My reading of the markets and the economy is very similar to Arnold's but even more simplistic. Nobody can understand what to do because everything looks broken simultaneously. Was there an "everything bubble"? Is it popping? where do those assets go in a flight to saftey? How much of this is due to excessive leverage taken out by large financial institutions on top of super easy money? My "as good as anyone else" bet right now = S&P as piece of long term holdings, hedged with rolling puts, Puts on long term treasuries, Bitcoin as long term inflation hedge. I'm tempted by gold, but spent a decade watching it do nothing and i don't trust the custodial arrangements for this asset class (unless that is the one institution that won't fail us).
I see multiple gold-bug comments here. Bitcoin makes as much sense as an asset for this thought process, and has outperformed gold by orders of magnitude in 3, 5, & 10 year period. A small allocation there could be a hedge within a hedge.
This is perplexing logic- BTC outperformed gold in a very different environment, therefore it should outperform for this environment as well? BTC has been strongly correlated with risk assets and it would be a truly unique asset if it wildly outperformed risk assets during growth phases and then also outperformed defensive assets in a downturn. In fact if you thought that was the case you would never buy anything other than BTC (which is what cryto bugs argue for in the same way that some gold bugs argue for gold constantly).
"In eight years, these four stocks just about tripled in value relative to the scale of the economy. That will never happen again. Never. Happen. Again. Even if their stocks appreciate in value, the rate of increase is bound to be lower than it has been."
For the whole group, I would agree, but I could imagine certain breakthrough technologies that do in fact replicate that kind of increase for one particular company. E.G., software for self-driving cars, problem-solving AI, Alphabet's research on life extension/anti-aging, reliable and safe drone delivery (okay, this one might be a stretch), new types of wearable devices, quantum computing, etc. I guess kinda the way I look at it is that there is a winner take all quality to many tech products or services, and existing companies with lots of talented people on the payroll and lots to spend on R&D should be well-positioned to continue to be winners in the future with regard to new products and services, so they still stand to grow at a greater clip than NGDP.
Couldn't the conventional wisdom about how to invest still be right even if your model is correct, provided that the investor in question doesn't have the knowledge and skills needed to time the market?
I think your approach is to limiting. Take this statement 'The tug-o’-war model says that there must be people with the opposite view of mine. That is, there must be people who think that the path of interest rates is too high, and that rates will turn out to be lower than expected. I cannot see that happening without a recession, and a recession would hurt profits and stock prices.'- The implication as I read it is a comparison of a US investor vs a US investor, but the total investment capital in the world minus the US is > total investment capital in the US. The investment calculus for someone who spends in Yen or Euro is different from one who spends in dollars and the recent dollar strength has generated strong real returns for foreign investors even as US stocks are down in US dollar terms. Higher interest rates in the US are compounding this effect, getting a 3% return on treasuries is terrible if you take the rate of inflation into account in the US but it is amazing if you are a Yen spender and got that on top of the 30% depreciation in the Yen over the last 6 months.
Its pretty bad at best, but if prices are rising by 8% a year then holding a basket of goods/futures that mimic the price increases will be the loss minimization strategy.
Yeah, the returns on treasuries and the like are still too low to be very compelling. Especially since you need to buy a longer-term treasury to even get to 3%, and the prices of such treasuries are likely to decrease in the short term as the Fed continues to raise rates (i.e. you may be better off holding cash for now, and waiting until rates are plausibly near their peak to buy longer-term treasuries).
Anytime one believes that they have a better model of the economy than the consensus, one should cautiously trade on it. But the bigger picture is that how much one saves and invests is more important than when one invests in which instrument.
True sometimes, not true other times. If you were an investor in Japan in the late 80s it made a huge difference what you invested in over the next 45 years.
Heuristic investors say, “I go with the gospel according to Vanguard. Just buy and hold an S&P 500 index fund.” Meanwhile economic unreality says, "The large-cap companies can take a significantly larger bite out of the economy."
Another option for investors may be to buy a total world stock fund?
The last 2-3 decades have arguably been the best in all of human history when it comes to foreign economic growth. Yet even under such favorable conditions, world funds haven't quite kept up with the S&P 500.
Diversification tends to be worthwhile... as long as you stay near the efficient frontier. It's not clear that what's added in a world fund is as close to the frontier as e.g. the large oil companies in the S&P 500 that have done very well during this tech crash.
The implication of my outlook is that all conventional asset classes are risky. If I went all in on my outlook, I would have a portfolio consisting of money market funds, put options on the S&P (to hedge recession risk), and put options on long-term Treasuries (to hedge inflation risk). I have not done that yet, but I am slowly talking myself into it.
