Global Macro Trading Journal

The big difference between 1999/2000 and today that the CAPE cult doesnt bring up is the fact that in that year, the CAPE was in the sky but so was the forward PE. So the market was priced to perfection. Now the CAPE is high but the forward PE is not, its about avg. So the market is not that optimistic. Which brings to the question why is the CAPE so high? And when you dig it up, you find out that reason, its because of its many flaws. The fact the CAPE is high now tells you more about its structural flaws rather than what the market valuation is
 
There is another indicator that the CAPE ties with in terms of regressions. A while back I tested Damodaran's Implied Risk Premium figure (which goes back to 1965) as a predictor of 10 year stock returns. The R2s came out pretty similar (0.56 for IRP vs 0.58 for CAPE). Right now his IRP figure is 4.75%, so the total projected stock returns would be the bond yield + IRP (so 7 something percent).

So out of the 3 indicators I got that match CAPE in terms of fit to the data
-Forward PEs
-Damodaran IRPs
-Trailing PEs

Two are saying that stocks are a decent value (Forward, Damodaran), Trailing PEs are a little on the expensive side (at 24 its still bellow the 1996-2015 average) but thats only because the market sees the obvious (taxes were cut and EPS is going to pop), and even that one is far from saying stocks are crazily priced.

What we have here is a lot of signs that the CAPE has broken

I find this relevant because if this market were to dump a lot without a recession (so, without the earnings figures being impacted), that will be a big buying opportunity

Since 2009 this market havent gotten killed despite many `reasons` for it. If it were it to dump in this highly benign profit enviroment (a great story to induce a reversal), then its just a nobrainer buy. The long-term momentum (the relentless bid that shows up everytime this market is on its ropes for the many comebacks it has had since 09) and the cleaning out of the marginal longs (plus the new shorts) will make it so. Maybe the entry is right now, and I did add to longs recently, but if it dump more I got cash in the sidelines for further purchases
 
Last edited:
Also, if this assesement of the cheapness of equities relative to rates is correct, it means that it would take a fair amount of surprises to the upside on rates before it truly impacts stocks. I mean truly impacts in the sense that it produces a significant decline in prices for a significant period of time, not just a bad week or month (which is likely to be bought back up)

I mean, 10y bonds averaged 6.2% yields since the 80s to 2007, the market valued equities at a 15 avg forward PE for that period. Why is it crazy to hold them at 16x with 10y yields at under 3%? Even if it were to go to 4% (or even 5%), equities would still be resonably valued at 16x assuming the reason why rates were up wasn`t some sort of 70s style inflation
 
upload_2018-4-12_6-36-40.png

Inflation has started to breakout some. I dont think the Fed will freak out about this but its something to monitor
 
ICO investor Ian Balina got hacked for over $2M
https://www.ccn.com/ian-balina-hacked-for-millions-through-old-email-account/

Here are some of his mistakes that I can think of
-Position sizing, he had over 95%+ of his networth in alt coins, which is just downright absurd. It was fun for him on the way up as he rode $90K all the way to $5M but then the market tanked it back down to under $2M and now he got hacked out of most of it
-He didnt properly secure his Gmail account. Removing phone recovery and email recovery (which are used in case you lose your password to regain access to the account) seem to be a better option. Save the password in a piece of paper somewhere instead of allowing email recovery. If you allow email recovery, now you got to protect 2 accounts (the main one and the recovery one), the recovery one might itself have a recovery email. This all increase the vulnarability surface of the setup
-No hardware wallet. The guy was worth millions but didnt bother to buy a simply hardware wallet, which would be a lot harder to hack (though still possible)
-He kept his private keys in encrypted evernote texts. The problem was that ALL his private keys were exposed once someone cracked his encryption passphrase, which I believe the hacker did doing a brute force off the data found in his email account (using common words, interests, numbers, etc)
-I'm not sure but I believe he didnt had 2 factor authentication on evernote

I learned from his mistakes, this morning I removed the recovery email and phone (someone can take over someones phone number through social engineering by calling the phone company) from my gmail account. I rather lose access to my gmail account then to let someone else in.
Crypto is too unforgiven for people to mess around with weak security
 
"
There were a number of vulnerabilities in Balina’s security which he admits were the cause of the hack. His main email account was backed up by an old college email account, long-since abandoned. In the event of Balina losing the password to his account, the college account could be used to reset the password. Hackers discovered this account and accessed it, using it to reset the password and access the main account where they came across the second major security breach.

