This page has been archived and commenting is disabled.
Why Stocks Are Not "Cheap Relative To Bonds"
Authored by Jim Quinn's Burning Platform blog,
For the lazy people who don’t like to slog through Hussman’s entire data laden weekly tome, I’ve picked out the most pertinent sections. For the really lazy, I’ve bolded the most important sentences.
When everyone on Wall Street is using the same algorithms in their HFT supercomputers, and John Q. Public isn’t even in the market, who will these supercomputers sell to when they all get the sell signal at the same time?
When that time comes, and it won’t be long, I’ll be munching popcorn and watching the festivities unfold. The talking heads, government apparatchiks, and Ivy League educated big swinging dicks on Wall Street will declare a national emergency and demand another bailout.
Will we be stupid enough to fall for it again, or will we start hanging bankers?
Every valuation ratio used on Wall Street is simply an effort to approximate the Iron Law of Valuation by comparing price with some fundamental “X,” instead of explicitly modeling the long-term stream of deliverable cash flows for that investment. And here’s the central issue – if your fundamental “X” is not representative and proportional to the very, very long-term stream of cash flows that stocks are likely to deliver over time (think 50 years), valuing stocks as a ratio to X is meaningless. At the extreme, paying $100 for a one-year promise of $25 would represent a “cheap” P/E of just 4, but it would also be a ridiculous investment. Similarly, history has demonstrated cycle after cycle after cycle that paying elevated P/E multiples on record earnings is a time-tested way to lose 30-50% of your money by the time the cycle is complete.
...
The higher the price an investor pays for a given stream of expected cash flows today, the lower the return that an investor should expect over the long-term. As detailed below, investors have responded to zero interest rates by driving stock valuations up to the point where expected market returns over the coming decade are also zero. Given that outcome, one is quite free to say that stocks are reasonably valued “relative” to zero interest rates, but one should still expect zero 10-year returns on stocks.
My impression is that’s not how investors are thinking. Particularly at market peaks, investors seem to believe that regardless of the extent of the preceding advance, future returns remain entirely unaffected. The repeated eagerness of investors to extrapolate returns and ignore the Iron Law of Valuation has been the source of the deepest losses in history.
Current valuations are above the 2007 peak, and are now within about 15% of the 2000 extreme.
What we haven’t seen at any point in history is the combination of dismal projected returns for the S&P 500 coupled with a similarly dismal yield-to-maturity on bonds. The coming decade will be an underfunding disaster for corporate pension plans, endowments, and municipalities, most that still typically plan around an assumed rate of return closer to 8%. The most reliable measures we identify suggest that nominal total returns on a conventional asset mix are likely to be closer to 1% annually. Quantitative easing has already given investors, at least on paper, the gains that they would otherwise have waited years longer to achieve (again, at least on paper). Particularly in equities, investors who do not have a very long horizon and cannot actually tolerate a 50% loss should consider realizing those paper gains now and cutting exposure to a tolerable level. That’s not market timing – it’s sound financial planning that may be quite overdue. My impression is that the window of opportunity is closing quickly.
Recall that the 2000-2002 and 2007-2009 collapses were accompanied by Fed easing, not tightening. “Following the Fed” would have been disastrous in each case, as the Fed cut rates persistently and aggressively as the market lost half its value. Indeed, the Fed began cutting rates several weeks before the 2007 peak. The Fed also did not tighten within a year of the 1929 peak.
How many investors do you suspect will be available to absorb your shares at current price levels once they begin trying to exit simultaneously?
Look around, and all you’ll see are other bulls who share virtually identical beliefs despite the fact that many of those beliefs are contradicted by historical evidence. As I’ve detailed in recent weeks, stocks have been in a clear price-volume distribution pattern for nearly a year. The NYSE Composite has gone nowhere since last July, while the Dow and S&P 500 are back to their late-December levels. Soon, the only ones who will be available to take the buy side against sell orders are, well, value investors like me, and we don’t see value anywhere near current levels. The rule is simple. Once market internals have deteriorated, the exit rule for bubbles is that you only get out if you panic before everyone else does.
Frankly, history suggests that a rather ordinary completion to the present market cycle would involve the S&P 500 losing more than half of its value.
Based on the combination of obscene valuations and increasing deterioration across a wide range of market internals, our outlook remains hard-defensive here.
At present, market losses that may seem like “worst case” scenarios are actually quite run-of-the-mill expectations. As Santayana wrote, “Those who do not remember the past are condemned to repeat it.”
»
- 15119 reads
- Printer-friendly version
- Send to friend
- advertisements -
Who's buying treasuries today? The usdx is sinking fast. It looks like that H/S on the 4-hour chart might play out later.
The average ZH reader knows that anything that can be manipulated is being manipulated to make someone else rich. That goes for stocks, bonds, currency rates, insurance, housing, etc.
So let me get this straight, an article about the valuation of one fraudulent financial product being high or low versus another fraudulent financial product? Zzzzzzz.
