1. IrvingSnodgrass - Feb. 10, 1999 - 9:02 AM PT
A new dialogue in Slate between William Fleckenstein and Dave Kansas on "Is the Stock Market a Bubble?" raises some interesting questions.
Let's settle this long-debated question once and for all.
2. DanDillon - Feb. 10, 1999 - 9:14 AM PT
GET OUT! SELL! RUN FOR YOUR LIVES!!!
3. DocBrown - Feb. 10, 1999 - 9:15 AM PT
Buy Buy Buy! There's a fortune to be made, but you gotta act fast!
4. thoughtful - Feb. 10, 1999 - 9:30 AM PT
Yes.
5. DocBrown - Feb. 10, 1999 - 9:47 AM PT
So far the dialogue is not very helpful in the subject of this thread. Fleckenstein is not making much of a case for the existence of a bubble, instead he is concentrating on the consequences we might face *if* the stock market becomes a bubble.
IMO we may simply be seeing the consequences of an enormous shift in the economy. Over the course of many decades we are moving to an economy where more non-workers are supported by fewer workers. In order to establish a strong income in a non-working lifestyle people need to make many investments, including the stock market.
A huge number of people are seeking a non-working lifestyle, while the infrastructure to support that lifestyle cannot grow quickly enough to keep up. Of course the price of that lifestlyle must increase. It only makes sense to me that the stock market would grow rapidly.
We are seeing a whole new paradigm in earnings ratios, and we will never go back.
6. msivorytower - Feb. 10, 1999 - 9:54 AM PT
Hey Thoughtful
I heard the latest labor productivity numbers this morning!
Mein Gott! I can't believe it! 2.6%? Huzzah! Has there been a significant upsurge in capital deepening recently? Is this the lingering effects of continued capital investments over time? Why now? Can you provide some analysis?
I'm trying to absorb this latest info in light of our long-ago discussion on the tightening labor market, slowing profit rates, and likely slower growth this year.
7. Raskolnikov - Feb. 10, 1999 - 10:04 AM PT
Doc: never go back? sooner or later these people who saving for retirement will retire, and begin drawing down that savings. I have no idea of the extent to which boomer driven retirement savings is driving current stock market growth, but the greater it is the, the greater a problem it will cause when the money is yanked out.
8. thoughtful - Feb. 10, 1999 - 10:11 AM PT
Mit, had you seen the 8+% growth in mfg. productivity in Q4, you probably would've popped the champagne. However, these numbers are somewhat suspect in that they reflect the auto industry bounceback after the GM strike. Besides, you know that one quarter does not a significant number make.
There's no doubt that there have been some positive things going on, especially in mfg where productivity has been running 3-4% for several quarters now. Some of it is related to the capital deepening, in light of the very tight labor markets. Some of it relates to the "peace dividend" we all mentioned early in the Clinton admin on the benefits of reducing the govt. deficit. It has led to much lower interest rates. No doubt, investment spending has been very strong over the last few years. (One concern though is how much relates to Y2K problems, spending on which should start drying up later this year.)Some of it relates to businesses significant improvement in working smarter...some IT investment is perhaps starting to pay off, and other management intiatives which have allowed genuine improvement in productivity. To wit, check out the mfg. inventory/sales ratios to see how low they are.
9. thoughtful - Feb. 10, 1999 - 10:22 AM PT
However, also as suggested, deflation is here. Even the fixed-weight GDP deflator is negative. The inability to raise prices and the delay in acquiring lower-cost materials has put profits in a squeeze. Losing export markets and facing stiff competition from overseas in import markets has taken its toll. Look at the % change vs. same quarter year ago in corp. profits after tax and you'll see it's now negative. 90% of 98's S&P500 profits were accounted for by 10% of firms. There's no sign of deflation letting up either, as long as worldwide demand continues to deteriorate.
This has resulted in a weird bifurcated economy. (If I may brag, I believe I suggested this would happen a year ago. }:-)) The consumer sector with strong incomes from stocks and high employment, low oil prices and low imported-goods prices and low interest rates is flying along -- flying so fast, in fact, that the savings rate has turned negative.
At the same time, export markets contracted, capacity utilization is weak, profits are falling, and investment spending ex IT is bound to slip.
Right now, the outlook is that the positive effects, helped along by 3 interest rate cuts, will be enough to keep the economy moving along -- slower than 98, but at a reasonably sustainable trend of about 2 1/2%.
Definitely, though, no new paradigm.
