At what point is this a bubble?

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alluringreality
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Re: At what point is this a bubble?

Post by alluringreality » Wed Feb 12, 2020 1:42 pm

rascott wrote:
Wed Feb 12, 2020 12:38 pm
PE ratio is basically identical to what it was in 2015
There are various ways to look at valuations. For example, I think CAPE increased the last 5 years. Page 35 of Vanguard's 2020 outlook labels the S&P 500 "Overvalued, maybe, but not a bubble".
https://pressroom.vanguard.com/nonindex ... k_2020.pdf

onourway
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Re: At what point is this a bubble?

Post by onourway » Wed Feb 12, 2020 1:43 pm

quantAndHold wrote:
Wed Feb 12, 2020 12:02 pm
You’ll know it’s a bubble when Uber drivers are giving you stock tips. Every bubble I’ve lived through (dotcom, real estate, bitcoin, etc) has had the same feature. Someone at the bottom of the economic ladder was telling me how to make money on the bubbling financial product.

Until then, not a bubble.
Well, that literally happened to me in my last Uber ride about two weeks ago so...

Pierre Delecto
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Re: At what point is this a bubble?

Post by Pierre Delecto » Wed Feb 12, 2020 1:46 pm

MathWizard wrote:
Wed Feb 12, 2020 1:30 pm
Pierre Delecto wrote:
Wed Feb 12, 2020 9:51 am
And if your looking at PE values, it’s the forward PE that matters. The rear-looking PE value is largely meaningless.

You know what the current price is
You know what the last year's earnings were

You can only guess what the earning for the next year will be.

So the traditional rear-looking PE is based in reality,
and the forward-looking PE is a guess.


If you think about it, forward PE should be right around 1/return
where return is the return that investors expect to get.
Since the price is always positive, and investors would never want
negative earnings, forward PE will never be negative, though the rear-looking PE in a year could be.

In fact, I would venture that forward PE will always be positive, but less than 25 , corresponding to
an expected rate of return in excess of 4%.
Recognize that rearward looking PE is not based in PRESENT reality. Those earnings ALL occurred in the past.

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Schlabba
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Re: At what point is this a bubble?

Post by Schlabba » Wed Feb 12, 2020 1:56 pm

PoultryMan wrote:
Wed Feb 12, 2020 9:45 am
I know to stick with a plan and rebalance as needed. Having said that, when Warren buffett cant find anything to invest in, PE ratios seem high, when is it a bubble and time to take some money off the table?

Maybe my unease is an irrational emotion?

Im trying to make this post actionable, so I guess Im asking, is it reasonable to be concerned? Does this tell me my rebalancing bands are too wide? Too narrow? Anyone else wondering the same?
As far as actionable goes, maybe its best to stop reading financial news or what the S&P500 is doing. If you are shaking as-we-speak, feel free to do a little market timing. Maybe increase your bonds percentage by 5% in 2020. If you are still really worried in 2021 add another 5%.
Secretly a dividend investor. Feel free to ask why.

Coltrane75
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Re: At what point is this a bubble?

Post by Coltrane75 » Wed Feb 12, 2020 1:56 pm

You'll know it's a bubble when the bubble bursts.

SovereignInvestor
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Re: At what point is this a bubble?

Post by SovereignInvestor » Wed Feb 12, 2020 1:56 pm

Forward PE is better to use. Remember the highest PE recently on trailing basis was mid 2009...how did being bearish then work out?

But now with forward PE near 19, it is the highest since about 2001. In 2015-16 it peaked in the 16-17 range.

Many are spooked by the PE expansion but the Gravity holding down stocks is interest rates and they are lowest ever..10Y yield is 1.6%.

IMO stocks aren't close to bubble, maybe a little bit overvalued relative to rates.

In 1999 S&P was at 26x forward earning with 10Y yield at 6%.

Now it is 19x forward EPS with 10Y at 1.6%, not even close.

S&p is only up around 17% in the last 24 months ..far from overextended. In March 2000 it had rallied near 50% in trailing 24 months.

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Forester
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Re: At what point is this a bubble?

Post by Forester » Wed Feb 12, 2020 2:02 pm

S&P 500 is looking top heavy

Image

Lee_WSP
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Re: At what point is this a bubble?

