asset classes on https://www.portfoliovisualizer.com/backtest-asset-class-allocation https://www.portfoliovisualizer.com/backtest-asset-class-all... Their negative correlation zig-zag is remarkable the past few decades. Some research postulates that in a decreasing interest rate environment (past 40 years), they’re negatively correlated, while in a rising rate environment they’re positively correlated, leading to the past 100 years minimal (almost 0) long term correlation.
nickthemagicman 6y ago
Does this mean cheapest as far as returns go? Or are you buying stocks at a very bargain rate right now?
- mywittyname 6y ago
  The article is using CAPE yield as a measure. Basically, showing that CAPE yield are maintaining at a solid 3.8%. https://www.investopedia.com/terms/c/cape-ratio.asp https://www.investopedia.com/terms/c/cape-ratio.asp
- findthewords 6y ago
  The fact that Shiller had to come up with a new metric to rationalize exuberance should be worrying. "The time had come, as in all periods of speculation, when men sought not to be persuaded of the reality of things but to find excuses for escaping into the new world of fantasy." – John Kenneth Galbraith https://en.wikipedia.org/wiki/The_Great_Crash,_1929 https://en.wikipedia.org/wiki/The_Great_Crash,_1929
cbanek 6y ago
It's interesting that they're comparing against the 10 year bond yield to basically prove what the market knew 4 years ago when Europe started flirting with negative interest rates - TINA - There Is No Alternative, you can't put your money in a CD, savings account, or bonds, and expect to get a decent yield / return on your money. So people put their money into the stocks of dividend aristocrats (companies that have increased and maintained dividends over long periods of time) to be "bond-proxies." This pushed up those prices a lot. But no matter where you are, it seems there's not much easy money, unless you're a private VC investor. I think the real lesson here is everyone is getting squeezed out. I feel like the other shoe is going to drop some day, but who knows when. The weaker hands (poorer people) will inevitably fold first, increasing wealth inequality, as it usually does.
- marvin 6y ago
  Famous last words, but: I wouldn't be entirely surprised if, in 10 years' time, we'll hear the same lamentations about the stock market as we do about housing. "The older generation climbed up there and pulled up the ladder". Only slim returns, and you can't expect to make much from it unless you happened to be invested before the great re-pricing hit.
  - cbanek 6y ago
    I think what might change things (at least in the US) is the demographic shifts. Housing demand (and so, related, prices) is obviously related to the number of people and what they can pay. If anything, the lowering of the 10 year yield, which is used to determine mortgage rates, allows people to spend more for a house due to the low interest rate. If interest rates go up, then the prices should go down to keep steady with what people are able to pay for a monthly mortgage. Same thing about all the retirees eventually dying off and liquidating or handing down all this money, stock, and housing (honestly, I feel the same about political leanings, but that seems fairly steady unfortunately). Seems like if history has shown us anything, while one person might be good with money, the same can't always be said for their children (3rd generation rule - by the 3rd generation, 90% of wealthy families lose it).
grey-area 6y ago
...when compared only to bonds (which currently governments are pushing to zero yield). By any other measure they look far too expensive for the current economic outlook.
- AnimalMuppet 6y ago
  Right, but if I'm trying to buy a return, what are my options? Stocks, bonds, some kinds of real estate, and maybe annuities. But annuities basically track with bonds. For the segment that is trying to buy a return, and doesn't want the hassle of managing rental property, stocks and bonds are pretty much the only games there are. So, at least for them, the question is: How much does it take to buy a given return? The question isn't the only one in investing, but it's also not an insane way of looking at the market...
  - grey-area 6y ago
    I completely agree the current irrational exuberance in stock markets is caused by the artificially depressed yields on bonds - it is yet another unintended consequence of QE. You haven't mentioned risk though - this is a very risky game and the more mispriced assets get the riskier it is. What happens when interest rates rise?
  - anm89 6y ago
    I want to buy a bicycle but bicycles cost $10k right now because of a parts shortage. But what if I want a bike, and also car would be $20k, so actually bicycles are pretty cheap! At the end of the day though, when the short term situation resolves itself, that bike is still worth $500 and it wasn't cheap. I think the fallacy here is that you don't HAVE to buy returns. You could choose to just eat the inflation or pick an alternative asset class.
    - imtringued 6y ago
      The idea would be to invest into bicycle companies to make money off the shortage which encourages more companies to make bicycles effectively solving the shortage.
justicezyx 6y ago
The article is written with filler words to buff up a simple idea: stock market is now more attractive than ever compared to bond market (I am not expect in financial jargons, so could be wrong), because the interest rate is so low. This idea sounds self evident, and everyone is already doing that. Forbes asks me to subscribe, after reading this, I have to reconsider this at least in 1 year where my memory of this low info density article faded away...
findthewords 6y ago
This is just a regurgitation of "Making Sense of Sky-High Stock Prices" (Nov 30, 2020) by Robert J. Shiller, Laurence Black, Farouk Jivraj. https://www.project-syndicate.org/commentary/making-sense-of-soaring-stock-prices-by-robert-j-shiller-et-al-2020-11?barrier=accesspaylog https://www.project-syndicate.org/commentary/making-sense-of...
- scarmig 6y ago
  Ungated: https://www.zawya.com/mena/en/markets/story/Making_sense_of_skyhigh_stock_prices-ZAWYA20201206041519/ https://www.zawya.com/mena/en/markets/story/Making_sense_of_...
vmception 6y ago
I've been using a similar metric, price to bond market, as it is much better than being a "permabear" just because the PE Ratio you grew up with is totally busted and being ignored by the entire market. "My 1980s technical analysis hasn't been relevant for 5 years and I just learned how to short sell muahahaha .... but I guess the market can remain irrational longer than I can remain solvent!" I honestly think this is a natural progression for people studying stock trading on the internet. But I really find the credit markets illuminate a lot, and I find a lot of traders and investors to ignore that. "Bonds are boring", so they think. They are a leading indicator in stock in a variety of ways. It all does circle back to macroeconomic trends and monetary policy, as they are intrinsically related. Yes, when people are trying to get higher yields there are few options. This isn't that controversial, the Central Banks say so themselves and increase the money supply to transform everyone into a finder to locate the remaining assets to buy. Every time you look at a bank and laugh at their advertised savings account interest rate, that is exactly what the Central Banks wanted you to do.
- yowlingcat 6y ago
  > But I really find the credit markets illuminate a lot, and I find a lot of traders and investors to ignore that. "Bonds are boring", so they think. They are a leading indicator in stock in a variety of ways. You hit the nail on the head. Bond behavior changes systematic incentives in a variety of first order and second order ways. It's inevitable that it gets somehow refactored back into stock behavior as a second order effect. I guess the billion dollar word there is "somehow."
  - vmception 6y ago
