Secular Bull?

[Guest]

Eric,

 

Did you own a home back in 2004-2007? I believed you recently moved to CA but I'm not aware of your previous residence.

 

Also, I believe I read you lost a good amount of your networth on MSFT stock options (company provided ones) back in the day and that you had a desire to "make it back."

 

Yes, I remember the 1990s. haha. I know I lost a bit back in the dotcom boom and bust. I didn't have much at the time since I was a kid. 

 

As far as easy money, here are some things:

 

http://www.huffingtonpost.com/2013/08/23/patrick-hop-tesla_n_3806361.html

 

http://www.cnbc.com/id/100991598

 

http://www.marketwatch.com/story/the-return-of-the-million-dollar-house-flip-2013-10-17

 

http://www.bloomberg.com/news/2012-11-09/low-yields-force-seniors-into-stocks.html

 

http://articles.chicagotribune.com/2013-03-17/news/ct-met-north-dakota-fracking-chicagoans-20130317_1_oil-boom-oil-rush-man-camps

 

http://finance.yahoo.com/blogs/breakout/meet-the-23-year-old-kid-who-turned-down--3-billion-for-snapchat-010309114.html

[ERICOPOLY]

Eric,

 

Did you own a home back in 2004-2007? I believed you recently moved to CA but I'm not aware of your previous residence.

 

Also, I believe I read you lost a good amount of your networth on MSFT stock options (company provided ones) back in the day and that you had a desire to "make it back."

 

Yes, I remember the 1990s. haha. I know I lost a bit back in the dotcom boom and bust. I didn't have much at the time since I was a kid. 

 

I have been front-and-center in every (2 for 2) boom of my adult life -- perhaps that's why I thought they were so obvious.

 

I had sudden gains from employee options that were suddenly gone.  Then, given that Seattle had the 2nd-worst economy (behind Portland) after the tech bust (due to all the laid-off tech contractors), I was able to leverage my Microsoft salary with real estate rentals.  The Seattle market wasn't appreciating while other markets in the country were up 20% annually -- I just speculated that the same would happen in Seattle once the local job market recovered.  I made a quick little fortune when Seattle had a couple of 20% years of it's own.  It was at this time that the Fairfax options came along in 2006 -- I had a couple of hundred thousand to invest from my easy money in real estate.  Tada!

 

So, maybe you are right that there is a boom going on right now in the areas you mentioned, and perhaps I'm not seeing it because this time I'm missing out on it.  But I'm having a little mini-boom of my own in BAC, which despite the boom-like returns is really still trading at recession-level valuation.

[Guest]

Very good points, Eric.

 

I do appreciate your insights, as always. You're much wealthier than me so I look forward to learning from you. For selfish reasons (I like the way you think, what can i say!), once you hit your $50 million (or whatever your goal is now), I hope you'll continue to post here.

[ERICOPOLY]

The Tesla boom you mention is purely stock market related.

 

The tech boom wasn't just a stock market boom -- it was tons and tons of new startup companies ordering tons and tons of equipment using debt that would never be paid back.  So it created a real economy that collapsed.

 

Tesla has not spawned a real-economy boom.  It's just a stock that went up -- did not drag GDP along with it.

[Guest]

The Tesla boom you mention is purely stock market related.

 

The tech boom wasn't just a stock market boom -- it was tons and tons of new startup companies ordering tons and tons of equipment using debt that would never be paid back.  So it created a real economy that collapsed.

 

Tesla has not spawned a real-economy boom.  It's just a stock that went up -- did not drag GDP along with it.

 

I agree. I was thinking along the lines of easy money. We could also look offers at Snapchat (I posted that later) or Instagram. They're not using a lot of equipment but they're getting really dicey valuations.

 

Couldn't we argue about the government debt is similar to the tech boom? We're creating a ton of debt that will never be paid back (at least in real terms).

[ERICOPOLY]

Couldn't we argue about the government debt is similar to the tech boom? We're creating a ton of debt that will never be paid back (at least in real terms).

 

That is something that can go on for a heck of a long time -- look at Japan's indebtedness.

 

But I've seen it mentioned many times that it doesn't need to go on for a long time -- only until the private sector deleveraging is over, and we're 1/2 there already (according to a few sources).

