Search Results for “double speed”

Goes Down Double-Speed (Update 4)

Posted on 9 June 2017 by David Merkel

Markets always find a new way to make a fool out of you. ?Sometimes that is when the market has done exceptionally well, and you have been too cautious. ? That tends to be my error as well. ?I’m too cautious in bull markets, but on the good side, I don’t panic in bear markets, even the most severe of them.

The bull market keeps hitting new highs. ?It’s the second longest bull market in the last eighty years, and the third largest in terms of cumulative price gain. ?Let me?show you a graph that simultaneously shows how amazing it is, and how boring it is as well.

The amazing thing is how long the rally has been. ?We are now past 3000 days. ?What is kind of boring is this — once a rally gets past two years time, price return results fall into a range of around 1.1-2.0%/month for the rally as a whole, averaging around 1.4%/month, or 18.5% annualized. ?(The figure for market falling more than 200 days is -3.3%/month, which is slightly more than double the rate at which it rises. ?Once you throw in the shorter time frames, the ratio gets closer to double — presently around 2.18x. ?Note that the market rises are 3.2x as long as the falls. ?This is roughly similar to the time spans on the credit cycle.)

That price return rate of 1.4%/month isn’t boring, of course, and is?close to?where the stock market prediction model would have predicted back in March 2009, where it forecast total returns of around 16%/year for 10 years. ?That would have implied a level a little north of 2500, which is only 3% away, with 21 months to go.

Have you missed the boat?

If you haven’t been invested during this rally, you’ve most like missed more than 80% of the?gains of this rally. ?So yes, you have missed it.

?The Moving Finger writes; and, having writ,
Moves on: nor all thy Piety nor Wit
Shall lure it back to cancel half a Line,
Nor all thy Tears wash out a Word of it.?

? Omar Khayy?m?from The Rubaiyat

In other words, “If ya missed the last bus, ya missed the last bus. ?Yer stuck.”

We can only manage assets for the future, and only our decrepit view of the future is of any use. ?We might say, “I have no idea.” and maintain a relatively constant asset allocation policy. ?That’s mostly what I do. ?I limit my asset allocation changes because it is genuinely difficult to time the market.

If you are tempted to add more money now, I would tell you to wait for better levels. ?If you can’t wait, then do half of what you want to do.

A wise person knows that the past is gone, and can’t be changed. ?So aim for the best in the future, which at present means having at least your normal percentage of safe assets in your asset allocation.

(the closing graph shows the frequency and size of market gains since 1928)

Goes Down Double-Speed (Update 3)

Posted on 30 April 20162 May 2016 by David Merkel

S&P 500 at turning points — Data Credit: Ed Yardeni

This is the fourth article in this series, and is here because the S&P 500 is now in its second-longest bull market since 1928, having just passed the bull market that ended in 1956.? ? Yeah, who’da thunk it?

This post is a little different from the first three articles, because I got the data to extend the beginning of my study from 1950 to 1928, and I standardized my turning points using the standard bull and bear market definitions of a 20% rise or fall from the last turning point. ?You can see my basic data to the left of this paragraph.

Before I go on, I want to show you two graphs dealing with bear markets:

As you can see from the first graph, small bear markets are much more common than large ones. ?Really brutal bear markets like the biggest one in the Great Depression were so brutal that there is nothing to compare it to — financial leverage collapsed that had been encouraged by government policy, the Fed, and a speculative mania among greedy people.

The second graph tells the same story in a different way. ?Bear markets are often short and sharp. ?They don’t last long, but the intensity in term of the speed of declines is a little more than?twice as fast as the rises of bull markets. ?If it weren’t for the fact that bull markets last more than three times as long on average, the sharp drops in bear markets would be enough to keep everyone out of the stock market.

Instead, it just keeps many people out of the market, some entirely, but most to some degree that would benefit them.

Oh well, on to the gains:

Like bear markets, most bull markets are small. ?The likelihood of a big bull market declines with size. ?The current bull market is the fourth largest, and the one that it passed in duration was the second largest. ?As an aside, each of the four largest bull markets came after a surprise:

(1987-2000) 1987: We knew the prior bull market was bogus. ?When will inflation return? ?It has to, right?
(1949-56) 1949: Hey, we’re not getting the inflation we expected, and virtually everyone is finding work post-WWII
(1982-7) 1982: The economy is in horrible shape, and?interest rates are way too high. ?We will never recover.
(2009-Present) 2009: The financial sector is in a shambles, government debt is out of control, and the central bank is panicking! ?Everything is falling apart.

Sometimes you win, sometimes you lose... — Sometimes you win, sometimes you lose…

Note the two dots stuck on each other around 2800 days. ?The arrow points to the lower current bull market, versus the higher-returning bull market 1949-1956.

Like bear markets, bull markets also?can be short and sharp, but they can also be long and after the early sharp phase, meander upwards. ?If you look through the earlier articles in this series, you would see that this bull market started as an incredibly sharp phenomenon, and has become rather average in its intensity of monthly returns.

Conclusion

It may be difficult to swallow, but this bull market that is one of the longest since 1928 is pretty average in terms of its monthly average returns for a long bull market. ?It would be difficult for the cost of capital to go much lower from here. ?It would be a little easier for corporate profits to rise from here, but that also doesn’t seem too likely.

Does that mean the bull is doomed? ?Well, yes, eventually… but stranger things have happened, it could persist for some time longer if the right conditions come along.

But that’s not the way I would bet. ?Be careful, and take opportunities to lower your risk level in stocks somewhat.

