mattee2264

Perhaps the analogy doesn't work with China. But for the USA at least I have a healthy respect for the power of shock-and-awe bailouts/stimulus to lift markets. And for the know-nothing investor index funds are probably the vehicle of choice with the added benefit that if the plunge protection team decides it wants to support markets it will buy index funds. MSCI China is at levels last seen almost 15 years ago. While some of that does reflect that GDP growth has been offset by massive dilution of shareholders with probably some more to come especially in financial/property institutions because the bath has been thrown off with the bathwater if you buy the index you'll end up owning some of the companies that will see an impressive recovery when the crisis is over.

What I mean is that if you amortise the PE compression over a longer period its impact on your overall returns greatly diminish. Over the next decade I do not think it is unreasonable to expect S&P 500 earnings to grow 10% per annum for the following reasons. 1) Inflation will probably be stuck in the 3-4% range and we've already seen companies in the S&P 500 can pass on cost increases fairly easily and the companies that dominate the indices can use their monopoly power to push through above inflationary price increases 2) There probably will be some productivity benefits from AI which could mean real GDP growth will be stronger over the next decade than the last decade. There will also be some support from much higher investment in areas such as AI, renewable energies, onshoring etc. 3) The indices are dominated by quality growth companies and double digit earnings growth is easy for these kind of companies Even if you knock off a few percentage points to reflect earnings compression (to reflect the increasing maturity of tech companies and the likelihood interest rates will settle at a level higher than pre-COVID) you still could get 7-8% returns. That is a lot better than the 4% you get on long bonds and you get more of an inflation hedge. In real terms it would probably be only about 4-5% which is much less than the double digit real returns investors have been used to this cycle. But that is all the CAPE model really tells you. Whether there is any benefit from lightening up on equities at this point depends on how much volatility there is and whether the next bear market is a few years or ten years away. Very difficult to predict. A lot depends on whether we are entering into a new economic cycle or whether a recession is still in the pipeline over the next year or two. Also depends on whether AI lives up to its promise as that has extended the growth runway of market leaders and helping investors ignore the possibility of higher for longer and overlook that in recent years there have been some signs of incipient maturity

Shiller PE has become less and less helpful over time. Perhaps if it was adjusted for interest rates and the long-run upward trend in valuations over time it would be more useful. But all it is really designed to do is give some indication of likely expected stock market returns over the next decade. Problem is that economic and market cycles are so protracted that it is little use as a timing indicator. Even if the basic concept that valuations eventually revert to the mean is true it makes a big difference whether they do so within 1 year, 5 years, 10 years because over that period earnings and stock prices will continue to grow. And over long periods the positive impact of period earnings growth increasingly dominates any negative impact from PE multiple compression. Are we in the late stages of a bull market? Or are we at the start of a new cycle powered by an investment boom resulting from AI advancements, onshoring etc? Has recession merely been delayed resulting in a major rug pull later this year or next year? Or have we already had the soft landing and starting to see grass shoots? Really tough to tell and that's why uncomfortable as it may be you have to accept that as a buy-and-hold investor (especially one concentrated in index funds) the long term market returns come from continuing to hold through periods of low valuations and high valuations and suffering through 50% market declines every decade or two.

Stock markets are leading indicators so the real pain in the Chinese economy is likely to come. What I find odd is there hasn't been much in the way of contagion. There must be some global banks with some exposure to Chinese RE. If anything the failure of China's re-opening has been bullish by suppressing global inflationary pressures especially in relation to commodities etc.

People get confused between the price level and inflation. Prices have gone up at least 20-30% since before COVID. Probably more in certain categories. If all the inflation was just the result of supply chain disruptions then prices should have gone back down. But while companies were quick to pass on cost increases to consumers they haven't lowered prices once input costs started to come back down. Helped in part because the economy has been strong and unemployment low thanks to fiscal largesse. So I can understand why a lot of people are still complaining about inflation even as inflation rates have come back down into the low single digits. Obviously if you own stocks your wealth has doubled since the pandemic which makes paying 20-30% more for groceries, entertainment, restaurant meals, holidays etc a small price to pay. But for the common man they've been stuck with much higher rents, much higher prices of basic necessities like groceries, and their credit card interest has gone through the roof and they are understandably miserable.

