bubble

Sociological Explanation for Rising Markets?

        The huge increase in PE ratios (double what is reasonable and traditional) along with the huge increase in debt to GDP ratio (also doubled) over the past 20 years requires an explanation. Of course, central bank policies encouraging growth of the money supply (part of which is connected to declining interest rates) were the main reason. Another reason may be a sociological one that in the past several decades there has been a tendency for high earning, degreed, credentialed professionals to get married to each other, whereas many decades ago there was a greater degree of married couples in a situation, where the spouse, usually the wife, had a non-professional, moderate income career. The benefit of

2017-10-24T09:58:35-07:00 October 24th, 2017|mayflowercapital blog|Comments Off on Sociological Explanation for Rising Markets?

Thaler Wins Nobel Prize For Behavioral Economics

   Richard Thaler won the Nobel prize for work on Behavioral Economics. In my years of experience working with consumer/investors in finance I have been shocked how many well educated consumers made irrational financial decisions because of the gravitational tug of emotions, including peer pressure. I am shocked at how society tolerates huge, irrational, unjustified stock market bubbles. The establishment viewpoint about finance, the Efficient Market Hypothesis (EMH), assumes stocks are always fairly priced because everyone is presumed to be rational and diligent in investing. In reality many investors don’t study the market and instead allow peer pressure to push them into poorly thought through investment themes. If the EMH was correct then there never would have been a huge

2017-10-10T13:56:34-07:00 October 10th, 2017|mayflowercapital blog|Comments Off on Thaler Wins Nobel Prize For Behavioral Economics

Cash On The Sidelines: Does It Justify High PE Ratios?

Fundamental analysis may look at PE ratios to define bubbles. But what should one do if the money supply has been drastically increased thus providing more funds for investors to engage in a bidding war to buy stocks? Does that mean that PE ratio guidelines should be expanded to accommodate the increased supply of money? Some fundamentalist advisors refer to the phrase “cash on the sidelines” as a false concept that can’t happen.  They assume that there is a finite amount of cash available to be traded between investors for shares of stock held by other investors and that on the aggregate that no new cash can appear on the sidelines and then be deployed into buying stocks. This would

2017-08-14T14:01:11-07:00 August 14th, 2017|mayflowercapital blog|Comments Off on Cash On The Sidelines: Does It Justify High PE Ratios?

Greenspan Says Bonds Are A Bubble

          Alan Greenspan was quoted today saying that stocks are not a bubble yet he said bonds are. I strongly disagree. The traditional metric was that the ten year Treasury yield equals nominal GDP. Using PCE inflation around 1.6% and real GDP of 2.5% implies a 4.1% yield is needed. (But this metric was developed during the old days before the labor market became weak and before EM countries had huge Savings Gluts.) Contrast this with the current yield of 2.25%; the difference between 2.25 and 4.1% is 1.875%. Assuming the 1.875% difference is multiplied by the duration of 8.8 then the 10 year bond price needs to drop 16.5% to reach fair value. That is hardly a sign of

2017-08-01T14:32:46-07:00 August 1st, 2017|mayflowercapital blog|Comments Off on Greenspan Says Bonds Are A Bubble

Not A Bond Bubble

    An article in FT.com “Bond bubble brews as central banks retreat from QE” today expressed worry that global central banks will end Quantitative Easing thus triggering a rise in rates. I disagree. Ultimately central banks will act to avoid triggering a crisis and will let any tapering plans be controlled by a need to taper gradually so as to avoid a crisis. What is more powerful than central banks and their ownership of bonds is the marketplace. By “marketplace” I mean the global market for all types of goods and services. I expect global GDP to continue to have a weak growth rate with minimal chances of it suddenly improving. Unemployment will also have minimal chances of suddenly improving,

2017-07-24T16:37:45-07:00 July 24th, 2017|mayflowercapital blog|Comments Off on Not A Bond Bubble

CAPE PE10 Still Valid

   The Vanguard research paper “Improving U.S. stock return forecasts: A “fair-value” CAPE approach” on CAPE PE10 valuation method suggested that it could be improved by using real interest rates instead of nominal rates. The paper was well intentioned and very professional. It may appear to be correct but the real reason why this appears to work is different from what the Vanguard paper says. The intuitive opinion is that lower real rates act as a lever to lift stock and bond prices and thus in the post 2008 era low rates have acted to make stocks go higher than forecast by the PE10. However, for several decades experts have researched and written about the phenomenon of low and declining

2017-07-20T13:41:09-07:00 July 20th, 2017|mayflowercapital blog|Comments Off on CAPE PE10 Still Valid

Feedback Loop Fools Stock Investors

    The availability of put options has reduced risk for owners of stocks who own puts, thus inducing more people to buy stock. As low interest rates make more people seek to earn a fake “yield” from selling naked put options this has created a vicious cycle or feedback loop where the flow of money into put writing makes stocks less risky and thus makes writers of puts feel there is not much risk in writing a put. This is like in the pre-2008 era when AIG offered a huge amount of cheap insurance against the risk of a crash in mortgage backed securities which helped contribute to the creation of more risky mortgages that in turn allowed more people

2017-07-19T18:16:37-07:00 July 19th, 2017|mayflowercapital blog|Comments Off on Feedback Loop Fools Stock Investors

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.

2017-04-11T13:20:26-07:00 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

2017-04-06T13:46:56-07:00 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

2017-02-14T13:36:23-08:00 February 14th, 2017|mayflowercapital blog|Comments Off on Stocks Hit New High: Does That Mean Time To Buy Them?