    The "somehow" is easy too. So, as the Central Banks in the major Western economies are prohibited from buying equity ownership, they generally do not buy stocks from companies^. They just buy bonds, mostly government bonds but when the utility of that diminishes they also buy corporate bonds. Either way, Central Bank actions distort the entire credit market, allowing any existing bond holder to sell to the central bank at a profit. it allows corporate bond issuers to create and sell to the distorted market, or directly to the central bank in both the primary and secondary market, at a profit. Note, when issuing bonds this is not called a profit, but let's be honest here, we are talking about writing on a sheet of paper that I will pay your $2,000,000,0000 back in 10 years at 0.75% a year. They frequently use new investor's money to pay back old investors. There is a word for that, but it dilutes my point. The accuracy of this reality doesn't change though. These sheets of paper are exchanged for money that did not exist prior to the moment of that transaction. The recipients buy stocks (and everything else). The corporate issuers buy back their own stock, give executives bonuses who make a diversified portfolio. The hedge fund issuers just amplify their own holdings with extremely cheap, non-margin callable leverage. ^Exceptions: Swiss National Bank buys US stocks with newly created francs. US Federal Reserve buys bond ETFs, in order to access the universe of bonds. Outside of the West, the People's Bank of China buys stocks directly. Predictable collective ownership philosophy.
Swizec 6y ago
Best advice my dad ever gave was: The middle class is disappearing. In the future there will be only rich and poor. Your job is to end up on the correct side of that line. He then peaced out of my life but that part stuck.
- capableweb 6y ago
  I like this advice, because it's not dictating what "correct side" is, and it doesn't define "rich" as in "wealthy", so you can take this advice a little bit how you want to take it.
- Wirerack 6y ago
  I have felt the same thing for some time. With the rise of automation I expect this separation to get even worse. You, can't help but think that now might be the last chance to get on the right side, lest you get left behind in "digital serfdom".
- scarmig 6y ago
  > He then peaced out of my life but that part stuck. I guess he decided raising his child would cut too much into his savings rates. I don't disagree with his stance descriptively, but if we embrace it, it means committing ourselves to an amoral, spiritually impoverished future.
  - Swizec 6y ago
    > I guess he decided raising his child would cut too much into his savings rates. Mmmm no it’s not that simple, but it’s a long story. Last I heard he was presumed homeless.
    - pc86 6y ago
      I've had a similar experience with my biological mom.
    - scarmig 6y ago
      Sorry, I shouldn't have projected my assumptions onto your particular story =)
cm2187 6y ago
I think these days there is only one metric that really matters: the size of the Fed balance sheet. And it is going up [1]. As long as the Fed keeps printing, asset prices will go up, no matter the financial ratios. [1] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
- jpalomaki 6y ago
  I've been thinking about the same, but not sure sure if numbers really match. Just checked some figures for fun: Fed balance sheet has gone $6 trillion since 2007. ECB [1] bit less than €3 trillion. US stock market cap is $36 trillion [2], up $17 trillion since 2007. [1] https://www.ecb.europa.eu/pub/annual/balance https://www.ecb.europa.eu/pub/annual/balance /html/index.en.html [2] https://siblisresearch.com/data/us-stock-market-value/ https://siblisresearch.com/data/us-stock-market-value/
  - cm2187 6y ago
    I don’t know if you can do that. This is assuming an inflationary effect alone. But when there is too much cash around, when you have lots of buyers chasing a small number of assets, the price of these assets can increase in a completely irrational way.
  - cat199 6y ago
    this is at least partly due to the money multiplier effect - a fed $1 isn't just a $1 after it's been distributed/reloaned/etc through the system: https://en.wikipedia.org/wiki/Money_multiplier https://en.wikipedia.org/wiki/Money_multiplier so you have fed $$ going into banks, which increases their ability to generate loans of future $$ > fed $$, which is then reinvested somehow
- ronyfadel 6y ago
  Something I can't comprehend: how can they keep printing at this scale, yet inflation remains so low?
  - 6y ago
mywittyname 6y ago
Blame interest rates. Yields tracked Fed interest rates pretty tightly up until the GFC. This decade has been anomalous in this respect, with yields going up while interest rates fall, and so it seems that the market is on a correction-course. We've also had nearly a decade where inflation is higher than the Fed rate. Making borrowing effectively more profitable than saving. And what are investors going to do with this borrowed cash? Well, probably buy assets that, at minimum, track inflation. The Fed tried raising rates in 2018, but Yellen was replaced at the Federal Reserve with Jerome Powell, who quickly reversed course and put into place policies which are fueling an asset bubble. Now we are in this awful position where the economy needs higher interest rates, but whomever pulls the trigger on raising is going to tank the market, hard.
cesaref 6y ago
The old 'if we keep analysing the data we can draw any conclusion we like from it'. I'm reminded of the classic book 'how to lie with statistics' and the perils of staring at graphs to determine stuff like this. We're one financial scandal away from a crash, one pandemic resolving drug away from a bull market.
- AnimalMuppet 6y ago
  > We're one financial scandal away from a crash, one pandemic resolving drug away from a bull market. ... and trying to guess which will hit first.
  - maerF0x0 6y ago
    > ... and trying to guess which will hit first. Or more accurately, and the market has already priced in the capital weighted average sentiment of which will hit first.
deleted 6y ago
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OJFord 6y ago
I really dislike it when EPS is discussed as if it's a different metric to P/E. It's like claiming some deeper insight from the area of a square vs. its side length.
- rileymat2 6y ago
  I am not following, they are quite different as far as I can tell. I am not sure either has a deep meaning, but P/E gives a better clue to the earnings per invested dollar you would expect when purchasing. I have never found much use for EPS, because outstanding shares between companies vary so much, and change with stock buybacks and such.
orange_tee 6y ago
Has anyone considered investing in emerging markets overseas? The markets over there should be more akin to the "golden age" in the west. I looked a bit into it. In general you need higher risk tolerance and I was disappointed to find that stocks often under performed compared to US tech stocks. But maybe still a wiser investment in the long run.
- SpaceRaccoon 6y ago
  The Russian stock market is considered the most undervalued in the world (CAPE ratio), but the political risk is just too high. The dividend yields alone are nuts.
  - cvak 6y ago
    undervalued if you think Russia will not just nationalize given company. https://en.wikipedia.org/wiki/Yukos_shareholders_v._Russia https://en.wikipedia.org/wiki/Yukos_shareholders_v._Russia
    - SpaceRaccoon 6y ago
      I've never seen that cited as a credible risk by any institutional investor. It's almost all just sanction risk.
- legulere 6y ago
  You can just invest in big corporations on the stock market. In emerging countries big companies are often there just through corruption, cronyism etc. so they are not a good deal.
  - imtringued 6y ago
    Yeah, this is one of the big reasons why the stock market is stronger than the domestic economy.
- TMWNN 6y ago
