Are we NOW in a bubble?

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Tellurius
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Are we NOW in a bubble?

Post by Tellurius »

I often heard that this didn't compare to 1999 because there wasn't much retail investor or "not smart money" activity. This article claims that it's arrived

From the article:

"In the process, everyday traders have grabbed a greater share of market liquidity. They now make up 20 per cent of US equity trades, double the total last year, according to internal estimates at Citadel Securities, the US’s biggest market maker. That share approaches 25 per cent on peak days, says Joe Mecane, its head of execution services.

The brutal price war last year among brokerages to cut trading commissions laid the groundwork for this shift. Robinhood, which offers a trading app popular with millennials — and led the way on zero-commission products — gained 3m users in the first quarter of the year.

The ‘retail bros’ have been bullish, encapsulated by the “stocks only go up” mantra of day trader Dave Portnoy. Retail investors have been net buyers of stocks since March, according to broker TD Ameritrade, focusing on sectors such as technology and consumer goods.

These investors are sometimes dismissed as lacking the sophisticated models and financial analysis of professional managers. But equity buyers who simply rode the market since its coronavirus-induced low in March have enjoyed a more than 40 per cent rise in the blue-chip S&P 500 index, even taking into account this month’s sell-off.

The Nasdaq 100, made up of the tech companies beloved of many retail traders, is up more than 50 per cent in that period and up about a quarter for the year to date.

Should professional investors take notice? Though they have helped to stoke the market rally, retail investors are not unduly affecting valuations across the board, say market participants.

But they can have more impact on individual companies, particularly those that are making headlines. “You will see retail focusing on stocks that are in the news where there is often short-term volatility and increased market activity,” said Mr Mecane. "

https://www.ft.com/content/ddc4630c-c27 ... 036d16b0f9
Last edited by Tellurius on Mon Sep 28, 2020 3:25 pm, edited 1 time in total.
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Ed 2
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Re: Are we NOW in a bubble?

Post by Ed 2 »

Tellurius wrote: Sun Sep 27, 2020 4:09 pm I often heard that this didn't compare to 1999 because there wasn't much retail investor or "not smart money" activity. This article claims that it's arrived

https://www.ft.com/content/ddc4630c-c27 ... 036d16b0f9
Do I have to pay for subscription of FT go find out the end is near. In serious note , No market timing is the only one way for investors. So , I am ignoring for many years and will ignore years ahead.
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Re: Are we NOW in a bubble?

Post by willthrill81 »

Considering that U.S. stocks are now 8% off their all time high, it's less plausible than a bubble exists now than at the all time high.
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Re: Are we NOW in a bubble?

Post by 1789 »

Tellurius wrote: Sun Sep 27, 2020 4:09 pm I often heard that this didn't compare to 1999 because there wasn't much retail investor or "not smart money" activity. This article claims that it's arrived

https://www.ft.com/content/ddc4630c-c27 ... 036d16b0f9
It requires subscription?
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Re: Are we NOW in a bubble?

Post by Godot »

Tellurius wrote: Sun Sep 27, 2020 4:09 pm I often heard that this didn't compare to 1999 because there wasn't much retail investor or "not smart money" activity. This article claims that it's arrived

https://www.ft.com/content/ddc4630c-c27 ... 036d16b0f9
The link leads to an article titled, "Professional investors should not ignore the retail wave." Are you a professional investor?
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guyinlaw
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Re: Are we NOW in a bubble?

Post by guyinlaw »

This link works.
https://www.google.com/amp/s/amp.ft.com ... 36d16b0f9

or Search "Professional investors should not ignore the retail wave" on Google. the link takes you to the article.
Last edited by guyinlaw on Mon Sep 28, 2020 7:46 am, edited 1 time in total.
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Cyclesafe
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Re: Are we NOW in a bubble?

Post by Cyclesafe »

We're somewhere between a crest and a trough. Seriously.

Have you ever not been reluctant to make a speculative move?

Does your investment plan have a target valuation for Monday? Or are you concerned for when you need to cash out and spend the money. My guess is that your relevant time frame is a bit longer than next week or Covid or ....

Celebrate a downturn because (if you still have a paycheck) you'll be buying or converting when the market is depressed.
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Re: Are we NOW in a bubble?

Post by Angst »

Tellurius wrote: Sun Sep 27, 2020 4:09 pm I often heard that this didn't compare to 1999 because there wasn't much retail investor or "not smart money" activity. This article claims that it's arrived

https://www.ft.com/content/ddc4630c-c27 ... 036d16b0f9
I hadn't realized how much trading has apparently increased due to COVID. I also find it interesting to note that something of an increase in trajectory had already begun approximately two years prior to COVID. From the article:

Image
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nedsaid
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Re: Are we NOW in a bubble?

Post by nedsaid »

Very interesting. The chart on retail trading could mean that we are in a market euphoria or it could mean that quarantined retail investors are bored and don't have much else to do.

What I would say is that if everyone is screaming that we are in a bubble, we are probably not in one. Too much pessimism out there.
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Re: Are we NOW in a bubble?

Post by Eric76 »

Maybe. Maybe not.
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Re: Are we NOW in a bubble?

Post by Fallible »

Morgan Housel wrote a good perspective piece on bubbles posted on the forum recently:

viewtopic.php?t=323627
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Re: Are we NOW in a bubble?

Post by rockstar »

We'll know it's a bubble when it pops.
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Re: Are we NOW in a bubble?