Post by Lee_WSP » Wed Feb 12, 2020 2:25 pm

JonnyB wrote:
Wed Feb 12, 2020 1:01 pm
nisiprius wrote:
Wed Feb 12, 2020 12:23 pm
I learned this in 1997. Alan Greenspan made his "irrational exuberance" speech in December 1996. I didn't go to cash, but I did pull back on our stock allocation. The crash happened around April, 2000, more than three years later, during which time the Dow rose from 7,000 almost to 12,000. Now, this wasn't a disaster at all, but the point is that it didn't do me much good, either. Because of having lowered our stock allocation, we partly missed out on the crash, but we partly missed out on three years of fantastic growth, too. Overall it didn't do much good or much harm. I don't kick myself for doing it.
If you sold your stocks in 1997 and invested in the Vanguard Total Bond Fund instead, you would have been ahead in 2013. That's 16 years later. And if you had decided to reinvest in stocks any time between 2008 and 2013, a 5-year span, when PEs were much lower, you would come out way ahead.

Stock prices matter. Investors can be irrational. Bubbles exist, can be recognized and can be avoided.
It's certainly a compelling visual. However, a 60/40 or 40/60 portfolio would have done just as well, if not better, than total bond.

https://www.portfoliovisualizer.com/bac ... tion3_3=60

That said, we've been in a bond bull market for a couple of decades, if rising rates cause the next crash, things may not look so rosy for bonds.

Theseus
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Re: At what point is this a bubble?

Post by Theseus » Wed Feb 12, 2020 2:29 pm

1130Super wrote:
Wed Feb 12, 2020 1:28 pm
ge1 wrote:
Wed Feb 12, 2020 10:00 am
I agree that certain part of the markets most definitely seem to be in a bubble (Tesla with a market cap of almost 150bn for example), primarily US Tech. Other part of the markets seem fine (international, energy for example).

The difficult part is what to do with it. In my portfolio I overweigh US value and small cap value, but I do this knowing that I may underperform the broader index for longer periods of time. There are no guarantees.

good luck
Why do you assume Tesla is in a bubble? Btw don’t say they are bigger than GM and Ford combined, Tesla is not just a car Manufacture, again Tesla is not just a car manufacturer they are a tech company with an ecosystem. They supply the fuel for their ecosystem, they make the fuel for their ecosystem. They sell the cars directly to the consumer.
Tesla = Exxon + 7-Eleven + Ford dealerships + Ford. Not just Ford
Very interesting. I own a Tesla and I didn't think about this.

Tesla may be overpriced, but I agree with you. Comparison of Tesla to the traditional car manufactures is misplaced. It is like when people where comparing Amazon to Borders and B&N without fully understanding that they are not the same businesses and comparison didn't make sense. While they both sold books, they were both fundamentally different businesses. Since I bought my Tesla in 2017, my car has continue to materially improve. It is just fascinating to watch and experience that progression. That never happened with any car I have ever bought before. It just seems like a different business altogether and a disrupter. Traditional auto companies can't reproduce that model.

JonnyB
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Re: At what point is this a bubble?

Post by JonnyB » Wed Feb 12, 2020 4:12 pm

1130Super wrote:
Wed Feb 12, 2020 1:28 pm
Tesla is not just a car manufacturer they are a tech company
I'm not sure how valuable this argument is. I can remember when WeWork said it wasn't just a real estate company, but a tech company. Enron was not just an energy company, but a tech company. And I can remember when a pet food store said it wasn't just a pet food company, but a tech company.

SovereignInvestor
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Re: At what point is this a bubble?

Post by SovereignInvestor » Wed Feb 12, 2020 4:15 pm

Amazon isn't just a retail company. It wasn't a bubble.

quantAndHold
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Re: At what point is this a bubble?

Post by quantAndHold » Wed Feb 12, 2020 4:20 pm

onourway wrote:
Wed Feb 12, 2020 1:43 pm
quantAndHold wrote:
Wed Feb 12, 2020 12:02 pm
You’ll know it’s a bubble when Uber drivers are giving you stock tips. Every bubble I’ve lived through (dotcom, real estate, bitcoin, etc) has had the same feature. Someone at the bottom of the economic ladder was telling me how to make money on the bubbling financial product.

Until then, not a bubble.
Well, that literally happened to me in my last Uber ride about two weeks ago so...
So we're there then. Like when my tennis pro, a guy who worked part time teaching old ladies to hit forehands, told me he bought a condo. That was 2007.

The problem is that knowing there's a bubble, and being able to profit from it, are two different things. I *knew* about the housing bubble in 2007. But I had no idea what to do with that knowledge. I still don't.
Yes, I’m really that pedantic.

rbaldini
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Re: At what point is this a bubble?

