Why Are U.S. Asset Prices So High Today?

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SimpleGift
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Why Are U.S. Asset Prices So High Today?

Post by SimpleGift » Sat May 18, 2019 1:42 pm

This post makes the case that today's high asset prices could be a result of the Great Moderation, which began in the mid-1980s and continues to the present day. The "Great Moderation" is a term used to describe the reduction in business cycle volatility observed in many advanced economies, and coinciding with a period when inflation was successfully brought down to a low level.

Several causes have been proposed for this moderation of business activity, inflation and real interest rates over the past thirty years, from improved central bank policies, to a shift from manufacturing to a service economy, to advances in information technology, to sheer good fortune! Some argue that the Great Recession of 2008 ended the Great Moderation — but one look at the three charts below indicates that GDP growth, inflation and real rates today are all consistent with their pre-recession levels of volatility:
  • Image
    Source: Jorda et. al. data
  • Image
    Source: Shiller data
  • Image
    Source: Shiller data

DISCUSSION: Though unexpected risks could certainly emerge (e.g., pandemics or global environmental breakdowns), when economic growth, inflation and real interest rates become less volatile and more predictable, it seems reasonable to expect that asset prices would be high, as the overall level of risk is much reduced. Your thoughts on this?

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Re: Why Are U.S. Asset Prices So High Today?

Post by nedsaid » Sat May 18, 2019 1:59 pm

Recessions used to be called inventory recessions. When companies made more stuff than consumers could buy, companies would have to lay people off. Companies manage this process much better now, inventory doesn't pile up in the warehouse anymore. Just in time inventory and all of that.

Recessions are also caused when so much credit has been extended that borrowers have trouble servicing their debt. Defaults happen, lenders lighten up on borrowing, and the economy slows. 2008-2009 was this on steroids, lots more subprime loans out there than what experts and regulators realized. Credit cycles, both long term and short term are much better understood now than let's say 1929.

The economy is more globalized now, that reduces the risk of recession being caused by local factors.

These are all factors in the great moderation.
Last edited by nedsaid on Sat May 18, 2019 2:00 pm, edited 1 time in total.
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Re: Why Are U.S. Asset Prices So High Today?

Post by DonIce » Sat May 18, 2019 1:59 pm

SimpleGift wrote:
Sat May 18, 2019 1:42 pm
DISCUSSION: Though unexpected risks could certainly emerge (e.g., pandemics or global environmental breakdowns), when economic growth, inflation and real interest rates become less volatile and more predictable, it seems reasonable to expect that asset prices would be high, as the overall level of risk is reduced. Your thoughts on this?
Is the risk really reduced given that the two biggest bear markets since the great depression (measured by % fall of the S&P500 index) were both during the period of "the great moderation"?

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Re: Why Are U.S. Asset Prices So High Today?

Post by rj342 » Sat May 18, 2019 2:05 pm

Not sure how relevant, but I note that the indirect stimulus provided by abnormally low central bank interest rates, which ultimately pumps up assets, creates problems for older people w a very modes nest egg whhc they keep in things like CDs. Of course regular bank savings acct rates are a joke also.

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Re: Why Are U.S. Asset Prices So High Today?

Post by columbia » Sat May 18, 2019 2:07 pm

Higher correlation of global financial markets is not up for consideration?

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Re: Why Are U.S. Asset Prices So High Today?

Post by SimpleGift » Sat May 18, 2019 2:09 pm

DonIce wrote:
Sat May 18, 2019 1:59 pm
Is the risk really reduced given that the two biggest bear markets since the great depression (measured by % fall of the S&P500 index) were both during the period of "the great moderation"?
My sense is that when asset prices are high (due to the moderation of GDP growth, inflation and real rates), the potential for rapid meltdowns and rapid recoveries in the financial markets may be increased. It seems paradoxical that reduced levels of overall economic risk might lead to increased levels of episodic financial market risk (since valuations are so high to begin with) — but this may well be where we are today.

In response, we've improved the credit quality of our safe assets (from munis and corporates to Treasuries), but who knows.
Last edited by SimpleGift on Sat May 18, 2019 2:16 pm, edited 1 time in total.