Post by burritoLover »

There’s no way to know you are in a bubble when you’re in it. Even if you suspect you might be in one, it can go on for years and years (assuming you are even right and that’s a big assumption).

Solution: have a well diversified portfolio that you can feel confident pumping money into whether you are in a bubble or not.
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Re: Are we NOW in a bubble?

Post by whodidntante »

While stocks are not cheap, valuations are reasonable so long as rates stay low. Show me a 10 year Treasury at 7% though, and both stock and bond investors are going to feel some pain to get there. The fact that everyone knows this can't happen makes me think it can happen.
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Re: Are we NOW in a bubble?

Post by Robot Monster »

Tellurius wrote: Sun Sep 27, 2020 4:09 pm I often heard that this didn't compare to 1999 because there wasn't much retail investor or "not smart money" activity. This article claims that it's arrived

https://www.ft.com/content/ddc4630c-c27 ... 036d16b0f9
Articles like that are "the noise." Please ignore. They're not reliable.
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Re: Are we NOW in a bubble?

Post by Angst »

Robot Monster wrote: Sun Sep 27, 2020 7:34 pm
Tellurius wrote: Sun Sep 27, 2020 4:09 pm I often heard that this didn't compare to 1999 because there wasn't much retail investor or "not smart money" activity. This article claims that it's arrived

https://www.ft.com/content/ddc4630c-c27 ... 036d16b0f9
Articles like that are "the noise." Please ignore. They're not reliable.
I found the article less generic than your dismissal of it. Can you be more specific? For example, why is this chart from the Financial Times just "noise"?

Image
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Re: Are we NOW in a bubble?

Post by Angst »

Fallible wrote: Sun Sep 27, 2020 6:13 pm Morgan Housel wrote a good perspective piece on bubbles posted on the forum recently:

viewtopic.php?t=323627
Thank you Fallible for pointing this out. That thread slipped past me and certainly the blog article referenced in it is apropos of both this thread and the current times - "of all times" I suppose Hyman Minsky would say. Great stuff! Thanks for the heads up. Here's the direct pdf link:
https://www.collaborativefund.com/uploads/Collaborative%20Fund%20Bubbles.pdf
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firebirdparts
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Re: Are we NOW in a bubble?

Post by firebirdparts »

This is not exactly like 1999 but certainly there are several worthless companies with high market cap. If you look, you can find stocks like the stocks that collapsed in 1999, but keep in mind none of these clown stocks are included in the 500 right now. Somebody is buying this trash, and frankly I don’t think it’s just the dumb people.

I don’t buy that you can just label the idiots and viola we can identify that a bubble is close to popping. Can you tell me how many years it took for Berkshire Focus Fund to recover from 1999? I can tell you. It ain’t happened yet. Everybody thinks Berkshire is smart. When the fed printed trillions this spring, all that money was to save the big institutions. Retail investors may just be buying the dips and holding less risky positions than the institutional trading desks.
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Re: Are we NOW in a bubble?

Post by arcticpineapplecorp. »

Tellurius wrote: Sun Sep 27, 2020 4:09 pm This article claims that it's arrived

https://www.ft.com/content/ddc4630c-c27 ... 036d16b0f9
“The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently.”
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Re: Are we NOW in a bubble?

Post by OnTrack »

Angst wrote: Sun Sep 27, 2020 6:04 pm I hadn't realized how much trading has apparently increased due to COVID.
Is the increase in trading due to covid19 or due to the elimination of commissions at several large brokerage companies in the fall of 2019?
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Re: Are we NOW in a bubble?

Post by KyleAAA »

No, definitely not. Not even close. It doesn't compare to 1999 because valuations are reasonable now and tech companies actually make money.
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Tellurius
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Re: Are we NOW in a bubble?

Post by Tellurius »

From the article:

"In the process, everyday traders have grabbed a greater share of market liquidity. They now make up 20 per cent of US equity trades, double the total last year, according to internal estimates at Citadel Securities, the US’s biggest market maker. That share approaches 25 per cent on peak days, says Joe Mecane, its head of execution services.

The brutal price war last year among brokerages to cut trading commissions laid the groundwork for this shift. Robinhood, which offers a trading app popular with millennials — and led the way on zero-commission products — gained 3m users in the first quarter of the year.

The ‘retail bros’ have been bullish, encapsulated by the “stocks only go up” mantra of day trader Dave Portnoy. Retail investors have been net buyers of stocks since March, according to broker TD Ameritrade, focusing on sectors such as technology and consumer goods.

These investors are sometimes dismissed as lacking the sophisticated models and financial analysis of professional managers. But equity buyers who simply rode the market since its coronavirus-induced low in March have enjoyed a more than 40 per cent rise in the blue-chip S&P 500 index, even taking into account this month’s sell-off.

The Nasdaq 100, made up of the tech companies beloved of many retail traders, is up more than 50 per cent in that period and up about a quarter for the year to date.

Should professional investors take notice? Though they have helped to stoke the market rally, retail investors are not unduly affecting valuations across the board, say market participants.

But they can have more impact on individual companies, particularly those that are making headlines. “You will see retail focusing on stocks that are in the news where there is often short-term volatility and increased market activity,” said Mr Mecane. "
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Re: Are we NOW in a bubble?

Post by tre3sori »

https://www.morningstar.com/market-fair-value
The Morningstar Fair Value Estimate tells investors what the long-term intrinsic value of a stock is, helping them see beyond the present market price.

