{"id":24522,"date":"2021-01-30T19:00:56","date_gmt":"2021-01-31T00:00:56","guid":{"rendered":"http:\/\/chcollins.com\/100Billion\/?p=24522"},"modified":"2022-08-01T07:42:44","modified_gmt":"2022-08-01T11:42:44","slug":"high-and-low-finance-2021","status":"publish","type":"post","link":"https:\/\/chcollins.com\/100Billion\/2021\/01\/high-and-low-finance-2021\/","title":{"rendered":"High (and Low) Finance 2021"},"content":{"rendered":"

I’ve been watching the stock market with a bit of trepidation lately.\u00a0 (Roughly half of our retirement\/long-term-care money is in stock market mutual funds, the rest is in less risky bond funds and CDs.)\u00a0 The current “Reddit Revolt<\/a>” led by a self-assembled group of online trader-warriors<\/a> against Wall Street hedge funds has turned the popular notion of stock-market-as-casino into something that feels more like the Running of the Bulls<\/a>.<\/p>\n

These self-styled Davids (you know, of Goliath fame), spurred along by everyday Joes and Josies tempted by quick profits, have led to wild gyrations — and absurd valuations — of the stocks of GameStop<\/a>, AMC Theaters<\/a>, Blackberry<\/a> and whatever meme company<\/a> that the Redditors will decide to target next.<\/p>\n

I don’t think this will end well for those companies, for the speculators in those companies, nor inevitably for the whole idea of normal people like you and me using mutual funds as a means to secure one’s retirement.\u00a0 Something has broken, and I am wary of the machine falling apart.<\/p>\n

\"\"This Gamestop stock-market ploy<\/a> smells a lot like the January 6th US Capitol rampage: a loosely-coordinated anarchical uprising of people wanting to take something back (but not sure exactly what) and who discovered their sudden and surprising power to create havoc.\u00a0 As Sen. Susan Collins (no relation) of Maine would put it, this is all very troubling<\/a>. Luckily, there have been no casualties so far in GameStopGate, as it is already called<\/a>.<\/p>\n

Yes, fellow lefties, I realize that hedge funds and the big investment banks like JPMorgan, Goldman Sachs, Barclays and others, have been screwing ordinary saver-investors forever to enrich themselves and their high-net-worth clients.\u00a0 But financial anarchy would portend something far worse.\u00a0 Reddit speculators are not going to topple the powers-that-be and usher in a new era of capitalism-as-a-positive-force in our lives.\u00a0 Rather, financial anarchy a la Reddit would be more like a forest fire, burning down anything in its path.\u00a0 My fear is that government regulators would respond like forest firefighters, i.e., trying to contain things only after much damage is done and lives are ruined.<\/p>\n

Have I painted a too fatalistic scenario?\u00a0 I’m not sure.\u00a0 The embers of the fire are there for all to see.<\/p>\n

\u2022 \u2022 \u2022 \u2022 \u2022\u00a0<\/p>\n

With that sad taste-in-the-mouth, I offer an update on The Trend<\/a>.\u00a0 The U.S. stock market as of January 2021 is at a level well above what The Trend (its performance between 1950 and 2012) suggests is reasonable.\u00a0 Below<\/a> is an updated chart of how the S&P 500 Index has fared relative to The Trend since 1950.\u00a0 As of this writing, the S&P 500 Index — which mainly reflects the stock prices of the big U.S. tech companies Apple, Amazon, Facebook, Google and Netflix — is almost 24% above The Trend.<\/p>\n

This excess performance represents three-years-worth of normal stock market returns.\u00a0 This is not sustainable, I repeat, not sustainable.\u00a0 The party could<\/em> go on for quite a while longer, or it could end tomorrow.<\/p>\n

\"\"<\/a>I take The Trend seriously — I lighten up on our family’s stock-market allocation when the Trend suggests we are 25-30% above historical price levels, as we are now.<\/p>\n