Not a huge amount of evidence of pain. Euro stocks have been on a bit of a tear lately with a 1 year return of almost 20% and that was without the benefit of having Mag7 or equivalent to do all the heavy lifting. While the eurozone narrowly avoided recession in 2023 their inflation rate is down to 2.9% so they will probably able to start cutting sooner than USA. And the interest rate transmission mechanism works faster in Europe so they've probably already felt a lot of the pain from higher rates and adjusted to them. Of course Europe has a lot of regulations and so on but it also has a high concentration of quality multinational companies.

It probably does have something to do with the top. A major factor in the resilience of the US economy is unprecedented deficit spending. That can continue to be justified if there is a large influx of immigrants who wind up on benefits. Perhaps at some point tax rates will go up but for now the USA does not have to balance the books because the USD is the global reserve currency.

American Dream was that you could come to America, work hard, and have a better life. And the country was vast and underpopulated and industrializing so lots of opportunities. Now the only industry making any money is technology and they are laying off staff left right and centre and trying to replace with their own AI technologies. And most of the new jobs being created are in government as they've embraced deficit spending and are very motivated to keep unemployment low to get Biden re-elected. And most jobs these days are part-time. You can understand the motivation to create a welfare state with a huge population of people dependent on government benefits who will vote for governments who keep the benefits flowing to them. But hardly good for the long run future of America.

History repeats itself. She's just a reincarnation of the go-go investors of the 1960s. The lesson investors never learn that if a fund massively outperforms over a short period of time it is usually a combination of: a) Taking on a lot of risk (i.e. speculating) b) Being in the right place at the right time (i.e. the flavour of the month happens to be the stocks you are concentrated in) Of course there is some salesmanship involved. If you can talk your book convincingly that will attract more investors into the stocks you are investing in. And you need to be intelligent enough to at least sound convincing. But she is a product of a speculative investing environment where the current generation of investors are used to getting rich quick and are easily seduced by anything futuristic.

Must be some good companies that have been thrown out with the bathwater. Mandarin Oriental comes to mind. At similar levels to depths of the pandemic. Jardine Matheson is a solid storied conglomerate Marty Whitman used to love Henderson Land, CK Hutchinson Holdings, Wheelock etc.

If models need a lot of customisation or in-house programming to be useful wouldn't that limit the revenue opportunity for Big Tech? Presumably the idea is to provide for a subscription fee either the infrastructure or an off-the-shelf model that can easily be customized or programmed. And for the most basic applications/models there will probably be open source versions that allow companies to bypass Big Tech and allow niche smaller providers to make models for limited uses. OpenAI is a bit of a sham as they've already got into bed with Microsoft and clearly have little interest in making the underlying technology freely available for the benefit of mankind. But other Big Tech companies have come up with their own models and presumably lots of start ups can as well. Competition would drive down prices and returns and ultimately benefit consumers the most. But the way Big Tech companies have melted up since the release of Chat GPT there seems to be the implicit assumption that Big Tech will enjoy a lot of additional revenue with the same high margins and returns on investment they have made on their existing products/services. And maybe the internet is an example. It wasn't the companies providing access to the internet who made hay. But rather the companies who found a way to make money through the internet and even then there was a time delay and they weren't spared from the shakeout and even very big companies who were frontrunners didn't end up being the big winners. Only Microsoft is still on top. This time round Big Tech have a competitive edge as they have the huge customer base, the customers trust their products/services, they can invest far more than anyone else in AI and fund promising start ups and VC firms and reap the benefits of their work (and exclude others from doing so) but if the products they provide only provide a limited value add they won't be able to charge exorbitant fees and it may be that other smaller companies come up with more innovative uses and applications.

