Authored by Lance Roberts via RealInvestmentAdvice.com, In our portfolio management practice, we focus on weekly and monthly data to smooth out daily volatility. Since we are longer-term investors, our focus remains on being invested during rising (bullish) trends and more heavily weighted to fixed income and cash during declining (bearish) trends. Therefore, the only data that really matters to us is where the market closes at the end of each week. As I stated in this past weekend’s missive: “While the immediate consensus is the ‘bear market of 2018’ is now over, there are several important points about the chart below that should be considered. Despite the correction, the market did hold support at the 200-dma The bullish trend line, which goes back to the beginning of 2016, has also not been violated. However, the upper red “trendline” may provide some overhead resistance temporarily and is worth watching closely. While the market did get oversold on a short-term basis, which suggested a bounce was likely, the longer-term overbought condition, and subsequent ‘sell signal’ remain intact. The bottom line is that while there was much ‘angst’ in the markets last week, the market has not violated any important trend lines that would suggest the current sell-off is anything more than just an ordinary ‘garden variety’ correction.” This morning, the market opened back below the 50-dma. While this is concerning, and keeps our short-hedge in place for now, it is where we finish this trading week that will determine out next positioning changes. The chart below is a weekly view of the S&P 500 index. With much of the volatility stripped away, the important levels for the close of trading on Friday become more evident. In order for us to fully remove hedges, the market must close above the 50-dma on Friday. As noted, there is tremendous resistance from the upper trendline of the bullish trend channel that began at the beginning of 2016. We currently expect the market to remain confined to the currently rising bullish trend channel, but there are risks to that view which keeps us cautious. A failure at resistance which leads to a retracement back to recent lows and the 200-dma is very likely. Here is what we are looking for if that happens. If the market holds support at the 200-dma and completes a successful retest, we will begin removing hedges and adding to equity exposure. The retracement to the 200-dma will trigger the MACD sell-signal which is already at historically high levels. That “sell signal” will put additional downward pressure on the market. As long as the market holds at the rising bullish trend and 200-dma, the bullish backdrop remains intact keeping portfolios weighted towards equity exposure. However, if the market breaks below those “critical support” levels, as noted above, the risk of a deeper correction rises. Such a break will lead to increased hedging and a reduction of equity risk in our portfolio models. A break of that critical support will likely lead to a retest of the longer-term bullish trend around 2250 which would be a 22% decline from recent highs and an “official bear market.” A break below 2250 will likely coincide with the onset of the next recession and is an entirely different portfolio management strategy. While I have laid out the risks, the bullish trend remains intact. While we are currently hedged, we remain primarily long-biased in our portfolios. However, don’t completely dismiss the “bearish” case either. The Bear Still Cometh Back the newsletter: “The good news, for those who remain ever bullishly inclined, is on a long-term, monthly basis, the bull market remains intact for now. Unfortunately, despite the rather harrowing correction, little was done to relieve any of the underlying pressures. Valuations still remain elevated Bearishness and volatility, despite the recent spike, remain at historically low levels, and; Investors simply could not jump “back” into the markets fast enough. These are not signs of a real, lasting bottom, which long-term investors should aggressively buy into.” In that missive, I laid out two charts of the 2000 and 2007 market topping processes. In both previous cases, the first 10% correction was a precursor to a bear market. The chart below shows this a little differently by comparing the both previous bull markets to the current bull run. As you can see, the recent correction, which followed an accelerated advance, is behaving in much the same fashion as seen previously. Does this mean we are the cusp of the next great “bear market?” Simply looking at prices without context can be misleading. While markets are driven in the short-term by momentum, or better termed “psychology,” it is the long-term underlying fundamentals which ultimately determine a market’s fate. Not surprisingly, given the surge in monetary liquidity by the Federal Reserve, combined with the underlying sluggishness of economic growth, investors are once again betting on a “this time is different” scenario as market valuations, on many measures, are at, or near, historically high levels. But, again, just weak economic growth, or high valuations, or rising prices does not necessarily immediately result in a substantial mean-reverting event. Major mean reverting events are generally tied to the combination of more major extremes in long-term measures of price deviations, economic growth, and valuations. Using quarterly data we can calculate several long-term measures for the S&P 500: The 12-period (3-year) Relative Strength Index (RSI), Bollinger Bands (2 and 3 standard deviations of the 3-year average), CAPE Ratio, and; The percentage deviation above and below the 3-year moving average. The vertical RED lines denote points where all measures have aligned On virtually every measure price and valuation, the markets are grossly extended. However, it is when these measures coincide with the onset of an economic recession that “mean reverting” events tend to occur. The table below looks at the S&P 500 going back to 1873, based on Robert Shiller’s data, to detail economic recessions and bear markets. In April, the current economic expansion will become the second longest in U.S. history. However, that period of expansion will also be the slowest, based on annualized economic growth rates, as well. Could the current economic expansion become the longest in U.S. history? Absolutely. Over the next several weeks, or even months, the markets can certainly extend the current deviations from long-term means even further. But such is the nature of every bull market peak, and bubble, throughout history as the seeming impervious advance lures the last of the stock market “holdouts” back into the markets. The correction over the last couple of weeks did little to correct these major extensions OR significantly change investor’s mental state from “greed” to “fear.” As discussed above, the bullish trend remains clearly intact for now, but all “bull markets” end….always. Do not be mistaken, the next “bear market” is coming. Of that, there is absolute certainty. As the charts clearly show, “prices are bound by the laws of physics.” While prices can certainly seem to defy the law of gravity in the short-term, the subsequent reversion from extremes has repeatedly led to catastrophic losses for investors who disregard the risk. There are substantial reasons to be pessimistic about the markets longer-term. Economic growth, excessive monetary interventions, earnings, valuations, etc. all suggest that future returns will be substantially lower than those seen over the last eight years. Bullish exuberance has erased the memories of the last two major bear markets and replaced it with “hope” that somehow “this time will be different.” Maybe it will be. Probably, it won’t be. The Reason To Focus On Risk Our job as investors is to navigate the waters within which we currently sail, not the waters we think we will sail in later. Greater returns are generated from the management of “risks” rather than the attempt to create returns by chasing markets. That philosophy was well defined by Robert Rubin, former Secretary of the Treasury, when he said; “As I think back over the years, I have been guided by four principles for decision making. First, the only certainty is that there is no certainty. Second, every decision, as a consequence, is a matter of weighing probabilities. Third, despite uncertainty, we must decide and we must act. And lastly, we need to judge decisions not only on the results, but on how they were made. Most people are in denial about uncertainty. They assume they’re lucky, and that the unpredictable can be reliably forecast. This keeps business brisk for palm readers, psychics, and stockbrokers, but it’s a terrible way to deal with uncertainty. If there are no absolutes, then all decisions become matters of judging the probability of different outcomes, and the costs and benefits of each. Then, on that basis, you can make a good decision.” It should be obvious that an honest assessment of uncertainty leads to better decisions, but the benefits of Rubin’s approach, and mine, goes beyond that. For starters, although it may seem contradictory, embracing uncertainty reduces risk while denial increases it. Another benefit of acknowledged uncertainty is it keeps you honest. “A healthy respect for uncertainty and focus on probability drives you never to be satisfied with your conclusions. It keeps you moving forward to seek out more information, to question conventional thinking and to continually refine your judgments and understanding that difference between certainty and likelihood can make all the difference.” We must be able to recognize, and be responsive to, changes in underlying market dynamics if they change for the worse and be aware of the risks that are inherent in portfolio allocation models. The reality is that we can’t control outcomes. The most we can do is influence the probability of certain outcomes which is why the day to day management of risks and investing based on probabilities, rather than possibilities, is important not only to capital preservation but to investment success over time. Just something to consider.
