Maybe, but with infinite QE and near zero interest rates until 2023 at least, the market will likely continue to pay a premium for growth. If you picked low P/E stocks over the last 20 years, your portfolio would have done worse than a portfolio of high P/E stocks. For instance, Blockbuster and Netflix were trading during the same period and Blockbuster had a lower P/E, but obviously Netflix was the better investment. Same thing with Ford and Tesla.
There is no infinite QE. It is dependent on confidence in the value of the currency, which has been decreasing by a number of metrics, although we can certainly argue about the rate of decline. Not a rebuttal to your overall point, but worth paying attention to.
As holders of Zimbabwean trillion-dollar notes will attest, governments can and will keep printing money even after complete loss of confidence, and in a hyperinflationary situation you're much better off holding shares than cash. (Of course, you're even better holding hard currency.)
That said, by most measures the current crisis has to date been deflationary. I expect that to change at some point, but I'll also readily admit I did not foresee the current market rally, so who knows what the market will do tomorrow.
"but I'll also readily admit I did not foresee the current market rally"
Given you didn't see that, have you considered that your view of Zimbabwe might be wrong? Nothing to do with confidence and everything to do with a silly policy to redistribute land to people that can't farm.
QE doesn't give money away for free does it. It is always an asset purchase. That is a qualitative difference.
Similarly a bad pilot doesn't mean heavier than air flight is impossible. You just need a better pilot.
The fed can do what they are doing because the dollar has safe haven status. When things get bad globally, capital flows into the dollar not out of it. If any other country (except perhaps Japan) tried to do what the fed does they would probably end up like Zimbabwe no matter how good their pilot. Currencies have got in the shit for a lot less.
So, the fed can do it because is special. Japan can do it because is special, the Central European Bank can do it because it's special and the British can do it because they are special. Not only that, but they can do it all at the same time.
At some point, a theory with more exceptions than the opposite should be considered useless.
Specially when there is a clear alternative: inflation happens when the spending in the economy surpass the capacity of the economy. Than can happen because the government and the private sector spend too much (bubbles) or because the supply side collapse (hyperinflation in Zimbabwe).
The most that can happen is that there is no saving of the Baht or the Rand outside the taxation area of those currencies. Assuming they are fully floating.
In which case the central bank will be doing nothing other than offsetting the domestic savings in the currency of issue. Because sector balances have to balance.
The concept of "reserve" is utterly flawed. People hold balances of all sorts of currencies for very many reasons - largely working capital, but also for insurance and for prestige.
Arguably as most Japan treasuries are owned by the Japanese themselves, and carry 0% interest, we can consider that the debt has already been repaid. That's apparently what Warren Buffet thinks.
No, the reality is quite boring. The additional central bank money is just pooling up somewhere, never reaching the hands of consumers. If you give consumers money directly you're going to see inflation instantaneously. Central banks are trying to hammer a screw into a wall. It just doesn't work. That's why all central banks in all countries fail equally.
Hyperinflation in Zimbabwe happened because the government printed money that wasn't backed by anything meaningful. (What started the Zim economic crisis is a different question).
But here's the trillion dollar question: if QE consists of printing money and buying hugely inflated tech stocks of dubious value, then is there really a qualitative difference?
If hyperinflation ends up happening the central bank can just sell its stocks and thereby reduce the amount of money in circulation. It's entirely risk free.
Over the past 10 years or so Zimbabwean trillion dollar notes have outperformed the stock market with an annualized investment return of ~70%. They're so valuable that there's a huge counterfeit market.
The Zim dollar ceased to be legal currency in 2009, they're purely collectible now and the value is rising because they're not making any more of them. (Maybe they should?)
There is. The central bank can offset all the excess saving in the economy from now until doomsday. As Japan has shown for decades.
Once you close the mental model you'll see why. What does "confidence in the currency" mean in reality? It means that fewer people want to save in that denomination. When they don't save they have to spend (since that is the only alternative in aggregate), when they spend that generates asset inflation, production and, most importantly, more and more tax points - which reduces the need for bonds and "QE" in the first place.
Always remember that an FX transaction is nothing more than a set of two contracts each of which transfer a currency to the other party no less than two days hence. Which means eventually somebody has to have the actual liquidity to settle the net flow. There is no liquidity provider of last resort.
When people start telling you there is a new normal, this is a new paradigm, you just don't understand these new companies, x style of investing is dead, you know a reset is coming.
The phrase "Value investing is dead" is a decades-old inside joke. One can google it. Value & growth strategies oscillate. When then persist in one state too long people who haven't been around as long (or who are selling something) make grandiose proclamations. It's a fundamental reality related as much to the business cycle as it is to the human condition/psychological cycle of investment.
An investment is worth the value of its future cash flows discounted by the risk free rate (plus terminal value). That's it, it's all that 90% of people need to know. There are many, many unknowns in that statement, which makes it a market.
If you have a point, make it. Otherwise I am a more established member of this community than you are on every metric, and have just as much publicly identifiable information in my profile.
Haha why? I'd much rather be wrong and miss out on some gains for a year than loose a bunch like I did in 2008 with this mentality. Pandemic damage is certainly not priced in.
Right, but that's not what's happening. Value spreads, the difference in price between the most expensive stocks and the cheapest stocks, are at all-time highs.
So the opposite is true: very few people are value investors these days. Possibly in part because value has under-performed over the last 10-15 years. Will the trend reverse? Who knows.
Yes, that’s the easy and obvious answer. The hard question: where do you park that money? People are investing in tech stocks because everything else is so uncertain right now.
I paid off my 25 years remaining mortgage after selling some long-held TSLA, because I really didn't know where else to put it, especially with the election uncertainty coming up. I feel a little bit cowardly doing this, but I'm in tech and aapl/amzn/goog is a fair chunk of my portfolio and don't want to put even more of my eggs in one basket.
That seems to be a value that would be valid for a different era. I am not sure whether we can go by those same numbers for the current market environment (especially after the QE starting from 2008/09).
I absolutely search and buy the former... there is only so much growth Tesla can realistically sustain... and currently it's "not any more". Same for all of the Big Tech.
Give me Rio Tinto and I buy it any day.
No, not really. A high PE ratio just means investors are expecting the company to grow. I probably wouldn't buy TSLA, but 25 isn't some magic number which means the stock is overpriced otherwise people who "know what they are doing" would short anything with a PE ratio higher than 25.
It's been a long time but I remember one explanation of the value premium was value stocks are more likely to get wiped out in a crisis (no free lunch).
Another was that high commission costs would have eaten up all the gains in actually maintaining a value portfolio. Apparently there's a lot of churn in and out of value.
By many measures tech stocks have not been this overvalued since 1999. Similar situation. COVID + staying at home + government stimulus means there's a lot of money sloshing around. Tech companies are relatively unaffected by pandemic so all this money ends up there.
Lots of general public getting in on the market just like 99. Senseless valuations on companies without a dollar of revenue. A historic year for tech stocks right after a historically long bull run, just like 99. Many allegations of fraud since money is so easy to get. Tech stocks make up something crazy like 30% of value in market, again just like 99.
If tech isn't in a bubble, I don't know what's going on. How does virtually every tech company become twice as valuable in 6 months? They don't.
Unlike last time, most of these companies won't crash to zero. But they could easily lose 2/3 of the value as soon as life goes back to normal and everyone sees how much damage corona has done. The relatively fast early recovery has the markets in a state of euphoria.
I moved all my money to "value" stocks last week. These tech valuations defy all logic. Remember when Buffet said to be fearful when others are greedy? Well right now he's investing out in Japan
Look at PE ratios, percent of non-professional investors in the market, average valuation of tech companies at age X, percent of stock market value in tech, length of current bull market, stock performance vs economic growth. There's so many metrics pointing towards a bubble, and not many that don't.
Of course not everyone believes it, which is why market is so high. And I'm an admitted skeptic that's shorting this market so take that how you will. You will find some mainstream investors calling the market a bubble which is not really normal. All bubbles are obvious in retrospect, and even many investors that think we're in a bubble will join the frenzy assuming they won't be left holding the cards.
The consistent growth tech companies like Amazon are able to maintain is INSANE. They're continuing to grow at a staggering rate despite their already massive size.
There's also almost half the world that doesn't even use the internet in any meaningful capacity. There's a lot of growth left.
> There's also almost half the world that doesn't even use the internet in any meaningful capacity. There's a lot of growth left.
But unlike growth in domestic Western markets, this one will be hard for the companies to expand upon on their own. 1B people in China cannot be reached at all by Western companies, the half billion in South America will depend on someone getting rid of the cartels before meaningful buildout of infrastructure can happen (and that won't be possible until the US and Europe drastically change their approach to drugs, until then most countries will effectively be narco states), and the 1B people in Africa... an even tougher nut to crack, given that there are a lot of countries in there that can be considered "failed states" or various degrees of dictatorships, and the rest tend to be extremely poor as a result of hundreds of years of colonialism.
I don’t know which year in the past you’re commenting from, but South America is nearing 80% penetration and already has ~500m people online. Cartels are an exclusively Colombian thing, courtesy of the USA.
The African continent is really is the last big market left, and only 1B people.
> "There's also almost half the world that doesn't even use the internet in any meaningful capacity. There's a lot of growth left."
Albert Bartlett[1] would like to have a word. When you find a new petri-dish, and it's as large as the current one - as much space as has ever been used before in all of history, a vast bounty of unexplored space - how long will it last? One minute. One doubling period to go from 50% full to 100% full, and that's it.
I share your sentiment. What should a semi-informed investor like myself buy (or, sell into the future I suppose) to express this in a position in the market? I consider myself more a value investor, is there a vehicle that’s more geared toward next ~ 6 months 40% decline vs. Vegas style highly levered bet?
I hope your timing is right. By nearly all measures, much of what you said was true in 2017 and 2018. And if you shorted then, you would've missed the continued 2 or 3 years of growth. All economic cycles come to an end eventually, but there is no telling when it will occur.
Timing is the big thing. Look at all the people who've said Tesla is overvalued (which it almost certainly is) who would've lost tons of money shorting it or buying puts. I think trying to time the market is not worth most retail investors' time.
The problem is tech companies aren't immutable to the laws of finance and human folly. Not every EV truck startup is going to become the next Tesla... yet people behave as though this is the case.
To me those are the real signs of a bubble: NKLA's share price continuing to grow with a total lack of evidence the company is anything besides a complete fraud, or also ZOOM's share price spiking because people confused it with ZM (the actual ticker symbol for the video communication company).
If those aren't signs of a deeply irrational market, I don't know what are.
No mention of peloton? The big problem is the umbrella of “tech stocks” includes an increasingly diverse set of companies that have little in common. FANGs are an example. Movies, advertising, consumer electronics, online retail, but we talk of “tech” stocks being too high or low as a group. Microsoft is not peloton. Amazon is not zoom.
I think peleton is in a different class because at least they have a real product which people like to use, and good brand perception overall, but the valuation is also probably out of control.
It has. And I don't think the resulting crash would be as bad. But there's still been an unprecedented run up in tech stocks this year, even for companies with declining sales which is certainly unusual.
The reason people are concerned about a bubble is because the valuations of these companies are hard to reconcile with any real-world increase in value creation. The price of many the FAANG stocks has gone up a huge amount relative to their increase in revenue.
But they have gone up proportionately to changes in the risk free rate, which is now at 0%, and expected to be about ~1% over the next 30 years (see: 30yr bond yields).
In 2019, Apple paid ~1.7% in dividend yield when 10YR treasuries were paying ~1.7%.
In 2020, Apple now pays ~0.77% in dividend yield, and 10YR treasuries pay ~0.7%.
Do you see a pattern? :)
It's absolutely possible for the fair value of a stock to double: you just need lower interest rates.
That's my opinion. Most investors know it's a party, but when will it end? With the election, corona vaccine, and the return to normalcy nearing everyone is wondering how long this will keep up.
The trigger to a stock crash is usually unexpected. I think either car loan or student debt crises but who knows
That doesn't fit the context of the above statement though, which was something about pandemics and general 2020 craziness. There's no indication that a "return to normalcy" regarding that is just around the corner.
> Most investors know it's a party, but when will it end?
The thing with bubbles and crashes is that they never come to an end when most investors think they are in it. They only end when most people don’t think they are in one
I think as soon as the election is over, doesn't matter who wins. The one side wants get things back to normal, the other won't have a need of propping the market anymore.
Always reminds me this buffet letter. Written almost in similar times. I think oft repeated argument has still some merit. The debt yields are non existent at this point and have not reach dot.com euphoria level but it doesn't give too much of a comfort.
"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities ¾ that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future ¾ will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands."
-- Warren Buffett, Chairman’s Letter to Shareholders of Berkshire Hathaway [1]
The interesting twist this time is that we might actually be seeing the start of a profound and permanent change in our lifestyles, and some part of the big increases in the values of tech stocks is probably a rational response to that. The trillion dollar question is, how much?
Assuming we overcome the virus and life returns to something like what it used to be, does anyone think we won't still see a significant shift in working patterns? WFH has been a revelation to many people and many employers, and its pros and cons are probably better understood now than they ever have been before. I doubt we'll see anything as dramatic as everyone wanting to work from home full time, not least because I think a lot of people underestimated the downsides before they tried it, but I expect we'll still see a lot more remote working than before. Both our homes and other local venues amenable to it will adapt accordingly, and technologies that support remote collaboration in its many forms will continue to be vital.
The shift to buying more goods and accessing more services online instead of physically going out has forced rapid changes in many businesses and other organisations. That includes many smaller places that haven't traditionally had much interest in or need for technology. Those changes won't suddenly get undone even when we all start going out more again. So again, the technologies now supporting online shopping and services probably have increased significantly in real value.
My guess is that the ruling class of the US has been spoiled by the China's governance model and now wants the same here. They see USA v2 as one huge corporation: it's simply more efficient when the growth phase is over. Fed invests into the big corps to consolidate power. Some folks in the ruling class didn't like the idea and left the US to New Zealand and other places.
I'd also add that 25th and 75th year of every century are turning points: the sudden influx of ideas and highly capable people stirs the pot and pushes the progress forward. We're approaching the end of the age started in 1925: opportunities depleted, morale is low, cynical people extracting whatever valuable is left. 2025 is supposed to unlock new ideas and opportunities that'll set the trajectory for the next century.