PS — one difference with the Bloomberg article linked to in the first paragraph, the longest bull market did not begin in 1990 but in 1987. ?There was a correction in 1990 that fell just short of the -20% hurdle at -19.92%, as mentioned in this Barron’s article. ?The money shot:

The historical analogue that matches well with these conditions is 1990. There was a 19.9% drop in the S&P 500, lasting a bit under three months. But the damage to foreign stocks, small-caps, cyclicals, and value stocks in that cycle was considerably more. Both the Russell and the Nasdaq were down 32% to 33%. You might remember United Airlines? failed buyout bid; the transports were down 46%. Foreign stocks were down about 30%.

And then Saddam Hussein invaded Kuwait.

That might have been the final trigger. The broad market top was in the fall of 1989, and most stocks didn?t bottom until Oct. 11, 1990. In the record books, it was a shallow bear market that didn?t even officially meet the 20% definition. But it was a damaging one that created a lot of opportunity for the rest of the 1990s.

FWIW, I remember the fear that existed among many banks and insurance companies that had overlent on?commercial properties in that era. ?The fears led Alan Greenspan to encourage the FOMC to lower rates to… (drumroll) 3%!!! ?And, that experiment together with the one in 2003, which went down to 1.25%, practically led to the idea that the FOMC could lower rates to get out of any ditch… which is now being proven wrong.

Goes Down Double-Speed (Update 2)

Posted on 6 September 20147 September 2014 by David Merkel

2791702123_3a088ec05d_z — Photo Credit: hounddiggity

This is the third time I have written this article during this bull market. ?Here are the other two times, with dates:

Goes Down Double-Speed?2/17/2011
Goes Down Double-Speed (Updated)?5/22/2013

The first time, we had doubled since the bottom. ?Second time, up 2.5x. ?Now it is a triple since the bottom. ?That doesn’t happen often, and this rally is getting increasingly unusual by historic standards. ?That said, remember that every time a record gets broken, it shows that the prior maximum was not a limit. ?If you think about that, after a bit you know that idea is obvious, but that isn’t the way that many people practically think about extreme statistics.

Let’s look at my table, which is the same as the last two times I published, except for the last line:

Since the second?piece, the gains have come slowly and steadily, though faster than between the first and second pieces. ?As I said last time,

“In long recoveries, gains first come quickly, then slowly, then near the end they often come quickly again.? Things are coming quickly again now, but who can tell how long it might persist.”

Indeed, and after the first piece, the market did nothing for about 16 months, after which the market started climbing again at a rate of about 1.5% per month for the last 27 months. ?Though not as intense as the rally in the mid-’80s, this is now the third longest rally since 1950, and the third largest. ?It is also the third most intense for rallies lasting 1000 calendar days or more. ?This is a special rally.

And now look at the cumulative gain:

Does this special rally give us any clues to the future? ?Sadly, no. ?Or maybe, too much. ?Let me spill my thoughts, and you can take them for what they are worth, because I encouraged caution the last two times, and that hasn’t been the winning idea so far.

To top the rally of the ’90s for total size, we would have to see 2700 on the S&P 500.
It is highly unlikely that this rally will top the intensity of that of the ’50s or ’80s. ?Gains from here, if any, are likely to be below the 1.7%/month average so far.
For this rally to set a length record, it would have to last until 12/14/16 (what a date).
Record high profit margins should constrain further growth in the?S&P 500, but that hasn’t worked so far. ?As it is, there are very good reasons for profit margins to be high, because unskilled and semi-skilled labor in the capitalist world is not scarce.
Rallies tend to persist longer when they go at gradual clips of between 1-2%/month. ?Still, all of them eventually die.
At present the market is priced to give 5.5%/year returns over the next 10 years. ?That figure is roughly the 85th percentile of valuations. ?Things are high now, but they have been higher, as in the dot-com bubble. ?We are presently higher than the peak in 2007.
On the negative side, it doesn’t look like the market is pricing in any war risk.
On the positive side, I’m having a hard time finding too many industries that have over-borrowed. ?Governments and US students show moderate?credit risk, as do some industries in the finance and energy sectors.
Finally, the most unusual aspect of this era is how little competition bonds are giving to stocks. ?In my opinion, that idea is getting relied on too heavily for a relative value trade. ?Instead, what we may find is that if bond yields rise, stocks, particularly dividend paying stocks, will get hit. ?By relying on a relative yield judgment for stocks, it places them both subject to the same risks.

I still think that we are on borrowed time, but maybe you need to regard me as a stopped digital clock with a date field, which isn’t even right twice per day. ?Historically, if the rally persists, stock prices should only appreciate at a 8-9% annual rate with the bull this old.

That’s all for now. ?I’m not hedging my equity portfolio yet, but maybe my mind changes near 2300 on the S&P 500, should we get there.

PS — the title comes from the fact that markets move down twice as fast as they go up, so be ready for when the cycle turns. ?The first article in the series focused on that.

Goes Down Double-Speed (Updated)

Posted on 22 May 201322 May 2013 by David Merkel

A little more than two years ago, I wrote Goes Down Double-Speed.? I wrote it after the market had doubled from its lows two years earlier.? I want to update the piece and explain we have learned over the past 2+ years, and maybe discuss what could happen over the next 2+ years.? Anyway, here is the modified table of bull and bear markets:

Since the last piece, the gains have come slowly, validating my comment, “But it would be unprecedented for the market to continue to advance at a 3% [per month] pace from here.”? In long recoveries, gains first come quickly, then slowly, then near the end they often come quickly again.? Things are coming quickly again now, but who can tell how long it might persist.

Maybe Goldman Sachs can tell us.? After all they increased their price targets for the S&P 500 yesterday.? Now let me republish my updated bull market graphs from the prior piece:

And now look at the cumulative gain:

The predictions of Goldman Sachs are both believable and unbelievable.? Believable: it’s not historically impossible for a rally to last that long, or for it to be so large.? That said the probability historically has been low.

