Wednesday, March 30, 2016

The Shit Charade Continues

If every time Yellen opened her damn trap and the S&P500 shoots up 30 points, they should schedule her to make speeches every single goddamn day.

Now let me get this straight...

The US stock markets exploded yesterday because Yellen pretty much said rate hikes were not going to happen and that the US can drop back into ZIRP, and if needed, follow the playbook of other central banks and go into NIRP hell.

So lower rates for longer it good for stocks, but that's only being put in place due to the "weakening global growth environment".

The reason for low rates is a shit economy, but stocks are going up? This is a shit show in its purest form.

Japanese industrial production just crashed. So have HK exports and South Korea exports, both of which have been somewhat correlated in the past to global trade. The number of reports and statistics showing "worse since 2008/2009" have never been higher.

The facts are simple.

  • It has been 8 years and 9 months since the last US recession. After next month, there has been only 1 time in history that there has there been a longer period of uninterrupted growth. That ended in the tech bubble. Given that recessions are cyclical, as every month goes by, it progressively increases the odds (which are already very high) of a recession occurring. (statistically speaking)  
  • US stocks are at excessively high valuations, which have always lead to a decline in prices from the levels that we are at now (GAAP PE 23X).

The premise is deadly simple: US stocks has risen tremendously for an extended period of time. This is just not sustainable.

To paraphrase Jason Zweig, buy high, sure die.

The stock market is not the economy, and if people think pigs can fly, so be it. Buyers beware the bear.


  1. Thanks GMGH, always enjoy reading your posts

  2. Looks like spam machines only read key words and the machine don't really understand the article.
    Comic to see it post an advert-comment saying "great opportunity to make good money" when the blog article is saying the opposite.

  3. Spam bots love me, they are my most frequent commenters haha. Now, if only they would help me click on a few adsense ads along the way....

    From an asset allocator's point of view, I'm finding it hard to decide where next to focus my attention to. Perhaps the deep value EMs and commodities.

  4. There's no reason that stocks have to go down just because they've gone up. But yeah, US stock valuations are looking a tad rich at the moment, but there's a reason for that. 

    The PE ratio has a numerator and a denominator, and the PE ratio can be useful or useless as an indicator depending on which one of those is moving around. If it's the price that's moving, then the PE is meaningful. This is what we saw in late '99, when low-quality dotcom earnings (hahahaha "earnings") were bid up to the moon; or in the early 80s when disgust with stocks sent price/earnings to all-time lows and Businessweek magazine famously nailed the lows with its "The Death of Equities" cover. 

    But if PE's being driven by a change in earnings, then it can swing around wildly and be totally meaningless. US market PEs spiked to 45x in 2001, which turned out to be the second-biggest buying opportunity of the decade; and when PEs went infinite in 2008 because the banks were haemorrhaging so much money that the denominator went to zero, well, that was the biggest buying opportunity since 1930.

    I think the current rise in US PE ratios is at least partly driven by the implosions in the energy sector - and frankly, that's already priced in, because energy stocks have been hammered so badly. I'm not interested in trading based on PEs; they might tell you when things are expensive or cheap, but they won't tell you when those things are going to turn around; and as we saw in '01 or '08, they can be pretty much worthless in some situations. 

    The other thing, though, is that the reason US stocks have "risen tremendously for an extended period of time" is that they had a tremendous fall in the first place. It took stocks five years - from the beginning of 2009 through to mid-2013 - to reclaim the value they lost in six months in late 2008, and we've pretty much been bopping around in a range since about early 2015. 

    And one thing you'll want to take note of: every single thing in this article has been to do with American stocks. All this valuation discussion, asking "are stocks expensive", is nothing to do with Singaporean stocks. Singaporean stocks were (and frankly still are) in that nice obvious "stupid cheap" zone: for all my talk above about how high PEs are meaningless, low PEs usually aren't: when US PEs dropped to single digits in 1980 that was a screaming buy, and Singaporean earnings are trading right around that level now (I'm seeing the STI trading at about 11.5 times earnings, which is the sort of number you really can buy and sit on for thirty years).

    1. Hi Anon,

      What you are saying is spot on. There is no reason for prices to decline just because they have gone up.

      I do agree that it is important to know what about the P/E is changing, which is why Shiller's CAPE has gotten so much recognition. It smooths out that earnings portion so that the price becomes the main determinant of the ratio.

      I doubt that the energy sector implosion is causing the PE's to shoot up. If earnings are negative, they are usually just excluded. Even then, energy makes up 6% of the S&P and 2% of the R2K.

      With earnings declining, buyback power dropping and global outlook meek, the downside looks more probably than the upside from here. From the valuations that the US is at, the more reliable indicators are pointing towards low to no real returns over the next 10 years. I doubt we flatline for 10 years, so I think that there is tremendous risk in the US markets.

      Yes, I did not talk about Singapore stocks. I think that Singapore stocks are of a relatively safe entry point for long term investors. Although there might be collateral impact if my alleged meltdown does occur, the possible downside is definitely not as large and likely to be more temporary given the low multiples we are already at.

      The markets are getting so much less interesting these days. I might just go into lazily indexing once I no longer get the same level of joy and excitement anymore.


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