bubble

A Permanently High Plateau For Stocks?

    Since 1996 the central banks have been increasing the money supply and the amount of debt to GDP by a factor of two. In the last century debt/GDP ratio was around 125% to 75% except for WWII.  Now it is double the 20th century average at 345%. This is why stocks are so seriously overpriced even without the mania symptoms of 1999 which Jeremy Grantham says are proof that it is not a bubble. I disagree with Grantham. A bubble can still happen without an explicit mania because the circumstances of the low growth very weak recovery have acted to camouflage the enthusiasm for stocks that are evidenced by those who enjoy participating in momentum style short term trading.

April 11th, 2017|mayflowercapital blog|Comments Off on A Permanently High Plateau For Stocks?

Building a Bullish Case

The best case for stock bulls is to say that since stocks are mostly owned by the upper 10% of society and these people’s earned income have gone way up, compared to blue collar workers, due to ever-increasing complexity of various professions such as engineering, medicine, the practice of law, CPA practice, etc. then stock prices are a reflection of these professional’s ability to earn and save rather than GDP or the average person’s earnings. The earnings of professionals went up far faster than workers because a talented professional today can be far more productive than 50 years ago; by contrast, an uneducated blue collar worker’s productivity didn’t go up that much. Assuming a finite amount of stock and a

April 6th, 2017|mayflowercapital blog|Comments Off on Building a Bullish Case

Stocks Hit New High: Does That Mean Time To Buy Them?

Stocks continue to rise. The SP index reached 2,337. The ten year Treasury yield is 2.47%. As stocks rise to excessive heights that induces some bond investors to sell bonds and buy stocks. This makes bond prices go down and stock prices go up. However, since stocks are very high priced, it is wrong to chase after a bubble and buy stocks. Instead, people should avoid the bubble in stocks and seek refuge in short term duration bonds, preferably in investment grade quality bonds. The current rally reminds me of the feverish pace of the stock bubble of 1998-2000 when it kept going higher even as a growing number of experts were forecasting a crash. The experts looked bad because

February 14th, 2017|mayflowercapital blog|Comments Off on Stocks Hit New High: Does That Mean Time To Buy Them?

Do Employment Patterns Of Highly Skilled People Explain Stock Bubbles?

Over the past forty years society has become a more class stratified environment where the highly skilled upper-middle class and upper class have a much higher earnings capacity and capacity to quickly find employment than do manual workers. The lower one’s skill set the harder it is to earn a living or find work. If stocks typically are bought by the top 10% of society and this class has gotten bigger percentage pay increases than moderate income people then perhaps this helps to explain the huge run up in stock prices since the low of August, 1982. As the affluent class has increased its ability to save and its financial self-confidence it has used these things to invest in stocks

February 6th, 2017|mayflowercapital blog|Comments Off on Do Employment Patterns Of Highly Skilled People Explain Stock Bubbles?

Will The SP Rise Dramatically In a Melt-Up?

When stocks go up far too fast this is called a “melt-up”. It happened in 1999-2000. Currently various metrics like PE ratio, Price to Sales, Price to GDP show that stocks are at roughly the same degree of being overpriced as the tops of the bubbles of 1929, 1966, 2007. The great bubble of 2000 was briefly higher for a few months. Investor psychology may explain why extreme bubble tops occur. Demographics also help explain investor behavior. During 1999 the median aged Baby Boomer was 44. During ages 25-45 many people go through an aspirational stage where anticipate future promotions and pay raises and use borrowed money to consume a little extra in advance of the expected pay raise. Then

January 26th, 2017|mayflowercapital blog|Comments Off on Will The SP Rise Dramatically In a Melt-Up?

Dow Hits 20,000 Yet Barely Beats Bonds

The Dow hit 20,000 today. It doubled since March, 1999, almost 18 years ago. That’s an annual compounded appreciation of 3.8%, plus the dividend. Since the dividend of roughly 2% a year roughly offsets inflation, then the inflation adjusted total return was basically the 3.8% price appreciation. From 1998 to 2007 bond yields were often higher than this. The Long Government bond index total return was 2.8213 times it starting value since March, 1999, which is an annual return of 5.93%. The Dow had a total return of 3.0845 times its starting value since March, 1999, making a 6.52% annualized rate of total return (which is both dividends and appreciation). The Dow beat bonds by 0.7% a year. Traditionally the

January 25th, 2017|mayflowercapital blog|Comments Off on Dow Hits 20,000 Yet Barely Beats Bonds

The New Administration: Will It Be The Man With The Pin?

Today Trump is inaugurated as president. Trump said stocks are a bubble. I agree. I remember Jeremy Grantham saying no leader wants to be the one with the giant pin who pops the bubble, which explains why the bubbles keep getting bigger. But Trump, who sold off his stocks recently, may end up doing society a favor and be “the man with the pin”. In Dec., 1989 in Japan there was a massive bubble and central bank governor Meino popped it, leading to a horrible but much needed crash. The possibility exists that similar things may happen in the U.S. Our society will be better off. Once people realize it is foolish to play with bubbles then people will focus

January 20th, 2017|mayflowercapital blog|Comments Off on The New Administration: Will It Be The Man With The Pin?

Rising Stocks And Sinking Bonds: Is This The Bubble Top?

Some experts like Jeremy Grantham have warned a few years ago that the current stock market cycle is not big enough to become a true bubble until it is at least 2 Standard Deviations which would be 2,250 for the SP. It is now there. Typically a stock top is a blow off formation on a chart where prices go parabolic and then collapse, like an airplane going into a stall because it went up at too steep of an angle. The enthusiasm over Trump’s policies are causing investors to make an emotional leap of faith that the economy will receive fiscal stimulus that will enable a new era of growth which will help stocks. As long as people believe

December 9th, 2016|mayflowercapital blog|Comments Off on Rising Stocks And Sinking Bonds: Is This The Bubble Top?

Irrational Exuberance 20th Anniversary

Today is the 20th anniversary of Greenspan’s famous comment about being aware of “irrational exuberance” in stock markets. At the time stocks had risen 23% that year. He asked rhetorically (to paraphrase) “how do we know if stock prices are too high”? My answer to that is to use a ratio of price to earnings, or price to sales, price to GDP, also price to Book Value and price to reconstruction cost (Tobin’s Q). When people buy stocks they perceive they will benefit by buying something that has already risen in price so they are literally attracted to something that is expensive. This is called a “Giffen Good” phenomenon by economists where consumers dislike cheap things and pursue the purchase

December 5th, 2016|mayflowercapital blog|Comments Off on Irrational Exuberance 20th Anniversary

Even If Risk Of Stocks Reduced By Federal Reserve They Are Too Risky Compared To Bonds

What happens if every time stocks need to crash they get a bailout from Federal Reserve money printing? In theory stocks are overpriced and need to crash 55% to reach fair value. What is possible is that central banks will decide a deep crash would cause problems for the economy and thus they have sought and could seek to prevent crashes. This could mean that at any given point in time stocks are overpriced but the authorities at the central bank, because they fear a crash, are propping it up. If the Fed decides that a stock crash is like a Too Big To Fail bank crash then they could continuously prop up stocks thus preventing them from dropping down

November 28th, 2016|mayflowercapital blog|Comments Off on Even If Risk Of Stocks Reduced By Federal Reserve They Are Too Risky Compared To Bonds