I think you make some very interesting points. We are seeing extraordinary speculation (ie. fartcoin market cap at $700mm). In 2000, as you point out, the market was down a lot. But tech had been 45% of the S&P and many non-tech names did just fine. I just wonder what the best asset to own will be going forward. I do not see inflation going away so, for me, no bonds. While I think that paying 30+ times earnings for MSFT is silly, I think there are more than a few decent equity values out there.
Agree very much on the assessment for bonds - they don't make any sense (and haven't for a number of years) except for asset-liability matching investors like insurance companies. On the equity side, I think income-generating stocks make sense.
the thing is, where would the money go once it collapses? There is no place to go.
How would it collapse is because of liabilities that need to be paid of en-masse on a global scale that can only be paid off by selling assets. Probably due to a boom in people of pensioner age.
John, can you explain what you mean by "Much of the rest [referring to the Fed's balance sheet] went into the stock market." How, exactly, do bank reserves flow "into" the stock market? Every time someone buys a stock, someone sells a stock (except for new issues or buybacks), so the money just moves from one bank account to another. One guy got in, the other guy got out. Sure, the price per share changes in accordance with supply and demand, but the actual flow of money nets to zero. Right?
Hi Marc, thanks for asking. In principle I agree, but stock markets are not sufficiently deep, as many academics assume, so excess demand drives up prices (more buyers entering the market than what people would want to sell). Plus, there’s the new issue market. For example, in 2021 (the year of peak QE) there was a record volume of IPOs of around $300 billion. When QE ended in spring 2022 and went into reverse, IPO volume collapsed.
I agree that when a lot of people want to buy there may not be enough sellers - at that price. But when the price moves up to the clearing price, there are exactly as many sellers as buyers. Still, money changes hands; it doesn't go "into" the market. Also, according to Grok the current market cap of the US stock market is $52T, so $300B of IPOs couch change at Elon's house.
That’s an interesting point! I think it would translate into other investment assets as well, for example you would see even lower spreads of high-grade corporate bonds if credit risk of government bonds increases – worth keeping an eye on.
My protection lies in part in holding REIT and energy midstream firms with great balance sheets, and ability to grow modestly, and moderate dividend yields.
This will meet my income needs even with modest cuts, so I don't care what prices do anytime soon.
The bubble can keep inflating much higher. Higher than any bubble valuation metric we've seen before.
Why do I know?
The globalisation of asset trading.
In the past, bubbles had a lower limit. The pool of "bagholders" was limited geographically. In the 1999 bubble, it was still very hard for non-US private investors to buy US shares.
Now, every country globally has several fintech apps that allow individuals to buy US shares easily. So the pool of bagholders is now many times larger than back in 1999. More bagholders means a bubble can inflate to even bigger sizes, and stay inflated for longer.
I think you make some very interesting points. We are seeing extraordinary speculation (ie. fartcoin market cap at $700mm). In 2000, as you point out, the market was down a lot. But tech had been 45% of the S&P and many non-tech names did just fine. I just wonder what the best asset to own will be going forward. I do not see inflation going away so, for me, no bonds. While I think that paying 30+ times earnings for MSFT is silly, I think there are more than a few decent equity values out there.
Agree very much on the assessment for bonds - they don't make any sense (and haven't for a number of years) except for asset-liability matching investors like insurance companies. On the equity side, I think income-generating stocks make sense.
the thing is, where would the money go once it collapses? There is no place to go.
How would it collapse is because of liabilities that need to be paid of en-masse on a global scale that can only be paid off by selling assets. Probably due to a boom in people of pensioner age.
Arguably, the collapse, itself, reduces the amount of money that is out there. because as the prices decline, sales result in less money to go around
Great write up!
thanks!
John, can you explain what you mean by "Much of the rest [referring to the Fed's balance sheet] went into the stock market." How, exactly, do bank reserves flow "into" the stock market? Every time someone buys a stock, someone sells a stock (except for new issues or buybacks), so the money just moves from one bank account to another. One guy got in, the other guy got out. Sure, the price per share changes in accordance with supply and demand, but the actual flow of money nets to zero. Right?
Hi Marc, thanks for asking. In principle I agree, but stock markets are not sufficiently deep, as many academics assume, so excess demand drives up prices (more buyers entering the market than what people would want to sell). Plus, there’s the new issue market. For example, in 2021 (the year of peak QE) there was a record volume of IPOs of around $300 billion. When QE ended in spring 2022 and went into reverse, IPO volume collapsed.
I agree that when a lot of people want to buy there may not be enough sellers - at that price. But when the price moves up to the clearing price, there are exactly as many sellers as buyers. Still, money changes hands; it doesn't go "into" the market. Also, according to Grok the current market cap of the US stock market is $52T, so $300B of IPOs couch change at Elon's house.
A different way to look at this could be that the market doesn’t perceive risk free assets as risk free anymore in relation to equity positions?
That’s an interesting point! I think it would translate into other investment assets as well, for example you would see even lower spreads of high-grade corporate bonds if credit risk of government bonds increases – worth keeping an eye on.
Spot on John. This will not end well.
My protection lies in part in holding REIT and energy midstream firms with great balance sheets, and ability to grow modestly, and moderate dividend yields.
This will meet my income needs even with modest cuts, so I don't care what prices do anytime soon.
sounds like a plan! In my old firm, we looked at pipeline operators which are less exposed to energy price swings.
The bubble can keep inflating much higher. Higher than any bubble valuation metric we've seen before.
Why do I know?
The globalisation of asset trading.
In the past, bubbles had a lower limit. The pool of "bagholders" was limited geographically. In the 1999 bubble, it was still very hard for non-US private investors to buy US shares.
Now, every country globally has several fintech apps that allow individuals to buy US shares easily. So the pool of bagholders is now many times larger than back in 1999. More bagholders means a bubble can inflate to even bigger sizes, and stay inflated for longer.