Brian Pretti
Executive Summary
- Will global capital continue to push US stocks higher, despite their stretched valuations?
- Global capital is becoming more cautious
- S&P outperforming as capital seeks the safety of "blue chip" companies
- Investing in the age of anomalies
If you have not yet read Part 1: Time To Toss The Playbook available free to all readers, please click here to read it first.
This leads us to equities and, again, this very important concept of being flexible in thinking and behavior. Historically, valuation metrics have been very important in stock investing. Not just levels of earnings and cash flow growth, but the “multiple” of earnings and cash flow growth investors have been willing to pay to own individual stocks. This has been expressed in valuation metrics such as price-to-earnings, price relative to book value, cash flow, etc. To the point, in the current market environment, common stock valuation metrics are stretched relative to historical context.
In the past we have looked at indicators like total stock market capitalization relative to GDP. The market capitalization of a stock is nothing more than its shares outstanding multiplied by its current price. The indicator essentially shows us the value of stock market assets relative to the real economy. Warren Buffet has called this his favorite stock market indicator.
The message is clear. By this valuation metric, only the…
Investing In The Age Of Anomalies
PREVIEWExecutive Summary
- Will global capital continue to push US stocks higher, despite their stretched valuations?
- Global capital is becoming more cautious
- S&P outperforming as capital seeks the safety of "blue chip" companies
- Investing in the age of anomalies
If you have not yet read Part 1: Time To Toss The Playbook available free to all readers, please click here to read it first.
This leads us to equities and, again, this very important concept of being flexible in thinking and behavior. Historically, valuation metrics have been very important in stock investing. Not just levels of earnings and cash flow growth, but the “multiple” of earnings and cash flow growth investors have been willing to pay to own individual stocks. This has been expressed in valuation metrics such as price-to-earnings, price relative to book value, cash flow, etc. To the point, in the current market environment, common stock valuation metrics are stretched relative to historical context.
In the past we have looked at indicators like total stock market capitalization relative to GDP. The market capitalization of a stock is nothing more than its shares outstanding multiplied by its current price. The indicator essentially shows us the value of stock market assets relative to the real economy. Warren Buffet has called this his favorite stock market indicator.
The message is clear. By this valuation metric, only the…
Executive Summary
- The 3 reasons why deflation will continue to haunt the global economy
- The importance of cash flows in a deflationary environment
- Understanding the deflationary reasons behind the recent drop in oil prices and the material implications this will have going forward
If you have not yet read Part 1: Deflation Is Winning available free to all readers, please click here to read it first.
So an very important question remains despite the trillions in new currency printed around the world in the past few years: Why are deflationary pressures still present?
- The debt overhang from the prior cycle has not vanished by a long shot. In fact today there is significantly more debt outstanding globally than was the case at the highs of 2007, primarily driven by global government borrowings. The following chart is total US credit market debt relative to GDP. You can see that very little has been reconciled since the peak. By the way,
Data Source: US Federal Reserve
Additional global debt assumption means additional interest cost burdens, even under an environment of interest rate suppression. And that means…
What Deflation Means For Investors
PREVIEWExecutive Summary
- The 3 reasons why deflation will continue to haunt the global economy
- The importance of cash flows in a deflationary environment
- Understanding the deflationary reasons behind the recent drop in oil prices and the material implications this will have going forward
If you have not yet read Part 1: Deflation Is Winning available free to all readers, please click here to read it first.
So an very important question remains despite the trillions in new currency printed around the world in the past few years: Why are deflationary pressures still present?
- The debt overhang from the prior cycle has not vanished by a long shot. In fact today there is significantly more debt outstanding globally than was the case at the highs of 2007, primarily driven by global government borrowings. The following chart is total US credit market debt relative to GDP. You can see that very little has been reconciled since the peak. By the way,
Data Source: US Federal Reserve
Additional global debt assumption means additional interest cost burdens, even under an environment of interest rate suppression. And that means…
Executive Summary
- Lack of demand is the key drag on economic growth. And there's no end in sight.
- Private sector credit expansion just isn't happening fast enough
- Why the central banks' "wealth effect" policies have been a total bust
- Capital flows are simply chasing yield, precious little economic productivity is being created
If you have not yet read Part 1: Where To From Here available free to all readers, please click here to read it first.
The Bad
Who wrote this tired sea song set on this peaceful shore? I think you’ve heard this one before…
As mentioned, at least for the small business community, availability of credit has not been a key fundamental issue in the current cycle. In fact, their number one issue of concern for years has been lack of final demand.
Personally, I believe the experience of the small business community is simply a microcosm of the larger domestic and global macro. Subdued final demand IS the key macro. Is this why we see a growing gap between small business perceptions of credit availability and actual capital spending? Probably. The credit is there, but actual final demand that would support credit expansion is not. Hence the current cycle divergence in what has been a very tight data series correlation between credit and cap spending historically.
