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

Post a Comment

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)...
Post a Comment
Read more

Spray painting Taylor Swift G650 aircraft (updated)

 First, a bit of paint will not harm anyone.  These climate activities are going to learn two things in the next few days:  (1) Trespassing at an airport is a felony almost anywhere in the world.  That means criminal prosecution.   (2) removing paint from an aircraft is expensive.   So these climate activists are about to find out the reach of the British criminal system and it will not be pleasant, the UK has very strict laws about that, I would be surprised if cleaning the aircraft of all the paint will cost less than $100,000.     I am sure that when they planned (premeditation) this little show they had a very valid logic to doing this.  Tonight, they are probably realizing the depth of their troubles.   I understand that in the UK it's a minimum one-year jail sentence.    Also, good luck travelling with a criminal trespass charge against you.  I am relatively certain that the airline industry will ...
Post a Comment
Read more

Janet Yellen from China supporter to Hawk...

There is rarely serious news in the world these days, it seems that most newspapers are filled with headlines and little else, and then Ms Yellen went to China.  Secretary Yellen has long been known in the Biden administration as the voice of moderation when dealing with China, yet as her trip which concluded yesterday a hawk was born:  She warned the Chinese against dumping goods in the United States.    fighting words! The American administration is very concerned about the lack of Chinese domestic consumption.   Even before the COVID-19 epidemic, there were already the beginning signs of a slowdown, automobile sales were off.   China is facing domestic deflation (a clear sign of collapsing demand) China imports few consumer goods, they import raw materials and intermediary goods.   It seems that the American administration is concerned that the Chinese administration will dump consumer goods abroad to keep its manufacturing machinery ...
Post a Comment
Read more