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Re: Why Are U.S. Asset Prices So High Today?

Post by Dialectical Investor » Sat May 18, 2019 2:16 pm

Tighter tolerances, higher precision, smoother ride overall, but when something goes wrong, what used to cause a loud rattle makes the wheels fall off.

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Re: Why Are U.S. Asset Prices So High Today?

Post by DonIce » Sat May 18, 2019 2:17 pm

SimpleGift wrote:
Sat May 18, 2019 2:09 pm
My sense is that when asset prices are high (due to the moderation of GDP growth, inflation and real rates), the potential for rapid meltdowns and rapid recoveries in the financial markets may be increased. It seems paradoxical that reduced levels of overall economic risk might lead to increased levels of episodic financial risk (since valuations are so high to begin with) — but this may well be where we are today.
Maybe, but I'm not convinced we have lower overall economic risk now. There are plenty of risks on the horizon. Some of them may manifest themselves, others might not. Examples include:

- Rising income and wealth inequality, which may result in a backlash
- Rapidly increasing costs of further scientific/technological innovation. Much of the low hanging fruit has apparently already been picked. This may lead to much slower productivity growth
- Rapidly declining population growth in developed countries, and even population contraction in some countries. The majority of economic growth over the last 100 years has been a result of population growth (and the rest from technological progress)
- Increasing student loan burden in the US, which may result in economic problems
- Increasing automation, which may result in increasing unemployment, which may cause economic problems
- Increasing debt burden of advanced countries, most are now at the highest debt levels since WWII, and unlike then, have no path to reducing the debt levels. Even a few % increase in interest rates may cause the budgets of many advanced countries to falter.

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Re: Why Are U.S. Asset Prices So High Today?

Post by FIREchief » Sat May 18, 2019 2:30 pm

This is a fascinating thread. Thanks for starting it. :beer
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Re: Why Are U.S. Asset Prices So High Today?

Post by Thesaints » Sat May 18, 2019 2:57 pm

“High” asset prices compared to what ?

If it is high compared to, let’s say, 1950, the reason is productivity and profits growth. This of course only refers to stocks because bonds are as expensive as they were back then.

If instead the question is high compared to 2010, the reason is without the shade of a doubt “monetary policies” and it applies to both stocks and bonds.
Rarely an asset prices driver has been so clear and I don’t understand the reason for so many graphs.

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Re: Why Are U.S. Asset Prices So High Today?

Post by willthrill81 » Sat May 18, 2019 3:10 pm

Compared to fairly recent history, the U.S. is at peace (many historians refer to the period from 1945 until today as the 'great peace', where there have been no major conflicts between the world's major powers), the economy is stable, inflation is low, and seemingly little risk of deflation in the views of most. In such situations, there is a general perception of less risk than in much of the past, and less risk is associated with higher asset prices.
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Re: Why Are U.S. Asset Prices So High Today?

Post by SimpleGift » Sat May 18, 2019 3:13 pm

DonIce wrote:
Sat May 18, 2019 2:17 pm
Maybe, but I'm not convinced we have lower overall economic risk now. There are plenty of risks on the horizon. Some of them may manifest themselves, others might not.
No doubt there will always be risks on the horizon. However, taking a step back and looking at United States from a global perspective today, it's easy to make a case that the U.S. economy, including its stocks and bonds, are perceived as among the strongest and safest in the world.

U.S. stocks, especially tech companies, are the darlings of the world. U.S. government bonds are viewed as the safest on the planet. The U.S. dollar is the world's primary reserve currency. Central bank policies have shown success moderating inflation and unemployment. Oil shocks are less of a danger, as the U.S. is now energy independent. The U.S. military is head-and-shoulders above any other. Financial risks are somewhat less prevalent, due to post-2008 safeguards in the banking system.

I'm not suggesting that financial risks have disappeared in the U.S., but simply moderated significantly in the past three decades — thus contributing to today's higher asset prices.
Last edited by SimpleGift on Sat May 18, 2019 3:24 pm, edited 1 time in total.

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Re: Why Are U.S. Asset Prices So High Today?

