John Hussman: Yes, This is a Bubble

[Vish_ram]

I decided that Walmart is a bubble stock.

 

It's at 15x earnings and those earnings are inflated by government welfare programs.  Essentially, they pay less than a living wage, then the government buys food for their employees "the working poor", and the Walmart shareholders pocket the difference.

 

Not sure when that market distortion is going to end.  It would take a big political change to get the federal minimum wage raised up to the "living wage" level.  That would be the level at which Walmart would be feeding and clothing their own workers, rather than having the government essentially make payroll for them.

 

But I dunno... those kinds of obvious bubbles can go on for a long time.

 

If Wal-mart along with other companies are forced to increase minimum wage, then you'll have less income inequality. The lower and middle income wagers who are customers of walmart can buy more stuff (their spending relative to income is much higher). The wealthy would shop less at Tiffany.

It may not be a bubble after all. It could be a wash too. Someone should prepare a Laffer curve for minimum wage to better understand the impact.

 

[CorpRaider]

I agree on Walmart and some of the others that are essentially externalizing their labor costs.  Rectifying this problem might be one scenario under which profit margins "mean revert" as some have been calling for.

[ERICOPOLY]

If Wal-mart along with other companies are forced to increase minimum wage, then you'll have less income inequality. The lower and middle income wagers who are customers of walmart can buy more stuff (their spending relative to income is much higher). The wealthy would shop less at Tiffany.

 

There would be less "income inequality", but that's because cash wages are regarded as "income" but not the value of food stamps.

 

So if you remove food stamps, tax subsidies, rent subsidies, etc....  and replace dollar-for-dollar with cash income (aka "living wage")... then they cannot afford more stuff.

 

They just get by exactly as they are doing now in terms of what they can consume...

 

The only change therefore is that instead of it being tacked onto the government deficit, it gets expensed by Walmart as payroll expense.

 

The wealthy would shop less at Tiffany -- or would they???  Perhaps we keep the government deficit the same, and instead cut taxes a bit.  Who pays most of the taxes?  The wealthy.

[arbcon]

For me, there is no question that we are in a bond bubble, and it's eventual repricing , to say, 3% overnight ,will have consequences. However, the key for me in stocks is whether companies can price with inflation, or not. The sustainability in this will depend on wage growth. I'm watching Hershey/Mars now to see whether their price increase sticks.

In general, I look less at the tree than the new growth on the tips of the branches to determine future value,but that's me.

To Bmichaud, I know three or four of the guys in the article. When it was written, all were watching  banks implode and wondering whether the resultant damage would spread through the economy. So, we all bought Wells Fargo and did well.but had a rough ride for a few years.

[ERICOPOLY]

So my main point is that:

 

A)  First, Walmart figured out how much government assistance is available for "working poor". 

B)  Second, they pay the bare minimum to "bump up" that assistance to the level where their workers can afford the bare minimum combination of food/housing/clothing/medicine

 

This is a recipe for bubble profits!  It relies entirely on government aid to help them make payroll.

 

The way to fix it would be either:

 

1)  remove all government subsidies and wait for Walmart workers to begin dropping dead.  The free market will then begin to work once Walmart realizes that they need to pay their workers enough to keep them alive.  So that's obviously a very ugly path from a humanitarian standpoint.

 

... or instead ...

 

2)  raise the Federal minimum wage and phase out all of the subsidies for the "working poor".  It's called a "living wage", so live on it!  And yes, that includes getting rid of progressive taxation, because that's yet one more way that corporations are able to pay lower wages to the lower income strata of society.  In fact, the steeper the progressive taxation, the more income disparity you should expect.

 

The government subsidies consist of:

progressive tax rates

tax credits

low income housing programs

food stamps

etc...

 

All of those programs (combined with a low Federal minimum wage) lead to excessive profits at Walmart.

 

It's a bubble if the profits rely on government largess, and not on free market economics.

 

 

 

 

[KCLarkin]

I don't know a whole lot about macro, and I don't think it helps a lot to spend a lot of mental energy on it, but http://www.philosophicaleconomics.com/ is absolutely worth reading if you want some counter arguments against what John Hussman is saying.

 

Agreed. I've been reading his blog for a while and have posted a few of my favorite pieces in the Macro Musing discussion thread.