Post by rbaldini » Wed Feb 12, 2020 4:24 pm

Bubbles, by their very nature, are elusive. If everyone knew we were in a bubble, we wouldn't be in a bubble. You don't know until after it has popped.

You have basically two choices. You can go with your gut / analysis / whatever, and pull some money out of the market. Or you can stick to an asset allocation that you believe will help you weather the bubbles over the long term. Usually the former doesn't work out because humans are stupid, but sometimes it does, by luck or skill.

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Forester
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Re: At what point is this a bubble?

Post by Forester » Wed Feb 12, 2020 4:39 pm

rbaldini wrote:
Wed Feb 12, 2020 4:24 pm
Bubbles, by their very nature, are elusive. If everyone knew we were in a bubble, we wouldn't be in a bubble. You don't know until after it has popped.

You have basically two choices. You can go with your gut / analysis / whatever, and pull some money out of the market. Or you can stick to an asset allocation that you believe will help you weather the bubbles over the long term. Usually the former doesn't work out because humans are stupid, but sometimes it does, by luck or skill.
Third choice, have part of the portfolio dedicated to mechanical equity trend. Conservative long-only investors will doggedly follow the market down 30%, 40%, 50%, 60%, thus providing eventual profit for the trend follower who buys back in at a lower entry.

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gmaynardkrebs
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Re: At what point is this a bubble?

Post by gmaynardkrebs » Wed Feb 12, 2020 4:44 pm

The problem with bubbles, even when you think it's a bubble (as I do today), is that it's only slightly irrational to continue invest in them (as I do today). If it were insane to do so, there would not be any bubbles. So, you hold your nose, and "stay the course" (to coin a phrase), until...

MathWizard
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Re: At what point is this a bubble?

Post by MathWizard » Wed Feb 12, 2020 4:54 pm

Pierre Delecto wrote:
Wed Feb 12, 2020 1:46 pm
MathWizard wrote:
Wed Feb 12, 2020 1:30 pm
Pierre Delecto wrote:
Wed Feb 12, 2020 9:51 am
And if your looking at PE values, it’s the forward PE that matters. The rear-looking PE value is largely meaningless.

You know what the current price is
You know what the last year's earnings were

You can only guess what the earning for the next year will be.

So the traditional rear-looking PE is based in reality,
and the forward-looking PE is a guess.


If you think about it, forward PE should be right around 1/return
where return is the return that investors expect to get.
Since the price is always positive, and investors would never want
negative earnings, forward PE will never be negative, though the rear-looking PE in a year could be.

In fact, I would venture that forward PE will always be positive, but less than 25 , corresponding to
an expected rate of return in excess of 4%.
Recognize that rearward looking PE is not based in PRESENT reality. Those earnings ALL occurred in the past.
That is true, but the sun came up yesterday, and the day before, etc. Lacking any other data, it will probably come up tomorrow.

A company has value, and it comes from earnings. The question you need to ask is if
the past earnings were e.g. $10/share and the number of shares does not change, why would you expect that next year the earnings would be $15/share?

The P in either training or forward PE is the same. If they are different, it must be that someone thinks the forward earnings will be different from the trailing earnings. If they are vastly different, the earnings projection must be vastly different from the previous years earnings. I can imagine that for a single company, but not for the total stock market for highly increased earning. I can imagine a huge short term drop in earnings from a recession from the entire market, but not a huge rise.

I am not a believer in the EMH. Things get improperly priced all the time. The problem is that one often cannot take advantage of that, at least in the short term. All you can do is to buy either bonds or stocks, or some other investment based upon which will provide the best return on investment long term.

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dogagility
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Re: At what point is this a bubble?

Post by dogagility » Wed Feb 12, 2020 5:14 pm

I don't see any bubble.
"The stock market is a device for transferring money from the impatient to the patient" -- Warren Buffett

james22
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Re: At what point is this a bubble?

Post by james22 » Thu Feb 13, 2020 2:15 am

"...when you don’t know it’s a bubble, you don’t see the pin.” Schiff

manatee2005
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Re: At what point is this a bubble?

Post by manatee2005 » Thu Feb 13, 2020 4:43 am

james22 wrote:
Thu Feb 13, 2020 2:15 am
"...when you don’t know it’s a bubble, you don’t see the pin.” Schiff
Schiff has been wrong for the past 10 years.

manatee2005
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Re: At what point is this a bubble?

