[quote=carlsbadworker]I am reading Rich’s latest article, “Shambling a tiny, halting step towards affordability”.
One of the key premise seems to be that “valuation always falls back to mean” (mean reversion). This is the bedrock of any value investing. Yet, even Jeremy Grantham GMO starts to questioning that in the past few years, that “the market can stay irrational longer than you can stay solvent”.
Here is my observations:
1. More money in the system does not always equal to higher inflation. Why? That’s because it depends on where does the money go. Here, I simplify by creating two population groups: rich and poor.
1a. If the money goes to the poor, they spend it which will cause inflation. I observe this in the minimal wage lift in California. Datassential, a company that researches and analyzes restaurant menu trends, recently found that the median price of fast food burgers has risen 26 percent in the last four years, one of the steepest price hikes across the industry. But there is no nation-wide wage inflation despite historical low unemployment rate.
1b. If the money goes to the rich, they are already maxed out in their consumer spends, so the money goes to the asset (stock, house), causing asset inflation.
So it sounds like to me that mean reversion is not going to happen anytime soon:
i. In good time, more money being created which will push stock/housing price higher.
ii. In bad time, FED will pump more money into the system, which ends up in the hand of rich people, which will put a floor on the asset price (we are below the mean ONLY in one month in the last great recession as stocks quickly bounced back.)
iii. Fiscal policy might help but given congress is controlled by riches, tax cut always favors the top.
Will it ever be back to mean? Sure, if you have infinite time horizon, all asset bubbles will eventually collapse, but in both stocks and housing, we are not above 2-sigma level yet, it is hard to call for an asset bubble burst…at least not in U.S. (Maybe in China, but it doesn’t look like they have an asset bubble bursting soon. Tariff just basically re-allocates products through global supplier chain with little impact to the global supply and demand. i.e. China buys more soybean from Brazil while other countries (e.g. Japan) who bought soybean from Brazil now buys from the US.
Therefore, in the near future, this bull market will not end with a massive pullback. Q.E.D.[/quote]
soon?! 3 years, 5 years,… a decade???
given growing populations and QE from various central banks which are flooding the market(s) w/ liquidity,… this in large part explains why there has been “asset inflation”
AND as I’ve said before it is going to be interesting to see what happens to prices of various assets like RE, equities and bonds given contractual debt obligations like,…
[quote] U.S. public pensions posted their weakest performance in three years, falling a percentage point short of their investment targets, and the prospect of rock-bottom interest rates and a trade-war induced recession could put a greater strain on state and city retirement plans.
The median U.S. public pension returned 6.2% in the fiscal year ending in June 30 after paying fees to investment managers, according to Norwalk, Connecticut-based InvestmentMetrics, which provides analytics to institutional investors. Pensions assume a median annual investment return of 7.3% to cover promised benefits.
…This has exposed them to greater volatility even as they try to climb out of a hole that’s left them with between $1.6 trillion and $4 trillion less than they need to cover all the benefits that have been promised, depending on the interest rate used to value liabilities.
That gap could get even bigger if U.S. Treasury yields, already close to all-time lows, fall further because of an escalating U.S.-China trade war or the spread of economic stagnation from Japan to Europe.
