Signs of Bubble

[rukawa]

I don't think we are in a bubble. I just think things suck for value investors but that is not the same as being in a bubble. Canadian housing on the other hand is a definite bubble.

 

The shitty thing for value investors is that this whole thing could last a long time. Interestingly companies are not investing in increased capacity, there are issuing buybacks. This is keeping returns on equity relatively high since there is better pricing discipline as long as capacity isn't increased. And this can continue for a while.

 

I really am at a loss as to what to do except look at emerging markets or invest in high quality companies at expensive valuations.

[scorpioncapital]

"I really am at a loss as to what to do except look at emerging markets or invest in high quality companies at expensive valuations."

 

Or do nothing.

 

[Guest cherzeca]

How are we defining bubble here? ;)

 

I think it depends on whether margins are sustainable.  If not, it's an epic bubble.  If they are, then it's just at the high end of fair.

 

That's for the US.  Plenty of ex-US markets are more reasonable.

 

i've seen 2 bubbles in >30 years: internet 2000 and mbs (and to a lesser extent, HY) 2008.  each time i was aware that things had gotten crazy, not just expensive.  the only sector currently that i would say is crazy is sovereign LT debt (and i aint shorting against a printing press).  alas, neither 2000 nor 2008 was i convicted enough to go short

[gjangal]

I am in the "Please God , Just one more bubble" camp right now

[TwoCitiesCapital]

How are we defining bubble here? ;)

 

I think it depends on whether margins are sustainable.  If not, it's an epic bubble.  If they are, then it's just at the high end of fair.

 

That's for the US.  Plenty of ex-US markets are more reasonable.

 

i've seen 2 bubbles in >30 years: internet 2000 and mbs (and to a lesser extent, HY) 2008.  each time i was aware that things had gotten crazy, not just expensive.  the only sector currently that i would say is crazy is sovereign LT debt (and i aint shorting against a printing press).  alas, neither 2000 nor 2008 was i convicted enough to go short

 

I think things have gotten crazy!

 

The U.S. equity market is the single stand-out in a globe full of assets pricing in a recession. The rest of the world is priced for either malaise or mayhem and the U.S. is priced for perfection. I mean, it's hitting new highs despite the fact that we're already 18 months into an earnings recession. People seem excessively confident that one of the longest running earnings recessions will also end as one of the most shallow despite the fact that earnings are still contracting on a global scale and expected to continue for the next two quarters (probably the longest period of time we can forecast with any certainty).

 

TIPS breakevens have cratered. Yield curves are the flattest they've been in the last decade barring recessionary periods. Commodities are in a 4-5 bear market with oil being the last shoe to drop. EM assets were priced one of the cheapest levels we've seen them in in two decades and their currencies have plummeted similarly. The dollar is significantly off it's lows and looks likely to continue to rise. And to top all of that off, the liquidity has been tightening either via financial market conditions or via Fed rate hikes. None of these point to an S&P that should be hitting new highs...

 

 

[Libs]

I don't think we are in a bubble. I just think things suck for value investors but that is not the same as being in a bubble. Canadian housing on the other hand is a definite bubble.

 

The shitty thing for value investors is that this whole thing could last a long time. Interestingly companies are not investing in increased capacity, there are issuing buybacks. This is keeping returns on equity relatively high since there is better pricing discipline as long as capacity isn't increased. And this can continue for a while.

 

I really am at a loss as to what to do except look at emerging markets or invest in high quality companies at expensive valuations.

 

 

Berkshire is still quite attractive IMO. Below average risk, above average prospects,

and priced well below the market. What more could you ask for? It's a 30% weighting for me.

 

After that, I agree, it gets tougher.

 

 

 

 

[rukawa]

Or do nothing.

 

That's exactly what I'm doing :). I just don't know if there is a better solution.

[james22]

I work on the sell side.  Over the past year, I've seen a notable increase in return chasing behavior.  Retail investors, having seen no gains since the beggining of 2015, and facing 0% interest rates, seem to be getting antsy. 

 

Further, I speculate that global instability and 0% rates (or negative rates) are a driving factor in moving US stocks up generally.  I just think investors are desperate for any return and the US appears to be the safest place (relatively speaking).

 

agreed. rational behavior, not bubble behavior.  there is a difference between being a value investor and lamenting that everything is too expensive, and crying bubble

 

Return chasing behavior = bubble behavior.

 

(Why expect antsy investors desperate for any return to act like greedy investors euphoric and offering stock tips?)

 

Return chasing behavior ≠ rational behavior:

 

A world where short-term interest rates are compressed to zero is also a world where economic growth is likely to run several percent below historical norms. The narrow gap between low expected growth and no growth at all implies an elevated probability of intervening recessions and credit strains. The extreme level of equity valuations also implies an elevated potential for steep cyclical drawdowns.

 

In this high-risk environment, investors should be demanding larger-than-normal risk premiums on equities versus the returns available on Treasury securities. Instead, current stock valuations imply 10-year expected returns that provide no compensation at all for the additional risk.

 

http://www.hussman.net/wmc/wmc160718.htm

[jobyts]

In other words, the markets were more than two standard deviations from their mean.

 

I tried SP500 data from yahoo finance onto my excel sheet, tried to calculate the SD. I'm getting completely different numbers. When calculating the mean, how many years is he including? Can anyone try this on the excel sheet and share how you got the 2300 number?

[petec]

How are we defining bubble here? ;)

 

I think it depends on whether margins are sustainable.  If not, it's an epic bubble.  If they are, then it's just at the high end of fair.