Post by manatee2005 » Thu Feb 13, 2020 4:47 am

quantAndHold wrote:
Wed Feb 12, 2020 4:20 pm
onourway wrote:
Wed Feb 12, 2020 1:43 pm
quantAndHold wrote:
Wed Feb 12, 2020 12:02 pm
You’ll know it’s a bubble when Uber drivers are giving you stock tips. Every bubble I’ve lived through (dotcom, real estate, bitcoin, etc) has had the same feature. Someone at the bottom of the economic ladder was telling me how to make money on the bubbling financial product.

Until then, not a bubble.
Well, that literally happened to me in my last Uber ride about two weeks ago so...
So we're there then. Like when my tennis pro, a guy who worked part time teaching old ladies to hit forehands, told me he bought a condo. That was 2007.

The problem is that knowing there's a bubble, and being able to profit from it, are two different things. I *knew* about the housing bubble in 2007. But I had no idea what to do with that knowledge. I still don't.
You should have shorted countrywide and home builders in 2007.

Chicken Little
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Re: At what point is this a bubble?

Post by Chicken Little » Thu Feb 13, 2020 5:24 am

anoop wrote:
Wed Feb 12, 2020 12:21 pm
So the key is knowing when the fed is going to stop supporting the bubble.
I don't know if there is an equity bubble, but I'm pretty sure the fed can't stop supporting the economy. They raised rates and trimmed the balance sheet a wee bit, and the market tanked, causing a prompt reversal.

If there was a recession, I would guess there's a high probability the fed would further lower rates, further extend balance sheet, and that there would be large US debt issuance for stimulus. I would expect an initial drop in stocks, but my main concern would be fixed income. There's a lot of debt out there, and any economic downturn would be amplified by a cascading decline in "capacity to pay", first in corporate and then consumer as conditions decline (employment).

In the current global context, rates would almost have to go negative. At some point (I'd say the next round, but who knows?) fixed income investors will balk, and rates of new issuance have to rise to attract cash. At that point the fed would no longer be in the drivers seat, inflation would set in, and they'd start raising well after the fact to combat.

I understand a stock market crash. I have no idea what to expect when a lot of people in Total Bond tell me they don't have the money?

Or GDP could grow by 5% for the next thirty years and we buy ourselves out of all this. Who knows?

TN_Boy
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Re: At what point is this a bubble?

Post by TN_Boy » Thu Feb 13, 2020 10:47 am

MathWizard wrote:
Wed Feb 12, 2020 4:54 pm

stuff deleted

I am not a believer in the EMH. Things get improperly priced all the time. The problem is that one often cannot take advantage of that, at least in the short term. All you can do is to buy either bonds or stocks, or some other investment based upon which will provide the best return on investment long term.
The EMH does not state or claim that things are "properly" priced. It states that the price reflects all available information.

Without knowing the future the "proper" price is unknown.

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bottlecap
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Re: At what point is this a bubble?

Post by bottlecap » Thu Feb 13, 2020 10:52 am

The minute you stop worrying that it's a bubble, that's when it becomes a bubble.

JT

mega317
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Re: At what point is this a bubble?

Post by mega317 » Thu Feb 13, 2020 10:55 am

manatee2005 wrote:
Thu Feb 13, 2020 4:47 am
You should have shorted countrywide and home builders in 2007.
This brings up a good point. Even if you correctly recognize a bubble, and correctly determine how to profit from it, you still don't know when it will pop, how long you'd have to hold your short position.

"The market can stay irrational longer than you can stay solvent.” is a quote I vaguely remembered and just now Googled.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

manatee2005
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Re: At what point is this a bubble?

Post by manatee2005 » Thu Feb 13, 2020 1:43 pm

mega317 wrote:
Thu Feb 13, 2020 10:55 am
manatee2005 wrote:
Thu Feb 13, 2020 4:47 am
You should have shorted countrywide and home builders in 2007.
This brings up a good point. Even if you correctly recognize a bubble, and correctly determine how to profit from it, you still don't know when it will pop, how long you'd have to hold your short position.

"The market can stay irrational longer than you can stay solvent.” is a quote I vaguely remembered and just now Googled.
I agree. I was just replying to someone who said he still doesn't know how he could have profited from the housing bust. This was one of the ways. Another one was to keep renting, hoard cash and then buy foreclosures in 2010.

fortyofforty
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Re: At what point is this a bubble?

Post by fortyofforty » Thu Feb 13, 2020 2:55 pm

It is a bubble the moment it pops.

JonnyB
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Re: At what point is this a bubble?

Post by JonnyB » Thu Feb 13, 2020 2:59 pm

quantAndHold wrote:
Wed Feb 12, 2020 4:20 pm
The problem is that knowing there's a bubble, and being able to profit from it, are two different things. I *knew* about the housing bubble in 2007. But I had no idea what to do with that knowledge. I still don't.
You don't necessarily have to profit from a bubble. You just need to avoid getting burned by a bubble.

