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Definitely In A Bubble


Gregmal
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Guest cherzeca

thought the japanofication of markets discussion was interesting.  I worry some about that, and also if for some gawd awful reason warren becomes POTUS (also discussed). I think she is out of her mind and her policies are worse, and this is not intended as a political but rather a market comment.  I am already thinking about what to do this time next year, but I just dont think that polls will be reliable enough to be comfortably out or in the market if, as I expect, the polls show a close race.  and of course MM will have warren in the lead.

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I agree about political risk and have tapered, and continue to taper my portfolio to be much more neutral by the time we get a handle on the Democratic nominee. Japan comparison has always fascinated me, but I think its unlikely, some of the reasons in the blog post address why. But whats important to consider with Warren, is not really what the actually policy does to a business's fundamentals, but the effect it will have on the market. Maybe nothing tangible materializes, but that still doesnt mean we couldn't/cant see multiple contraction.

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thought the japanofication of markets discussion was interesting.  I worry some doubt that and if for some gawd awful reason warren becomes POTUS (also discussed). I think she is out of her mind and her policies are worse, and this is not intended as a political but rather a market comment.  I am already thinking about what to do this time next year, but I just dont think that polls will be reliable enough to be comfortably out or in the market if, as I expect, the polls show a close race.  and of course MM will have warren in the lead.

 

The bubble may not within the equity market, it’s want in the equity markets either in 2007, when valuations were actually lower than they are now. The bubble is most likely related to some lending,  could be European real estate (bubble due to low or non existent interest rates ) or the whole negative yielding bond markets which are trillions of Euro in size. One could argue that this is a bigger bubble than the subprime mortgages were in 2007.

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Guest cherzeca

@greg

 

couldn't agree more, that the market wont wait to see if any of her policies are enacted, market would take a dive on the Wednesday after election.  I have a fair amount of gain positions that I would prefer not to sell in taxable accounts, but I am already thinking of going to cash in my nontaxable accounts. might do it right after democratic convention.

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Have any of you given thought to how your behavior in investing and/or work might change if Warren were elected?  Do you think you’d spend more as opposed to investing?  Work less and enjoy your time more?  If she had her wish list, I honestly do think I’d become more of a hedonist.  I wonder if other professionals would consider the same types of changes and what that would mean for the economy and culture.  What are the second order effects?

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Have any of you given thought to how your behavior in investing and/or work might change if Warren were elected?  Do you think you’d spend more as opposed to investing?  Work less and enjoy your time more?  If she had her wish list, I honestly do think I’d become more of a hedonist.  I wonder if other professionals would consider the same types of changes and what that would mean for the economy and culture.  What are the second order effects?

 

I'd still probably spend the same amount of time on investing...I'm an addict. David Winters said it best when he called inviting a "global treasure hunt"...but yes, to answer your question...we'd basically become France...where June-August offices are mandatorily closed and it would be illegal to respond or even check work emails between 6pm and 6am. How boring...and how opportunistic for those of us that dare work, or enjoy what we do.

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@greg

 

couldn't agree more, that the market wont wait to see if any of her policies are enacted, market would take a dive on the Wednesday after election.  I have a fair amount of gain positions that I would prefer not to sell in taxable accounts, but I am already thinking of going to cash in my nontaxable accounts. might do it right after democratic convention.

 

I feel like all of you are way overestimating the role of the president on the economy.  If you follow one rule: goverment spending during a recession, you will do about as well as an average president in a cycle.  Warren can't propose her more leftwing policies without consent from congress and republicans will likely control the senate.  It's unlikely she will politicize bureaucratic roles as the current state of the world is abnormal for politicians of any stripe.  So while she might encourage anti-trust to go after big tech firms in her speeches, the general hands off policy over the last 20 years will be more the norm with maybe a little reversal.  Healthcare is a huge bogeyman, but again, Obamacare didn't do anything huge to the stock market in general and again she needs a dem senate.  Tax raises for corporations, whoop-de-do, the market has been on a 10 year bull market and most of it was before tax cuts.  Might see some effect, but that doesn't change the long term competiveness of American firms.  As Buffet says always stay invested if you can find good valuations in corps to buy and trust in American businesses, true when Trump took office and will be true if Warren does. 

