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Has The Bull Market In Stocks Become 'Too Big To Fail'
I heard too Joe Nocera on NPR yesterday use the word "bubble" to describe the current equity market.
Based on historical valuation (M*'s fair value plot below), I just don't see it.
To me his description, along with "faux wealth" in current article, seem like sour grapes for those that got out of stocks in early 2009, if understandably so.
Reply to @Charles: As for people who got out of stocks and/or who haven't gotten in and or who have fleed to bonds entirely, I think it's unfortunate that there's no exploration of the psychology after you have three years of almost consistent outflows of stocks and visibly less interest in investing (if measured by searches, business channel ratings, outflows etc.)
Maybe not "faux wealth", but people act as if it's a free lunch. As David Einhorn noted on CNBC a couple of years ago: "I think you can argue that, because we have gotten to the point where the transmission method is broken. You are trying to create a wealth effect which is another asset-based economy thing, it's very questionable whether higher stock prices cause lots of incremental demand, and you have the cost of food and energy which are real things that people have to pay for. And if you have to pay $3, $4 or $5 for gas, you have less money to go out to eat."
Meanwhile, prices for many common needs continue to rise noticeably. Meanwhile, what % of people own what % of stocks in this country, while much of the rest just sees higher prices as the effect? The Fed has admitted that they are trying for a "wealth effect", and it's troubling that blowing one asset bubble after another would appear to be the only idea that government has. That's not a solid foundation or sustainable without continued stimulus. I agree with what Seth Klarman said the other day: "(The) underpinnings of our economy and financial system are so precarious that the un-abating risks of collapse dwarf all other factors."
Collapse? I don't think so, but I see big picture problems that aren't being addressed at all (not surprising, given you have a government unable to work together) and worry about social instability if the gap in this country between the haves and have nots continues to get wider. I remain curious about the continued ability to blow one asset bubble after another - if we go into recession, we already have ZIRP and QE.
Not saying anything against stocks, I think people have to own stocks because you have a government who has effectively given up decision making and told the Fed to (as Senator Schumer told Bernanke) "Get to work." They've been working with ZIRP and QE for the majority of the last four-five years, and I think they'll continue to until the next election.
While I'm not going to debate valuation, I do think this chart showing margin correlation to the markets is rather interesting:
Good chart on margin correlation...had not seen before.
I think people have to own stocks because you have a government who has effectively given up decision making...
You're telling me. I'm actually more frustrated and concerned with nation's gridlock and inability to legislate than Mr. Bernanke's activity (or inactivity), but just my perception. Sequestration is embarrassing.
Will be interesting to see how markets react next week.
* Those that have sit out since the bottom of 2009 is turning sour just like Husman. When these people do give in a return to market it is time to be more cautious.
* I agree with Charles that Market valuations are not stretched. Still we can have pedestrian declines every now and then. I try to put a few dollars to work in these times. In fact, while the index levels are similar to pre-crisis levels, the underlying fundamentals are different. A lot of weaker companies have disappeared since the last crisis. Index composition has changed. The survivors have much better balance sheets, debt levels are much less and many companies have re-financed their debt with cheaper lower interest ones. Balance sheets are much better.
* The concept of "Faux wealth" is false itself. If you had invested during this time, can you sell your equity investments and buy so-called real assets? You can so it is very real. Perhaps they mean "not-absolute" or just political pandering by Mr. Corker to undermine the recovery. Would he call it "faux wealth" has someone else at the white house? I bet he wouldn't!
* Bernanke has become an easy target. Had the congress did not abdicate its own duty and provided fiscal stimulus, we could have normalized the monetary policy sooner. Not only they are not providing any help, but they are actually going counter. This is why we have much slower recovery than previous times.
* One person in the article is quoted to saying that ultra-low interest rates are artificial. How does he know? A lot of cheap talk but nothing to back it up. They are the appropriate levels when you have still high unemployment and monetary multipliers are low, and congress is not in the play. If we can have everyone fleeting to bonds even at such low levels of interest instead of riskier investments that could grow the economy, at higher interest levels they would have even less incentive. If people are willing to put their money in these ultra-low yielding instrument at very high demand why would you offer to pay more? Just look at Europe that made the mistake of trying to keep the interest rates high in the middle of crisis, when the businesses, banks were being squeezed. At the time, people here, even at this board or the predecessor (FA) have been praising Europe. What happened? Now they are 2 years behind and they went through even more painful times.