That can be as simple as avoiding the flip-this-house mania of the 2000s. Or deciding that it wouldn't be a good time to upgrade to a larger house so stay put until rationality resumes.

In the 1990s it could be as simple as reducing your equity allocation and increasing your bond allocation until the dot-com mania subsided.

There are two valid approaches to bubbles.

The one that niprius advocates is just sitting tight. It may take 10 years or 15 years but eventually sanity will prevail and then it will be smooth sailing. On the other hand, this means being able to avoid panicking while riding a sickening and terrifying double dip rollercoaster ride.

Another valid approach is to recognize the insanity and avoid playing with insane people. This means you can avoid the sickening rollercoaster ride but you also have to avoid the regret when the insane people drive to ever higher but temporary peaks. The ride is much smoother but you have to have the discipline to stick out 10 years or 15 years of irrationality.

Either approach may work for different people. I prefer the second because I prefer to avoid irrational, crazy people.

fortyofforty
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Re: At what point is this a bubble?

Post by fortyofforty » Thu Feb 13, 2020 6:48 pm

Means and ability are required to avoid getting burned by bubbles.

You have to have the means to ride out severe moves against you, in any asset class. Carrying enough of an emergency fund can allow you to spend that down while you wait. Also, not having to tap into hard hit assets when they are low will preserve capital for the future. If you can continue paying your mortgage, and if your mortgage company doesn't force you to pay more than you can afford to cover any valuation shortfall, you can stay in your house. As long as your job is stable, your income will keep rolling in.

Ability is more a question of mindset and nerve. The 1987 crash was gut-wrenching, but was pretty quick. Things happened so fast, at least for me, that in the age before instant trading, the internet, and 24-hour news, there really was no time to react. The dot-com bubble rolled down, month after month, but I was truly still in accumulation mode, that it didn't really bother me. The 2008 crash was the worst of the three, at least to me. Several people on our street lost their homes to foreclosure and had to move. Home values plummeted. And the market kept going down, seemingly without end. As I was convinced "this, too, shall pass" I kept buying stocks, all the way down. And it did pass.

When the next one hits, whether I am 80/20, 60/40, or even 50/50, the fact that part of my portfolio doesn't drop as much will be small consolation. It will still be an enormous (for me) hit. I hope I will be able to embrace the suck the way I did in the past. That led to major profits. The bursting of bubbles is never as quick and clean as they appear to be in hindsight. They are messy, with fits and starts, with false moves up only to be followed by more drops, with severe shocks that impact friends and family. Society as a whole seems consumed by bad financial news, and even those not normally paying attention are paying attention to the economy. Steely nerves, or what Alec Baldwin said are needed to be good closers, are necessary to survive relatively unscathed, or even to profit from lower prices.

Financologist
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Re: At what point is this a bubble?

Post by Financologist » Thu Feb 13, 2020 6:57 pm

Warren Buffet has market beating objectives. He also has scale to consider. You should have neither.

Financologist
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Re: At what point is this a bubble?

Post by Financologist » Thu Feb 13, 2020 11:22 pm

You'll know it's a bubble when it pops.

Hustlinghustling
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Re: At what point is this a bubble?

Post by Hustlinghustling » Thu Feb 13, 2020 11:28 pm

how many ways and at how many points can this question be asked?

Pierre Delecto
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Re: At what point is this a bubble?

Post by Pierre Delecto » Thu Feb 13, 2020 11:31 pm

I think there’s a bubble on bubble talk. All I’ve heard about is bubbles since 2009. Everything’s a bubble.

The more I hear bubble talk, the less likely I think there is one.

anon3838
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Re: At what point is this a bubble?

Post by anon3838 » Thu Feb 13, 2020 11:35 pm

quantAndHold wrote:
Wed Feb 12, 2020 12:02 pm
You’ll know it’s a bubble when Uber drivers are giving you stock tips. Every bubble I’ve lived through (dotcom, real estate, bitcoin, etc) has had the same feature. Someone at the bottom of the economic ladder was telling me how to make money on the bubbling financial product.

Until then, not a bubble.
I <3 this.

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unclescrooge
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Re: At what point is this a bubble?