10. msivorytower - Feb. 10, 1999 - 10:33 AM PT
Thoughtful
So this jives with what we discussed early last year, and I remember your predictions regarding deflation. Very nice call.
What we have is consumer driven then, but won't this help the profit rate to increase again if it continues long enough? And surely the strengthening in wages over the last year or so will keep consumer demand rolling along for the rest of this year (at least).
Can you speak to the declining world demand you noted? Is this related to the effects of the Asian crisis, Russia's unstable economy, and Japan's continued lethargy?
I confess I haven't keep up with world wide issues recently. What about Europe? The impact of the new eurodollar, etc...
11. FreeToChoose - Feb. 10, 1999 - 10:34 AM PT
DocBrown
“So far the dialogue is not very helpful in the subject of this thread. Fleckenstein is not making much of a case for the existence of a bubble, instead he is concentrating on the consequences we might face *if* the stock market becomes a bubble.”
Strange. I reached the opposite conclusion. I thought he was making an interesting albeit superficial case for the existence of a bubble.
However, I am yet to be impressed by Kansas. Seems like a meandering discussion, at best tangentially related to the subject at hand. Hey, he might make a good Fraygrant!
12. ranheim - Feb. 10, 1999 - 10:42 AM PT
I don't follow econ. all that closely; likely I am not totally informed. However, from other reading, it is my impression that the entire world went into depression in the late 1920s. It took WW II to reverse that.
From what I read today, most of the rest of the world is either in a depression (Russia, Brazil, etc.) or recession (Japan, China, etc.).
Nearly every commodity is falling in price; locally, real estate prices are off 20 - 30% from this time last year.
If the above is basically true, how can the USA prevent severe economic problems here?
13. thoughtful - Feb. 10, 1999 - 11:04 AM PT
Mit, no doubt volume will help and clearly Q4 was very strong. Jan. car sales have eased -- haven't seen the truck #s yet though, and early indications are that retail sales were strong in Jan. However, consumer spending is outpacing income and that can go on for long -- even with the strong stock market, so spending is expected to ease some.
There has also been a record # of consolidations as businesses attempt to reduce capacity, costs (and competition) and layoffs hit a record in 1998. Trade shaved over 1% point off of GDP growth in 1998; and though the consensus is trade deterioration won't be as bad in 1999, I disagree. I think we have yet to see the real import flood from overseas.
This is definitely a bifurcated economy.
14. thoughtful - Feb. 10, 1999 - 11:13 AM PT
Re weak world demand -- yes. Russia's broke, Brazil followed, Japan is still unable to get its act together, oil prices are devastating the oil countries, Asia's stopped falling for the most part, but isn't really recovering yet -- key risk here is China and whether it will devalue -- China too is in deflation. Europe is starting to slow -- UK already had rate cuts and German & French prices are starting to fall. German unemployment rate is also picking up. Czech Republic is in recession, and Canada has been hit by the falling commodity prices.
15. FreeToChoose - Feb. 10, 1999 - 11:24 AM PT
thoughtful
You said, “However, consumer spending is outpacing income and that can go on for long”
Is this what you meant, or did you mean to say that it canNOT go on for long?
16. thoughtful - Feb. 10, 1999 - 12:40 PM PT
FTC, thanks. I meant *cannot* go on for long.
17. DocBrown - Feb. 10, 1999 - 12:53 PM PT
Raskolnikov said:
> I have no idea of the extent to which
> boomer driven retirement savings is
> driving current stock market growth,
> but the greater it is the, the greater
> a problem it will cause when the money
> is yanked out.
This isn't just about Boomer retirement 401Ks and 403Bs. It is about a much larger shift in the economy necessitated by improving technology. Just as technology blurred the line between muscles and machines in the industrial revolution, now computers are infringing on the the territory of the brain. We are creeping slowly toward a jobless economy; a world in which your income will be defined by what you own rather than what you do.
Imagine this concept taken to the extreme.
Obviously the price of admission into a jobless world would be steep. You must literally be born with enough property to pay for your entire life. In that world income-producing items like stocks and bonds will be very valuable, hence very expensive.
18. ScottLoar - Feb. 10, 1999 - 3:02 PM PT
From the Slate dialogue, since the end of 1996 no earnings growth yet market's up 70%; since the end of 1994 earnings are up 29% and the market's up 177%. The Nikkei traded @ 70 or 80 x earnings with the NASDAQ now trading @ 90 x earnings. From the end of 1994 to the present the S&P is up 177% with earnings growth only 29%.