People have been calling tech "overvalued" since 2005. Its a misnomer, and everyone who has used that as in investment philosophy has lost tons of money. Tech is here to stay, and as an investment, offers significantly more leverage than elsewhere. Tech is twice as valuable relative to other investments. You dont understand how markets work
Buffet is an old out of touch man, who got rich buying the hot stocks of his day. He has lagged the market for 15 years
Your chart is incorrect. With split and dividend adjustments, the returns are almost identical from 2002 onwards (I don't have personal data before 2002).
2002 to date, BRK had a 8% annualized return and the S&P 500 has a 7.8% return.
However, BRK has a lower Sharpe ratio (0.38) than the S&P 500 (0.4). So in a real sense, SPY has outperformed BRK. That's not to say that an investment in BRK is irrational, the beta is low (0.71) and the correlation to the market is low as well (0.65).
You can't just naively compare some price chart, finance doesn't work like that.
Thanks. I should have listened to the small voice in my head before posting that.
So while BRK isn't crushing the index, would it be fair to say it "lagged" the market over the past 15 years? Seems pretty close, but I don't have the knowhow to analyze that time period with dividend reinvestment thrown into the mix. Though I've always thought these charts account for splits, no?
No I definitely wouldn't say it lagged the market. While BRK isn't "crushing it", it's done a pretty good job considering the high concentration of positions and low diversification. It's clear that Buffet has been delivering significant alpha over the 21st century.
Due to the low correlation with the market, BRK can be seen as a great way to diversify away market risk and increase the risk-adjusted returns of a S&P 500+BRK portfolio.
Or in other words, it's a totally solid investment.
Price charts don't account for dividends because people would get confused why the actual price you pay for something is different than the price on the chart.
Edit: sorry if I sounded harsh in my previous comment, I'm a little anal about these things as I see a lot of financial misinformation on HN.
If you knew anything about stocks then the people who performed the worst are usually falling into the trap of buying "hot stocks". Inexperienced investors buy stocks that have gone up recently and then get disappointed when they eventually go down. Essentially they commit the mistake of buying high and selling low. The "age-old" strategy is to buy "cold" under-performing stocks whose company has growth potential.
Today people just buy "hot" stocks and make bank because the central bank is also buying them.
With interest rates near 0%, equities are one of the few places you can expect to earn a reasonable yield on capital. The Fed has made it clear they don't plan to raise rates in the foreseeable future, so don't count on the demand for stocks to go away anytime soon.
If you're curious about how retail confidence is holding up, here's a dashboard I'm building to track discussion on the notorious WallStreetBets subreddit: https://www.quiverquant.com/wallstreetbets/
Yes, and in addition to near-zero rates for the foreseeable future, the Fed has also shown a willingness to engage in QE and other unconventional forms of monetary stimulus. This is a key driver of the continued climb in equity and real estate assets that seems to defy economic reality.
> This is a key driver of the continued climb of equity and real estate assets that seems to defy economic reality.
The real estate crash hasn't rippled ... yet.
Lots of younger people have moved home. High cost-of-living rental areas are going to lose those renters permanently. Once those younger people swallow their pride and move home ... there really isn't anything pulling them back.
Commercial real estate is like Wile E. Coyote running in mid-air trying not to look down. The commercial real estate has lots of empty spaces with no real prospect of refilling them ... yet they're placing those on the books by tacking them onto the end of the financing at the same level as they were when they were rented. That works great ... until the cash flow can't support anything at which point it all collapses together.
Of course, this is all going to hang together like the traders before 2008: "They're is a crash coming. If I'm right, it's almost impossible for me to diversify enough to survive because the trashing is going to be so thorough. If I'm wrong, I look like an idiot and lose money. So, I'll close my eyes and toe the company line and see if I can cash out before the devastation."
I think "lots" is pretty load-bearing here. How many younger people, precisely, have moved back home? If half of them have, I agree that's a big paradigm shift; if 5% have, I'm not sure that adds up to something very far outside normal variability.
I would say a significant amount, I don’t have the article link on hand but U-Haul prices out of California are 10 - 40x the price the opposite direction. I was hit by this since we had planned to move out of state prior to what is going on (roughly a year ago) and needed to price it out. We’re still moving, just getting the trailer instead of the full truck and I’ll haul the stuff while my girlfriend and son fly out instead.
The relevant variable here isn't the headline 52%, but the fraction of young people who lived independently but have recently stopped, which is (52 - 47) / (100 - 47) = 9.4%. That's a big number, but I don't know that it's big enough to be the death of many cities - it seems plausible that those 9.4% could move back out over the next few years for the same reasons they moved out in the first place. (And remember that young people living independently are only a part of a city's population.)
Of course, it's likely that this impact isn't going to be uniform, so that doesn't mean individual neighborhoods (or even individual cities) have no cause for concern.
> How many younger people, precisely, have moved back home?
It appears like quite a few. I can see into a lot of different apartments from where I live in SF and many, many more are empty. This might also be due to AirBnBs.
The real estate rental prices have fallen, but they're still pretty sticky - I predict they are going to fall more.
> Once those younger people swallow their pride and move home ... there really isn't anything pulling them back.
I just left a remote oriented(Major infrastructure automation startup) to work for a company in a HCOL area. Just completed the 2200 mile trek back from “home” with the pets and the family on Monday.
Anecdotal but the prospect of raising my kid in the middle of nowhere back “home” was not appealing. If I lost my remote gig I would have to take a 50% pay cut to hopefully find a job at one of a few employers locally- or pray I could get another remote gig in a very competitive job market.
Better nature, better job market and higher pay were a deciding factor. Just saying there are plenty of things that might pull a young person like myself and my partner back other than “pride.”
I tried to acknowledge that by pointing out that it was an anecdote. My point was mostly that it is condescending and short sighted to think that young people’s decision about where to live boils down to pride.
> My point was mostly that it is condescending and short sighted to think that young people’s decision about where to live boils down to pride
And I would point out that it completely ignores reality to think that it doesn't.
For better or worse in the US, a single male living with his parents at age 25 or above will generally be regarded as a "failure". You can claim otherwise, but the dating pool disagrees with you strongly.
However, I will concede that your situation (under 30 with a child but still in a place like the Bay Area) was not really what I was thinking about. That's kind of a minority for most high tech/high-COL areas which are renowned for having a highly skewed male/female ratio.
Again...that’s exactly my point; when you make blanket statements about broad groups of people you always end up being wrong in a lot of cases...I’m not the only young person who gladly chooses to live in a big city- not by a long shot.
The second crash this year has already started, perhaps triggered by the realisation that tech stocks are not as insulated from the global recession as previously hoped. Central banks are out of ammunition and have been reduced to buying corporate debt indiscriminately and promising ZIRP forever, having less and less impact on markets.
FANGMAN has lost $1.4tn in mkt cap since beginning of Sep w/#Apple quietly down 22.6% from highs, #Netflix down 18.3%, #Nvidia 17.2%, #Facebook 17.1%, #Amazon down 16.8%, #Google 15.9%, #Microsoft down 14%.
Things are highly volatile right now. Frothy stocks like Tesla are moving 20% in a day both ways, which is neither normal nor desirable, CAPE at 1929 levels, 5 largest companies (all tech) were > 20% of S&P, IPOs reaching 140x earnings on first day (snowflake), fraud like We Work and Nikola constantly coming to light, companies like Softbank (of We infamy) making huge speculative bets on options. All the signs are here for a remarkable speculative bubble in tech stocks.
All this in the face of the sharpest recession on record, with worse unemployment than the great recession of the 1930s. I'm not convinced US equities will continue to provide the remarkable returns seen this year (with no basis in the real economy). Tech companies like Amazon need other tech companies to spend on AWS and consumers to buy, companies like FB/Google need other companies to spend on ads, companies like Apple/Netflix need consumers with disposable income. Everything is connected.
The thing that the Bitcoin people got right is that the dollar is worth less than most people realize. The government can erase much of the debt by printing money. Owning cash is a bad idea. Sure the P/E of Tesla looks like a bubble. But what alternative is there to do with cash right now?
I think this asset class is crazy on the west coast of the US. Putting all your money in an illiquid asset, in a place where it might experience a significant earthquake, just to hedge against inflation. What could possibly go wrong?
But.... It's the one asset class where normal people are allowed to leverage themselves heavily. And you can live in it.
When you buy a house to live in, it magnifies the tension between maximizing lifestyle (schools, work, amenities, friends, family, etc.) and maximizing returns.
In practice, by and large, you have to balance towards the former, which means your financial returns tend to be lower.
Earthquakes are not a significant risk to most single family homes on the US west coast. Yes, there is more than zero risk, but its nothing like areas prone to tornados, hurricanes, floods, or wildfires which can and fairly regularly do destroy entire neighborhoods.
Significant risk includes likelihood, not just damage.
If you want to hedge bets against highly unlikely events best hold as few physical belongings as possible
I know how to compute the expected value. No, if I want to hedge I'd spend a lot of money on earthquake insurance and hope it actually pays out. Damaging earthquakes are not unlikely event in these locales. In the next 20 years a 6+ magnitude quake is above 90% in the Bay. Something like 60% for a 7+. Cascadia subduction zone produces 9s almost periodically, and it is overdue as well.
Central banks are not out of ammunition. I think you underestimate the impact of "open-ended QE", as well as the dozens of incredible and never-seen-before programs set up during COVID; sometimes stretching the mandate through "special purpose vehicles".
Everyone expects the Fed to inject as many trillions of dollars as needed to the _stock market_ to keep stock prices up. The effects on the economy are more uncertain; but we know the Fed can, has, and said they will do "whatever it takes" to ensure an "orderly market"; which is just an euphemism for "stop stocks from crashing".
TINA. There is no alternative, and if you look at long term treasury rates (YCC has not happened _yet_), people are believing interest rates will be around the 1% mark for the _next 30 years_.
When the long term risk free rate goes from 2% to 1%; stocks become worth twice as much.
Such a strategy in the face of high unemployment will end poorly. It's effectively currency debasement to prop up your top corporations stock prices at the expense of the real economy.
You'll be left with 5-100 megacaps, carrying less real revenue than when the debasement started. Consumers, SMBs, and employees will have had their dollars eroded.
>If the currency was "debased" it would show up everywhere
Not necessarily.
Prices are dictated by supply/demand - and different goods have different amounts of supply/demand.
As so, it's theoretically possible to continually print money into existence, and use it all to buy Tesla stock, until there are no more shares of Tesla stock left for sale.
Under such a hypothetical scenario, INFLATION would only happen in Tesla's Stock price - as all this extra money spurred DEMAND for Tesla stock and wasn't accompanied by an increase in SUPPLY of Tesla stock. However, the price of shirts would remain the same - as none of this money changed the SUPPLY/DEMAND of shirts.
As so - inflation doesn't necessarily have to happen everywhere.
Note, this is mainly why CPI is a bad indicator of inflation - as it doesn't track the inflation that is happening around us - inflation in assets like stocks / real estate. This also explains why prices of real estate in certain cities are way pricier than others, and also why the stock market can be way overvalued when the economy is doing bad.
Asset prices have grown faster than incomes in the U.S for the last several decades; this trend appears to be accelerating.
In my neighborhood of Boston, YoY condo prices are growing at 8%. On paper I've been paid to live in my condo for the last few years.
<Speculation>
IMHO the method that the Fed uses to inject currency biases towards asset classes by controlling borrowing costs. In an industrial economy, this would typically result in direct investment into new equipment, and an agricultural economy the tilling of new land. However, growth in services or tech is rarely debt-financed as there are relatively low CapEx costs and high opex loads. Given the relative maturity of the industrial and agricultural sectors, there aren't many places in the economy that can productively absorb debt-backed financing.
What we end up with is relatively static asset classes absorbing massive debt-based financing and inflating overall asset prices. Unfortunately, several of these asset prices bleed over as costs to workers who need a home, a rent for their place of business, or an education to acquire skills.
While in a healthy economy, everyone's cost is someone else's income. As long as the Central bank is applying a QE strategy, your cost is a mortgage or a rent backed by a mortgage; the "income" side of the equation is just the central bank.
Asset holders benefit from holding assets that magically increase in price.
The job of the Fed is to maintain inflation and employment targets. Since both inflation and employment are below target, they are engaging in an expansionary monetary policy.
I'm honestly baffled by so many people thinking that a contractionary stance would be better?
Doesn't seem like the levers they have are working. Economic growth rather than inflation is the goal. The measures are not the goal.
Maybe that needs massive investment rather than monetary policy. Certainly QE has had many other impacts, but it hasn't led to a positive change in the measure that matters - consumer price inflation.
The other poster said "doesn't seem," which is already an admittance that it is just anecdotal observation.
I'm also not sure what you're hoping to accomplish here. Yes, quantifiable claims are better than subjective ones, but "no one knows what would have happened otherwise" is just an argument that justifies literally any action.
> just an argument that justifies literally any action.
I'm saying having a model for what you're talking about and also having empirical research about what has happened with similar interventions on the aggregate is good.
Looking at a single intervention in response to a massive calamity and saying "well that didn't work because things were bad after!" is what I'm trying to critique.
We should consider that the fed's methods of measuring inflation and/or injecting capital could be flawed.
If the money injected by the fed is not making it to consumers, then we should expect that inflation measured via some kind of consumer price index would not move.
Consumers take out loans, that's a fact. Interest rates are lower, that's also a fact. Therefore, the money is making it to consumers.
If the Fed is able to expand the monetary supply without inflation, then that is a good thing (again) and the Fed should continue doing so until inflation does move.
Have a significant number of consumers taken out new loans? What percentage of consumers actually benefit, especially if they do not purchase a new home?
>If the Fed is able to expand the monetary supply without inflation, then that is a good thing
Expanding the money supply alone does not seem like the right goal. Suppose the fed decided to expand the money supply by cutting a check to the top 1%. I wouldn't expect to see any inflation in the pricing of general consumer goods since that segment of the population just isn't competing for those goods.
I think they eventually have to release all ammunitions that they have. It is not a good sign, it means that they are desperate, it is their last chance, live or die. We should not be complacent that everything will be ok. They need to maintain status quo. If they fail, all of us will be in precarious situation.
