Are We In a Bubble?

[TwoCitiesCapital]

6 hours ago, thepupil said:

TwoCities, given your view, what sort of net exposure do you run? what's your asset allocation? what hedges do you have in place? how might that differ if stocks went down 30% w/ some multiple contraction?

 

 

I've run 50% invested since the middle of 2019. The other 50% remains in short- and intermediate- bond funds. I also work in finance and my bonuses are heavily dependent on market levels, so I'm probably a bit more cautious than most since my compensation is dramatically impacted by sustained drawdowns. 

 

My target to begin adding substantially to my equity position was 2300. I set this in early 2020 before the bulk of the crash occurred. We hit that for a single day and I invested 3-4% of my portfolio, but since we immediately raced higher again I only made a few small incremental adds after that. Recently have been trimming to remain 50% invested. 

 

I don't see any reason to be willing to pay a higher prices, on average, today than I was willing to pay in 2020. Earnings power is lower, share counts have increased, and indebtedness is through the roof. So I would want to see a drawdown back closer to 2300 before considering any substantial increase in my net equity exposure. Either that, or become convinced that any improvement in fundamentals is sustainable outside of an environment of trillions in stimulus. 

 

Asset allocation for the 50% invested? Largely emerging market value, some international value, and real asset producers. This is what was cheap from 2015-2020 and what I've spent years accumulating. I also have call spreads in GLD, SLV, and TLT to play the negative real rates theme along with puts spreads on Apple and Tesla just in case. Idiosyncratic bets like Fannie Mae/Freddie Mac have also captured my interest. Outside of my traditional portfolio, I've been adding heavily in crypto - both in stable-coins and in token ownership/staking. 

 

I would love to be comfortable investing in the U.S. equities again but it all just seems like it's a house of cards. Aggregate earnings growth has been predicated on share count reduction and increases in leverage as opposed to revenue growth for years. A one time tax-cut seemed to extend the inevitable and now trillions in stimulus appear to be attempting to do that same thing. I don't know where it ends, but cannot get comfortable playing Russian Roulette with the bulk of my savings so am being cautious. Particularly since everyone tells me this is all justified by lower rates, but those same people often believe we're on the cusp of a massive inflationary event...

[thepupil]

thanks! appreciate the perspective. I disagree with most of it, but helpful to hear where you're coming from. You've probably outperformed most thanks to the crypto! 

 

This very much resonates w/ me

Quote

I also work in finance and my bonuses are heavily dependent on market levels, so I'm probably a bit more cautious than most since my compensation is dramatically impacted by sustained drawdowns.

 

[spartansaver]

On 6/27/2021 at 6:30 PM, Cigarbutt said:

 

 

 

 

I think my conclusion is similar to yours. Graham and Marks did a nice job of summarizing it with Mr. Market and the pendulum. Emotions swing from pessimistic to optimistic, occasionally reaching extremes. Everything in between is justified by a story (low interest rates, revolutionary technologies, enormous growth, etc.). The story might have some truth to it, but there's some truth to every story. 

Edited June 29, 2021 by spartansaver

[Simba]

On 6/27/2021 at 1:32 PM, wabuffo said:

he makes some data-backed arguments that we're pretty much in year 2000 territory again

 

I only take these arguments seriously when the presenter adjusts for tax rate and discount rate.    Back in 2000, the corporate federal tax rate was 35% and the 30-year Treasury was at 6%   Therefore $1 of pre-tax corporate earnings would be worth ($1 x (1-35%))/.067 = 9.7x pre-tax EPS.

 

Today, the corporate federal tax rate is 21% (for now) and the 30-year is at 2.2% - so $1 of pre-tax corporate earnings would be worth 35.9x pre-tax EPS.   Even if the corporate rate goes to 28% and the 30-year to 4% - its still 18x pre-tax earnings.  Without any growth in underlying earning power, $1 of pre-tax earnings is worth double what it was in 2000. 

 

I have trouble with folks like Bloomstran who use historical benchmarks without making any necessary adjustments. 

 

wabuffo

 

Nice Analysis!! Very clear.