Post by unclescrooge » Fri Feb 14, 2020 12:45 am

manatee2005 wrote:
Thu Feb 13, 2020 4:43 am
james22 wrote:
Thu Feb 13, 2020 2:15 am
"...when you don’t know it’s a bubble, you don’t see the pin.” Schiff
Schiff has been wrong for the past 10 years.
I'm pretty sure he's been wrong for at least 16. In 2004 he was calling for gold and interest rates to spike and the dollar to collapse.
Last edited by unclescrooge on Fri Feb 14, 2020 12:51 am, edited 1 time in total.

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unclescrooge
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Re: At what point is this a bubble?

Post by unclescrooge » Fri Feb 14, 2020 12:50 am

mega317 wrote:
Thu Feb 13, 2020 10:55 am
manatee2005 wrote:
Thu Feb 13, 2020 4:47 am
You should have shorted countrywide and home builders in 2007.
This brings up a good point. Even if you correctly recognize a bubble, and correctly determine how to profit from it, you still don't know when it will pop, how long you'd have to hold your short position.

"The market can stay irrational longer than you can stay solvent.” is a quote I vaguely remembered and just now Googled.
I shorted countrywide in 2008. Unfortunately the trade went against me and I closed my position at a 20% loss. That was the high point of the stock and it was acquired by Bank of America several months later.
:oops:

I had also shorted XLF (financial sector ETF) but then I heard Ben Stein in the radio. He was proposing going long that same ETF. I figured he probably knew better than I did so I closed by short in April 2008. :oops:

Since then I don't listen to anyone. I also moved away from event-based investing. That's a losing position.

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JoMoney
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Re: At what point is this a bubble?

Post by JoMoney » Fri Feb 14, 2020 12:58 am

PoultryMan wrote:
Wed Feb 12, 2020 9:45 am
I know to stick with a plan and rebalance as needed. Having said that, when Warren buffett cant find anything to invest in, PE ratios seem high, when is it a bubble and time to take some money off the table?

Maybe my unease is an irrational emotion?

Im trying to make this post actionable, so I guess Im asking, is it reasonable to be concerned? Does this tell me my rebalancing bands are too wide? Too narrow? Anyone else wondering the same?
I don't think it's true that "Warren Buffett can't find anything to invest in", while he may not be finding any really big buyout deals, he's been continuing to buy common stocks. It will be interesting to see what he has to say in his letter coming out soon.
Stocks are far from cheap currently, but in current conditions the name of the game seems to be TINA .
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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whodidntante
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Re: At what point is this a bubble?

Post by whodidntante » Fri Feb 14, 2020 1:10 am

Creating money out of thin air and using it to buy securities and drive rates down to artificially and generationally low levels combined with sustained gigantic budget deficits and tepid growth and tepid inflation might lead to some kind of great meh or kaboom. The question is what form the great meh or kaboom will take, and when. My recommendation is that everyone reading this should panic and should also invest according to their desired asset allocation. :happy

If I decide to sell all my equities, I'll let the forum know.

sf_tech_saver
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Re: At what point is this a bubble?

Post by sf_tech_saver » Fri Feb 14, 2020 1:51 am

Stocks have decent returns in part because it's never obvious how much they are worth. Once you understand the emotional toil of stock investing you realize what you are really being paid for.

Stock volatility is also a reminder of why I love bonds too. The first of the month I get a nice check from my muni-bonds that I get to rebalance into my portfolio and DCA stocks with. Economic rain/shine that's a nearly 100% certainty.

I'm 70/30 and the goal is to work hard enough in my career to make the 30% bonds enough to live on if I had to.
VTI is a modern marvel

Chicken Little
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Re: At what point is this a bubble?

Post by Chicken Little » Fri Feb 14, 2020 6:00 am

unclescrooge wrote:
Fri Feb 14, 2020 12:45 am
manatee2005 wrote:
Thu Feb 13, 2020 4:43 am
james22 wrote:
Thu Feb 13, 2020 2:15 am
"...when you don’t know it’s a bubble, you don’t see the pin.” Schiff
Schiff has been wrong for the past 10 years.
I'm pretty sure he's been wrong for at least 16. In 2004 he was calling for gold and interest rates to spike and the dollar to collapse.
Schiff has probably been right all along, just not very good at investing (yet?). For those guys, it's all timing, so he's basically failed miserably. Not sure how his clients would fare even if his future came to pass. Would they catch up? Surpass?

I do agree with the general thesis. I'm in the school that thinks we're in a debt supercycle. People assign different start dates, but I look to the 80's as the modern jump-off point. I personally consider 2000 and 2008 to be part of the same multi-decade event, which is ongoing. That's looking at annual deficit, total debt, and future liability on the federal side, and buybacks and CLOs for corporate.