**[Noise Trading, Bubbles, and Excess Stock Market Volatility](http://www.bradford-delong.com/2013/12/noise-trading-bubbles-and-excess-volatility-in-the-aggregate-stock-market-noah-smith-and-robert-shiller-and-andrei-shleifer-a.html ): Hoisted from the Archives from 2013**: Noah Smith has a very nice post this morning: Noah Smith: Risk premia or behavioral craziness?: >John Cochrane is quite critical of Robert Shiller.... He... thinks that Shiller is trying to make finance less quantitative and more literary (I somehow doubt this, given that Shiller is first and foremost an econometrician, and not that literary of a guy). >But the most interesting criticism is about Shiller's interpretation of his own work. Shiller showed... stock prices mean-revert. He interprets this as meaning that the market is inefficient and irrational... "behavioral craziness". But others--such as Gene Fama--interpret long-run predictability as being due to predictable, slow swings in risk premia. >Who is right? As Cochrane astutely notes, we can't tell who is right just by looking at the markets themselves. We have to have some other kind of corroborating evidence. If it's behavioral craziness, then we should be able to observe evidence of the craziness elsewhere in the world. If it's predictably varying risk premia, then we should be able to measure risk premia using some independent data source... Let's back up to do some explaining... When economists...
(Bloomberg) -- Лауреат Нобелевской премии по экономике Роберт Шиллер, предсказавший "пузыри" в секторе доткомов и на рынке жилья, говорит, что вопрос о том, завершилась ли распродажа на рынке акций, остается открытым.Акции демонстрируют признаки восстановления после обвала, сократившего капитализацию мировых рынков почти на $5 триллионов в этом...
Feb.12 -- Yale University Professor of Economics Robert Shiller discusses the psychology of the market following last week's selloff. He speaks with Bloomberg's Alix Steel on "Bloomberg Daybreak: Americas." (Corrects spelling of guest's last name in headline and description.)
Yale economics professor Robert Shiller discusses market volatility, interest rates and the housing market.
As originally written at RT, outspoken Aussie economist Steve Keen points out that everyone who’s asking “why did the stock market crash Monday?” is asking the wrong question; the real question, Keen exclaims, is “why did it take so long for this crash to happen?” The crash itself was significant - Donald Trump’s favorite index, the Dow Jones Industrial (DJIA) fell 4.6 percent in one day. This is about four times the standard range of the index - and so according to conventional economics, it should almost never happen. Of course, mainstream economists are wildly wrong about this, as they have been about almost everything else for some time now. In fact, a four percent fall in the market is unusual, but far from rare: there are well over 100 days in the last century that the Dow Jones tumbled by this much. Crashes this big tend to happen when the market is massively overvalued, and on that front this crash is no different. It’s like a long-overdue earthquake. Though everyone from Donald Trump down (or should that be “up”?) had regarded Monday’s level and the previous day’s tranquillity as normal, these were in fact the truly unprecedented events. In particular, the ratio of stock prices to corporate earnings is almost higher than it has ever been. More To Come? There is only one time that it’s been higher: during the DotCom Bubble, when Robert Shiller’s “cyclically adjusted price to earnings” ratio hit the all-time record of 44 to one. That means that the average price of a share on the S&P500 was 44 times the average earnings per share over the previous 10 years (Shiller uses this long time-lag to minimize the effect of Ponzi Scheme firms like Enron). The S&P500 fell more than 11 percent that day, so Monday’s fall is minor by comparison. And the market remains seriously overvalued: even if shares fell by 50 percent from today’s level, they’d still be twice as expensive as they have been, on average, for the last 140 years. After the 2000 crash, standard market dynamics led to stocks falling by 50 percent over the following two years, until the rise of the Subprime Bubble pushed them up about 25 percent (from 22 times earnings to 28 times). Then the Subprime Bubble burst in 2007, and shares fell another 50 percent, from 28 times earnings to 14 times. This was when central banks thought The End of the World Is Nigh, and that they’d be blamed for it. But in fact, when the market bottomed in early 2009, it was only just below the pre-1990 average of 14.5 times earnings. Safe Havens That valuation level, before central banks (staffed and run by people with PhDs in mainstream economics) decided that they knew how to manage capitalism, is where the market really should be. It implies a dividend yield of about six percent in real terms, which is about twice what you used to get on a safe asset like government bonds—which are safe, not because the governments and the politicians and the bureaucrats that run them are saints, but because a government issuing bonds in its own currency can always pay whatever interest level it promises. There’s no risk that it can’t pay, and it can’t go bankrupt, whereas a company might not pay dividends, and it can go bankrupt. Now shares are trading at a valuation that implies a three percent return, as if they’re as safe as government bonds issued by a government which owns the bank that pays interest on those bonds. That’s nonsense. And it’s a nonsense for which, ironically, central banks are responsible. The smooth rise in stock market prices which led to the levels that preceded Monday’s crash began when central banks decided to rescue the economy by “Quantitative Easing (QE).” They promised to do “whatever it takes” to drive shares up from the entirely reasonable values they reached in late 2009, and did so by buying huge amounts of government bonds back from private banks and other financial institutions (pension funds, insurance companies, etc.). In the USA’s case, this amounted to $1 trillion per year—equal to about seven percent of America’s annual output of goods and services (GDP or “gross domestic product”). The Bank of England brought about £200 billion worth, which was an even larger percentage of GDP. With central banks buying that volume of bonds, private financial institutions found themselves awash with money, and spent it buying other assets to get yields - which meant that QE drove up share prices as banks, pension funds and the like bought them with money created by QE. Blind Oversight So this is the first central bank-created stock market bubble in history, and central banks have just had the first stock market crash where the blame is entirely theirs. Were this a standard, private hysteria and leverage driven bubble, we could well be facing a further 50 percent fall in the market—like what happened after the DotCom crash. This would bring shares back to the long-term average of 17 times earnings. Instead, what I believe will happen is that central banks, having recently announced that they intend to end QE, will restart it and try to drive shares back to what think are “normal” levels, but which are at least twice what they should be. As I said in my last book ‘Can we avoid another financial crisis?’ QE was like Faust’s pact with the Devil: once you signed the contract, you could never get out of it. They’ll turn on their infinite money printing machine, buy bonds off financial institutions once more, and give them liquidity to pour back into the markets, pushing them once more to levels that they should never rightly have reached. This, of course, will help to make the rich richer and the poor poorer by further increasing inequality. Which is arguably the biggest social problem of the modern era. So, as well as being incompetent economists these mainstreamers are today’s Marie Antoinette. Let them eat cake, indeed.