 

It is pretty hard to read http://www.philosophicaleconomics.com/2014/06/critique/ and not believe that Hussman is living in his own bubble:

 

"He’s calling for 'zero or negative nominal total returns for the S&P 500 on horizons of 8 years or less, and about 1.9% annual total returns over the next decade.'"

 

As value investors, I think we can all agree that valuation matters but nobody can predict the sequencing of returns with that kind of precision.

[stahleyp]

The guy at philosophical economics is smart. I don't think anyone doubts that. However, he doesn't have a lot of "skin in the game" if he's wrong, either. He's anonymous. Hussman, Klarman and Watsa have their reputations (and business to some degree) at stake. Liberty, since you mentioned Dalio, isn't he expecting 0% or so returns, too? Someone posted that on here not too long ago, I believe.

 

That doesn't mean the guy at PE is wrong. His logic seems solid but he doesn't have a lot at stake (best I can tell anyway) if the future doesn't turn out quite as rosy as he thinks.

[bmichaud]

Bridgewater is at a 4% expected return right now I believe.

 

They also think we are in the economic sweet spot - not too hot, not too cold, where monetary policy can remain relatively neutral.

[Liberty]

Liberty, since you mentioned Dalio, isn't he expecting 0% or so returns, too? Someone posted that on here not too long ago, I believe.

 

No idea. But he certainly believes in printing money as part of achieving a 'beautiful deleveraging' and helping the real economy.

 

That doesn't mean the guy at PE is wrong. His logic seems solid but he doesn't have a lot at stake (best I can tell anyway) if the future doesn't turn out quite as rosy as he thinks.

 

I don't really care about that as long as the logic is sound. People are not right in function of their portfolio or reputation size. John Paulson hasn't exactly been right on his gold call...

 

And I wouldn't be surprised if he's investing millions of his own money. If you follow him on twitter for a while, he sounds a lot more like an experienced investor/trader than an academic economist, despite his brilliance there too.

[Orange]

Walmart will find a way to automate many of the jobs they offer if the minimum wage is drastically increased. Low or no skill minimum wage jobs are the easiest to automate. Cashiers are already starting to get fazed out. The nearest Walmart to me has 8 self checkout stations (supervised by only 1 employee), so they already have developed and put in place some of the technology to automate.

 

The losers in a drastically higher minimum wage scenario aren't Walmart, they are small businesses who cannot afford the technology that replaces low skill workers, and of course the newly unemployed workers themselves.

 

 

[KCLarkin]

Hussman, Klarman and Watsa have their reputations (and business to some degree) at stake.

 

Hussman is very different than Klarman and Watsa. He has very high certainty based on quantitative models. Yes, he is incredibly smart and has skin in the game but LTCM also had skin in the game. And LTCM was eventually right too. Markets are incredibly complex, unstable, unpredictable things. Overconfidence is not an admirable trait.

[ERICOPOLY]

Walmart will find a way to automate many of the jobs they offer if the minimum wage is drastically increased. Low or no skill minimum wage jobs are the easiest to automate. Cashiers are already starting to get fazed out. The nearest Walmart to me has 8 self checkout stations (supervised by only 1 employee), so they already have developed and put in place some of the technology to automate.

 

The losers in a drastically higher minimum wage scenario aren't Walmart, they are small businesses who cannot afford the technology that replaces low skill workers, and of course the newly unemployed workers themselves.

 

Perhaps that is 100% accurate.

 

I take it the Republicans think that a continuation of this corporate welfare state is the best path forward?

 

You can't have small businesses without corporate welfare.  They cannot survive in the free market, thus you have to make payroll for them.  Plain and simple.  That's their position?

 

Stated differently, the Democrats' social programs for the working poor are keeping small business afloat -- that's the Republican party line?

[Hielko]

So my main point is that:

 

A)  First, Walmart figured out how much government assistance is available for "working poor". 

B)  Second, they pay the bare minimum to "bump up" that assistance to the level where their workers can afford the bare minimum combination of food/housing/clothing/medicine

 

This is a recipe for bubble profits!  It relies entirely on government aid to help them make payroll.

 

The way to fix it would be either:

 

1)  remove all government subsidies and wait for Walmart workers to begin dropping dead.  The free market will then begin to work once Walmart realizes that they need to pay their workers enough to keep them alive.  So that's obviously a very ugly path from a humanitarian standpoint.

 

... or instead ...

 

2)  raise the Federal minimum wage and phase out all of the subsidies for the "working poor".  It's called a "living wage", so live on it!  And yes, that includes getting rid of progressive taxation, because that's yet one more way that corporations are able to pay lower wages to the lower income strata of society.  In fact, the steeper the progressive taxation, the more income disparity you should expect.