 

Meanwhile, debt is growing at a slower pace compared to at the start of this process.  The slowly growing economy is gradually lifting government revenue.

 

Inflation, when it comes, will at least be lifting the imputed earnings of the indebted Americans.  Take that girl we recently talked about who has $250,000 of student loans and $25,000 of income.  Were inflation to be 5%, she would have tax-free imputed income of $12,500, which is a 50% increase over the $25,000 she currently makes.

[ERICOPOLY]

The Tesla boom you mention is purely stock market related.

 

The tech boom wasn't just a stock market boom -- it was tons and tons of new startup companies ordering tons and tons of equipment using debt that would never be paid back.  So it created a real economy that collapsed.

 

Tesla has not spawned a real-economy boom.  It's just a stock that went up -- did not drag GDP along with it.

 

I agree. I was thinking along the lines of easy money. We could also look offers at Snapchat (I posted that later) or Instagram. They're not using a lot of equipment but they're getting really dicey valuations.

 

Couldn't we argue about the government debt is similar to the tech boom? We're creating a ton of debt that will never be paid back (at least in real terms).

 

Anyhow, it seems to me that the last two mega-crashes in the stock market were not just about lofty stock prices -- they were about unsustainable bubbles in sectors of the real economy.  They were magnified by industries that quickly moved from booms into depressions, and that dragged general employment down and led to recessions (that fed into stock prices).

 

Housing going from mega-boom into Depression overnight was just catastrophic.  I mean, that's a real Epic one that we'll probably never top in my lifetime.

[Guest]

The Tesla boom you mention is purely stock market related.

 

The tech boom wasn't just a stock market boom -- it was tons and tons of new startup companies ordering tons and tons of equipment using debt that would never be paid back.  So it created a real economy that collapsed.

 

Tesla has not spawned a real-economy boom.  It's just a stock that went up -- did not drag GDP along with it.

 

I agree. I was thinking along the lines of easy money. We could also look offers at Snapchat (I posted that later) or Instagram. They're not using a lot of equipment but they're getting really dicey valuations.

 

Couldn't we argue about the government debt is similar to the tech boom? We're creating a ton of debt that will never be paid back (at least in real terms).

 

Anyhow, it seems to me that the last two mega-crashes in the stock market were not just about lofty stock prices -- they were about unsustainable bubbles in sectors of the real economy.  They were magnified by industries that quickly moved from booms into depressions, and that dragged general employment down and led to recessions (that fed into stock prices).

 

 

Right, I would agree here, as well. I think this is Klarman's point. The economy is so weak that the fed is not only keeping interest rates low in the traditional sense but with QE, too. They have been doing this for years now and the economy still isn't back to normal. As he sad "there is no free lunch" but, if this works out as people hope, there would be. Perhaps "this time is different" and monetary shenanigans will work out with no super tough pain to get a full recovery, just a longer, less painful way there. This process can take quite a while. That's why I'm cautious but not "batten down the hatches" cautious yet. Things are rarely as good or as bad as we think.

[ERICOPOLY]

The Tesla boom you mention is purely stock market related.

 

The tech boom wasn't just a stock market boom -- it was tons and tons of new startup companies ordering tons and tons of equipment using debt that would never be paid back.  So it created a real economy that collapsed.

 

Tesla has not spawned a real-economy boom.  It's just a stock that went up -- did not drag GDP along with it.

 

I agree. I was thinking along the lines of easy money. We could also look offers at Snapchat (I posted that later) or Instagram. They're not using a lot of equipment but they're getting really dicey valuations.

 

Couldn't we argue about the government debt is similar to the tech boom? We're creating a ton of debt that will never be paid back (at least in real terms).

 

Anyhow, it seems to me that the last two mega-crashes in the stock market were not just about lofty stock prices -- they were about unsustainable bubbles in sectors of the real economy.  They were magnified by industries that quickly moved from booms into depressions, and that dragged general employment down and led to recessions (that fed into stock prices).