  >Has anyone considered investing in emerging markets overseas? "Does investing in emerging markets still make sense? | Apart from China and India, there is little sign that developing economies are converging with the developed world." (https://www.ft.com/content/0bd159f2-937b-11e9-aea1-2b1d33ac3271 https://www.ft.com/content/0bd159f2-937b-11e9-aea1-2b1d33ac3...)
almost_usual 6y ago
In other words no one believes these companies are as valuable as they are. People are seeking somewhere easy to grow their money.
- whatshisface 6y ago
  In other, other words, dollars are worth much less than companies. Companies are worth a little less than they were last year, but dollars are worth a lot less. The price of a share isn't the value of a share in absolute terms, it's the exchange rate between dollars and the company. Low interest rates is the Fed saying "get rid of your dollars," and high asset prices are the market saying "yes, sir."
secabeen 6y ago
> On the other hand, it’s quite alarming to see how much investors are banking on central bank intervention. You don’t want to hear them even murmuring about the slightest chance of backing down. This is the real question; how does the Fed stop holding down the accelerator, and when they do, how many years of flat returns do we end up with?
mcguire 6y ago
NB: Interest rates are not guaranteed to remain low.
- tonyedgecombe 6y ago
  The trend is in one direction and has been for a very long time: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018.pdf https://www.bankofengland.co.uk/-/media/boe/files/working-pa...
legulere 6y ago
This seems like turning the argument upside down. The stock market is not cheap, but it is expensive because bond yields are low. That does not contradict that stocks are overpriced but simply explains why. The big question is if this situation of overpriced stocks will increase, how long it will endure and how will it end?
kristianp 6y ago
Howard Mark's latest memo has much to say about low interest rates and market returns. He also compares today's tech stocks to the Nifty fifty stocks of the late 60s, which went on to have poor returns after becoming overpriced in the way tech stocks are now. https://www.oaktreecapital.com/insights/howard-marks-memos https://www.oaktreecapital.com/insights/howard-marks-memos
adam_arthur 6y ago
I'm not a big fan of the TINA (There is no alternative), assertion. Sure, if you compare yields of stocks against bonds, they look relatively more attractive, but that's a strictly relative comparison. Even if bonds yield 0%, if you buy a stock that goes down 50%, as many did in the dotcom bubble, you've done much worse. Can stocks continue their historical run up? Sure. But we're pretty clearly one catalyst away from a major correction. Will that catalyst arise in the next year? Impossible to say, but it will come eventually. In an effort to save the economy, the Federal Reserve and Government have created a much bigger long-term problem. They've shown a willingness to prop up the stock market and removed all downside risk. Wealth inequality is ballooning to an all-time high due to large inflation of asset prices. Homes are less affordable than ever due to extraordinarily low interest rates. And when the Fed attempted to raise rates (2018 dip) and stocks dipped a few percent, they backed off totally. Years of asset price growth is happening in a few months, which is basically a wealth transfer from the investors of tomorrow to the asset holders of today. While government intervention has helped the real economy in the short-run, we're setting ourselves up for much bigger problems down the line.
- thewarrior 6y ago
  What catalyst could be bigger than covid ? I simply cannot imagine an economic hit bigger than covid. If this can’t crash stock prices nothing can.
  - adam_arthur 6y ago
    Covid did cause the market to crash. It was one of the fastest crashes in stock market history. However, the federal reserve and government acted in tandem to enact the swiftest and largest economic response to an event like this in history. That's what drove the turnaround and led to the subsequent (and ongoing) bull market. However, the market is much frothier now (in certain segments) than before covid hit. For example, Tesla's value has increased by 10x from the March lows. Tesla is being priced as if it will be a near monopoly on both car sales and the self driving market, which is pretty clearly not true. Even though it may take legacy automakers or Apple a few years to catch up. There are less levers to pull than before. Interest rates are close to 0, congress has already passed trillions in new spending. Ability to counter a second dip will be more limited than before. A catalyst would be something like accounting fraud being uncovered in one of the growth stock darlings (ala Enron), or perhaps Tesla simply reporting numbers far below expectations. Volkswagen EVs are outselling Tesla in Europe for example, so the bull thesis of a monopolistic market position is a bit weak. Another catalyst could be unexpectedly high inflation, which would indicate the Federal reserve may raise rates soon. It's also entirely possible the market just trades close to flat for a few years until valuations level out into something more realistic. Is it possible that we're in a "new normal" where stocks are just valued higher than historical norms in perpetuity? Maybe, but when things look this frothy, the "new normal" thesis generally doesn't pan out.
8bitsrule 6y ago
The stock market is an irrelevant measure of anything of significance.
c2the3rd 6y ago
This is moronic reasoning. Just because stocks are "cheap" relative to bonds right now does not make stocks an "attractive" investment. As Buffet says, never confuse price with value. For the people that haven't noticed, a global pandemic and lockdowns killed 40% of small businesses this year, forced many large businesses to take on new debts that will blunt future profits, and forced the government into unprecedented deficits. Stocks are "cheap" because risk went up.
Traster 6y ago
I'm struggling to see what this new measure is actually telling us that's useful. We know bond yeilds are super low, whcih is putting pressure on people to move into more risky investments like the S&P. This measure seems to simply show that pressure. What it says nothing about is whether those investments are good. What it seems to show is that there's enormous pressure on the stock market to go up. At some point though, those companies have to actually make money. We know they're not going to be making hugely higher earnings - we're a long way into a good economy, there's no real reason to think everything is going to get massively better. The only alternative is that inflation sky rockets and that's how earnings go up. So what happens if inflation goes up? Well for inflation to have any meaningful effect it would have to blast past the fed's targets and the fed would need to massively increase bond yields. Which would remove the pressure on stocks, causing stock prices to drop. What I'm not so sure about is what happens if inflation really does stay flat. If inflation stays flat, then everyone is just holding a load of stock with really bad yeild. Does that also cause a crash when people realise they're holding bad investments and those bonds don't look so bad because there isn't inflation?
T-A 6y ago
Suppose that I create a valuation measure by taking the yield on my bond, and “correcting it by for interest rates” by subtracting out bond yields. Now, that seems ridiculous, but it’s very close to what’s going on when people try to “adjust” stock market valuations for the level of interest rates and use phrases like “fairly valued” and “attractive.” When both assets are at extreme valuations, this comparison, at best, says only that the dismal expected return on one asset is expected to exceed the really dismal expected return on the other asset. https://www.hussmanfunds.com/comment/mc201220/ https://www.hussmanfunds.com/comment/mc201220/
RGamma 6y ago
I wonder when your collective breakdown comes...