Morningstar calculates the fair value estimate of a company based on how much cash we think the company will generate in the future. When determining the fair value estimate, Morningstar also takes into account the predictability of a company's future cash flows--the uncertainty rating. A stock with a higher uncertainty rating requires a larger margin of safety before earning a 4- or 5-star rating.

The Morningstar Fair Value Estimate is a measuring stick for determining long-term intrinsic value.
By that measure the market seems fairly priced.
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Re: Are we NOW in a bubble?

Post by fredflinstone »

I believe we are now in a bubble. The bubble is not in the stock market per se, but in the global financial system underlying it. In the US, for example, the federal debt to GDP ratio is 136%, up from 56% in 2000. This is World War II level of debt. Central banks in the US and elsewhere have kept interest rates low so far via debt monetization, which is not a viable long-term strategy for dealing with out-of-control government spending. This Ponzi scheme cannot go on forever. When the party ends--and it will end eventually--it will not be pretty.
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Re: Are we NOW in a bubble?

Post by Alchemist »

KyleAAA wrote: Mon Sep 28, 2020 12:46 am No, definitely not. Not even close. It doesn't compare to 1999 because valuations are reasonable now and tech companies actually make money.
This, exactly this. As I type this reply on an Apple MacBook, wearing an Apple watch, and checking my Gmail account for my order confirmation from Amazon.

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Re: Are we NOW in a bubble?

Post by nisiprius »

I personally think yeah, we are in a bubble. But that's not a very germane question.

The big question is, "what should I do if I think we are in a bubble?"

One of the things that is really hard to believe, but I think it's true, is that the right answer is, "do nothing." The reason is that a) you need to consider the consequences of being wrong, and b) you need to look at the question of timing. Vague impressions are not valuable. "Sooner or later a crash is coming and it may be terrific" is only remembered because Roger Babson said it in September, 1929.

In December of 1996, Alan Greenspan made his famous "irrational exuberance" speech. Here's a chart showing the growth of $10,000 invested into the Vanguard Total Stock Market Index ETF in 1993.

Image

Suppose you had taken that as a warning and gone to cash. When would have been the right time to get back in? The answer is that selling at the end of 1996 was (almost certainly) an irreversible mistake.

Image

You never could buy in for as little as you had sold. Even if you had exactly spotted the bottom in 2002, you would still have sold for $18,778 and then had to pay $22,382 to get back in.

But suppose you had timed it a little better. Suppose you'd waited a full year after Greenspan and sold at the end of 1998.

Image

In order to have done better than buying and holding,

1) you would have needed to call the bottom within ±5 months. You would have had to buy between July, 2002 and March, 2003.

2) And the most you could possibly have scored, even if you'd bought at the exact bottom, would have been to sell at $25,010 and buy back in at $22,382, i.e. about a 12% boost in your personal return over a 4-1/2 year period, or about an average of 2.5% per year. That's certainly something, but it's not life-changing, and it has to be measured against the chances of underperforming if your timing calls were off.

In short, you need a timing accuracy of a few months, with penalties for being wrong. In order to profit from a bubble you need to play chicken all the way up and sell reasonably close to the top, and then buy in reasonably close to a bottom.

If you are honest with yourself, particularly if you keep records, you will probably find that vague feelings that "it's too much," "I think this is a bubble," "this isn't sustainable," "trees don't grow to the sky," etc. can last for years and years and year before the crash. Or, in the saying often attributed to Keynes, "the markets can remain irrational longer than you can remain solvent."
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Ramjet
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Re: Are we NOW in a bubble?

Post by Ramjet »

whodidntante wrote: Sun Sep 27, 2020 6:27 pm While stocks are not cheap, valuations are reasonable so long as rates stay low
Assuming rates stay low, what valuation starts to make you uncomfortable?
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Re: Are we NOW in a bubble?

Post by Fortune Seeker »

Angst wrote: Sun Sep 27, 2020 7:51 pm I found the article less generic than your dismissal of it. Can you be more specific? For example, why is this chart from the Financial Times just "noise"?
[upd:chart removed due to size]
What if there's just about same number of retail traders trading, but due to low/no comissions they can now afford to make more pointless trades and buy more worthless options, before their money are siphoned away by market makers (instead of trading fees)? This chart alone does not mean "we" are in a bubble.

But some part of stock market may definitely be. I read the article on an app and I like the phrase "flight to crap". That's exactly how i feel about people buying up airlines and cruise ship stocks this year.

Some people on reddit compiled a video chart of what stocks retail traders were buying up during covid epidemic: https://v.redd.it/69wgtdh9hi651 Watch it, this is so sad. People have loaded up on riskiest, most hazardous stocks possible. I would absolutely not be surprised if the actual 2020 bubble is not in FAANGs and megacap tech, but instead in ultra-low quality, "hot value" stocks that are being propped up by clueless retail investors, who consider themselves stock picking experts after watching a 10-minute Youtube video of 17-year old yelling at camera about how he made a million dollars trading these 10 hot stocks of the week.
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Re: Are we NOW in a bubble?

Post by Leesbro63 »

fredflinstone wrote: Mon Sep 28, 2020 4:22 am I believe we are now in a bubble. The bubble is not in the stock market per se, but in the global financial system underlying it. In the US, for example, the federal debt to GDP ratio is 136%, up from 56% in 2000. This is World War II level of debt. Central banks in the US and elsewhere have kept interest rates low so far via debt monetization, which is not a viable long-term strategy for dealing with out-of-control government spending. This Ponzi scheme cannot go on forever. When the party ends--and it will end eventually--it will not be pretty.
I, somewhat, agree that it seems like we are in a global financial system bubble. But aren’t the odds high that it ends in inflation, with stocks being the asset class of choice?
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Re: Are we NOW in a bubble?