Is this not grossly inflated expectation beyond the earnings value of the bulk of companies listed? I'd call that a stockmarket driven by wild speculation, a bubble, and it will burst.
19. ScottLoar - Feb. 10, 1999 - 3:04 PM PT
Whether or not you'll get shat upon when the bubble bursts depends on the nature and diversity of your investments.
20. ProfEmeritus - Feb. 10, 1999 - 3:39 PM PT
Of course there is a major bubble. The interesting question is when and why will the inevitable burst come. The market has little to do with the real economy; it is driven by expectations. We know very little about what causes drastic changes in expectations, but it appears that fears are a powerful determinant of negative expectations. In this connection, the danger on the horizon is fear that the Republicans may come back into power and resume their inflationary policies of the 1980's. Their calls for tax cuts and increased defense spending sound like Reagan's 1980's policies which helped cause the last big bubble to burst. Fears of impending inflation are today's worst dangers for continuing market upsurge; witness the market's reaction to speculation about Fed interest rate changes.
21. elliot803 - Feb. 10, 1999 - 4:07 PM PT
Rask:
" I have no idea of the extent to which boomer driven retirement savings is driving current stock market growth, but the greater it is the, the greater a problem it will cause when the money is yanked out."
This is my fear, despite all the reassurances to the contrary. Being at the very tail of the baby boom I'll be cashing out right after all the earlier boomers have wreaked whatever havoc they may on the market. The answer, I suppose, is to watch things carefully and get out of stocks if it looks like there's going to be trouble. But I know better than to second-guess the market.
22. Raskolnikov - Feb. 10, 1999 - 4:51 PM PT
Doc: sorry, but the whole "jobless economy" idea is nonsense.
23. chloel - Feb. 10, 1999 - 5:34 PM PT
It's possible that middle-class jobs will disappear, replaced by either property ownership or unprotected toil. I think that would only happen after terrible degradation of the democracies, and that it would be a Bad Thing in itself, but it does sound really familiar.
"Building a bridge to the 18th Century!"
24. DocBrown - Feb. 11, 1999 - 6:49 AM PT
Raskolnikov, how can you say a jobless economy is nonsense?
It certainly will not happen in our lifetimes, but it will happen eventually. The shift has already begun.
It was bad planning on my part that I jumped right into that "jobless" suggestion. The real issue here is whether the stock market is currently being driven by the same forces as in the past, or if maybe something new is happening here. My overall position is that this is that we are seeing something new . . . something that has never been seen before.
If this is just a continuation of the old ways of the market then I would agree that this is probably a bubble. Even if there *are* new forces at work it might still be a bubble.
I am simply making the case that we cannot tell for certain, and those who describe the situation in absolutes (elliot803, ProfEmeritus, ScottLoar, and yourself) write more from pessimism than from facts.
25. DocBrown - Feb. 11, 1999 - 6:53 AM PT
Sorry, chloel, in a century or so I see no value for unprotected toil. You either own property or you survive on the charity of those who do. You might have a job for sheer pleasure, but you won't collect a paycheck.
Sounds wonderful to me.
26. ranheim - Feb. 11, 1999 - 11:57 AM PT
DocBrown in #24/# 25 has described a new world. It is my fond hope that I don't live that long. I am not an academic. To you who are, do studies/papers exist showing that the male of the species MUST be engaged in some form of work.
There is an internet joke that mentions that man, without a woman, is good only for the "production of methane." In the continued absence of a woman, man "decomposes rapidly and smells". Without work man is also violent.
For the past 27 years I have lived in a rural area with a tradionally high un-employment rate. I see or read of its fruits daily :
1). Young males in groups standing on street corners taking swigs
from brown paper bags as I go to work in the morning
2). Fist fights that too often escalate into knife fights or gun
battles
3). Very high incarceration rates
groups
4). Feminine complaints of harrassment; or far worse
5). High school truancy rates
6). Swollen welfare rolls
7). The rate of absentee fathers goes up to an even higher level.
We need a "soft landing". Can a case be made that we are slowly creating a coterie of very large, international corporations who's stock certificates may, some day, be mentioned in the same breath as US Treasuries? For those with money to risk or venture, the high flying internet stocks, technology stocks, others would remain.
The huge % of 401K (other plans) monies would seek not only Teasuries
but these new safe havens.
Somehow we need to continue to increase the % of the populace who has a portion of his retirement monies invested in the market. This group of investors would serve two useful purposes :
1). Possible prevention of a new group of muckrakers.