120 points by dankul1 6y ago

dpc_pw 6y ago

I would like to see this metric but where instead of substraction they should use division.

shabda 6y ago
Subtraction makes sense here as you are trying to find the excess yield of equity over dividend. A yield of bond: 0.5, equity 4 vs bond: 1, equity: 4.5 doesn't change his argument, but changes the ratio significantly.

d0gbread 6y ago

My favorite line from the article is "There are simply no alternatives" as people build cash reserves and buy stores of value like gold and Bitcoin. People are hungry for an alternative, but yes I suppose if you only consider stocks and bonds this article has a point.

SigmundA 6y ago
This, I want an alternative, high interest savings accounts and CD used to be a good safe place for some savings, now your losing value relative to inflation. A mixed portfolio makes no sense. Nobody has a pension, everyones retirement is in the market, none of this seems good to me long term, all very fragile. Either your in stocks or Bitcoin at this point or your at negative rates relative to inflation.
- bgorman 6y ago
  What about real estate? Unlike stocks, land/buildings have some inherent value
  - jordache 6y ago
    who is going to predict the post covid future of commercial real-estate market?
    - scarmig 6y ago
      Well, if someone predicts accurately the future of commercial real estate, that who is likely to be a fair bit richer than they are today.
  - nightski 6y ago
    Stocks have inherent value as well, due to dividends. Price growth is not the only way to make money in the market.
    - nerfhammer 6y ago
      also, book value, though it's usually much smaller than market cap. if a stock ever fell below its book value you could buy it out and liquidate its assets to make money, so the book value should be a price floor for the stock.
      - sgerenser 6y ago
        This is extremely uncommon these days, but back in the dark days of the 1980s buying stocks below book value was a common way that people like Warren Buffet made a lot of money.
  - jcpham2 6y ago
    I'm in real estate (rental properties), an IRA spread across 5 growth funds, and maybe 10-20% bitcoin at this point. Edit: Exited my stock positions this year
    - programmertote 6y ago
      As a novice to bitcoin investing, could you share the best (most secure/trusted) way to buy bitcoin? Thank you!
- marvin 6y ago
  What you'd really want is a machine you can buy that provides you useful goods and services at almost-zero maintenance cost. The stock market is sort of a proxy for this wish: You have excess capital, and you want to invest it in something that yields a return. Maybe that's a machine producing goods you can sell, maybe it's a machine that produces food and gives medical aid to you, the owner. You don't want to operate such a machine (if it is available at all), so you outsource the responsibility for a percentage of your return. It seems almost absurd that the world can end up in a state where it is impossible to invest capital in a way that provides any significant return at all. All is relative, but people still want to eat and get shelter from the rain.
  - dv_dt 6y ago
    The stock market is increasingly disconnected from investments in real-world improvements of productivity and even if they manage to invest there in some tiny measure, it's not delivered to most people in the economy. That's the highest risk item in this whole discussion.
    - marvin 6y ago
      I've had the sense that growth investments are almost completely closed to the public in the United States. This trend has been gradually solidifying ever since the dot-com bubble, and has reached its logical conclusion today. The only IPOs happen when companies reach 100-billion dollar valuations, and sometimes not even then. IPOs seem more likely for private companies that have lost their growth potential. There's certainly some potential for growth and returns still available when companies reach this stage, but the lion's share is taken out already. The index funds are also often at the ass end of this phenomenon, buying in only at very high valuations. The most absurd example happening a week ago, with Tesla entering the S&P500 as the sixth biggest company. I'd like the possibility of investing in a fund of unlisted companies. The growth sector that's not represented in the major indexes is far too big to ignore. I try to compensate by having a portion of my wealth in "small cap" companies, but there is still a very significant sector that's completely missing.
      - 6y ago
- raiyu 6y ago
  But this is the issue with zero interest rates. There is no incentive to save, but alternatively, it also pushes interest rates on mortgages to near zero which increases the demand side by opening up home ownership to people that before couldn't afford it which pushes up prices. The same occurs with stocks, with no returns in other asset classes everyone floods in to stocks and pushes the prices higher. This is definitely the new normal going forward, because you can't increase interest rates without dramatically reducing purchasing power, which in turn leads to slow down across many areas of the market.
  - peteradio 6y ago
    Maybe investment in real but non-liquid assets would make sense. If stocks are bogus valued then the real money would be "in-the-know" asset purchases. Personally I am trying to get what I see is under-valued unique rural property in a locale favored by an apparently changing climate.
    - fzzzy 6y ago
      Better act fast, the rural property markets are on fire. Where I grew up I can always remember hundreds of for sale signs as long as I lived here because there just weren't any jobs. Now, everything sold last fall. It's unprecedented.
      - Apocryphon 6y ago
        What do the property owners plan on doing with that land if there aren't any jobs? Or are there jobs there now?
        SpaceRaccoon 6y ago
        Remote work is my guess.
