Secular Bull?

[premfan]

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

 

Gio,

 

If the market is going nowhere for ten years where should capital flow to?  Knowing that capital has to flow somewhere where would you recommend?

 

 

[blainehodder]

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

 

Gio,

 

If the market is going nowhere for ten years where should capital flow to?  Knowing that capital has to flow somewhere where would you recommend?

 

Much like how not all stocks in the US are expensive, not every country's broad index is expensive.

[giofranchi]

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

 

No, no! I still hold a basket of short positions, but that is no more than 8% my firm’s capital. FFH is around 30%, I hold no Gold, and cash is around 20%. As I have said, I possess other means to make money than the stock market, and my firm’s equity is up 20% YTD.

 

Its totally useless because my holdings are undervalued.

 

If I may ask: how old are you?

 

 

Gio

[giofranchi]

Gio,

 

If the market is going nowhere for ten years where should capital flow to?  Knowing that capital has to flow somewhere where would you recommend?

 

Well, this is a good question, to which I ignore the answer.

Where did the capital flow from 1964 until 1981? Where did it flow from 1999 until 2009? Into bonds? Maybe from 1999 until 2009, but certainly not from 1964 until 1981!

I don’t know the answer… but I do know that earnings must very much surprise on the upside, for the general market to deliver other than dismal results during the 10 years ahead… And I just don’t see how… If you are not a fan of profit margins reverse to the mean, think about sales: profits have soared since 2009, while sales have stagnated… In my businesses I have experienced many times that is not sustainable. If it is not sustainable for me, I don’t see why it should be sustainable for others.

 

Gio

 

[giofranchi]

50 to 51…

Ok, I would like 50 people to read the latest letter by Mr. Hussman, and counterargument with historical data that are as precise as the ones presented by Mr. Hussman.

This thread is not a discussion about the “usefulness” of what Mr. Hussman does. In other words, it is not a discussion about the usefulness of general market action. Instead, it is a discussion about whether we are in a new secular bull, or the last half cycle of the secular bear is still to be concluded.

To date I have seen no argument pertaining the subject of this thread, which is more rigorous, steeped in data, and therefore convincing, than Mr. Hussman’s.

Anyway, if one of those 50 people thinks he/she knows how to be more convincing than Mr. Hussman, I would very gladly listen to him/her! :)

 

Cheers,

 

Gio

An-Open-Letter-to-the-FOMC-Rcognizing-the-Valuation-Bubble-In-Equities.pdf

[CorpRaider]

All I know about Hussman is that if we have a couple more up years, he might be "retired".

[bmichaud]

He has been fully hedged since 1100 in the 2011 euro crisis. You cannot take him seriously. Think the Fed is reading his "open letter"? Hahahah

[giofranchi]

All I know about Hussman is that if we have a couple more up years, he might be "retired".

 

Well, I agree. But that is not what I think the subject of this thread is all about. I haven’t started this thread, therefore I might be wrong. Maybe bmichaud could clarify what the question he has asked is truly about.

 

What I know is that to read and comment historical data correctly, and to devise an effective investment strategy are two very different things. Therefore, you cannot judge the content of Mr. Hussman’s latest letter, simply by saying: “He is not a good investor.”

 

Gio

 

[racemize]

Well, speaking for me personally, I'm just not sure I care about the labels of what period we are in.  When I attempted to answer this question, I had to go look up the definitions to determine what the question even meant, so I'm sure my answer is mostly useless.  Or said another way, I think it could be either, and we will have to wait a while to find out.  Given the 50-50 split, it seems clear that the answer isn't clear! 

 

Gio and I have already discussed this some, but, in my opinion, forecasts are only useful if 1) they are accurate and have been accurate repeatedly (most fail at this point) and 2) if you can actually act on them and outperform the market.  I am unconvinced that these 10 year predictions fulfill 1) or 2) above.  It would seem to me that you would have to skip entire decade periods to act on them--if you have a shorter period (i.e., you are unwilling to wait for 5-10 years in the sidelines, while inflation/opportunity cost eats away), then they do not seem useful.  Has there been any studies where these long term predictors would have outperformed the market if you acted on them?  e.g., where an investor only bought when the 10 year prediction was high and stayed out at other times?  Perhaps there is.  Let's take CAPE/Shiller PE--what level is the buy area?  If it is below 15, then one wouldn't have been in stocks from 1987-current.  Perhaps that will have been correct, but we have to recognize that that level of patience is pretty incredible and 2009 appears to only have touched 15 (perhaps because of data point averaging though).  There were certainly bargains during that period (the easy answer and out).

 

Saying all that yet another way--how do we use these predictions to outperform the market?  This is a genuine question--if you have an answer, has it been verified with data?