Via Global Macro Monitor, Asset valuations, including stock prices, eventually revert to their long-term mean (average) valuation or at least attempt to if not interrupted by outside intervention, such as central banks. It has been the major factor in the steep sell-off in stocks over the past few days, in our opinion. Stock valuations are at extreme levels, are running way ahead of fundamentals, and sentiment and positioning were off the charts. Many investors even began to delude themselves that stocks can and never go down. Moreover, it is the new Fed Chairman’s, Jerome Powell, first day on the job. It is less than certain that the new regime at the Fed will step in to prop up stock valuations. Don’t bet against it, however, as ever since the mid-1990’s, the stock and asset markets have become the economy. Macro Triggers There are other short and medium-term macro factors at play that may have triggered the sell off: 1) the end of quantitative easing; 2) rising interest rates, inflation, and fears of bursting bond bubbles; 3) U.S. fiscal promiscuity and worries about how the government will finance itself, including $1 trillion in 2018 (stunning and gone unnoticed); 4) the botching of dollar policy by Secretary Mnuchin at Davos, which could spook off foreign buyers of U.S. Treasury debt; 5) fears central banks are way behind the curve as almost all still have negative real policy rates; 6) threat of increased political instability in the world’s oldest democracy; 7) the first day on the job for new Fed Chair and uncertainty about Fed independence from the White House; 8) machines gone wild; 9) money supply growing slower than the economy; 10) other; 11) we don’t know; 12) all of the above; and 13) none of the above. Then there are the technical issues. Massive short volatility positioning by everyone and their Target manager which got drilled today as the new VIX had its highest one day increase in history. The old VIX, linked to the OEX or S&P100, which was in play in 1987, was up much higher. Take a look at the short volatility ETF, XIV, today, which disintegrated in after hours. Asset Values And Nominal GDP Interestingly, former Secretary of Treasury, Larry Summers, comments in today’s Washington Post on the prospect that: “Asset values and levels of borrowing cannot grow faster than gross domestic product.” Asset values and levels of borrowing cannot indefinitely grow faster than gross domestic product, even though their ability to do so for a time has contributed to economic success over the past few years. If the Fed raises rates sufficiently to assure financial stability, there is the risk that the economy will slow too much. If it focuses on maintaining the growth necessary to meet its inflation target, there is the risk of further increases in leverage and asset prices setting the stage for trouble down the road. – Larry Summers, WashPost Prescient and he did not even know it. U.S. Household Net Worth and Nominal GDP After all, it was under Mr. Summers’ watch in the 1990’s that U.S. asset values, as measured by household net worth, began to significantly diverge from the nominal gross domestic product. Chart 1 illustrates this point. More than forty years before 1995, household net worth tracked nominal gross domestic product in a very tight relationship (note we estimated the last data point in both time series). The largest divergence of the two series prior to 1995 was at the beginning of 1979, when the net worth index, after a decade of inflation, was 12 percent below the GDP index. Furthermore, it was during the 1970’s; the net worth index was below GDP in every quarter except one, Q4 1972, the Nixon reelection rally. The take away here is that net asset value growth lags nominal GDP growth in periods of relatively high inflation. In other words, inflation has been, historically, bad for assets. The largest positive divergence of net worth to GDP was 8.41 percent, at the beginning of 1961. During the 1952-1995 period, household net worth growth would thus mean revert to nominal GDP. Asset prices were closely linked and anchored to the fundamentals of the economy. Net Worth To GDP Ratio This above is also illustrated in Chart 2, which shows the ratio of household net worth to GDP. Similarly, during the 1952-1995 net worth remained in a range of 3.15 – 3.87 to nominal GDP and mean reverting to its average of 3.55 during the period. The chart also illustrates household net worth is now completely unhinged from nominal GDP as assets are currently at extreme valuations and this sell-off may be the start of a mean reverting process. Also see the Household Net Worth to Personal Income ratio. Note how the ratio moved back into the range during the collapse of the NASDAQ in 2001 and the bursting of the credit/housing bubble in 2009. Policymakers deemed it too painful and potentially deflationary to allow assets to mean revert fully and intervened with extraordinary monetary policy, more so after the collapse of the credit bubble. The result was to push asset values ever higher and away from their fundamental value, albeit, asset valuation is ambiguous and nobody knows their “true value.” Stock prices are likely to be among the prices that are relatively vulnerable to purely social movements because there is no accepted theory by which to understand the worth of stocks….investors have no model or at best a very incomplete model of behavior of prices, dividend, or earnings, of speculative assets. – Professor Robert Shiller What Happened In The Mid-1990’s? So why did asset values begin their rapid divergence from the economy in the mid 1990’s? Nobody knows for certain but we have our priors. 1) Moral Hazard First, moral hazard was internalized by traders and investors. Though the “Greenspan put” was born almost a decade earlier after the 1987 stock market crash, the 1994-1995 monetary tightening culminated in the collapse of the Mexican peso and set off the Tequila Crisis in emerging markets. The U.S. government had to step in and bailout Mexico with $50 billion-plus in loans. The Fed moves after the Russian debt crisis, the dot.com collapse, and the bursting of the credit bubble, ultimately led to quantitative easing (QE) with the goal of inflating asset prices. Many of those bailed out during Mexico’s peso crisis were U.S. investors trapped in the country’s bonds and short-term debt securities. Though we think it was the right thing to do, as a collapse of the Mexican economy was not in the interest of anyone, it did set in motion significant inflationary expectations in financial assets and as consequence institutionalized moral hazard. 