1999 again?

[K2SO]

OK here's my contribution to the thought experiment here.

 

High inflation, low rates. Hugely negative real interest rates.

 

At this point, no private investor will buy bonds. The only buyer of the newly issued debt is the government, in the form of printed money.

 

They keep this up for any length of time, and hyperinflation results. I don't care if you're a reserve currency.. there is only so much money printing the system can bear.

 

In this scenario I want to own hard assets, including gold.  I also want to own companies with pricing power.

 

I also want to own global companies that can move assets and HQ around because at a certain point you need to worry about expropriation of their property.  In this case you prefer companies whose value lies in their intellectual property rather than buildings or mines (which kinda goes against the hard asset argument... not sure how to balance this).

 

[SharperDingaan]

The best, and most anti-fragile asset, is you - the IP in your head, and your remaining length of time in the workforce.

If inflation comes back - simply collectively withhold your labor until you are better rewarded. If the economy craters en-mass, there is little choice for the authorities other than mass stimulus (make-work projects, benefit reliefs, skills upgrading, etc.) - free money to go back to school, and upgrade. Put bluntly - you have a long straddle on the economy, and the more volatile the economy, the more the straddle is worth to you. Fortunately, very few realize that  ;)

 

SD

 

 

[mattee2264]

Also interesting that base metal prices such as copper and iron ore have not only fully recovered but are well above 2018 and 2019 lows. Also suggestive of currency devaluation from all the money printing.

 

I think modest inflation isn't going to worry central banks and will be somewhat helpful in easing the debt overhang from Covid-19. The danger of course is that historically inflation has a habit of getting out of control. But things are different from the 70s.

 

Firstly, there is a deflationary impact from COVID-19 for some time. Once it fades away and there is a meaningful economic recovery then the Fed will be able to raise rates and that is already priced in (10 year treasury yields below 1% but S&P 500 earnings yield still around 3-4%)

 

Secondly, cost-push inflation is unlikely to be a major worry. Wage pressure is very muted and unions aren't a big factor any more. We are also a lot less reliant on commodities.

 

Thirdly, there is massive inequality in society both at a corporate and individual level. Rich companies and individuals are saving not spending. Poor companies and individuals are having to operate on a shoestring.

 

 

[SharperDingaan]

A useful exercise is to download the Nymex WTI and Gold price history, from Mar-2020 onwards.

Set the gold price at the Apr-17 close (day before the WTI price collapse), and recalculate the WTI history after PTD debasement (using gold prices as the inflation proxy).

 

Adjusted WTI peaked at USD 39.70 on June-05, and has been in DECLINE ever since.

As at close of trading yesterday (Aug-07), the adjusted WTI price since June-05 is DOWN 14% - which implies that incremental demand is drawing down inventory. The unadjusted WTI price (Aug-07) since June-05 is UP 10% - a 24% price gap! 124% of adjusted WTI, as at close of business yesterday, was USD 42.57. The closing WTI price of USD 41.22, implies that the sizeable global inventory of oil is lowering price by roughly 3.2%.

 

Do the same thing with the leading economic commodities.

Very different views  ;)

 

SD

 

 

 

 

[UK]

https://www.bloomberg.com/news/articles/2020-08-11/a-1000-stock-jump-is-hong-kong-s-new-pro-democracy-rallying-cry

https://www.bloomberg.com/news/articles/2020-08-12/the-1-100-rally-in-lai-s-firm-slows-after-regulator-warning

 

Buying the stock has become a popular way for the city’s pro-democracy activists to show support for Lai following his arrest on Monday, along with snapping up copies of his Apple Daily newspaper.

[Seanzy]

Hasn't Warren Buffett talked about this? Didn't he say a good protection against inflation is a high quality company with pricing power such as Hersheys or Coca Cola that can increase its prices and pass on inflationary costs to the consumer, without needing to worry so much about a loss of demand? He even talked about how return on equity is positively affected by such companies during inflationary periods.

 

I think real estate has also done well historically, during periods of increasing interest rates. I remember seeing a chart about this, but I don't remember whether it was referring to real rates or nominal.

 

Also, regarding GDP, why has no one mentioned the possibility of wages increasing? I keep hearing about inflation over and over in forums and on the news, but there is no mention of possible wage growth.