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Guest cherzeca

@greg

 

couldn't agree more, that the market wont wait to see if any of her policies are enacted, market would take a dive on the Wednesday after election.  I have a fair amount of gain positions that I would prefer not to sell in taxable accounts, but I am already thinking of going to cash in my nontaxable accounts. might do it right after democratic convention.

 

I feel like all of you are way overestimating the role of the president on the economy.  If you follow one rule: goverment spending during a recession, you will do about as well as an average president in a cycle.  Warren can't propose her more leftwing policies without consent from congress and republicans will likely control the senate.  It's unlikely she will politicize bureaucratic roles as the current state of the world is abnormal for politicians of any stripe.  So while she might encourage anti-trust to go after big tech firms in her speeches, the general hands off policy over the last 20 years will be more the norm with maybe a little reversal.  Healthcare is a huge bogeyman, but again, Obamacare didn't do anything huge to the stock market in general and again she needs a dem senate.  Tax raises for corporations, whoop-de-do, the market has been on a 10 year bull market and most of it was before tax cuts.  Might see some effect, but that doesn't change the long term competiveness of American firms.  As Buffet says always stay invested if you can find good valuations in corps to buy and trust in American businesses, true when Trump took office and will be true if Warren does.

 

the brilliance of our constitution is that it is hard for any one branch of govt to screw things up totally...but POTUS comes the closest.  unless you have been under a rock, you may have noticed that there is a substantial portion of our society that has embraced victimization, and shirked responsibility as a primary civic objective.  my big issue with warren would be that she would absolutely entrench this slackerism bordering on socialism as official govt policy, and as POTUS, she can absolutely get much of her policies ingrained into the bureaucracy...an example is the extent to which Obama reformed universities to eliminate due process rights for those accused of sexual misconduct, simply as an adjunct to receiving federal funds.

 

now, back to the market.  almost every industry will become a battleground...increase corporate taxes, eliminate private health insurers (I cant even imagine the disruption that this will cause over 20% of the US economy), tech (break them up), banks (breaks them up) etc.  she doesn't have to accomplish this in order to wreck the economy. just proceeding as the big and beautiful POTUS would be enough.

 

obama for all of his faults was a relative neophyte in matters financial and economic, so he tended to rely on advisors (who were relatively mainstream).  warren thinks she knows better than any one in matters financial and economic, and is absolutely inclined to concentrate power in a massively undemocratic bureaucracy (think CFPB, her baby).   

 

this is not a political rant, this is a market rant.  the market will observe these prospects and vomit.  on the day after the election of warren.

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the market will observe these prospects and vomit.  on the day after the election of warren.

 

The market is fairly good at handicapping political outcomes.  It will mark-to-market the odds of either party winning on a daily basis throughout the political campaign season - and thus, won't wait until election.  Unless its a complete surprise ("Dewey Wins!")

 

Also - what if these ultra-low long-term Treasury rates are here to stay for the next 10-20 years?  Stocks might actually be undervalued at a 3% risk-free long-term rate.  I think the comparisons to historical valuations are really comparisons at much higher discount rates (and higher domestic corporate tax rates).

 

What is $1 pre-tax earnings worth at a 35% tax rate and 7% 30-year Treasury ($0.65/.07 =  9.3x pre-tax earnings) vs

a 21% tax rate and a 3% 30-year Treasury ($0.79/.03 = 26.3x pre-tax earnings).  Of course, if that 3% 30-year Treasury rate is here to stay................