 

Moreover, with respect to corporate margins, both Buffett and Marks are somewhat ambivalent on this subject, so to me, that means it isn't as obvious as Hussman makes it out to be.  e.g., consider Marks' response to the question where he indicates that it will come down when more capital is spent on growth, as opposed to the relentless focus on cost cutting.  When that happens, the margin shrinkage would be offset with the results of the growth spending.  This seems reasonable to me (and also why stock price growth probably won't be particularly high, since revenue gorwth may be offset with margin compression).

 

Edit: here is a link to Shiller PE for readers:

http://www.multpl.com/shiller-pe/

 

 

[giofranchi]

Joel,

I agree with all you have said.

Once again, though, I don’t think it answers the question which is the title of this thread. Let’s put it this way: ok, I agree it is not a really useful question (sorry bmichaud! ;D ;D), yet a lot of people have provided an answer… If you had to answer only to useful question, life would be somewhat boring, wouldn’t it?! ;D Therefore, I simply want to know on which basis, or on which historical evidence, people came to a different conclusion, than the one Mr. Hussman, the worst investor in the whole wide universe! ;), keeps providing us.

Because, I just cannot find better historical data!

For instance, Mr. Hussman shows the correlation between 3-yr chg in govt + personal savings as % of GDP and 3-yr annual growth in corporate profits. And he says from 1950 until 2013 this is what has happened. Period. Instead, you reason on why the future might be different… And this is what I’d like to know: those 50 people have based their vote on more accurate and more reliable historical data than Mr. Hussman’s, or have they based their vote on some reasoning that justifies why the future might be different from the past?

 

Gio

 

[ERICOPOLY]

Can't Hussman invest in areas that aren't showing record profit margins, like banks and insurance companies?  Are the interest payments on bonds that an insurer counts as income... are they too high from a historical standpoint?

 

His argument sounds like that of a young man who refuses to date women because (due to the aging baby boomers), demographically women are older than they used to be and he only wants a young woman.

 

For example, he brings up bank insolvency again but those worries are long past.  I think he is trying to justify why he didn't buy the market bottom and of course, it wasn't because he was wrong that the market rallied, it's because of an accounting fraud.  You missed the bottom, quit whining baby!  There were lots of bargains to choose from -- you didn't need to stay away simply because of banking insolvency.

[giofranchi]

You missed the bottom, quit whining baby! 

 

Also this is not fair! He has repeatedly admitted he missed the bottom! Yet, he has also explained why he missed it, and why that has nothing to do with what historical data are suggesting right now.

I am not asking for further evidence that Mr. Hussman is the worst investor in the whole wide universe… ;D ;D There is already plenty of that!! ;)

Instead, I am asking of some evidence that the historical data he keeps on displaying are flawed!

 

Gio

 

[frommi]

If I may ask: how old are you?

 

I am your age, happily married and owner of a small software-consulting-company. Half of your networth.

 

 

Well, this is a good question, to which I ignore the answer.

Where did the capital flow from 1964 until 1981? Where did it flow from 1999 until 2009? Into bonds? Maybe from 1999 until 2009, but certainly not from 1964 until 1981!

I don’t know the answer… but I do know that earnings must very much surprise on the upside, for the general market to deliver other than dismal results during the 10 years ahead… And I just don’t see how… If you are not a fan of profit margins reverse to the mean, think about sales: profits have soared since 2009, while sales have stagnated… In my businesses I have experienced many times that is not sustainable. If it is not sustainable for me, I don’t see why it should be sustainable for others.

 

 

In the years mentioned capital flowed into gold, because of negative real cash yields. For money there is currently no real alternative asset class to stocks, cash looses to inflation, gold is above its inflation adjusted average price and bond yields are much too low to be an alternative.

But the thing is, when you invest bottom-up and not top-down every piece of macro information is noise in the wind. Look at 1999 when the market was really overvalued, from 2000-2002 cheap stocks outperformed the market big time, so it is probably very good for cheap stocks if the broad market is really overvalued. :)

 

[ERICOPOLY]

 

Instead, I am asking of some evidence that the historical data he keeps on displaying are flawed!

 

Gio

 

One thing he takes for granted is that today's profit margins are due to government and private sector deficits.

 

So I have a two-part question:

 

Are government deficits going to shrink in the decades to come?

How high are private sector deficits today?

 

 

I read his paper, and I am left with the impression that he is saying the rising deficits led to the rising profit margins.  So what if the government deficit keeps getting bigger?

[giofranchi]

But the thing is, when you invest bottom-up and not top-down every piece of macro information is noise in the wind. Look at 1999 when the market was really overvalued, from 2000-2002 cheap stocks outperformed the market big time, so it is probably very good for cheap stocks if the broad market is really overvalued. :)

 

My problem with that is you must be a very rational judge of business value, not to make mistakes in an overvalued market… That’s why I think you are right… provided you are as good as Eric or Packer! And you might certainly be! I surely don’t know... Given your age, you have invested through 2008, and given you confidence, you most probably have done really well!

I know I am not as good as that. Even my conviction in the true worth of my own companies is… well, a bit shaky!! ;D ;D Let alone my conviction about listed companies, that I will never know everything about.