2) Money Velocity Second, the rise of the internet and technological changes fundamentally changed the U.S. economy and its payments system. We do not have time to research the specifics, but we suspect it is reflected in the secular decline in money velocity that peaked in the 1990’s and has fallen ever since with the exception of a small bump just before credit/bubble popped. Chart 3 illustrates the coincidental timing of the fundamental divergence in asset values and decline in M2 money velocity. We inverted the velocity axis to show how it tracks the net worth series. That is as the money velocity declined, assets values rose relative to nominal GDP. Monetary policy is a complicated beast, and nobody knows exactly why M2 velocity has been falling, just as it difficult to even define what the concept of money truly is. Nevertheless, by definition falling money velocity is a simple mathematical calculation that the money supply is growing faster than nominal GDP. The hypothesis is that the “excess money,” rather than being absorbed into the economy flows into the asset markets. It is interesting to note the increase in velocity just before the housing/bubble collapse. That is the “excess liquidity” as we just defined was declining leading some to believe it contributed to the bursting the bubble. Ironically, we awoke this morning to the following tweet. Same concept. Hat Tip: @Schuldensuehner This fits our “liquidity über alles” model as we think, above all else, excess liquidity fuels momentum markets and trumps even fundamental valuation in the short and medium-term. 3) Asset Markets Became The Economy The labor shock caused by the entry of China and Eastern Europe into the global economy contributed significantly to the hollowing out the U.S. middle class as policymakers failed to compensate the losers of free trade. They were effectively swept under the rug as globalization took off, corporate profits soared, and consumer prices were held in check with cheap imports. Fundamental Shift In Aggregate Demand Thus, it is our contention the decline in the purchasing power of a relatively large swath of Americans, with a relatively high propensity to consume, were crippled and when coupled with the rapid rise in income and wealth inequality aggregate demand has become insufficient to drive economic growth at an adequate pace. The simple circular flow of income, which we all learned in Econ 101, no longer applies to the new economy. Income needs a kicker in the form inflated asset values and household net worth. Policymakers therefore have little choice but to keep asset prices high and continue to generate asset inflation to induce consumption through an ever diminishing wealth effect and boost confidence in the business sector to positively influence CapX. Go no further and look at the new channels of monetary policy. Conclusion Finally, we have no idea if this recent sell-off is the beginning of a major mean reversion to fundamental value for stock prices. Major meaning net worth moving back into the 1952-1995 range. We seriously doubt policymakers will stand idly by and let that happen and we could soon be back in QE mode. What is clear from the above charts, however, is that the efficacy and efficiency of monetary policy are diminishing after the bursting of each bubble. As the size of each bubble increases a larger policy response is warranted. We suspect the next round of QE in the U.S. will be the direct buying of corporate equities ala the Bank of Japan. We doubt this can continue, ad infinitum, however. Either inflation will take hold and/or dollar holders will lose confidence in the currency. Time For Gary Cohn To Step Up One last thing. After Secretary Mnuchin’s currency debacle in Davos, it would behoove the Trump Administration to keep him in the closet and let Gary Cohn become the face of government during this period of market turbulence. Mr. Mnuchin does not exactly exude confidence, and the new Fed Chair is an untested unknown. It was comical to watch the money channel today. The financial pundits are seeing only the tip of the iceberg or, it could be, we are seeing icebergs that are just ice cubes? Doubt that. Good luck, folks.
After cheering the market’s relentless rise, Trump is forced to face the reality of Monday's swift and historic fall.
Authored by Lance Roberts via RealInvestmentAdvice.com, Just recently, a report was released discussing why you should NOT try and time the market, but rather “just stay invested for the long-haul.” To wit: “Periods of high volatility and occasional bouts of uncertainty are a part of the investing process. When markets correct, you can’t control their length or severity, but you CAN control how you respond. The temptation is to exit the market entirely and sit on the sidelines waiting for the ‘right’ time to re-enter and re-invest. We believe that unfortunately, for the typical investor, this is not a prudent investment strategy. Why? Because we are not aware of anyone who can successfully time the market on a consistent basis and the consequences of missing just a few of the best days in the market can really put a dent in your long-term returns.” The report then continues: “Additionally, bear markets have tended to be short-lived while bull markets have been longer, stronger and more powerful creating a net positive for the long-term investor vs the ‘buy low, sell high’ investor.” Unfortunately, the entirety of the analysis is based on faulty, mainstream, assumptions. The “Math” Problem For years, the investment industry has tried to scare clients into staying fully invested in the stock market at all times, no matter how high stocks go or what’s going on in the economy. The warnings are always the same: “You can’t time the market.” “Studies show that market timing doesn’t work.” Of course, the reasoning for promoting “buy and hold” investing is not necessarily for “your benefit,” but generally for those wishing to extract a “fee” for their services. But let’s get right to the “math” of it. Is it true that over the long-term investors made most of their money from just a handful of big one-day gains? In other words, if you missed any of those days, your return would be “bupkis.” Obviously, since no one can predict when those few, big jumps are going to occur, it’s best to stay fully invested at all times, right? So just give them your money and bask in the warm blow of the “efficient market hypothesis.” But, that’s entirely wrong. What it doesn’t address is the other half of the equation which makes the real difference to whether you should invest, when and how.” While it is true, that missing out on the 10-best days did reduce your gains, missing out on the 10-WORST days was far more lucrative. Clearly, avoiding major drawdowns in the market is the key to long-term investment success. Given that markets spend roughly 95% of their time making up previous losses, avoiding major drawdowns leads to a greater probability of reaching long-term goals. As Brett Arends once stated: “The cost of being in the market just before a crash is at least as great as being out of the market just before a big jump and may be greater. Funny how the finance industry doesn’t bother to tell you that.” The reason that the finance industry doesn’t tell you the other half of the story is because it is NOT PROFITABLE for them. The finance industry makes money when you are invested – not when you are in cash. Therefore, it is of no benefit to Wall Street to advise you to move to cash. The Percentage Problem If the “math problem” wasn’t bad enough, the author then climbs right into the “percentage problem” in the second chart trying to prove his point yet again. Unfortunately, this is also incorrect. Since the chart above was nominal, I have rebuilt the analysis presented above using inflation-adjusted total returns using Dr. Robert Shiller’s monthly data. The chart shows the S&P 500 from 1900 to present and I have drawn my measurement lines for the bull and bear market periods. Also, notice the very long periods before the markets make “new highs.” The table below is the most critical. The table shows the actual point gain and point loss for each period. As you will note, there are periods when the entire previous point gains