Skip to main content

The market: Priced for perfection

The capital market are by definition optimistic in their outlook, until reality or a crisis or just fear take over, since as in 1927, 1987, 2001 and 2008 (there were others...but these are either recent or well known), the market is looking expensive.  The most well know index for valuation of the market is the CAPE which stands for cyclically adjusted price earning ratio;  It stands today only second (in level) to that of 1927 and 2000)


First the market has been uneven for a long time; the majority of the S&P500 has generated pedestrian returns for investors -- aside from Tech the market has done little to impress  Five companies account for fully 30% of the market's rise over the past 3 years.  So is the market in a bubble?  I don't know anymore because ALL asset classes have seen massive increase in value (reduction in yield).  From housing, to bonds to equity -- everything is up.  In fact, since January 1, the market is up nearly 14% -- no bad for a economy that has seen GDP growth of 2.4%, and interest rates of 2% on 10 year Treasury bonds (its a bit higher now at 2.3% now)


Some of my younger friends are keen to get into the property ladder with the expectation that they will make good returns over years.  Using these property income to meet their loan repayment obligations and overhead costs -- building equity in their assets over years and years.  There are many assumptions here:

  • That their property will rise in value
  • That their rental income will match their outflow needs
  • What is forgotten is when an apartment is empty or the tenant doesn't pay
  • what about taxes!  They are going up all the time, at level that far exceed inflation
  • Maintenance costs can be high
And the number for Canada are scary, bellow is a video using US housing prices (pre-2008) Canada is far far worse than the US...



Back to our potatoes -- the market is clearly not cheap, but it could still go up for a little while.  What is scary is that all asset classes seem to be going the same way.  There is a historical high saving ratio (from the baby boomers) and a lack of investment opportunity in the OECD, which depresses interest rates.

Interest rate (real) are at or near zero -- the search for yield has even allowed Argentina to issue a 100 year bond...at attractive pricing.  That's from a country that has defaulted 6 times in the past 110 years.

So the conclusion is complex, yes yields are low because there is such demand for investment opportunities.  Can it go on?  yes, Canadian real estate is less clear since the economy is slowing, but interest rates have nowhere to go (they are close to zero as we speak) so there will be no real stimulation.  Government spending is helping push up GDP but there is a limit to what can be achieved.  It remains that a market trading at these levels baggs the question of what can happen?  Because, all asset classes have gone up!  There is no room for safety (US gov't bonds maybe).  All boats have been lifted over the last few years.  

Buyers beware!  

Comments

Popular posts from this blog

Ok so I lied...a little (revised)

When we began looking at farming in 2013/14 as something we both wanted to do as a "second career" we invested time and money to understand what sector of farming was profitable.  A few things emerged, First, high-quality, source-proven, organic farm products consistently have much higher profit margins.  Secondly, transformation accounted for nearly 80% of total profits, and production and distribution accounted for 20% of profits: Farmers and retailers have low profit margins and the middle bits make all the money. A profitable farm operation needs to be involved in the transformation of its produce.  The low-hanging fruits: cheese and butter.  Milk, generates a profit margin of 5% to 8%, depending on milk quality.  Transformed into cheese and butter, and the profit margin rises to 40% (Taking into account all costs).  Second:  20% of a steer carcass is ground beef quality.  The price is low, because (a) a high percentage of the carcass, and (b) ground beef requires process

21st century milk parlour

When we first looked at building our farm in 2018, we made a few money-saving decisions, the most important is that we purchased our milk herd from a retiring farmer and we also purchased his milking parlour equipment.  It was the right decision at the time.  The equipment dates from around 2004/05 and was perfectly serviceable, our installers replaced some tubing but otherwise, the milking parlour was in good shape.  It is a mature technology. Now, we are building a brand new milk parlour because our milking cows are moving from the old farm to the new farm.  So we are looking at brand new equipment this time because, after 20 years of daily service, the old cattle parlour's systems need to be replaced.  Fear not it will not be destroyed instead good chunks will end up on Facebook's marketplace and be sold to other farmers for spare parts or expansion of their current systems. All our cattle are chipped, nothing unusual there, we have sensors throughout the farm, and our milki

So we sold surplus electricity one time last summer...(Update)

I guess that we will be buying an additional tank for our methane after all.   Over the past few months, we've had several electricity utilities/distributors which operate in our region come to the farm to "inspect our power plant facilities, to ensure they conform to their requirements".  This is entirely my fault.  Last summer we were accumulating too much methane for our tankage capacity, and so instead of selling the excess gas, that would have cost us some money, we (and I mean me) decided to produce excess electricity and sell it to the grid.  Because of all the rules and regulations, we had to specify our overall capacity and timing for the sale of electricity (our capacity is almost 200 Kw) which is a lot but more importantly, it's available 24/7, because it's gas powered.  It should be noted that the two generators are large because we burn methane and smaller generators are difficult to adapt to burn unconventional gas, plus they are advanced and can &qu