6 ms·

Not OP, but it's very simple - by historical standards, everything is crazy expensive, especially in the stock market, but not only (housing...). Home price to

Not OP, but it's very simple - by historical standards, everything is crazy expensive, especially in the stock market, but not only (housing...). Home price to median household income ratio is at all time high - current generations have to work almost twice as long to pay a house, compared to their parents. S&P price / earnings ratio is around 27 now and it's been above 20 pretty much all the time since late 90s. In the past it was hovering between 10-20 usually - here is a chart: https://www.multpl.com/s-p-500-pe-ratio https://www.multpl.com/s-p-500-pe-ratio We have huge companies (the famous MAG 7) with PERs above 30. Given their scale, it's pretty much impossible to grow enough to reduce this PER significantly, unless we discover another planet with eager customers, or solve poverty worldwide. So while they do make a lot of cash, if you were to buy the whole business, you would need to wait 30 years for it to pay back for itself... I know people stopped thinking like that, and just hope the 'price will go up' and there will be a greater fool willing to buy even higher. But at some point, the music will stop, although nobody knows when though. And if you look at the history of when the music stops for the markets, it's not pretty.

s1artibartfast 2y ago
There's nothing magic about the number 20 that makes it better than 30. The number it's just based on the marginal value of capital at the time. If there's enough capital built up and few enough opportunities, the per can go arbitrarily high.
- Jensson 2y ago
  Cheaper is better, having to pay more for productive assets isn't a good thing.
  - s1artibartfast 2y ago
    It's a lot more complicated than that. There are advantages to having Capital chasing investments and high pER. As a thought experiment, consider what factors would have to be true for extremely cheap assets, say a PER of 1.
    - Jensson 2y ago
      > As a thought experiment, consider what factors would have to be true for extremely cheap assets, say a PER of 1. The singularity? The bad things you are thinking about doesn't come from assets being cheap, they are flaws that causes the asset to be cheap for other reasons. All else being equal it is better when things are cheaper.
      - s1artibartfast 2y ago
        I don't think it necessarily needs to invoke a singularity. It just means that the cost of capital is low relative to the value of goods produced. You can find examples of this today. If I am a small scale fisherman from a pier, I might be happy to sell my business for one year's revenue. The pole only costs $200, and the vast majority of the value is created through my time and labor. I'll be happy to recieve my annual earnings of say $20,000, sell you the business, buy a new pole and see you out on the pier tomorrow. Inversely, if I run a semiconductor Fab that billions of dollars in construction, the situation might be the opposite because there is a vast amount of value tied up in the infrastructure that is not represented in my earnings number.
        Jensson 2y ago
        > If I am a small scale fisherman from a pier, I might be happy to sell my business for one year's revenue. The pole only costs $200, and the vast majority of the value is created through my time and labor. I'll be happy to recieve my annual earnings of say $20,000, sell you the business, buy a new pole and see you out on the pier tomorrow. This is a good example, imagine having to spend $200k just to get a fishing pole? That isn't a good thing, that is asset inflation, cheaper assets is better. Many modern evaluations are on that level, you pay a ton and get very little.
- downrightmike 2y ago
  And it has, clearly
- roenxi 2y ago