have been either entirely, or almost entirely, destroyed. The next two charts are a rebuild of the first chart above in both percentage and point movements. Again, even on an inflation-adjusted, total return, basis when viewing the bull/bear periods in terms of percentage gains and losses, it would seem as if bear markets were not worth worrying about. However, when reconstructed on a point gain/loss basis, the ugly truth is revealed. Percentages are very deceiving especially when you start talking about very large numbers. However, when it comes to your money, it is about how many points are lost which is critically more important. So, what’s the solution? No, You Can’t Time The Market I do agree with the statement above that you “can’t time the market.” Importantly, I do not endorse “market timing” which is specifically being “all in” or “all out” of the market at any given time. The problem with “market timing” is consistency. But answer this question: Why are there are no great investors of our time that “buy and hold” investments? Because all great investors manage risk. Having a methodology to “buy” and “sell” investments is the core of investing, hence the very basic rule of investing which is to “buy low and sell high.” While there are many sophisticated methods of handling risk within a portfolio, even using a basic method of price analysis, such as a moving average, can be a valuable tool over the long-term holding periods. Will such a method ALWAYS be right? Absolutely not. However, will such a method keep you from losing large amounts of capital? Absolutely. The chart below shows a simple 12-month moving average study. What becomes clear is that using a basic form of price analysis can provide useful identification of periods when portfolio risk should be REDUCED. Importantly, I did not say risk should be eliminated; just reduced. Again, I am not implying, suggesting or stating that such signals mean going 100% to cash. What I am suggesting is that when “sell signals” are given that is the time when individuals should perform some basic portfolio risk management such as: Trim back winning positions to original portfolio weights: Investment Rule: Let Winners Run Sell positions that simply are not working (if the position was not working in a rising market, it likely won’t in a declining market.) Investment Rule: Cut Losers Short Hold the cash raised from these activities until the next buying opportunity occurs. Investment Rule: Buy Low By using some measures, fundamental or technical, to reduce portfolio risk by taking profits as prices/valuations rise, or vice versa, the long-term results of avoiding periods of severe capital loss will outweigh missed short-term gains. Small adjustments can have a significant impact over the long run. Buy & Hold Won’t Get You There If you just “buy and hold” and “dollar cost average” you will make money over the long-term. This is a true statement. It will just leave you very short of your required investment goals. Let me give you an example of what I mean. In 1988, Bob was 35 years old, had saved up a $100,000 nest egg and decided to invest it in the S&P 500 index. He added $625/month to the index every month and never touched it. When Bob retires at 65, he wants to maintain his current $75,000 lifestyle. We will assume he can generate 3% a year in retirement on his nest egg. The chart below shows the difference between two identical accounts. Each started at $100,000, each had $625/month in additions and both were adjusted for inflation and total returns. The purple line shows the amount of money required, inflation-adjusted, to provide a $75,000 per year income to Bob at a 3% yield. The only difference between the two accounts is that one went to “cash” when the S&P 500 broke the 12-month moving average in order to avoid major losses of capital. There is a clear advantage to providing risk management to portfolios over time. The problem, as I have discussed many times previously, is that most individuals cannot manage their own money because of “short-termism.” Despite their inherent belief that they are long-term investors, they are consistently swept up in the short-term movements of the market. Of course, with the media and Wall Street pushing the “you are missing it” mantra as the market rises – who can really blame the average investor “panic” buying market tops and selling out at market bottoms. Yet, even after two major bear market declines, it never ceases to amaze me that investors still believe that somehow they can invest in a portfolio that will capture all of the upside of the market but will protect them from the losses. Despite being a totally unrealistic objective this “fantasy” leads to excessive risk-taking in portfolios which ultimately leads to catastrophic losses. Aligning expectations with reality is the key to building a successful portfolio. Implementing a strong investment discipline, and applying risk management, is what leads to the achievement of those expectations. Planning To Win Many individuals have been led believe that investing in the financial markets is their only option for retiring. Unfortunately, they have fallen into the same trap as most pension funds which is believing market performance will make up for a “savings” shortfall. With valuations elevated, the economic cycle very long in the tooth, and the 3-D’s (debt, demographics, and deflation) applying downward pressure to future economic growth rates, investors need to consider the following carefully. Expectations for future returns and withdrawal rates should be downwardly adjusted. The potential for front-loaded returns going forward is unlikely. The impact of taxation must be considered in the planned withdrawal rate. Future inflation expectations must be carefully considered. Drawdowns from portfolios during declining market environments accelerate the principal bleed. Plans should be made during rising market years to harbor capital for reduced portfolio withdrawals during adverse market conditions. The yield chase over the last 8-years, and low interest rate environment, has created an extremely risky environment for retirement income planning. Caution is advised. Expectations for compounded annual rates of returns should be dismissed in lieu of plans for variable rates of future returns. Chasing an arbitrary index that is 100% invested in the equity market requires you to take on far more risk that you most likely want. Two massive bear markets over the last decade have left many individuals further away from retirement than they ever imagined. Furthermore, all investors lost something far more valuable than money – the TIME that was needed to reach their retirement goals. Investing for retirement, no matter what age you are, should be done conservatively and cautiously with the goal of outpacing inflation over time. This doesn’t mean that you should never invest in the stock market, it just means that your portfolio should be constructed to deliver a rate of return sufficient to meet your long-term goals with as little risk as possible. It should be clear that market corrections are indeed very bad for your portfolio in the long run. However, before sticking your head in the sand, and ignoring market risk based on an article touting “long-term investing always wins,” ask yourself who really benefits? This outcome this time will not be “different,” so isn’t it worth considering a different approach?