I have a somewhat similar outlook to you and a different interpretation. I moved our 401k to cash in February and have been buying calls on the S&P slowly building a long position, and have a significant gold holding (roughly half the value of our 401k). I think this covers me for most scenarios. I don't currently think that puts on the S&P do much, they juice my returns if this is the peak before a crash but having cash before a crash gives really high theoretical returns. I'd rather have the diversification if I am wrong and also the mental cushion not to want to chase a sudden surge in stock prices.
The stock market will either revert to the long term mean, or the dollar disappears in a hyperinflation. My bet, at least to the extent I am still alive, is that the market reverts to the mean.
I think a recession, a bad one, can't be avoided in the next year. That will bring inflation crashing back down along with interest rates.
This seems like a somewhat simplistic formulation.
Combined revenue of Apple, Amazon, Google, and Facebook in 2014: ca $350B.
Combined revenue of Alphabet, Apple, Amazon, and Meta in 2021: ca $1,209B
So we might all agree that the current valuation makes no sense, but the fact that they quintupled over 8 years (using the right number for AMZN) is at least largely explained by the fact that *they are much better businesses now*.
Agreed. I don't think that there is 3+B of revenue sitting around four these four companies even WITH their international businesses (which is reflected in their financials but not USNGDP).
OTOH if I had to steelman the investor heuristic, it would be something like "these companies are _so good_ at making money and have strong moats so it's reasonable to assume that they grow at some factor higher than NGDP for a while" and then just extend that to the overall market and go back to watching Stranger Things.
But largely I agree with you. There's a LOT of recency bias in these things and recently we've seen incredible returns (last 7 months excepted) so there's probably a lot of wishful thinking in the market.
Netflix is in that acronym because of its historically high compensation, not its size and influence. The obvious large-and-influential company to add to the list is Microsoft.
My reading of the markets and the economy is very similar to Arnold's but even more simplistic. Nobody can understand what to do because everything looks broken simultaneously. Was there an "everything bubble"? Is it popping? where do those assets go in a flight to saftey? How much of this is due to excessive leverage taken out by large financial institutions on top of super easy money? My "as good as anyone else" bet right now = S&P as piece of long term holdings, hedged with rolling puts, Puts on long term treasuries, Bitcoin as long term inflation hedge. I'm tempted by gold, but spent a decade watching it do nothing and i don't trust the custodial arrangements for this asset class (unless that is the one institution that won't fail us).
I see multiple gold-bug comments here. Bitcoin makes as much sense as an asset for this thought process, and has outperformed gold by orders of magnitude in 3, 5, & 10 year period. A small allocation there could be a hedge within a hedge.
This is perplexing logic- BTC outperformed gold in a very different environment, therefore it should outperform for this environment as well? BTC has been strongly correlated with risk assets and it would be a truly unique asset if it wildly outperformed risk assets during growth phases and then also outperformed defensive assets in a downturn. In fact if you thought that was the case you would never buy anything other than BTC (which is what cryto bugs argue for in the same way that some gold bugs argue for gold constantly).
"In eight years, these four stocks just about tripled in value relative to the scale of the economy. That will never happen again. Never. Happen. Again. Even if their stocks appreciate in value, the rate of increase is bound to be lower than it has been."
For the whole group, I would agree, but I could imagine certain breakthrough technologies that do in fact replicate that kind of increase for one particular company. E.G., software for self-driving cars, problem-solving AI, Alphabet's research on life extension/anti-aging, reliable and safe drone delivery (okay, this one might be a stretch), new types of wearable devices, quantum computing, etc. I guess kinda the way I look at it is that there is a winner take all quality to many tech products or services, and existing companies with lots of talented people on the payroll and lots to spend on R&D should be well-positioned to continue to be winners in the future with regard to new products and services, so they still stand to grow at a greater clip than NGDP.
Couldn't the conventional wisdom about how to invest still be right even if your model is correct, provided that the investor in question doesn't have the knowledge and skills needed to time the market?
I think your approach is to limiting. Take this statement 'The tug-o’-war model says that there must be people with the opposite view of mine. That is, there must be people who think that the path of interest rates is too high, and that rates will turn out to be lower than expected. I cannot see that happening without a recession, and a recession would hurt profits and stock prices.'- The implication as I read it is a comparison of a US investor vs a US investor, but the total investment capital in the world minus the US is > total investment capital in the US. The investment calculus for someone who spends in Yen or Euro is different from one who spends in dollars and the recent dollar strength has generated strong real returns for foreign investors even as US stocks are down in US dollar terms. Higher interest rates in the US are compounding this effect, getting a 3% return on treasuries is terrible if you take the rate of inflation into account in the US but it is amazing if you are a Yen spender and got that on top of the 30% depreciation in the Yen over the last 6 months.