  There is - humans have a finite horizon for their investments to pay back on for it to be useful to them in this lifetime and we have reason to believe it is, in practice, around 10-20 years. In theory maybe we could have enough capital to get it arbitrarily high but that isn't remotely the situation we're in right now. Globally we have a couple of billion people who need more stuff and in the Western economies we are facing a concerning prosperity problem (the political situation seems to be flashing bright red lights at us and we're being out-competed by Asia). Nothing here is screaming excess capital. If anything we seem to have some serious capital misallocations playing out (my slogan for the month has been China seems to have built >1 US real economy in the time it took the US to build 0 new US economies - you can't tell me the US is efficiently allocating capital with results that bad).
  - s1artibartfast 2y ago
    Can you explain your slogan more? What time frame are you talking about with respect to China and the US? If you benchmark say the 1940s, the US economy has expanded about 4.5 times, and the Chinese economy has increased about three US economies in that same frame. Questions of capital allocation of course depend on what variables you consider available for change. To me it's not at all clear that there are excellent investment opportunities available in the West which are being overlooked
    - roenxi 2y ago
      I look first and foremost at energy [0] and would typically measure from 1970 since that seems to be the last time we had a major change in economic regime [1]. Although admittedly the US has grown since the 70s, stagnation didn't set in until around the 2000s. So as far as sloganing it'd have to be sometime around then. And I don't think the US is growing at all. The energy picture and GDP/M2 [2] both suggest it is treading water at best although the situation is hopefully a little better than those timeseries suggest since there should be some efficiencies from better tech. But the political situation to me is the most telling. We shouldn't be seeing the sort of slow-motion collapse of the polity that we are in the US unless there was also serious slow-burn economic pressure. EDIT I can't decide which follow up comment to respond to so I'll just put it here: The energy efficiency argument isn't really valid - improvements in energy efficiency tend to cause usage to increase; it is a textbook case of Jevons' paradox [3]. [0] https://ourworldindata.org/grapher/primary-energy-cons?tab=chart&country=OWID_WRL~CHN~USA https://ourworldindata.org/grapher/primary-energy-cons?tab=c... [1] I have actual arguments, but I don't think it is controversial so https://wtfhappenedin1971.com/ https://wtfhappenedin1971.com/ gets the point across. [2] https://fred.stlouisfed.org/graph/?g=eTtE https://fred.stlouisfed.org/graph/?g=eTtE [3] https://en.wikipedia.org/wiki/Jevons_paradox https://en.wikipedia.org/wiki/Jevons_paradox
- TheAlchemist 2y ago
  Your comment reminds me about “Stock prices have reached what looks like a permanently high plateau”. What you say is technicaly true and in a rational simulation it could even work like that. But humans are not like that.
- skybrian 2y ago
  "Few enough opportunities" is doing a lot of work, though. Aren't there other things to buy?
  - riffraff 2y ago
    Yeah, the multiples for non-us companies in advanced economies (UK, Canada, EU, Japan etc) are a lot lower than for the SP500. But stocks are hype-driven so it doesn't matter.
lsh123 2y ago
With 10+% annual inflation in US in the last 2-3 years, 20+ P/E doesn’t look bad at all. Actually anything under 40 or so should be a strong buy.
- metadat 2y ago
  Based on what?
  - s1artibartfast 2y ago
    P/E ratios dont account for inflation. IF the P/E is 40 and inflation is 10%, you will break even in 17 years, not 40 years. If P/E is 20, you break even in 12 years. Inflation has a similar but more dramatic impact on housing because you can leverage your investment with the loan.
    - ffgjgf1 2y ago
      > ratios dont account for inflation For future inflation. It was relatively low between 2010 and 2020 and has been reducing at a fairly fast pace recently. It’s not obvious it won’t go back to the baseline.
      - s1artibartfast 2y ago
        They don't account for any inflation at all. I am just explaining how inflation influences p/e interpretation. Everyone has their own model of what they think inflation will be in the future, which they use to judge PE and roi.