 

 

Right, I would agree here, as well. I think this is Klarman's point. The economy is so weak that the fed is not only keeping interest rates low in the traditional sense but with QE, too. They have been doing this for years now and the economy still isn't back to normal. As he sad "there is no free lunch" but, if this works out as people hope, there would be. Perhaps "this time is different" and monetary shenanigans will work out with no super tough pain to get a full recovery, just a longer, less painful way there. This process can take quite a while. That's why I'm cautious but not "batten down the hatches" cautious yet. Things are rarely as good or as bad as we think.

 

They did raise taxes this year.  Times are not quite as easy as some of the pundits claim.

[Guest]

That's true but taxes are still low from a historical standard.

 

http://www.ntu.org/tax-basics/history-of-federal-individual-1.html

 

I suppose though, Eric, I'm just a bit cynical that we can gloss over the excesses of the past with easy money. If it sounds to good to be true, it usually is...but not always.

[ERICOPOLY]

That's true but taxes are still low from a historical standard.

 

http://www.ntu.org/tax-basics/history-of-federal-individual-1.html

 

I suppose though, Eric, I'm just a bit cynical that we can gloss over the excesses of the past with easy money. If it sounds to good to be true, it usually is...but not always.

 

Look at the relative headwind coming from the US Treasury this year.  They were injecting $1.3 trillion into the economy in 2011, and this year roughly 1/2 that much.

 

On absolute terms, it's still a deficit.  But I look at the relative change -- it has to be growing from year to year in order to be boosting the economy relative to the prior year, no?  Instead, it's drastically shrinking which (relative to prior year) is a big punch in the gut.

 

http://www.usgovernmentspending.com/federal_deficit_chart.html

 

FY 2013: $680 billion

FY 2012: $1,087 billion

FY 2011: $1,300 billion

FY 2010: $1,294 billion

 

 

[ERICOPOLY]

I suppose though, Eric, I'm just a bit cynical that we can gloss over the excesses of the past with easy money. If it sounds to good to be true, it usually is...but not always.

 

Money isn't easy.  The Fed tries to make it easy, but then it goes through this filter (aka "the banks") who are exceptionally difficult to borrow from.  The banks aren't reporting much lending growth, indicating that as easy as the money may be, it's not driving the economy on any kind of debt binge.  Not consumer debt anyhow.  My comments are in relation to what your experience would be if you walked into a bank and wanted a loan, as a consumer.

[racemize]

That's true but taxes are still low from a historical standard.

 

http://www.ntu.org/tax-basics/history-of-federal-individual-1.html

 

I suppose though, Eric, I'm just a bit cynical that we can gloss over the excesses of the past with easy money. If it sounds to good to be true, it usually is...but not always.

 

Look at the relative headwind coming from the US Treasury this year.  They were injecting $1.3 trillion into the economy in 2011, and this year roughly 1/2 that much.

 

On absolute terms, it's still a deficit.  But I look at the relative change -- it has to be growing from year to year in order to be boosting the economy relative to the prior year, no?  Instead, it's drastically shrinking which (relative to prior year) is a big punch in the gut.

 

http://www.usgovernmentspending.com/federal_deficit_chart.html

 

FY 2013: $680 billion

FY 2012: $1,087 billion

FY 2011: $1,300 billion

FY 2010: $1,294 billion

 

Note that it will start increasing again due to structural issues (at least according to CBO):

http://www.calculatedriskblog.com/2013/08/update-shrinking-deficit.html

 

[wisdom]

Marks makes a good point -

People are not necessarily bullish but are being forced to act bullish by the central banks. Thus, they are taking on risk that they would normally not be comfortable with. In case, there is any shock or unexpected outcome in the major economies - those individuals who have moved up the risk curve without being comfortable with it are going to run for exits.

 

I expect this to present good opportunities at some point.

[ERICOPOLY]

That's true but taxes are still low from a historical standard.

 

http://www.ntu.org/tax-basics/history-of-federal-individual-1.html

 

I suppose though, Eric, I'm just a bit cynical that we can gloss over the excesses of the past with easy money. If it sounds to good to be true, it usually is...but not always.

 

Look at the relative headwind coming from the US Treasury this year.  They were injecting $1.3 trillion into the economy in 2011, and this year roughly 1/2 that much.

 

On absolute terms, it's still a deficit.  But I look at the relative change -- it has to be growing from year to year in order to be boosting the economy relative to the prior year, no?  Instead, it's drastically shrinking which (relative to prior year) is a big punch in the gut.

