mattee2264

b]Falling for the bear market rally narrative At the time it seemed reasonable to take advantage of the initial rally to raise some cash. Buffett was pretty bearish and most economists believed there was a strong possibility of a depression and the economy would take years to recover and most health experts warned that vaccines take years to develop. As such it seemed strange to see the market back trading at around 20x pre-COVID earnings and only 20% off pre-COVID highs. What I should have done is focused on base cases. A 30% decline is pretty typical for bear markets and the base case after an event driven bear market is a sharp V shaped recovery. So there was every possibility that the market bottomed in March (as proved to be the case). Also while the health and economic uncertainty remained incredibly high most of the S&P 500 consisted of companies incredibly well positioned for the pandemic. And of course I should have expected that in a no-fault recession the governments and central banks worldwide would do whatever it takes to support markets and the economy. Also even if the rally did reflect excessive optimism I should have realized that events could subsequently justify that optimism which turned out to the the case. Of course turned out to be very costly because now I'm sitting in far too much cash and virtually everything is up over 50% or more from their 52w lows. And with the market showing no signs of slowing down watching the market continue to run away from me is increasingly painful and I am feeling very foolish.

Worth remembering that there are quite a lot of leakages. Some is saved or goes into the stock market. Some of it goes towards paying off debt. Some goes on imports. And for now it is mostly life support rather than stimulus. With delays in the vaccine rollouts and mutations and a desire to achieve herd immunity that could remain the case for much of 2021. The real recovery might not be until 2022 and by that time it might be a lot harder to pass these trillion dollar stimulus packages.

Investment banks generally have the view we are in the early innings of a new bull market and the Roaring 20s are ahead. I think the main risk is we have massive amounts of global debt that is predicated on low interest rates. That feels like a house of cards to me.

https://www.jpmorgan.com/wealth-management/wealth-partners/insights/big-government-runaway-inflation-and-a-market-bubble This is quite good. Supports the idea that institutions are optimistic rather than necessarily crazy. Their main arguments: 1) US large cap companies earnings power was very resilient in the face of one of the sharpest recessions in history 2) Low interest rates support expensive valuations 3) Even if there is some multiple compression, this will be offset by earnings growth with their expectations of +25% earnings growth for the S&P 500 and +15% earnings growth from all other major reasons 4) Inflation is still well below target and major components such as wages and shelter remain weak and if inflation does pick up it will be in the context of a healing economy 5) We may have passed the hope phase but we still have the growth phase to come

https://www.jpmorgan.com/wealth-management/wealth-partners/insights/big-government-runaway-inflation-and-a-market-bubble This is quite good. Supports the idea that institutions are optimistic rather than necessarily crazy. Their main arguments: 1) US large cap companies earnings power was very resilient in the face of one of the sharpest recessions in history 2) Low interest rates support expensive valuations 3) Even if there is some multiple compression, this will be offset by earnings growth with their expectations of +25% earnings growth for the S&P 500 and +15% earnings growth from all other major reasons 4) Inflation is still well below target and major components such as wages and shelter remain weak and if inflation does pick up it will be in the context of a healing economy 5) We may have passed the hope phase but we still have the growth phase to come

Yeah it is a good read. He has a no BS approach to investing which I think anyone can learn from. Like many great investors he also has the ability to focus on the few factors that really matter and come up with well reasoned variant perceptions.

I think with SPACs the condemnation is by class rather than every single instance. The same as IPOs. I would be quite happy giving a blank cheque to someone like Sam Zell. And even with Bill Ackman's SPAC you can have some confidence he will make a decent acquisition.

Haha this year people have been making way more than 50% returns in penny stocks. But I kinda feel that wasn't what Buffett had in mind.

Yeah the ability of social media to mobilize massive retail crowding is a scary thing.

You'd imagine yield curve control would be used to prevent an increase in treasury yields from crashing the stock market as well as reinforcing financial repression. Grantham had a recent interview with Meb Faber and thinks we are in more of an individual frenzy as opposed to an institutional frenzy. He says institutions are over optimistic though. Wonder what the implications of this are? Usually I'd say retail are a small part of the market. But with the amount of leverage they are using and their preferred vehicle call options perhaps there could still be a significant market impact.

Problem is Yellen and Powell are milking this no-fault recession for as much as it is worth. Both use a desire for full employment as an excuse for excessive stimulus. But government handouts do little for work incentives or job creation. And zero interest rates have done little to encourage productive investment and by keeping zombie companies alive prevent a healthy process of structural adjustment in the economy.

Grantham is basing his views on crazy investor behaviour which I agree suggests we are closer to 2000 than 1998. Problem is he underestimates the ability of the Fed and the government to keep this going. Zero interest rates were bad enough with their TINA implication and encouragement of the use of leverage and financial engineering by companies (e.g. share buybacks). But now we have the government giving unlimited handouts to people who really don't need the money and have figured out they can make handsome returns by investing it in the stock market. And so long as the virus lingers around there are limited options for spending so a higher saving rate should continue to support higher share prices. Ultimately Grantham's argument is that economic forces result in an eventual reversion to mean. But we are no longer in a free market economy.

It is definitely a speculative and momentum driven market which is usually a dangerous sign. But the problem is that this time the Fed and the government instead of taking away the punch bowl are refilling it to the brim. The Fed in particular is determined not to allow the market to crash and through its policies is encouraging investors to lever up and take on more and more risk and allocate even more to equities and that is creating an unprecedented level of moral hazard. Of course the rationale used by the Fed and the government is that with low interest rates and inflation nowhere to be seen the usual constraints on economic policy do not exist. And inflation is actually quite desirable given the high levels of debt in the world. And you'd expect with the "too much is better than too little" mantra this argument will get pushed to its natural limits (whatever they are) but you'd imagine this policy experiment still has quite a few years to run and with it the bull market. There will probably be a market correction at some point so to that extent we may be approaching a top. But I think we could be a long way from the actual top of this market.