s1artibartfast 2y ago

There's nothing magic about the number 20 that makes it better than 30. The number it's just based on the marginal value of capital at the time. If there's enough capital built up and few enough opportunities, the per can go arbitrarily high.

Jensson 2y ago
Cheaper is better, having to pay more for productive assets isn't a good thing.
- s1artibartfast 2y ago
  It's a lot more complicated than that. There are advantages to having Capital chasing investments and high pER. As a thought experiment, consider what factors would have to be true for extremely cheap assets, say a PER of 1.
  - Jensson 2y ago
    > As a thought experiment, consider what factors would have to be true for extremely cheap assets, say a PER of 1. The singularity? The bad things you are thinking about doesn't come from assets being cheap, they are flaws that causes the asset to be cheap for other reasons. All else being equal it is better when things are cheaper.
    - s1artibartfast 2y ago
      I don't think it necessarily needs to invoke a singularity. It just means that the cost of capital is low relative to the value of goods produced. You can find examples of this today. If I am a small scale fisherman from a pier, I might be happy to sell my business for one year's revenue. The pole only costs $200, and the vast majority of the value is created through my time and labor. I'll be happy to recieve my annual earnings of say $20,000, sell you the business, buy a new pole and see you out on the pier tomorrow. Inversely, if I run a semiconductor Fab that billions of dollars in construction, the situation might be the opposite because there is a vast amount of value tied up in the infrastructure that is not represented in my earnings number.
      - Jensson 2y ago
        > If I am a small scale fisherman from a pier, I might be happy to sell my business for one year's revenue. The pole only costs $200, and the vast majority of the value is created through my time and labor. I'll be happy to recieve my annual earnings of say $20,000, sell you the business, buy a new pole and see you out on the pier tomorrow. This is a good example, imagine having to spend $200k just to get a fishing pole? That isn't a good thing, that is asset inflation, cheaper assets is better. Many modern evaluations are on that level, you pay a ton and get very little.
downrightmike 2y ago
And it has, clearly
roenxi 2y ago
There is - humans have a finite horizon for their investments to pay back on for it to be useful to them in this lifetime and we have reason to believe it is, in practice, around 10-20 years. In theory maybe we could have enough capital to get it arbitrarily high but that isn't remotely the situation we're in right now. Globally we have a couple of billion people who need more stuff and in the Western economies we are facing a concerning prosperity problem (the political situation seems to be flashing bright red lights at us and we're being out-competed by Asia). Nothing here is screaming excess capital. If anything we seem to have some serious capital misallocations playing out (my slogan for the month has been China seems to have built >1 US real economy in the time it took the US to build 0 new US economies - you can't tell me the US is efficiently allocating capital with results that bad).
- s1artibartfast 2y ago
  Can you explain your slogan more? What time frame are you talking about with respect to China and the US? If you benchmark say the 1940s, the US economy has expanded about 4.5 times, and the Chinese economy has increased about three US economies in that same frame. Questions of capital allocation of course depend on what variables you consider available for change. To me it's not at all clear that there are excellent investment opportunities available in the West which are being overlooked
  - roenxi 2y ago
    I look first and foremost at energy [0] and would typically measure from 1970 since that seems to be the last time we had a major change in economic regime [1]. Although admittedly the US has grown since the 70s, stagnation didn't set in until around the 2000s. So as far as sloganing it'd have to be sometime around then. And I don't think the US is growing at all. The energy picture and GDP/M2 [2] both suggest it is treading water at best although the situation is hopefully a little better than those timeseries suggest since there should be some efficiencies from better tech. But the political situation to me is the most telling. We shouldn't be seeing the sort of slow-motion collapse of the polity that we are in the US unless there was also serious slow-burn economic pressure. EDIT I can't decide which follow up comment to respond to so I'll just put it here: The energy efficiency argument isn't really valid - improvements in energy efficiency tend to cause usage to increase; it is a textbook case of Jevons' paradox [3]. [0] https://ourworldindata.org/grapher/primary-energy-cons?tab=chart&country=OWID_WRL~CHN~USA https://ourworldindata.org/grapher/primary-energy-cons?tab=c... [1] I have actual arguments, but I don't think it is controversial so https://wtfhappenedin1971.com/ https://wtfhappenedin1971.com/ gets the point across. [2] https://fred.stlouisfed.org/graph/?g=eTtE https://fred.stlouisfed.org/graph/?g=eTtE [3] https://en.wikipedia.org/wiki/Jevons_paradox https://en.wikipedia.org/wiki/Jevons_paradox
TheAlchemist 2y ago
Your comment reminds me about “Stock prices have reached what looks like a permanently high plateau”. What you say is technicaly true and in a rational simulation it could even work like that. But humans are not like that.
skybrian 2y ago
"Few enough opportunities" is doing a lot of work, though. Aren't there other things to buy?
- riffraff 2y ago
  Yeah, the multiples for non-us companies in advanced economies (UK, Canada, EU, Japan etc) are a lot lower than for the SP500. But stocks are hype-driven so it doesn't matter.

lsh123 2y ago

With 10+% annual inflation in US in the last 2-3 years, 20+ P/E doesn’t look bad at all. Actually anything under 40 or so should be a strong buy.

metadat 2y ago
Based on what?
- s1artibartfast 2y ago
  P/E ratios dont account for inflation. IF the P/E is 40 and inflation is 10%, you will break even in 17 years, not 40 years. If P/E is 20, you break even in 12 years. Inflation has a similar but more dramatic impact on housing because you can leverage your investment with the loan.
  - ffgjgf1 2y ago
    > ratios dont account for inflation For future inflation. It was relatively low between 2010 and 2020 and has been reducing at a fairly fast pace recently. It’s not obvious it won’t go back to the baseline.
    - s1artibartfast 2y ago
      They don't account for any inflation at all. I am just explaining how inflation influences p/e interpretation. Everyone has their own model of what they think inflation will be in the future, which they use to judge PE and roi.