 

http://www.usgovernmentspending.com/federal_deficit_chart.html

 

FY 2013: $680 billion

FY 2012: $1,087 billion

FY 2011: $1,300 billion

FY 2010: $1,294 billion

 

Note that it will start increasing again due to structural issues (at least according to CBO):

http://www.calculatedriskblog.com/2013/08/update-shrinking-deficit.html

 

Yes, but before that happens it's expected to roughly halve from present levels (relative to GDP):

 

Quoting:

 

For the current fiscal year (ends September 30th), the CBO is projecting a deficit of 4.0%.  This is down sharply from 7.0% last year.  And the CBO expects the deficit to fall to 2.1% of GDP in 2015.

 

[Packer16]

Marks makes a good point -

People are not necessarily bullish but are being forced to act bullish by the central banks. Thus, they are taking on risk that they would normally not be comfortable with. In case, there is any shock or unexpected outcome in the major economies - those individuals who have moved up the risk curve without being comfortable with it are going to run for exits.

 

I expect this to present good opportunities at some point.

 

This true if interest rates are higher but if they are where the are now are folks going to dump there stocks to jump into 2.5% yielding bonds or 0% yielding T-bills for long?  Also, the flows into equities has been tepid at best over the past few months after a large outflow over the past few years.  The normal magnet of higher interest rate pulling dollars from stocks is less with current rates.  I agree with Marks in theory but we may be seeing the beginning of the practice with flow of asset to equities.

 

Packer

 

Packer

[Guest]

Eric and Packer,

 

I'm glad to know you guys. You keep me out of trouble and get me to think differently. Thank you for that.

 

On the plus side, it seems to me that when I speak with people about the market they "know" things will drop again due to QE tapering or something else. This concern is somewhat comforting. And, two guys mentioned above are still bullish, so that's a good thing.

 

On the other hand, Klarman was wrong (premature) for about 4-5 years before for the tech bubble burst. If we make it through early to mid 2015 without a drop, that'll be the same time he's wrong this time (assuming the bottom does fall out then...I don't know but you guys have persuasive arguments to the contrary). It's also a bit concerning when long term bears (Hussman, Grantham and Hendry) are suddenly bulls, while more successful investors (Buffett and Marks) are less bullish than they were previously. Oddly, I believe all of these opinions have switched roughly at similar times - within the past month or so.

[ERICOPOLY]

I tend to think my portfolio will gain about 35% next year (from now through end of 2014), and that makes me bullish.  That's without using leverage.

 

It has nothing to do with central banks making me go into stocks.  A 35% probable return is enough to do it for me.

 

I also tend to think people will warm up to what's in my portfolio at an accelerating pace given that less opportunity is available elsewhere -- that's my efficient market hypothesis, I will expect a call from Sweden any minute now.

[gary17]

I think there are probably two groups of investors on this board -

 

those have high net worth or are relying solely on investment as the primary income

 

And those who are doing investing as a second source of income.

 

So for the first group, I'd think having cash or some form of hedge against the downside makes a lot of sense, regardless of the market sentiment.

 

For the second group, for which I belong to, I think it makes sense to be  100% invested, and probably a bit more if the right opportunity comes up.... as the income from the primary job would allow one to buy more cheaper shares if we have a crash.

And the loss of purchasing power if not participated in the market  at this stage just feels almost as risky as a crash. The run up of Vancouver real estate is a great example... 500K used to buy a nice home, it is now a 750sf condo. yes, it may have a 30% correction but then prices are unlikely to  ever go down to the affordable levels. And I feel it might be like that for the stock market.

 

I guess the strategy has to do with where the cash flow for funding stock investment comes from...

 

Overtime I'd like to train myself to be in the first camp, as at some point I'd retire and need to have the ability to manage the funds through different cycles.

 

 

[no_free_lunch]

The run up of Vancouver real estate is a great example... 500K used to buy a nice home, it is now a 750sf condo. yes, it may have a 30% correction but then prices are unlikely to  ever go down to the affordable levels. And I feel it might be like that for the stock market.