Unbelievable: Unless revenue growth kicks in, that means the profit margin, already at record highs, will soar to an astounding record.? But won’t revenue growth begin again?? That’s hard to say, but if revenue growth starts in earnest, the Fed will start removing policy accommodation, because bank lending will be perking up.? At that point, it is anyone’s guess as to what will happen.? Therefore, I rule out Goldman Sachs’ forecast as a possibility.

The rally continues to get longer in the tooth, and its has been aggressive this year.? I repeat how I ended the original piece: “Consider trimming some of your hottest positions.”

Goes Down Double-Speed

Posted on 17 February 201117 February 2011 by David Merkel

Eddy Elfenbein wrote an interesting post on the market doubling from its bottom.? But given all of the odd things going on in the markets, and one of my mottoes is “Weird begets weird,” I asked how unusual the fall was? before the rise.? Over the last 61 years, it is unprecedented.? Here’s the table:

This table lists all of the major turning points as I see them.? The summary statistics are these: bull markets last 3.5x as long as bear markets on average.? Bear markets move at 1.9x the rate of bull markets. (double speed)

But now consider cumulative bear markets as I define them:

and the monthly losses versus the number of days for the loss.

The longer the losses go on, the less intense the losses are on an annualized basis.? But the loss level is higher per unit time than for gains — the amount of time spent in gains is 3.5x that of the losses.? Look at the cumulative gains:

Though the gains clump around doubling, there are two results in the triple to quadruple area — makes up for a lot of losses.

As one might expect, short rallies tend to be more intense than long rallies.? Normal rallies since 1950 tend to double the index value.? Abnormal falls cuts the index in half.

But for today that leaves us overextended.? Yes, levels have rapidly doubled versus the low.? That’s unusual; it undoes a harder than normal fall.? But it would be unprecedented for the market to continue to advance at a 3% pace from here.? That would be uncharted waters.

Consider trimming some of your hottest positions.

It Doesn’t Get Much Better Than This?

Posted on 27 March 2020 by David Merkel

Photo Credit: Valerie || Photo taken from the coast of Key West at sunset. Relaxing and peaceful, so they say…

What an amazing three days. I’ve said to some of my clients that moves of this magnitude are highly unusual. How unusual?

The returns of the last three days would rank sixth in the top ten three-day moves upward for the S&P 500 since 1928. When did the rest of the top ten take place? During the Great Depression — four in 1932, three in 1933, and one each in 1931 and 1935.

Given the overall difficulties of the stock market in the Great Depression, one could say that the 2020 stock market should find being peers with which to keep company.

One more note about March 26th, 2020, that sets it apart: It’s the only one of the dates that may be a bounce up from a bear market low. The fastest bear market may become the fastest bull market if the S&P 500 closes above 2685 soon.

It Doesn’t Get Much Worse Than This?

Consider monthly price volatility. Using 21 days to represent a month, the standard deviations of price movements for March 26th would be the eleventh highest. When did the other ten take place. One day after another for ten trading days starting on November 14th, and ending on the 27th of the same month.

Do you feel like the current market action has slugged you hard? I do. That would be a normal feeling, as we haven’t been through anything quite like this in our lifetimes.

Even if you look at implied volatility, for which we only have data since 1986 (if you are looking at the old VIX, 21-day average volatility would have ranked 54th. 39 trading days starting on October 27th, 2008, and 14 trading days starting on November 3rd, 1987 ranked higher. Still it been fascinating to not see the VIX move down much over the last three days. Perhaps there are a lot of investors still aggressively buying puts and calls.

Four Interesting Periods in the Stock Market

So think about:

The Great Depression
Black Monday and related problems in 1987
The Great Financial Crisis in 2008, and
Now

The two “Greats” had collapses in asset prices and corresponding impairments of banks, and some other financial institutions. They were for practical purposes universal panics.

1987 was shocking, but it came back fast, and it didn’t have much collateral damage. The current time period? Well, banks are lending to creditworthy borrowers, and March is a record for US dollar denominated investment grade corporate bonds, Jon Lonski reported at Moody’s in his report released tonight. There’s no lack of liquidity to the big guys with normal balance sheets.

For CLOs, MLPs, repos and Mortgage REITs, that’s different. They are highly dependent on capital market conditions to do well. They are “fair weather” vehicles. In this situation, the Fed is extending itself in ways that it doesn’t need to, and for areas that should be left alone. Nonbanks should not be an interest of the Fed. If you’re going to take all systematic risk away from business, they’re going to behave in even more aggressive ways, and create an even bigger crisis. This one would have been small enough for the private sector to handle, once the initial wave furor over COVID-19 dies away in a couple of weeks.

Same for the Treasury. We don’t need the stimulus, and recessions help to clear out bad allocations of capital. This is a waste of the declining creditworthiness of the US Treasury, which will find itself challenged by a bigger crisis in 10-15 years, with no flexibility to deal with it.

Two Final Notes

I have a series of four articles called, “Goes down double-speed.” The market going down rapidly is less unusual than it going up rapidly. Typically the speed of down moves is twice as fast as up moves. For the current up moves to be so fast is astounding. I would say that it shouldn’t persist, but I think the market will be higher because the first wave of COVID-19 will fade.

And so I go back to one of my sayings: “Weird begets weird.” Weird things happen in clumps, in bunches. Much of it is driven by bad monetary and fiscal policies, including policies the encourage people and institutions to take on too much debt. Unusual factors include COVID-19 and the policy response to it. Part of it is cultural — we take too much risk as a culture, which works fabulously in the bull phase of the cycle, and horribly in the bear phase.

And thus I would say… prepare for more weird. Like COVID-19, it’s contagious.

