i'm not saying you or the models are wrong or that we aren't at the limits or outside the model, just that the .com bubble was built on complete and utter bullsh1t.
Posted on 08/06/2018 12:07:26 PM PDT by Wuli
"Here are the stock indicators with enviable track records - and the cautionary tale that they tell".
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"Bubble Flashbacks" "The only other time it was more bearsih (...since 1951...) was at the top of the internet stock market bubble".
[areas that are] "Overvalued by Almost Any Measure" "Ratio of S&P 500's current reading to average since 1954" "Household Equity Allocation" "Price/sales ratio" "Price/book ratio" "Q Ratio" "Buffet Indicator" "Dividend Yield" "Shiller P/E (CAPE)" "Price Earnings ratio"
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(Excerpt) Read more at wsj.com ...
Thank you.
“Have a enjoyable evening! And good luck...”
You too. No hard feelings.
Stock prices are high now.
The great depression low was higher than the earliest 20’s recession low? I didn’t know that.
Just out of curiosity, what % of your money is considered risk money?
The “case” has little directly to do with the “why”, as the data statistical history is neutral and reflected warning patterns seen in the market in previous cycles, warning sings that do not care about why the markets became over valued.
The case is the valuations themselves compared to those valuations in the market history. The history suggests that when those valuations get above the historical averages or even worse above historic highs - regardless of why - they are signalling over valued conditions.
Your suggestion is to me similar to the excuses made for the dot.com bubble - “the economy is different”. Well, the fact that the market was overvalued did not care one twit that “the economy was different”, the market was still over valued.
I understand your points, though I am not sure if they fully counter the trends that concerned the analysts in the WSJ article.
“Tax cuts are not monetary stimulus. Monetary stimulus is increasing the money supply, like the Obama Administration did with quantitative easing.”
Not only the Federal Reserve but the banking system itself - the way it operates, can increase the money supply. Why? It only has to have 10% of what it owes depositors in its reserves. A depositors account of $100 will still read that it has $100 dollars in it, even though the bank has loaned out $90 of those dollars to someone else. The bank has converted $100 to $190 dollars in the M2 money supply. That’s Ok when the M2 monetary supply grows with the economy, and not more than the economy.
Companies also have big bank deposits. And for many companies their cash herd has grown.
So it is no mystery that with the tax cuts and in spite of the Fed raising interest rates the GDP has grown about 5% since December 2016, while the M2 money supply has grown more than 6%. In other words the M2 money supply is growing faster then the GDP. That is monetary expansion, and as the Fed is off its stimulus now and increasing interest rates, that monetary expansion is not being caused by the Fed, but by the banking system itself; flush with more deposits especially from corporations; deposits loaned out with only 10% of the deposits in its reserves - more money out than what came in; monetary expansion.
“The Net Present Value of that additional stream of earnings should be incorporated into stock prices. The Cyclically Adjusted P/E itself, needs to be adjusted to this new baseline.”
First there is no “baseline”. The P/E is what the P/E is - share price versus earnings. Yet, I understand what you seem to suggest - that the current tax cuts mean that some semi-permanent rate at which earnings compared to share price ought to be expected to be “O.K.” ought to be higher than in the past. I think that expectation defies the long market history of charting the P/E through all the tax, Fed and economic changes for nearly a century. I think the reason for that is all affects of big changes (like tax Fed or other policies) and booms, depressions, recessions and growth play themselves out in time and the market settles into its historic norms once it stabilizes as neither too much of a bear or too much of a bull.
But whether your “adjustment” suggesttion happens or not will depend on whether or not expectations of continued growth in companies exceeds actual growth, boosting current overvalued shares even higher and instead of correcting the P/E ratios turn them even more skewed than they are now. You see that happen all the time in all kinds of markets - “good news” breeds excessive good news that everyone wants in on, and the run up to a head and shoulders condition begins.
“Government revenues have set records (they strongly tend to go up when taxes are cut, and this tax cut was particularly efficiently designed). Debt to GDP declined last quarter.”
Only slightly, and the rate of growth of government debt will require far more revenue growth than than the tax cuts will deliver. Why? Without some big spending & entitlement cuts, deficits will outpace revenue growth. The current federal debt to GDP ration is at 105% of GDP, not very far below its all time high in December 2016 and about 164% higher than where it stood in December 2008. The current economy has been handed debt levels it may not be able to grow us out of. The outlook is not favorable in that regard, without drastic federal spending and entitlement changes.
“The re-orientation of manufacturing supply chains back to the USA from China, can be as big of an effect as it was going the other way - and it can happen more quickly. A generational shift, compressed into 5-10 years.”