> Central banks are out of ammunition and have been reduced to buying corporate debt indiscriminately and promising ZIRP forever, having less and less impact on markets.
This is wrong. The Fed will keep doing QE to prop things up for as long as long as it takes. Do you read the FOMC meeting minutes or listen to Jerome Powell talk? There wouldn’t be massive inflows to equities without the Fed put (QE).
No, I listened to economists who are skeptical that quantitative easing works for the original purpose (to increase liquidity and stimulate real economic growth). If you ignore the interviewer this chat with Lyn Alden and Jeff Snider on QE is interesting.
Facebook makes more profit than some stock markets as a whole (might be an exaggeration). Tech companies did well in the crisis, adapted better than others and were generally pretty good in making even more money.
I do agree: lots of people loose in this crisis. But we are probably in fact living in times of super inflation; the EU has for the first time ever taken debt; US and China race for debt.
All you can do (I feel): is watch and be taken for a ride. The gap between rich and poor will grow, so will the gap between “fast adapters” and “the good old industries”.
It may sound harsh: but the economy in the US probably doesn’t really care about those that lost the most and were the most vulnerable.
Hitchhikers Guide to the Galaxy may be the book we all should be reading (again) these days...
It was what, a little over 30% drawdown, that's a crash now?
I did say started, not finished :)
Sorry Great Depression. We're in the first few months of this recession, which may well become a depression, and crucially is happening worldwide in almost every country and slowing trade at the same time. It's certainly been a much sharper shock than the Great Depression - the US has seen unemployment rise faster:
Since it usually takes these things several years to play out, I'm not convinced that the high water mark for unemployment has been reached yet. There are also hints that the true rate in early 2020 was more like 20% (department of labour statistics). We'll know in a few years, but this is certainly the sharpest recession on record (due to the imposed nature of it), and the only comparable is the Great Depression.
The price for equities is driven by supply and demand, like all other prices. Does COVID make you want to save more, or less? If it's more, given that bonds have extremely low returns, why not stocks? Especially if you think that there will be a sharp rebound next quarter.
I mean, I think the stock are overvalued, but it's not hard to see how we ended up here. I thought about rebalancing out of stocks to avoid a drop, but I'm stymied by the question: rebalance to what?
Rebalancing to cash would seem to make sense if you expected a crash. I gather that this doesn't happen because no one wants to pay a money manager to not invest their money.
Sure, a crappy bond now is crappy, but if everyone is right about QE to prop up the stock market, they'll be worth more compared to future crappier bonds.
If inflation ticks up a little, they'll rapidly lose value. Bonds give you a contractual guarantee for zero upside. Those multi-decade sub 2% bond issuances are wild.
Incorrect. The expectation of inflation and the low yields of bonds means that equities are the best place for your money. Asset values will get inflated while cash loses value.
This implies that the interest rate reduction counter-balances the reduction in future cash flows.
In an economy with 15-20% unemployment and entire industries on the brink of destruction ( airlines/travel ) this is not a given. If the 5-10 year revenue projections of air-travel are 1/5th of the pre-covid economy, then a small change to cost of capital won't allow you to continue investing as if nothing happened. The risk inherent to Google's bottom line from long-term structural unemployment and lower ad-revenue should outweigh even a 0% cost of capital.
Don't forget how ridiculously over-leveraged almost every big company already is. They are saddled with huge debt and many are struggling to pay the interest on the debt, let alone the principal.
So the Fed can force rates to nothing so companies can get more debt to pay down their existing debt, but the point where they are actually profitable gets further and further away. Meanwhile, they get more and more vulnerable to even the slightest increase in rates.
Everyone can close their eyes and keep driving faster off this cliff for a while, but best case is we become Japan with 100 year mortgages and a market that is flat for the next 30 years because it is half owned by the government.
The real problem is the companies that hit the wall first and go bankrupt suddenly, I think Dave and Busters just announced and October is whispered to be full of incoming bankruptcies. Confidence in stocks won't hold when companies keep randomly dropping 20% in a day.
TINA doesn't consider "not losing money" is a very reasonable alternative that people will eventually realize.
"it hasn't been true in the recent past, therefore it won't be true in the future" isn't a strong line of argument. Huge QE and extremely low interest rates can of course result in considerable inflation in the coming years.
No the argument is that long-term inflation moving averages are determined by what has occurred in the past (because they're moving averages), so a much higher inflation now would actually be good. Due to a collapse in AD, that's not going to happen.
You seem to be ignoring supply and demand for the assets themselves irrespective of the asset's value or earning potential. Low interest rates increases demand for asset types like property and equities.
Certainly. But in the end, they are buying stocks in the belief that the price will go up, while the underlying asset, the cash flows, do not seem likely to do so for some time, and not to the extent that the stock prices require. That's pure speculation.
> Low interest rates increases demand for asset types like property and equities.
Interest rates have been low for over ten years.
Interest rates were at de facto 0% in 2015 (and still close to it for 2016) while Apple had a sub 10 PE and Microsoft was around a 15-16 PE. Now they have multiples in the mid 30s despite slow growth. The S&P 500 PE is about 40-50% higher than in 2014-2015, with a worse economic situation.
The Eurozone and Japan have had negative real rates across many years in the past without the type of stock market valuations the US is seeing now. One doesn't guarantee the other.
It's obvious this all comes apart at some point. Interest rates at 0% won't prevent that. There's nothing that stops the market from going back to 2014-2015 style valuations. Companies like Snowflake aren't going to be worth $70 billion (~140 times sales) on the backside of this insanity.
Quick, someone dig up the remains of DrKoop.com and do an IPO. Maybe they can be reincarnated as a telemedicine EV maker that sells hydrogen powered big data machine learning HTML5 supercomputer cloudlets that drift downhill via gravity, producing perpetual energy. Or maybe they can just analyze logs and lose a lot of money for a cool $10 billion valuation.
What we have going on now is primarily mania, not low interest rates. The economy in 2015 was healthier than the economy is today, multiples were nowhere near this, and rates were on the floor for many years at that point. So how about we just reset valuations back to when interest rates were close to 0% in 2015, what will that do to the market? It'll crash it big time, that's what.
It's certainly possible that valuations will remain elevated due to forever low rates. That doesn't mean the mania part of it will sustain, that is likely to be temporary. The public market mania is now so far beyond what was previously going on in the private market, companies have collectively switched modes and are rushing for the exits (Snowflake's recent public valuation was six times the private valuation they were fetching in February). WeWork in hindsight should have waited a year to try to IPO, this market would bid them up.
How do you calculate the present value of it's future cash flows? You 'discount' the future cash flows by the cost of capital.. which is tied to the interest rate.
So if interest rates go down, the present value of those future cash flows increases and share price increases.
I urge you to try the exercise and determine either the discount rate you need to use to get reasonable future valuations or the valuations you get with a reasonable discount rate.
Sure, let's look at FB. AA corp bonds are around 2%, so let's use that for the discount rate and assume Fb maintains their 40% growth for 3 years then transitions to 10% for 7 years. Cash flows per share would be just under $50 during the growth period and just over $200 during the stability period.
Basically 10 years to break even with the current share price. Not very far out of line with historical PE ratios.
With the fed buying debt like a drunk sailor the money released has to go somewhere. That somewhere seems to be the stock market right now. It feels like the fed is testing to avoid 2007 again but just buying the bad debt early.
The Fed is independent from the government. But that’s theory. Can you explain more what the influences are between a given party in power and the Fed?
Those are two valid definitions of value stocks. Earnings are easy to calculate but not terribly good. Book value is a better measure but it's just a made-up number.
So I read somewhere that 40+% of all investors are currently leveraged, which seems like an insane figure given the recent influx of "Robinhood investors" into the market. It makes me wonder: who's on the hook if all these unsophisticated investors get wiped out?
For a lot of these investors, it will be catastrophic to their personal finances, and this might have knock-on effects on landlords for example when these people can't make rent.
Presumably this would also result in a lot of bankruptcies, and if that is the case who is on the hook for all that debt? Probably credit card companies, mortgage lenders, but what I don't know is who is the owner of the debt for leveraged trading? Is that the brokerage themselves? Is it banks? Someone else?
> 40+% of all investors are currently leveraged, which seems like an insane figure
This does sound insanely high given how many investors have passive portfolios. I'm guessing "leveraged" means something closer to "owns at least one option" than "would be wiped out in a 25% market correction".
As for people not being able to make rent if their investments go bad, there aren't many people who are paying their rent out of their personal savings and relying on their investments. Most people work, pay rent out of their earnings, and if they're lucky put some of the excess into savings or brokerage accounts. People with larger savings are likely to own their own home.
Of course, if there's a market downturn this will lead to bankruptcies, rent defaults and a knock on effect on landlords, lenders, etc. But the main causal method there is people losing their jobs, not their savings.
> I'm guessing "leveraged" means something closer to "owns at least one option" than "would be wiped out in a 25% market correction".
I hope so, but do we know this? My understanding is that apps like Robinhood make it very easy to do options trading, and there's a whole online subculture around this type of trading.
Can we actually rule out the possibility that a non-trivial percentage of the recent run-up of the stock market is based on "dumb money" from unsophisticated investors, much of which they may not actually have?
edit:
Also I just searched Robin-hood options trading on youtube and this video was the second result:
I find the UI effect when he finishes the option buy to be very telling, and it's interesting to think about who the intended audience of this content is.
> It makes me wonder: who's on the hook if all these unsophisticated investors get wiped out?
If they’re borrowing on margin, a correction happens, and they get a margin call they can’t pay and end up negative, they owe the money to the brokerage. It’s like any other debt that can be bought or sold, I assume.
No they don't. The average person's insurance doesn't cover bad stock performance, the only insurance against bad trades is adjusting the beta of your portfolio. What happens when a main street investor gets hit by a crash, depending on how bad the crash is, is that they lose their savings. If they actually end up with debt that they can't repay, they may lose their house (if they own one), declare bankruptcy, and have their credit ruined for several years.
Well, hopefully the brokerage’s risk department prevents that! If too many people went bankrupt and owed margin debt and the brokerage went under, the government would step in and take custody of securities and cash and get them back to the holders, (at some point) who may or may not take a loss if they’re over SIPCs coverage limits of 250,000 cash and 500,000 of securities.
> Well, hopefully the brokerage’s risk department prevents that!
Blind-spots do exist, as we have seen in 2008. I'm not saying that I know better, but we can't take it for granted that these organizations have an accurate assessment of all the risks, especially when they are making record profits.
> Blind-spots do exist, as we have seen in 2008. I'm not saying that I know better, but we can't take it for granted that these organizations have an accurate assessment of all the risks, especially when they are making record profits.
Absolutely! IB got caught with their pants down when /CL (WTI crude futures contract) went negative in April. Their system used to calculate margin requirements did not take negative contract prices into account, and neither did the trading software. Margin calls were not issued at the proper time, and traders couldn’t see the price or execute a trade on IB while the contract value was negative. Due to the latter, IB ended up absorbing any losses incurred by customers while /CL was negative. They lost around $110 million.
I live in a Northern US state and we have a saying about four-wheel drive in the snow and ice: your car won’t slide as often, but when it does it will be disastrous. Every winter you see the ditch filled with pickup trucks and SUVs who have four or all wheel drive. Usually so deep in the ditch that they need a tow truck. Most of the two-wheel drive vehicles get stuck on the shoulder, where a simple shovel could easily free them.
The Fed can keep the market from going down, and they can keep it afloat for a long time. But all that energy builds up like a rubber band, until it snaps. The stock market is going up even though it has no reason to be going up. Which means valuations are higher than they would normally be, and keep going up even though they should be flat or going down. Usually this would be fixed through minor “corrections” like maybe a quarter or two of sliding prices and then quickly back to stability and growth again.
But the longer we refuse to let nature find its equilibrium, the more catastrophic the eventual reset will be.
> But the longer we refuse to let nature find its equilibrium, the more catastrophic the eventual reset will be.
What is this "equilibrium"? Why does the Fed taking a super contractionary policy stance seem better to you?
Expenditures are rebounding and personal income is at an all time high - both of which seem like pretty obvious reasons why stock prices are not crashing.
But this is much more of a short-term band-aid than a real solution isn't it? As I understood the eviction moratorium is just a block preventing people from being removed from their homes. It's not rent forgiveness. So when it expires, those renters will still be on the hook for months worth of back rent, and assuming a lot of them are unable to pay because they are unemployed, this just seems like we're inflating a debt bubble to be dealt with later.
That's also ignoring the financial obligations of landlords - they might also be running into trouble due to lost revenue and for now I suppose they are just supposed to bear it.
> But this is much more of a short-term band-aid than a real solution isn't it?
My point is that you can't compare rent payment rates from when you would get evicted if you didn't pay rent to rent payment rates from an eviction moratorium where there is no penalty for not paying rent.
> they might also be running into trouble due to lost revenue and for now I suppose they are just supposed to bear it.
The reason that landlords make the profits they do is because they're taking on this kind of risk. They are the party to bear it, and have hopefully hedged in some way. If they are overexposed, then yes, they will fail. Hopefully we don't make the same too big to fail mistake we made last time.
I'm not claiming that everything is great with our economy. It's obviously not. But suggesting the Fed stop doing what it is doing would be perhaps the single worst thing you could do to the entire economy. It is good that equity prices remain high and it is good that personal income has risen. We should capitalize on those trends so that people can soon go back to work.
I'm not saying the fed should stop what they're doing, but there are certainly alternatives which might have lead to a better result. For instance, in other countries, more of the government assistance was directed to maintaining payroll and to actually support rent payments rather than just delaying that obligation. It's hard for me to understand why that would not be a better approach to stabilizing the economy compared to what happened in the US.
It seems that the actual result of QE has been that a huge percentage of that money has been dumped into equities, driving prices higher. Yes it's better than a total economic collapse, but it's not clear to me that this is actually a good thing, and not just an artificially inflated indicator which is essentially papering over very real risks to the economy which could cause massive issues down the road.
> the government assistance was directed to maintaining payroll and to actually support rent payments
There was substantial action towards both of those ends, more than any other country.
Other countries are not really as comparable because we're the only rich developed country to have failed so badly at containing it (early on, in the next few months some of Europe will follow us).
> delaying that obligation
Delaying the obligation is better because it means that people won't be evicted if they can't meet the payments even with the governmental support. I'll be honest - the landlords aren't my principal concern here.