This Deer with popcorn needs to become a thing. Almost as good as the dead cat bouncing down the XLE.
Serious answer: rotation out of EM and EU bonds to UST's on Japan/China 1Q GDP revisions.
Hit the fucking panic button Bitchez! Hit it!
Don't look at it and maybe it'll go away
Everything will be fine as long as the fairy dust supply holds out....
cooooommmeee ooooonnnnn - close below 2084 !
we swindled some folks
"Will we be stupid enough to fall for it again, or will we start hanging bankers? "
Its a good question, albeit probably rhetorical.
So when the Police pension funds get decimated, and the bankers are the only ones who will be able to afford a security detail, do the police cast their lot with their new employers or with the rest of the public. I hope to not be around at that point, but it will be "interesting" nonetheless.
Cops are cannon fodder to the coming shit storm. If I was a B person, my security detail would be a little more carefully selected.
Annnnnnnnnnddd........it's gone.
https://youtu.be/-DT7bX-B1Mg
BANK MANAGERS FLEE TO BRAZIL!
POLITICIANS FOLLOW CLOSSELY BEHIND!
John Q. Public is broke. John Q. Public can "feel" something is wrong in the force. Can't quite put his finger on it. But it has his attention at this point.
The collapse is in centralization. In the nanny state. Not privately. Where is the cash going to run? Who runs bartertown?
Ultimately Wall Street gets decimated. But, if one plays for the end game, they likely get run over by the events in between.
Most of these rediculous valuations are based on buybacks, profit reporting shenanigans, and low interest rates.
I saw some ass clown on the blowhorn earlier saying that Japan, and Europe are great places to invest now. How that dolt can look in the mirror in the morning is beyond me.
Not only are valuations high, but rates are rising through the markets thereby destroying borrowing costs and profits.[ corporate bonds, mergers, buybacks, Capex,]
Long SPXU
Got another 18 months left in the term.
The time to put any index short on is right before the elections.
There will be no OMG!! seloff until then, regardless of what anyone says.
It would have happened by now if it was ever going to happen. So, it's not happening, so save your money and wasts it on a tech company.
Or go buy some gold coins, or donate to a charity, (you can write that off)
Empirical vs. theoretical, the theory sounds great and the real world sucks, so go with the stuff that sounds good ...no matter what....
MW:
The Group of Seven leaders agreed Monday that the world should end its use of fossil fuels by the end of the century.
“Deep cuts in global greenhouse gas emissions are required with a decarbonisation of the global economy over the course of this century,” the G-7 leaders from the United States, Germany, Canada, Japan, France, Italy and the United Kingdom said in a declaration from the meeting in Germany.
But the end of the century is a long way off.
In the meantime, “oil companies will predict that fossil fuels will remain dominant into the 22nd- and perhaps even the 23rd-century, but I sense more traction for the anti-carbon foes,” said Tom Kloza, global head of energy analysis at the Oil Price Information Service.
AHAHAHAHAHA! Fools don't even understand how many things they touch every minute of every day are made from petroleum products. If we go back to being an agrarian society and living in caves perhaps they get their wish come true...
Does this mean that only moar QE can save the pension funds, insurance companies and .. the womens and childrens ? Then QE-moar it is !
The privileged, who enjoy borrowed money at 0%, have brought market profits forward. It's the opposite side of record debt (demand brought forward). Therefore, when it falls, it will be epic in both magnitude and duration.
very well said.
and succinct.
In a deflationary depression EVERYTHING collapses in price. Those that do not understand that will fall early prey to the deflationary vortex about to suck the global economy into its abyss. Trying to find a safe haven other than cash will surely destroy those that attempt to do so. In a deflationary environment, Cash is NOT Trash.
http://www.globaldeflationnews.com/inflation-vs-deflation-part-1which-on...
So no gold or silver?
This article again presumes central banks will raise interest rates versus embark on negative interest rates (or a tax on central bank deposits similar to the EU). A reduction or at least maintenance of current central bank rates is a likely outcome into 2016 and 2017 given lower interest rates, lower commodity prices, and increased government and personal debt have failed to stimulate the enconomy. Moreover, articles on stock market valuations continue to point to acceptable PE tolerance ratios of 17X to 18X for the overall market, which are based on histoical benchmarks established when interest rates were significantly higher. Those PE benchmarks no longer hold true if the pervailing 1-3 year GIC or bond rate is yeild 1-3%, and these days fading quickly to 1%. A PE of 20X translates in pure form to an annual return rate of 5%, much higher than prevailing bond and invest yield. The PE ratio just has to be real and sustainable, thus reliance on a host of variables in selecting the right stocks is key. A bump in interest rates of half or even a full point, may set the markets into a temporary tail spin, but investors will continue to place their cash where they can attain the highest yield, which is in good quality stocks. The notion of whether you invest in cash or invest is pathetically low GIC and bond market yield is hardly worth getting out of bed for.
Like two steaming piles of dookie next to each other and saying the one on the left smells great RELATIVE to the one on the right.....in reality, they're both....shit!