I don't know that things have to end in calamity. I'm way too apathetic to buy gold or a bunker. My main focus is trying to understand the true risk to my fixed income investments (bonds primarily) in a high-debt environment. I'm relatively light on corporate, and likely to get lighter. The US government will never default, but they can devalue. I win for as long as they can push rates lower, but it gets tricky when that turns. I would actually like to increase equity exposure at the expense of bonds, but a shock-drop in equity is always the opening move. Have a bread-and-butter portfolio, but will try to time my windmill with a tactical rebalance.

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Nicolas Perrault
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Re: At what point is this a bubble?

Post by Nicolas Perrault » Fri Feb 14, 2020 6:08 am

A bubble is a sociological phenomenon, so the criteria to identify a bubble should be sociological, not with P/E ratios. According to William Bernstein (https://awealthofcommonsense.com/2017/0 ... -a-bubble/), the four criteria of a bubble are:
(1) Everyone around you is talking about stocks (or real estate or whatever the fad asset of the day is). And you should really start worrying when the people talking about getting rich in certain areas of the market don’t have a background in finance.

(2) When people begin quitting their jobs to day trade or become a mortgage broker.

(3) When someone exhibits skepticism about the prospects for stocks and people don’t just disagree with them, but they do so vehemently and tell them they’re an idiot for not understanding things.

(4) When you start to see extreme predictions. The example Bernstein gives is how the best-selling investment book in 1999 was Dow 36,000.
Seeing three of these four conditions met would be a warning sign. Clearly, we are not there yet.

P/E ratio are high perhaps in contrast with 20th century history. But you're investing in the 21st century, not the 20th. Perhaps the average over the 21st century will be a CAPE of 25 or 35 rather than 15, nobody knows. So stay the course.

Pikel
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Re: At what point is this a bubble?

Post by Pikel » Fri Feb 14, 2020 7:31 am

I was just looking at S&P 500 price to 12 month trailing operating earnings.

Since 2015 we have been in the 19-22 range. Based on the most recent forward estimate right now the S&P is sitting at around 24 PE.

In 2007-2008 pre-crash we were in the 17-18 range.

In 1998-2001 we were in the 25-29 range.

I would feel a lot better about the current situation if the fed had continued raising interest rates.

guyinlaw
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Re: At what point is this a bubble?

Post by guyinlaw » Fri Feb 14, 2020 7:46 am

Pikel wrote:
Fri Feb 14, 2020 7:31 am

I would feel a lot better about the current situation if the fed had continued raising interest rates.
The whole melt up is based on expectation that Fed is ready to support the expansion. Much of the market expects 1 cut from the Fed this year.
"Equity markets could get worse if the slowdown extends further, but also realize that the markets will rebound far before economic data improve."

Pikel
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Re: At what point is this a bubble?

Post by Pikel » Fri Feb 14, 2020 8:02 am

guyinlaw wrote:
Fri Feb 14, 2020 7:46 am
Pikel wrote:
Fri Feb 14, 2020 7:31 am

I would feel a lot better about the current situation if the fed had continued raising interest rates.
The whole melt up is based on expectation that Fed is ready to support the expansion. Much of the market expects 1 cut from the Fed this year.
What makes you say the market is expecting another cut?

columbia
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Re: At what point is this a bubble?

Post by columbia » Fri Feb 14, 2020 8:25 am

When the levee breaks.
If you leave your head in the sand for too long, you might get run over by a Jeep.

guyinlaw
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Re: At what point is this a bubble?

Post by guyinlaw » Fri Feb 14, 2020 8:30 am

Pikel wrote:
Fri Feb 14, 2020 8:02 am
guyinlaw wrote:
Fri Feb 14, 2020 7:46 am
Pikel wrote:
Fri Feb 14, 2020 7:31 am

I would feel a lot better about the current situation if the fed had continued raising interest rates.
The whole melt up is based on expectation that Fed is ready to support the expansion. Much of the market expects 1 cut from the Fed this year.
What makes you say the market is expecting another cut?
https://www.cnbc.com/2020/02/05/fed-rat ... mist.html

You can look at many more articles pre and post virus.
"Equity markets could get worse if the slowdown extends further, but also realize that the markets will rebound far before economic data improve."

Call_Me_Op
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Re: At what point is this a bubble?

Post by Call_Me_Op » Fri Feb 14, 2020 8:34 am

PoultryMan wrote:
Wed Feb 12, 2020 9:45 am
I know to stick with a plan and rebalance as needed. Having said that, when Warren buffett cant find anything to invest in, PE ratios seem high, when is it a bubble and time to take some money off the table?