        bergie 6y ago
        Thanks to COVID there are now jobs everywhere where there is an Internet connection
- derekp7 6y ago
  My concern is when retirement comes, and it is time to start selling off stocks. If there are more retirees than employees buying stocks via their 401k, won't that cause a price crash?
  - bostik 6y ago
    Annuity buy-backs, anyone? Someone at Wall Street must have thought of that and pitched the securitisation already. Think about it - large companies agreeing up front to spend a minimum of X billion a year buying back their stock. And then WS banks parceling both sides of the risk and exposure to investors seeking anything with non-negligible yield.
  - nerfhammer 6y ago
    slowly transition your assets away from growth stocks to bonds and dividend-issuing stocks as you age
  - sgerenser 6y ago
    Not really, because the process is very gradual. You don’t sell all your stocks the day you retire, you gradually wind down until you hit some reasonably conservative allocation in your 80s or so like 30% stock/70% bonds. This certainly can put some downward pressure on the stock market if the rate of this winding down is higher than the rate that young people are adding to their 401ks but it’s counterbalanced by many other forces.
  - imtringued 6y ago
    Retirees generally only liquidate a portion of their funds. They start withdrawing something like 4% per year roughly half a decade ahead (to avoid withdrawing during a crash) of retirement. As others said they also shift away from risky investments.
chadash 6y ago
Gold has terrible historical returns compared to equities. If you bought gold 30 years ago and sold now, you'd have about a 5x return. You would have done significantly better if you bought stocks 30 years ago and sold them at the bottom of the market in March. If you sold now, you'd have done more than twice as well. BTC might go up, might go down. But it's a risky asset and there's only so much money that can flow into a non-productive asset.
- david927 6y ago
  You could have said the same in 1929. The last 30 years has had an expanding market. We're now facing a deeply contracting market. Equities will lose most of their value; gold will do the opposite.
fredophile 6y ago
Gold and bitcoin won't help you. When stock prices move down, correlations between stocks go up. If you look at the last couple downturns you can see that this correlation between assets and asset classes has increased. Stocks dropping leads to people selling their bitcoin and gold which causes those prices to drop. Falling prices make speculators get scared and sell to cut their losses which drives prices down further and the cycle continues. What you really want to find is an asset that is negatively correlated to the stock market while stocks are dropping.
- pcdoodle 6y ago
  Please share an example of something that has this property.
  - jmalicki 6y ago
    For a long time timber (as in, owning a forest and letting people log it occasionally) has been one of the favorites of large endowments and hedge funds. https://investmentsandwealth.org/getattachment/cc0f7589-7411-41d8-82c2-f287892ac2da/IWM15SepOct-SeeingForestForTrees.pdf https://investmentsandwealth.org/getattachment/cc0f7589-7411...
  - fredophile 6y ago
    There aren't many examples. Volatility is the best one I'm aware of. However, if you're regularly buying volatility to hedge your stock exposure you're going to lose a lot of money that way.
  - reducesuffering 6y ago
    Long term US bonds are definitely the most prominent example for the last 40 years. Past 100 years though, not really. Check the ETF TLT compared to total US stock market, VTI, on https://www.portfoliovisualizer.com/backtest-portfolio https://www.portfoliovisualizer.com/backtest-portfolio or the asset classes on https://www.portfoliovisualizer.com/backtest-asset-class-allocation https://www.portfoliovisualizer.com/backtest-asset-class-all... Their negative correlation zig-zag is remarkable the past few decades. Some research postulates that in a decreasing interest rate environment (past 40 years), they’re negatively correlated, while in a rising rate environment they’re positively correlated, leading to the past 100 years minimal (almost 0) long term correlation.

nickthemagicman 6y ago

Does this mean cheapest as far as returns go? Or are you buying stocks at a very bargain rate right now?

mywittyname 6y ago
The article is using CAPE yield as a measure. Basically, showing that CAPE yield are maintaining at a solid 3.8%. https://www.investopedia.com/terms/c/cape-ratio.asp https://www.investopedia.com/terms/c/cape-ratio.asp
findthewords 6y ago
The fact that Shiller had to come up with a new metric to rationalize exuberance should be worrying. "The time had come, as in all periods of speculation, when men sought not to be persuaded of the reality of things but to find excuses for escaping into the new world of fantasy." – John Kenneth Galbraith https://en.wikipedia.org/wiki/The_Great_Crash,_1929 https://en.wikipedia.org/wiki/The_Great_Crash,_1929

cbanek 6y ago

It's interesting that they're comparing against the 10 year bond yield to basically prove what the market knew 4 years ago when Europe started flirting with negative interest rates - TINA - There Is No Alternative, you can't put your money in a CD, savings account, or bonds, and expect to get a decent yield / return on your money. So people put their money into the stocks of dividend aristocrats (companies that have increased and maintained dividends over long periods of time) to be "bond-proxies." This pushed up those prices a lot. But no matter where you are, it seems there's not much easy money, unless you're a private VC investor. I think the real lesson here is everyone is getting squeezed out. I feel like the other shoe is going to drop some day, but who knows when. The weaker hands (poorer people) will inevitably fold first, increasing wealth inequality, as it usually does.