 

I had a similar experience with real estate.  Prices went up 6-7% a year for 5 or 6 years, well ahead of inflation.  I thought, well that can't continue.  The next year prices went up 70%, in 1 single year.  At that point, there were 2 camps of people, those who said real estate is the greatest investment ever and those who were adamant that it was over-extended and would crash back.  Practically everyone was in the bullish camp.  I am at that point a seasoned value investor so I think, that's it, look at the sentiment, that's the top.  Wrong.  5 years later, prices are up still another 33%.  It's important to have downside protection but trying to predict tops is a very dangerous game.

[james22]

It was my belief the market is overvalued that drove me from (Fama-French) indexing to (Novy-Marx) value investing.

 

Allows me to participate in further advances with some margin of safety and a belief the jockeys will be opportunistic come a correction.

[giofranchi]

Good piece by Mr. David Hay.

For those who don’t like CAPE, please look at Figure 17 on page 5: the stock market is probably going nowhere for the next 10 years… And I don’t see why anyone should disregard this information as useless in his/her investing decisions.

 

Of course, if you are as good as Packer or Eric, you might very well overlook what everybody else (the market in general) is doing… The law of gravity to you clearly doesn’t apply! (And I say this with a mixture of envy and great respect!)

 

Everyone else, first of all, must know his/her self: I guess chances are you are subject to the law of gravity. Just like I know I am!! ;)

 

Gio

EVA+11.22.2013+NA+.pdf

[twacowfca]

That's true but taxes are still low from a historical standard.

 

http://www.ntu.org/tax-basics/history-of-federal-individual-1.html

 

I suppose though, Eric, I'm just a bit cynical that we can gloss over the excesses of the past with easy money. If it sounds to good to be true, it usually is...but not always.

 

Look at the relative headwind coming from the US Treasury this year.  They were injecting $1.3 trillion into the economy in 2011, and this year roughly 1/2 that much.

 

On absolute terms, it's still a deficit.  But I look at the relative change -- it has to be growing from year to year in order to be boosting the economy relative to the prior year, no?  Instead, it's drastically shrinking which (relative to prior year) is a big punch in the gut.

 

http://www.usgovernmentspending.com/federal_deficit_chart.html

 

FY 2013: $680 billion

FY 2012: $1,087 billion

FY 2011: $1,300 billion

FY 2010: $1,294 billion

 

Eric,

 

I believe you will find that reducing the deficit within reasonable bounds especially by restraining spending rather than tax increases and reaping increased capital gains tax collections as asset prices rise is  not necessarily a bad thing for stock market prices.  Look at what happened during the Clinton years. Then, we had a president who was popular (especially with young female interns) as the country benefitted from adult supervision when the Republicans controlled the purse strings.

[frommi]

Good piece by Mr. David Hay.

For those who don’t like CAPE, please look at Figure 17 on page 5: the stock market is probably going nowhere for the next 10 years… And I don’t see why anyone should disregard this information as useless in his/her investing decisions.

 

Of course, if you are as good as Packer or Eric, you might very well overlook what everybody else (the market in general) is doing… The law of gravity to you clearly doesn’t apply! (And I say this with a mixture of envy and great respect!)

 

Everyone else, first of all, must know his/her self: I guess chances are you are subject to the law of gravity. Just like I know I am!! ;)

 

Gio

 

Its totally useless because my holdings are undervalued. What would bother me is if a recession is on its way, but currently there is no sign of it on the wall.

 

Is this still your capital allocation?

22% Fairfax, which is fully hedged

5% Gold (who knows? just in case!)

36,5% other long positions

36,5% short positions

 

Then i don`t wonder why you are so convinced that the market is overvalued. But you should make a reality check if that is a wise allocation of capital going forward. As Tepper said, "i am only worried that the long/short guys are not long enough".  ;D

[ERICOPOLY]

The law of gravity to you clearly doesn’t apply! (And I say this with a mixture of envy and great respect!)

 

The more expensive the overall market (the greater it's total valuation mass), the greater the gravitational pull it will exert on undervalued stocks.

 

This happens when people trade expensive for cheap.  There comes a time where a lot of stock become expensive and few cheap ones remain.  This is a bullish outcome for the prospects of those cheap stocks.  I am talking about truly cheap stocks, not just ones that are "cheap" for good reason.