 

wabuffo

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Guest cherzeca

@wab

 

generally I agree with you as to market prescience, but witness the huge market movements (first down, then up) the day after trump won.  unless one candidate somehow is comfortably ahead in the polls, I think 2020 repeats 2016 in market movement. and I dont expect there to be much certainty as to outcome leading up to Election Day.  you can take a map, color it red and blue reliably, and then you have the battleground states and uncertainty as to outcome.

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One only needs to look at how bad Canada has underperformed (TSX) and how much capital has left the country to realize the impact of a bad administration.

 

While some hate oil & gas, it still is a major component of the Canadian economy and with policies in place (lack of support for pipelines, carbon tax, Bill C69, etc.) billions in projects have been cancelled, foreign funds have left in droves and most energy foreign firms have left the country (ConocoPhillips, Statoil, Apache, etc.) and even Canadian firms are relocating (Encana this week). Some may argue that some sectors have thrived or things like Shopify but, it is still a net loss for the country as Shopify would still be there.

 

There has also been zero effort to match the U.S. on corporate tax reduction or our biggest competitor to attract capital.

 

So when a leader with executive powers is promising to wage war against banks, fracking, drug companies, tech companies, billionaires, raising taxes on middle/upper class among others, you should pay attention. It is a very significant portion of the economy that would suffer from uncertainty or much larger than Canada with O&G.

 

And once stocks retreat, it is a vicious circle that gets into motion. Anyone who has been through 2008-2009 or any bear market should know that low interest rates won't provide any support when the herd starts to be afraid and wants out due to market losses. Then the economy starts to dive with poor first in line to be laid off and relying on food stamps to survive.

 

This is the kind of experiment that no one should wish for as no one will benefit. If you decide to go all in cash and wait for that to happen, you will also either get in way too early or will never deploy since you will be scared shitless.

 

Cardboard

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@greg

 

couldn't agree more, that the market wont wait to see if any of her policies are enacted, market would take a dive on the Wednesday after election.  I have a fair amount of gain positions that I would prefer not to sell in taxable accounts, but I am already thinking of going to cash in my nontaxable accounts. might do it right after democratic convention.

 

I feel like all of you are way overestimating the role of the president on the economy.  If you follow one rule: goverment spending during a recession, you will do about as well as an average president in a cycle.  Warren can't propose her more leftwing policies without consent from congress and republicans will likely control the senate.  It's unlikely she will politicize bureaucratic roles as the current state of the world is abnormal for politicians of any stripe.  So while she might encourage anti-trust to go after big tech firms in her speeches, the general hands off policy over the last 20 years will be more the norm with maybe a little reversal.  Healthcare is a huge bogeyman, but again, Obamacare didn't do anything huge to the stock market in general and again she needs a dem senate.  Tax raises for corporations, whoop-de-do, the market has been on a 10 year bull market and most of it was before tax cuts.  Might see some effect, but that doesn't change the long term competiveness of American firms.  As Buffet says always stay invested if you can find good valuations in corps to buy and trust in American businesses, true when Trump took office and will be true if Warren does.

 

the brilliance of our constitution is that it is hard for any one branch of govt to screw things up totally...but POTUS comes the closest.  unless you have been under a rock, you may have noticed that there is a substantial portion of our society that has embraced victimization, and shirked responsibility as a primary civic objective.  my big issue with warren would be that she would absolutely entrench this slackerism bordering on socialism as official govt policy, and as POTUS, she can absolutely get much of her policies ingrained into the bureaucracy...an example is the extent to which Obama reformed universities to eliminate due process rights for those accused of sexual misconduct, simply as an adjunct to receiving federal funds.

 

now, back to the market.  almost every industry will become a battleground...increase corporate taxes, eliminate private health insurers (I cant even imagine the disruption that this will cause over 20% of the US economy), tech (break them up), banks (breaks them up) etc.  she doesn't have to accomplish this in order to wreck the economy. just proceeding as the big and beautiful POTUS would be enough.