marvin 6y ago
Famous last words, but: I wouldn't be entirely surprised if, in 10 years' time, we'll hear the same lamentations about the stock market as we do about housing. "The older generation climbed up there and pulled up the ladder". Only slim returns, and you can't expect to make much from it unless you happened to be invested before the great re-pricing hit.
- cbanek 6y ago
  I think what might change things (at least in the US) is the demographic shifts. Housing demand (and so, related, prices) is obviously related to the number of people and what they can pay. If anything, the lowering of the 10 year yield, which is used to determine mortgage rates, allows people to spend more for a house due to the low interest rate. If interest rates go up, then the prices should go down to keep steady with what people are able to pay for a monthly mortgage. Same thing about all the retirees eventually dying off and liquidating or handing down all this money, stock, and housing (honestly, I feel the same about political leanings, but that seems fairly steady unfortunately). Seems like if history has shown us anything, while one person might be good with money, the same can't always be said for their children (3rd generation rule - by the 3rd generation, 90% of wealthy families lose it).

grey-area 6y ago

...when compared only to bonds (which currently governments are pushing to zero yield). By any other measure they look far too expensive for the current economic outlook.

AnimalMuppet 6y ago
Right, but if I'm trying to buy a return, what are my options? Stocks, bonds, some kinds of real estate, and maybe annuities. But annuities basically track with bonds. For the segment that is trying to buy a return, and doesn't want the hassle of managing rental property, stocks and bonds are pretty much the only games there are. So, at least for them, the question is: How much does it take to buy a given return? The question isn't the only one in investing, but it's also not an insane way of looking at the market...
- grey-area 6y ago
  I completely agree the current irrational exuberance in stock markets is caused by the artificially depressed yields on bonds - it is yet another unintended consequence of QE. You haven't mentioned risk though - this is a very risky game and the more mispriced assets get the riskier it is. What happens when interest rates rise?
- anm89 6y ago
  I want to buy a bicycle but bicycles cost $10k right now because of a parts shortage. But what if I want a bike, and also car would be $20k, so actually bicycles are pretty cheap! At the end of the day though, when the short term situation resolves itself, that bike is still worth $500 and it wasn't cheap. I think the fallacy here is that you don't HAVE to buy returns. You could choose to just eat the inflation or pick an alternative asset class.
  - imtringued 6y ago
    The idea would be to invest into bicycle companies to make money off the shortage which encourages more companies to make bicycles effectively solving the shortage.

justicezyx 6y ago

The article is written with filler words to buff up a simple idea: stock market is now more attractive than ever compared to bond market (I am not expect in financial jargons, so could be wrong), because the interest rate is so low. This idea sounds self evident, and everyone is already doing that. Forbes asks me to subscribe, after reading this, I have to reconsider this at least in 1 year where my memory of this low info density article faded away...

findthewords 6y ago

This is just a regurgitation of "Making Sense of Sky-High Stock Prices" (Nov 30, 2020) by Robert J. Shiller, Laurence Black, Farouk Jivraj. https://www.project-syndicate.org/commentary/making-sense-of-soaring-stock-prices-by-robert-j-shiller-et-al-2020-11?barrier=accesspaylog https://www.project-syndicate.org/commentary/making-sense-of...

scarmig 6y ago
Ungated: https://www.zawya.com/mena/en/markets/story/Making_sense_of_skyhigh_stock_prices-ZAWYA20201206041519/ https://www.zawya.com/mena/en/markets/story/Making_sense_of_...

vmception 6y ago

I've been using a similar metric, price to bond market, as it is much better than being a "permabear" just because the PE Ratio you grew up with is totally busted and being ignored by the entire market. "My 1980s technical analysis hasn't been relevant for 5 years and I just learned how to short sell muahahaha .... but I guess the market can remain irrational longer than I can remain solvent!" I honestly think this is a natural progression for people studying stock trading on the internet. But I really find the credit markets illuminate a lot, and I find a lot of traders and investors to ignore that. "Bonds are boring", so they think. They are a leading indicator in stock in a variety of ways. It all does circle back to macroeconomic trends and monetary policy, as they are intrinsically related. Yes, when people are trying to get higher yields there are few options. This isn't that controversial, the Central Banks say so themselves and increase the money supply to transform everyone into a finder to locate the remaining assets to buy. Every time you look at a bank and laugh at their advertised savings account interest rate, that is exactly what the Central Banks wanted you to do.

yowlingcat 6y ago
> But I really find the credit markets illuminate a lot, and I find a lot of traders and investors to ignore that. "Bonds are boring", so they think. They are a leading indicator in stock in a variety of ways. You hit the nail on the head. Bond behavior changes systematic incentives in a variety of first order and second order ways. It's inevitable that it gets somehow refactored back into stock behavior as a second order effect. I guess the billion dollar word there is "somehow."
- vmception 6y ago
  The "somehow" is easy too. So, as the Central Banks in the major Western economies are prohibited from buying equity ownership, they generally do not buy stocks from companies^. They just buy bonds, mostly government bonds but when the utility of that diminishes they also buy corporate bonds. Either way, Central Bank actions distort the entire credit market, allowing any existing bond holder to sell to the central bank at a profit. it allows corporate bond issuers to create and sell to the distorted market, or directly to the central bank in both the primary and secondary market, at a profit. Note, when issuing bonds this is not called a profit, but let's be honest here, we are talking about writing on a sheet of paper that I will pay your $2,000,000,0000 back in 10 years at 0.75% a year. They frequently use new investor's money to pay back old investors. There is a word for that, but it dilutes my point. The accuracy of this reality doesn't change though. These sheets of paper are exchanged for money that did not exist prior to the moment of that transaction. The recipients buy stocks (and everything else). The corporate issuers buy back their own stock, give executives bonuses who make a diversified portfolio. The hedge fund issuers just amplify their own holdings with extremely cheap, non-margin callable leverage. ^Exceptions: Swiss National Bank buys US stocks with newly created francs. US Federal Reserve buys bond ETFs, in order to access the universe of bonds. Outside of the West, the People's Bank of China buys stocks directly. Predictable collective ownership philosophy.