Being exuberant is great... Being irrationally exuberant just makes you seem crazy. The same goes for the markets, so protect yourself while there’s still time...
"This will end badly": Bubble, Bubble, Fraud and Trouble, by Paul Krugman, NY Times: The other day my barber asked me whether he should put all his money in Bitcoin. And the truth is that if he’d bought Bitcoin, say,...
Хакеры из «Фэнси Биарс» опубликовали новую порцию грязного белья западных жуликов. Выяснилось, что лыжные сборные Швеции и Норвегии плотно сидят на допинге, при этом когда спортсменам не хватает «легального» допинга и они попадаются на использовании ещё более сильных препаратов, их практически не наказывают:
The general mood in markets has been optimistic, but at the World Economic Forum, experts are debating how long the rally will last. Yahoo Finance's Jen Rogers caught up with Nobel prize winning economist, Robert Shiller — who predicted the last housing and tech bubbles in his book “Irrational Exuberance.” She asked him what he thinks about the mood and the ever-moving-higher markets.
Yahoo Finance’s Jen Rogers sits down with Nobel prize winning economist, Robert Shiller on markets and economic growth.
1. Хакеры из «Фэнси Биарс» опубликовали новую порцию грязного белья западных жуликов. Выяснилось, что лыжные сборные Швеции и Норвегии плотно сидят на допинге, при этом когда спортсменам не хватает «легального» допинга и они попадаются на использовании ещё более сильных препаратов, их практически не наказывают:https://www.gazeta.ru/sport/news/2018/01/25/n_11088901.shtmlКак и предсказывали эксперты, проеведённый американцами рейдерский захват олимпийского движения привёл к его стремительной деградации. В век интернета уже невозможно удержать от широкого распространения информацию о западных спортсменах и об их методах подготовки к соревнованиям.Кстати, подобные скандалы хорошо объясняют причину звериной ненависти западных политиков к телеканалу RT, который невзирая ни на что делает свою журналистскую работу, даёт общественности информацию о реальном положении дел:https://www.rt.com/sport/416866-fancy-bears-tue-doping/2. Олимпийского чемпиона из США тем временем решили не наказывать за допинг. Судьи сочли убедительной версию спортсмена, согласно которому допинг попал в его организм во время поцелуя с девушкой:https://lenta.ru/news/2018/01/26/america/Что же, ничего другого от американских жуликов мы и не ждали. Пожалуй, мир удивился бы гораздо сильнее, если бы у попавшемся на горячем американца забрали его медали. Повторю ещё раз, олимпийское движение умирает: невозможно долго поддерживать интерес публики к шоу в условиях, когда судьи даже не пытаются скрыть свою полную ангажированность.3. Грызня элит в США достигла в последний год уже чуть ли опереточного градуса, который было бы более привычно видеть в банановых республиках или в молодых демократиях бСССР. Нобелевский лауреат Роберт Шиллер, заслуженный экономист, известный, в частности, своими верными прогнозами кризисов, заявил, что Дональд Трамп — это «революция», и что он бы хотел, чтобы демократы «обезвредили» президента:http://finfront.ru/2018/01/24/trump-is-revolution/По заявлениям Шиллера видно, что никакого «объединения американской элиты» вокруг экономического плана Трампа нет, и, скорее всего, не будет. Ещё пять лет назад невозможно было себе представить, что нобелевский лауреат и один из наиболее влиятельных экономистов в США будет желать «обезвредить» американского президента.Для экономики США такая ситуация жесточайшего внутриполитического конфликта — огромный минус, особенно на фоне рисков замедления роста.
Authored by Michael Lebowitz via RealInvestmentAdvice.com, Comparing current equity valuations to prior valuation peaks such as those of 2008, 1999 or any other period is commonplace, but remains an essential way of assessing current market prospects and potential risks. Currently, seven of the eight traditional valuation techniques shown by Goldman Sachs below are in the upper strata of recent history. The graph above, courtesy Goldman Sachs, is from August 2017. Since that time it is highly likely that all of those valuation levels have risen further. In Second to None, published March 1, 2017, we opined that simply assessing valuation techniques, as shown above, is a great starting place for investors to gauge the present status of valuations. We added that it is equally important to normalize different periods of time to make their valuations comparable based on the level of economic growth which directly supports corporate profits. The result of our analysis shows that the current level of Cyclically Adjusted Price to Earnings (CAPE) is well above the levels of every other market peak, including 1999 and 1929. Essentially, investors are willing to pay more for each unit of economic growth today than at any time in modern history. In this article, we update the data to reflect the current GDP adjusted CAPE and take it a step further to include the cyclical nature of corporate profit margins. When both adjustments are factored in, we gain a unique perspective that demonstrates the extent to which today’s valuations are, quite literally, off the charts. GDP Trends While the economy cycles from recession to growth and back, the long term economic growth trend, or secular GDP, has trended lower for the better part of the last 30 years. The graphs below show the cyclical short-term nature of economic growth (left) as well as the longer term trend (right). Data Courtesy: St. Louis Federal Reserve (FRED) There are a number of reasons for the long-term, downward growth trend about which we have written extensively. In a nutshell, the following are the three largest factors accounting for the deteriorating trend in growth: Debt – The amount of federal, corporate and individual debt has consistently risen at a pace faster than economic growth. As such, many debtors are unable to borrow further to keep spending. Others are hampered by interest payments which crowd out spending. The Federal Reserve has used extraordinary policies to force interest rates to historic lows to counter the debt burden, but their actions have only bought time and incentivized even more debt. The debt problem, which we call the Lowest Common Denominator, has only worsened. Demographics – Over the last 30 years, baby boomers provided a driving force for economic growth. As this outsized generation nears retirement, they will spend less and, in many instances, become a burden on the taxpayers that support them through social security and other entitlements. Additionally, slowing population growth and tightened restrictions on immigration are reducing the number of workers and consumers that can contribute to economic growth. Productivity – Partially as a result of years of poor