Maybe my unease is an irrational emotion?

Im trying to make this post actionable, so I guess Im asking, is it reasonable to be concerned? Does this tell me my rebalancing bands are too wide? Too narrow? Anyone else wondering the same?
No, it is telling you that your AA is not the right one for you.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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firebirdparts
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Re: At what point is this a bubble?

Post by firebirdparts » Fri Feb 14, 2020 8:40 am

I think this is the best financial question I've ever read. What a great question. And great answers too.

I think anybody can look at equity valuations and of course real estate valuations and say "that should be lower" If at some point there is sufficient agreement, it will be lower, and then we'll say "boy, that was a bubble. Those were too high". It really does have to pop.

Right now, it's not at all obvious that equity valuations are truly excessive based on the fundamentals. The big dangers, in my opinion, are two.
1. Recession. Recession occurs when people slow down spending their money en masse. You can't really control that. It does not really depend on your analysis of when it's time.
2. Increase in key interest rates. The cost of capital is fundamental to present value. The values will come in line with the cost of capital however it changes. The values change immediately, but obviously everybody wants to see this coming ahead of time, so there is visible "sentiment" on this.

Personally, I don't see how interest rates can increase, but then I didn't predict it in 1975 either, so there you go. I totally expect there to be some variations in consumption. My mother told me 90% of your money goes for stuff you don't have to have. So I ought not to be too shocked when somebody doesn't spend some of it.

Small danger might be that for some reason a handful of these overweight players can't make a profit simultaneously. This is the same effect as a recession, but it happen for reasons other than recession. An example of that might be caronavirus today, but everybody expects that to be temporary.
It might be a permanent change in consumer preferences tomorrow. It almost certainly will be a permanent change in demographics, but that is happening slowly over the course of about 100 years. We are 70 years into it right now.
A fool and your money are soon partners

manatee2005
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Re: At what point is this a bubble?

Post by manatee2005 » Fri Feb 14, 2020 4:36 pm

unclescrooge wrote:
Fri Feb 14, 2020 12:50 am
mega317 wrote:
Thu Feb 13, 2020 10:55 am
manatee2005 wrote:
Thu Feb 13, 2020 4:47 am
You should have shorted countrywide and home builders in 2007.
This brings up a good point. Even if you correctly recognize a bubble, and correctly determine how to profit from it, you still don't know when it will pop, how long you'd have to hold your short position.

"The market can stay irrational longer than you can stay solvent.” is a quote I vaguely remembered and just now Googled.
I shorted countrywide in 2008. Unfortunately the trade went against me and I closed my position at a 20% loss. That was the high point of the stock and it was acquired by Bank of America several months later.
:oops:

I had also shorted XLF (financial sector ETF) but then I heard Ben Stein in the radio. He was proposing going long that same ETF. I figured he probably knew better than I did so I closed by short in April 2008. :oops:

Since then I don't listen to anyone. I also moved away from event-based investing. That's a losing position.
Oh man, Ben Stein. I remember reading his column on Yahoo Finance saying how the whole subprime mortgage market was only $300 mil and even if it all collapsed it won't affect economy. Boy was he wrong.

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firebirdparts
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Re: At what point is this a bubble?

Post by firebirdparts » Fri Feb 14, 2020 5:22 pm

manatee2005 wrote:
Fri Feb 14, 2020 4:36 pm
Oh man, Ben Stein. I remember reading his column on Yahoo Finance saying how the whole subprime mortgage market was only $300 mil and even if it all collapsed it won't affect economy. Boy was he wrong.
I remember that like it was yesterday. To his defense though, he didn’t realize how much portfolio insurance had been created on it.
A fool and your money are soon partners

fortyofforty
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Re: At what point is this a bubble?

Post by fortyofforty » Fri Feb 14, 2020 5:50 pm

firebirdparts wrote:
Fri Feb 14, 2020 5:22 pm
manatee2005 wrote:
Fri Feb 14, 2020 4:36 pm
Oh man, Ben Stein. I remember reading his column on Yahoo Finance saying how the whole subprime mortgage market was only $300 mil and even if it all collapsed it won't affect economy. Boy was he wrong.
I remember that like it was yesterday. To his defense though, he didn’t realize how much portfolio insurance had been created on it.
While Nobel prizewinning "economist" Paul Krugman predicted the crash that never came, way back in 2016. The hardest thing for economists to do is predict the future. It doesn't stop them from trying, obviously, since that's how they get published and make money from television appearances.

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