Swizec 6y ago

Best advice my dad ever gave was: The middle class is disappearing. In the future there will be only rich and poor. Your job is to end up on the correct side of that line. He then peaced out of my life but that part stuck.

capableweb 6y ago
I like this advice, because it's not dictating what "correct side" is, and it doesn't define "rich" as in "wealthy", so you can take this advice a little bit how you want to take it.
Wirerack 6y ago
I have felt the same thing for some time. With the rise of automation I expect this separation to get even worse. You, can't help but think that now might be the last chance to get on the right side, lest you get left behind in "digital serfdom".
scarmig 6y ago
> He then peaced out of my life but that part stuck. I guess he decided raising his child would cut too much into his savings rates. I don't disagree with his stance descriptively, but if we embrace it, it means committing ourselves to an amoral, spiritually impoverished future.
- Swizec 6y ago
  > I guess he decided raising his child would cut too much into his savings rates. Mmmm no it’s not that simple, but it’s a long story. Last I heard he was presumed homeless.
  - pc86 6y ago
    I've had a similar experience with my biological mom.
  - scarmig 6y ago
    Sorry, I shouldn't have projected my assumptions onto your particular story =)

cm2187 6y ago

I think these days there is only one metric that really matters: the size of the Fed balance sheet. And it is going up [1]. As long as the Fed keeps printing, asset prices will go up, no matter the financial ratios. [1] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

jpalomaki 6y ago
I've been thinking about the same, but not sure sure if numbers really match. Just checked some figures for fun: Fed balance sheet has gone $6 trillion since 2007. ECB [1] bit less than €3 trillion. US stock market cap is $36 trillion [2], up $17 trillion since 2007. [1] https://www.ecb.europa.eu/pub/annual/balance https://www.ecb.europa.eu/pub/annual/balance /html/index.en.html [2] https://siblisresearch.com/data/us-stock-market-value/ https://siblisresearch.com/data/us-stock-market-value/
- cm2187 6y ago
  I don’t know if you can do that. This is assuming an inflationary effect alone. But when there is too much cash around, when you have lots of buyers chasing a small number of assets, the price of these assets can increase in a completely irrational way.
- cat199 6y ago
  this is at least partly due to the money multiplier effect - a fed $1 isn't just a $1 after it's been distributed/reloaned/etc through the system: https://en.wikipedia.org/wiki/Money_multiplier https://en.wikipedia.org/wiki/Money_multiplier so you have fed $$ going into banks, which increases their ability to generate loans of future $$ > fed $$, which is then reinvested somehow
ronyfadel 6y ago
Something I can't comprehend: how can they keep printing at this scale, yet inflation remains so low?
- 6y ago

mywittyname 6y ago

Blame interest rates. Yields tracked Fed interest rates pretty tightly up until the GFC. This decade has been anomalous in this respect, with yields going up while interest rates fall, and so it seems that the market is on a correction-course. We've also had nearly a decade where inflation is higher than the Fed rate. Making borrowing effectively more profitable than saving. And what are investors going to do with this borrowed cash? Well, probably buy assets that, at minimum, track inflation. The Fed tried raising rates in 2018, but Yellen was replaced at the Federal Reserve with Jerome Powell, who quickly reversed course and put into place policies which are fueling an asset bubble. Now we are in this awful position where the economy needs higher interest rates, but whomever pulls the trigger on raising is going to tank the market, hard.

cesaref 6y ago

The old 'if we keep analysing the data we can draw any conclusion we like from it'. I'm reminded of the classic book 'how to lie with statistics' and the perils of staring at graphs to determine stuff like this. We're one financial scandal away from a crash, one pandemic resolving drug away from a bull market.

AnimalMuppet 6y ago
> We're one financial scandal away from a crash, one pandemic resolving drug away from a bull market. ... and trying to guess which will hit first.
- maerF0x0 6y ago
  > ... and trying to guess which will hit first. Or more accurately, and the market has already priced in the capital weighted average sentiment of which will hit first.

deleted 6y ago

[deleted]

OJFord 6y ago

I really dislike it when EPS is discussed as if it's a different metric to P/E. It's like claiming some deeper insight from the area of a square vs. its side length.

rileymat2 6y ago
I am not following, they are quite different as far as I can tell. I am not sure either has a deep meaning, but P/E gives a better clue to the earnings per invested dollar you would expect when purchasing. I have never found much use for EPS, because outstanding shares between companies vary so much, and change with stock buybacks and such.

orange_tee 6y ago

Has anyone considered investing in emerging markets overseas? The markets over there should be more akin to the "golden age" in the west. I looked a bit into it. In general you need higher risk tolerance and I was disappointed to find that stocks often under performed compared to US tech stocks. But maybe still a wiser investment in the long run.

SpaceRaccoon 6y ago
The Russian stock market is considered the most undervalued in the world (CAPE ratio), but the political risk is just too high. The dividend yields alone are nuts.
- cvak 6y ago
  undervalued if you think Russia will not just nationalize given company. https://en.wikipedia.org/wiki/Yukos_shareholders_v._Russia https://en.wikipedia.org/wiki/Yukos_shareholders_v._Russia
  - SpaceRaccoon 6y ago
    I've never seen that cited as a credible risk by any institutional investor. It's almost all just sanction risk.
legulere 6y ago
You can just invest in big corporations on the stock market. In emerging countries big companies are often there just through corruption, cronyism etc. so they are not a good deal.
- imtringued 6y ago
  Yeah, this is one of the big reasons why the stock market is stronger than the domestic economy.
TMWNN 6y ago
>Has anyone considered investing in emerging markets overseas? "Does investing in emerging markets still make sense? | Apart from China and India, there is little sign that developing economies are converging with the developed world." (https://www.ft.com/content/0bd159f2-937b-11e9-aea1-2b1d33ac3271 https://www.ft.com/content/0bd159f2-937b-11e9-aea1-2b1d33ac3...)

almost_usual 6y ago

In other words no one believes these companies are as valuable as they are. People are seeking somewhere easy to grow their money.