Balina stored the personal and public keys he needed to access his digital assets on popular cloud storage program Evernote, secured with password protection. Having accessed the main email, it was a simple matter of resetting the Evernote password and gaining access to millions of dollars worth of cryptocurrency. Balina recalls receiving a message about his college account being targeted, saying “I remember getting an email about it being compromised and tried to follow up with my college security to get it resolved, but wasn’t able to get it handled in a fast manner and gave up on it thinking it was just an old email."
 
Daal said:
Also, if this assesement of the cheapness of equities relative to rates is correct, it means that it would take a fair amount of surprises to the upside on rates before it truly impacts stocks. I mean truly impacts in the sense that it produces a significant decline in prices for a significant period of time, not just a bad week or month (which is likely to be bought back up)

I mean, 10y bonds averaged 6.2% yields since the 80s to 2007, the market valued equities at a 15 avg forward PE for that period. Why is it crazy to hold them at 16x with 10y yields at under 3%? Even if it were to go to 4% (or even 5%), equities would still be resonably valued at 16x assuming the reason why rates were up wasn`t some sort of 70s style inflation
More...

Short answer: I don't know
Long answer (not that have any firm conviction one way or the other, these are just the broad arguments):
  • valuation comparisons are generally done against post 1990 interest rates. Over that period rates have fallen hard. This is likely a one-off that could even be partly reversed.
  • as interest rates have fallen leverage has risen. total debt levels are now at record levels relative to gdp all over the world.
  • China is only going to have joined the WTO once. The one-off era of massive increase in globalisation has happened. It may even reverse.
  • recent (multi decade) equity performance has occurred against a backdrop of rising working age populations generally. This is now slowing or reversing nearly everywhere.
  • corporate profits in US at least are at all time highs relative to GDP. Labo(u)r could well be getting the shake in future especially with relatively declining numbers of workers per population.
 
Quiet1 said:
Short answer: I don't know
Long answer (not that have any firm conviction one way or the other, these are just the broad arguments):
  • valuation comparisons are generally done against post 1990 interest rates. Over that period rates have fallen hard. This is likely a one-off that could even be partly reversed.
  • as interest rates have fallen leverage has risen. total debt levels are now at record levels relative to gdp all over the world.
  • China is only going to have joined the WTO once. The one-off era of massive increase in globalisation has happened. It may even reverse.
  • recent (multi decade) equity performance has occurred against a backdrop of rising working age populations generally. This is now slowing or reversing nearly everywhere.
  • corporate profits in US at least are at all time highs relative to GDP. Labo(u)r could well be getting the shake in future especially with relatively declining numbers of workers per population.
More...
You bring up great points, these points seem to have one thing in common, they embedd some sort of expectation for the future. In my view, in order to assess how attractive equities are one needs to look at current conditions and then make an assesement about how the future will change that. Which is pretty much what analysts do when they put out forward EPS projections (for individual equities or for the S&P500 index).

That is not what the majority of people do when they look at CAPE ratios and then project out returns, which is just absurd. So we are in agreement, perhaps those things will hurt equity returns in the future so a "lower" valuation (relative to interest rates) is called for. But to me the big lesson is that in stock markets, the forward PE (adjusted by the trader up or down based on his analysis) is a lot more robust and useful than CAPE ratios or even current PEs
 
You must log in or register to reply here.
Back
Top