> papering over very real risks to the economy which could cause massive issues down the road.
What massive issues? I agree that Fed actions impact equity prices, I disagree that that is a bad thing for the economy. If we had an equity price crash along with what we're experiencing, we would be in deep, deep recession by now.
> There was substantial action towards both of those ends, more than any other country.
I just don't think that's true. From what I understand, they payroll support was extremely difficult to get for small businesses, and the majority went to large corporations who had the connections and the bandwidth to deal with the bureaucracy. Even the Cares checks took weeks to arrive in the hands of people without direct deposit.
By contrast, I am currently living in Germany, and I have friends who are freelancers and they had support funds in their bank accounts less than a week after the lockdown started. Also there was already legal machinery in place to avoid job losses which was put in place in 2008 and activated almost immediately.
> Other countries are not really as comparable because we're the only rich developed country to have failed so badly at containing it (early on, in the next few months some of Europe will follow us).
We will have to see, but I'm doubtful this is the case. In Germany for example we still have aggressive contract tracing, and we've already seen containment measures implemented successfully. We have not seen the particular failures in leadership which occurred in the US, and though we may indeed see a second wave, I'm not sure why we should expect that to go worse now that there's improved information and the population has already dealt with this once I'm not sure why we should expect this to go worse the second time.
> Delaying the obligation is better because it means that people won't be evicted if they can't meet the payments even with the governmental support
Why are these options mutually exclusive? You could provide direct support to tenants and also prevent evictions. This would limit the extent to which you are creating a future financial obligation which out-of-work tenants will have no way of meeting.
> I agree that Fed actions impact equity prices, I disagree that that is a bad thing for the economy.
I never said rising equity prices were a bad thing for the economy. My concern is that if we optimize the recovery effort for increasing equity prices, but fail to address other risks, like lack of employment and the creation of housing debt, we could be setting ourselves up for failure in the medium term. If we managed to keep people employed and in their homes and also saw rising equity prices I would have no such concern.
> By contrast, I am currently living in Germany, and I have friends who are freelancers and they had support funds in their bank accounts less than a week after the lockdown started. Also there was already legal machinery in place to avoid job losses which was put in place in 2008 and activated almost immediately.
Every tax payer got paid $1200. You're right that it took weeks to come and was inefficient, but paired with an eviction moratorium I think mitigated the impact of the delay. The PPP had issues, but I think the money did keep unemployment lower.
That said, I'm not disputing that the German model for fiscal stimulus is better: it is. But I don't think there was a huge failure of fiscal stimulus in the US.
> Why are these options mutually exclusive? You could provide direct support to tenants and also prevent evictions
Agreed, I don't think those are mutually exclusive and I don't think more fiscal support to tenants would be a bad thing at all. I thought you were suggesting doing such instead of moratoriums, which seems unjust to me.
> My concern is that if we optimize the recovery effort for increasing equity prices, but fail to address other risks, like lack of employment and the creation of housing debt, we could be setting ourselves up for failure in the medium term
I don't think we are optimizing recovery efforts for increasing equity prices. I think that in the short-term higher equity prices is a consequence of expansionary monetary policy with a goal of reducing unemployment.
I don't think we're seeing a housing debt crisis right now and the actions the Fed is currently taking are meant to reduce unemployment (which is higher than it should be right now).
The equilibrium is wherever “the market” decides it is. With the Fed pumping trillions of dollars into the market and dropping rates to 0% for extended periods of time, that’s not “the market”, that’s just the Fed.
And I’m not just talking about now, at this moment. It goes all the way back to 2008, when rates dropped to near-zero and didn’t even break 3% before they had to drop to near-zero again for the next recession (right now). The Fed gave up almost all their normal tools and never asked for them back, and now they’re gone. Which means if the economy gets worse (and staying the same as right now for an extended period of time is the same as “getting worse”), there’s not a whole lot anyone can do about it.
Basically, if the Fed is out of tools already, the only thing the Fed can do is cash injections. Which they’ve already done this year, trillions of dollars worth. And that might keep the market afloat for another year or two or ten... all while the stock market keeps going up. Not because investors think these businesses are worth that much, but because they know there will never be a decline in the market overall.
And what happens when the market becomes completely decoupled from the value of the businesses they’re trading? And better question... what happens when the Fed changes their mind?
> The equilibrium is wherever “the market” decides it is
Remind me the last time "the market" decided on an equilibrium without the Fed. 1912?
> The Fed gave up almost all their normal tools and never asked for them back, and now they’re gone. Which means if the economy gets worse (and staying the same as right now for an extended period of time is the same as “getting worse”), there’s not a whole lot anyone can do about it.
Despite its popularity as a talking point, there is actually little economic evidence that Fed policy becomes ineffective at the zero bound. Nor really any evidence that the Fed is "out of tools."
There is huge empirical evidence that taking a expansionary stance during a recession helps lessen the impact of the recession and lower unemployment.
Why would it be better for the Fed to take a contractionary approach during a recession? So the stock market better reflects how you feel it should look?
You’re right, the Fed is supposed to help stabilize the market. But their current position of “never let it crash” is unprecedented and dangerous.
It’s not about a “feeling” and it’s not a “contractionary approach”. My concern is the Fed has taken the position that the stock market must always go up, no matter what. It’s like saying we must never allow wildfires... well eventually something will happen outside of your control and now the entire west coast is burning and there’s nothing you can do to stop it. If you just let the smaller fires burn when they wanted/needed to, we wouldn’t be in that situation.
You seem to be drawing a hard black and white line, that either the Fed does nothing or they do everything imaginable. As always, there is a middle ground... let the market make its corrections and if something big happens then step in and help ease the pain. The problem with the “do anything and everything to make sure the market NEVER goes down” approach is at some point it will. At some point something will happen that scares investors and the market will drop faster than the Fed can print money. And the more out of touch the markets are, the harder it will drop and the more painful it will be.
But even if the eventual crash never comes, if the Fed is willing to print trillions of dollars every year to keep the stock market up, is it really even a stock market? At that point it’s just a high-interest savings account for the ultra-rich, paid for by inflation (which hurts everyone who doesn’t own stocks). And the way that ends is the rich get richer until we end up with an oligarchy.
It’s dangerous and unprecedented for the Fed to say they will keep printing unlimited amounts of money [2] in order to make sure the markets never go down. Their job is to prevent a depression, not prevent Wall Street from losing even a single dollar.
Unless Fed has been overtaken by wallst people, who use the money printing machine in their own interest.
Imagine you own a 10% stake of the economy. You invest into stocks and turn the money making machine on. Others see the trend and invest as well. Then everybody runs out of money and the growth stops. So you sell your stake, turn the money making machine off and the crash wipes out lots of investors: they can't know when you turn the machine on or off, so they invest after a delay. Once the market reaches the bottom, you invest your now 15% stake and turn the machine on. Others see the growth and join. They have to join because inflation dilutes cash savings. Repeat until your stake is 50%. This is what I believe is the "market" right now, with one investor and a bunch of blind followers.
Nope, no remote way that's true. 40% of all retail investors that were surveyed by a poll that probably misses out on people with retirement accounts, etc. self-reported being "leveraged." I'm not 100% confident that the general American public would be able to identify what leverage is/if they are actually leveraged.
Agree, in addition it is helpful to observe relative weightings. A retail investor with 50k and 2x leverage has less impact than one 100bn+ fund that isn't borrowing
Buffett also moved into the gold market [0], which he never really liked in the past. Perhaps he still doesn’t like it but believes it’s one of the better places to allocate his resources right now.
It's probably not Buffett who made that decision but rather one of the two other investors tasked with putting berkshire's cash to work: todd Combs and ted weschler.
The investment in barrick gold is tiny in relation to brk's other investments. About $500m in a $210bn+ portfolio of public stocks (which in turn are smaller than their privately owned firms).
Additionally, Berkshire's holds about $147bn in cash so let's please not get carried away with the gold comments.
> “ How does virtually every tech company become twice as valuable in 6 months? They don't.”
I think you’re actually wrong on this point. Entrenched incumbent companies like Amazon and Microsoft do become 2x valuable in a time when all kinds of growing startup competition is shuttering due to covid-19 related economic changes.
It’s not an expression of say Amazon’s existing business capabilities, but rather its moat and financial security to be in leader position when the crises subside, and in a position to squash or acquire poorly capitalized new competition that couldn’t endure the financial stress of the economic situation.
Very unlike 2000, you have several huge, multi-industry conglomerate tech companies with vastly more products, reach and relative capital reserves.
It makes total sense to speculate those incumbents will completely rule the day for the next 10 years, and it will take a long time for new, effective competition to return. When people consider where Amazon will be in 10 years, ~2x price change during the middle of a global crisis where Amazon seems to be doing ok - this makes sense.
Like any price speculation, there’s risk and it might not be correct.
But it’s not a wildly crazy bubble like 1999 - the situations are very different and the types of businesses seeing high valuations are totally different.
It’s not 1999, the biggest tech companies make a ton of money.
> Remember when Buffet said to be fearful when others are greedy? Well right now he's investing out in Japan
Berkshire bought into the SNOW IPO last week... That’s an American tech company.
> I bought into value stocks last week
You can hold IWM, I’ll stick with XLK. I bet I’m up more than you one year from today. Mega caps can use 0% financing a lot more effectively than small caps can.
Microsoft, IBM, and Sun were all profitable in 1999 too. It’s not the big tech companies that people were/are worried about, it’s the billion dollar startups who will collapse in a year or two. Uber and Palantir (et al) aren’t Hewlett-Packard, they’re Pets.com.
What are your positions? My retirement funds are 100% US equities, overweight tech. My taxable account is 150% into pure tech. I’m not just saying words on the internet, I’m putting money behind my thesis.
Yep and there are plenty of gamblers on /r/wallstreetbets going broke (and sometimes committing suicide) following strategies like this. It may be working for you and you may have the risk appetite for it, but encouraging other people to pursue ultra-risky investments (really, to gamble with money they don’t have) is incredibly dangerous and has resulted in at least one human death.
I think the idea behind “value stocks” if I remember the Intelligent Investor correctly was about “book vs. market value” in many aspects. “Buy stocks worth a dollar for pennies”.
I think times have changed. When the automotive industry falters, the assets won’t be worth anything near “book value”.
A very wealthy (now retired) investment banker once told me: “The stock market over-reacts, but is right about the general direction”.
Growth potential, margins and inflation drive stock prices.
I don’t see how tech could be anything but a winner. If anything, Corona has accelerated the need for digitization and buying patterns change.
Buffet did horribly during the crisis. He admittedly undervalued Tech and invested in Airlines - big regrets.
I do not think a lot of industries will go back to the way things were. Why travel in planes if you can do zoom meetings? Why your own car when you can work from home?
Personally, I would rather be worried about the real estate market and office buildings folding in value...
Lofty tech valuations means that the "baseline" performance expectation for many companies is rapid revenue and profit growth. Apple will need to start making 100 billion a year in profit, Tesla needs to make 20 billion a year in profit, etc (just making up numbers to illustrate the point).
The businesses can achieve solid growth, but the stock price can still lag if the growth isn't in line with expectations. Microsoft from 2000-2010 is an example of a stock price that fell even as the business kept growing year-over-year.
The Intelligent Investor did discuss book value, but the pennies on the dollar quote was for companies trading below salvage value. Book value is still an important metric, but agree that it's not nearly as useful for tech companies.
Traditional financial analysis is still useful when analyzing companies. assets - liabilities = book_value_of_equity, the income statement, the statement of cash flow, and the balance sheet should still be considered.
It's better to compare market value vs intrinsic value. Frothy markets are when valuations start becoming increasingly detached from intrinsic value.
Let me maybe put it a bit differently: companies disrupting or creating markets usually cannot be understood or discovered easily with a look at the balance sheet or income statement alone...
The ability to create, grow and protect rents is more complex and often only understood retrospectively.
I honestly don’t have a good answer how to do better. I know that “book value of equity” is useless for me.
Think about the oil and gas industry.
And even if the fundamentals don’t look great per se: in a time where money is printed like crazy, many industries fold - where are you gonna put your money.
Tech’s growth might also be “lack of other opportunities”.
Buffet would have done mich better/Value investors would have done much better had they understood how the world changed and adjusted their views.
> Personally, I would rather be worried about the real estate market and office buildings folding in value...
Real estate also has a long-term demographic problem: fewer people means lower demand. We're below replacement rate[1], so as a general class I'd expect real estate to underperform.
My folks sold a house in a upper-middle class neighborhood in one of the best school districts in their state. They owned for 22 years and didn't make inflation on the sale.
Thanks for sharing! Yes - but with a BUT: I think it depends where. On average this certainly is very true. But urban areas (I speak for Germany): they will probably not see a decline in population but rather an increase. Less dense areas may die out. Urban areas with strong economies are “hot” and I am not convinced this may change soon.
Home-office may make “urban centers” less attractive and overvalued - but “suburbs” will remain very valuable imho. People still want to have good infrastructure and schools, so even with a shift from city-center office work to “suburb-homeoffice” I don’t think this will change...
And for clarification: in Germany (over-simplified) expensive locations in city centers run at 10kEUR/sqm, suburbs maybe at 4k-7k EUR/sqm in strong regions? So this may sound “super cheap” to folks in the US with a bit of upside until we reach “US prices”.
I am sorry and surprised to hear that they didn’t make inflation even on the sale... Crazy.
The average price per square meter is roughly the same in Berlin and Washington DC. The real estate market in San Francisco and the bay area is an outlier. Houses in second and third tier cities in the US are actually cheaper than comparable cities in Germany, even before you take all the additional transaction costs in Germany into account.
For those who wonder: in some states, there is a 6.5% tax on real estate sales. You sell a house for 1 Mn EUR, the buyer has to pay 65k in taxes... Per transaction. Add the notary and add the real estate agent leaves you at 10% pretty quickly...
And then the government wonders “why aren’t people more flexible in moving across the country to fill all these skilled worker gaps”...
It may also be worthwhile to consider: most houses are brick houses with excellent insulation and high quality windows. The “substance” of the houses is usually built to last 50+ years...
the "fewer people" statement doesn't check out, the article linked shows the US population steadily growing by 1-2 million every year. By replacement rate I'm assuming you are referring specifically to the fertility aspect but that's not enough to jump to the "fewer people overall" and "real estate to underperform" conclusions.
