A very-underappreciated risk for equities is price controls, in my opinion. If you are right and we will have stubbornly high inflation, I don't think it's a stretch to think the government will attempt to lay blame on price-gougers, etc. In an era of record corporate profits, the electorate may go along with that plan as well.
Stock prices are where we see current hyper-inflation. Investors will need to have wheelbarrows full of cash to buy Apple or Tesla (or BRK-A, now at ... 417954 per share - Buffet no longer the richest man, but still doing well).
Oh, wait - how few people have $60k or more invested in the stock market (other than 401(k) & other retirement)? Not easy to find, most who own shares own thru IRAs. Simple analysis:
"For example, in 2020, 77% of households making less than $40,000 per year didn’t own stock. In contrast, only 15% of households earning $100,000+ per year weren’t invested in some form of stock"
If $36k is nominally feasible, why not a BRK price of $418k? The rich making huge profits have to do "something" with the money. Or not. How much was Buffett holding last year, some $128billion?
Sorry, Arnold. I haven't read Dow 36,000, Rogoff's old and new columns, and your old column. I have just read your new piece. It seems that all the referred writings are based on the idea of just two assets --one called "stocks", and the other "bonds". There are thousands of millions of assets in the global economy that differ in many ways, including the marginal cost of expanding their production (from low to extremely high), and any attempt to simplify the analysis of asset markets by assuming two "aggregates of close substitutes" is likely to be very misleading*. In the past 50 years, the global demand for assets has been increasing rapidly but the supply which had increased at a similar pace in the first 25 years has lately been increasing at a much lower rate. Since the increasing world saving out of current income has been the main driving force of the demand for assets, we should focus on the driving forces of the world supply of assets.
An interesting question is how we consider the huge investment in residential and commercial buildings at the world level in the past 50 years. I regard these buildings as assets, and I think that in the past 15 years at the world level the investment may have declined but not as much as the production of other assets.
Finally, world saving out of current income would have declined in 2010-19 because of the many government interventions to redistribute income from future to present generations.
* You cannot explain a "price index" of "fruit" by reference to a "price index" of "vegetables". Our diets include a lot of other food, and the total expenditure on food and other consumption goods depend on current and permanent income.
Doesn't your risk-neutral price-earnings ratio imply no growth in profits? Basically, it is the perpetuity formula: current profits / r. But for a growing perpetuity the formula is current profits / r - g. Historically, I think corporate earnings growth has historically been about 1% above NGDP. But since interest rates are below the rate of nominal GDP growth, this implies that r - g < 0, so this framework is telling us that the current situation is very strange.
If central banks take the Sumner Pill, and NGDP becomes better-tethered to a reasonable trend, then stocks should go up. That's part of my explanation behind the current increase in share prices, the Fed's proved it can and will master NGDP in a crisis. Share prices also go up if we enter a science fiction corporate-run dystopia though, via the drop in the labor share, and the share of GDP accruing to small business. So it's hard to disentangle the effects.
A related issue which i've been pondering. Does there come a point when "measured wealth" is more sensitive to changes in the discount rate than to future cash flows? In other words, with such a large stock of wealth relative to GDP do we actually want a strong economy if it comes along with a higher discount rate if we are solving for measured wealth?
The math of it, I believe, is that if stocks are priced relative to interest rates, then even if there is a risk premium, the priced in return for stocks is very low. If the ten year Treasury is 1.25% and the risk premium is expressed as a percentage of 100%, then stocks are priced to return 2.5% over the next ten years. But seldom in history have flat returns over ten years taken a smooth glide path.
A very-underappreciated risk for equities is price controls, in my opinion. If you are right and we will have stubbornly high inflation, I don't think it's a stretch to think the government will attempt to lay blame on price-gougers, etc. In an era of record corporate profits, the electorate may go along with that plan as well.
Stock prices are where we see current hyper-inflation. Investors will need to have wheelbarrows full of cash to buy Apple or Tesla (or BRK-A, now at ... 417954 per share - Buffet no longer the richest man, but still doing well).
Oh, wait - how few people have $60k or more invested in the stock market (other than 401(k) & other retirement)? Not easy to find, most who own shares own thru IRAs. Simple analysis:
"For example, in 2020, 77% of households making less than $40,000 per year didn’t own stock. In contrast, only 15% of households earning $100,000+ per year weren’t invested in some form of stock"
https://www.visualcapitalist.com/how-many-americans-own-stocks/
If $36k is nominally feasible, why not a BRK price of $418k? The rich making huge profits have to do "something" with the money. Or not. How much was Buffett holding last year, some $128billion?
https://www.marketwatch.com/story/heres-the-real-reason-warren-buffett-is-sitting-on-a-record-128-billion-in-cash-according-to-one-strategist-2020-03-02
Sorry, Arnold. I haven't read Dow 36,000, Rogoff's old and new columns, and your old column. I have just read your new piece. It seems that all the referred writings are based on the idea of just two assets --one called "stocks", and the other "bonds". There are thousands of millions of assets in the global economy that differ in many ways, including the marginal cost of expanding their production (from low to extremely high), and any attempt to simplify the analysis of asset markets by assuming two "aggregates of close substitutes" is likely to be very misleading*. In the past 50 years, the global demand for assets has been increasing rapidly but the supply which had increased at a similar pace in the first 25 years has lately been increasing at a much lower rate. Since the increasing world saving out of current income has been the main driving force of the demand for assets, we should focus on the driving forces of the world supply of assets.
An interesting question is how we consider the huge investment in residential and commercial buildings at the world level in the past 50 years. I regard these buildings as assets, and I think that in the past 15 years at the world level the investment may have declined but not as much as the production of other assets.
Finally, world saving out of current income would have declined in 2010-19 because of the many government interventions to redistribute income from future to present generations.
* You cannot explain a "price index" of "fruit" by reference to a "price index" of "vegetables". Our diets include a lot of other food, and the total expenditure on food and other consumption goods depend on current and permanent income.
Doesn't your risk-neutral price-earnings ratio imply no growth in profits? Basically, it is the perpetuity formula: current profits / r. But for a growing perpetuity the formula is current profits / r - g. Historically, I think corporate earnings growth has historically been about 1% above NGDP. But since interest rates are below the rate of nominal GDP growth, this implies that r - g < 0, so this framework is telling us that the current situation is very strange.
If central banks take the Sumner Pill, and NGDP becomes better-tethered to a reasonable trend, then stocks should go up. That's part of my explanation behind the current increase in share prices, the Fed's proved it can and will master NGDP in a crisis. Share prices also go up if we enter a science fiction corporate-run dystopia though, via the drop in the labor share, and the share of GDP accruing to small business. So it's hard to disentangle the effects.
A related issue which i've been pondering. Does there come a point when "measured wealth" is more sensitive to changes in the discount rate than to future cash flows? In other words, with such a large stock of wealth relative to GDP do we actually want a strong economy if it comes along with a higher discount rate if we are solving for measured wealth?
The math of it, I believe, is that if stocks are priced relative to interest rates, then even if there is a risk premium, the priced in return for stocks is very low. If the ten year Treasury is 1.25% and the risk premium is expressed as a percentage of 100%, then stocks are priced to return 2.5% over the next ten years. But seldom in history have flat returns over ten years taken a smooth glide path.