economic, fiscal and monetary policy that dis-incentivized long-term investment in favor of consumption, the rate of productivity growth, the lifeline of economic growth is nearing zero. It is primarily these three reasons and their longer-term projections that make us nearly certain that secular economic growth will continue to weaken in the years ahead. That does not mean there will not be periods of stronger growth. However, given that few of our nation’s leaders truly understand what drives sustainable economic growth and even fewer have the courage required to reverse the trends, we see little reason to expect change. Given our assumption that long-term economic trends are likely to persist, we believe it is necessary to use economic growth to normalize current equity valuations to compare them to prior periods. The following graph is an updated version of the one shown in Second to None. It plots CAPE divided by the trailing ten-year growth rate of nominal GDP. Data Courtesy: St. Louis Federal Reserve (FRED) and Robert Shiller Note that the graph above and all of the graphs normalizing CAPE in this article, unlike the one presented in Second to None, are scaled by multiples of the average on the y-axis instead of the calculated number. The rationale being that the purpose of the analysis is not to provide a concrete numerical data point, but a comparative measure that allows one to relate valuations over many different economic environments. As an example the current reading is 2.86, meaning market valuations using this measure are 2.86 times higher than the average since 1956. The two potential arguments against this type of analysis are likely from those that disagree with our longer-term growth forecast or those that agree with us but believe that we should exclude data from the financial crisis of 2008 as it was far from the norm. For those that think economic growth will be better than the trend of the last thirty years, you should be aware that a ten-year growth rate of 8.21% is required to bring the adjusted valuation to its long-term mean. Such a ten-year growth rate has not been witnessed since 1987 and is nearly 2% greater than the average over the last 70 years. For those that think excluding 2008 is appropriate, we calculated a seven-year CAPE divided by seven-year growth. While the current level using this time frame is not as egregious, it is two times that of the average over the last 70 years and only slightly lower than the peak established in the year 2000. We remind those in this camp that the current economic expansion has lasted 103 months, almost twice the average since 1945. The longest expansion during this period was 120 months. No one knows when a correction will come, but we are clearly in the later stages of the cycle unless one assumes that the laws of mean reversion have been permanently suspended for both valuations and economic cycles. Margins are Cyclical Corporate profit margins, or the difference between sales and net profits, are considered one of the most cyclical fundamental measures that exist. The reason is that, when margins are high in certain industries, new entrants are lured to those industries by the higher margins. Conversely, when margins are low, companies exit those industries and those remaining companies can increase margins. The graph below shows the cyclical nature of corporate margins since 1948. Data Courtesy: St. Louis Federal Reserve (FRED) When margins are higher or lower than average, it makes sense to assume they will revert to the mean over time. Therefore, the rationale and logic for normalizing CAPE based on current margins and its historical tendency, provides a valuation level, as shown below, that is comparable to other periods. Data Courtesy: St. Louis Federal Reserve (FRED) and Robert Shiller Note that in the first graph showing historical margins that margins over the last 70 years appear to have broken the cyclical pattern and have stayed well above the average for an extended period. Many stock promoters believe this is a reflection of a “new normal” and cheer such a feat. They may be correct, but you might also want to consider that if margins have risen to a new level and are not cyclical anymore, the age-old incentives that drive business decisions in a free market economy no longer exist. If that is the case, we may also want to consider that capitalism may be broken. If capitalism is in fact eroding, do you really want to pay a high premium for stocks? To help answer that question, we suggest a quick review of the gross economic inefficiencies of those nations where capitalism is not employed. Comparative CAPE We believe that durable longer-term economic trends and profit margins should be used to normalize CAPE and again make it comparable to prior periods. The graph below presents CAPE adjusted for both. Data Courtesy: St. Louis Federal Reserve (FRED) and Robert Shiller The graph above highlights that valuations using this measure dwarf any prior valuation peak since at least the 1950’s. At over 350% above the mean, stock investors are currently paying significantly more for a unit of economic growth than at any time in the last 70 years. To extend the analysis, we estimated the adjusted CAPE level of 1929, as shown on the graph, and come to the same conclusion. Summary Most astute investors know that stock valuations are at or near historical highs. Even these investors, however, may be unaware that today’s valuations, when adjusted for the level of economic growth and heightened profit margins, defy comparison with any prior period since the Great Depression. The simple fact is that investors are paying over three times the average and almost twice as much as the prior peak for a dollar of economic growth. Furthermore, it is happening at a time when we are clearly late in the economic cycle and the outlook for growth, even if one is optimistic, is well below that required to justify such a level. Fundamental valuations are a great means of understanding the potential value or lack thereof in a market or individual stock. However, it is a poor short-term trading tool. There is no doubt that, in time, valuations will revert to the norm. This can occur via sharp earnings increases or slower earnings growth accompanied by years of price stagnation. It can also transpire, as it has in the past, with a sharp drawdown in equity prices. Regardless of how you think this resolves itself, we hope this valuation technique provides another helpful tool for assessing the proper risk and reward tradeoff offered by markets currently.
Мировой фондовый рынок потерял в III квартале 2015 г. $11 трлн. Падение во всех крупных мировых экономиках сильно ударило по "бумажному богатству", и это был худший квартал для фондового рынка с 2011 г.
