Commentary

What Triggered the Crash?

The title of this comment may seem odd, given that – as I write this on July 14, 2021 – the S&P 500 is at a record high.

Commentary

Alice’s Adventures in Equilibrium

Coherent thinking is interested in how things are related; where they come from, where they go, and the mechanisms by which they affect each other.

Commentary

Counting the Chickens Twice

There’s an old bit of advice that one shouldn’t count one’s chickens before they’re hatched.

Commentary

Always a Reckoning

From 1949 through 1964, the S&P 500 enjoyed an average annual total return of 16.4%. In the 8 years that followed, through 1972, the total return of the index averaged a substantially lower 7.6% annually; strikingly close to the 7.5% projection that Graham had suggested based on prevailing valuations, yet still providing what Graham had suggested would likely “carry a fair degree of protection” against inflation, which averaged 3.9% over that period.

Commentary

How to Spot a Bubble

The word “bubble” is tossed around quite a bit in the financial markets, but it’s rarely used correctly.

Commentary

Detached Parabolas and Open Trap Doors

Nothing so animates a speculative herd as a parabolic price advance in an asset detached from any standard of value. I am convinced that future generations will use the present moment to define the concept of a reckless speculative extreme, in the same way our generation uses “1929” and “2000.”

Commentary

The Speculative “V”

The speculative “V” is one of the most interesting and challenging features of the market cycle. For passive investors, it can be a period of exhilaration followed by panic.

Commentary

A Good Response to a Bad Situation

I should start by saying that I’ve got great admiration for Robert Shiller. Even three decades ago when I was completing my doctorate at Stanford, I avidly embraced his work, including his studies on excess volatility. He has originated an impressive range of useful tools, including the Case-Shiller housing price indices. As the tech bubble was peaking in 2000, I doubt that any 30-something in finance was more pleased to see Shiller become a widely-quoted figure in the financial markets. All of that is important to say, before I tear into this particular metric.

Commentary

Hypervaluation and the Option Value of Cash

One of the most insidious ideas foisted on investors by Wall Street, in tacit cooperation with activist policy makers at the Federal Reserve, is the fiction that zero interest rates offer investors “no alternative” but to speculate in risky securities.

Commentary

Pushing Extremes

In calling the current market the third “Real McCoy” bubble of recent decades, Jeremy Grantham described, in his own words, what I call the Iron Law of Valuation: a security is nothing more than a claim on some set of future cash flows that investors expect to be delivered into their hands over time. The higher the price an investor pays today for some amount of cash in the future, the lower the long-term return the investor can expect on that investment.

Commentary

Herd Mentality

Here in the U.S., I estimate that the actual number of people infected by SARS-CoV-2 to-date is currently just over four times the number of reported cases. Actual cases are undercounted partly because, based on very large-scale, unbiased testing, roughly 45% of people who acquire SARS-CoV-2 infection are asymptomatic.

Commentary

Yikes

You know it’s a bubble when you have to edit the Y axis on all of your charts because valuations have broken above every historical peak, and estimated future market returns have fallen beyond the lowest points in history, including 1929.

Commentary

Avoiding a Second Wave

About two-thirds of this month’s comment is about COVID-19 and the risk of a second wave. This is not only for the sake of public health, which would be enough, and not only to contribute to a better understanding of the epidemic.

Commentary

Fundamentally Unsound

Saying that extreme stock market valuations are “justified” by low interest rates is like saying that poking yourself in the eye is “justified” by smashing your thumb with a hammer.

Commentary

Incubation Phase: Gradually and then Suddenly

Severe economic recessions often feature what might be called an “incubation phase,” where an exuberant rebound from initial stock market losses becomes detached from the quiet underlying deterioration of economic fundamentals and corporate balance sheets.