Post by Leesbro63 »

nisiprius wrote: Mon Sep 28, 2020 7:18 am I personally think yeah, we are in a bubble. But that's not a very germane question.

The big question is, "what should I do if I think we are in a bubble?"

One of the things that is really hard to believe, but I think it's true, is that the right answer is, "do nothing." The reason is that a) you need to consider the consequences of being wrong, and b) you need to look at the question of timing. Vague impressions are not valuable. "Sooner or later a crash is coming and it may be terrific" is only remembered because Roger Babson said it in September, 1929.

In December of 1996, Alan Greenspan made his famous "irrational exuberance" speech. Here's a chart showing the growth of $10,000 invested into the Vanguard Total Stock Market Index ETF in 1993.

Image

Suppose you had taken that as a warning and gone to cash. When would have been the right time to get back in? The answer is that selling at the end of 1996 was (almost certainly) an irreversible mistake.

Image

You never could buy in for as little as you had sold. Even if you had exactly spotted the bottom in 2002, you would still have sold for $18,778 and then had to pay $22,382 to get back in.

But suppose you had timed it a little better. Suppose you'd waited a full year after Greenspan and sold at the end of 1998.

Image

In order to have done better than buying and holding,

1) you would have needed to call the bottom within ±5 months. You would have had to buy between July, 2002 and March, 2003.

2) And the most you could possibly have scored, even if you'd bought at the exact bottom, would have been to sell at $25,010 and buy back in at $22,382, i.e. about a 12% boost in your personal return over a 4-1/2 year period, or about an average of 2.5% per year. That's certainly something, but it's not life-changing, and it has to be measured against the chances of underperforming if your timing calls were off.

In short, you need a timing accuracy of a few months, with penalties for being wrong. In order to profit from a bubble you need to play chicken all the way up and sell reasonably close to the top, and then buy in reasonably close to a bottom.

If you are honest with yourself, particularly if you keep records, you will probably find that vague feelings that "it's too much," "I think this is a bubble," "this isn't sustainable," "trees don't grow to the sky," etc. can last for years and years and year before the crash. Or, in the saying often attributed to Keynes, "the markets can remain irrational longer than you can remain solvent."
Great post, Nisiprius! Thank you.
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Re: Are we NOW in a bubble?

Post by tmcc »

Angst wrote: Sun Sep 27, 2020 6:04 pm
Tellurius wrote: Sun Sep 27, 2020 4:09 pm I often heard that this didn't compare to 1999 because there wasn't much retail investor or "not smart money" activity. This article claims that it's arrived

https://www.ft.com/content/ddc4630c-c27 ... 036d16b0f9
I hadn't realized how much trading has apparently increased due to COVID. I also find it interesting to note that something of an increase in trajectory had already begun approximately two years prior to COVID. From the article:

Image
OK now show us dollar volumes traded per day.... like no change lol
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Re: Are we NOW in a bubble?

Post by whereskyle »

Tellurius wrote: Sun Sep 27, 2020 4:09 pm I often heard that this didn't compare to 1999 because there wasn't much retail investor or "not smart money" activity. This article claims that it's arrived

https://www.ft.com/content/ddc4630c-c27 ... 036d16b0f9
No. Profits for extremely profitable growth companies are still near all-time highs, even in a pandemic. There are some bubbly stocks, namely Tesla, but, no, as long as FAANGM are raking in something like $40bn per quarter, the truth is that current prices for them may not even be high enough.

Prices for all non-extremely-profitable growth companies are pretty reasonable.
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Re: Are we NOW in a bubble?

Post by David Jay »

Angst wrote: Sun Sep 27, 2020 7:51 pmI found the article less generic than your dismissal of it. Can you be more specific? For example, why is this chart from the Financial Times just "noise"?
I am not the poster, but these articles are “noise” because they are not actionable in any real sense (see Nisiprius’ first post). They may be interesting but the articles will have essentially zero impact on my retirement portfolio in 20 years. Which I consider to be the definition of “noise”.
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Re: Are we NOW in a bubble?

Post by guyinlaw »

nisiprius wrote: Mon Sep 28, 2020 7:18 am I personally think yeah, we are in a bubble. But that's not a very germane question.

The big question is, "what should I do if I think we are in a bubble?"
Great post! We cannot do much except rebalance.
Time is your friend; impulse is your enemy. - John C. Bogle
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Re: Are we NOW in a bubble?

Post by Robot Monster »

Angst wrote: Sun Sep 27, 2020 7:51 pm
Robot Monster wrote: Sun Sep 27, 2020 7:34 pm
Tellurius wrote: Sun Sep 27, 2020 4:09 pm I often heard that this didn't compare to 1999 because there wasn't much retail investor or "not smart money" activity. This article claims that it's arrived

https://www.ft.com/content/ddc4630c-c27 ... 036d16b0f9
Articles like that are "the noise." Please ignore. They're not reliable.
I found the article less generic than your dismissal of it. Can you be more specific? For example, why is this chart from the Financial Times just "noise"?

