3 ms·

What is the implication of M2?

pclmulqdq 3y ago
It's the amount of money in the economy, and its growth is one measure of inflation. GP may be commenting that the "good times" of super-high valuations are about to come back thanks to inflation. That isn't the financial datum that really matters, though - what matters for P/E ratios is the risk free rate (which establishes the discount rate for the time value of money), which is still very high.
- jgalt212 3y ago
  > what matters for P/E ratios is the risk free rate Where's the research showing the empirical relationship between P/E ratios and the risk free rate? Also, we are living in a a time of unprecedented monetary aggregate growth (for the US at least). I posit his why the yield curve has been inverted for so long and yet there is no recession in sight. The predictive power of asset prices seemingly no longer exists.
  - pclmulqdq 3y ago
    There's a ton of it: here's one person's regression. You can find the same in academic papers (although economics papers don't exactly deserve that label). https://www.currentmarketvaluation.com/posts/sp500pe-vs-interest-rates.php https://www.currentmarketvaluation.com/posts/sp500pe-vs-inte... It's also just common sense if you understand company valuation.
    - jgalt212 3y ago
      It's not 1:1, and only fits over long periods of time. Furthermore, none of those studies encompass the great money printing period of COVID, and post COVID. And most of those studies model the 10Y rate vs stocks. The 10Y rate is not the risk free rate. In 2000 the SP500 PE was 40, and fed funds was 6%. it's low 20s now, and fed funds is 5.25% studies over more recent times have shown this correlation break down. It's probably the reason Ray Dalio retired.
      - FredPret 3y ago
        If a 10 yr T bill isn’t risk free, what is? A shorter term US Gov bond? I mean realistically the US will just print the money it needs to pay that interest. It’s not a consequence-free decision for them, but much better than defaulting.
        jgalt212 3y ago
        10Y has duration risk. 1 week T bill have no credit risk or duration risk, hence this is the risk free rate.
        pclmulqdq 3y ago
        That's not true at all. The "risk free rate" is a theoretical concept that represents the rate of return that you can get on capital without taking any risk. No bond alone is the risk free rate. Neither is the reverse repo rate or the rate of a money market. All of these are proxies.
- FredPret 3y ago
  By risk-free rate, do you mean the yield on US gov bonds?
  - pclmulqdq 3y ago
    "Risk-free rate" is a theoretical concept that represents the rate of return you get without taking any risk. T bill rates, reverse repo rates, and money market savings rates are a practical proxy for it, but it's not any one of these.

It's the amount of money in the economy, and its growth is one measure of inflation. GP may be commenting that the "good times" of super-high valuations are about to come back thanks to inflation. That isn't the financial datum that really matters, though - what matters for P/E ratios is the risk free rate (which establishes the discount rate for the time value of money), which is still very high.

jgalt212 3y ago
> what matters for P/E ratios is the risk free rate Where's the research showing the empirical relationship between P/E ratios and the risk free rate? Also, we are living in a a time of unprecedented monetary aggregate growth (for the US at least). I posit his why the yield curve has been inverted for so long and yet there is no recession in sight. The predictive power of asset prices seemingly no longer exists.
- pclmulqdq 3y ago
  There's a ton of it: here's one person's regression. You can find the same in academic papers (although economics papers don't exactly deserve that label). https://www.currentmarketvaluation.com/posts/sp500pe-vs-interest-rates.php https://www.currentmarketvaluation.com/posts/sp500pe-vs-inte... It's also just common sense if you understand company valuation.
  - jgalt212 3y ago
    It's not 1:1, and only fits over long periods of time. Furthermore, none of those studies encompass the great money printing period of COVID, and post COVID. And most of those studies model the 10Y rate vs stocks. The 10Y rate is not the risk free rate. In 2000 the SP500 PE was 40, and fed funds was 6%. it's low 20s now, and fed funds is 5.25% studies over more recent times have shown this correlation break down. It's probably the reason Ray Dalio retired.
    - FredPret 3y ago
      If a 10 yr T bill isn’t risk free, what is? A shorter term US Gov bond? I mean realistically the US will just print the money it needs to pay that interest. It’s not a consequence-free decision for them, but much better than defaulting.
      - jgalt212 3y ago
        10Y has duration risk. 1 week T bill have no credit risk or duration risk, hence this is the risk free rate.
        pclmulqdq 3y ago
        That's not true at all. The "risk free rate" is a theoretical concept that represents the rate of return that you can get on capital without taking any risk. No bond alone is the risk free rate. Neither is the reverse repo rate or the rate of a money market. All of these are proxies.
FredPret 3y ago
By risk-free rate, do you mean the yield on US gov bonds?
- pclmulqdq 3y ago
  "Risk-free rate" is a theoretical concept that represents the rate of return you get without taking any risk. T bill rates, reverse repo rates, and money market savings rates are a practical proxy for it, but it's not any one of these.