 

 

[LearningMachine]

On 6/27/2021 at 1:19 PM, JRM said:

I just finished reading "Devil Take The Hindmost".  It was originally published prior to the 2000 crash and of course the 2008 crash.

 

It is astonishing the parallels between stories from 300 years ago and today.  

 

Even though the past 2 (3?) crashes weren't included in the book, the author very accurately forecast the sentiment around the time of each peak.

 

I think bonds are in a bubble and certain stocks, sectors, and cryptos.  There is not a bubble in everything.

Thank you for sharing.

 

Great how it called out interesting parallels to today that led to 1989 Nikkei 225 peak of 40,000 in Japan:

• "[S]ince interest rates remained low and the rising yen discouraged investors from taking their money abroad, the Japanese people were left with no alternative but to continue investing in the domestic stock market."
• "Nomura had five million loyal domestic customers, mainly Japanese housewives, who daily put their savings into special Nomura piggy banks, played stock market computer games on Nomura software, faithfully followed Nomura's stock tips…"
• "Encouraged by low interest rates, people took out fresh loans against the equity of their homes."

Nikkei 225 subsequently fell by 80% to 7700 over the next 13-14 years by 2003 even though the "Official Discount Rate was successively cut until, in September 1995, it reached an all-time low of 0.5 percent.  The rate remained unchanged until September 1998, when it was cut to 0.25 percent."

Edited July 2, 2021 by LearningMachine

[flesh]

I wasn't part of the dot com bubble, however I had just started a inside sales job just after the crash. Unfortunately for me, it was another ten years before I would get into stocks because all I heard was old people who went from 1m to 150k all day every day. I guess they were invested in nasdaq like stuff. 

 

Going along with the two tiered market and the "value-nirvana" period I'd add the obvious tid bit is that a large percentage of the market is our big tech companies which are durable, profitable, and still growing quite well juxtaposed to the junk in the dot com era. Also, a much greater percentage of revenue's come from over seas as a stabilizing factor. The whole world is much more market based. 

 

I have a hard time buying anything that's not a cinch though, recently I punted 1/3 of my net to a hedge fund so I don't have to be the one doing it. 

 

Sometimes I wonder if it's worth being in the market at all. If I can do 100% 1-2 times a decade during drawdowns while being invested only 20% of calendar days and enjoy life/produce income with the remaining time, why not? Mix in the odd cinch here and there, relax. Return on brain damage. 

[SharperDingaan]

To be in the market  - does NOT always mean active management. Most people use a COMBINATION of active, ETFs, and fixed income, with the portfolio weighting to each approach changing over time - as both lifestage and market condition change. 

 

We invest in o/g because we are not constrained by investment policy statements, and have deep expertise in the industry, risk management, and investment finance. We have a material, sustained, competitive advantage relative to most industry analysts AS LONG AS WE STAY within the o/g sector. We are active investors, BECAUSE o/g is cyclical - a buy/hold strategy applied to a cyclical doesn't work; ie: expertise drives approach.

 

Outside of o/g we're very conservative; excluding rollovers, we might trade FI instruments once every 2-3 years, as opportunity presents. We actively manage so that we can use the collaterall, otherwise we would use a bond ETF.  Example: Margin a bond to repay a mortgage, to capture both the interest difference and the tax advantage.   

 

We are the exception, for most people an ETF will be the better way to go.

We earn a larger return because we bring more to the table.

 

SD

[Guest]

This is pretty wild.

 

https://www.ft.com/content/85b06040-1993-4752-bf4f-7964fed3fe26

[Viking]

2 hours ago, stahleyp said:

This is pretty wild.

 

https://www.ft.com/content/85b06040-1993-4752-bf4f-7964fed3fe26

The bond market looks wild to me  the article states $12 trillion in bonds currently trade at a negative yield. Makes sense that some of that would shift to equities. 

 

[maplevalue]

17 hours ago, Viking said:

The bond market looks wild to me  the article states $12 trillion in bonds currently trade at a negative yield. Makes sense that some of that would shift to equities. 