Image
Don't particularly feel like debating this, but will leave you with this to consider:

"As investors, we hunger for an inside scoop on what the market will do based on an event, real or imagined, that is being considered (for example, Brexit, the Orlando shooting, the U.S. presidential election, etc.). This hunger is being fed by the emergence of a 24/7 news culture that seeks to identify, examine and report each and every possibility of what the outcome will (might) be. This explosion of information too often gets interpreted as knowledge or wisdom but most often, in reality, it is just a piece of data that can be placed with other pieces of data to be considered in arriving at knowledge or wisdom."
Source

Maybe the FT article/chart are a piece of the puzzle. The problem is that taken in isolation this puzzle piece is more noise than signal.
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Re: Are we NOW in a bubble?

Post by unclescrooge »

whereskyle wrote: Mon Sep 28, 2020 8:53 am
Tellurius wrote: Sun Sep 27, 2020 4:09 pm I often heard that this didn't compare to 1999 because there wasn't much retail investor or "not smart money" activity. This article claims that it's arrived

https://www.ft.com/content/ddc4630c-c27 ... 036d16b0f9
No. Profits for extremely profitable growth companies are still near all-time highs, even in a pandemic. There are some bubbly stocks, namely Tesla, but, no, as long as FAANGM are raking in something like $40bn per quarter, the truth is that current prices for them may not even be high enough.

Prices for all non-extremely-profitable growth companies are pretty reasonable.
The PE ratio for Apple is about 40. That is pretty rich for a $2 trillion company.

If you take out the top 5 tech companies, the valuation of the rest of the SP500 is pretty reasonable.
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Re: Are we NOW in a bubble?

Post by fredflinstone »

Leesbro63 wrote: Mon Sep 28, 2020 7:41 am
fredflinstone wrote: Mon Sep 28, 2020 4:22 am I believe we are now in a bubble. The bubble is not in the stock market per se, but in the global financial system underlying it. In the US, for example, the federal debt to GDP ratio is 136%, up from 56% in 2000. This is World War II level of debt. Central banks in the US and elsewhere have kept interest rates low so far via debt monetization, which is not a viable long-term strategy for dealing with out-of-control government spending. This Ponzi scheme cannot go on forever. When the party ends--and it will end eventually--it will not be pretty.
I, somewhat, agree that it seems like we are in a global financial system bubble. But aren’t the odds high that it ends in inflation, with stocks being the asset class of choice?
Stocks should fare reasonably well if there is modest inflation--say 5% to 10% per year. But inflation can feed on itself due to increases in inflationary expectations. The risk is that there will be a positive feedback loop between inflationary expectations and rising prices. If the price of a gallon of milk rises to a billion dollars (similar to Zimbabwe or Weimar Germany), it is a whole other ballgame. Perhaps cryptocurrency could fill the gap left by fiat currency, but in any case I have to believe such a scenario would be a disaster for both bonds and stocks.
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Re: Are we NOW in a bubble?

Post by unclescrooge »

fredflinstone wrote: Mon Sep 28, 2020 11:04 am
Leesbro63 wrote: Mon Sep 28, 2020 7:41 am
fredflinstone wrote: Mon Sep 28, 2020 4:22 am I believe we are now in a bubble. The bubble is not in the stock market per se, but in the global financial system underlying it. In the US, for example, the federal debt to GDP ratio is 136%, up from 56% in 2000. This is World War II level of debt. Central banks in the US and elsewhere have kept interest rates low so far via debt monetization, which is not a viable long-term strategy for dealing with out-of-control government spending. This Ponzi scheme cannot go on forever. When the party ends--and it will end eventually--it will not be pretty.
I, somewhat, agree that it seems like we are in a global financial system bubble. But aren’t the odds high that it ends in inflation, with stocks being the asset class of choice?
Stocks should fare reasonably well if there is modest inflation--say 5% to 10% per year. But inflation can feed on itself due to increases in inflationary expectations. The risk is that there will be a positive feedback loop between inflationary expectations and rising prices. If the price of a gallon of milk rises to a billion dollars (similar to Zimbabwe or Weimar Germany), it is a whole other ballgame. Perhaps cryptocurrency could fill the gap left by fiat currency, but in any case I have to believe such a scenario would be a disaster for both bonds and stocks.
What if, without maybe QE, we would have seen a deflationary cycle? And the only reason we haven't is because of QE?
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Re: Are we NOW in a bubble?

Post by Leesbro63 »

unclescrooge wrote: Mon Sep 28, 2020 11:20 am
fredflinstone wrote: Mon Sep 28, 2020 11:04 am
Leesbro63 wrote: Mon Sep 28, 2020 7:41 am
fredflinstone wrote: Mon Sep 28, 2020 4:22 am I believe we are now in a bubble. The bubble is not in the stock market per se, but in the global financial system underlying it. In the US, for example, the federal debt to GDP ratio is 136%, up from 56% in 2000. This is World War II level of debt. Central banks in the US and elsewhere have kept interest rates low so far via debt monetization, which is not a viable long-term strategy for dealing with out-of-control government spending. This Ponzi scheme cannot go on forever. When the party ends--and it will end eventually--it will not be pretty.
I, somewhat, agree that it seems like we are in a global financial system bubble. But aren’t the odds high that it ends in inflation, with stocks being the asset class of choice?
Stocks should fare reasonably well if there is modest inflation--say 5% to 10% per year. But inflation can feed on itself due to increases in inflationary expectations. The risk is that there will be a positive feedback loop between inflationary expectations and rising prices. If the price of a gallon of milk rises to a billion dollars (similar to Zimbabwe or Weimar Germany), it is a whole other ballgame. Perhaps cryptocurrency could fill the gap left by fiat currency, but in any case I have to believe such a scenario would be a disaster for both bonds and stocks.
What if, without maybe QE, we would have seen a deflationary cycle? And the only reason we haven't is because of QE?
"What if?" Sort of like if my dog said meow, he'd be my cat (an adapted saying for Bogleheads).
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Re: Are we NOW in a bubble?