Post by jeffyscott » Sat May 18, 2019 3:18 pm

SimpleGift wrote:
Sat May 18, 2019 1:42 pm
This post makes the case that today's high asset prices could be a result of the Great Moderation, which began in the mid-1980s and continues to the present day. The "Great Moderation" is a term used to describe the reduction in business cycle volatility observed in many advanced economies, and coinciding with a period when inflation was successfully brought down to a low level.
What about the low (at least relative to the US) stock prices in ex-US advanced economies?
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Why Are U.S. Asset Prices So High Today?

Post by SimpleGift » Sat May 18, 2019 3:22 pm

jeffyscott wrote:
Sat May 18, 2019 3:18 pm
What about the low (at least relative to the US) stock prices in ex-US advanced economies?
See my post immediately above yours. The risks in other advanced countries haven't moderated as much as in the U.S. today.

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Re: Why Are U.S. Asset Prices So High Today?

Post by The Wizard » Sat May 18, 2019 3:26 pm

Stock prices are high the past few years because the alternative investment, buying bonds, is rather low yielding nowadays.
Simple...
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Re: Why Are U.S. Asset Prices So High Today?

Post by Cycle » Sat May 18, 2019 4:04 pm

I just blindly plow all our money into target funds. Isn't this what most US investors do? I don't know anyone personally who picks stocks or cares about the current asset price... Granted I'm in my 30s

Also, there aren't many other ways to get passive gains that beat inflation thanks to low interest rates.

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Re: Why Are U.S. Asset Prices So High Today?

Post by Tycoon » Sat May 18, 2019 4:09 pm

The Wizard wrote:
Sat May 18, 2019 3:26 pm
Stock prices are high the past few years because the alternative investment, buying bonds, is rather low yielding nowadays.
Simple...
There is truth in this explanation.
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Re: Why Are U.S. Asset Prices So High Today?

Post by jeffyscott » Sat May 18, 2019 4:16 pm

Tycoon wrote:
Sat May 18, 2019 4:09 pm
The Wizard wrote:
Sat May 18, 2019 3:26 pm
Stock prices are high the past few years because the alternative investment, buying bonds, is rather low yielding nowadays.
Simple...
There is truth in this explanation.
Aren't foreign, developed bond interest rates even lower, though?
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Why Are U.S. Asset Prices So High Today?

Post by wootwoot » Sat May 18, 2019 4:27 pm

The fed lowering interest rates for the last ~10 years (impacting bonds) while putting money into the market through QE has had a massive impact on asset valuation.

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Re: Why Are U.S. Asset Prices So High Today?

Post by Tycoon » Sat May 18, 2019 4:30 pm

jeffyscott wrote:
Sat May 18, 2019 4:16 pm
Tycoon wrote:
Sat May 18, 2019 4:09 pm
The Wizard wrote:
Sat May 18, 2019 3:26 pm
Stock prices are high the past few years because the alternative investment, buying bonds, is rather low yielding nowadays.
Simple...
There is truth in this explanation.
Aren't foreign, developed bond interest rates even lower, though?
Yes, many developed countries have very low bond yields.
“To know what you know and what you do not know, that is true knowledge.” Confucius

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Re: Why Are U.S. Asset Prices So High Today?

Post by jeffyscott » Sat May 18, 2019 4:42 pm

Tycoon wrote:
Sat May 18, 2019 4:30 pm
jeffyscott wrote:
Sat May 18, 2019 4:16 pm
Tycoon wrote:
Sat May 18, 2019 4:09 pm
The Wizard wrote:
Sat May 18, 2019 3:26 pm
Stock prices are high the past few years because the alternative investment, buying bonds, is rather low yielding nowadays.
Simple...
There is truth in this explanation.
Aren't foreign, developed bond interest rates even lower, though?
Yes, many developed countries have very low bond yields.
That seems like a problem with the interest rate explanation. Shouldn't foreign developed stock prices be as high or higher than US, due to the even lower interest rates, if that's the explanation?
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Why Are U.S. Asset Prices So High Today?