How High Are We?

Posted on 8 September 2016 by David Merkel

I’ve said this before, but I like it when research destroys a preconceived notion of mine. ?Today’s post stems from an exchange that I had with Jackdamn (what a name) on Stocktwits, talking about a chart created by?dshort.

S&P 500 Percent Off High Since March 9, 2009. Chart by Doug Short. $SPX $SPY $DIA

? Jack Damn (@jackdamn) Sep. 3 at 09:39 AM

I responded:

@jackdamn over a 7.5 year period, how frequently do you get 5-10%. 10-15%, 15-20%, 20%+ drawdowns? This graph looks tame to me. $$

? David Merkel (@AlephBlog) Sep. 5 at 02:52 PM

To which he responded: That’s a great question. ?And it is a great question, but I’m not going to answer it directly here… because I think I am answering a better question.

Let me take you through my thought process, because I went through four different ways of trying to answer the question before settling on the better question, and getting the answer.

How do you summarize an area of a price graph in order to make comparisons of different periods? ?How do you determine when the market has been near highs for a long time, or far away for a long time? ?How does the intensity/distance below the high matter? ?If you are looking at troughs, where does one begin and another end?

I started by trying to identify the troughs individually, and the difficulty was trying to establish that in a mechanical way that did not require interpretation. ?I stumbled around playing with minimum periods between troughs, recovery levels before a new trough could start, moving averages to establish when a new trough was genuinely significant. ?Sigh.

I tried a lot of different things, and I could create rules that mostly made the troughs look decent, but I could never get it to be fully mechanical or lack arbitrariness. ?Why this trough?and not that? ?The same criticisms can be applied to dshort’s graph as well.

I finally pulled out of my mental gymnastics when I concluded: couldn’t I just take the area under the maximum line in percentage terms and use that as a measure, say over a 200-day period? ?200 days is arbitrary, and so is the measure, but that is less than most of the measures that I considered, and at least this one corresponds to a relatively simple calculation.

So if you look at the red line in my graph above, you will note that it has dipped below 2.0?five times in the last 66 years, in 1954, 1959, 1964, 1995 and 2014. ?These observations followed periods where the markets moved to new highs rather smartly and without a lot of downside volatility. ?Then there were 3 times that the measure peaked?higher than 64, in 1975, 2003 and 2009. ?These times followed incredible market falls, and were great times to be putting money into the market.

Below you can see ?a table of values for how often the measure is below a given threshold. ?It’s only above 64 about 5% of the time, and below 2 about 3.5% of the time. ?My main thought is this measure is this: high values of the measure probably are a “buy signal.” ?Low values of the measure aren’t necessarily a “sell signal.”

That signals are asymmetric should not be surprising. ?The largest factor in most long-term market moves, the credit cycle, is also asymmetric. ?It’s like my continuing series, Goes Down Double Speed. ?Bull markets have shallower moves and longer duration, the same way that the bull phase of the credit cycle goes. ?Extend credit, extend credit, extend credit… loosen standards, loosen standards, loosen standards… tighten spreads, tighten spreads, tighten spreads, etc. ?Then in the bear phase it is DENY CREDIT!! TIGHTEN STANDARDS!! SHEPHERD LIQUIDITY!! SURVIVE!! ?Short and sharp. ?Painful. ?Prices are lower, and yields higher at the end.

To close this off, where is this indicator now? ?It’s around 8, which is near the 40th percentile… kind of a blah figure, not saying much of anything… which is good in its own way. ?The market meanders and hits a few new highs, sags a little, comes back, hits a few new highs, etc. ?Not many people believe in it, but we are inches off the highs. ?Odds are we go higher from here, but not aggressively higher.

One final note: we are in the fourth and final phase of the credit cycle now, so don’t get too aggressive. ?Debt is getting higher inside nonfinancial corporations. ?Be wary, and do your fundamental due diligence on balance sheets.

Percentile	DFHI200MS
1%	1.33
5%	2.42
10%	3.21
20%	4.50
30%	5.73
40%	8.18
50%	11.67
60%	17.42
70%	27.47
80%	36.52
90%	49.83
95%	63.10
99%	83.08

Best of the Aleph Blog, Part 17

Posted on 19 June 2012 by David Merkel

These articles appeared between February and April 2011:

On the Percentage of Market Cap held by Domestic Stock ETFs

Implications

Domestic stock ETFs tend to pick more volatile stocks.

Domestic stock ETFs tend to pick stocks held by major institutions.

Domestic stock ETFs tend to pick stocks less held by insiders.? (They tend to be more boring.)

Goes Down Double-Speed

Bear markets move at 1.9x the rate of bull markets. (double speed)

Consider the Boom in the Bust; Consider the Bust in the Boom

We would all be better off if policymakers thought at least half a cycle ahead in the credit cycle. Sadly, they are linear thinkers, and would be better off working at the county landfill, if they qualified for such authority.

Critical Analysis of Buffett?s Annual Letter

Critical Analysis of Buffett?s Annual Report

Analyzes Berkshire Hathaway in 2011.? Points at the growth in debt at BRK, and concentration risk in the subsidiaries.

Musings on Yield

Why you should not use yield as a criterion for investment.

On the Usefulness of Yield Spreads

So what does this tell us?

There is a credit factor that effects yields, and the effect on Baa bonds is roughly 1.5x that of Aaa bonds.

As Treasury yields get lower, Baa bond yields rise at roughly 45% of the rate.? There is the nominal yield need ? even Baa bonds tend to need a certain nominal yield, particularly for 20+ year bonds.

Present yield levels are fair for long Baa bonds, to the extent that Moody?s measures them accurately.