2). Silence those progressives and big government types whose
facile tongues can't wait to spout the politics of envy.
27. ScottLoar - Feb. 11, 1999 - 2:18 PM PT
DocBrown, I take pains in Message #18 to recount the figures supporting my argument of "grossly inflated expectation beyond the earnings value of the bulk of the companies listed" and you perversely credit me with a pessimistic attitude. Don't assume "attitude" governs my thoughts, just counter the argument please. Or do you believe that a stock price thousands of times higher than earnings (in the case of certain internet stock such as Amazon.com which has yet to make a profit) reflects prudent thought by sober investors?
28. alnegin - Feb. 12, 1999 - 6:06 AM PT
The two burst bubble's that are mentioned was the USA in the 20's and Japan in the 80's. Our bubble may burst, just as those did, but their markets stayed down (as opposed to a bear market) because the US had a decade long depression, ended by WWII, and Japan had a decade long recession, which it still is in.
I suggest that if our bubble does burst, and the market stays down that, that will be because at that time the market will be linked to the economy, not separated from the economy.
If the Fed had an easing of monetary policy in the 30's instead of a constrictive policy, would we have had a depression, and consequently a stock market that took 17 years to recover to its 1929 levels?
29. ScottLoar - Feb. 12, 1999 - 6:32 AM PT
Alnegrin, an economic "bubble" by definition must burst, or deflate if you will, you choose the word describing the collapse of a wildly speculative market.
30. RobertKier - Feb. 12, 1999 - 10:18 AM PT
I no longer feel that the current valuations of the S&P are exhorbitant despite the fact that an S&P P/E of 30+ is almost double the historical norm. Why? Because present value analysis based on fundamental interest rates of 4% says yearly growths of earnings of only 4% would justify a P/E of 25. The stock market earnings have grown 11% for more than 70 years. 5% earnings growth justifies a P/E of 31. That's where we are today. A historical 11%, much greater than 4% risk-free returns, provides a risk premium.
People are realizing that long term risks are small. People are realizing that they will have long retirements. Even if the S&P reverts to P/E=15, in the next twenty years an investment today of $1000 becomes $8062.31 which when divided by 2 is still $4031.16. At a risk-free 4%, the investment becomes only $2191.12. Inflation actually favors stock market investment. With 4% inflation, you still make money with historical market returns.
Of course inflation causes other complications that may make business fail. However, I think the federal government has learned how to control inflation. So, the current pricing of the S&P is very rational and even though people are often irrational and may stampede the market back down, there is ample evidence they won't.
31. thoughtful - Feb. 12, 1999 - 11:58 AM PT
RKier, some problems:
1. Interest rates are over 5%.
2. Corporate profits are falling.
3. Economists still only know one way to unwind inflation -- that's with a recession.
32. RobertKier - Feb. 12, 1999 - 3:48 PM PT
Thoughtful:
1. The 11% average growth of the market includes many recessions.
2. Aren't short-term T-bills at about 4%?
3. Nevertheless, even a 5% interest rate doesn't approach 11%.
4. Inflation is not necessarily hard to forestall.
5. One year of flat profits doesn't mean much in the long term.
33. wonkers2 - Feb. 13, 1999 - 6:04 PM PT
"Many shall be restored that now are fallen and many shall fall that are now in honor." from Horace's "Ars Poetica" quoted in preface of Benjamin Graham's "Security Analysis."
34. wonkers2 - Feb. 13, 1999 - 6:10 PM PT
There are bubbles in some stocks; others are undervalued; and the market is fairly or fully valued as it usually is, some say by definition.
35. wonkers2 - Feb. 13, 1999 - 6:14 PM PT
Wonkers' picks: Inco Ldt, West Marine, Wells Fargo, KMart Pfd., Vanguard High Yield Corporporate Bond Fund.
36. Judithathome - Feb. 15, 1999 - 8:06 AM PT
To answer your question, Is The Stock Market A Bubble?...who knows? But at less than 10 posts a day since this thread started, it is clearly a Bore.
37. ptboya - Feb. 15, 1999 - 11:24 AM PT
Doc…
"…in a century or so I see no value for
unprotected toil. You either own property or you
survive on the charity of those who do."
Sounds mildly descriptive of the present actually.
38. thoughtful - Feb. 15, 1999 - 1:54 PM PT
RKier,
1. Point to point comparisons -- arriving at your 11% average -- can be misleading. For example, it took until 1954 for the Dow to regain the 1929 pre-depression level. The Dow's peak in 1979 was 898 -- only a hair over 1964's peak at 892.