Post by FIREchief » Sat May 18, 2019 4:45 pm

Cycle wrote:
Sat May 18, 2019 4:04 pm
I just blindly plow all our money into target funds. Isn't this what most US investors do?
It may be what many US investors do, but that through ignorance or just not caring about their investments. Here on the forum, there may be many who use target funds but I believe that there are more who use individual index funds to invest in accordance with whatever allocation strategy they may have.
I don't know anyone personally who picks stocks or cares about the current asset price... Granted I'm in my 30s
This I can largely agree with. Although I don't particularly care about valuations, I do wind up getting drawn into some of the discussions on the forum.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Why Are U.S. Asset Prices So High Today?

Post by Tycoon » Sat May 18, 2019 4:49 pm

jeffyscott wrote:
Sat May 18, 2019 4:42 pm
Tycoon wrote:
Sat May 18, 2019 4:30 pm
jeffyscott wrote:
Sat May 18, 2019 4:16 pm
Tycoon wrote:
Sat May 18, 2019 4:09 pm
The Wizard wrote:
Sat May 18, 2019 3:26 pm
Stock prices are high the past few years because the alternative investment, buying bonds, is rather low yielding nowadays.
Simple...
There is truth in this explanation.
Aren't foreign, developed bond interest rates even lower, though?
Yes, many developed countries have very low bond yields.
That seems like a problem with the interest rate explanation. Shouldn't foreign developed stock prices be as high or higher than US, due to the even lower interest rates, if that's the explanation?
One would think so. Perhaps the culture in the US isn't as risk averse? Perhaps there is more confidence in US stocks? I don't know the answers.
“To know what you know and what you do not know, that is true knowledge.” Confucius

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Re: Why Are U.S. Asset Prices So High Today?

Post by Cycle » Sat May 18, 2019 5:15 pm

FIREchief wrote:
Sat May 18, 2019 4:45 pm
Cycle wrote:
Sat May 18, 2019 4:04 pm
I just blindly plow all our money into target funds. Isn't this what most US investors do?
It may be what many US investors do, but that through ignorance or just not caring about their investments. Here on the forum, there may be many who use target funds but I believe that there are more who use individual index funds to invest in accordance with whatever allocation strategy they may have.
I should probably clarify I don't hold target funds in a taxable

I graduated from the 3-fund to a simpler strategy. In tax deferred, target fund or equivalent if auto re-balancing is available. In taxable, 100% VT (vanguard total world admiral). This luxury costs me about $300 on 800k in a 401k.

The beauty of this strategy is one doesn't try to figure out when Asset prices are overvalued to try and figure out a way to beat the market through "buying the dip" or whatever else market timers call their shenanigans.

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Re: Why Are U.S. Asset Prices So High Today?

Post by FIREchief » Sat May 18, 2019 5:37 pm

Cycle wrote:
Sat May 18, 2019 5:15 pm
The beauty of this strategy is one doesn't try to figure out when Asset prices are overvalued to try and figure out a way to beat the market through "buying the dip" or whatever else market timers call their shenanigans.
Certainly, if a target fund helps you (or any investor) with this then it may be worth the price of admission. My concerns with target date funds for some/many situations is that they charge higher ERs and, more importantly, are "one size fits all." For those who can ignore the "shananigans" and follow sound Boglehead advice, many of them will be better off developing their own investing strategies based upon their own unique situations (which doesn't have to be any more cumbersome than 100% target fund).
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Why Are U.S. Asset Prices So High Today?

Post by garlandwhizzer » Sat May 18, 2019 7:17 pm

I agree that we in the US have greatly benefited from our lack of major wars (none on our own soil, unlike Europe and Asia which were devastated), relative political and economicl stability, world reserve currency, dominant technology innovation, deepest and most liquid investment markets, rule of law, property rights, culture of risk investing, etc.. I would like to add one more factor that I believe keeps prices of all US investment assets elevated. There has been for decades a growing concentration of wealth at the top, the investing class. Real wages for most working people have hardly budged in inflation adjusted terms since the 1970s. On the other hand the wealthy have gotten wealthier by far and that's the group tends to invest big time. Their money flows into bonds, stocks, investment and high end real estate, alternates, and collectables. Everything looks generously valued to me now except EM and INTL for obvious reasons. This increased investment demand helps to put a floor under prices. It also has the capacity along with low interest rates to occasionally create excesses like the tech and real estate bubbles. Prices can be bid up to unsustainable levels.

