Republicans have all three branches now. They are planning, at this moment, to repeal the taxes that fund the ACA, but leave much of the expense in tact. What do you think?

market is the third most expensive it has ever been in history. only other times it was more expensive was before crash in 1929 and 2000 tech bubble.

fed is tightening, we are nearing the end of a bull cycle IMO. in the past, most cycles came to a conclusion while the fed was tightening. this is only the 3rd time in the past decade they have tightened. couple that with historically high valuations, a 1Q17 GDP on track for 0.9%, if Trump is unable to deliver market is in for some pain IMO...

http://www.multpl.com/shiller-pe/

our economy is $20 trillion in debt. low rates are the new normal..

That graph is worse than useless without interest rate taken into account.
What matters is future interest rate and future earning, not some average earning in the past 10 years.

Oh ya, that's right, Benjamin Graham and Shiller are useless. And using only 1yr of earnings makes more sense...

Fed tightening seems like it is going to take place very slowly. Only 2 more rate hikes this year at most and once Yellen is gone I doubt whoever replaces her is going to not be accommodative to Trump.

Where do you see .9% GDP growth? I saw the Atlanta fed said 1.2% but didn't see .9%.

Trump's repatriation, tax reform, regulatory reform, deficit spending seems like a lot of mud slinging. I wouldn't say I'm bullish right now but it is hard to see S&P 2k before 3k if he is going to be that aggressive with fiscal policy.

Atlanta Fed recently revised it lower to 0.9%

So your saying as the debt increases, interest rates will decrease over time?

I mean I would see why governments would love that but eventually they turn into Zimbabwe.

The US is not Zimbawe. In fact, (while this is changing) no other country in the world has both a central bank and world reserve currency status.

Play this out in your head and then reconsider your position (you must keep in mind that Europe and Japan are also a mess financially. And while China has a surplus there are many questions about their books). The cleanest dirty shirt.

Owe your banker $1M and he's got you in a tough place. Owe your banker a $1B and you've got him in a tough place (if you control the currency that debt is denominated in...you really have your banker by ballz).

Normal is an interest rate that has a reasonable correlation to the failure rate of the loans being made that are based off of that interest rate. Depending on the economy most loans tend to fail at different rates. Loans in 2008,2009, and 2010 failed at much higher rates than loans are predicted to fail today. That does not mean that interest rates today are "right" in an economic sense.

The major reason that the FED can't raise rates quickly is because of the losses that would happen to bondholders. A mortgage loan made at 3.5 interest is identical to one made today at 4.5 percent interest from the risk perspective of an investor. The principle on most loans is insured by the government through Fannie Mae and Freddie Mac. So in a situation in which the FED is increasing interest rates what incentive does an investor have to hold a loan with a lower coupon with an identical risk profile from a practical standpoint?

The only way the FED can stop this is to purchase the majority of the old bonds themselves and to ride out the market value losses over time by collecting the coupon on the loans. Presently the FED is returning 90 billion to the Treasury Department annually. To take those losses, the FED is going to have to return less to the government. Essentially, they have created a position in which they have to subsidize the bond market in order to be able to raise interest rates. There is no way around this predicament without allowing major losses to bond holder's in the real economy.

But even with FED assistance the bond market has the potential to be a big problem for the economy.

Defaults were more sensitive to interest rates a decade ago than they are today. Today, there are less adjustable rate mortgages and a tightening of lending standards.

Buying bonds, or injecting liquidity, is counterproductive to the purpose raising rates.

However, you bring up an interesting point of whether the fed should consider the impact of default rates in addition to their 2% inflation goal.

Sent from my SAMSUNG-SM-G925A using Tapatalk

coincidence this well written article was published today.....


https://realinvestmentadvice.com/shi...st-b-s-part-i/

I don't understand how Shiller ever convinced the world to take him seriously. The fact that seemingly reasonable people quote the Shiller ratio without context as if it's meaningful is ridiculous.

Are you talking about Shiller as in the Yale professor who wrote this book: https://www.amazon.com/Irrational-Ex...nal+exuberance

Also as in the Case-Shiller Index?

I read that book, thought it was pretty good.