2. When looking at returns over long periods of time, you should be looking at long-term interest rates, not short term ones.
3. If you have a sure-fire way of forestalling inflation, then what are you doing in the fray? You should be knocking on Greenspan's door instead.
4. One year of declining profits doesn't necessarily mean anything, but the stock market should reflect earnings which has some relationship to real economic output. Earnings growth has been slowing steadily since 1995 and has since turned negative. US GDP has taken 14 years to double vs. the Dow which doubled in the last 3 years. This is what bubbles are made of.
39. ptboya - Feb. 15, 1999 - 2:27 PM PT
Edward Keon in this week's Barron's gives an interesting answer to this question. he concludes that the multiple expansion we've seen since '74 when it was in the high single digits has reached its logical limits. It is now at 24 to 30 today (S &P) depending upon whether you look at forward or trailing earnings. Based on his estimate of profit growth at 8-9% (actually, that's better than the historic norm) he sees the index growth for the next decade at 5-10% rather than the recent 15-20%.
My own feeling is that if the market cracks badly it will affect the economy far more than such events have in the past. And that may create a spiral effect. Current equity ownership is much higher than it has been historically. The success of the stock market probably accounts for the paucity of savings in the recent past. So, a hit to the markets could really affect consumer spending drastically. This is one reason why I think Greenspan & Co. will be quick to protect against bubble bursting events.
The fly in the ointment could be a resurgence of inflation. Labor costs have recently been rising more quickly than during the last decade. And, if Asian economies begin to rebound, commodity inflation will begin anew. Deflationary markets for basic goods have thus far helped to offset the rise of US labor costs. So The Fed may not have such an easy time going forward if this scenario holds.
40. thoughtful - Feb. 15, 1999 - 3:13 PM PT
ptboya, I agree with some of what you say, but Greenspan & co are not in the business of rescuing the stock market. They are in the business of maximizing employment while minimizing inflation.
I agree that consumer spending has become increasingly dependent on the stock market gains. I also am concerned that with the wide spread between the haves & have nots, that the strong market is masking some severe underlying weakness in the majority of consumer balance sheets. The K-mart shopper is far more extended than is healthy. While not a concern in a growing economy, should we face a downturn, it could deteriorate rapidly.
41. ptboya - Feb. 15, 1999 - 6:49 PM PT
"Greenspan & co are not in the business of rescuing the stock market. They are in the business of maximizing employment while minimizing inflation."
Well, officially anyway this is their job description. It's hard to see though how their actions since '87 fit this… rapidly increased liquidity after the '87 crash-reliquification of bank balance sheets after the S & L debacle-the loosening due to Long term Credit's potential implosion as well as the bailout of the hedge fund itself.
I'm just saying that, for better or worse, the ups and downs of equity and bond markets are perceived by the Fed to have direct and serious effects on both inflation and employment. They're still keeping their eyes on the ball, but they see that markets can move that ball these days.
42. wexxford1 - Feb. 18, 1999 - 10:18 PM PT
ptboya : Remember when Greenspan was a PR man for the Ayn Rand selfishness idea ? Remember when Alan was hired as a part timer by Fortune to do statistical stuff for industry roundups ? Now, Alan is married to that greatest-TV-talkin'woman-of-all-time,Mitchell and has been elevated to the wiseguy ranks . Fun this bubble thang up will you? The market will do what the computer operators of People's Capitalism will tell it to do . Example : eBay,4 months old ,with under a hundred employees and no assets,is worth $6 billion according to the screens that give you market prices .The wealth-creating program for the folks gets more and more outlandish, while Alan Greenspan and Andrea Mitchell turn up at all those hilarious Washington roasts . Git aboard,ptboya and enjoy the ride .This People's Capitalism program has a long way to go .
43. wexxford1 - Feb. 18, 1999 - 10:23 PM PT
Hey PT- re inflation . In a global economy with hundreds of millions of men out of work in China alone, and Europe on its backside,employmentwise, ya can't have inflation.Ever hear of outsourcing ? US aircraft manufacturers can hire engineeers in India at $8,000 per year, compared with $80,000 in Amurrica. The Russians want a cut of this outsourcing stuff,too . No inflation in this global economy. That's for sure . Remember also there are no unions in Amurrica. Only pseudounions.
44. ptboya - Feb. 18, 1999 - 10:31 PM PT
So what are you saying? That the US had *real* unions when inflation was running at 18% back in the late 70's.