All in all investors who have stayed the course and have not self-sabotaged have done very well for a long time since 1982 with some bad bumps along the way which are always inevitable. The question of course is will it continue like this in the US for another 3 or 4 decades? About that there is a high level of uncertainty IMO.

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Re: Why Are U.S. Asset Prices So High Today?

Post by SovereignInvestor » Sat May 18, 2019 8:15 pm

garlandwhizzer wrote:
Sat May 18, 2019 7:17 pm
I agree that we in the US have greatly benefited from our lack of major wars (none on our own soil, unlike Europe and Asia which were devastated), relative political and economicl stability, world reserve currency, dominant technology innovation, deepest and most liquid investment markets, rule of law, property rights, culture of risk investing, etc.. I would like to add one more factor that I believe keeps prices of all US investment assets elevated. There has been for decades a growing concentration of wealth at the top, the investing class. Real wages for most working people have hardly budged in inflation adjusted terms since the 1970s. On the other hand the wealthy have gotten wealthier by far and that's the group tends to invest big time. Their money flows into bonds, stocks, investment and high end real estate, alternates, and collectables. Everything looks generously valued to me now except EM and INTL for obvious reasons. This increased investment demand helps to put a floor under prices. It also has the capacity along with low interest rates to occasionally create excesses like the tech and real estate bubbles. Prices can be bid up to unsustainable levels.

All in all investors who have stayed the course and have not self-sabotaged have done very well for a long time since 1982 with some bad bumps along the way which are always inevitable. The question of course is will it continue like this in the US for another 3 or 4 decades? About that there is a high level of uncertainty IMO.

Garland Whizzer
The part about real wages seems to be off base. Averagr real hourly earnings of production non supervisory workers has risen substantially since the 1970s and is up firmly this decade.

The median household income hasnt budged since the 1970s but thst is a flawed statistic since the typical household has changed...more single and one person householders and more elderly and aged persons who of course will have Lower incomes.

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Re: Why Are U.S. Asset Prices So High Today?

Post by knpstr » Sat May 18, 2019 8:21 pm

Are asset prices high?

Warren Buffett says if interest rates stay this low in the long term, that asset prices are "ridiculously cheap" right now.
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Re: Why Are U.S. Asset Prices So High Today?

Post by SovereignInvestor » Sat May 18, 2019 8:30 pm

knpstr wrote:
Sat May 18, 2019 8:21 pm
Are asset prices high?

Warren Buffett says if interest rates stay this low in the long term, that asset prices are "ridiculously cheap" right now.
Yup. It's all relative. Relative to 15% long term rates like what existed in 1982 most assets and stocks are in a bubble. Relative to current long term interest.rates under 3.0%, stocks seem reasonable.

He also said interest rates are the gravity holding down asset prices.

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Re: Why Are U.S. Asset Prices So High Today?

Post by willthrill81 » Sat May 18, 2019 9:49 pm

SovereignInvestor wrote:
Sat May 18, 2019 8:15 pm
garlandwhizzer wrote:
Sat May 18, 2019 7:17 pm
I agree that we in the US have greatly benefited from our lack of major wars (none on our own soil, unlike Europe and Asia which were devastated), relative political and economicl stability, world reserve currency, dominant technology innovation, deepest and most liquid investment markets, rule of law, property rights, culture of risk investing, etc.. I would like to add one more factor that I believe keeps prices of all US investment assets elevated. There has been for decades a growing concentration of wealth at the top, the investing class. Real wages for most working people have hardly budged in inflation adjusted terms since the 1970s. On the other hand the wealthy have gotten wealthier by far and that's the group tends to invest big time. Their money flows into bonds, stocks, investment and high end real estate, alternates, and collectables. Everything looks generously valued to me now except EM and INTL for obvious reasons. This increased investment demand helps to put a floor under prices. It also has the capacity along with low interest rates to occasionally create excesses like the tech and real estate bubbles. Prices can be bid up to unsustainable levels.