That is known as “reshoring” and it has not been seen as big at any macro level yet. Also, some analysts think that if consumer demand picks up it will remain more cost effective to boost the offshore supplies (in manufacturing) in order to keep pace with the higher demand, and that will nullify some boost in reshoring by some manufacturers. So, most market analysts are not betting on a lot of reshoring right now. If end of 2018 data shows a radical change, they could change their mind. The tarrifs are a factor in that and right now they are creating more uncertainty than immediate change, because it is clear that they are really a negotiating tactic for trade concessions with no certainty how long the tarrifs will last. There is a lot of wait and see going on, in reshoring as well.
Yes, you are right, on energy (fossil fuels). It is clear that sector is a bigger element in the domestic economy now with stability in that regard, and growth in exports from it, expected for the long term. That will keep more of our energy dollars in, and coming back into, the U.S. domestic economy. Right now the total energy sector is not greatly overvalued. However companies that are strictly in the sub-sector of just oil and gas production alone are presently above any bubble range, with a P/E for that subsector of about 95. That is not atypical, as that subsector is hit the most with boom or bust trends. It’s share prices follow the same boom and bust extremes of the work of that subsector, which is sensitive to global demand changes.
Tax cuts are not monetary stimulus - they are explicitly fiscal stimulus. No need for gymnastics.
Monetary stimuli are: Interest rate reduction, Reserve rate reduction, and Open market operations being net buyers of Government debt, or raising the interest rate on bank reserves.
The relationship between P/E, or CAPE P/E, (using trailing earnings), to gauge fair market value (which is rationally based on future earnings), is going to change when there is a change to expected future earnings.
If you want to judge the fair price, use the best estimate of earnings.
Higher expected earnings, higher price, same ratio. It is useless to wait ten years for historical data to accumulate with the new baseline (structural) level of profit reflected. Tax cuts are explicitly quantified, direct additions to earnings - they justify higher prices (which would look overvalued if using lower historical earnings).
It boils down to using trailing earnings vs. future earnings. Usually, future earnings projections are relatively unreliable, but tax cuts are a reliable (virtually unavoidable) effect. This is the year that change happens, and assessments of fair market value should rationally adapt.
“First there is no “baseline”.” P/E is a snapshot, CAPE (Cyclically Adjusted P/E) is based on the prior ten year baseline data.
%(100-age)
Here is the fly in the ointment which will hurt everybody, including the market. Good news is should be 3-5 years in future. In the meanwhile enjoy the party.
i'm not saying you or the models are wrong or that we aren't at the limits or outside the model, just that the .com bubble was built on complete and utter bullsh1t.
“i’m not saying you or the models are wrong or that we aren’t at the limits or outside the model, just that the .com bubble was built on complete and utter bullsh1t.”
You are not wrong. MY only point about the warning signs is that they were evident then, in the rise of the dot.com bubble, and smart investment people (like those doing the investments for my pension) noticed and they (and I) were not following the crowd. The warning signs then were not wrong, and they may not be now. THAT is my point about the “why” does not matter. If market history can be any judge of contemporary market behavior, it is at least good to consider it - no matter what causes are driving the contemporary market.
The “Internet Bubble” burst prematurely. It was growing, and would have been worse, but the truth was the Clinton regieme forced it to burst.
In June of 2000, the leftist persecution of Microsoft at the hands of those who literally bribed their way into a conviction caused the failure of the market that triggered the burst of the bubble.
Leading up to the persecution, Microsoft refused to use lobbyists. They felt it was unethical to do so. Their biggest competitors, the ones who stood to benefit most from their downfall, had lobbyists not only in Congress, but the Department of Justice!!! Justice in this case was not blind, but bought and paid for. Period.
Since then, Microsoft has played the government game better than anyone. They have lobbyists in all aspects of the federal government.
100%
“In June of 2000, the leftist persecution of Microsoft at the hands of those who literally bribed their way into a conviction caused the failure of the market that triggered the burst of the bubble.”
That was not it. Microsoft was not even at the peak of dot.com activity, and the antitrust suit had next to nothing to do with Micrsoft’s direct Internet BUSINESS.
The dot.com bubble burst because too many dollars were chasing fly-by-night dot.com outfits, as if any company getting in on the ground floor of the Internet was going to make it big. Stock valuations of hundreds of companies proved to be valuations of worthless shells in too many cases.
So, the market crashing and the start of the destruction of the overvalued stocks starting right at that point had nothing to do with the Microsoft verdict?
Seems coincidental that the April, 2000 “Findings of law” statement from the judge coincided with a huge crash and it just collapsed from there.
“Seems coincidental that the April, 2000 “Findings of law” statement from the judge coincided with a huge crash and it just collapsed from there.”’
It was coincidental. Quite a number of investment analysts were already exposing the bubble as a bubble. My pension fund’s chief investment officer was already citing it has the left side of a true “head and shoulders” condition poised to reach the head and fall down the right side.
Sellers getting smart hearing how very overvalued conditions were sought to get out before the crowd, which started the route.
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