It might have a modest impact on cyclicals and other recovery plays but much of the US stock market is growth and defensives so money would probably just rotate into those. Much of the recovery in stock prices was well before we even had a vaccine and even when it was obvious that we would be in for a rough winter.

In a sense by sitting in cash waiting for lower market valuations and therefore higher prospective returns you are reaching for yield. Perhaps the new normal is higher valuations and lower returns especially if investors are now confident that the Fed will do whatever it takes to prevent a bear market. Perhaps the market will go higher for a while longer and then go sideways for a number of years as earnings growth and multiple compression offset one another. And even if there is a weak economic recovery you'd expect low interest rates to support share buybacks that could drive earnings higher. In both these scenarios there is no guarantee that you will get to invest at much lower market levels and while you are waiting inflation is eroding the purchasing power of cash. Grantham's argument is that we are in a bubble and it will burst in the coming months resulting in a large market decline that the Fed will be helpless to prevent. That would of course be a strong reason to sit in cash or to seek shelter in less expensive segments of the investment universe such as emerging markets or value stocks. But it is very difficult to see an imminent 30%+ market decline. For that to happen you would need sentiment to swing from mania to depression and there is no obvious trigger for that. Nor is it likely that the Fed will raise interest rates too fast especially as it seems to be going out of its way to avoid a taper tantrum.

Problem is you have to invest your money somewhere so the 4% growing FCF yield you can get on US equities is a lot more attractive than the 1% fixed coupon you get on bonds.

https://nypost.com/2021/01/21/seth-klarman-likens-investors-to-frogs-slowly-boiling-in-a-pot/ The NY post has some quotes from the letter and I don't think it is behind a paywall.

I think there is always some rationality to exuberance. And clearly in this case a combination of low interest rates and acceleration of secular growth trends has been very favourable to technology stocks and is expected to continue to be so. The irrationality will come from extrapolating recent growth rates and low interest rates too far into the future and paying too high a price for the favourable outlook. That will create a situation whereby any hint of interest rates rising or growth slowing will reset expectations and the hit to confidence will result in large share price declines.

Yeah I think all this craziness could cause a lot of market participants to want to take some profits and reduce risk. Especially as there is plenty of uncertainty ahead in terms of the virus and the economy and so on. And perhaps with all the margin debt and new money in the market a healthy correction could turn into something much deeper. Other thing that could be interesting is if the same market participants who bet on the market going up decide to bet on the market going down.

I think perhaps we are seeing separate cycles. For cyclicals the peak was 2018 and obviously the bottom was 2020. There has already been a bit of a recovery and so long as we avoid going back into recession they should do well in the coming years. For secular growth stocks there has been a very very long bull market for which 2020 was just a mild correction and the bull market has been extended by the shift in spending patterns from Covid and all the liquidity and easy money. Not sure what will end that bull market. Perhaps inflation/higher interest rates?

Seth Klarman has a great take on the economic situation: "Trying to figure out if the economy is in recession is like trying to assess if you had a fever after you just took a large dose of aspirin," Obviously it is a no-fault recession so the government is doing everything it can to maintain consumer and business balance sheets. And a lot of the pain is being postponed to the future. So it is easy to think that a recovery is simply a matter of vaccinating everyone and re-opening the economy and therefore easy to ignore bad economic data and see across the valley. And it is a recession that hurts the old economy and benefits the new economy. So combine that with lower interest rates for longer and you can understand why tech has done so well and the old economy is now catching up.

I think it is a combination of things. Chasing performance and buying high and selling low and taking excessive risks rather than being content to get wealthy slowly. Buying too much house and spending too much on repairs and home improvements as a result. Expensive divorces Living beyond your means with conspicuous consumption and wanting the very best for your kids

Grantham loves the green energy theme so probably has an unconscious bias so is refusing to recognize the froth in that area the market. I think the new bull market thing is confusing. I think we are still in the same bull market and it has been extended by the promise of lower interest rates for longer and a reinvigoration of the growth prospects for tech due to much faster adoption and the potential for broadening as cyclicals have a lot of room to run in a strong economic recovery. A lot of the speculative mania shows we are in the late inning. But could be another year or two before tapering and withdrawl of fiscal stimulus result in both Big Tech and cyclicals seeing significant price declines. I think so long as there is concern about the real economy the Fed is going to be very accommodating and so long as COVID continues to linger around there will be a lot of remote working and home entertainment and online shopping which will keep growth expectations high.

I can't really see the Fed tapering for at least a few years. Last time round they didn't start talking about it until 2013. And difficult to turn off the taps when you have all of Biden's trillions to fund. They've already said they will let inflation run hot and won't tighten until we approach full employment. Tax rates probably won't go up until next year. And I think most wealthy individuals and corporations will be able to avoid most of the impact. A weaker than expected recovery coupled with a re-opening is probably the main risk. In that scenario cyclicals would suffer and probably Big Tech too as consumers will probably spend less on consumer goods and entertainment so they can go out more and businesses might try and economise on software and cloud etc. And while you'd expect a weaker economy to lead to more fiscal stimulus it might be harder to push through without tax increases.

JNJ vaccine sounds promising. They are guiding an efficacy rate of at least 70% but possibly a lot higher and far fewer distribution issues and only one shot. Although there won't be a massive amount of doses available until much later in the year.