mattee2264

After the V shaped recovery narrative seems to be panning out and reflation trades are all the rage we've moved on to Roaring 20s headlines in the Economist, Bloomberg Businessweek and Money Week. Predictions of a lasting global boom driven by post-pandemic animal spirts, re-building better, productivity gains from cloud etc., supportive fiscal and monetary policy, and so on. All of which could result in a multi year bull market. How plausible is this prediction given we struggled to get much above 3% GDP growth pre-pandemic and we now have more debt than ever before and a lot of jobs are not coming back? Obviously massive transfer payments can juice GDP figures considerably and show no signs of stopping and there will be even more spending with infrastructure programs up next. And there will be some pent up demand released this year resulting in higher consumption and investment. But will the result of all of this be a much healthier and stronger growing economy or will we just revert to pre-COVID stagnant growth as soon as the fiscal and monetary stimulus starts to be tapered? And are we really going to achieve full employment or are we most likely heading towards being far more of a welfare state which if you look at Europe has never really been a source of a robust and fast growing economy.

I kind feel moderate inflation is going to be yet another positive for stocks especially as with financial repression (Fed keeping interest rates low) it will be impossible to hold cash. And kinda agree with Powell that you don't just go from 1-2% to 6% overnight. Inflationary pressures tend to build slowly over time although agree could be some short lived effects due to supply shortages/pent up demand etc which might push it to 3-4% this year. Also different economy from the 1970s. Far less manufacturing based so high input prices aren't going to have the same kinda impact. Remember commodity prices were super high in 2008 and inflation was still moderate. Learning Machine. Guessing the PE of 39 you are using is 2020 which is obviously trough earnings. If the strong growth everyone is expecting comes through that multiple could come way down. Also for the S&P 500 not sure how relevant CAPE is given a lot of S&P constituents are fast growing so average earnings are less relevant than future earnings and a lot of the cyclicals could enjoy very strong future earnings compared to the stagnant economy post GFC if all the stimulus juices the economy. I think the Fed hiking rates and the bond market hiking rates are very different in effect. The former leads to tighter financial conditions. The latter not so much and it will be a while before bonds become credible alternatives to stocks.

yeah james i fell into that trap. Especially when some of the initial price moves have been so explosive it is hard to jump on the latest hot trade but if it is still very undervalued it can still be a buy. agree that it is much more reassuring when you buy a little too early and have the opportunity to average down. but buying a little too late is equivalent and can still produce good results if there is still a large margin of safety.

I think Buffett probably sees the AGM as a better format for some of those questions. I think the style shift is to allow for continuity/comparability for future reports he might not be authoring. No doubt he has private views on some of the crazy speculation. But I suspect that for the S&P 500 he probably feels the same that it is cheap if interest rates stay low.

Yeah narratives can be very powerful especially in speculative markets. The reflation one does seem quite compelling: trillions of fiscal stimulus, mass vaccinations, re-opening etc. And we've already seen in Q3 2020 how massive fiscal stimulus can completely override the business cycle. But I also wonder how durable a recovery is if it is almost entirely supported by transfer payments and we are stuck in a debt trap and a liquidity trap. And what happens if markets start to worry about overheating?

What I find a bit suspect is that he obviously knew the stock became way overvalued but still held on and kept cheerleading the stock. He's a smart guy so he must have known the dynamics of what was going on. So while I don't think he went into this trying to engineer a short squeeze he certainly rode it for all it was worth and encouraged others to do so.

Fed have already said they won't talk about raising rates until we achieve full employment which is going to be pretty near impossible because the entire service sector has been gutted and a lot of those jobs simply aren't coming back. Also their favoured measure of inflation includes rent and wages which are going to be under pressure for some time. And even after the next round of stimulus checks the Democrats still have all the infrastructure and green spending lined up.

Gold and Treasuries are both safe havens so not surprising that both are selling off if there is a lot more confidence in a recovery. There are people buying Bitcoin because they are worried about inflation/monetary debasement. But I think the vast majority see it a bet on increasing adoption and therefore more and more demand over time. Also you'd imagine the Fed would start yield curve control at some point.

Chevron seems like a pretty good investment. Short cycle projects so should be a nice cash cow and make hay as oil enjoys a final hurrah before green energy starts to take too much share.