 

Big companies and employers are more efficient now than ever. They have been reporting pretty decent earnings. Couldn't it be the case that many companies start increasing the wages of their employees over the next few years? Wouldn't this contribute to higher GDP, and to a gradual lowering of the Warren Buffett indicator (ratio of Wilshire 5000 to GDP), which is bound to mean revert? 

 

I am trying to figure out if our economy is a bubble about to burst, or if we are undergoing what Ray Dalio refers to as a "beautiful deleveraging", where fiscal austerity, debt monetization, wealth redistribution, and fiscal policy all contribute to gradually combat the long-term, secular decline that we seem to be undergoing right now.

 

I believe consumers are experiencing inflation, whatever the numbers say, at least in terms of cost of living increases. Have you gone to the grocery store lately? Prices are higher than they were 6 months and one year ago. Shouldn't wages be increasing soon? Employees will start demanding them. There is evidence to support this here:

https://tradingeconomics.com/united-states/wage-growth

 

Maybe the Fed knows what it's doing, and that we should all have some faith that things will be okay. Also, bitcoin lol. Don't get me started.

 

 

[Castanza]

Hasn't Warren Buffett has talked about this? Didn't he say a good protection against inflation is a high quality company with pricing power such as Hersheys or Coca Cola that can increase its prices and pass on inflationary costs to the consumer, without needing to worry so much about a loss of demand? He even talked about how return on equity is positively affected by such companies during inflationary periods.

 

I think real estate has also done well historically, during periods of increasing interest rates. I remember seeing a chart about this, but I don't remember whether it was referring to real rates or nominal.

 

Also, regarding GDP, why has no one mentioned the possibility of wages increasing? I keep hearing about inflation over and over in forums and on the news, but there is no mention of possible wage growth.

 

Big companies and employers are more efficient now than ever. They have been reporting pretty decent earnings. Couldn't it be the case that many companies start increasing the wages of their employees over the next few years? Wouldn't this contribute to higher GDP, and to a gradual lowering of the Warren Buffett indicator (ratio of Wilshire 5000 to GDP), which is bound to mean revert? 

 

I am trying to figure out if our economy is a bubble about to burst, or if we are undergoing what Ray Dalio refers to as a "beautiful deleveraging", where fiscal austerity, debt monetization, wealth redistribution, and fiscal policy all contribute to gradually combat the long-term, secular decline that we seem to be undergoing right now.

 

I believe consumers are experiencing inflation, whatever the numbers say, at least in terms of cost of living increases. Have you gone to the grocery store lately? Prices are higher than they were 6 months and one year ago. Shouldn't wages be increasing soon? Employees will start demanding them. There is evidence to support this here:

https://tradingeconomics.com/united-states/wage-growth

 

Maybe the Fed knows what it's doing, and that we should all have some faith that things will be okay. Also, bitcoin lol. Don't get me started.

 

Grocery store price increases aren't necessarily due to inflation. I think they can be more attributed to a lack of production in the meat slaughterhouses and produce farms. Also price gouging to prevent hording is also an aspect. It probably would be better to watch prices on consumer goods that are not "necessary". You very well may find inflation there, but I cannot speak to that.

[mattee2264]

Problem is that most of the companies with the desirable features you mention (pricing power, low capital intensity etc) are very expensive and in general inflationary periods are associated with multiple compression. There were some very good companies in the Nifty Fifty and they weren't immune from the carnage caused by all the inflation in the 70s. So you would want to make sure that earnings growth can offset that multiple compression to some extent.

 

 

[stahleyp]

Can someone who thinks this is 1999 all over again give me a date on which they'll say they're wrong if we don't have a 50% decline?

[wescobrk]

Didn't we get to 44 on the P/E back in 99 on the S&P? Today I think we are in the mid 20's and zero interest rates. We could go up another 50% if it is like the late 90's.

[TwoCitiesCapital]

 

Hasn't Warren Buffett has talked about this? Didn't he say a good protection against inflation is a high quality company with pricing power such as Hersheys or Coca Cola that can increase its prices and pass on inflationary costs to the consumer, without needing to worry so much about a loss of demand? He even talked about how return on equity is positively affected by such companies during inflationary periods.

 

I think real estate has also done well historically, during periods of increasing interest rates. I remember seeing a chart about this, but I don't remember whether it was referring to real rates or nominal.