A little more colour coming out of the latest round of tech earnings calls on the AI breakthroughs will play out. First area seems to be AI model as a service giving clients access to a variety of AI models they can customize while not having to worry about maintaining the infrastructure. Second area seems to be AI agents which can improve productivity by assisting with simple tasks. Already have a customer list that is hooked on their existing products/services and the seductive qualities of AI are such that they'd probably happily pay over an extra chunk of money to get AI add-ons or upgrades and the same powerful network effects and ability to spread investment in AI over hundreds of millions of users. Potential issues might be: -It will require a lot of investment. All the CEOs touting further cost cuts and efficiency gains but those won't be alone to fund it and the risk is that research will eventually hit a dead end and it will become a black hole in a quest for artificial general intelligence when the history of the development of AI shows that progress eventually stalls and you then get an AI winter and only many many years later is the next breakthrough made -Even if the revenue opportunity is tens of billions that doesn't really move the needle when these are trillion dollar companies already generating over $100b revenue a year and market caps already anticipate double digit earnings growth

Also interesting is that after the corporate profits recession in 2022 and 1H2023 the last few quarters have been very strong with 7.5% EPS growth in Q3 and with 80% of S&P 500 companies reporting Q4 is lining up to come in a little higher than that. Along with the strong GDP figures looks more like an economic take-off than an economic landing. Although of course the caveat is that most of that earnings growth is probably coming from Big Tech.

It is simple valuation math. You cannot assume a long term growth rate much more than GDP because to do so would result in ridiculous valuations. Mag7 are growing a lot faster because: a) they are growing at the expense of old economy stocks b) they are benefiting from changes in consumer and corporate spending patterns with an ever increasing wallet share being allocated to Big Tech products c) they have powerful network effects that allow them to benefit from increasing returns so earnings can grow even faster than revenues d) some of them took advantage of cheap debt to buy back shares so financial engineering has also resulted in EPS growing faster than earnings e) they are taking advantage of untapped pricing power and as most of them are monopolies providing essential products/services with inelastic demand the market is able to bear them Eventually growth rates will slow and be more in line with global GDP growth. But their growth runway has been a lot lot longer than most anticipated and betting against Big Tech has been a losing bet over the last decade. I think the main risk at the moment is they are exceeding their remit and trying to act more like venture capitalists in their greed to make sure they reap all the benefits of advancement in AI technology. Previously most of them had a low capital intensity and gushed free cash flows. Now free cash flow is being diverted to investment in AI. Even if you call it growth capex I am sceptical that the returns will be as good as their core businesses and whether they'll be able to recapture enough of their spend through pricing increases for AI upgrades to their existing product suite. It is probably more of a medium term risk because in the short term AI markets itself and people will pay whatever it takes to get their hands on fancy new AI bells and whistles fearing that if they don't their competitors will and get an edge.

Well yeah so long as Big Tech can continue eating the world then it doesn't really matter that much whether US or global GDP growth is sluggish. And arguably sluggish growth is a good thing if it keeps inflation down and allows interest rates to come back down to a more neutral range. Over last 5 years CAGR EPS growth rate for Mag7 was over 30%. Many multiples of global GDP growth over the same period. Agree that you aren't getting a hard landing so long as the US government keeps spending like crazy and the underlying weaknesses in the economy are bullish to the extent there is room for improvement and it would be far more dangerous if things were as good as they can get (meaning they can only get worse). The market has also correctly sussed out that resumption of issues in the banking sector are going to force the Fed to halt QT and probably provide more bailouts and last year that stealth QE was pretty bullish for markets. Also investors are pretty inoculated against bad news and have seen the stock market recover from a global pandemic, the Ukraine war, double digit inflation, a profits recession and surpass all time highs. So it will take a lot more than a mild slowdown or a modest reacceleration of inflation or later than expected interest rate cuts to shake their confidence. We've had 2 V shaped recoveries now and you'd need something far more scary than a run of the mill short lived cyclical slowdown (or even recession) to cause anything more than a mild correction. It would also be highly unusual for there to be another bear market so soon after having had 2 already this decade. 10-20% correction quite possible and par the course. But with most of the Mag7 firing on all cylinders and Fed and US government motivated to juice the economy ahead of the elections direction of travel at least for the next year or so seems to be firmly upwards.

Common misconception that the stock market and the economy are the same thing. Under the surface the economy isn't doing that great. Little concerning that such massive fiscal deficits are required to get the economy to grow at the long term historical norm of 2-3%. Banking sector on life support and will need more of the same in 2024 with all the CRE worries. Manufacturing is in recession. Consumers continue to live beyond their means by draining their savings, taking on more debt, and falling prey to buy now pay later retail schemes. Cost of living still rising faster than wages squeezing real incomes. Lots of people having to moonlight to make ends meet etc. But it doesn't really matter when Mag7 grew 100% in 2023 and are off to the races in 2024 with a Mag7 ETF already up 10% following the after hours increases in Meta and Amazon stock prices. Nvidia and Meta leading the pack up over 20% in a month alone! Microsoft results picture perfect. Amazon on fire with double digit sales growth. Even laggards like Apple and Goggle had pretty good quarters. With Tesla the only real disappointment-but its always been the odd one out. And the momentum will continue because they haven't even seen much of an impact from AI and even if it is overhyped and of fairly dubious value you can bet your hat that all the C-suite executives are going to be easy to try them out using shareholders money and adding some AI bells and whistles to existing products is an easy way for Big Tech to push through big price increases and gain further market share.

Fundamental indices can outperform over short periods but you aren't getting the long track record you get with a market cap weighted index. Also arguably a low interest rate environment favours cash cows because they are seen as bond proxies and they may not do as well in a somewhat higher interest rate environment and cash cows also generally are mature or declining business with their growth behind them. A basic FCF calculation also penalizes companies that are making growth investments through their P+L (e.g. marketing expenses, research expenses) or intentionally keeping prices low to increase market share (e.g. Amazon).

I mean we all know that "higher for longer" is another Fed fairy tale? Sooner rather than later mortgage rates will come back down and real estate markets will unfreeze. If workers manage to negotiate wage increases this year that will also improve affordability and in some markets at least there has been a correction in prices.

As I understand it when you index invest you free ride on the efforts of active managers to price stocks. So indexing will keep working so long as there are enough active managers who care about fundamentals and do a proper job. Whether it will continue to work when active managers are either losing their jobs or hugging the indices and most of the buying and selling is done by speculators (retail and hedge funds) remains to be seen. Market cap weighting has the best track record and understandably so because capitalism is based on survival of the fittest and the largest companies have withstood competitive challenges, dominated their markets, and become entrenched in the economy. Also by holding a market cap weighted index fund you are betting that over time the market capitalization of the S&P 500 will increase over time in line with the US and global economy. That is a pretty safe bet to make. You are also benefiting from efficiencies as there is little need to trade and rebalance and trading costs can eat away quickly at returns. With the benefit of hindsight there were times when you'd have done better switching into an equal weighted index or favouring EAFE over USA for example or switching into small caps. But that is a variant of market timing and as outperformance of every index comes in short bursts and likewise underperformance the costs of getting it wrong can be severe. Besides for most of the cycle a market cap weighted index will outperform. Concentration is also a common feature of a market cap weighted index. For the US economy it hasn't been too detrimental because the economy is sufficiently diverse that the top 10 stocks by market cap still offer a range of industries and sectors. Even the current concentration isn't as bad as it looks because Big Tech is involved in other industries e.g. retail/luxury goods/advertising etc. Other economies it can be a bit more toxic for example an FTSE 100 indices would mean owning a lot of financial companies and mining/energy stocks which over long periods tend to be bad investments. Another thing worth mentioning is that with index investing you do not need to be able to value every stock. Ben Graham used to write about how large growth companies are speculative because so much of their value depends on future prospects. Clearly for most of this market cycle investors underestimated these prospects and perhaps now they are starting to overestimate them. But an index investor would have participated in their dramatic outperformance and probably far more so than the majority of active managers. It also allows you to be valuation indifferent. Generally in the later stages of bull markets there aren't obvious bargains and even good investors can run out of good ideas and end up with too much cash or unwittingly end up taking on too much risk or lowering their standards etc. An index investor doesn't care as over long periods he knows that it isn't valuations that drive stock markets return (although there has been a helpful long run upward drift in valuations) but growth in earnings and dividends (and latterly the shrinking share count from buybacks). And maybe one of the reasons that index investing will never catch on to the extent it stops working is that it is hard for intelligent people to accept that all they need to do is hold an index fund through thick and thin with no need to read annual reports, study business economics, read Berkshire letters, follow the news, know any accounting etc. And for short periods of time at least it is possible to beat the market and think you are one of the few who can do so long term. And the few people who can beat the market over long periods of time get lionised and continue to inspire hope others can do the same. And another reason is that indexing does not work all the time. You have to suffer through the occasional 50% drop or occasional lost decade and you need a holding period of at least 10 years to reliably outperform bonds. And during those bear markets and lost decades it is a lot easier for active managers to beat the market and gain a reputation for doing so and attract money.

So apparently a factor in the slump of BTC post ETF approval is that the FX estate is having to liquidate bitcoins creating a lot of selling pressure. Should be coming to an end soon (although sometimes these things can continue to develop a momentum of their own).

You aren't going to get a hard landing in the USA with the US government running a multi-trillion dollar deficit and the Fed likely to accommodate any supply-side inflation. Also even if AI is incredibly overhyped the short term impact will be an investment spending boom which will add further support to the economy. And to an extent I agree we have already had a landing. There was a corporate profits recession in 2022 and outside of Mag 7 there wasn't much profit growth and the Russell 2000 is still in a bear market. The real risk I think for markets is that investors might sour again on Mag7 when they realize that interest rates aren't going much lower than they already are and earnings growth will be harder to achieve this year as they've already taken advantage of cost cutting/restructuring opportunities and it will take time for AI to deliver meaningful benefits to the bottom line.

Something that has occurred to me is that in the short term it does not really matter whether AI is any good or not or the extent to which it boosts productivity and over what timeframe. So long as enough people believe it is worthwhile it will still result in a massive investment boom that will be very supportive to the US economy in the same way that mostly unproductive US government spending is. And that combination of massive US fiscal deficits and massive AI investment spending at the least could offset the recessionary pressures in the global economy and may even result in an economic boom similar to the dot com bubble. Of course if AI doesn't fulfil its promise and the investment boom turns to bust or continued deficit spending proves unsustainable then it sets us up for a massive hangover. But in the short term at least the above seems very bullish and suggests we are closer to 1995 than 1999.

Other thing I am wondering is whether with ETFs and so on the original thesis for BTC continues to stand up? IE only 29M coins and therefore perfectly inelastic supply so price will increase with growing demand and use. But if no one is trading coins but is instead trading ETFs and fractional trading of bitcoin is possible does that start to fall apart?

US grew the exact same amount Q3 (before revisions). I think economic data is pretty suspect and subject to a lot of political motivation in both countries. As a famous politician once said "It's the economy stupid".

Read an article in the FT suggesting that the Fed will soon start QE. https://www.ft.com/content/d4012025-28d5-40bd-b525-9594dc970569 Argument is that just as draining of reserves forced a pivot in 2019 this time it is the exhaustion of the overnight reverse repo facility (ON RRP) with Dallas Fed President Lorie Logan is already suggesting QT should taper once the ON RRP runs dry. Apparently the ON RRP is connected to a hedge fund basis trade and there are also worries about all the bonds the US Treasury will be issuing this year. Reminds me of Japan. QE seems to be like heroin. Once you start, you can never seem to get off it. Very bullish for stocks though.