The Everything Bubble

[TwoCitiesCapital]

On 6/2/2024 at 3:44 AM, mattee2264 said:

Dow 40,000 as I recall is based on the idea that there is no need for an equity risk premium because you get your margin of safety from growth of earnings. 

 

On that basis if bonds yield around 3-4% over the next decade or so then PE multiples of 25-30x are reasonable. 

 

Of course the catch is that historically you got a higher earnings yield to compensate for the risk of investing in equities and essentially got the long term earnings growth for free. And therefore unless long term earnings growth is a lot faster than historically has been the case you aren't going to get 10%. 

 

And it is reasonable to say that in a low interest rate environment (i.e. lower risk free rate) where the perceived risk of investing in equities is a lot lower (because of the Fed put) and where the inflation protection equities offer seems particularly valuable, then you're being greedy insisting on 10% expected returns. Buffett has a great analogy about not wanting to be like a mortician waiting for a flu epidemic that is apt. 

 

 

The problem is, you can lock in returns 2x that 3-4% for the next decade today. Even agency mortgages, with a duration of 10-15 years, are currently paying 6-7%.

 

You don't even have to take credit risk!

Edited June 3 by TwoCitiesCapital

[mattee2264]

Problem though is that even a safe 6-7% is very boring and unattractive to most investors who always look in the rear window mirror when it comes to projecting future returns and over the last 5 years you'd have made over 25% a year investing in the Nasdaq and almost 15% a year investing in the S&P 500. And investors aren't worried about losing money because they figure the Fed will rescue markets at the first sign of trouble. 

 

Bull markets do not end because investors decide bonds offer a better risk-reward. They end because sentiment shifts and investors are more worried about losing money than anything else. That is probably why stagflation is the greatest worry because it could conceivably prevent the Fed from rescuing markets and might even require them to increase rates as well as being a serious headwind to earnings. 

[Dinar]

6% from a bond is essentially zero return after tax and inflation.  So while TIPS at 2.5% are attractive in a retirement account, they are not attractive to a tax paying individual

[mattee2264]

Institute of International Finance recently stated that global debt (governments, consumers, businesses) is $315TR. That compares to global GDP of $109.5TR. 

 

Maybe it is nothing. But there probably is a link between massive accumulation of debt since 2010 and the incredible global stock market performance. And if interest rates stay high or there is a rise in unemployment or a fall in corporate profitability or bond vigilantes start disciplining governments running unfunded deficits then it probably will start to matter in a big way. 

[Luca]

1 hour ago, mattee2264 said:

Institute of International Finance recently stated that global debt (governments, consumers, businesses) is $315TR. That compares to global GDP of $109.5TR. 

 

Maybe it is nothing. But there probably is a link between massive accumulation of debt since 2010 and the incredible global stock market performance. And if interest rates stay high or there is a rise in unemployment or a fall in corporate profitability or bond vigilantes start disciplining governments running unfunded deficits then it probably will start to matter in a big way. 

Cash will always be trash! 

[blakehampton]

11 hours ago, Luca said:

Cash will always be trash! 

I’m starting to think more-so fixed income