Its pretty bad at best, but if prices are rising by 8% a year then holding a basket of goods/futures that mimic the price increases will be the loss minimization strategy.
Yeah, the returns on treasuries and the like are still too low to be very compelling. Especially since you need to buy a longer-term treasury to even get to 3%, and the prices of such treasuries are likely to decrease in the short term as the Fed continues to raise rates (i.e. you may be better off holding cash for now, and waiting until rates are plausibly near their peak to buy longer-term treasuries).
Not bet is without risk, however I don't have an Au bet, I have a series of positions of which Au is a substantial position. Its not there on its own.
My outlook is similar to Arnold's. For the first time in my life, I bought a small amount of gold from the cash I have been accumulating.
Anytime one believes that they have a better model of the economy than the consensus, one should cautiously trade on it. But the bigger picture is that how much one saves and invests is more important than when one invests in which instrument.
True sometimes, not true other times. If you were an investor in Japan in the late 80s it made a huge difference what you invested in over the next 45 years.
Dang it.
Heuristic investors say, “I go with the gospel according to Vanguard. Just buy and hold an S&P 500 index fund.” Meanwhile economic unreality says, "The large-cap companies can take a significantly larger bite out of the economy."
Another option for investors may be to buy a total world stock fund?
With the S&P 500 so heavily dominated by its largest cap tech stocks, a world fund would be more diversified.
The last 2-3 decades have arguably been the best in all of human history when it comes to foreign economic growth. Yet even under such favorable conditions, world funds haven't quite kept up with the S&P 500.
Diversification tends to be worthwhile... as long as you stay near the efficient frontier. It's not clear that what's added in a world fund is as close to the frontier as e.g. the large oil companies in the S&P 500 that have done very well during this tech crash.
What would you suggest investing in?
If you think inflation isn't going to abate then I guess stocks or houses still make more sense than bonds.
If you think inflation is going away then treasuries. But not long term treasuries if rates go up? Or long term treasuries because they will go down?
The implication of my outlook is that all conventional asset classes are risky. If I went all in on my outlook, I would have a portfolio consisting of money market funds, put options on the S&P (to hedge recession risk), and put options on long-term Treasuries (to hedge inflation risk). I have not done that yet, but I am slowly talking myself into it.
I have a somewhat similar outlook to you and a different interpretation. I moved our 401k to cash in February and have been buying calls on the S&P slowly building a long position, and have a significant gold holding (roughly half the value of our 401k). I think this covers me for most scenarios. I don't currently think that puts on the S&P do much, they juice my returns if this is the peak before a crash but having cash before a crash gives really high theoretical returns. I'd rather have the diversification if I am wrong and also the mental cushion not to want to chase a sudden surge in stock prices.
The stock market will either revert to the long term mean, or the dollar disappears in a hyperinflation. My bet, at least to the extent I am still alive, is that the market reverts to the mean.
I think a recession, a bad one, can't be avoided in the next year. That will bring inflation crashing back down along with interest rates.
This seems like a somewhat simplistic formulation.
Combined revenue of Apple, Amazon, Google, and Facebook in 2014: ca $350B.
Combined revenue of Alphabet, Apple, Amazon, and Meta in 2021: ca $1,209B
So we might all agree that the current valuation makes no sense, but the fact that they quintupled over 8 years (using the right number for AMZN) is at least largely explained by the fact that *they are much better businesses now*.
But I think it is almost arithmetically impossible for them to quadruple revenue again in 7 years if NGDP only goes up less than 50 percent.
Agreed. I don't think that there is 3+B of revenue sitting around four these four companies even WITH their international businesses (which is reflected in their financials but not USNGDP).
OTOH if I had to steelman the investor heuristic, it would be something like "these companies are _so good_ at making money and have strong moats so it's reasonable to assume that they grow at some factor higher than NGDP for a while" and then just extend that to the overall market and go back to watching Stranger Things.
But largely I agree with you. There's a LOT of recency bias in these things and recently we've seen incredible returns (last 7 months excepted) so there's probably a lot of wishful thinking in the market.
The N in FAANG is Netflix. Its market cap went from $20.6 in 2014 to $88.4 today.
Netflix is in that acronym because of its historically high compensation, not its size and influence. The obvious large-and-influential company to add to the list is Microsoft.
Amazon's 2022 market capitalization is much larger than what you share here. It's around $1.25 trillion.
you're right. the chart at macrotrends makes no sense. fixed now