1999 again?

[rb]

In 2018/2019 Grantham was warning about a melt-up. Now he is saying we are forming a bubble.

 

I think it is quite possible the market could go a lot higher if a V-shaped recovery does materialize and coronavirus fears subside either because a second wave doesn't materialize or a vaccine is discovered. Especially with continued supportive fiscal and monetary policy that is very fertile soil for a melt-up.

 

Economists in general are very sceptical about the V-shaped recovery idea and expect that the disconnect between the markets and the economy will correct. But what if it is the other way around and the animal spirits alive and well in the stock market spread to the real economy?

Well the economy is not gonna do a V. There are lots of reasons for that. I'm not gonna go into them cause then I'm gonna write a book.

 

But stocks looked pretty expensive at the end of 2019. That was with rosy expectations. Right now we're roughly back at that level. Bu companies are more expensive already because their EVs have gone up because they've levered up. The story is that it's ok because it's gonna be a V. Now you're saying if a V actually happens then stocks will shoot up higher.

 

Let's say you're right. At that point equities will be way overvalued. So the question becomes: Do you want to buy into a bubble?

[Jurgis]

Well the economy is not gonna do a V. There are lots of reasons for that. I'm not gonna go into them cause then I'm gonna write a book.

 

Get this man an agent, make him write a book, and ... , profit!

[rb]

Well the economy is not gonna do a V. There are lots of reasons for that. I'm not gonna go into them cause then I'm gonna write a book.

 

Get this man an agent, make him write a book, and ... , profit!

Pretty sure nobody would buy that book and an agent would laugh at me.

 

Now... If i'd be able to incorporate vampires, wizards, and dragons that might be something. But sadly I'm not that good a writer, sorry.

[mattee2264]

 

I think in the US you are seeing a failure to properly contain and suppress the first wave. Other countries are having a lot more success on that front. Provided laggard countries get their act together the virus could burn out by the end of the summer. That will reduce the risks of a second wave that gets out of control especially as there is now some degree of population immunity. I agree that the second wave risk will still be in the background. But markets seem to be trading based on the headlines.

 

I don't think a V shaped recovery is being priced in. If it was then markets would be a lot higher because you'd expect a much higher multiple on pre-COVID earnings to reflect significantly lower interest rates and Fed commitment to keep them that way indefinitely.

 

I think what you are seeing priced in is a partial recovery with lower earnings offset by lower interest rates (and therefore higher multiples) as well as optimism about a vaccine and no further lockdowns being required.

 

And yes as the perceived uncertainty fades away and the economic data starts to improve that could propel markets even higher as could the usual bull market psychology and accompanying rose tinted spectacles.

 

Of course there are significant risks that markets seem to be ignoring so I'm also intending to sit on the sidelines.

 

Firstly, I think there is a risk of overheating as productive capacity remains suppressed and a fiscal stimulus does little for the supply side so you get the classic inflationary set up of too much money chasing too few goods. If inflation does take off the Fed will have to tighten and it won't be pretty.

 

Secondly, I think deleveraging and a focus on cost control will be the modus operandi for some time which will constrain a recovery.

 

Thirdly, market psychology can change and a more balanced or indeed pessimistic view might start to prevail especially as there is a lot of crappy company data on the way.

 

[rb]

If you would get a V why would the Fed be accommodating? In fact if we get a V you should expect the Fed to slam the breaks like it's 1980.

[Spekulatius]

We also had low interest from 2010-2016 and lower valuation multiples than we have now. The important question for stock valuation is not where interest rates are 2 years from now, it is where interest rates will be 10 or 20 years from now. Stocks are like bonds with infinite duration that way and most of the value is decades out.

[Guest]

If you would get a V why would the Fed be accommodating? In fact if we get a V you should expect the Fed to slam the breaks like it's 1980.

 

Agreed. V shaped + stimulus would almost have to lead to inflation and likely to higher interest rates. The government/fed adding a ton of stimulus because it didn't think a V shaped recovery was likely.

[mattee2264]

V shaped would just mean a return to pre-COVID GDP within the next year or so. The economy was hardly firing on all cylinders before COVID and not showing signs of overheating. Also the Fed had to reverse its last tightening cycle so I think even if there was a recovery they would probably accommodate too long and only act if inflation reared its ugly head and forced its hands. Another reason interest rates probably will not go up any time soon is because of the debt overhang from coronavirus. Another reason is that when everyone else in the world has low interest rates it is difficult to raise interest rates as doing so would result in an even stronger dollar and I think that other countries probably won't see as robust recoveries as the US will.