On Con Men

So avoid complex investments.? Particularly avoid investments that you don?t understand.? At minimum, find a competent friend, or some neutral party that will look at the deal.? If you can?t find such a friend/party, don?t do the deal.? The friend is important, because he does not want you to come to harm, or lose you as a friend if things go bad.

Three Years from Now

There are real advantages to managing for the intermediate term.

Responding to a Bright Reader

Why I started a bond product.

Things are not as good as they look

Analyzing economic statistics when they don’t sound right.

Limits: Models, Governments, and Central Banks

Most writers say the governments and central banks are all-powerful.? I disagree, and I try to explain why.

Regarding David Sokol

Regarding David Sokol, Redux

Regarding David Sokol, Part 3

Regarding David Sokol, Part 4

The growing sentiment, though ahead of the crowd, that David Sokol should leave Berkshire Hathaway.

Everything Old is New Again in Bonds

On unconstrained mandates and managing for total returns with bonds.

When I was Young

What I went through in investing in my younger days.? Taught me a lot.

When Everything is Strong

When Everything is Strong, Redux

When the only thing weak is high quality bonds, what do you do?

It Would Have Happened Already, Redux

What do you do when all you hear are consensus opinions?

Sorted Weekly Tweets

Posted on 26 February 2023 by David Merkel

Picture Credit: David Merkel, with an assist from the YouImagine AI image generator || Twitter bird happily surfs

Real Estate

NYC’s biggest-ever office-to-housing conversion is opening in the Financial District at prices ranging from just over $1 million for a studio to $12.75 million for a four-bedroom spread https://t.co/sXCwHGAgC3 Nice, if you can afford it. Feb 24, 2023
Home lenders are looking for ways to make 6% mortgages more appealing https://t.co/fOq3ulMZm0 Don’t do a buydown of the first-year interest rate. If you can’t afford the house on a level rate basis, don’t buy the house. What will you do when the rate rises? Feb 24, 2023
That 3% Mortgage Just Keeps Getting Better https://t.co/mFcum8UPo1 Rather than prepay, invest prepayment money in higher-yielding safe bonds. If rates fall such it doesn’t work anymore, take the appreciated bonds and do a big prepayment Feb 24, 2023
The US housing market lost the most value since 2008 https://t.co/qJYXFrPWp7 Has the FOMC forgotten the lessons of the Great Financial Crisis? Yes! Same errors that Bernanke committed… same certainty Feb 23, 2023
A growing number of big office landlords are defaulting on their loans, reflecting high interest rates and the popularity of remote and hybrid work policies https://t.co/5LJIGtxPrn Slow motion train wreck Feb 22, 2023
Some people buying their first home will see their fees cut by about $800 a year under a new program that aims to address soaring borrowing costs https://t.co/ABVJpJfqj1 Make FHA loans more attractive by reducing the rate charged on mortgage insurance by 0.3% Feb 22, 2023
A couple near Chicago sees investing in real estate as a way to boost their wealth. A financial pro offers advice https://t.co/lVFWXKktkX No. Real estate is a business. Consider the value of your time, as you say you want to start a family. Buy shares in equity REITs instead. Feb 22, 2023
Pyramid’s Crossgates Mall loans lurch toward default https://t.co/Xx2tiOqSR6 “Like most large malls across the U.S., the Crossgates business model has been crushed by the pandemic and changing shopping trends” Feb 21, 2023
A growing number of big office landlords are defaulting on their loans, reflecting high interest rates and the popularity of remote and hybrid work policies https://t.co/5LJIGtxPrn Office properties & lower quality retail will show increasing defaults Feb 21, 2023
Europe’s property sector is springing cash calls and dividend cuts on shareholders. But investors in the financially stronger firms aren’t all smiles @hughes_chris https://t.co/nxWXx4cVWw Effect is highest in Sweden, lowest in the UK Feb 21, 2023
A California-based real-estate agent was arranging a deposit when she realized she was getting scammed. “My guy was ready to wire $70,000 to this escrow. Thank God he didn’t.” https://t.co/IRvY6Ap0fW Bizarre real estate stories where crime was a factor. Feb 20, 2023

Odds & Ends

Starbucks launches a range of olive oil-infused drinks in Italy to boost market share in a country where it’s struggled to gain a foothold https://t.co/qsDrYX3fHr That will work? Feb 23, 2023
Is tort reform in the Sunshine State even possible? https://t.co/xyLdMxeue8 Unlikely. By the state gov’t being too interventionist in market issues and yet allowing for too many tort claims to go to trial, the P&C insurance markets are broken in Florida Feb 23, 2023
@michaelxpettis I said something like this yesterday, but not as well. Thanks. Feb 23, 2023
The Securities and Exchange Commission is investigating whether investor-protection laws were violated as stablecoins were issued https://t.co/PAF7eJnwfF They are akin to deposit accounts in banking, and should be regulated that way. This one doesn’t belong to the SEC. Feb 23, 2023
Social Security Myths That Won’t Die https://t.co/BFGmcGq9GE Mostly correct, though there are some nuances that he misses. Worth a read. Feb 22, 2023
The pandemic wiped out decades of gains by US students. Many parents are in the dark about how far their own kids must go to recover https://t.co/MKkoW2YSuK One big error of the COVID era was not requiring an additional year of school for students, to make up for what they missed Feb 22, 2023
Major brokerages and news media feature technical analysis https://t.co/D6REmikOvx Pictures grab people, because they like patterns, whether intellectually defensible or not. Feb 21, 2023
My tweet “Clouds moving rapidly west, with strong surface winds out of the south” s/b “Clouds moving rapidly east, with strong surface winds out of the south” But what a day, now it is “Clouds moving rapidly east, with strong surface winds out of the north” Feb 21, 2023
The Perfect Retirement Investment Nobody Wants https://t.co/27PPPYbt3k Life insurers have gotten badly burned on LTC. Many annuity companies don’t want to offer LTC. Agents don’t like Immediate Annuities because they never get another commission from the policyholder Feb 21, 2023
Asda is rationing sales of fruit and vegetables after widespread shortages. Here’s what UK shoppers need to know https://t.co/x7ITKaOtuU Effects of a bad growing season in N. Africa Feb 21, 2023
Plains, Ga., has about 550 residents—including Jimmy Carter, who is receiving home hospice care. “When I heard the news my heart hurt to know that he was going through this.” https://t.co/3Q5eSEDV6s Liberal Baptist became a most improbable President of the US Feb 20, 2023