«Сейчас очень опасное время», - отметил в интервью CNBC нобелевский лауреат Роберт Шиллер. – «Типичное соотношение P/E (прим. ProFinance.ru: цена акции/доход на акцию), на которое обычно смотрит большинство инвесторов, на самом деле вводит в заблуждение. В то же время соотношение CAPE (Cyclically Adjusted Price-Earnings, разработанное господином Шиллером) указывает на «спра читать далее…
Не могу уже вспомнить, когда мне тут объясняли, почему не надо было ждать роста цен на недвижимость в Германии...Как бы то ни было, Бундесбанк уже разглядел возможные пузыри на рынке недвижимости в крупных городах страны :). Логика прежних рассуждений о недвижимости в Германии была простой. Валюта в Германии казалась недооцененной из-за большущего профицита по счету текущих операций, поэтому цены должны были расти. Процентные ставки ЕЦБ были слишком низкими для Германии, что обязано было стимулировать рост цен на недвижимость. Понимающие это инвесторы должны были ускорить рост цен... Сегодня трудно найти читающего человека, который еще не слышал о свежеиспеченном лауреате Нобелевской премии Роберте Шиллере. Многие сразу же нарисуют его знаменитую картинку американского пузыря на рынке жилья. Но еще больше вокруг уверенных в том, что они видят пузырь на рынке недвижимости, будь то в Австралии, Канаде, Великобритании, Китае, России...Нельзя за такое осуждать. Раз уж жилье доминирует наше и их богатство, то очень хочется знать, пора ли купить квартирку или же лучше вовремя соскочить с обреченного поезда. Вдобавок к мыслям о Москве, Лондоне, Париже, Берлине, Таллине, Риге, Юрмале и Малаге, не лишне еще раз вспомнить о Гонконге. Ведь это Гонконг был правильной подсказкой к пониманию кризиса в Латвии и еврозоне. На рисунке из мартовского доклада цб Гонконга о финансовой стабильности показаны цены на жилье. Виден пузырь 1997 года, падение цен к 2004 году, в течение 6 лет, как заказывали Рейнхарт и Рогофф, и последующий волшебный взлет к сегодняшнему счастью (или горю?). После лопнувшего пузыря в 1997 году правители Гонконга уже прекрасно понимали, чем рискуют, как понимают сейчас специалисты Бундесбанка, насмотревшись на страдания Ирландии и Испании. Поэтому они внимательно следили за ростом цен на недвижимость и изо всех сил старались защитить экономику от будущих потрясений. О перспективах Гонконга в период "необычной" политики ФРС давно уже записывал здесь и здесь. Там же сохранил параграф Позена о трудностях определения пузырей, не говоря уже об их предотвращении оружием денежно-кредитной политики. Со времени тех записей, несмотря на 6 раундов (!) затягивания гаек в Гонконге и настойчивые публичные предупреждения цб, цены на жилье продолжали расти...Уже много лет не стихают споры о пузыре на рынке недвижимости Гонконга.
Колонка опубликована в журнале "Профиль" от 20 октября 2013 года (N833) Присуждение Нобелевской премии 2013 года по экономике еще раз подтвердило, что современная экономическая теория — это не наука и с научными критериями подходить к ней глупо В этом году решение о присуждении Нобелевской премии в области экономики выглядело донельзя скандальным. Два из трех лауреатов — Юджин Фама и Роберт Шиллер — не только радикально расходятся в своих концепциях по одному и тому же вопросу, но еще и крайне неодобрительно отзываются друг о друге. Кстати, последнюю из известных мне колкостей в адрес своего оппонента Шиллер опубликовал совсем недавно, в конце июля этого года. Ситуация, конечно, абсурдная. Один (Фама) говорит, что финансовых пузырей нет и быть не может, потому что никто не знает, что это такое. Другой (Шиллер) утверждает, что пузыри возможны и он знает, что они собой представляют. Он же предсказал кризис 2007—2008 годов. Фама же уверяет, что такого рода предсказания ничего не стоят, поскольку раз в сто лет и палка стреляет, и если постоянно одно событие предсказывать, то рано или поздно повезет. Третий лауреат, Ларс Хансен, теорией не занимается и своей концепции не имеет. Он разрабатывает методы количественного анализа явлений финансового рынка. И полученные им результаты опровергают теоретические построения обоих его коллег. Впрочем, чтобы опровергнуть разработанную Фамой концепцию эффективных рынков, никаких сложных расчетов и не требуется. События 2007—2008 годов наглядно показали ее ценность. Любопытно, что Фама был одним из претендентов на Нобелевскую премию еще в 2009 году, но тогда ему ее постеснялись дать. Как будто с тех пор что-то изменилось! Один из наших отечественных либералов, защищая решение Нобелевского комитета, заявил, что «на самом деле в гипотезе эффективных рынков нет ничего такого, что можно опровергнуть эмпирически». Ну да, и в гипотезе всемирного заговора тоже нет ничего такого, что можно опровергнуть эмпирически. Невозможность эмпирического опровержения — это, согласно общепринятому критерию Карла Поппера, как раз явный признак ненаучности теории. Любой человек, претендующий на то, чтобы называться ученым, кто бы он ни был, должен это понимать. Но ни тем, кто вручает премию, ни нашим либералам Поппер не указ, хоть именно он и разработал любезную сердцу и тех, и других концепцию открытого общества. Так какую мысль хотели донести до нас таким экстравагантным способом? Еще раз подтвердилось то, о чем многие догадывались, но не решались говорить вслух. То, что называется современной экономической теорией, — это вовсе не наука, и с научными критериями подходить к ней глупо. Это религия, организованная как бюрократическая структура. В таких структурах вознаграждается не реальный результат, а правильное поведение. Что сегодня является правильным и одобряемым поведением? Прежде всего это доходящая до абсурда верность букве и духу первоисточников религии. Это качество в полной мере присуще Юджину Фаме. Он из трех лауреатов самый титулованный, обладатель множества других премий. Его теория эффективных рынков — это теория о божественной сущности финансовых рынков, то есть теория ни о чем. Другой нобелевский лауреат, Пол Кругман, в свое время иронизировал по этому поводу, что рынки правильно оценивают, что пол-литра кетчупа должны стоить ровно в два раза дешевле одного литра, но ничего не могут сказать о том, почему и литр, и пол-литра стоят столько, сколько они стоят. Присуждение премии Роберту Шиллеру сигнализирует, что в рамках религиозной доктрины допустима некоторая доза безобидной и не сильно противоречащей догматам ереси. После кризиса такой допустимой ересью были признаны исследования в области так называемой поведенческой экономики. Здесь идея заключается в том, что сам рынок устроен идеально, но сомнению подвергается способность простых людей правильно пользоваться ниспосланным им инструментом. В тех сложных условиях, в которые попала ортодоксальная экономическая наука, когда противоречия между ее утверждениями и реальным положением дел бросаются в глаза всем, хорошим поведением считается «просто возделывать свой сад» и стараться не задумываться о высоких материях. Упорный труд есть лучшее средство справиться с обуревающими человека сомнениями. Этот образец поведения демонстрирует Ларс Хансен — и поделом награда. В общем, последнее решение о присуждении Нобелевской премии по экономике показало, что она не имеет никакого отношения к поиску истины, а есть лишь способ контроля и управления научным сообществом. http://www.profile.ru/article/ekonomika-kak-religiya-77602. От ред. so-l.ru - в смысле религиозности науки показательны слова самого Шиллера в которых он это прямо и признает, см. интервью: