Global Macro Trading Journal
- Thread starter Daal
- Start date
I disagree with the premise of the tweet and table...
Companies do not create wealth. People who want to or need to patronize the companies that are listed on stock markets are the ones who generate the wealth for them.
It's all about the little guys. WE THE PEOPLE.
Whether its the people or the companies, point is, stock returns are very influced by a few outliers. Anyone looking at 20y periods and pronnouncing 'the small cap effect is dead' 'this or that is over' is missing out on this factor. With stocks, either you got a boatload of data and then can perhaps infer SOME things from that data or you have nothing at all. A little data might be worse than no data, at least to the extend that it enables people to cherry pick and justify their previous existing biases
"Berlin office buildings are especially hot thanks to the city’s growing population, limited supply and booming tech scene. Prime office capitalization rates there are at 3.25%, a record low, according to CBRE GroupInc."
https://www.wsj.com/articles/europes-new-safe-haven-german-real-estate-1491298209?mod=e2tweu
And you know what, these properties are probably worth every penny. Low cap rates sound crazy but they aren't like bond yields that are fixed. Usually good buildings can pass inflation through the yields, so its more like a floating rate bond than a fixed coupon bond. Owing prime real estate in Germany is probably a much better bet than owning gov bonds or perhaps even stocks
https://www.wsj.com/articles/europes-new-safe-haven-german-real-estate-1491298209?mod=e2tweu
And you know what, these properties are probably worth every penny. Low cap rates sound crazy but they aren't like bond yields that are fixed. Usually good buildings can pass inflation through the yields, so its more like a floating rate bond than a fixed coupon bond. Owing prime real estate in Germany is probably a much better bet than owning gov bonds or perhaps even stocks
What happens to the Shiller CAPE ratio when we roll out the weak 2008/09 earnings?
https://earlyretirementnow.com/2017/03/22/cape-fear/
https://earlyretirementnow.com/2017/03/22/cape-fear/
How about switching USD for CHF regarding cash? Idea I'm strongly considering in a very near future.
I used to be a big believer in 'valuations', CAPEs and other things like that. You see the historical numbers and somehow feel this sense of control about how the market behaves. Then I decided to do my backtesting project of testing out allocations, portfolios, random tests using US data from the 1920s to 2000s. I learned quite a bit but a big lesson was, how quickly historical conclusions that you develop (or theories) are completely destroyed as you add more data. I learned how fragile 'empirical' stuff really is.
CAPE is a great example of that, it has a great history, then the 90's and 2000s come along and the true believers (people like John Hussman) blow up like there is no tomorrow because anyone that goes to cash, buy puts like crazy, shorts based on that, is inherently short the convexity of the stock market. And when you do that, you need to be right a huge % of the time. Stock market 'idiots' on the other hand (the ones buying at 'crazy' valuations) don't need to be right as often. Worse case, they overpaid some but that is fine because people get salaries, dividends, interest income and a fall will enable them to invest those proceeds at better prices/implied returns. Therefore what the true idiots are afraid of (folks like Hussman and Jeremy Grantham) is actually a bening risk people shouldn't even care much about. Its a lot worse watching markets go up for years/a decade without you, then to overpay some for an investment
But if someone needs follow this CAPE religion that badly, here is a way to do it:
Sell out of that market that has the high CAPE that one is afraid about but immediatly rebuy another that has a much lower CAPE (a different country stock market, or better, several countries). That way, if selling was a mistake in the first place, the repurchase of a different market is likely to offset that mistake
Worst thing you do is to join the church of CAPE and then go to cash, post bearish articles around, short, buy puts like they are going out of style, etc.
I learned this lesson the painful way, by watching something rise exponentially for years without me on board. I wish I had more critical thinking of this 'empirical' crap back in the day
This valuation stuff only truly works with figuring out what is 'cheap', there is a zero bound to the downside that makes estimates a lot easier. Finding out when something is too expensive is a lot more difficult because stocks are unbounded to the upside (so are nominal and real earnings)
CHF is really at a good premium these days because of all the disllocations in Europe (I think). Not only its high on a PPP basis, there is also a fair amount of negative carry. One idea that I had recently in order to make it ok to own CHF, is to split 70% CHF plus 30% EM currencies. CHF is high safety and negative carry, EMs are high risk big positive carry. By 'mixing' it you get medium risk ok carry, and the risk part is highly diversified (10+ currencies). So overall pretty safe.
I dont do it because I still think the dollar will be ok but its a good play to bring out of the toolbox down the line
If you look at things like IG corporates (LQD) with a 3.24% yield, junk bonds with yields of 5.5% and SPY with a dividend yield of 1.75% plus a buyback yield (on a sustainable basis) of 2 something percent, we are talking about a stock market that will return 4% a year from divs and buybacks alone. You put some growth in there and the competition from junk bonds and the market is likely to return something like 6%, against an historical of 10%
The real craziness is how much a stock market like that is hated and called crazy/a bubble/a sell
The real craziness is how much a stock market like that is hated and called crazy/a bubble/a sell
Thanx for prompt and detailed reply, mate. Cheers