\u2022 \u2022 \u2022 \u2022 \u2022\u00a0<\/p>\n

If you’re not a fan of The Trend, then may I offer this from Yale economist Robert Shiller<\/a>.\u00a0 Shiller created a metric (let’s just call it the Shiller P\/E) that captures what investors are willing to pay for a dollar of corporate profits.\u00a0 One would think that, after taking inflation and interest rates into account, the amount that an investor is willing to pay for a dollar of profits would be relatively stable.\u00a0 But here’s the real story, a la Shiller:<\/p>\n

\"\"<\/p>\n

The white line in the graph above is Shiller’s P\/E Ratio, plotted from 2006 to the present.\u00a0 Note how the P\/E ratio (how much an investor is willing to pay for a dollar of earnings) has risen steadily since the Great Recession — then less than 15, now approaching 30.\u00a0 Why?\u00a0 Why are investors willing to pay so much more for the same return on stocks?<\/p>\n

It’s not just about our ultra-low interest rates since the Great Recession.\u00a0 Rather, it has much to do with the tons of money that have been pumped into the economy and where that money has gone.\u00a0 The green line in the graph shows how the U.S. “M2” money supply (which includes checking, savings, and money-market funds) has grown over the same time period.\u00a0 See any parallels between this and the prices being paid for stocks?<\/p>\n

The Great Recession (Bush) tax cuts and Trump tax cuts, on top of the easy-money policies dictated by the Federal Reserve, have clearly benefited corporations, and those who hold corporate stocks, and those who receive corporate dividends, more than they did middle-income families.*\u00a0\u00a0 The haves<\/em> who benefited the most from financial stimulus have been using the money to bid up the prices of the assets of greatest interest to them: stocks and real estate.\u00a0 There’s only so much food rich people can eat, and only so much gas they can pump into their BMWs.\u00a0 The rest of their money has to slosh somewhere.\u00a0 That is why we have asset inflation<\/a> (which the Fed mostly ignores) instead of food\/energy inflation.<\/p>\n

And that is why stocks are so expensive now, far beyond what The Trend and Shiller would deem that they are intrinsically worth.\u00a0 And now, internet desperadoes have arrived on the scene to stir up this already-boiling pot.\u00a0 Oh, did I forget to mention that we remain in the grips of a worldwide pandemic?\u00a0 What (more) could possibly go haywire?\u00a0 Stay tuned.<\/p>\n

______________<\/p>\n

* As Lino Zeddies said on positivemoney.org<\/a>, “…money being created as bank credit systemically results in a multitude of direct and indirect factors that concentrate the distribution of power, wealth and income in the hands of fewer and fewer people.”<\/h5>\n","protected":false},"excerpt":{"rendered":"

I’ve been watching the stock market with a bit of trepidation lately.\u00a0 (Roughly half of our retirement\/long-term-care money is in stock market mutual funds, the rest is in less risky bond funds and CDs.)\u00a0 The current “Reddit Revolt” led by … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[59],"tags":[],"class_list":["post-24522","post","type-post","status-publish","format-standard","hentry","category-finance"],"_links":{"self":[{"href":"https:\/\/chcollins.com\/100Billion\/wp-json\/wp\/v2\/posts\/24522","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/chcollins.com\/100Billion\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chcollins.com\/100Billion\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chcollins.com\/100Billion\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/chcollins.com\/100Billion\/wp-json\/wp\/v2\/comments?post=24522"}],"version-history":[{"count":53,"href":"https:\/\/chcollins.com\/100Billion\/wp-json\/wp\/v2\/posts\/24522\/revisions"}],"predecessor-version":[{"id":24649,"href":"https:\/\/chcollins.com\/100Billion\/wp-json\/wp\/v2\/posts\/24522\/revisions\/24649"}],"wp:attachment":[{"href":"https:\/\/chcollins.com\/100Billion\/wp-json\/wp\/v2\/media?parent=24522"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chcollins.com\/100Billion\/wp-json\/wp\/v2\/categories?post=24522"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chcollins.com\/100Billion\/wp-json\/wp\/v2\/tags?post=24522"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}