>Buffet did horribly during the crisis. He admittedly undervalued Tech and invested in Airlines - big regrets.
Buffet actually did wonderfully. His 2016 Apple investment (which he made in front of everybody's plain eyes) grew by more than $50BN (even after Apple's recent falter) and is probably the greatest trade ever pulled off. Airlines trade that didn't go well (and clearly covid outbreak is not Buffet's fault) was worth a fraction of that.
One of the big reasons that tech and knowledge companies outperform their book value is because of intangible assets. You can’t represent unmeasurable assets on a balance sheet (thanks intro to financial accounting, I got my tuition money’s worth I guess)
Things like future performance and intangible competitive advantages (e.g. Apple’s growing “ecosystem”) aren’t part of financial statements.
We should expect value to be low right now. Many businesses are closed or below normal operating capacity.
But in the future? These tech companies aren’t going anywhere and if anything COVID-19 is cementing their position.
I think tech companies have more elastic costs than companies with physical products and factories. The tech companies facing unfortunate circumstances (Uber, Groupon) can just cut payroll and run on a skeleton crew with few consequences. They aren’t paying rent on thousands of retail storefronts. Their cloud computing scales down. The software is already written.
Even if people are just using companies to store their money while interest rates are low, I’m not sure it matters, because there’s no good reason to sell.
One thing a lot of people fail to see or think about is the federal reserve literally propping up the stock market with cheap available cash.
This year, the federal reserve not only added over $3T (trillion) USD to the money supply, they effectively inflated the money supply infinitely by removing the reserve requirements of partner banks (who add to the money supply by creating loans on collateral given to them) completely.
I am not kidding. [0]
As of March 26th 2020, banks literally need to hold no capital in reserve to hand out loans (aka inflating the money supply).
Stock values are increasing because there is an infinite amount of money floating around and most everybody you know is blissfully unaware of that fact.
We are in uncharted waters now. The reserve requirement was always 10% I believe from the day the federal reserve opened up shop. Now it's 0%. That is insanity.
I seriously worry the US is in for a taste of hyperinflation very soon.
> How does virtually every tech company become twice as valuable in 6 months?
If every human suddenly became a celiac — with some cases definitely being temporary and some definitely being permanent, but most being indeterminate — the gluten-free food industry would experience unprecedented projected growth.
Instead, every human is stuck in their houses at once, and every job has become remote at once... with some cases being definitely temporary, some definitely permanent, but most indeterminate.
Why wouldn’t the industry that delivers products and services to enable people to work, have fun, eat, communicate, etc. from home, not then experience unprecedented projected growth?
Calibrate this comment with the fact that HNers are perma-bears and were saying it was time to sell during the bottom of the COVID-19 crash. "Like catching a falling knife," "Historical crashes dropped 60% more than this. A long way to go" and the like. Ignore HN if you have any plans to make money from this market. That's what I did.
Between the Feds quantitative easing during the Great Recession and now their buying of corporate bonds (sometimes junk), it’s difficult to discern the true value of companies. Easy and cheap money can make balance sheet appear pretty good at first glance.
The USD losing value relative to peers is helping the market as well. Most companies generate significant revenue overseas but report in USD. As the dollar falls in value they end up with more dollars when converting.
If the dollar continues to weaken then I’d hedge towards the markets continuing an upwards trajectory.
By this standard, the US dollar is down about 10% from its post-COVID crash high (103 -> 93). But over a longer time scale, it's up about 10% from where it spent most of the 2000's: https://www.marketwatch.com/investing/index/dxy/charts.
So I think the answer both "yes, the dollar is signicantly weakening" and "the dollar is still slightly stronger than its recent historical norm".
I’m wondering if that describes this scenario: there aren’t enough dollars, there is high demand for them, but as they get printed they go into securities.
I don't feel I understand well enough to offer much of an opinion, but I think that captures a lot of it. An important addendum might be that a lot of foreign debt is dollar denominated, which means that dollars are often required even to service debt that is not US originated. In my amateur opinion, this is a good primer: https://www.lynalden.com/global-dollar-short-squeeze/
The terms “growth” and “value” nowadays are silly mechanical definitions that bear little relationship to any intelligent investing strategy. The worlds premier “value” investor Warren Buffett was buying Pepsi and Coke stock 50 years ago, and owns more Apple now than anyone.
Buffett will tell anyone who will listen that value investing is purchasing investments at discount offering a good margin of safety to a reasonable estimate of intrinsic value. Low price to book value or low price to earnings don’t remotely comprise the universe of good value investments.
I have only recently started reading about investment and the concept of value investing and your comment doesn't seem to encapsulate what I've understood.
There are also things like the company's management and how they run the company. It's about looking for "wonderful companies" at a good price.
I'm not saying which investment strategy is better or worse, just that I believe there is a lot more to Buffet's idea of value investment than you imply.
You and GP are both right but simply referring to different definitions of value investing.
GP is using “value” in the traditional Benjamin Graham sense of companies that are quantitatively undervalued based on current financial statements. This is the definition used on Wall Street for “value” ETFs or mutual funds.
You’re referring to Warren Buffett’s expanded definition of “value” as any company priced below intrinsic value, which can include qualitative judgment of future growth.
You both make the point that Buffett’s approach deviates from the traditional Wall Street definition of “value”.
The definition of intrinsic value comprises everything you mention and more, such as strength of companies moats. I didn’t want to write a dissertation.
And the least important factor for long term value is strength of management. GE was renowned as the greatest managed company in the world before Immelt. You want a business any idiot can run, because eventually one will.
Additionally, book values have become much less meaningful over time. Many leading companies in the pharma or software space don't have large tangible assets to speak of. If you want to understand google, you won't find much valuable information in their balance sheet.
Value stocks have always faltered when growth stocks did well.
If value stocks always worked then they would lose their advantage. The fact that people give up on them is one theory academics have used to explain the persistent long-term edge value stocks have had over growth, for at least the past century.
Massive inflation in stocks and real-state. It's ridiculous. They should have started raising interest rates years ago - we had record low levels of unemployment, what was the Fed doing but protecting the top 10%?
And for failing to make the right moves ... we get hit with COVID.
Low interest rates are dictated by market forces, not by "them". Too much money, accumulated by older people, chase too few investments, that young people must pay interest for. There are fewer and fewer young people relative to old people, that's the fundamental problem.
This is unsurprising, given how disconnected the market has been from the economy. "Growth" stocks have naturally taken the greater share of incoming money.
It won't last. There will be a correction, of one kind or another, more or less violent. That is how the "efficient market" works.
I'm not using the strategy myself, but if I had to buy and hold anything right now just to test your idea, the market seems full of reasonably intuitive options. I could think of a lot more worrying securities than e.g. AAPL at $106. They've split many times before, and the odds are it'll happen many times again in the future. (This is not investing advice, yada yada)
"You can gauge just how pricey a stock is by looking at its price-to-book ratio,"
"Since 2010 the Russell 1000 value index, which tracks American stocks with low price-to-book ratios and low expected earnings growth, has risen by just 87%, compared with 171% for the market overall."
This reminds me of what Blow-up artist Niederhoffer told me before his second blow up: Price-Earnings ratios have no meaning for long term stock performance :-)
This is an over simplistic view. Simplify the terms so much and you get garbage in, so obviously garbage out.
The russell 1000 value index is quantitative only and tries hard to define "cheap" stocks by different measures.
Value investing in the real world, especially when talking about Buffet, is heavily reliant on qualitative analysis.
How else would Apple, Buffet's biggest holding, will be considered a value investment?
The title therefore is completely wrong.
A good title would be: "Russell 1000 value index performed worse then their growth index recently"
First, Berkshire Hathaway holds AAPL. Ted or Todd probably initiated the position, not Warren Buffett.
Second, they are up about 300% on the stake. That equates to a P/E of 10x based on ttm earnings on AAPL and their basis. At the time, I think AAPL had a pretty modest valuation, also. The theory is that phones were cyclical and that service income would not offset the loss of income from devices. AAPL was widely discussed as a value investment around that time (as was Facebook).
You're right. In September 2016, Apple's market cap was around 500 billion with 45 billion of profit. Apple is currently at 1.83 trillion with 58 billion of profit.
The stock price has tripled, but the profit has not.
Apple's fundamental value metrics were significantly different a few years ago.
Todd or Ted was the first to buy Apple shares for Berkshire, but Warren Buffett made the decision for the bulk of Berkshire’s current stake in Apple. The $35 billion Apple investment (worth more now) [1] is larger than what Todd or Ted manage (about $13 billion each as of last year) [2]. Buffett has also commented publicly on the rationale behind his decision to own Apple.
"Cheap shares" are only cheap because investors are pricing in less growth compared to other countries with similar revenue. Common mistake new investors make is to invest only in companies with low P/E because they're "underpriced". But the pricing is the market saying they have little faith in their abilities to improve their business.
The obvious explanation is that the market is getting better at assessing growth. Of course there are companies like Tesla, Nikola, Snowflake with insane valuations relative to their actual business (and two of them are solid companies with real products and growth). It might be possible that people are pricing in too much growth. But when yields outside of equities are so low you kind of have to chase growth, which incentivizes investors to pile onto growth opportunities.
Where do the authors of the article get the chart data?
It turns out that index details and data are kind of treasured secrets. I could only find Russel 3000 on Bloomberg and MarketWatch[3][4]. On official FTSE Russell page there are no current values[1]. On Googling "Russel 3000 Growth" I get a chart from Google, but when going to MorningStar, which according Google's disclaimer is their source of data for "INDEXRUSSELL", I could only find Russel 3000[2] and it has bogus quote compared to Bloomberg and MarketWatch.
I'm new to all this and since I've been reading a lot about ETFs latey I was hyped about the transparency. But it seems that if you're not Authorized Participant and the ETF tracks index such as Russell 3000 Growth, you know as much about your portfolio as if you had money in managed mutual fund.
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[ 5.8 ms ] story [ 292 ms ] threadThat said, by most measures the current crisis has to date been deflationary. I expect that to change at some point, but I'll also readily admit I did not foresee the current market rally, so who knows what the market will do tomorrow.
Given you didn't see that, have you considered that your view of Zimbabwe might be wrong? Nothing to do with confidence and everything to do with a silly policy to redistribute land to people that can't farm.
QE doesn't give money away for free does it. It is always an asset purchase. That is a qualitative difference.
Similarly a bad pilot doesn't mean heavier than air flight is impossible. You just need a better pilot.
More on what actually happened in Zimbabwe here: http://bilbo.economicoutlook.net/blog/?p=3773
At some point, a theory with more exceptions than the opposite should be considered useless.
Specially when there is a clear alternative: inflation happens when the spending in the economy surpass the capacity of the economy. Than can happen because the government and the private sector spend too much (bubbles) or because the supply side collapse (hyperinflation in Zimbabwe).
There's over 100 currencies. Most central banks control currencies that are rather pedestrian like Thai Baht or South African Rand.
The most that can happen is that there is no saving of the Baht or the Rand outside the taxation area of those currencies. Assuming they are fully floating.
In which case the central bank will be doing nothing other than offsetting the domestic savings in the currency of issue. Because sector balances have to balance.
The concept of "reserve" is utterly flawed. People hold balances of all sorts of currencies for very many reasons - largely working capital, but also for insurance and for prestige.
But here's the trillion dollar question: if QE consists of printing money and buying hugely inflated tech stocks of dubious value, then is there really a qualitative difference?
There is. The central bank can offset all the excess saving in the economy from now until doomsday. As Japan has shown for decades.
Once you close the mental model you'll see why. What does "confidence in the currency" mean in reality? It means that fewer people want to save in that denomination. When they don't save they have to spend (since that is the only alternative in aggregate), when they spend that generates asset inflation, production and, most importantly, more and more tax points - which reduces the need for bonds and "QE" in the first place.
Always remember that an FX transaction is nothing more than a set of two contracts each of which transfer a currency to the other party no less than two days hence. Which means eventually somebody has to have the actual liquidity to settle the net flow. There is no liquidity provider of last resort.
and realize how many people have missed out on a good chunk of profit from the most determined bull run in history
When people start telling you there is a new normal, this is a new paradigm, you just don't understand these new companies, x style of investing is dead, you know a reset is coming.
An investment is worth the value of its future cash flows discounted by the risk free rate (plus terminal value). That's it, it's all that 90% of people need to know. There are many, many unknowns in that statement, which makes it a market.
So the opposite is true: very few people are value investors these days. Possibly in part because value has under-performed over the last 10-15 years. Will the trend reverse? Who knows.
It's hard to predict the next "winner", maybe it remains tech, maybe it becomes something else.
1000 could even be low.
Would you rather buy a 20 P/E company that is growing by 1% a year; or would you rather buy a 200 P/E company that is growing by 30% a year?
Another was that high commission costs would have eaten up all the gains in actually maintaining a value portfolio. Apparently there's a lot of churn in and out of value.
Lots of general public getting in on the market just like 99. Senseless valuations on companies without a dollar of revenue. A historic year for tech stocks right after a historically long bull run, just like 99. Many allegations of fraud since money is so easy to get. Tech stocks make up something crazy like 30% of value in market, again just like 99.
If tech isn't in a bubble, I don't know what's going on. How does virtually every tech company become twice as valuable in 6 months? They don't.
Unlike last time, most of these companies won't crash to zero. But they could easily lose 2/3 of the value as soon as life goes back to normal and everyone sees how much damage corona has done. The relatively fast early recovery has the markets in a state of euphoria.
I moved all my money to "value" stocks last week. These tech valuations defy all logic. Remember when Buffet said to be fearful when others are greedy? Well right now he's investing out in Japan
Of course not everyone believes it, which is why market is so high. And I'm an admitted skeptic that's shorting this market so take that how you will. You will find some mainstream investors calling the market a bubble which is not really normal. All bubbles are obvious in retrospect, and even many investors that think we're in a bubble will join the frenzy assuming they won't be left holding the cards.
There's also almost half the world that doesn't even use the internet in any meaningful capacity. There's a lot of growth left.