 

Also, regarding GDP, why has no one mentioned the possibility of wages increasing? I keep hearing about inflation over and over in forums and on the news, but there is no mention of possible wage growth.

 

Big companies and employers are more efficient now than ever. They have been reporting pretty decent earnings. Couldn't it be the case that many companies start increasing the wages of their employees over the next few years? Wouldn't this contribute to higher GDP, and to a gradual lowering of the Warren Buffett indicator (ratio of Wilshire 5000 to GDP), which is bound to mean revert? 

 

I am trying to figure out if our economy is a bubble about to burst, or if we are undergoing what Ray Dalio refers to as a "beautiful deleveraging", where fiscal austerity, debt monetization, wealth redistribution, and fiscal policy all contribute to gradually combat the long-term, secular decline that we seem to be undergoing right now.

 

I believe consumers are experiencing inflation, whatever the numbers say, at least in terms of cost of living increases. Have you gone to the grocery store lately? Prices are higher than they were 6 months and one year ago. Shouldn't wages be increasing soon? Employees will start demanding them. There is evidence to support this here:

https://tradingeconomics.com/united-states/wage-growth

 

Maybe the Fed knows what it's doing, and that we should all have some faith that things will be okay. Also, bitcoin lol. Don't get me started.

 

Problem is that most of the companies with the desirable features you mention (pricing power, low capital intensity etc) are very expensive and in general inflationary periods are associated with multiple compression. There were some very good companies in the Nifty Fifty and they weren't immune from the carnage caused by all the inflation in the 70s. So you would want to make sure that earnings growth can offset that multiple compression to some extent.

 

+1

 

It's all about the price you pay. KOs stock is basically up 20% since the late 90s. Of course there is the dividend, but the real return of a 30-year period of excessive spending and asset inflation left much to be desired because it was FAR too expensive in the 90s.

 

Methinks we'll see the same with today's "quality" investments.

 

Didn't we get to 44 on the P/E back in 99 on the S&P? Today I think we are in the mid 20's and zero interest rates. We could go up another 50% if it is like the late 90's.

 

Mid-20s on fictitious earnings. Mid 30s on actual trailing 12-month earnings.

 

[UK]

Didn't we get to 44 on the P/E back in 99 on the S&P? Today I think we are in the mid 20's and zero interest rates. We could go up another 50% if it is like the late 90's.

 

more like 100%:)

 

[Casey]

New Fed policy is that it will be 1999 again for the next 5 years.

[fareastwarriors]

U.S. tech stocks are now worth more than the entire European stock market

 

 

 

https://www.cnbc.com/2020/08/28/us-tech-stocks-are-now-worth-more-than-the-entire-european-stock-market.html

 

U.S. tech stocks were now more valuable by market cap than the entire European market, according to Bank of America.

 

The European market was four times larger than U.S. tech in 2007, according to the note.

[scorpioncapital]

Problem is that most of the companies with the desirable features you mention (pricing power, low capital intensity etc) are very expensive and in general inflationary periods are associated with multiple compression. There were some very good companies in the Nifty Fifty and they weren't immune from the carnage caused by all the inflation in the 70s. So you would want to make sure that earnings growth can offset that multiple compression to some extent.

 

Any idea how value stocks, cheap stocks and inflation oriented stocks like financials, reits, hard assets did in the 1970's inflation?

 

 

[fareastwarriors]

Softbank identified as ‘Nasdaq whale’ buyer of billions in options, juicing tech rally before drop

 

https://www.cnbc.com/2020/09/04/softbank-reportedly-the-nasdaq-whale-that-bought-billions-in-options.html

[Cigarbutt]

From morningstar:

"By contrast, U.S. equity funds lost $24 billion to outflows in June. While that wasn't as bad as May's

record outflow of $30 billion, it pushed quarterly redemptions to a $72 billion record, surpassing the

previous record of $55 billion set in 2009's first quarter."

Not exactly euphoria.

Who knows but there may be an element of rebalancing. From the lows in 2009 to now, investor allocation to equities went from about 30-35% to 50-55%. From an overall perspective (i spent only a short time on data and the full Morningstar report) the net outflows in Q2 represent around 1 to 1.3% of the increase in value of listed us equities. So investors, in the aggregate, retained about 99% of the rise in market value into the equity market.