 

The government subsidies consist of:

progressive tax rates

tax credits

low income housing programs

food stamps

etc...

 

All of those programs (combined with a low Federal minimum wage) lead to excessive profits at Walmart.

 

It's a bubble if the profits rely on government largess, and not on free market economics.

This is very off topic, but I'm pretty sure it isn't that easy. Not everybody is able to contribute enough to be worth a high minimum wage. I don't know if you ever visited a super market in for example the Netherlands, but you would probably be amazed at the relative low number of people working there (I was amazed at the high number of people working at Wallmart when I visited the US). When you raise the minimum wage you might also be forcing the less skilled into unemployment while they are replaced by technology and/or other alternatives (doing stuff yourself as a customer: no-one here in the Netherlands to pack your grocery bags...).

[ERICOPOLY]

This is very off topic, but I'm pretty sure it isn't that easy. Not everybody is able to contribute enough to be worth a high minimum wage.

 

 

Sure.  A "high" minimum wage would be wrong.

 

Rather, a "living wage" as the minimum.  That is the absolute lowest value wage possible to keep the person healthy, rested, and cleanly dressed -- coming in to work each day to fullfil the basic needs of the corporation (cleaning toilets, mopping floors, stocking shelves).

 

[stahleyp]

Hussman, Klarman and Watsa have their reputations (and business to some degree) at stake.

 

Hussman is very different than Klarman and Watsa. He has very high certainty based on quantitative models. Yes, he is incredibly smart and has skin in the game but LTCM also had skin in the game. And LTCM was eventually right too. Markets are incredibly complex, unstable, unpredictable things. Overconfidence is not an admirable trait.

 

I can agree with that.

 

That's really my point though: are we being compensated enough for the unpredictable nature of the market? That, I'm not too sure of.

[james22]

Markets are incredibly complex, unstable, unpredictable things.

 

I am not defensive because I believe markets predictable, but because I believe markets are too incredibly complex and unstable for central banks to manage.

 

[oddballstocks]

Just to throw some fuel on the fire here.  For everyone who's saying there are no ideas out there, I just ran a screen on US stocks with a 5yr ROE greater than 20% that are debt free (there are 122) and I'm seeing 67 with P/E's less than 20x, 58 with a P/E less than 16, and 34 with P/E's under 10.  Maybe all of these companies are junk, I don't know, but I'm guess there are at least one or two good ideas in there.

 

My suspicion is that this is an ever changing list, if I ran the same screen next month it would probably have different results.  Just hunting off a list like this one could build a portfolio of high compounding companies.

[CorpRaider]

So my main point is that:

 

A)  First, Walmart figured out how much government assistance is available for "working poor". 

B)  Second, they pay the bare minimum to "bump up" that assistance to the level where their workers can afford the bare minimum combination of food/housing/clothing/medicine

 

This is a recipe for bubble profits!  It relies entirely on government aid to help them make payroll.

 

The way to fix it would be either:

 

1)  remove all government subsidies and wait for Walmart workers to begin dropping dead.  The free market will then begin to work once Walmart realizes that they need to pay their workers enough to keep them alive.  So that's obviously a very ugly path from a humanitarian standpoint.

 

... or instead ...

 

2)  raise the Federal minimum wage and phase out all of the subsidies for the "working poor".  It's called a "living wage", so live on it!  And yes, that includes getting rid of progressive taxation, because that's yet one more way that corporations are able to pay lower wages to the lower income strata of society.  In fact, the steeper the progressive taxation, the more income disparity you should expect.

 

The government subsidies consist of:

progressive tax rates

tax credits

low income housing programs

food stamps

etc...

 

All of those programs (combined with a low Federal minimum wage) lead to excessive profits at Walmart.

 

It's a bubble if the profits rely on government largess, and not on free market economics.

This is very off topic, but I'm pretty sure it isn't that easy. Not everybody is able to contribute enough to be worth a high minimum wage. I don't know if you ever visited a super market in for example the Netherlands, but you would probably be amazed at the relative low number of people working there (I was amazed at the high number of people working at Wallmart when I visited the US). When you raise the minimum wage you might also be forcing the less skilled into unemployment while they are replaced by technology and/or other alternatives (doing stuff yourself as a customer: no-one here in the Netherlands to pack your grocery bags...).