Non-US

Soaring onion prices are forcing governments to protect supplies https://t.co/QpkUL7EyZN If you want to see riots, have poor people unable to afford moderately good food. Feb 25, 2023
New Zealand’s recent cyclone shows “the importance of physical cash still in society today,” RBNZ Assistant Governor Karen Silk says https://t.co/lxfSOZh3Th You can’t have a society without physical currency Feb 25, 2023
How India is shaking off its shackles and emerging as an economic power https://t.co/E7WETLSov6 This is wishful thinking. Cultures change slowly, and the Indian government is still pretty corrupt. Feb 23, 2023
Iraq is planning to pay for private-sector imports from China in yuan, injecting foreign currency into the financial system to help ease pressure on the dinar https://t.co/IIQsGpJNbI Will do little for the Iraq economy Feb 22, 2023
Iran introduces fresh restrictions on foreign currency sales after a rush on euros and dollars weakened the rial to an all-time low of 500,000 against the greenback https://t.co/BCAg4mi3Om Corruption, bad policy and sanctions create this hyperflation Feb 21, 2023
Kazakhstan says local brokerages that snapped up Russian sovereign debt last year did so largely on behalf of clients who were Kazakh and Russian residents https://t.co/he4RkZaErR Own Russian sovereign debt? There is liquidity in Kazakhstan. Feb 21, 2023
Russian exports of discounted crude and fuel oil to China jumped to record levels as the re-opening of the world’s biggest energy importer gathers pace https://t.co/j6iiSMmeFT The discounts to Brent for Urals ($13) and Espo ($8) Crude are smaller than what I have read in the past Feb 21, 2023
Terrorists were blamed when explosives were found in an SUV parked outside the home of Mumbai’s richest man. The truth was far more alarming. https://t.co/ckyNmd6as8 Long article on entrenched police/political corruption. Another reason India will not develop Feb 21, 2023
Japan promises radical spending to boost its birthrate. Will it work? https://t.co/judPpbjI0z It probably won’t, but perhaps governments could reduce old-age social insurance payments to those who don’t raise children, making the systems solvent #thepunishmentfitsthecrime Feb 20, 2023

Portfolio Management

Wagering on the bounce in stocks was always a long shot. Now it’s looking like a sucker’s bet https://t.co/Uy9U89wJBF The problem is greater for growth stocks Feb 25, 2023
“There’s a risk that the macro economy delivers results that markets are still woefully unprepared for,” Billionaire quant investor Cliff Asness warned https://t.co/1yPXSxPr4f “the valuation gap between the priciest and cheapest stocks is still at the 94th percentile” #agree Feb 23, 2023
The fixed-income market has become too bearish, too quickly https://t.co/4CyBDZevFM Hard to say. There seems to be more demand to borrow on the long end of late. They may be wrong, but the long end of the bond market is rarely irrational. Feb 22, 2023
Rajiv Jain is the opposite of Ark CEO Cathie Wood. He’s quietly built a stock-picking juggernaut by investing in old-school, out-of-favor companies https://t.co/JEYvyUM7WD Difficult to get so many decisions right consistently. Feb 22, 2023
The DJIA’s shake-up in the summer of 2020 dumped Exxon Mobil, Pfizer and Raytheon just as it was their turn to thrive https://t.co/QAnLl0umqv The short-run effect of index inclusion/deletion is up/down, but the 2020 DJIA changes had the opposite performance over the next 2.6 yrs Feb 21, 2023
Rising interest rates boosted corporate pensions last year. This year rising rates may boost costs. https://t.co/YctKh06Uxi It doesn’t have to work this way. You can invest to immunize your pension costs against changes in interest rates. It’s not rocket science. Feb 20, 2023
Biden’s SEC is coming for your investment account https://t.co/kTUj8hg9nQ Actually, Gensler’s proposal would level the playing field, and create a fairer market structure for smaller investors. Why we have such a fragmented market system today astounds me. Feb 18, 2023

Economics

“It’s everywhere.” A bird flu outbreak has led to the death of nearly 60 million farm-raised chickens, turkeys and ducks in the U.S. Farmers fear the virus is here to stay. https://t.co/3v2NvG5N5u A greater proportion of laying hens have died vs chickens generally in the US. Feb 23, 2023
Which explains why egg prices have risen so much more than chicken meat prices… https://t.co/eEyGIkUTVG Feb 23, 2023
The world’s largest trial of the four-day work week finds a majority of companies are making the shift https://t.co/hnAky9goEQ Color me dubious Feb 21, 2023
The rise of kitchen table economics https://t.co/Bo6nBxqnZB Yes, contracts are too complex and construe everything in favor of the large corporations, but you don’t have to sign them unless you are getting enough value. Feb 21, 2023
Letter: The economic conditions that make wars more likely https://t.co/NfubUHNC8R “A plan is needed to regulate current account imbalances, which draws on John Maynard Keynes’s project for an international clearing union.” You really want near-fixed exchange rates? Feb 21, 2023
Presidents are tweeting about it, and it’s featuring in election campaigns: Here’s how the world fertilizer crisis became political https://t.co/in7c4UVLgO This is over shortages of potash & phosphate. Also trade issues stemming from a few wars and their related sanctions Feb 21, 2023