Yeah I think there are a few reasons why this could continue for a few more years: 1) Fiscal and monetary policy are going to be supportive for at least the next year or two given the new emphasis on full employment and willingness to let inflation run hot (and there is probably a limit to how hot it can run in the short term given the size of the output gap and absence of wage pressures and falling rents) 2) The pandemic has reinforced the notion that the Fed won't let markets crash and that will continue to encourage a buy the dips mentality as well as keeping confidence levels high. 3) There are still quite a lot of investors worried about market valuations and speculative activity in the market. "1999 again" isn't the same as "this time it is different". And probably some of the residual health and economic uncertainty is keeping some investors out of the market. 4) Markets don't generally crash when the economy is getting better so if a V shaped recovery plays out (and that seems a lot more likely now with fiscal stimulus and effective vaccines) then rising earnings should support rising stock prices and expensive valuations 5) There is nothing obvious on the horizon that would break investors confidence or lead to increased risk aversion. Perhaps rising interest rates will result in some degree of rotation into bonds and value stocks but if it is gradual that should be a fairly orderly and healthy rebalancing of the market and not result in a market crash.And perhaps mutations will delay reopening but you'd expect investors to look past this and expect more stimulus to soften the blow.

b]Falling for the bear market rally narrative At the time it seemed reasonable to take advantage of the initial rally to raise some cash. Buffett was pretty bearish and most economists believed there was a strong possibility of a depression and the economy would take years to recover and most health experts warned that vaccines take years to develop. As such it seemed strange to see the market back trading at around 20x pre-COVID earnings and only 20% off pre-COVID highs. What I should have done is focused on base cases. A 30% decline is pretty typical for bear markets and the base case after an event driven bear market is a sharp V shaped recovery. So there was every possibility that the market bottomed in March (as proved to be the case). Also while the health and economic uncertainty remained incredibly high most of the S&P 500 consisted of companies incredibly well positioned for the pandemic. And of course I should have expected that in a no-fault recession the governments and central banks worldwide would do whatever it takes to support markets and the economy. Also even if the rally did reflect excessive optimism I should have realized that events could subsequently justify that optimism which turned out to the the case. Of course turned out to be very costly because now I'm sitting in far too much cash and virtually everything is up over 50% or more from their 52w lows. And with the market showing no signs of slowing down watching the market continue to run away from me is increasingly painful and I am feeling very foolish.

Worth remembering that there are quite a lot of leakages. Some is saved or goes into the stock market. Some of it goes towards paying off debt. Some goes on imports. And for now it is mostly life support rather than stimulus. With delays in the vaccine rollouts and mutations and a desire to achieve herd immunity that could remain the case for much of 2021. The real recovery might not be until 2022 and by that time it might be a lot harder to pass these trillion dollar stimulus packages.

Investment banks generally have the view we are in the early innings of a new bull market and the Roaring 20s are ahead. I think the main risk is we have massive amounts of global debt that is predicated on low interest rates. That feels like a house of cards to me.

https://www.jpmorgan.com/wealth-management/wealth-partners/insights/big-government-runaway-inflation-and-a-market-bubble This is quite good. Supports the idea that institutions are optimistic rather than necessarily crazy. Their main arguments: 1) US large cap companies earnings power was very resilient in the face of one of the sharpest recessions in history 2) Low interest rates support expensive valuations 3) Even if there is some multiple compression, this will be offset by earnings growth with their expectations of +25% earnings growth for the S&P 500 and +15% earnings growth from all other major reasons 4) Inflation is still well below target and major components such as wages and shelter remain weak and if inflation does pick up it will be in the context of a healing economy 5) We may have passed the hope phase but we still have the growth phase to come

https://www.jpmorgan.com/wealth-management/wealth-partners/insights/big-government-runaway-inflation-and-a-market-bubble This is quite good. Supports the idea that institutions are optimistic rather than necessarily crazy. Their main arguments: 1) US large cap companies earnings power was very resilient in the face of one of the sharpest recessions in history 2) Low interest rates support expensive valuations 3) Even if there is some multiple compression, this will be offset by earnings growth with their expectations of +25% earnings growth for the S&P 500 and +15% earnings growth from all other major reasons 4) Inflation is still well below target and major components such as wages and shelter remain weak and if inflation does pick up it will be in the context of a healing economy 5) We may have passed the hope phase but we still have the growth phase to come