All in all investors who have stayed the course and have not self-sabotaged have done very well for a long time since 1982 with some bad bumps along the way which are always inevitable. The question of course is will it continue like this in the US for another 3 or 4 decades? About that there is a high level of uncertainty IMO.

Garland Whizzer
The part about real wages seems to be off base. Averagr real hourly earnings of production non supervisory workers has risen substantially since the 1970s and is up firmly this decade.
Indeed. According to FRED, real median household income as of 2017 was up 21.5% from 1984.
SovereignInvestor wrote:
Sat May 18, 2019 8:15 pm
The median household income hasnt budged since the 1970s but thst is a flawed statistic since the typical household has changed...more single and one person householders and more elderly and aged persons who of course will have Lower incomes.
That's a very good point. Referring to the above period of 1984-2017, the median household size declined from 2.71 to 2.54, a 6.3% decline. Median household size has shrunk from 1970 through 2018 by a substantial 19.4%.
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Re: Why Are U.S. Asset Prices So High Today?

Post by Ferdinand2014 » Sat May 18, 2019 10:30 pm

knpstr wrote:
Sat May 18, 2019 8:21 pm
Are asset prices high?

Warren Buffett says if interest rates stay this low in the long term, that asset prices are "ridiculously cheap" right now.
He discusses this in his shareholder letter for 2017 regarding the bet and the wager of 1,000,000 or 500,000 each for Buffett and Protege Hedge Fund’s placed into U.S. Treasuries in 2007. He points out that by 2012 the Treasury was yielding only .88%. So they sold the bonds and put the proceeds into BRK/B shares and distributed the earnings to the winners charity of choice.

“Protégé and I, meanwhile, leaning neither on research, insights nor brilliance, made only one investment decision during the ten years. We simply decided to sell our bond investment at a price of more than 100 times earnings (95.7 sale price/.88 yield), those being “earnings” that could not increase during the ensuing five years.”

“After our purchase, however, some very strange things took place in the bond market. By November 2012, our bonds – now with about five years to go before they matured – were selling for 95.7% of their face value. At that price, their annual yield to maturity was less than 1%. Or, to be precise, .88%.
Given that pathetic return, our bonds had become a dumb – a really dumb – investment compared to American equities. Over time, the S&P 500 – which mirrors a huge cross-section of American business, appropriately weighted by market value – has earned far more than 10% annually on shareholders’ equity (net worth).
In November 2012, as we were considering all this, the cash return from dividends on the S&P 500 was 21⁄2% annually, about triple the yield on our U.S. Treasury bond. These dividend payments were almost certain to grow. Beyond that, huge sums were being retained by the companies comprising the 500. These businesses would use their retained earnings to expand their operations and, frequently, to repurchase their shares as well. Either course would, over time, substantially increase earnings-per-share. And – as has been the case since 1776 – whatever its problems of the minute, the American economy was going to move forward.
Presented late in 2012 with the extraordinary valuation mismatch between bonds and equities, Protégé and I agreed to sell the bonds we had bought five years earlier and use the proceeds to buy 11,200 Berkshire “B” shares. The result: Girls Inc. of Omaha found itself receiving $2,222,279 last month rather than the $1 million it had originally hoped for.”


So he basically he took 1/.0088 to get 113 P/E for 10 year Treasuries.

With that metric, looking at today:

S&P 500 5% ‘yield’ with P/E of 20/1
10 year Treasuries are 2.4% or a P/E of 41/1

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Re: Why Are U.S. Asset Prices So High Today?

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garlandwhizzer
Posts: 2291
Joined: Fri Aug 06, 2010 3:42 pm

Re: Why Are U.S. Asset Prices So High Today?

Post by garlandwhizzer » Sun May 19, 2019 3:10 pm

SoverignInvestor wrote:

The part about real wages seems to be off base. Averagr real hourly earnings of production non supervisory workers has risen substantially since the 1970s and is up firmly this decade.
I suggest you read the following article from Pew Research written in August of 2018.

https://www.pewresearch.org/fact-tank/2 ... r-decades/

Quotes from the article:
After adjusting for inflation, however, today’s average hourly wage has just about the same purchasing power it did in 1978, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then. In fact, in real terms average hourly earnings peaked more than 45 years ago: The $4.03-an-hour rate recorded in January 1973 had the same purchasing power that $23.68 would today.

