RuleNumberOne

The FT list from 3 months ago already looks outdated.

I bet the market cap percentage of tech in the Wilshire 5000 + private companies is currently greater than 1999. Though P/S, P/E ratios in 1999 were crazy, the combined market cap of the crazy companies was less than what we have now. If we remove the top few such as GOOG, MSFT, AAPL, FB, IBM, ORCL, INTC the P/S and P/E of the remaining companies would be crazy. Those crazy companies are the ones that have been going up every week for the past few years.

In 1998-1999: - Inflation was less than 2% - Fed rates were 4.5% - Unemployment was higher - And yet we had a great bubble. In 2019: - the Fed looks weaker. - Unemployment is at 50-year lows. - Rates are at 2.5% and headed lower because "inflation is less than 2%". If we are going to have another 1999-sized bubble soon, what would you buy or sell?

Inflation between October 1997 and March 1999 was less than 2%. Yet, the short rates were much higher than now. Wasn't enough to prevent the big stock market bubble. Inflation exceeded 2% only in April 1999, and the 3-month yield then was 4.5%.

I think hedonic "adjustment" was introduced in the late 1990s. My theory without examining any data is that these "adjustments" killed reported inflation. CPI manipulators can always find some quality improvement in autos, housing, and anything else. As smartphone, Internet bandwidth, laptop prices go down, they offset price increases in other areas. They can come up with any "coefficients" they need to peg inflation at 1.5%. The Fed keeps rates low in response and a great bubble gets inflated somewhere.

A few months ago some Wall Street analyst pointed out that the US economy is less cyclical than before: more healthcare, less manufacturing. Less subject to inventory accumulation and liquidation. Needs a bigger catalyst to go into recession. Today's unemployment insurance claims data, this is the lowest it has been since the 1960s. Adjusted for the working-population growth, this is even lower than the 1960s. https://www.dol.gov/ui/data.pdf "In the week ending May 25, the advance figure for seasonally adjusted initial claims was 215,000, an increase of 3,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 211,000 to 212,000. The 4-week moving average was 216,750, a decrease of 3,750 from the previous week's revised average. The previous week's average was revised up by 250 from 220,250 to 220,500. "

I meant to add I moved from 100% cash to 0 cash based on the strength of the economy. The US economy continues to be very strong, it has always had minor problems. We can always make a list of negatives about the economy, but as Buffett says the positives rarely get mentioned. Permabears sold a lot of newsletters in 2009, but bulls made the money.

1. WFC had greater scrutiny a year ago and they were allowed $24.1 billion in buybacks. $24.1 billion is 12% of today's market cap. Their consumer deposits and checking account customers have only gone up over the past year. Apparently, their customers like them even if Elizabeth Warren uses WFC as a theatrical prop. 2. Buffett said if he had spent his time trying to figure out when the next recession would happen, Berkshire would be at $15. From my side, I made 40% on my stocks this year by moving from 100% cash to 0% cash in January, after the Fed meeting. wfc will buy back 10% of common stock over the fed's dead bodies 1) Agreed. WFC isn't going to buyback anywhere near that amount with the regulation and scrutiny they currently have. 2) The idea that the rest of the world has never had an impact on the U.S. and never will is terribly short-sighted. The globe used to be dependent on U.S. economic strength. Now the globe is dependent on credit creation in China. Further, the U.S. is hardly "very strong". As has been pointed out by a few, nominal economic growth has been less than nominal national debt growth in the U.S. for the last several years - i.e. without gov't spending/borrowing trillions more than it had, GDP would have been negative. This is obviously unsustainable and in no way indicative of a "strong" or "self sustaining" economy. And despite trillions in stimulus spending, tax cuts, and QE, we still haven't been able to spur growth above what would've been considered paltry pre-crisis nor have we had any appreciable amount of inflation despite generational low unemployment. Methinks all of these factors are still trying to offset the deflationary impulse of an incredible debt balance and an aging population. Imo this is a common misconception. Perpetual lower bond yields/growth lead to HIGHER stock multiples. As Buffett said: "if you had zero interest rates and you knew you were going to have them forever, stocks should trade at 100 or 200 times earnings". Lower interest rates = Higher P/E ratios Honestly, I'm so tired of this line being quoted. It has only been true in the U.S. and nowhere else. And the reasons it has been "true" for the U.S. aren't due to the low rates, but rather due to the following: 1) Higher relative growth 2) Low and stable inflation 3) Expectations that 1) and 2) will continue into perpetuity Not anything to do with low rates. We haven't seen extremely elevated multiples in Japan who has had incredibly low interest rates for my entire life. We haven't seen extremely elevated multiples in Europe who has interest rates far lower than the U.S. and has for years. Low rates =/= higher equity multiples. Buffett's statement only makes sense if you have assurance rates will remain low forever. When has that ever happened?!?!?! Rates are actually quite a bit more volatile than we give them credit for. (as demonstrated by the 100 bp decline in the 10 year treasury in the last 8 months). And you know who has had low interest rates for majority of most of our lives? Japan. And yet they still haven't even recovered to the highs they hit in the early 90s which set off their low interest rates path.... If interest rates fall because growth falters equity multiples will NEVER do well. Never. Deflationary environments NEVER lead to expanding equity multiples. Never. Growth going down leads to lower interest rates. Inflation turning negative leads to lower interest rates. Neither is supportive of stocks. The ONLY environment where low rates supports stocks is an environment where inflation is low, but positive, and stable. We've been there for nearly 10 years - it seems we might be leaving that arena for one where inflation turns negative. Once again, this is NEVER supportive of equity valuations.

I agree there is speculation in tech stocks. FT has prepared a long list of such companies titled "when is the crash?" https://ftalphaville.ft.com/2019/03/27/1553662858000/The-cloud-software-kings-are-nuts--when-s-the-crash-/ But something like WFC is rock-solid. In 4 weeks, they will announce a buyback of 10% of their market cap plus a 4% dividend yield. The US economy is very strong and will stay that way. The rest of the world has never impacted the US economy, simply because the exposure to the rest of the world has always been very small here.

The US economy is very strong right now. I believe European institutional investors have bought as many Treasuries as their regulators would allow. Apart from the extra yield in the US, USD/EUR is promising due to terrible economic prospects for Europe compared to the US. Something bad is going on in Europe, but Europe has been that way for the last 7 years. Here are European 10-year yields today, only Italy and Greece have a yield comparable to the US. COUNTRY YIELD 1 DAY 1 MONTH 1 YEAR TIME (EDT) Germany » -0.18% -1 -18 -43 11:42 AM United Kingdom »0.89% -2 -26 -29 11:42 AM France 0.22% -2 -14 -42 11:42 AM Italy 2.64% -4 +6 -51 11:42 AM Spain 0.73% -5 -28 -86 11:42 AM Netherlands 0.01% -2 -17 -45 11:42 AM Portugal 0.85% -7 -27 -131 11:42 AM Greece 3.11% -4 -17 -161 11:41 AM Switzerland -0.49% -2 -14 -32 11:41 AM

Myron Scholes had an interesting Bloomberg article. The corporate bond yield curve is steeper than average, even though the government bond yield curve is inverted. Another Bloomberg article, (I think by Myron Scholes again), pointed out that absolute short-term bond yields are very low compared to inflation. Historically, a recession requires short-term bond yields to be much higher than inflation compared to the current spread. The main thrust of both articles was that the government yield curve is not meaningful due to QE. Central banks pinning down government yields everywhere. Retreat from QE is too painful politically. Hedonic adjustments will make sure "inflation" stays pinned to 1.5%.