 

obama for all of his faults was a relative neophyte in matters financial and economic, so he tended to rely on advisors (who were relatively mainstream).  warren thinks she knows better than any one in matters financial and economic, and is absolutely inclined to concentrate power in a massively undemocratic bureaucracy (think CFPB, her baby).   

 

this is not a political rant, this is a market rant.  the market will observe these prospects and vomit.  on the day after the election of warren.

 

Putting this another way.  At worst the US will become a bigger version of Germany or France if Warren gets her way on everything.  The economy in France especially is worse then the US, but honestly nothing to freak out over.   

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One only needs to look at how bad Canada has underperformed (TSX) and how much capital has left the country to realize the impact of a bad administration.

 

While some hate oil & gas, it still is a major component of the Canadian economy and with policies in place (lack of support for pipelines, carbon tax, Bill C69, etc.) billions in projects have been cancelled, foreign funds have left in droves and most energy foreign firms have left the country (ConocoPhillips, Statoil, Apache, etc.) and even Canadian firms are relocating (Encana this week). Some may argue that some sectors have thrived or things like Shopify but, it is still a net loss for the country as Shopify would still be there.

 

There has also been zero effort to match the U.S. on corporate tax reduction or our biggest competitor to attract capital.

 

So when a leader with executive powers is promising to wage war against banks, fracking, drug companies, tech companies, billionaires, raising taxes on middle/upper class among others, you should pay attention. It is a very significant portion of the economy that would suffer from uncertainty or much larger than Canada with O&G.

 

And once stocks retreat, it is a vicious circle that gets into motion. Anyone who has been through 2008-2009 or any bear market should know that low interest rates won't provide any support when the herd starts to be afraid and wants out due to market losses. Then the economy starts to dive with poor first in line to be laid off and relying on food stamps to survive.

 

This is the kind of experiment that no one should wish for as no one will benefit. If you decide to go all in cash and wait for that to happen, you will also either get in way too early or will never deploy since you will be scared shitless.

 

Cardboard

 

Oil and gas has underperformed in the US just as much as they did in Canada. Have you looked at the shale stocks in the US? I almost think if Warren would ban fracking (or try to because I only think the respective states could do so and they wouldnt) the E&P stocks would go up, because at least NG would shot up in price. It’s almost like the gun industry and Obama, which did much better under Obama than Trump.

 

Anyways, Canada has a huge resource industry representation in the stock market and lacks high tech and that why the market has underperformed, not because of the Government in place.

 

We probably should get back on topic and discuss bubbles or lack there off.

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Sure we got say things like "worst case scenario Warren, is basically like France or Germany"...but lets not forget there is a reason the US economy is far superior to anything in Europe, and there is a reason US markets get premium multiples to Europe. So worst case, Warren erases a lot of that premium, and IMO theres a long way down. Wealthy people are fleeing France because of their crooked tax schemes orchestrated by the government, and Germany has basically confiscated residential real estate through price controls.

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Guest cherzeca

if trump was really smart, he would look around the world, notice Europe is a mess, Russia is a mess, South America is mostly a mess, Africa is Africa, Middle East is corrupt and really messy, and then look at china and say to Xi, you know what, if we cooperate, we can have a beautiful future together.

 

of course if trump did this, Xi would most likely say, I'll think about it

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You guys just need to by deep out of the money index puts. I think it’s probably a good idea at the right time. The economy is slowing down, manufacturing even in the US is already in a contraction and yet stocks are at record level, seemingly unconcerned about this and the political risk.

 

Or perhaps buy some gold as a cash alternative in case central banks go even more bonkers than they do already.

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You guys just need to by deep out of the money index puts. I think it’s probably a good idea at the right time. The economy is slowing down, manufacturing even in the US is already in a contraction and yet stocks are at record level, seemingly unconcerned about this and the political risk.

 

Or perhaps buy some gold as a cash alternative in case central banks go even more bonkers than they do already.

