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Market Correction
King Lodos
Posted: 27 May 2018 03:06:06(UTC)

Joined: 05/01/2016(UTC)
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Jon Snow;62977 wrote:
A risk free rate of 3% implies equities are overvalued as the equity risk premium is negative (USA metrics), so as you say markets (today) don't seem to be efficient.

Is that a function of the era in which the EMH was proposed - compared to the data saturated world we now live in.

Or is something else in play, fake (or at least manipulated) interest/mortgage/inflation rates (ZIRP), state support expected for any failure (TARP) etc.

Also, where can I buy these USA treasury bonds yielding 3%, do HL offer them.

Actually by the metrics I use – e.g. the Bond Equity Earnings Yield Ratio (BEER) – stocks look undervalued:

You can see 10-year treasury yields and stock market earnings yields tend to track (anyone who doubts stocks are valued relative to bonds).

Before the 80s, you can see the bonds were becoming better and better value relative to stocks, because of course you had monster inflation, and the yield had to rise to meet it .. By the early-80s, long-term bonds became one of the best investments you could make.

Since then, 10-year-bonds have sat on higher earnings yields .. And then you can see the effects of QE, driving them down .. Today, stocks on PE of 25 would need 10yrs to be on yields of 4% to reach parity .. But I think the reason stocks have been so slow to rise during this bull market is bond forecasts have ALWAYS had yields rising much faster than they have .. and we always value ahead.

In inflationary periods, it also makes sense stocks command higher valuations because there's more inflation protection .. Maybe we should be valuing stocks relative to TIPS, which yield about 0% .. Most ways I cut this, stocks still look cheap.

And I don't *think* they do offer US treasury bonds on HL? The problem is 3% isn't enough to cover currency hedging adequately .. So it's going to be more a bet on the US dollar .. That's why the US 10yr rising above 3% doesn't suck liquidity out of the global market – they can still be quite loose.
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King Lodos
Posted: 27 May 2018 03:49:56(UTC)

Joined: 05/01/2016(UTC)
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Jon Snow;62978 wrote:
The trap we fall into is thinking we all make decisions based on logic, mathematics and (god forbid) statistics. If that were the case everything would be priced to perfection based on its utility value alone.

Unfortunately or fortunately we are all different, we perceive, filter, make assesments, compare, value, ignore, dismiss etc things differently, that is what makes the market and that is why you can't beat it.

A little example-

I bought my wife a macbook air a few months ago on offer from Currys/PC world - £700.

I'm writing this on a Medion notebook (HD, of course) I bought from Aldi on Thursday that was delivered this morning for £199.

And that's why I invest in Apple.

Aldi's perhaps an example of what could kill investing off .. Amazon perhaps an even better example .. When a sector gets taken over by a company who are intent on cutting margins, you're on the way to 'perfect competition', and a world in which companies generate no net profits.

On efficient markets .. I think fund managers who decry how irrational markets are have incomplete pictures .. The collective opinions of thousands of traders, and just as many algorithms, form something beyond 'opinion' .. A crude metric will paint a 1-dimensional picture .. It may have mean reverting tendencies, but these pictures have rarely been suitable for timing the market .. I know I've found a good metric, because it'll show most companies and regions priced for extremely similar returns .. But it's the intangible (e.g. Apple) who have something markets obsessed with numbers will continue to undervalue – at least according to Buffett, Lindsell Train, etc. and I think that's still the best way to beat markets, especially as the battles these days are in the realm of numbers
Keith Cobby
Posted: 27 May 2018 07:56:40(UTC)

Joined: 07/03/2012(UTC)
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In the 1980s when I started investing it would be difficult to imagine the current financial situation. Interest rates below war time levels, bond yields lower than equity yields for years (maybe decades), huge debt everywhere. The situation is different this time and I think that although the US is quite high, most markets remain fair value or cheap compared to bonds.

One other reason is the shrinkage in equity markets and the rise of private equity/placings.
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