I'm specifically talking about the Shiller P/E or CAPE or whatever you want to call it. I'm probably wrong to criticize Shiller himself, but the people who quote the Shiller P/E as proof that this market is yuuuuuuuuugely overvalued and due for a big crash without accounting for secular trends in monetary policy or garbage earnings around the mortgage crisis are fools.

last two times the fed tightened were 1999 (before tech bubble) and 2005 (before mortgage collapse). QE ended October 2014. Monetary policy helped drive valuations higher and monetary policy is no longer accommodating. Valuations by themselves can only tell us when the market is expensive/cheap...

what other metric would you use to give yourself an idea of how expensive/cheap valuations are? I guess PM's managing hundreds of millions are also "fools." And this bull market will last foreva??

look at earnings themselves on the SPX which peaked in 2014. what could possibly lead to higher earnings besides Trump lowering taxes or easing regulations?

http://www.multpl.com/s-p-500-earnings/

if only "fools" use the Shiller P/E to get an idea of valuations, then what are you advocating? a trailing 12-month P/E? or a forward looking P/E that is crap anyways because analysts will ratchet down earnings expectations numerous times throughout the year...?

FED started QE in March 2009 so Shiller P/E is taking into account earnings almost exclusively within the time period of when QE began.

J/W would be nice to get an idea of what you think is so much better to get a sense of valuations instead of just calling Shiller P/E trash?

You can make a good argument for the market being overvalued currently. Shiller P/E without context is not that argument.

what do you think is a good alternative to shiller p/e?

I don't think the holy grail can be expressed as a single number.

guessing you have your own model. what do you have current valuation range as?

I think the point of Schiller P/E is that it roughly takes all of that into account. It's a crude measure of valuation, but that's kind of a feature too: it doesn't get lost in details which may not matter. Every time is special (the tech bubble was "special" - "the new Internet economy", the 20s bubble was special - "new amazing technology, trade, prosperity, work processes; the end of war; a new brotherhood of man"). Through all of these delusions, Schiller P/E keeps chugging along regardless of what's going on in the world. That's its value - it's a long run pretty reliable look of what happens if you buy now rather than at another Shiller P/E.
Can it be improved? Probably a great deal. These are excellent criticisms:
stinkypete P/E? You need to start pumping out research papers and getting people with more green matter and less gray matter to give you some of their green matter.

I don't have an overall market valuation model. My investment philosophy basically involves incorporating traditional valuation methods and trying to find their deficiencies, from both qualitative and quantitative perspectives.

I'm not saying the market isn't currently overvalued, but I am saying there's a lot of reasons to think that the Shiller P/E currently overstates how overvalued the market is.

For the record, when I'm particularly bullish I'm usually around 100-140% in equities. Currently I'm around 75-80%.

Yeah I totally get what you're saying. The reasons you give why Shiller is not particularly relevant right now in these extraordinary circumstances (includes GFC, includes zero rates/QE with no end in sight) are spot on. Just saying that even given all your intelligence and correct criticisms, Shiller imo has value in that it cuts through all the special pleading quite nicely in most circumstances. Humans are really really prone to special pleading, hence bubbles.

I was 100% serious on the last sentence by the way. You should be getting paid the big bucks somewhere. I'm pretty sure you could modify Shiller with a few more variables to make it a lot more useful.

If there was a stinkypete P/E as a direct response to the Shiller P/E as a valuation tool for today's market it would probably try to incorporate the yield curve.

It's a common argument that the S&P500 is gonna be toast because interest rates are rising. The reality is rate expectations are still historically incredibly low. Short rates are up a bit but long rates are still near all time lows. And my gut says we can't expect the fed to shock us with any hawkishness in the foreseeable future.

Unfortunately there's no real historical precedents for S&P500 performance under high Shiller P/Es in ultra low interest rate environments. Even incorporating international data, there's probably not a whole lot to go on.

Valuation is hard.

Insurance is very cheap, people have given up on it; imo youd be a fool not to cover some of your long positions at least through July. I think the Russell and DOW are good candidates if you are significantly invested there. VIX, complacency, earnings, typically poor months of July/Aug, debt ceiling and a mix of other political uncertainties provides a good set up.

Sentiment, job/wage growth, PMI, GDP and the Russell only being up 5% over 2 years provides some slight resistance to a correction.