 

Also valuations are to a large extent psychological. If the lesson taken from this is whatever happens the Fed and government have your back and the uncertainty related to the virus clears then that could support even higher valuations.

[deleuze68]

I think the bigger news over the past couple of weeks that the market is completely ignoring (not pricing in) is the rise of Biden in the polls. A Biden win would surely lead to an increase in the corporate tax rate and reduced earnings. This could end up being more consequential than a prolonged fight against the virus.

[Gregmal]

Incorporating the assumption of a 28% tax rate under Biden I think is important. I also have been looking at trying to find companies that will obviously have large NOLs from Covid that should help them over the next few years. Something like the sports teams or entertainment companies who literally have 0 revenue.

[mattee2264]

 

https://markets.businessinsider.com/news/stocks/stock-market-outlook-biden-win-republican-senate-best-investors-jpmorgan-2020-3-1028995167

 

JPM are suggesting a Biden presidency could be good for stocks so long as there is a Republican Senate.

[jobyts]

I think the bigger news over the past couple of weeks that the market is completely ignoring (not pricing in) is the rise of Biden in the polls. A Biden win would surely lead to an increase in the corporate tax rate and reduced earnings. This could end up being more consequential than a prolonged fight against the virus.

 

Companies in California pay about 9% corporate income state tax more than companies in, say, Louisiana, regardless of who is in power.

Are the companies in Louisiana doing better than Californian companies in the comparable industry?

[JRM]

One-off anecdote that I thought was worth sharing.  A friend recently lost his job, and I asked him how the job search was going.  He said he's recently started day trading, and its going so well that he's not worried about finding a new job.  He's really into Tesla, FWIW.

[Guest]

From morningstar:

 

"By contrast, U.S. equity funds lost $24 billion to outflows in June. While that wasn't as bad as May's

record outflow of $30 billion, it pushed quarterly redemptions to a $72 billion record, surpassing the

previous record of $55 billion set in 2009's first quarter."

 

Not exactly euphoria.

[Cigarbutt]

From morningstar:

"By contrast, U.S. equity funds lost $24 billion to outflows in June. While that wasn't as bad as May's

record outflow of $30 billion, it pushed quarterly redemptions to a $72 billion record, surpassing the

previous record of $55 billion set in 2009's first quarter."

Not exactly euphoria.

Who knows but there may be an element of rebalancing. From the lows in 2009 to now, investor allocation to equities went from about 30-35% to 50-55%. From an overall perspective (i spent only a short time on data and the full Morningstar report) the net outflows in Q2 represent around 1 to 1.3% of the increase in value of listed us equities. So investors, in the aggregate, retained about 99% of the rise in market value into the equity market.

FWIW, some expect that baby boomers (who have had lately a historically high exposure to stocks) will eventually become net sellers and maybe they will have an opportunity to unload in a Robinhood market.

Not to be used as a timing tool because this time may be different but the last times that investor allocation to equities was in this high range: around 1970, around 2007 and around 1999. (?)

[SharperDingaan]

The market is also NOT pricing in how the municipalities and states are going to finance their Covid-19 related spend.

To mitigate material property tax and state income tax hikes, EVERY muni/state in the nation will have to come to market by Mar-31 (year-end). There is no way that the sheer size of the aggregate borrow doesn't disrupt the hell out of the market, and no way that it can be achieved without severe political polarization adding further uncertainty.

 

SD

[Guest]

From morningstar:

"By contrast, U.S. equity funds lost $24 billion to outflows in June. While that wasn't as bad as May's

record outflow of $30 billion, it pushed quarterly redemptions to a $72 billion record, surpassing the

previous record of $55 billion set in 2009's first quarter."

Not exactly euphoria.

Who knows but there may be an element of rebalancing. From the lows in 2009 to now, investor allocation to equities went from about 30-35% to 50-55%. From an overall perspective (i spent only a short time on data and the full Morningstar report) the net outflows in Q2 represent around 1 to 1.3% of the increase in value of listed us equities. So investors, in the aggregate, retained about 99% of the rise in market value into the equity market.

FWIW, some expect that baby boomers (who have had lately a historically high exposure to stocks) will eventually become net sellers and maybe they will have an opportunity to unload in a Robinhood market.

Not to be used as a timing tool because this time may be different but the last times that investor allocation to equities was in this high range: around 1970, around 2007 and around 1999. (?)