Post by whereskyle »

unclescrooge wrote: Mon Sep 28, 2020 11:01 am
whereskyle wrote: Mon Sep 28, 2020 8:53 am
Tellurius wrote: Sun Sep 27, 2020 4:09 pm I often heard that this didn't compare to 1999 because there wasn't much retail investor or "not smart money" activity. This article claims that it's arrived

https://www.ft.com/content/ddc4630c-c27 ... 036d16b0f9
No. Profits for extremely profitable growth companies are still near all-time highs, even in a pandemic. There are some bubbly stocks, namely Tesla, but, no, as long as FAANGM are raking in something like $40bn per quarter, the truth is that current prices for them may not even be high enough.

Prices for all non-extremely-profitable growth companies are pretty reasonable.
The PE ratio for Apple is about 40. That is pretty rich for a $2 trillion company.

If you take out the top 5 tech companies, the valuation of the rest of the SP500 is pretty reasonable.
I agree. That said, I think Apple's profits will continue to be more than enviable for the foreseeable future. You might have seen the recent fracas over the use of the App Store. Companies NEED access to Apple's platform to survive, not just to do well. As has been the case, the only real threat to FAANGM's continued growth is regulation, not free-market headwinds imo.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: Are we NOW in a bubble?

Post by Kenkat »

I think everyone would agree that we had a bubble in 2000 and most reasonably diversified investors survived. Only investors who were “all in” on tech portfolios got really clobbered (I knew a couple).

Now I do remember that when that bubble was happening in 1998-2000, there were a lot of “value is dead” comments as well, so that is an interesting similarity between 2000 and now.
Last edited by Kenkat on Mon Sep 28, 2020 4:26 pm, edited 1 time in total.
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Re: Are we NOW in a bubble?

Post by JoMoney »

I definitely believe we have a market that has seen tremendous growth in active retail trading, I've had/heard enough anecdotal conversations with co-workers and others where I've personally been seeing more of this than I have in recent years past.
It is different though, in the late 1990's I knew people who took up day-trading as their primary 'job' (source of income), and committed huge amounts of their life savings to it. The people I know today who are engaged in this seem to view it as a fun hobby / interesting way to gamble, and don't seem to suffer any delusions about what they're doing, some of them aren't even putting any 'real' money towards it, their retirement 'investing' is done completely different then their 'funny money' accounts.
I also think it's important to note that we're not seeing unusually large amounts of garbage IPO's. There are always IPO's, many of them garbage, but there was something different about the quantity of them and the nature of them in the dot-com boom. As far as I can tell, "private equity" seems to be paying more for businesses in current time, and there doesn't seem to be the rush for new businesses to form and cash in on public markets offering inflated prices for businesses of any quality.
It's also worth noting that interest rates on bonds are incredibly low, so there's not good alternatives for investing. Investment grade corporate bond funds were earning 8%+ , and Series I US savings bonds earning 3%+ inflation at certain points of the 2000 bubble.
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Re: Are we NOW in a bubble?

Post by bigskyguy »

nisiprius wrote: Mon Sep 28, 2020 7:18 am I personally think yeah, we are in a bubble. But that's not a very germane question.

The big question is, "what should I do if I think we are in a bubble?"

One of the things that is really hard to believe, but I think it's true, is that the right answer is, "do nothing." The reason is that a) you need to consider the consequences of being wrong, and b) you need to look at the question of timing. Vague impressions are not valuable. "Sooner or later a crash is coming and it may be terrific" is only remembered because Roger Babson said it in September, 1929.

In December of 1996, Alan Greenspan made his famous "irrational exuberance" speech. Here's a chart showing the growth of $10,000 invested into the Vanguard Total Stock Market Index ETF in 1993.

Image

Suppose you had taken that as a warning and gone to cash. When would have been the right time to get back in? The answer is that selling at the end of 1996 was (almost certainly) an irreversible mistake.

Image

You never could buy in for as little as you had sold. Even if you had exactly spotted the bottom in 2002, you would still have sold for $18,778 and then had to pay $22,382 to get back in.

But suppose you had timed it a little better. Suppose you'd waited a full year after Greenspan and sold at the end of 1998.

Image

In order to have done better than buying and holding,

1) you would have needed to call the bottom within ±5 months. You would have had to buy between July, 2002 and March, 2003.

2) And the most you could possibly have scored, even if you'd bought at the exact bottom, would have been to sell at $25,010 and buy back in at $22,382, i.e. about a 12% boost in your personal return over a 4-1/2 year period, or about an average of 2.5% per year. That's certainly something, but it's not life-changing, and it has to be measured against the chances of underperforming if your timing calls were off.

In short, you need a timing accuracy of a few months, with penalties for being wrong. In order to profit from a bubble you need to play chicken all the way up and sell reasonably close to the top, and then buy in reasonably close to a bottom.