Therefore, I want Mr. Marks’ pendulum to help me a little bit: I want to pay attention to what other people are doing. And when they seem to be overly optimistic, I want to be a bit more cautious.

 

Gio

 

[giofranchi]

I read his paper, and I am left with the impression that he is saying the rising deficits led to the rising profit margins.  So what if the government deficit keeps getting bigger?

 

This is a very good question and the answer is: profit margins will keep getting higher! ;)

 

But this doesn't invalidate Mr. Hussman's historical data. Which is what I am trying to do!

 

Gio

 

[ERICOPOLY]

I read his paper, and I am left with the impression that he is saying the rising deficits led to the rising profit margins.  So what if the government deficit keeps getting bigger?

 

This is a very good question and the answer is: profit margins will keep getting higher! ;)

 

But this doesn't invalidate Mr. Hussman's historical data. Which is what I am trying to do!

 

Gio

 

 

I think his correlation might just be completely full of shit.

 

Does Japan have record profit margins?

 

[Kiltacular]

I read his paper, and I am left with the impression that he is saying the rising deficits led to the rising profit margins.  So what if the government deficit keeps getting bigger?

 

This is a very good question and the answer is: profit margins will keep getting higher! ;)

 

But this doesn't invalidate Mr. Hussman's historical data. Which is what I am trying to do!

 

Gio

 

 

I think his correlation might just be completely full of shit.

 

Does Japan have record profit margins?

 

http://boards.fool.com/the-most-recent-personal-savings-rate-just-came-in-30965776.aspx

 

 

[giofranchi]

I think his correlation might just be completely full of shit.

 

When I say, does someone have better data?, I mean: can someone post a graph that goes back to 1950 and disprove the one on page 5 of 14?

Because I have never seen one!

Same with the Price / Revenue ratio, and with the Market Cap / nominal GDP ratio.

 

Gio

 

[giofranchi]

http://boards.fool.com/the-most-recent-personal-savings-rate-just-came-in-30965776.aspx

 

Thank you! This is a good argument! (Although the author himself doesn’t seem to be so convinced of the fact profit margins will stay this high…)

What about the Price / Revenue ratio, and the Market Cap / nominal GDP ratio?

 

Gio

 

[frommi]

My problem with that is you must be a very rational judge of business value, not to make mistakes in an overvalued market… That’s why I think you are right… provided you are as good as Eric or Packer!

 

No they are in their own league.  :)

[ERICOPOLY]

I read his paper, and I am left with the impression that he is saying the rising deficits led to the rising profit margins.  So what if the government deficit keeps getting bigger?

 

This is a very good question and the answer is: profit margins will keep getting higher! ;)

 

But this doesn't invalidate Mr. Hussman's historical data. Which is what I am trying to do!

 

Gio

 

 

I think his correlation might just be completely full of shit.

 

Does Japan have record profit margins?

 

http://boards.fool.com/the-most-recent-personal-savings-rate-just-came-in-30965776.aspx

 

 

Thanks.  The first few sentences say it all:

 

The most recent personal savings rate just came in at +4.9%. The government deficit as a % of GDP in 2013 is expected to come in at -3.9%. This thread was partly about Hussman's claim in 2012 and again earlier this year, that the sum of these two rates determined, by accounting identity, the corporate profit rate.

[hyten1]

giofranchi, regarding the chart on page 5, sorry for my novice questions:

 

- i assume the GDP and profit are for US companies?

- i assume profit from overseas are included?

- i have never see anyone answer this. since companies are more global know how do you take into account the profit from oversea along with GDP's from other countries? I don't know how all these work out to. Even munger/buffett mention the profit/gdp ratio is not as useful as its use to be

- the idea of reversion to the mean (isn't this why hussman is concern). what if this time is different (i know i know the this time is different talk, i am just raising it, because it is a possibility no matter how low), considering the HUGE increase in labor supply from the world (which reduce cost and increase profit etc.)

 

i honestly don't know the answer, i just keep looking for undervalue situations.

 

hy

[giofranchi]

- i assume profit from overseas are included?

- i have never see anyone answer this. since companies are more global know how do you take into account the profit from oversea along with GDP's from other countries?

 

I think Mr. Hussman answers your question right beneath the chart on page 5.

 

i honestly don't know the answer

 

I am not looking for the answer… I believe nobody knows… I am just curious to know if those historical data presented by Mr. Hussman are right, or flawed. That’s all.

 

i just keep looking for undervalue situations.

 

Then, I guess you have not answered if we are in a new secular bull! ;)

 

Gio

[ERICOPOLY]

When I say, does someone have better data?, I mean: can someone post a graph that goes back to 1950 and disprove the one on page 5 of 14?

 

"disprove" is an interesting request.  Has anything in fact been proved by that graph?

 

One thing it doesn't account for is the supply of labor and presence/absence of wage pressure.

 

Which period in that graph going back to 1950 has a labor market similar to today's?