 

 

Fair points.  Where are you seeing investor allocation to equities? The AAII data only goes back to 1987?

[Cigarbutt]

^For the household allocation statistics, you can look at the Z.1 quarterly reports from the Federal Reserve. You can keep the calculations simple (corporate equities over total financial assets over time) but you may want to include the equity component of pension assets (note that pension assets used to have an equity to bond 30:70 pattern in the 70s and this has gradually been more or less reversed to 70:30). Mr. Buffett wrote a very interesting article in the late 70s (or early 80s?) noting that pensions manifested an unusually contrarian pattern for holders of long term funds then. But (if somebody suspected the secular downward drift in rates) an argument could be made that holding bonds made sense then but now, where can they hide, contrarian or otherwise?

https://www.federalreserve.gov/releases/z1/20200611/html/b101h.htm

 

Philosophical Economics talked about this a while back and offered some explanations about the potential outlook. Imagining un updated version of the model may suggest circumstances almost similar to when Mr. Buffett wrote his 1999 article about expected expectations.

http://www.philosophicaleconomics.com/2013/12/the-single-greatest-predictor-of-future-stock-market-returns/

 

Periodically, 'commentators' bring up the topic and i will include a recent one which uses a similar methodology with an update up to Q1 2020:

https://www.marketwatch.com/story/the-single-greatest-predictor-of-future-stock-market-returns-has-a-message-for-us-from-2030-2020-06-19

The correlation has broken down to some degree in the last few years and some have suggested that the business cycle has been conquered by the printing press..

 

Apologies because this is not very useful for stock picking. i've been reading a book recommended by wabuffo and it seems that i was born at the wrong time, at least from that perspective.

 

[SharperDingaan]

The market is also NOT pricing in this.

https://www.cnn.com/2020/07/27/politics/stimulus-negotiations-republican-plan/index.html

 

'For most recipients of the $600 federal unemployment benefit enhancement, the final checks went out a few days ago. The official deadline is July 31. The federal eviction moratorium expired last week'.

 

Negotiations are not going well, and starting today - the money tap turned off.

What do you think happens when millions of people no longer have a cash flow, and there are not enough jobs for them, because there is not enough spending? Do you really think that the Dow stays at 26,500 - or is it much more likely that it falls, and hard?

Just a 5% drop is 1,325 points.

 

SD

 

[rb]

I honestly don't think many people know about this. All I keep on reading is that the expanded unemployment ends at the end of the month. But it already ended on Friday. They were about 4% of GDP. In such a shit economy you figure, conservatively a 1.5 multiplier. So that's a 6% GDP hit. No biggie, just a GFC hit on top of the pile of crap we're in right now.

 

I see reports of talks that they'll maybe just cut to $200 from $600. So that'll only be a 4% GDP hit. So no worries. Dow 36,000!

[SharperDingaan]

Just to throw some numbers in, that highlight the severity,

This took roughly just one month from the time it became 'public' until the time the funding was announced - Ontario has roughly 38% of Canada's population. Converting to US equivalency, this is roughly CAD 10.5B (4/.38), or USD 8.0B. It is not just size, it is speed as well.

 

" Hard-hit Ontario municipalities will receive nearly $4 billion in funding from the federal and provincial governments to help shore up their finances in the wake of the pandemic-related shutdown. Premier Doug Ford said the funding—$2.2 billion from Ontario and $1.7 billion from the federal government—will help support "homeless shelters, women's shelters, food banks, public health and transit."

 

https://toronto.ctvnews.ca/ontario-municipalities-to-get-4b-in-covid-19-bail-out-1.5040183

 

Canada's equivalent to this unemployment benefit is the CERB.

It has already been extended once to Aug-31, following which most expect it to be rolled into the existing unemployment program. Expect about the same amount, and ability to earn more than currently the case - while also receiving the benefit.

 

A 5% decline in the Dow is conservative.

 

SD

 

 

[Guest]

If it's reported on cnn, why would you think it isn't already priced in the market?

[rb]

Cause they don't watch CNN.

[UK]

https://www.marketwatch.com/amp/story/trump-says-401k-investors-who-followed-his-advice-are-doing-phenomenally-the-others-not-so-much-2020-07-26

[Guest]

https://www.marketwatch.com/amp/story/trump-says-401k-investors-who-followed-his-advice-are-doing-phenomenally-the-others-not-so-much-2020-07-26

 

He's not wrong.

 

Though, admittedly, if we're at the precipice of the next Great Depression, these are the kinds of things that we'll look back on.