 

Go to Aldi if you want to feel at home.  We've got a range, from Whole Foods, where PHD candidates bag your groceries whilst reciting the entire supply chain of custody for each item, to Aldi where you get yo stuff yerself.  Also, w/r/t to the technology the self-scanners seem to need an intervention on the part of a human every other transaction.  When we get the cisco commercial with RFID on every product so you can just walk through a gate and pay without unloading and reloading, I will be enthused.  Of course I'm sure there will be loss prevention issues, which may or may not make that feasible in reality.

[writser]

Just to throw some fuel on the fire here.  For everyone who's saying there are no ideas out there, I just ran a screen on US stocks with a 5yr ROE greater than 20% that are debt free (there are 122) and I'm seeing 67 with P/E's less than 20x, 58 with a P/E less than 16, and 34 with P/E's under 10.  Maybe all of these companies are junk, I don't know, but I'm guess there are at least one or two good ideas in there.

 

My suspicion is that this is an ever changing list, if I ran the same screen next month it would probably have different results.  Just hunting off a list like this one could build a portfolio of high compounding companies.

 

Vulgar suggestions. We are not trying to make money here. We are predicting the future.  :P

[Guest 50centdollars]

Just to throw some fuel on the fire here.  For everyone who's saying there are no ideas out there, I just ran a screen on US stocks with a 5yr ROE greater than 20% that are debt free (there are 122) and I'm seeing 67 with P/E's less than 20x, 58 with a P/E less than 16, and 34 with P/E's under 10.  Maybe all of these companies are junk, I don't know, but I'm guess there are at least one or two good ideas in there.

 

My suspicion is that this is an ever changing list, if I ran the same screen next month it would probably have different results.  Just hunting off a list like this one could build a portfolio of high compounding companies.

 

Do you mind posting the list?

[writser]

Nate is probably using a different screener but this one lets your replicate the query:

 

http://markets.ft.com/screener/screenerResults.asp

[watsa_is_a_randian_hero]

Just to throw some fuel on the fire here.  For everyone who's saying there are no ideas out there, I just ran a screen on US stocks with a 5yr ROE greater than 20% that are debt free (there are 122) and I'm seeing 67 with P/E's less than 20x, 58 with a P/E less than 16, and 34 with P/E's under 10.  Maybe all of these companies are junk, I don't know, but I'm guess there are at least one or two good ideas in there.

 

My suspicion is that this is an ever changing list, if I ran the same screen next month it would probably have different results.  Just hunting off a list like this one could build a portfolio of high compounding companies.

 

I am seeing 213 companies with >20% ROE & <20 PE with US traded stock. 

 

A few large caps that fit the bill:

 

AAPL

MSFT

WMT

IBM

ORCL

UTX

MCD

BA

MO

DEO

LMT

ACN

 

I am using CapitalIq

[ERICOPOLY]

Just to throw some fuel on the fire here.  For everyone who's saying there are no ideas out there, I just ran a screen on US stocks with a 5yr ROE greater than 20% that are debt free (there are 122) and I'm seeing 67 with P/E's less than 20x, 58 with a P/E less than 16, and 34 with P/E's under 10.  Maybe all of these companies are junk, I don't know, but I'm guess there are at least one or two good ideas in there.

 

My suspicion is that this is an ever changing list, if I ran the same screen next month it would probably have different results.  Just hunting off a list like this one could build a portfolio of high compounding companies.

 

I am seeing 213 companies with >20% ROE & <20 PE with US traded stock. 

 

A few large caps that fit the bill:

 

AAPL

MSFT

WMT

IBM

ORCL

UTX

MCD

BA

MO

DEO

LMT

ACN

 

I am using CapitalIq

 

The screen is less meaningful when a large percentage of earnings are returned to shareholders.

 

For example, if 99% of earnings are returned, then only 1% are retained and theoretically compounded at the 20% ROE rate.

 

So I should think the screen could be tweaked to filter for this.

[ERICOPOLY]

Stated differently, do you make more money from company A or company B?

 

A:  10% ROE with 100% payout ratio

B:  20% ROE with 100% payout ratio

 

Given that you purchase either at identical P/E.

 

 

Okay, then change payout ratio to 0%.  It makes a world of difference.

[Liberty]

You could add ROIC metrics to the screen. A business with high enough ROIC could return a big part of its earnings and still do better than one that retains more but with a lower ROIC.