 

What is your take on deep OTM index puts vs deep OTM individual security puts. I won't mention names, because that could redirect the focus to specific company talk, but wouldn't it perhaps make a better setup to cherry pick the most endangered of species? We can all use our(relatively speaking) more sophisticated investing insights to basketize(I might have just made up a new word) the same general hedge trade, no? An index will never go to 0, but select securities can. I've been doing the OTM put stuff now for the past few months with pretty decent success(not to lose sight of the fact that you and others Ive noticed have been doing the same but with the index and VIX), so Im just trying to see where the greatest risk/reward setup is. Would a subjectively selected Warren basket outperform the broader index which would also include names that benefit, IE healthcare?

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Guest cherzeca

@greg

 

I've been thinking about this as well, and I might be getting too smart by half, but if you think warren through, then almost every industry will get trashed, but a commodity like oil should surge (no fracking, which she might executive order on day one).  so where I am now would be index puts and long oil future.

 

as to another post, the question as to when.  now is too early.  I think the market will tell you when warren fear has escalated to the right time...of course, she has to get nominated first, and she has plenty of time to screw the pooch.

 

one indicator I will be watching is public reaction to impeachment, which I assume will happen in house and acquittal in senate.  if Clinton is any guide, this will boomerang and trump will benefit.  if so, then I just go back to sleep on my longs and forget all this warren freak out

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@greg

 

I've been thinking about this as well, and I might be getting too smart by half, but if you think warren through, then almost every industry will get trashed, but a commodity like oil should surge (no fracking, which she might executive order on day one).  so where I am now would be index puts and long oil future.

 

as to another post, the question as to when.  now is too early.  I think the market will tell you when warren fear has escalated to the right time...of course, she has to get nominated first, and she has plenty of time to screw the pooch.

 

one indicator I will be watching is public reaction to impeachment, which I assume will happen in house and acquittal in senate.  if Clinton is any guide, this will boomerang and trump will benefit.  if so, then I just go back to sleep on my longs and forget all this warren freak out

 

Agreed, I just started a thread to discuss the market prep for a Warren win. I agree on oil, but think many of the E&P's still suffer quite a bit. IN fact, somewhere in there I am sure there is a tremendous pair trade shorting some type of fracker/E&P and going long something a little more casual, maybe KMI or something.

 

I think the house voting this week quelled any fears of impeachment. Politics aside, you need a big number of Senate support, if you cant even get a vote in the House, its not happening.

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Guest cherzeca

warren reminds me of McGovern. I suppose my reaction to her is akin to a progressive's reaction to Reagan.  I will take this over to your new thread, tho the blog piece you started with did contain a discussion of warren, which I thought was too mild for my raw sensibilities.

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You guys just need to by deep out of the money index puts. I think it’s probably a good idea at the right time. The economy is slowing down, manufacturing even in the US is already in a contraction and yet stocks are at record level, seemingly unconcerned about this and the political risk.

 

Or perhaps buy some gold as a cash alternative in case central banks go even more bonkers than they do already.

 

What is your take on deep OTM index puts vs deep OTM individual security puts. I won't mention names, because that could redirect the focus to specific company talk, but wouldn't it perhaps make a better setup to cherry pick the most endangered of species? We can all use our(relatively speaking) more sophisticated investing insights to basketize(I might have just made up a new word) the same general hedge trade, no? An index will never go to 0, but select securities can. I've been doing the OTM put stuff now for the past few months with pretty decent success(not to lose sight of the fact that you and others Ive noticed have been doing the same but with the index and VIX), so Im just trying to see where the greatest risk/reward setup is. Would a subjectively selected Warren basket outperform the broader index which would also include names that benefit, IE healthcare?

 

I prefer Index puts to be on market movements (both up and down ) for two  of reasons

 

1) index outs are cheaper and more liquid

2) in a sharp downturn, everything tends to get correlated and so the cheaper puts give you more bang for the buck and allow for better trading

 

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