Meanwhile, wage gains have gone largely to the highest earners. Since 2000, usual weekly wages have risen 3% (in real terms) among workers in the lowest tenth of the earnings distribution and 4.3% among the lowest quarter. But among people in the top tenth of the distribution, real wages have risen a cumulative 15.7%, to $2,112 a week – nearly five times the usual weekly earnings of the bottom tenth ($426)
Real wages for most workers have hardly budged since the mid-1970s and the gains that have occurred were concentrated in the top tenth decile, the investing class, as I pointed out. The rich are clearly much richer now which helps to drive the stock market and other asset prices higher.

Garland Whizzer

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willthrill81
Posts: 10336
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Why Are U.S. Asset Prices So High Today?

Post by willthrill81 » Sun May 19, 2019 3:20 pm

garlandwhizzer wrote:
Sun May 19, 2019 3:10 pm
SoverignInvestor wrote:

The part about real wages seems to be off base. Averagr real hourly earnings of production non supervisory workers has risen substantially since the 1970s and is up firmly this decade.
I suggest you read the following article from Pew Research written in August of 2018.

https://www.pewresearch.org/fact-tank/2 ... r-decades/

Quotes from the article:
After adjusting for inflation, however, today’s average hourly wage has just about the same purchasing power it did in 1978, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then. In fact, in real terms average hourly earnings peaked more than 45 years ago: The $4.03-an-hour rate recorded in January 1973 had the same purchasing power that $23.68 would today.

Meanwhile, wage gains have gone largely to the highest earners. Since 2000, usual weekly wages have risen 3% (in real terms) among workers in the lowest tenth of the earnings distribution and 4.3% among the lowest quarter. But among people in the top tenth of the distribution, real wages have risen a cumulative 15.7%, to $2,112 a week – nearly five times the usual weekly earnings of the bottom tenth ($426)
Real wages for most workers have hardly budged since the mid-1970s and the gains that have occurred were concentrated in the top tenth decile, the investing class, as I pointed out. The rich are clearly much richer now which helps to drive the stock market and other asset prices higher.

Garland Whizzer
Ignoring the fact that the median household is smaller today than it was in the mid-1970s, real household income grew by 35% between 1967-2017. That doesn't sound like "hardly budging" to me.

That being said, of course the rich have gotten richer. That's a natural consequence of a stable, capitalistic economy. Those who know how to build wealth continue to do so, while those who do not do not.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

garlandwhizzer
Posts: 2291
Joined: Fri Aug 06, 2010 3:42 pm

Re: Why Are U.S. Asset Prices So High Today?

Post by garlandwhizzer » Mon May 20, 2019 1:38 pm

willthrill81 wrote:

Ignoring the fact that the median household is smaller today than it was in the mid-1970s, real household income grew by 35% between 1967-2017. That doesn't sound like "hardly budging" to me.


Median household income is not the best way to measure wages. In the 1960s and 1970s almost all households were one income households. There is a much higher percentage of two income households now than in the 1960s and 1970s when it was much more common for one breadwinner and one stay at home spouse. In the 1960s and 1970s one worker per household with a manufacturing job could afford to buy a home and send his kids to college. That is no longer the case. Often with both parents working students still must take out huge loans to pay for a college eduction. Home ownership is a decreasing percentage at present due to affordability issues even if you have a decent job. Even given this distortion due to more 2 workers per household the numbers quoted above 35% real growth in household income from 1967 to 2017, 50 years, average out to an annual compound growth rate of 0.6% which is totally unimpressive. That 0.6% figure for median income has been inflated largely by the high end earners. The top 5% of households have seen their income grow by 113% almost 3 times the growth by median.These figures come from the website quoted by willthrill 81 and I believe they eloquently make my point.

https://www.advisorperspectives.com/dsh ... erspective

Money and assets have gotten more and more concentrated in the investing class over the last 5 decades and that increasing concentration of wealth in the investing class has dramatically increased the demand for investment assets (stocks, bonds, real estate, collectables, alternatives) and been yet another factor in driving up their prices.

Garland Whizzer

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