Whither equity investments?

onenote · December 16, 2022, 1:35am

TSLA is green

xerty · December 31, 2022, 1:49pm

Recap on stock and bond indexes for 2022 vs history.

onenote · December 31, 2022, 4:41pm

I just did a quick search on google finance for performance of other asset classes over 2022

Using ETFs as proxies:
GLD (gold) +0.8%
VNQ (reit) -28.3%

jesselivermore · January 1, 2023, 2:58am

shinobi:

Found this Paul Singer writing in the Financial Times, dated earlier today. Singer is a billionaire hedge fund manager. Fortune magazine described Singer as one of the “smartest and toughest money managers” in the hedge fund industry:

Investors piling on risk are setting themselves up for a fall

Central banks’ asset-buying spree has created a huge overhang, limiting their ability to support prices in a future downturn

Despite recent jitters over the Omicron variant, global stock market prices remain at or near their highest valuations in history. Bond prices reflect the lowest interest rates in history. And is it any surprise that inflation has broken out of the boundaries of the last 20 years, given the stated goal of policymakers to create more of it? Across the market landscape, risks are building, many of them hidden from view.

Yet, in a surprising twist, a growing number of the largest investors in the world — including socially important institutions such as pension funds, university endowments, charitable foundations and the like — are currently lining up to take on more risk, which could have catastrophic implications for these investors, their clients’ capital and the stability of broader public markets. What is driving this behaviour?

In the main, it is driven by the radically expansionary monetary and fiscal policies undertaken by developed-world governments since the end of the global financial crisis, which were accelerated after the Covid-19 pandemic rattled markets and depressed economic activity last year. And in part it is driven by benchmarking — the practice of institutional investors measuring their performance against a benchmark such as the S&P 500.

As monetary and fiscal policies have pushed securities valuations to new heights, institutional investors have been tempted to overweight their portfolios to stocks, even at record-high prices, for fear of missing out on extraordinary gains. The buying pressure created by these strategies is only driving prices higher and herding capital into risk assets.

At present, risks are at, or close to, the highest levels in market history. For instance, the market capitalisation of all domestic US public and private equities is now at 280 per cent of gross domestic product, much higher than the previous peak of 190 per cent just before the collapse of the dotcom bubble. And household equity allocations are at an all-time high of 50 per cent.

Eventually, rising inflation, rising interest rates or some unforeseen turn of events could cause a substantial stock and bond market decline, perhaps in an unpredictable sequence. What then for the institutional managers when the rush for the exits begins?

One answer might be that the authorities will never allow a sustained downturn in asset prices to happen again. This points to one of the key problems with the current set of monetary and fiscal policies in the developed world: they mask and minimise risks while preventing stock and bond prices from performing their indispensable signalling roles.

Currently, policies across the developed world are designed to encourage people to believe that risks are limited and that asset prices, not just the overall functioning of the economy, will always and forever be protected by the government.

Due to this extraordinary support for asset prices, almost all investment “strategies” of recent years have made money, are making money and are expected to keep making money. The most successful “strategy,” of course, has been to buy almost any risk asset, leaning hard on the latest fads, using maximum leverage to enhance buying power and buying more on the “dips”.

So it is no wonder that under these manufactured conditions, investors would “move out on the risk curve” — investor-speak for taking on more risk unconnected to expected returns. Most investors who say that they are willing to bear more risk do not actually mean that. What they really mean is that they fear missing out on the higher returns experienced by other investors — in other words, missing their benchmarks.

However, the ability of governments to protect asset prices from another downturn has never been more constrained. The global $30tn pile of stocks and bonds that have been purchased by central banks in order to drive up their prices has created a gigantic overhang. With inflation rising, policymakers are reaching the limits of their ability to support asset prices in a future downturn without further exacerbating inflationary pressures.