US Politics

Illinois Governor J.B. Pritzker said he’s willing to spend what it takes to keep Ron DeSantis & Donald Trump out of the White House https://t.co/V8cFk679HD “Taking your eye off the ball.” I’ve done that. Neglects core responsibilities as governor to criticize national politicians Feb 25, 2023
White House is considering two economists who in the Obama administration—Karen Dynan and Janice Eberly—as candidates to become the Federal Reserve’s vice chair https://t.co/IbgMLjjkiP Please, not an economist. No academics. No former Fed or government lackeys. Feb 23, 2023
The Defense Department and Microsoft are investigating an error that exposed military emails, highlighting the security risk of moving sensitive Pentagon data to the cloud https://t.co/w2YPXK9VCM Happens to the best of us, and the government as well. Feb 23, 2023
Biden’s Social Security Trap by @wjmcgurn https://t.co/o2c5ZSJQrV There is no political will to solve OASDHI (Social Security). Thus in 2032, we will face a scenario like this: https://t.co/BXY54hjsoB https://t.co/8YWKsnmZvX Feb 21, 2023
The PCAOB says it doesn’t have jurisdiction to monitor audits of privately held crypto firms. Some say there are ways to strengthen the board’s crypto oversight https://t.co/GUoKyWjYY6 Until you can say it is a deposit, commodity, or security, you don’t know how to regulate/audit Feb 21, 2023

Technology

Germ-zapping lasers can help cut down on infections after surgery https://t.co/979qq9KSSu Sounds promising. Feb 25, 2023
How Rust went from a side project to the world’s most-loved programming language https://t.co/YvAvVy4H0K Long read, but fascinating. Memory flaws are one of the biggest reasons for software crashes, and Rust eliminates that problem. Feb 24, 2023
Apple is making major progress on a no-prick blood glucose monitoring system for its smartwatch https://t.co/fzN4nDBa1Q Big stuff, if it works, which has been elusive so far Feb 23, 2023
Ozempic’s popularity among people looking to lose weight has limited supplies for diabetes patients who depend on the drug to control their blood sugar https://t.co/2cFHjgLzjK What is nice for those who want to lose weight is necessary for diabetics Feb 22, 2023
Removing carbon from the air will be a key step in fighting climate change. But it’s plagued by problems https://t.co/IhFxHwvqYV Interesting, if it genuinely does what they say it does Feb 20, 2023

China

Xi Jinping is set to have more control in decisions over the financial system, with the likely revival of a powerful committee and a possible appointment of a key ally in the central bank https://t.co/eu2p8z2dpx What good or bad comes from this is a mystery – ill-minded tinkering Feb 25, 2023
Empty shipping containers pile up at packed Chinese port as orders dwindle https://t.co/3f8GPQ1By3 So much for the Chinese economic recovery Feb 21, 2023
Thousands of Chinese Retirees Protest Government Cuts to Benefits https://t.co/8JmxGfyENx Social Insurance plans fail when the ratio of workers to beneficiaries gets too low. Feb 21, 2023
Any gains China might have anticipated from its embrace of Russia are hard to spot. But the costs are clear & growing https://t.co/F8wNl8ruWU “Xi is trapped in a strategic dilemma, at the mercy of events. His erstwhile masterstroke is looking more and more like a losing bet.” Feb 21, 2023
Pakistan’s creditors are demanding China take as big a haircut as them in any sovereign debt restructuring, perhaps bigger. It should @mihirssharma https://t.co/2wnXDsT4nW If corruption is not ended, debt forgiveness won’t do much Feb 20, 2023

Companies

Carvana’s disappointing quarterly results sent the online used-car dealer’s stock into freefall and triggered a string of warnings from analysts https://t.co/Pe6xrZjMBT So much for showmanship $CVNA Feb 25, 2023
BYD Most Likely Faked Its 2022 Sales Numbers, Real Ones Could Be Much Lower https://t.co/hpjoersddF I have no idea, but if true, wow. Feb 24, 2023
National Public Radio will reduce its staff by 10% after projecting a $30 million revenue shortfall for the coming year https://t.co/shgKfke3Xb In the end, it is just a business, albeit a nonprofit. Good nonprofits care for their people and don’t overexpand during booms https://t.co/Tlzm6Habx1 Feb 23, 2023
The EV question for auto executives is: How quickly should they make the shift to electric vehicles? https://t.co/8MaVClqMLB The danger is in moving too fast on this. Let unsubsidized consumers decide. Feb 22, 2023
Almost a decade ago, Elon Musk envisioned a passenger transit that moved at nearly the speed of sound. Where is it? https://t.co/rhGkIWdDSn Hyperloop: Boring fantasy, not technology Feb 21, 2023

South Africa

Eskom’s chairman says outgoing CEO behaved “reprehensibly” when he made accusations of theft and corruption within the state-owned electricity company https://t.co/dupwUx6T1U Telling the truth is “reprehensible.” Coal thieves also a problem. Get ready for more blackouts. Feb 23, 2023
South Africa’s rand rallies after the budget unveiled details of plans to deal with debt at the ailing state-run power utility Eskom https://t.co/TX3kvaN8PN Unless you deal with corruption and crime surrounding Eskom, this is all for naught Feb 22, 2023
South Africa’s finance minister will probably spend about five minutes of his budget speech Wednesday on Eskom — a tense 300 seconds for bondholders https://t.co/SBswUTR3G4 If you can’t end the corruption & sabotage regarding Eskom, the debt transfer won’t help South Africa Feb 21, 2023