 

Total stock market capitalization in US approx 75% of total bond market capitalization (source https://finance.zacks.com/bond-market-size-vs-stock-market-size-5863.html). When a huge portion of the US bond market becomes effectively uninvestable for anyone with a semi-reasonable return goal (iShares US Aggregate Bond ETF with avg duration of 6.5yrs and avg YTM of 1.45% = I hope investors like losing money in real terms!) the amount of money that needs to move out of fixed income and into other asset classes (namely stocks) is staggering. US 10yr real rates at -1% can do lots of crazy things!

[Gregmal]

Rates and multiples and thus stocks and bonds have to correlate. People can say what they want but at the end of the day the equation is simple. People need a place to put their money. So assuming you value a return on your capital, the ONLY things that matter is how much cash you are getting, and how stable/safe that cashflow is. With a 1% 10 year, 40x for a quality company, or a 2.5% earning yield, with some growth is a bargain. 

[Xerxes]

To those saying higher valuation are somewhat justified due to lower interest rate, Jeremy Grantham would say, you are using an inflated asset (bonds) as a yardstick to determine if another asset class (stocks) are in bubble.

 

To those saying (mostly on Twitter), US printing press will take US to the ways of Weimar Republic, I would say comparing the current incumbent super-power with USD as reserve currency (allbeit one that is relative decline), to the Weimar Republic that at the time was coming out of revolution in 1918 that saw the Wilhelmian monarchy fall, that got the short end of the stick coming of Treaty of Versailles, is a far fetch comparison.   

 

 

[Gregmal]

Eh, Grantham is an attention seeking diva who's got a perfect record calling bubbles because he's calling them every 3 months for decades. If you think bonds are a bubble, how do you deal with the simple fact that the rest of the world has been at or below 0 for ages? I am personally in the "rates will rise" camp....but sitting here claiming its a bubble when this is really just the state of the world....is pretty arrogant. Which is par for the course for Grantham. 

[Cigarbutt]

3 hours ago, maplevalue said:

 

Total stock market capitalization in US approx 75% of total bond market capitalization (source https://finance.zacks.com/bond-market-size-vs-stock-market-size-5863.html). When a huge portion of the US bond market becomes effectively uninvestable for anyone with a semi-reasonable return goal (iShares US Aggregate Bond ETF with avg duration of 6.5yrs and avg YTM of 1.45% = I hope investors like losing money in real terms!) the amount of money that needs to move out of fixed income and into other asset classes (namely stocks) is staggering. US 10yr real rates at -1% can do lots of crazy things!

i would say this line of thinking (move out of bonds, shift to equities) could be misleading.

When you sell your bond to me (for example), the bond is not retired and continues to exist; money cannot leave a sector if that sector still exists and the bond market has been growing ++.

After (not quite maybe) the most impressive bond bull market ever, there's still huge demand for bonds (people wanting to enter to take the place of those who want to leave), including for government debt securities. Have you recently looked at too-big-to-fail banks and their bulging holdings (assets) of government debt? This is also apparent in the recent demand that was high in the reverse repo market (cash being exchanged for low duration government debt) with a yield of 0%, a demand that skyrocketed to 772.6B (it was basically at zero last March) when yields offered by the Fed 'jumped' to 0.05%.

So, the underlying question is: where is all this (new) money coming from? Apart from the usual money creation from loan growth at banking institutions (which has been less than impressive lately (ask JPM, BoA etc), the government has put its shoulder to the wheel but government issues are not pure money printing, at least for now, as the cash injected into the system has been offset by government bonds held (ultimately) by someone. So, the unusual increase in the money (cash) supply has been offset by an equivalent increase in the total pool of bond securities, so resulting in a higher supply of bonds met with an even larger demand for such securities (driving the price up) and resulting in ultra-low yields (30-yr risk-free at 1.97-2.04% today).

So, the recent story has been a large increase in the size of the bond market offset by an increase of cash. Some of this cash went to money market funds (searching for yields at the zero bound) and some of the cash ended up in deposits, contributing to a record opening of brokerage accounts in the first half of 2021 with the purpose to replace owners of volatile stocks.