With all this in mind, it is puzzling that a growing number of otherwise sober money managers are in the process of boosting their allocations to riskier assets, rather than trying to figure out ways to make some kind of rate of return without giving back years of capital accretion in the next crash or crisis. Investors who have upgraded their risk levels, relying on policymakers to protect the prices of their holdings, may suffer significant and perhaps long-lasting damage when the government-orchestrated music finally stops.

Link to original FT piece

I guess @shinobi’s post aged well. Should have sold. Question is 2023 a repeat or another bad year for bonds AND stocks?

xerty · January 1, 2023, 2:50pm

I think bonds will do ok, rates may rise a bit more than expected under the Fed but most of the move is already in so the yield will be more than any interest rate risk for short or medium term bonds and you’ll end up net. Not sure if it’s better to wait for further rises to become more expected or just buy some now, harder to say… so maybe half now and half later for bonds?

Not wild about equities even after this year. I think esp growth / speculative ones will do poorly as higher debt costs and tighter credit markets will push marginal companies into distress.

xerty · January 2, 2023, 4:00am

Another visualization of the diversified portfolio returns for 2022 (bad) in context.

onenote · January 3, 2023, 2:55am

Wow, look at those returns! Years prior to 2022 had low inflation. The 2022 negative return should be decreased by the 10%+ inflation.

Honkinggoose · January 4, 2023, 9:15am

Since @shinbone is AWOL, I’ll answer in his words. The debt is big problem, and we’ll know the answer to your question in the fullness of time.

pattyb53 · January 4, 2023, 5:28pm

Yes only time will tell! Economy will probably get slightly better with new Congress.

I’m guessing shinobi has or had health problems. We all (myself) especially miss his thoughts popping up daily. Thinking only the best for him.

xerty · January 5, 2023, 1:21pm

This ie earnings, not stock price, but interesting to see how the big tech companies have done vs everyone else.

xerty · January 6, 2023, 12:25pm

Bearish, very reasonable take. Short interview

Rates are at historic highs, P/Es are medium, earnings look threatened by recession, where’s the upside?

xerty · January 10, 2023, 1:01pm

claims equities move (opposite to) interest rates with a ~1-1.5 year lag. Had a nice chart which suggested this was not sufficiently done yet compared to the large rate hikes recently, and equities had further downside.

onenote · January 10, 2023, 5:09pm

I don’t see the correlations. There was a huge run up in the stock market in 2020 and 2021 with almost no change in the ten year rate and a large drop in the stock market while the rate dropped about 80 basis points in the last few months.

xerty · February 15, 2023, 6:31pm

enough liquidity, here from China and Japan, and maybe markets go up in spite of the Fed’s tightening efforts.

onenote · February 15, 2023, 8:41pm

Liquidity = printing money. Question is, when to bail out and what to buy as shelter in the coming hyperinflation

ORLANDO, Fla., Feb 14 (Reuters) - The explanation for the whoosh higher in risk assets this year may be as simple as it is surprising: eye-popping liquidity from central banks.

Largely thanks to the Bank of Japan hoovering up domestic government bonds to keep its ‘yield curve control’ policy intact, and stimulus from the People’s Bank of China (PBOC), aggregate liquidity from the official sector has surged in recent months.

scripta · February 16, 2023, 8:28am

The answer is in the question – shelter!

Except that printing money is by other banks, not ours, so inflation risk is for their currency, not ours. And I wouldn’t buy shelter in China or Japan…

onenote · February 16, 2023, 4:04pm

The United States certainly is printing money and will continue to do so.

Inflation in the United States is running much hotter than the fake narrative cooked up for the midterm elections. See the posts in the inflation/stagflation thread about the latest CPI and today’s producer price index numbers.

As a result, the equity markets are dropping today.

onenote · February 18, 2023, 2:58am

Recall the Wall Street saying that the little guys are always wrong? We shall see

xerty · March 20, 2023, 3:10am

Long time bearish economist and market commentator makes good points.

xerty · April 9, 2023, 5:23pm