FWIW, some expect that baby boomers (who have had lately a historically high exposure to stocks) will eventually become net sellers and maybe they will have an opportunity to unload in a Robinhood market.

Not to be used as a timing tool because this time may be different but the last times that investor allocation to equities was in this high range: around 1970, around 2007 and around 1999. (?)

Fair points.  Where are you seeing investor allocation to equities? The AAII data only goes back to 1987?

Just in case there is some residual interest. This is not an effective timing tool (retail sentiment) but it's interesting to think about who's on the other side of transaction and there are potential conceptual links with the 1999 period.

From Morningstar:

https://www.morningstar.com/articles/1001907/the-fund-flows-indicator-is-behaving-strangely

https://www.morningstar.com/articles/1001536/us-fund-flows-batter-equity-funds-in-august

Here's another similar perspective:

 

 

i guess the very bright and qualified authors could be questioned using a forest-from-the-trees argument.

They are missing the big picture as their numbers showing what appears to be retail investors leaving in droves is simply reflecting the overall difficulty in keeping up with capital allocation given the incessant (with some volatility) rise in market value of marketable equity securities. There are many ways to use 'official' data to compute this and the author of the next graph has chosen one method which is absolutely different from many others but which, relatively, shows that we're back to 1999, in a way. One way to 'explain' (there are many) is that retail investors and households are, once again, being able to 'see' the value in stocks that hasn't been recognized by the real economy.

 

 

It's a great time to be alive (overall) and the future looks bright (mostly) but part of me wished that, as an investor, i'd have come of age in the early 70's.

[stahleyp]

Where is Hubert getting his data? Or should I say Ned Davis?

 

Look at equality allocation (red) in 2000 - coming in at over 60%.

 

Philosophical Economics has it around 52% or so.

 

 

[Cigarbutt]

^The important part is to have consistent methodology.

Mr. Hulbert's data seems to include direct and indirect ownership.

One can use data from the Federal Reserve Financial Accounts but you have to decide what to include. Some items are straightforward ie direct holdings of corporate and listed equities. You have to decide if indirect ownership through pension assets needs to be accounted for and it can tricky with 'balanced' funds which contain a variable percentage of equity exposure.

Some of these findings come from well done consumer surveys but this would tend to be less precise (although possibly accurate).

On top of that, you may want to adjust for other demographic factors. The US is getting older: median age in 1990:32.9, 2000:35.3 and 2019:38.4. Also, you may want to remember (or ignore) that stock ownership (especially since 1999) is becoming more concentrated in the top 10% and the top 10% of that 10%. Since the GFC, stock ownership (along age and income profile) has significantly decreased for all groups unless you're 65+ or make more than 100K a year. Interestingly(?), in 1999, the middle class held about 25% more wealth than the top 1% and now the top 1% holds 50% more wealth than the middle class (the numbers reported here also involve some reasonable methodological choices about definitions etc). i don't really care about this last part now but i wonder if this has future implications when we-the people eventually start to claim their share of the we-1%.

[mattee2264]

https://www.pzena.com/third-quarter-2020-commentary/

 

Pzena draws an interesting parallel in his 3Q20 commentary. The gist is that value outperforms growth after a recession and after a long long wait we've finally got one.

 

 

[fareastwarriors]

Greenlight Capital's David Einhorn just called the top in stocks and gave 10 reasons tech is in a bubble

 

https://markets.businessinsider.com/news/stocks/stock-market-outlook-top-call-einhorn-signs-technology-bubble-letter-2020-10-1029728846#

[Gregmal]

David is disqualified from being taken seriously. Been wrong for too long. Although perhaps finally, finally, he may be on to something. I noticed the same thing on 9/2.

[Spekulatius]

Greenlight Capital's David Einhorn just called the top in stocks and gave 10 reasons tech is in a bubble

 

https://markets.businessinsider.com/news/stocks/stock-market-outlook-top-call-einhorn-signs-technology-bubble-letter-2020-10-1029728846#

 

If someone gives you 10 reasons for something, he came up with the thesis first and the reasons later.

[wescobrk]

Anyone shorting today? If so, care to share any ideas?

[Spekulatius]

Most traded stocks in Europe - Nov 2020 from Degiro:

https://www.degiro.ie/knowledge/blog/most-traded-stocks-november-2020

 

Tesla has been tops for a while in many countries. Derigo publishes this monthly.