But unlike growth in domestic Western markets, this one will be hard for the companies to expand upon on their own. 1B people in China cannot be reached at all by Western companies, the half billion in South America will depend on someone getting rid of the cartels before meaningful buildout of infrastructure can happen (and that won't be possible until the US and Europe drastically change their approach to drugs, until then most countries will effectively be narco states), and the 1B people in Africa... an even tougher nut to crack, given that there are a lot of countries in there that can be considered "failed states" or various degrees of dictatorships, and the rest tend to be extremely poor as a result of hundreds of years of colonialism.
The African continent is really is the last big market left, and only 1B people.
Albert Bartlett[1] would like to have a word. When you find a new petri-dish, and it's as large as the current one - as much space as has ever been used before in all of history, a vast bounty of unexplored space - how long will it last? One minute. One doubling period to go from 50% full to 100% full, and that's it.
(paraphrased)
[1] https://www.youtube.com/watch?v=DZCm2QQZVYk
[1] https://www.investopedia.com/terms/p/pegratio.asp
* A lot of so called tech stocks are companies that aren't all that technology-driven, of course.
If those aren't signs of a deeply irrational market, I don't know what are.
Noone wants to miss out on the next Amazon because people are greedy.
In 2019, Apple paid ~1.7% in dividend yield when 10YR treasuries were paying ~1.7%.
In 2020, Apple now pays ~0.77% in dividend yield, and 10YR treasuries pay ~0.7%.
Do you see a pattern? :)
It's absolutely possible for the fair value of a stock to double: you just need lower interest rates.
The problem is that everyone has become complicit in this euphoria because no one wants to stop the party when everyone's making money.
Notwithstanding, parties eventually end and bubbles do pop. The next question is: when?
The trigger to a stock crash is usually unexpected. I think either car loan or student debt crises but who knows
Now the _average_ is higher!
The thing with bubbles and crashes is that they never come to an end when most investors think they are in it. They only end when most people don’t think they are in one
1. https://www.berkshirehathaway.com/2000ar/2000letter.html
Assuming we overcome the virus and life returns to something like what it used to be, does anyone think we won't still see a significant shift in working patterns? WFH has been a revelation to many people and many employers, and its pros and cons are probably better understood now than they ever have been before. I doubt we'll see anything as dramatic as everyone wanting to work from home full time, not least because I think a lot of people underestimated the downsides before they tried it, but I expect we'll still see a lot more remote working than before. Both our homes and other local venues amenable to it will adapt accordingly, and technologies that support remote collaboration in its many forms will continue to be vital.
The shift to buying more goods and accessing more services online instead of physically going out has forced rapid changes in many businesses and other organisations. That includes many smaller places that haven't traditionally had much interest in or need for technology. Those changes won't suddenly get undone even when we all start going out more again. So again, the technologies now supporting online shopping and services probably have increased significantly in real value.
I'd also add that 25th and 75th year of every century are turning points: the sudden influx of ideas and highly capable people stirs the pot and pushes the progress forward. We're approaching the end of the age started in 1925: opportunities depleted, morale is low, cynical people extracting whatever valuable is left. 2025 is supposed to unlock new ideas and opportunities that'll set the trajectory for the next century.
Buffet is an old out of touch man, who got rich buying the hot stocks of his day. He has lagged the market for 15 years
> He has lagged the market for 15 years
Here's Berkshire's performance compared to the S&P500, over the last 20 years: https://imgur.com/Ssfon56
S&P doubled your money, BRK quintupled it.
2002 to date, BRK had a 8% annualized return and the S&P 500 has a 7.8% return.
However, BRK has a lower Sharpe ratio (0.38) than the S&P 500 (0.4). So in a real sense, SPY has outperformed BRK. That's not to say that an investment in BRK is irrational, the beta is low (0.71) and the correlation to the market is low as well (0.65).
You can't just naively compare some price chart, finance doesn't work like that.
Source: I work as a quant
So while BRK isn't crushing the index, would it be fair to say it "lagged" the market over the past 15 years? Seems pretty close, but I don't have the knowhow to analyze that time period with dividend reinvestment thrown into the mix. Though I've always thought these charts account for splits, no?
Due to the low correlation with the market, BRK can be seen as a great way to diversify away market risk and increase the risk-adjusted returns of a S&P 500+BRK portfolio.
Or in other words, it's a totally solid investment.
Price charts don't account for dividends because people would get confused why the actual price you pay for something is different than the price on the chart.
Edit: sorry if I sounded harsh in my previous comment, I'm a little anal about these things as I see a lot of financial misinformation on HN.
Today people just buy "hot" stocks and make bank because the central bank is also buying them.
If you're curious about how retail confidence is holding up, here's a dashboard I'm building to track discussion on the notorious WallStreetBets subreddit: https://www.quiverquant.com/wallstreetbets/
The real estate crash hasn't rippled ... yet.
Lots of younger people have moved home. High cost-of-living rental areas are going to lose those renters permanently. Once those younger people swallow their pride and move home ... there really isn't anything pulling them back.
Commercial real estate is like Wile E. Coyote running in mid-air trying not to look down. The commercial real estate has lots of empty spaces with no real prospect of refilling them ... yet they're placing those on the books by tacking them onto the end of the financing at the same level as they were when they were rented. That works great ... until the cash flow can't support anything at which point it all collapses together.
Of course, this is all going to hang together like the traders before 2008: "They're is a crash coming. If I'm right, it's almost impossible for me to diversify enough to survive because the trashing is going to be so thorough. If I'm wrong, I look like an idiot and lose money. So, I'll close my eyes and toe the company line and see if I can cash out before the devastation."
https://www.pewresearch.org/fact-tank/2020/09/04/a-majority-...
Of course, it's likely that this impact isn't going to be uniform, so that doesn't mean individual neighborhoods (or even individual cities) have no cause for concern.
It appears like quite a few. I can see into a lot of different apartments from where I live in SF and many, many more are empty. This might also be due to AirBnBs.
The real estate rental prices have fallen, but they're still pretty sticky - I predict they are going to fall more.
https://www.pewresearch.org/fact-tank/2020/09/04/a-majority-...
I just left a remote oriented(Major infrastructure automation startup) to work for a company in a HCOL area. Just completed the 2200 mile trek back from “home” with the pets and the family on Monday.
Anecdotal but the prospect of raising my kid in the middle of nowhere back “home” was not appealing. If I lost my remote gig I would have to take a 50% pay cut to hopefully find a job at one of a few employers locally- or pray I could get another remote gig in a very competitive job market.
Better nature, better job market and higher pay were a deciding factor. Just saying there are plenty of things that might pull a young person like myself and my partner back other than “pride.”
And I would point out that it completely ignores reality to think that it doesn't.
For better or worse in the US, a single male living with his parents at age 25 or above will generally be regarded as a "failure". You can claim otherwise, but the dating pool disagrees with you strongly.
However, I will concede that your situation (under 30 with a child but still in a place like the Bay Area) was not really what I was thinking about. That's kind of a minority for most high tech/high-COL areas which are renowned for having a highly skewed male/female ratio.
FANGMAN has lost $1.4tn in mkt cap since beginning of Sep w/#Apple quietly down 22.6% from highs, #Netflix down 18.3%, #Nvidia 17.2%, #Facebook 17.1%, #Amazon down 16.8%, #Google 15.9%, #Microsoft down 14%.
https://twitter.com/Schuldensuehner/status/13072058719073361...
Things are highly volatile right now. Frothy stocks like Tesla are moving 20% in a day both ways, which is neither normal nor desirable, CAPE at 1929 levels, 5 largest companies (all tech) were > 20% of S&P, IPOs reaching 140x earnings on first day (snowflake), fraud like We Work and Nikola constantly coming to light, companies like Softbank (of We infamy) making huge speculative bets on options. All the signs are here for a remarkable speculative bubble in tech stocks.
All this in the face of the sharpest recession on record, with worse unemployment than the great recession of the 1930s. I'm not convinced US equities will continue to provide the remarkable returns seen this year (with no basis in the real economy). Tech companies like Amazon need other tech companies to spend on AWS and consumers to buy, companies like FB/Google need other companies to spend on ads, companies like Apple/Netflix need consumers with disposable income. Everything is connected.
[0] https://vietreader.com/business/finance/16638-why-is-vietnam...
But.... It's the one asset class where normal people are allowed to leverage themselves heavily. And you can live in it.
Which is... a good thing?
In practice, by and large, you have to balance towards the former, which means your financial returns tend to be lower.
Everyone expects the Fed to inject as many trillions of dollars as needed to the _stock market_ to keep stock prices up. The effects on the economy are more uncertain; but we know the Fed can, has, and said they will do "whatever it takes" to ensure an "orderly market"; which is just an euphemism for "stop stocks from crashing".
TINA. There is no alternative, and if you look at long term treasury rates (YCC has not happened _yet_), people are believing interest rates will be around the 1% mark for the _next 30 years_.
When the long term risk free rate goes from 2% to 1%; stocks become worth twice as much.
You'll be left with 5-100 megacaps, carrying less real revenue than when the debasement started. Consumers, SMBs, and employees will have had their dollars eroded.
Not necessarily.
Prices are dictated by supply/demand - and different goods have different amounts of supply/demand.
As so, it's theoretically possible to continually print money into existence, and use it all to buy Tesla stock, until there are no more shares of Tesla stock left for sale.
Under such a hypothetical scenario, INFLATION would only happen in Tesla's Stock price - as all this extra money spurred DEMAND for Tesla stock and wasn't accompanied by an increase in SUPPLY of Tesla stock. However, the price of shirts would remain the same - as none of this money changed the SUPPLY/DEMAND of shirts.
As so - inflation doesn't necessarily have to happen everywhere.
Note, this is mainly why CPI is a bad indicator of inflation - as it doesn't track the inflation that is happening around us - inflation in assets like stocks / real estate. This also explains why prices of real estate in certain cities are way pricier than others, and also why the stock market can be way overvalued when the economy is doing bad.
<Speculation>
IMHO the method that the Fed uses to inject currency biases towards asset classes by controlling borrowing costs. In an industrial economy, this would typically result in direct investment into new equipment, and an agricultural economy the tilling of new land. However, growth in services or tech is rarely debt-financed as there are relatively low CapEx costs and high opex loads. Given the relative maturity of the industrial and agricultural sectors, there aren't many places in the economy that can productively absorb debt-backed financing.
What we end up with is relatively static asset classes absorbing massive debt-based financing and inflating overall asset prices. Unfortunately, several of these asset prices bleed over as costs to workers who need a home, a rent for their place of business, or an education to acquire skills.
While in a healthy economy, everyone's cost is someone else's income. As long as the Central bank is applying a QE strategy, your cost is a mortgage or a rent backed by a mortgage; the "income" side of the equation is just the central bank.
Asset holders benefit from holding assets that magically increase in price.
</Speculation>
That's not what it was supposed to do. It also wasn't supposed to be policy forever but a carefully calculated (quantitative) intervention.
I'm not even sure it's working any more to boost stock prices.
I'm honestly baffled by so many people thinking that a contractionary stance would be better?
Maybe that needs massive investment rather than monetary policy. Certainly QE has had many other impacts, but it hasn't led to a positive change in the measure that matters - consumer price inflation.
Nope, economic growth is not the goal. Inflation targeting and unemployment targeting is the goal.
I don't see how you can claim that the levers "aren't" working if you don't know what would have occurred without the Fed action.
I'm also not sure what you're hoping to accomplish here. Yes, quantifiable claims are better than subjective ones, but "no one knows what would have happened otherwise" is just an argument that justifies literally any action.
I'm saying having a model for what you're talking about and also having empirical research about what has happened with similar interventions on the aggregate is good.
Looking at a single intervention in response to a massive calamity and saying "well that didn't work because things were bad after!" is what I'm trying to critique.
If the money injected by the fed is not making it to consumers, then we should expect that inflation measured via some kind of consumer price index would not move.
Consumers take out loans, that's a fact. Interest rates are lower, that's also a fact. Therefore, the money is making it to consumers.
If the Fed is able to expand the monetary supply without inflation, then that is a good thing (again) and the Fed should continue doing so until inflation does move.
>If the Fed is able to expand the monetary supply without inflation, then that is a good thing
Expanding the money supply alone does not seem like the right goal. Suppose the fed decided to expand the money supply by cutting a check to the top 1%. I wouldn't expect to see any inflation in the pricing of general consumer goods since that segment of the population just isn't competing for those goods.
Anyone who claims that the Fed is "out of ammo" is not worth arguing with.
Until it comes time to settle. Then they’ll have to either borrow more, by raising interest rates, or literally print money.
This is wrong. The Fed will keep doing QE to prop things up for as long as long as it takes. Do you read the FOMC meeting minutes or listen to Jerome Powell talk? There wouldn’t be massive inflows to equities without the Fed put (QE).
https://m.youtube.com/watch?feature=youtu.be&v=B4xcCO9v-Os
Facebook makes more profit than some stock markets as a whole (might be an exaggeration). Tech companies did well in the crisis, adapted better than others and were generally pretty good in making even more money.
I do agree: lots of people loose in this crisis. But we are probably in fact living in times of super inflation; the EU has for the first time ever taken debt; US and China race for debt.
All you can do (I feel): is watch and be taken for a ride. The gap between rich and poor will grow, so will the gap between “fast adapters” and “the good old industries”.
It may sound harsh: but the economy in the US probably doesn’t really care about those that lost the most and were the most vulnerable.
Hitchhikers Guide to the Galaxy may be the book we all should be reading (again) these days...
It was what, a little over 30% drawdown, that's a crash now? I've lived through 5 crashes then, hope to live through a few more.
> with worse unemployment than the great recession of the 1930s
Great Depression, not recession, and nope. During the Great Depression the unemployment rate hit 25% and was over 15% for most of a decade, here's the graph: https://en.wikipedia.org/wiki/Great_Depression#/media/File:U....
I did say started, not finished :)
Sorry Great Depression. We're in the first few months of this recession, which may well become a depression, and crucially is happening worldwide in almost every country and slowing trade at the same time. It's certainly been a much sharper shock than the Great Depression - the US has seen unemployment rise faster:
https://www.pewresearch.org/fact-tank/2020/06/11/unemploymen...
And there has been nothing like these levels in the US since the Great Depression.
https://www.cnbc.com/2020/05/19/unemployment-today-vs-the-gr...