 

That's for the US.  Plenty of ex-US markets are more reasonable.

 

Unless 30 year interest rates are 2.3% for the next decade or two... Your alternative to stocks right now (other than cash) is to guarantee destruction of about 1/3 of your principal in real terms over 30 years if you're in the top tax bracket.  If that doesn't change then even if margins fell this probably wouldn't be a bubble and if margins stay here stocks are way undervalued.

 

Who knows if that changes, although it seems crazy to think it wouldn't.

 

This is relatively true, but it is quite possible for all asset prices to fall. 

[TwoCitiesCapital]

I work on the sell side.  Over the past year, I've seen a notable increase in return chasing behavior.  Retail investors, having seen no gains since the beggining of 2015, and facing 0% interest rates, seem to be getting antsy. 

 

Further, I speculate that global instability and 0% rates (or negative rates) are a driving factor in moving US stocks up generally.  I just think investors are desperate for any return and the US appears to be the safest place (relatively speaking).

 

agreed. rational behavior, not bubble behavior.  there is a difference between being a value investor and lamenting that everything is too expensive, and crying bubble

 

Return chasing behavior = bubble behavior.

 

(Why expect antsy investors desperate for any return to act like greedy investors euphoric and offering stock tips?)

 

Return chasing behavior ≠ rational behavior:

 

A world where short-term interest rates are compressed to zero is also a world where economic growth is likely to run several percent below historical norms. The narrow gap between low expected growth and no growth at all implies an elevated probability of intervening recessions and credit strains. The extreme level of equity valuations also implies an elevated potential for steep cyclical drawdowns.

 

In this high-risk environment, investors should be demanding larger-than-normal risk premiums on equities versus the returns available on Treasury securities. Instead, current stock valuations imply 10-year expected returns that provide no compensation at all for the additional risk.

 

http://www.hussman.net/wmc/wmc160718.htm

 

+1

[TwoCitiesCapital]

https://www.bloomberg.com/news/articles/2017-10-19/aston-martin-moves-into-miami-condos-in-push-beyond-sports-cars

 

Aston Martin getting involved in luxury condos in Miami

 

A sign that brands can extend beyond the branded product or a sign that companies are getting loose with CapEx/investments and stretching further for returns?

[Cigarbutt]

Disclosure:

-anecdotal evidence, by itself, has little value.

The shoe shine boys stories or similar can always be remembered after the fact.

 

-limited knowledge and no interest in Bitcoin.

 

Still, the following link describes an interesting phenomenon.

 

http://www.newsweek.com/bitcoin-man-sells-house-possessions-cryptocurrency-682459

 

Isn't this too easy?

 

 

 

 

[randomep]

I am in the "Please God , Just one more bubble" camp right now

 

I can't really comprehend what you mean? Do you think we are NOT in a bubble and praying for it to get higher into bubble territory?  If so my question is, how do you know we aren't in a bubble right now.  Also, WOW you are an optimistic soul, you want the market to do what? double to get into bubble territory?

 

I saw your comment on a bumper sticker in 2005 or so, and I remember thinking, huh? How do you know we aren't in a bubble now? Turns out we were in a bubble, just a housing bubble.... haha

[Aberhound]

Disclosure:

-anecdotal evidence, by itself, has little value.

The shoe shine boys stories or similar can always be remembered after the fact.

 

-limited knowledge and no interest in Bitcoin.

 

Still, the following link describes an interesting phenomenon.

 

http://www.newsweek.com/bitcoin-man-sells-house-possessions-cryptocurrency-682459

 

Isn't this too easy?

 

If I try to invert to understand what this guy is thinking he watched his home rise probably 700% or more and so he sells it for an asset which he thinks will rise even more. He thinks that what is ridiculous is that the trends will continue as the policies in place are not changing until there is no choice. He likely knows the iron law of politics that bad systems tend to get worse. He sees that the hangman has already started swinging his ax and now the policies have to be continued until their conclusion. This means that prices are only going to get more distorted and more silly as people become desperate when they realize the ax is coming and they have failed to prepare. He expects that for most people the first realization that the problem is serious is when the ESM makes a cash call to the EU governments to refinance the ECB and taxes increase in the EU. He knows the ECB is not like the Fed as it has limited power to create money. He thinks the crazy people in the EU are the ones who don't sell their homes and only the insane leave their money in the EU banks. He has eliminated his debt and realizes that now is the time to eliminate debt while there are still matching assets. He does not want to be a debt slave like the fools who own homes with huge mortgages thinking that the low tax burden on holding properties will continue. He is content to invest the gains where the desperate and unprepared will flee.

 

The amazing thing is that so few have their own worldview instead of adopting the worldview of the manipulators and consequently only a few avoid loss.

 

[gjangal]

I am in the "Please God , Just one more bubble" camp right now

 

I can't really comprehend what you mean? Do you think we are NOT in a bubble and praying for it to get higher into bubble territory?  If so my question is, how do you know we aren't in a bubble right now.  Also, WOW you are an optimistic soul, you want the market to do what? double to get into bubble territory?

 

I saw your comment on a bumper sticker in 2005 or so, and I remember thinking, huh? How do you know we aren't in a bubble now? Turns out we were in a bubble, just a housing bubble.... haha

 

I don't know for sure that we are not in a bubble or not. My personal opinion is that we are not in a bubble right now, given where rates are. It was just a light hearted comment wishing for a bubble. #allequitiesallthetime