Of course this is a segue into a broader dark cloud of the current cycle that is private sector credit expansion, or more correctly, lack thereof relative to historical experience. When we listen to pundits speak of the economy potentially reaching “escape velocity”, they are of course referencing prior economic cycle growth results, aided and abetted by prior credit expansion that is now lacking. This is perhaps most dramatically seen in the rhythm of banking system credit, in the change in actual loans and leases outstanding.
As is clear in the chart below, never in any expansion cycle of the last four decades at least has banking system credit not grown in double-digit territory until…
The Bad & The Ugly
PREVIEWExecutive Summary
- Lack of demand is the key drag on economic growth. And there's no end in sight.
- Private sector credit expansion just isn't happening fast enough
- Why the central banks' "wealth effect" policies have been a total bust
- Capital flows are simply chasing yield, precious little economic productivity is being created
If you have not yet read Part 1: Where To From Here available free to all readers, please click here to read it first.
The Bad
Who wrote this tired sea song set on this peaceful shore? I think you’ve heard this one before…
As mentioned, at least for the small business community, availability of credit has not been a key fundamental issue in the current cycle. In fact, their number one issue of concern for years has been lack of final demand.
Personally, I believe the experience of the small business community is simply a microcosm of the larger domestic and global macro. Subdued final demand IS the key macro. Is this why we see a growing gap between small business perceptions of credit availability and actual capital spending? Probably. The credit is there, but actual final demand that would support credit expansion is not. Hence the current cycle divergence in what has been a very tight data series correlation between credit and cap spending historically.
Of course this is a segue into a broader dark cloud of the current cycle that is private sector credit expansion, or more correctly, lack thereof relative to historical experience. When we listen to pundits speak of the economy potentially reaching “escape velocity”, they are of course referencing prior economic cycle growth results, aided and abetted by prior credit expansion that is now lacking. This is perhaps most dramatically seen in the rhythm of banking system credit, in the change in actual loans and leases outstanding.
As is clear in the chart below, never in any expansion cycle of the last four decades at least has banking system credit not grown in double-digit territory until…
Executive Summary
- The new drivers of the current housing price cycle
- Why investment capital, not normal household formation, has become primary for pricing
- What the implications of an investment-driven housing market are
- Why prices will fall & what homeowners (residents & investors) can do now
If you have not yet read The US Housing Market's Darkening Data, available free to all readers, please click here to read it first.
The The New Drivers of The Current Housing Cycle
1. Cash
First, we are currently seeing something in residential real estate markets that has not occurred in our lifetimes – the magnitude of all-cash offers. 40-50% of residential real estate purchases have been for cash in recent years. This phenomenon has no precedent in recent economic history. Why is this happening? We need to remember that a primary goal of the Federal Reserve in setting short term interest rates near 0% was to induce investors to buy “risk assets” – think real estate and common stocks. By eliminating rate of return in safe securities such as Treasury bonds, CD’s, etc., the Fed essentially forced formerly conservative investors to purchase higher risk assets in order to get any acceptable rate of return.
In good part, the all-cash offers are coming from investor’s intent on buying to rent. Intent on obtaining an acceptable cash on cash rate of return as yield can no longer be found in safer investments. This crosses the boundaries between investors in the asset accumulation phase of life and retirees starved for yield, draining formerly CD-centric bank accounts in order to purchase income-producing rental properties…
Get Ready For Falling Home Prices
PREVIEWExecutive Summary
- The new drivers of the current housing price cycle
- Why investment capital, not normal household formation, has become primary for pricing
- What the implications of an investment-driven housing market are
- Why prices will fall & what homeowners (residents & investors) can do now
If you have not yet read The US Housing Market's Darkening Data, available free to all readers, please click here to read it first.
The The New Drivers of The Current Housing Cycle
1. Cash
First, we are currently seeing something in residential real estate markets that has not occurred in our lifetimes – the magnitude of all-cash offers. 40-50% of residential real estate purchases have been for cash in recent years. This phenomenon has no precedent in recent economic history. Why is this happening? We need to remember that a primary goal of the Federal Reserve in setting short term interest rates near 0% was to induce investors to buy “risk assets” – think real estate and common stocks. By eliminating rate of return in safe securities such as Treasury bonds, CD’s, etc., the Fed essentially forced formerly conservative investors to purchase higher risk assets in order to get any acceptable rate of return.
In good part, the all-cash offers are coming from investor’s intent on buying to rent. Intent on obtaining an acceptable cash on cash rate of return as yield can no longer be found in safer investments. This crosses the boundaries between investors in the asset accumulation phase of life and retirees starved for yield, draining formerly CD-centric bank accounts in order to purchase income-producing rental properties…
Total 18 items
by blaggers