-----

The 580B inflow number into global equity funds for Q1Q2 2021 looks impressive and is quite unusual but global equity market cap (from a few sources although i did not check in details) is now above 100T. Reading Dalbar studies about retail investors (and inferior returns) is interesting for hindsight perspective but it's always possible that the retail crowd is seeing something that smart money isn't. Of course, i wouldn't bet on it.

[adesigar]

Michael Burry, Jeremy Grantham, and other top investors are predicting an epic market crash. Here are their gravest warnings so far.

https://markets.businessinsider.com/news/stocks/michael-burry-jeremy-grantham-predict-epic-stock-market-crash-warnings-2021-7

 

[wabuffo]

Apart from the usual money creation from loan growth at banking institutions (...), the government has put its shoulder to the wheel but government issues are not pure money printing, at least for now, as the cash injected into the system has been offset by government bonds held (ultimately) by someone. So, the unusual increase in the money (cash) supply has been offset by an equivalent increase in the total pool of bond securities...

 

This is a close description - but not quite right, I think.

 

New deposits in the US commercial banking system come from two sources:

    a) bank credit -- a new bank loan simultaneously creates a deposit.  (new deposit asset + new loan liability but no increase in aggregate private sector net worth)

    b) US Treasury deficit spending -- spending creates a new deposit asset and an increase in aggregate private sector net worth.

 

Thus, only US Treasury deficit spending creates net new financial assets for the private sector.   Bank lending, OTOH, does not create net financial assets because of the matching asset and liability being simultaneously created. 

 

Since everybody already owns everything - the flows of new assets can only originate from US Treasury spending which has been massive since the pandemic.  It is slowing down now as we wait to see what comes out of Congress for the remainder of the year.  Everything else is an asset swap where a buyer enters and a seller leaves.... but everybody continues to own everything!

 

wabuffo

Edited July 6, 2021 by wabuffo

[Cigarbutt]

18 minutes ago, wabuffo said:

...

    b) US Treasury deficit spending -- spending creates a new deposit asset and an increase in aggregate private sector net worth.

wabuffo

Today, we're making home-made strawberry jam and it feels like some of us have a similar argument:

Some say, there is too much sugar in the jam.

Others suggest that the amount of sugar in the house has not changed.

And maybe both are right.

 

Some of the confusion may be related to the fact that we're trying to combine income statement and balance sheet elements in the same statement.

 

Let's see if the following concept helps.

In typical times, most or all of the Treasury spending (to the private sector) is matched by taxation revenue (from the private sector). The rest applies to deficit spending. When the Treasury spends money it does not have, it behaves like a bank (sort of) that act as an intermediate between a private actor that lends its cash (instead of consuming, investing or whatever) to another private actor (to consume, invest or whatever) through the Treasury. So the Treasury acting like a bank (sort of) can effectively be involved in money creation, through some kind of loan-deposit cycle, with a difference that the Treasury holds the expanded balance sheet in an inter-temporal way.

i would say the Fed has exploited this temporal loophole while the MMT crowd simply want to never have to deal with it. The Rubicon hasn't been crossed but..

 

The concept is imperfect but helps to explain the notion that the country owns the growing debt to itself (with no change in consolidated net worth with rising deficits), forgetting the current account part and forgetting that the debt assets are not distributed like the debt liabilities.

 

Speaking of inter-temporal tricks and the upcoming noise around the debt ceiling (preventing private sector net worth growth  ), you may enjoy this video which i thought funny (in 2011).

 

[Spekulatius]

Real estate yolo:

https://twitter.com/jmf_5/status/1412402644090507275?s=20

Edited July 6, 2021 by Spekulatius

[Viking]

4 hours ago, adesigar said:

Michael Burry, Jeremy Grantham, and other top investors are predicting an epic market crash. Here are their gravest warnings so far.

https://markets.businessinsider.com/news/stocks/michael-burry-jeremy-grantham-predict-epic-stock-market-crash-warnings-2021-7

 

interesting all people mentioned said we are in a bubble and pretty much everyone said they had no idea when it would pop. The dot com bubble was already epic in 1996 and it ran until 2000. And back then lots of stocks did just fine after the bubble in tech popped. My read is the key is the Fed... as long as the Fed stays very accommodative i think market averages will do well. And my guess is the Fed will be VERY accommodative for years (they have no choice). But i will remain open minded...