whatshisface 6y ago
In other, other words, dollars are worth much less than companies. Companies are worth a little less than they were last year, but dollars are worth a lot less. The price of a share isn't the value of a share in absolute terms, it's the exchange rate between dollars and the company. Low interest rates is the Fed saying "get rid of your dollars," and high asset prices are the market saying "yes, sir."

secabeen 6y ago

> On the other hand, it’s quite alarming to see how much investors are banking on central bank intervention. You don’t want to hear them even murmuring about the slightest chance of backing down. This is the real question; how does the Fed stop holding down the accelerator, and when they do, how many years of flat returns do we end up with?

mcguire 6y ago

NB: Interest rates are not guaranteed to remain low.

tonyedgecombe 6y ago
The trend is in one direction and has been for a very long time: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018.pdf https://www.bankofengland.co.uk/-/media/boe/files/working-pa...

legulere 6y ago

This seems like turning the argument upside down. The stock market is not cheap, but it is expensive because bond yields are low. That does not contradict that stocks are overpriced but simply explains why. The big question is if this situation of overpriced stocks will increase, how long it will endure and how will it end?

kristianp 6y ago

Howard Mark's latest memo has much to say about low interest rates and market returns. He also compares today's tech stocks to the Nifty fifty stocks of the late 60s, which went on to have poor returns after becoming overpriced in the way tech stocks are now. https://www.oaktreecapital.com/insights/howard-marks-memos https://www.oaktreecapital.com/insights/howard-marks-memos

adam_arthur 6y ago

I'm not a big fan of the TINA (There is no alternative), assertion. Sure, if you compare yields of stocks against bonds, they look relatively more attractive, but that's a strictly relative comparison. Even if bonds yield 0%, if you buy a stock that goes down 50%, as many did in the dotcom bubble, you've done much worse. Can stocks continue their historical run up? Sure. But we're pretty clearly one catalyst away from a major correction. Will that catalyst arise in the next year? Impossible to say, but it will come eventually. In an effort to save the economy, the Federal Reserve and Government have created a much bigger long-term problem. They've shown a willingness to prop up the stock market and removed all downside risk. Wealth inequality is ballooning to an all-time high due to large inflation of asset prices. Homes are less affordable than ever due to extraordinarily low interest rates. And when the Fed attempted to raise rates (2018 dip) and stocks dipped a few percent, they backed off totally. Years of asset price growth is happening in a few months, which is basically a wealth transfer from the investors of tomorrow to the asset holders of today. While government intervention has helped the real economy in the short-run, we're setting ourselves up for much bigger problems down the line.

thewarrior 6y ago
What catalyst could be bigger than covid ? I simply cannot imagine an economic hit bigger than covid. If this can’t crash stock prices nothing can.
- adam_arthur 6y ago
  Covid did cause the market to crash. It was one of the fastest crashes in stock market history. However, the federal reserve and government acted in tandem to enact the swiftest and largest economic response to an event like this in history. That's what drove the turnaround and led to the subsequent (and ongoing) bull market. However, the market is much frothier now (in certain segments) than before covid hit. For example, Tesla's value has increased by 10x from the March lows. Tesla is being priced as if it will be a near monopoly on both car sales and the self driving market, which is pretty clearly not true. Even though it may take legacy automakers or Apple a few years to catch up. There are less levers to pull than before. Interest rates are close to 0, congress has already passed trillions in new spending. Ability to counter a second dip will be more limited than before. A catalyst would be something like accounting fraud being uncovered in one of the growth stock darlings (ala Enron), or perhaps Tesla simply reporting numbers far below expectations. Volkswagen EVs are outselling Tesla in Europe for example, so the bull thesis of a monopolistic market position is a bit weak. Another catalyst could be unexpectedly high inflation, which would indicate the Federal reserve may raise rates soon. It's also entirely possible the market just trades close to flat for a few years until valuations level out into something more realistic. Is it possible that we're in a "new normal" where stocks are just valued higher than historical norms in perpetuity? Maybe, but when things look this frothy, the "new normal" thesis generally doesn't pan out.

8bitsrule 6y ago

The stock market is an irrelevant measure of anything of significance.

c2the3rd 6y ago

This is moronic reasoning. Just because stocks are "cheap" relative to bonds right now does not make stocks an "attractive" investment. As Buffet says, never confuse price with value. For the people that haven't noticed, a global pandemic and lockdowns killed 40% of small businesses this year, forced many large businesses to take on new debts that will blunt future profits, and forced the government into unprecedented deficits. Stocks are "cheap" because risk went up.

Traster 6y ago

I'm struggling to see what this new measure is actually telling us that's useful. We know bond yeilds are super low, whcih is putting pressure on people to move into more risky investments like the S&P. This measure seems to simply show that pressure. What it says nothing about is whether those investments are good. What it seems to show is that there's enormous pressure on the stock market to go up. At some point though, those companies have to actually make money. We know they're not going to be making hugely higher earnings - we're a long way into a good economy, there's no real reason to think everything is going to get massively better. The only alternative is that inflation sky rockets and that's how earnings go up. So what happens if inflation goes up? Well for inflation to have any meaningful effect it would have to blast past the fed's targets and the fed would need to massively increase bond yields. Which would remove the pressure on stocks, causing stock prices to drop. What I'm not so sure about is what happens if inflation really does stay flat. If inflation stays flat, then everyone is just holding a load of stock with really bad yeild. Does that also cause a crash when people realise they're holding bad investments and those bonds don't look so bad because there isn't inflation?

T-A 6y ago

Suppose that I create a valuation measure by taking the yield on my bond, and “correcting it by for interest rates” by subtracting out bond yields. Now, that seems ridiculous, but it’s very close to what’s going on when people try to “adjust” stock market valuations for the level of interest rates and use phrases like “fairly valued” and “attractive.” When both assets are at extreme valuations, this comparison, at best, says only that the dismal expected return on one asset is expected to exceed the really dismal expected return on the other asset. https://www.hussmanfunds.com/comment/mc201220/ https://www.hussmanfunds.com/comment/mc201220/

RGamma 6y ago

I wonder when your collective breakdown comes...