Rates, rates, rates...what to think???

PacNumber's picture
Rank: Neanderthal | 2,493

Random thoughts here...

The Fed is almost sounding like Mr. Greenspan back during the rise of tech and the Nasdaq. His "irrational exuberance" comments regarding the .com boom led him to put a pin in the proverbial bubble. The difference now is irrational exuberance across all major stock indices (maybe???).

Throw in a Fed that's probably hostile to Trump, and well, you're going to see rate hikes O'Plenty.

Feb 2000 the Nasdaq, hold your breath, was at a whopping 6700. All it took to completely destroy this Index and go from 4.5% GDP growth to 1% growth in 18mo was a 1.5% increase. At that was from 4.75 to maybe 6.25%. 1.5% doesn't matter a as much when you're in the 4's and 5's versus, say a jump from 1% to 2.5%.

Next, if stocks slide at some point over the next 18mo (seems like they will, right?)and money flows into treasuries, what will happen to long term rates if on one hand Fed rates are going up but at the same time cash is flying into Treasuries?

Next, at what point does the Fed begin to dispose of its $4trillion in treasuries? What impact will this have?

Seems like unprecedented times moving forward. I have no idea how all this will play out. Man, the Fed has a hold on everything it seems.

Comments (11)

Feb 22, 2017

The stock market is probably a bit overvalued now. However, it is NOTHING like the dot com bubble. That was insanity like has likely never been witnessed before in the stock market. We are just not seeing anything remotely like that right now.

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Best Response
Feb 22, 2017

True, but we aren't too far from the tech bubble days either. There probably isn't a single industry right now that is as outrageously valued as tech used to be, but to me it seems the entire market is very "fully valued".

PE versus Inflation


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Feb 22, 2017

If rates increase by 50%, which isn't much, then where do we stand?

Feb 22, 2017

I think it's overvalued, as I stated originally. Your little chart, I assume, is the P/E over the last ten years of earnings. As you could imagine, we had a massive trough in earnings within the last ten years (GFC about 9 years ago). If you were to look at P/E over the ttm or any reasonable projection of forward earnings at the time, you will see that you are not comparing apples to apples. Also, I don't think you can look at an earnings yield in isolation. Given our low interest rate and low inflation environment, earnings multiples should be higher than most environments.

The internet bubble was epic and unprecedented. To argue otherwise, means you were too young to remember it, most likely.

Imagine paying $2,000 for a Pampers diaper. That's about the equivalent of what it was for the somewhat overvalued companies, some many MANY times worse than that. Best case scenario: It's expensive and full of shit.

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Feb 23, 2017

there are tons of points you could make to support either a bullish or bearish case:

-carry trade will keep rates low relative to history, but not as low as they have been
-earnings growth picking back up
-recovery has been anemic economically, plenty more room to run
-tech bubble overvaluation was with a weak earnings picture, so not a fair comparison
-CAPE numbers include earnings recession because of energy (see 2014/2015) and GFC, not statistically honest

-highest CAPE since tech bubble
-trailing PE well above LT average
-national debt
-central bank easing artificially keeping rates low

I'm thinking we could just have another period like the mid 60s to early 80s (CAPE went from 24 to 7 from 66 to 82), returns were 6.8% compounded through that period with 6 down years. given the low level of rates, I think the best strategy (as per usual) is to dollar cost average into high quality global stocks, stay clear of high yield until spreads warrant entry, and keep 10-20% cash on hand to pick up bargains or invest more after down years.

history tells us that it's not wise to bail out, just be mindful of the risk you're taking and perhaps adjust your return expectations. valuation's a great guide for long term returns, but it's one of the worst short term indicators when you're looking at an entire market (Dreman has done quite well with 2nd quintile cheapest stocks as measured by PE, PCF, and PB, just looking year to year)

Feb 22, 2017

yellen said rates are going to 3% by 2019 and that she plans on raising rates again before the summer. If that happens most of the core CRE Assets are upside down when their balloons comes due

Feb 22, 2017

yellen said rates are going to 3% by 2019 and that she plans on raising rates again before the summer. If that happens most of the core CRE Assets are upside down when their balloons comes due

Shit. I didn't realize this was in the RE forum until now. Core RE assets are in for trouble soon. Sorry guys.

Still not an internet bubble. Core RE won't decline by 80% a la the NASDAQ from early 2000 until the trough, even with leverage for most investors.

Feb 23, 2017

core owners better hope they can push rents

Feb 23, 2017

yellen also said the fed is data dependent in an environment of sub 5% unemployment (official, not claiming this is the best stat) with no recession on the rise. I wouldn't trust that cow as far as I could throw her

Feb 23, 2017

Not to nitpick the analysis, but 9/11 and the ensuing collapse of the airline industry also had an impact on stocks, not just rate hikes.

Feb 23, 2017