Comments
I heard too Joe Nocera on NPR yesterday use the word "bubble" to describe the current equity market.
Based on historical valuation (M*'s fair value plot below), I just don't see it.
To me his description, along with "faux wealth" in current article, seem like sour grapes for those that got out of stocks in early 2009, if understandably so.
Maybe not "faux wealth", but people act as if it's a free lunch. As David Einhorn noted on CNBC a couple of years ago: "I think you can argue that, because we have gotten to the point where the transmission method is broken. You are trying to create a wealth effect which is another asset-based economy thing, it's very questionable whether higher stock prices cause lots of incremental demand, and you have the cost of food and energy which are real things that people have to pay for. And if you have to pay $3, $4 or $5 for gas, you have less money to go out to eat."
Commodity prices, highlighting Bernanke's time period:
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/02/20130227_Bernanke.jpg
Meanwhile, prices for many common needs continue to rise noticeably. Meanwhile, what % of people own what % of stocks in this country, while much of the rest just sees higher prices as the effect? The Fed has admitted that they are trying for a "wealth effect", and it's troubling that blowing one asset bubble after another would appear to be the only idea that government has. That's not a solid foundation or sustainable without continued stimulus. I agree with what Seth Klarman said the other day: "(The) underpinnings of our economy and financial system are so precarious that the un-abating risks of collapse dwarf all other factors."
Collapse? I don't think so, but I see big picture problems that aren't being addressed at all (not surprising, given you have a government unable to work together) and worry about social instability if the gap in this country between the haves and have nots continues to get wider. I remain curious about the continued ability to blow one asset bubble after another - if we go into recession, we already have ZIRP and QE.
Not saying anything against stocks, I think people have to own stocks because you have a government who has effectively given up decision making and told the Fed to (as Senator Schumer told Bernanke) "Get to work." They've been working with ZIRP and QE for the majority of the last four-five years, and I think they'll continue to until the next election.
While I'm not going to debate valuation, I do think this chart showing margin correlation to the markets is rather interesting:
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/03/20130301_indu.jpg
Good chart on margin correlation...had not seen before. You're telling me. I'm actually more frustrated and concerned with nation's gridlock and inability to legislate than Mr. Bernanke's activity (or inactivity), but just my perception. Sequestration is embarrassing.
Will be interesting to see how markets react next week.
Thanks, as always.
* I agree with Charles that Market valuations are not stretched. Still we can have pedestrian declines every now and then. I try to put a few dollars to work in these times. In fact, while the index levels are similar to pre-crisis levels, the underlying fundamentals are different. A lot of weaker companies have disappeared since the last crisis. Index composition has changed. The survivors have much better balance sheets, debt levels are much less and many companies have re-financed their debt with cheaper lower interest ones. Balance sheets are much better.
* The concept of "Faux wealth" is false itself. If you had invested during this time, can you sell your equity investments and buy so-called real assets? You can so it is very real. Perhaps they mean "not-absolute" or just political pandering by Mr. Corker to undermine the recovery. Would he call it "faux wealth" has someone else at the white house? I bet he wouldn't!
* Bernanke has become an easy target. Had the congress did not abdicate its own duty and provided fiscal stimulus, we could have normalized the monetary policy sooner. Not only they are not providing any help, but they are actually going counter. This is why we have much slower recovery than previous times.
* One person in the article is quoted to saying that ultra-low interest rates are artificial. How does he know? A lot of cheap talk but nothing to back it up. They are the appropriate levels when you have still high unemployment and monetary multipliers are low, and congress is not in the play. If we can have everyone fleeting to bonds even at such low levels of interest instead of riskier investments that could grow the economy, at higher interest levels they would have even less incentive. If people are willing to put their money in these ultra-low yielding instrument at very high demand why would you offer to pay more? Just look at Europe that made the mistake of trying to keep the interest rates high in the middle of crisis, when the businesses, banks were being squeezed. At the time, people here, even at this board or the predecessor (FA) have been praising Europe. What happened? Now they are 2 years behind and they went through even more painful times.