Since it usually takes these things several years to play out, I'm not convinced that the high water mark for unemployment has been reached yet. There are also hints that the true rate in early 2020 was more like 20% (department of labour statistics). We'll know in a few years, but this is certainly the sharpest recession on record (due to the imposed nature of it), and the only comparable is the Great Depression.
No, not in a world with COVID. Equities should be going down, not up.
I mean, I think the stock are overvalued, but it's not hard to see how we ended up here. I thought about rebalancing out of stocks to avoid a drop, but I'm stymied by the question: rebalance to what?
Sure, a crappy bond now is crappy, but if everyone is right about QE to prop up the stock market, they'll be worth more compared to future crappier bonds.
The value of any investment is the present value of it's future cash flows. Anything beyond that is going to end badly.
If your cost of capital is lower, your return on investment is:
(A) Higher (B) Higher (C) Higher
Which one is it, A B or C?
In an economy with 15-20% unemployment and entire industries on the brink of destruction ( airlines/travel ) this is not a given. If the 5-10 year revenue projections of air-travel are 1/5th of the pre-covid economy, then a small change to cost of capital won't allow you to continue investing as if nothing happened. The risk inherent to Google's bottom line from long-term structural unemployment and lower ad-revenue should outweigh even a 0% cost of capital.
So the Fed can force rates to nothing so companies can get more debt to pay down their existing debt, but the point where they are actually profitable gets further and further away. Meanwhile, they get more and more vulnerable to even the slightest increase in rates.
Everyone can close their eyes and keep driving faster off this cliff for a while, but best case is we become Japan with 100 year mortgages and a market that is flat for the next 30 years because it is half owned by the government.
The real problem is the companies that hit the wall first and go bankrupt suddenly, I think Dave and Busters just announced and October is whispered to be full of incoming bankruptcies. Confidence in stocks won't hold when companies keep randomly dropping 20% in a day.
TINA doesn't consider "not losing money" is a very reasonable alternative that people will eventually realize.
You can't eat stocks.
Interest rates have been low for over ten years.
Interest rates were at de facto 0% in 2015 (and still close to it for 2016) while Apple had a sub 10 PE and Microsoft was around a 15-16 PE. Now they have multiples in the mid 30s despite slow growth. The S&P 500 PE is about 40-50% higher than in 2014-2015, with a worse economic situation.
The Eurozone and Japan have had negative real rates across many years in the past without the type of stock market valuations the US is seeing now. One doesn't guarantee the other.
It's obvious this all comes apart at some point. Interest rates at 0% won't prevent that. There's nothing that stops the market from going back to 2014-2015 style valuations. Companies like Snowflake aren't going to be worth $70 billion (~140 times sales) on the backside of this insanity.
Quick, someone dig up the remains of DrKoop.com and do an IPO. Maybe they can be reincarnated as a telemedicine EV maker that sells hydrogen powered big data machine learning HTML5 supercomputer cloudlets that drift downhill via gravity, producing perpetual energy. Or maybe they can just analyze logs and lose a lot of money for a cool $10 billion valuation.
What we have going on now is primarily mania, not low interest rates. The economy in 2015 was healthier than the economy is today, multiples were nowhere near this, and rates were on the floor for many years at that point. So how about we just reset valuations back to when interest rates were close to 0% in 2015, what will that do to the market? It'll crash it big time, that's what.
It's certainly possible that valuations will remain elevated due to forever low rates. That doesn't mean the mania part of it will sustain, that is likely to be temporary. The public market mania is now so far beyond what was previously going on in the private market, companies have collectively switched modes and are rushing for the exits (Snowflake's recent public valuation was six times the private valuation they were fetching in February). WeWork in hindsight should have waited a year to try to IPO, this market would bid them up.
So if interest rates go down, the present value of those future cash flows increases and share price increases.
Basically 10 years to break even with the current share price. Not very far out of line with historical PE ratios.
Why not something that has less of a chance to fall in a recession, like gold?
The metric completely disregards capital structure (debt to equity) and uses earnings at a single point in time. Earnings can easily be manipulated.
Better to look at
Enterprise value / free cash flow
For a lot of these investors, it will be catastrophic to their personal finances, and this might have knock-on effects on landlords for example when these people can't make rent.
Presumably this would also result in a lot of bankruptcies, and if that is the case who is on the hook for all that debt? Probably credit card companies, mortgage lenders, but what I don't know is who is the owner of the debt for leveraged trading? Is that the brokerage themselves? Is it banks? Someone else?
This does sound insanely high given how many investors have passive portfolios. I'm guessing "leveraged" means something closer to "owns at least one option" than "would be wiped out in a 25% market correction".
As for people not being able to make rent if their investments go bad, there aren't many people who are paying their rent out of their personal savings and relying on their investments. Most people work, pay rent out of their earnings, and if they're lucky put some of the excess into savings or brokerage accounts. People with larger savings are likely to own their own home.
Of course, if there's a market downturn this will lead to bankruptcies, rent defaults and a knock on effect on landlords, lenders, etc. But the main causal method there is people losing their jobs, not their savings.
I hope so, but do we know this? My understanding is that apps like Robinhood make it very easy to do options trading, and there's a whole online subculture around this type of trading.
Can we actually rule out the possibility that a non-trivial percentage of the recent run-up of the stock market is based on "dumb money" from unsophisticated investors, much of which they may not actually have?
edit:
Also I just searched Robin-hood options trading on youtube and this video was the second result:
https://youtu.be/EQRLRYvRYOM?t=568
I find the UI effect when he finishes the option buy to be very telling, and it's interesting to think about who the intended audience of this content is.
https://www.bloomberg.com/news/articles/2020-09-15/big-inves...
I don't think we can rule out dumb money. But also, it's not just retail who's dumb.
If they’re borrowing on margin, a correction happens, and they get a margin call they can’t pay and end up negative, they owe the money to the brokerage. It’s like any other debt that can be bought or sold, I assume.
What happens if the insurance system goes bankrupt?
Blind-spots do exist, as we have seen in 2008. I'm not saying that I know better, but we can't take it for granted that these organizations have an accurate assessment of all the risks, especially when they are making record profits.
Absolutely! IB got caught with their pants down when /CL (WTI crude futures contract) went negative in April. Their system used to calculate margin requirements did not take negative contract prices into account, and neither did the trading software. Margin calls were not issued at the proper time, and traders couldn’t see the price or execute a trade on IB while the contract value was negative. Due to the latter, IB ended up absorbing any losses incurred by customers while /CL was negative. They lost around $110 million.
https://www.ft.com/content/01ee0794-158f-40c5-8bb9-82cf5d5f3...
https://www.bloomberg.com/news/articles/2020-05-08/oil-crash...
The Fed can keep the market from going down, and they can keep it afloat for a long time. But all that energy builds up like a rubber band, until it snaps. The stock market is going up even though it has no reason to be going up. Which means valuations are higher than they would normally be, and keep going up even though they should be flat or going down. Usually this would be fixed through minor “corrections” like maybe a quarter or two of sliding prices and then quickly back to stability and growth again.
But the longer we refuse to let nature find its equilibrium, the more catastrophic the eventual reset will be.
What is this "equilibrium"? Why does the Fed taking a super contractionary policy stance seem better to you?
Expenditures are rebounding and personal income is at an all time high - both of which seem like pretty obvious reasons why stock prices are not crashing.
What's this figure? Mean income? Median? Inflation adjusted? Is investment income included in that figure?
Not all the indicators are rosy right? I mean unemployment, and failure to make rent payments are both still abnormally high as far as I understand.
> is investment income included in that figure
Probably, but it's not a significant reason behind the recent rise.
> unemployment
Yes, unemployment is high which is why it is critical that the Fed is doing what it is doing now, while both employment and inflation are very low.
> failure to make rent payments are both still abnormally high
This metric is not really safe to look at to compare to 2019, given eviction/rent moratoriums.
But this is much more of a short-term band-aid than a real solution isn't it? As I understood the eviction moratorium is just a block preventing people from being removed from their homes. It's not rent forgiveness. So when it expires, those renters will still be on the hook for months worth of back rent, and assuming a lot of them are unable to pay because they are unemployed, this just seems like we're inflating a debt bubble to be dealt with later.
That's also ignoring the financial obligations of landlords - they might also be running into trouble due to lost revenue and for now I suppose they are just supposed to bear it.
My point is that you can't compare rent payment rates from when you would get evicted if you didn't pay rent to rent payment rates from an eviction moratorium where there is no penalty for not paying rent.
> they might also be running into trouble due to lost revenue and for now I suppose they are just supposed to bear it.
The reason that landlords make the profits they do is because they're taking on this kind of risk. They are the party to bear it, and have hopefully hedged in some way. If they are overexposed, then yes, they will fail. Hopefully we don't make the same too big to fail mistake we made last time.
I'm not claiming that everything is great with our economy. It's obviously not. But suggesting the Fed stop doing what it is doing would be perhaps the single worst thing you could do to the entire economy. It is good that equity prices remain high and it is good that personal income has risen. We should capitalize on those trends so that people can soon go back to work.
It seems that the actual result of QE has been that a huge percentage of that money has been dumped into equities, driving prices higher. Yes it's better than a total economic collapse, but it's not clear to me that this is actually a good thing, and not just an artificially inflated indicator which is essentially papering over very real risks to the economy which could cause massive issues down the road.
There was substantial action towards both of those ends, more than any other country.
Other countries are not really as comparable because we're the only rich developed country to have failed so badly at containing it (early on, in the next few months some of Europe will follow us).
> delaying that obligation
Delaying the obligation is better because it means that people won't be evicted if they can't meet the payments even with the governmental support. I'll be honest - the landlords aren't my principal concern here.
> papering over very real risks to the economy which could cause massive issues down the road.
What massive issues? I agree that Fed actions impact equity prices, I disagree that that is a bad thing for the economy. If we had an equity price crash along with what we're experiencing, we would be in deep, deep recession by now.
I just don't think that's true. From what I understand, they payroll support was extremely difficult to get for small businesses, and the majority went to large corporations who had the connections and the bandwidth to deal with the bureaucracy. Even the Cares checks took weeks to arrive in the hands of people without direct deposit.
By contrast, I am currently living in Germany, and I have friends who are freelancers and they had support funds in their bank accounts less than a week after the lockdown started. Also there was already legal machinery in place to avoid job losses which was put in place in 2008 and activated almost immediately.
> Other countries are not really as comparable because we're the only rich developed country to have failed so badly at containing it (early on, in the next few months some of Europe will follow us).
We will have to see, but I'm doubtful this is the case. In Germany for example we still have aggressive contract tracing, and we've already seen containment measures implemented successfully. We have not seen the particular failures in leadership which occurred in the US, and though we may indeed see a second wave, I'm not sure why we should expect that to go worse now that there's improved information and the population has already dealt with this once I'm not sure why we should expect this to go worse the second time.
> Delaying the obligation is better because it means that people won't be evicted if they can't meet the payments even with the governmental support
Why are these options mutually exclusive? You could provide direct support to tenants and also prevent evictions. This would limit the extent to which you are creating a future financial obligation which out-of-work tenants will have no way of meeting.
> I agree that Fed actions impact equity prices, I disagree that that is a bad thing for the economy.
I never said rising equity prices were a bad thing for the economy. My concern is that if we optimize the recovery effort for increasing equity prices, but fail to address other risks, like lack of employment and the creation of housing debt, we could be setting ourselves up for failure in the medium term. If we managed to keep people employed and in their homes and also saw rising equity prices I would have no such concern.
Every tax payer got paid $1200. You're right that it took weeks to come and was inefficient, but paired with an eviction moratorium I think mitigated the impact of the delay. The PPP had issues, but I think the money did keep unemployment lower.
That said, I'm not disputing that the German model for fiscal stimulus is better: it is. But I don't think there was a huge failure of fiscal stimulus in the US.
> Why are these options mutually exclusive? You could provide direct support to tenants and also prevent evictions
Agreed, I don't think those are mutually exclusive and I don't think more fiscal support to tenants would be a bad thing at all. I thought you were suggesting doing such instead of moratoriums, which seems unjust to me.
> My concern is that if we optimize the recovery effort for increasing equity prices, but fail to address other risks, like lack of employment and the creation of housing debt, we could be setting ourselves up for failure in the medium term
I don't think we are optimizing recovery efforts for increasing equity prices. I think that in the short-term higher equity prices is a consequence of expansionary monetary policy with a goal of reducing unemployment.
I don't think we're seeing a housing debt crisis right now and the actions the Fed is currently taking are meant to reduce unemployment (which is higher than it should be right now).
And I’m not just talking about now, at this moment. It goes all the way back to 2008, when rates dropped to near-zero and didn’t even break 3% before they had to drop to near-zero again for the next recession (right now). The Fed gave up almost all their normal tools and never asked for them back, and now they’re gone. Which means if the economy gets worse (and staying the same as right now for an extended period of time is the same as “getting worse”), there’s not a whole lot anyone can do about it.
Basically, if the Fed is out of tools already, the only thing the Fed can do is cash injections. Which they’ve already done this year, trillions of dollars worth. And that might keep the market afloat for another year or two or ten... all while the stock market keeps going up. Not because investors think these businesses are worth that much, but because they know there will never be a decline in the market overall.
And what happens when the market becomes completely decoupled from the value of the businesses they’re trading? And better question... what happens when the Fed changes their mind?
Remind me the last time "the market" decided on an equilibrium without the Fed. 1912?
> The Fed gave up almost all their normal tools and never asked for them back, and now they’re gone. Which means if the economy gets worse (and staying the same as right now for an extended period of time is the same as “getting worse”), there’s not a whole lot anyone can do about it.
Despite its popularity as a talking point, there is actually little economic evidence that Fed policy becomes ineffective at the zero bound. Nor really any evidence that the Fed is "out of tools."
There is huge empirical evidence that taking a expansionary stance during a recession helps lessen the impact of the recession and lower unemployment.
Why would it be better for the Fed to take a contractionary approach during a recession? So the stock market better reflects how you feel it should look?
It’s not about a “feeling” and it’s not a “contractionary approach”. My concern is the Fed has taken the position that the stock market must always go up, no matter what. It’s like saying we must never allow wildfires... well eventually something will happen outside of your control and now the entire west coast is burning and there’s nothing you can do to stop it. If you just let the smaller fires burn when they wanted/needed to, we wouldn’t be in that situation.