[Spekulatius]

1 hour ago, Viking said:

interesting all people mentioned said we are in a bubble and pretty much everyone said they had no idea when it would pop. The dot com bubble was already epic in 1996 and it ran until 2000. And back then lots of stocks did just fine after the bubble in tech popped. My read is the key is the Fed... as long as the Fed stays very accommodative i think market averages will do well. And my guess is the Fed will be VERY accommodative for years (they have no choice). But i will remain open minded...

The dot coms itself we’re not the real problem when you were a mutual fund or ETF Investor back in 2000. Those stocks mattered , but the real issue were the enormous amount of bubble tech stocks like SUN, Cisco,Microsoft, The ancillary telecom bubble stocks like JDS Uniphase, Nortel, Global Crossing (most of them become zeros or pretty close) as well as pretty much any semiconductor stock and the list goes on and on. Then there was TER Independent  power Producer bubble  with the most famous example being Enron, but there also was Mirant, Calpine,Montana Power (bankruptcy ), El Paso Energy (survived but was a shadow of it former self).

 

While there were plenty of cheap stocks so many high flyer stock were in the broad index fund that those absolutely got destroyed in addition to a lot of bankruptcy that caused irreversible damage to portfolios.

 

I do think we could have a similar meltdown when SPACS, high flying tech with no earnings as well as low quality secular challenged business get simultaneously rerated.

[glider3834]

It all comes down to level of fiscal & monetary stimulus which has been extremely accomodative - I think there are definitely speculative parts to the market that I am avoiding right now but picking if we will have a general (versus sector or stock-specific) market correction in the near term or where interest rates are going to be (in 1 year or 2 years) is impossible in my view. 

 

I like to keep it simple & easy - own concentrated equity positions - dig deep, understand why they are undervalued and what the investment case is?

 

I remember in 2012 I thought the market had run too far too fast & lost a lot of money hedging, I remember eventually swapping money losing S&P hedges for shares including Citigroup at $27 a share. I am not going to go back there for another round trip.

 

 

 

 

[Morgan]

6 hours ago, Spekulatius said:

Real estate yolo:

https://twitter.com/jmf_5/status/1412402644090507275?s=20

 

OMG - Maybe it’s time to sell all my real estate!! This is insane! 

[adesigar]

Http://www.einnews.com/amp/pr_news/545161081/tower-16-capital-partners-announces-the-sale-of-ivilla-garden-apartments-for-30-million-after-a-16-month-hold-period
 

 

Edited July 7, 2021 by adesigar

[wabuffo]

Let's see if the following concept helps.

In typical times, most or all of the Treasury spending (to the private sector) is matched by taxation revenue (from the private sector). The rest applies to deficit spending. When the Treasury spends money it does not have, it behaves like a bank (sort of) that act as an intermediate between a private actor that lends its cash (instead of consuming, investing or whatever) to another private actor (to consume, invest or whatever) through the Treasury. So the Treasury acting like a bank (sort of) can effectively be involved in money creation, through some kind of loan-deposit cycle, with a difference that the Treasury holds the expanded balance sheet in an inter-temporal way.

i would say the Fed has exploited this temporal loophole while the MMT crowd simply want to never have to deal with it. The Rubicon hasn't been crossed but..

 

Huh?

 

wabuffo

 

 

 

[thepupil]

17 hours ago, Spekulatius said:

Real estate yolo:

https://twitter.com/jmf_5/status/1412402644090507275?s=20

 

 Just to put on my permabull hat....

 

What will seem more insane in 10 years. 

 

1. That a bunch of studios/1BR's in Phoenix traded between $20-$40K/Unit from 2000-2017

2. That someone paid $140K/unit in 2021 after someone bought it for $70K/unit in 2020 and put in $7-$10K/unit of capex. 

 

I think number 1 will seem crazier than number 2. I'm not saying that  the 6/2021 purchaser didn't overpay or that I'd personally do the deal, but it's possible that it doesn't seem crazy in a decade.