Ukraine War

As NATO’s military commander a decade ago, Admiral @StavridisJ worked productively with Russian generals. But Putin’s obstinance led to his doomed war in Ukraine https://t.co/73lA9K8J0B The Russian military exists to make the French military look good Feb 23, 2023
As Russia’s invasion of Ukraine enters year two & relations with China worsen, concerns persist over whether the US is ready to fight a war https://t.co/w2JbHsZNi0 “Every single person knows that what we’re doing is crazy,” said Ferrari. “But everybody is helpless to change it.” Feb 21, 2023
Vladimir Putin should read the story of King Croesus. In fact, so should we all https://t.co/abmJ06n3qu Almost no expected the current outcome. That said, many wars end in a stalemate. That seems to be what is happening now. Feb 20, 2023

Personal Finance

Why don’t we talk about money? https://t.co/uYnJdKGDFs Other reasons: looking bad by comparison, people may think you are arrogant because you have done well. I think children need to understand how the economics of the family works, so they can do it as well or better Feb 22, 2023
Some parents aren’t waiting for retirement or urgent healthcare needs to move in with adult children https://t.co/EeBAGjFVHu Think hard about this, and all the adults talk it through — who is in charge? How are bills paid? Privacy? There are many ways for this to go wrong. Feb 22, 2023
Markets Weekend: When is a Banc not a bank? https://t.co/QoSdP3yFKx When it offers bonds that function like deposit accounts. How Compound Banc could originate the loans mentioned does not make sense. Avoid. Avoid. AVOID! ht: @felixsalmon Feb 20, 2023

Adani Group

The combined market value of Adani Group’s shares have just fallen below $100 billion https://t.co/qsNPOK1xGh The question is how much liquidity they really have, versus maturing debts and needed working capital. Paying off a few debts w/scarce liquidity could backfire Feb 22, 2023
Almost a month after a bombshell short seller report lopped off $132B in market value from Gautam Adani’s empire, the Indian billionaire has doubled down on his comeback strategy https://t.co/7RybNimFLC Making a virtue of necessity, while capital costs skyrocket Feb 20, 2023
Adani Group stocks have seen more than $132 billion of market value wiped out since the explosive Hindenburg Research report, but none is hit as bad as Adani Total Gas https://t.co/3j9MzDyK5S What a chart https://t.co/nlK8PZNAKZ Feb 20, 2023

Credit

The $1.8 trillion student debt bubble is about to burst https://t.co/LPQAkME8BI Do NOT borrow money to get a degree that will NOT give you the income to repay the debts. And don’t complain unless someone forced you to go to college & take on the debt Feb 25, 2023
An office landlord tied to money manager Pimco has defaulted on $1.7 billion of mortgage notes https://t.co/xUCEuoGkfW Becoming a self-reinforcing cycle of skittish lenders, defaults, sagging prices for offices. Feb 24, 2023
A quirky German debt product is gaining fans around the world. Here’s what it is all about https://t.co/FvUnDBAfLJ Illiquid promissory notes with low disclosure and no secondary market. I can see why borrowers like it, but all the lenders get is extra yield vs a traditional debt Feb 22, 2023

Estimating Future Stock Returns, March 2022 Update

Posted on 14 June 2022 by David Merkel

Image credit: All images belong to Aleph Blog

Well, finally the bear market… at 3/31/2002 the S&P 500 was priced to return a trice less than zero in nominal terms. After the pasting the market received today, that figure is 3.57%/year nominal (not adjusted for inflation). You would likely be better off in an ETF of 10-year single-A rated bonds yielding 4.7% — both for safety and return.

I will admit that my recent experiment buying TLT has been a flop. I added to the position today. My view is that the long end of the curve is getting resistant to the belly of the curve, and thus the curve is turning into the “cap” formation, where the middle of the curve is higher than the short and long ends. This is a rare situation. Usually, the long end rallies in situations like this. The only situation more rare than this is the “cup” formation where the middle of the curve is lower than the short and long ends.

I will have to update my my old post of “Goes Down Double-Speed.” We’ve been through three cycles since then — bear, bull, and now bear again. People get surprised by the ferocity of bear markets, but they shouldn’t be. People get shocked at losing money on paper, and thus the selloffs happen more rapidly. Bull markets face skepticism, and so they are slow.

What are the possibilities given where the market is now? When the market is expecting 3.57% nominal, give or take one percent, what tends to happen?

Most of the time, growth at these levels for the S&P 500 is pretty poor. That said, market expectations of inflation over the next ten years are well below the 4.7% you can earn on an average 10-year single-A rated corporate bond. Those expectations may be wrong — they usually are, but you can’t tell which way they will be wrong. I am still a believer in deflation, so I think current estimates of inflation are too high. There is too much debt and so monetary policy will have more punch than previously. The FOMC will panic, tighten too much, and crater some area in the financial economy that they care about, and then they will give up again, regardless of how high inflation is. They care more about avoiding a depression than inflation. They will even resume QE with inflation running hot if they are worried about the financial sector.

The Fed cares about things in this order:

Preserve their own necks
Preserve the banks, and things like them
Fight inflation
Fund the US Government
Promote nominal GDP growth, though they will call it reducing labor unemployment. The Fed really doesn’t care about labor unemployment, or inequality. They are a bourgeois institution that cares about themselves and their patrons — those who are rich.

I know this post is “all over the map.” My apologies. That said, we in a very unusual situation featuring high debt, high current inflation (that won’t last), war, plague, and supply-chain issues. How this exactly works out is a mystery, especially to me — but I am giving you my best guess here, for whatever it is worth. It’s worth than double what you paid for it! 😉

Full disclosure: long TLT for clients and me