You seem to be drawing a hard black and white line, that either the Fed does nothing or they do everything imaginable. As always, there is a middle ground... let the market make its corrections and if something big happens then step in and help ease the pain. The problem with the “do anything and everything to make sure the market NEVER goes down” approach is at some point it will. At some point something will happen that scares investors and the market will drop faster than the Fed can print money. And the more out of touch the markets are, the harder it will drop and the more painful it will be.
But even if the eventual crash never comes, if the Fed is willing to print trillions of dollars every year to keep the stock market up, is it really even a stock market? At that point it’s just a high-interest savings account for the ultra-rich, paid for by inflation (which hurts everyone who doesn’t own stocks). And the way that ends is the rich get richer until we end up with an oligarchy.
It’s dangerous and unprecedented for the Fed to say they will keep printing unlimited amounts of money [2] in order to make sure the markets never go down. Their job is to prevent a depression, not prevent Wall Street from losing even a single dollar.
[1] https://tradingeconomics.com/united-states/interest-rate
[2] https://www.marketwatch.com/story/fed-announces-unlimited-qe...
Imagine you own a 10% stake of the economy. You invest into stocks and turn the money making machine on. Others see the trend and invest as well. Then everybody runs out of money and the growth stops. So you sell your stake, turn the money making machine off and the crash wipes out lots of investors: they can't know when you turn the machine on or off, so they invest after a delay. Once the market reaches the bottom, you invest your now 15% stake and turn the machine on. Others see the growth and join. They have to join because inflation dilutes cash savings. Repeat until your stake is 50%. This is what I believe is the "market" right now, with one investor and a bunch of blind followers.
Nope, no remote way that's true. 40% of all retail investors that were surveyed by a poll that probably misses out on people with retirement accounts, etc. self-reported being "leveraged." I'm not 100% confident that the general American public would be able to identify what leverage is/if they are actually leveraged.
---
[0]: https://www.marketwatch.com/story/warren-buffett-undergoes-a...
The investment in barrick gold is tiny in relation to brk's other investments. About $500m in a $210bn+ portfolio of public stocks (which in turn are smaller than their privately owned firms).
Additionally, Berkshire's holds about $147bn in cash so let's please not get carried away with the gold comments.
I think you’re actually wrong on this point. Entrenched incumbent companies like Amazon and Microsoft do become 2x valuable in a time when all kinds of growing startup competition is shuttering due to covid-19 related economic changes.
It’s not an expression of say Amazon’s existing business capabilities, but rather its moat and financial security to be in leader position when the crises subside, and in a position to squash or acquire poorly capitalized new competition that couldn’t endure the financial stress of the economic situation.
Very unlike 2000, you have several huge, multi-industry conglomerate tech companies with vastly more products, reach and relative capital reserves.
It makes total sense to speculate those incumbents will completely rule the day for the next 10 years, and it will take a long time for new, effective competition to return. When people consider where Amazon will be in 10 years, ~2x price change during the middle of a global crisis where Amazon seems to be doing ok - this makes sense.
Like any price speculation, there’s risk and it might not be correct.
But it’s not a wildly crazy bubble like 1999 - the situations are very different and the types of businesses seeing high valuations are totally different.
In 2020, Apple now pays ~0.77% in dividend yield, and 10YR treasuries pay ~0.7%.
Stocks doubling is just monetary policy in action.
It’s not 1999, the biggest tech companies make a ton of money.
> Remember when Buffet said to be fearful when others are greedy? Well right now he's investing out in Japan
Berkshire bought into the SNOW IPO last week... That’s an American tech company.
> I bought into value stocks last week
You can hold IWM, I’ll stick with XLK. I bet I’m up more than you one year from today. Mega caps can use 0% financing a lot more effectively than small caps can.
Did not make up 20% of SPX in 1999. FB, AAPL, MSFT, GOOG and AMZN do.
Those are exactly the types of exuberant comments that are hyper prevalent before a crash.
I think times have changed. When the automotive industry falters, the assets won’t be worth anything near “book value”.
A very wealthy (now retired) investment banker once told me: “The stock market over-reacts, but is right about the general direction”.
Growth potential, margins and inflation drive stock prices.
I don’t see how tech could be anything but a winner. If anything, Corona has accelerated the need for digitization and buying patterns change.
Buffet did horribly during the crisis. He admittedly undervalued Tech and invested in Airlines - big regrets.
I do not think a lot of industries will go back to the way things were. Why travel in planes if you can do zoom meetings? Why your own car when you can work from home?
Personally, I would rather be worried about the real estate market and office buildings folding in value...
“The stock market over-reacts, but is right about the general direction”.
This is similiar but different to what Kostalany said:
"Stockmarket and economy move like a dog and his owner; the dog walks sometimes behind, sometimes in front of him but always comes back."
I like the description from Kostalany more. But in fact I believe that stocks and economy move only together in very long cycles.
But you thing the automotive industry will falter AND people will move more to the country side? You obviously have never lived outside a big city.
The businesses can achieve solid growth, but the stock price can still lag if the growth isn't in line with expectations. Microsoft from 2000-2010 is an example of a stock price that fell even as the business kept growing year-over-year.
The Intelligent Investor did discuss book value, but the pennies on the dollar quote was for companies trading below salvage value. Book value is still an important metric, but agree that it's not nearly as useful for tech companies.
Traditional financial analysis is still useful when analyzing companies. assets - liabilities = book_value_of_equity, the income statement, the statement of cash flow, and the balance sheet should still be considered.
It's better to compare market value vs intrinsic value. Frothy markets are when valuations start becoming increasingly detached from intrinsic value.
The ability to create, grow and protect rents is more complex and often only understood retrospectively.
I honestly don’t have a good answer how to do better. I know that “book value of equity” is useless for me.
Think about the oil and gas industry.
And even if the fundamentals don’t look great per se: in a time where money is printed like crazy, many industries fold - where are you gonna put your money.
Tech’s growth might also be “lack of other opportunities”.
Buffet would have done mich better/Value investors would have done much better had they understood how the world changed and adjusted their views.
I mainly do S&P500 ETF. I dont outsmart markets.
Real estate also has a long-term demographic problem: fewer people means lower demand. We're below replacement rate[1], so as a general class I'd expect real estate to underperform.
My folks sold a house in a upper-middle class neighborhood in one of the best school districts in their state. They owned for 22 years and didn't make inflation on the sale.
[1] https://en.wikipedia.org/wiki/Demographics_of_the_United_Sta...
And for clarification: in Germany (over-simplified) expensive locations in city centers run at 10kEUR/sqm, suburbs maybe at 4k-7k EUR/sqm in strong regions? So this may sound “super cheap” to folks in the US with a bit of upside until we reach “US prices”.
I am sorry and surprised to hear that they didn’t make inflation even on the sale... Crazy.
For those who wonder: in some states, there is a 6.5% tax on real estate sales. You sell a house for 1 Mn EUR, the buyer has to pay 65k in taxes... Per transaction. Add the notary and add the real estate agent leaves you at 10% pretty quickly...
And then the government wonders “why aren’t people more flexible in moving across the country to fill all these skilled worker gaps”...
It may also be worthwhile to consider: most houses are brick houses with excellent insulation and high quality windows. The “substance” of the houses is usually built to last 50+ years...
Buffet actually did wonderfully. His 2016 Apple investment (which he made in front of everybody's plain eyes) grew by more than $50BN (even after Apple's recent falter) and is probably the greatest trade ever pulled off. Airlines trade that didn't go well (and clearly covid outbreak is not Buffet's fault) was worth a fraction of that.
I do not know what it looks today tbh though.
Should definitely reconsider putting all your eggs in one basket when it comes to value vs growth.
Things like future performance and intangible competitive advantages (e.g. Apple’s growing “ecosystem”) aren’t part of financial statements.
We should expect value to be low right now. Many businesses are closed or below normal operating capacity.
But in the future? These tech companies aren’t going anywhere and if anything COVID-19 is cementing their position.
I think tech companies have more elastic costs than companies with physical products and factories. The tech companies facing unfortunate circumstances (Uber, Groupon) can just cut payroll and run on a skeleton crew with few consequences. They aren’t paying rent on thousands of retail storefronts. Their cloud computing scales down. The software is already written.
Even if people are just using companies to store their money while interest rates are low, I’m not sure it matters, because there’s no good reason to sell.
This year, the federal reserve not only added over $3T (trillion) USD to the money supply, they effectively inflated the money supply infinitely by removing the reserve requirements of partner banks (who add to the money supply by creating loans on collateral given to them) completely.
I am not kidding. [0]
As of March 26th 2020, banks literally need to hold no capital in reserve to hand out loans (aka inflating the money supply).
Stock values are increasing because there is an infinite amount of money floating around and most everybody you know is blissfully unaware of that fact.
We are in uncharted waters now. The reserve requirement was always 10% I believe from the day the federal reserve opened up shop. Now it's 0%. That is insanity.
I seriously worry the US is in for a taste of hyperinflation very soon.
[0] https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Not sure that is the dominant factor, but I'm buying Bitcoin for the first time in my life.
If every human suddenly became a celiac — with some cases definitely being temporary and some definitely being permanent, but most being indeterminate — the gluten-free food industry would experience unprecedented projected growth.
Instead, every human is stuck in their houses at once, and every job has become remote at once... with some cases being definitely temporary, some definitely permanent, but most indeterminate.
Why wouldn’t the industry that delivers products and services to enable people to work, have fun, eat, communicate, etc. from home, not then experience unprecedented projected growth?
Except everyone seems to be having this same discourse. I hear this as everyone being fearful, time to be greedy?
anyways, very happy to see so many people get it
If the dollar continues to weaken then I’d hedge towards the markets continuing an upwards trajectory.
But if the dollar weakens, it doesn’t weaken with no benefits, America starts selling and exporting more as products and services become cheaper.
By this standard, the US dollar is down about 10% from its post-COVID crash high (103 -> 93). But over a longer time scale, it's up about 10% from where it spent most of the 2000's: https://www.marketwatch.com/investing/index/dxy/charts.
So I think the answer both "yes, the dollar is signicantly weakening" and "the dollar is still slightly stronger than its recent historical norm".
I’m wondering if that describes this scenario: there aren’t enough dollars, there is high demand for them, but as they get printed they go into securities.
What do you think?
Buffett will tell anyone who will listen that value investing is purchasing investments at discount offering a good margin of safety to a reasonable estimate of intrinsic value. Low price to book value or low price to earnings don’t remotely comprise the universe of good value investments.
There are also things like the company's management and how they run the company. It's about looking for "wonderful companies" at a good price.
I'm not saying which investment strategy is better or worse, just that I believe there is a lot more to Buffet's idea of value investment than you imply.
GP is using “value” in the traditional Benjamin Graham sense of companies that are quantitatively undervalued based on current financial statements. This is the definition used on Wall Street for “value” ETFs or mutual funds.
You’re referring to Warren Buffett’s expanded definition of “value” as any company priced below intrinsic value, which can include qualitative judgment of future growth.
You both make the point that Buffett’s approach deviates from the traditional Wall Street definition of “value”.
And the least important factor for long term value is strength of management. GE was renowned as the greatest managed company in the world before Immelt. You want a business any idiot can run, because eventually one will.
If value stocks always worked then they would lose their advantage. The fact that people give up on them is one theory academics have used to explain the persistent long-term edge value stocks have had over growth, for at least the past century.
And for failing to make the right moves ... we get hit with COVID.
It won't last. There will be a correction, of one kind or another, more or less violent. That is how the "efficient market" works.
I remember an article saying "buy and hold was dead" in 2009. Marked the exact time to do buy and hold.
"Since 2010 the Russell 1000 value index, which tracks American stocks with low price-to-book ratios and low expected earnings growth, has risen by just 87%, compared with 171% for the market overall."
This reminds me of what Blow-up artist Niederhoffer told me before his second blow up: Price-Earnings ratios have no meaning for long term stock performance :-)
The russell 1000 value index is quantitative only and tries hard to define "cheap" stocks by different measures.
Value investing in the real world, especially when talking about Buffet, is heavily reliant on qualitative analysis. How else would Apple, Buffet's biggest holding, will be considered a value investment?
The title therefore is completely wrong. A good title would be: "Russell 1000 value index performed worse then their growth index recently"
Second, they are up about 300% on the stake. That equates to a P/E of 10x based on ttm earnings on AAPL and their basis. At the time, I think AAPL had a pretty modest valuation, also. The theory is that phones were cyclical and that service income would not offset the loss of income from devices. AAPL was widely discussed as a value investment around that time (as was Facebook).
The stock price has tripled, but the profit has not.
Apple's fundamental value metrics were significantly different a few years ago.
[1]: https://www.cnbc.com/2020/07/16/warren-buffett-reaps-40-bill...
[2]: https://www.cnbc.com/2019/02/25/warren-buffett-says-berkshir...
The obvious explanation is that the market is getting better at assessing growth. Of course there are companies like Tesla, Nikola, Snowflake with insane valuations relative to their actual business (and two of them are solid companies with real products and growth). It might be possible that people are pricing in too much growth. But when yields outside of equities are so low you kind of have to chase growth, which incentivizes investors to pile onto growth opportunities.
It turns out that index details and data are kind of treasured secrets. I could only find Russel 3000 on Bloomberg and MarketWatch[3][4]. On official FTSE Russell page there are no current values[1]. On Googling "Russel 3000 Growth" I get a chart from Google, but when going to MorningStar, which according Google's disclaimer is their source of data for "INDEXRUSSELL", I could only find Russel 3000[2] and it has bogus quote compared to Bloomberg and MarketWatch.
I'm new to all this and since I've been reading a lot about ETFs latey I was hyped about the transparency. But it seems that if you're not Authorized Participant and the ETF tracks index such as Russell 3000 Growth, you know as much about your portfolio as if you had money in managed mutual fund.
[1] https://www.ftserussell.com/products/indices/russell-us-styl...
[2] https://www.morningstar.com/indexes/ixus/rut/quote
[3] https://www.marketwatch.com/investing/index/rua
[4] https://www.bloomberg.com/quote/RAY:IND
In addition you can go to edgar and download the NPORT files monthly.
You're right that index positions are expensive to obtain. But the ETF holdings are a pretty good proxy