If you are honest with yourself, particularly if you keep records, you will probably find that vague feelings that "it's too much," "I think this is a bubble," "this isn't sustainable," "trees don't grow to the sky," etc. can last for years and years and year before the crash. Or, in the saying often attributed to Keynes, "the markets can remain irrational longer than you can remain solvent."
I do agree with everything that is written here. I, too, see the present world financial environment having swung to a level of extreme valuations, high cumulative debt, plateauing of growth rates (maybe even declining) in the developed world, and a future that likely portends some form of reckoning. Even John Mauldin, who is significantly more conservative/libertarian than I, sees our present position as approaching the end of a multi-decade debt cycle, (as do Ray Dalio, Lyn Alden Schwartzer, and others), which will require a significant unwinding, with the four main methodologies of doing so being 1. Major tax hikes, 2. major debt restructuring, 3. major debt forgiveness, or 4. currency debasement with likely inflation. And while it may indeed be impossible to predict when this might/will occur, and precisely how, it would seem only reasonable and rational to position oneself appropriately. To deny that there isn't a financial tsunami of sorts on the horizon is simply ignoring what the financial data suggests. Read the CBO Long Term Budget Outlook. It would be hard to deny that we are anywhere near a normal economic environment. Tempering one's financial position would seem only rational.

Predicting the future is a fools errand. So is ignoring the present economic environment. I personally see the present financial world as riskier than normal. My risk tolerance hasn't changed. Ergo, my portfolio should adjust.
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Re: Are we NOW in a bubble?

Post by fredflinstone »

unclescrooge wrote: Mon Sep 28, 2020 11:20 am
fredflinstone wrote: Mon Sep 28, 2020 11:04 am
Leesbro63 wrote: Mon Sep 28, 2020 7:41 am
fredflinstone wrote: Mon Sep 28, 2020 4:22 am I believe we are now in a bubble. The bubble is not in the stock market per se, but in the global financial system underlying it. In the US, for example, the federal debt to GDP ratio is 136%, up from 56% in 2000. This is World War II level of debt. Central banks in the US and elsewhere have kept interest rates low so far via debt monetization, which is not a viable long-term strategy for dealing with out-of-control government spending. This Ponzi scheme cannot go on forever. When the party ends--and it will end eventually--it will not be pretty.
I, somewhat, agree that it seems like we are in a global financial system bubble. But aren’t the odds high that it ends in inflation, with stocks being the asset class of choice?
Stocks should fare reasonably well if there is modest inflation--say 5% to 10% per year. But inflation can feed on itself due to increases in inflationary expectations. The risk is that there will be a positive feedback loop between inflationary expectations and rising prices. If the price of a gallon of milk rises to a billion dollars (similar to Zimbabwe or Weimar Germany), it is a whole other ballgame. Perhaps cryptocurrency could fill the gap left by fiat currency, but in any case I have to believe such a scenario would be a disaster for both bonds and stocks.
What if, without maybe QE, we would have seen a deflationary cycle? And the only reason we haven't is because of QE?
Yes I think that is possible. There are powerful deflationary forces in the world (e.g. globalization, the Internet) and there are also powerful potentially inflationary forces in the world (e.g. large government deficits, debt monetization). So far these forces have all balanced out in the aggregate. But in the future, who knows? I advocate a well-diversified portfoilio that should do well in a variety of different scenarios, including "black swan" scenarios like hyperinflation or depression.
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Re: Are we NOW in a bubble?

Post by fwellimort »

I think my father said this best after I talked with him with "I've no idea".
My father has been in this field his entire working career (and have many peers who also work in this field as a result).

Many professionals too are lost of whether this is a start of a new bull market or at the cliff of a bubble (that is to burst in the near future).

And yes, it seems the general consensus among professionals is that retail investors is having notable impact on stock prices recently.

The thing is, unlike the past, zero commission trades are here to stay. Just like 401Ks and all, zero commission trades might mean that the new rise in retail trading could be more or less permanent (just like the flood of money that came in to the market after IRA/401K/etc).

As for valuations themselves, this is the biggest "I've no idea". Compared to the historical market, yes, we are way overvalued. The continuous quantitative easing has somewhat 'distorted' traditional valuation of stocks.
At the same time, I think most would agree when compared to the current interest rates, stocks do seem fairly valued if not even under-valued. I think Buffett put it best in one of his talks. Low interest rates distort everything cause then appreciating assets can be valued at almost any ridiculous levels and still seem under-valued.

Truth is, no one knows. But at least for my father, I think the thought process is, "let's just see it out". I wouldn't be surprised if many other professionals are doing the same. While we 'could' be in a bubble, there's a chance that the influx of retail trading is the new norm with zero commission trading and as many experienced professionals have come to experience many instances of 'time in the market beats timing the market' (especially after the instance in 2008), why take the risk (if the market is wrong, then professionals have the market to blame but if the professionals are wrong and the market is right, then the careers of those professionals could be at risk).

Also, let's not forget that just cause we are in a bubble does not mean the bubble has to pop right away. Bubbles while they might be noticeable for some are hard to time. It could be years before the bubble pops: or the bubble doesn't pop and stock values simply plateaus for years to come. But one thing is for certain: for many developed markets, it has been shown time and time again that generally (not always*) time in the market beats timing the market.
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Re: Are we NOW in a bubble?

Post by Reamus294 »

bigskyguy wrote: Mon Sep 28, 2020 12:07 pm
Predicting the future is a fools errand. So is ignoring the present economic environment. I personally see the present financial world as riskier than normal. My risk tolerance hasn't changed. Ergo, my portfolio should adjust.
+1

I expect more volatility in the future and my hunch is that a correction will start in the near future, but I have no idea if it will last 3 months, or 10 years. What I do know is that my asset allocation is set to weather a storm or sunny days that may or may not happen. I shoot for having a a balance of a little FOMO in good times, and getting a little uncomfortable in bad times and I'll change my asset allocation to maintain this balance, but the changes will be very slow and measured. I do very little based on current market conditions other than paying extra towards my mortgage vs investing/saving, but that also aligns with a personal preference of having no mortgage.
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Re: Are we NOW in a bubble?

Post by Wanderingwheelz »

fredflinstone wrote: Mon Sep 28, 2020 4:22 am I believe we are now in a bubble. The bubble is not in the stock market per se, but in the global financial system underlying it. In the US, for example, the federal debt to GDP ratio is 136%, up from 56% in 2000. This is World War II level of debt. Central banks in the US and elsewhere have kept interest rates low so far via debt monetization, which is not a viable long-term strategy for dealing with out-of-control government spending. This Ponzi scheme cannot go on forever. When the party ends--and it will end eventually--it will not be pretty.
I generally agree with this. I wouldn’t go so far to call it a Ponzi scheme but at some point wages are going to have to rise to justify the bubble-like asset prices. Debt is fine, but households are taking in way too much of it if this is to end in a way that isn’t destabilizing like we saw during the GFC.

I read this morning that Bozeman, MT has a median household income of @ $52,000 and the median home price has moved higher over the last 30 days from $487,000 to $575,000. 30 days! Haven’t we seen this movie before?
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Re: Are we NOW in a bubble?

Post by fredflinstone »

Wanderingwheelz wrote: Mon Sep 28, 2020 12:53 pm
fredflinstone wrote: Mon Sep 28, 2020 4:22 am I believe we are now in a bubble. The bubble is not in the stock market per se, but in the global financial system underlying it. In the US, for example, the federal debt to GDP ratio is 136%, up from 56% in 2000. This is World War II level of debt. Central banks in the US and elsewhere have kept interest rates low so far via debt monetization, which is not a viable long-term strategy for dealing with out-of-control government spending. This Ponzi scheme cannot go on forever. When the party ends--and it will end eventually--it will not be pretty.
I generally agree with this. I wouldn’t go so far to call it a Ponzi scheme but at some point wages are going to have to rise to justify the bubble-like asset prices. Debt is fine, but households are taking in way too much of it if this is to end in a way that isn’t destabilizing like we saw during the GFC.

I read this morning that Bozeman, MT has a median household income of @ $52,000 and the median home price has moved higher over the last 30 days from $487,000 to $575,000. 30 days! Haven’t we seen this movie before?
Indeed:

"Within city limits in Bozeman, the month of July’s median single-family home sales price was at $510,000, but in August it jumped to $584,500."

https://www.montanarightnow.com/bozeman ... d76c2.html

"The median household income in Bozeman, MT in 2017 was $51,919."

http://www.city-data.com/income/income- ... ntana.html

* * *

Related:

Used cars make their biggest price jump in a half-century
https://www.autoblog.com/2020/09/11/use ... -increase/

Home sellers’ asking prices jump 34% in California
https://www.mercurynews.com/2020/09/14/ ... alifornia/
Stocks 28 / Gold 23 / Long-term US treasuries 19 / Cash (mainly CDs) 22 / TIPS 8
Wanderingwheelz
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Re: Are we NOW in a bubble?

Post by Wanderingwheelz »

fredflinstone wrote: Mon Sep 28, 2020 1:03 pm
Wanderingwheelz wrote: Mon Sep 28, 2020 12:53 pm
fredflinstone wrote: Mon Sep 28, 2020 4:22 am I believe we are now in a bubble. The bubble is not in the stock market per se, but in the global financial system underlying it. In the US, for example, the federal debt to GDP ratio is 136%, up from 56% in 2000. This is World War II level of debt. Central banks in the US and elsewhere have kept interest rates low so far via debt monetization, which is not a viable long-term strategy for dealing with out-of-control government spending. This Ponzi scheme cannot go on forever. When the party ends--and it will end eventually--it will not be pretty.
I generally agree with this. I wouldn’t go so far to call it a Ponzi scheme but at some point wages are going to have to rise to justify the bubble-like asset prices. Debt is fine, but households are taking in way too much of it if this is to end in a way that isn’t destabilizing like we saw during the GFC.

I read this morning that Bozeman, MT has a median household income of @ $52,000 and the median home price has moved higher over the last 30 days from $487,000 to $575,000. 30 days! Haven’t we seen this movie before?
Indeed:

"Within city limits in Bozeman, the month of July’s median single-family home sales price was at $510,000, but in August it jumped to $584,500."

https://www.montanarightnow.com/bozeman ... d76c2.html

"The median household income in Bozeman, MT in 2017 was $51,919."

http://www.city-data.com/income/income- ... ntana.html

* * *

Related:

Used cars make their biggest price jump in a half-century
https://www.autoblog.com/2020/09/11/use ... -increase/

Home sellers’ asking prices jump 34% in California
https://www.mercurynews.com/2020/09/14/ ... alifornia/
It’s everywhere. Go look at boat prices or RV prices assuming your dealers even have one to show you.

Zillow has my home up 14% in the last 30 days and it would take me 3 days to drive to Bozeman.

Nancy and Steve are meeting today to discuss $2,000,000,000,000 more stimulus, too. I shudder to think what will happen to asset prices when/if that happens.
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Re: Are we NOW in a bubble?

Post by Leesbro63 »

Boats, cars and houses might just be a function of Covid. Not much else to do. I’m not convinced that this, in itself, is the “financial bubble resolution overall inflation” that we might eventually see.
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