Saturday, April 25, 2015

Excellent Post By Lux Capital: "Of Bubbles, Synapses & Slime Molds"

This post is really interesting:

Around this time last year, while sitting with Yahoo founder (and a co-investor in some of Lux Capital’s investments) Jerry Yang, he told me he thought the market had jumped the shark with the huge head-scratching headlines of Snapchat, Oculus and WhatsApp. But he said the most important thing I heard: he capitulated. Now, he said, he thought it could go on for two more years or maybe more. And at that moment, I started tracking what percentage of people I polled and spoke with on a given week said “two years”. Around that time, from a pretty diverse sample set ranging from cynical short sellers and deep value equity investors to CEOs, VCs and bullish entrepreneurs, 10% of people imperfectly (and not very empirically) polled, said “2 years”. About six months ago, the number crept up to 25%.

Today, in April 2015, it stands at 1 in 2, 50%. My speculation is that when 80% of my imperfect sample size measure answers “two years”, then that day, it’s over.
This seems like a very good metric. Look what faithful bear Tim Knight said on Thursday:
"it’s looking like the S&P might be poised for another 80 points higher in the near future. The relentless bull market is so long-lived at this point, I’ve noticed a severe change in tone over at ZH. The comment section has morphed from a cabal of tin-foil hat wearing lunatics into basically a bunch of people pissed off at ZH for being solidly bearish since its founding in early 2009. I have seriously never seen behavior like that over at ZH, so I guess the last wispy threads of bearish spirit have finally been snuffed out for good."
Poll in the comments section. Be honest - how much longer do you think the bull market can last? My over/under is one year.


whydibuy said...

I resemble that remark!
I have always thought of Zero Brains, er, I mean Zero Hedge as a permabear site with nothing of value to offer.
If anything, it provides that wonderful bull market fuel known as the wall of worry. Yes, not a day goes by without Zero Brains trumpeting some chart that denotes imminent crashing of stocks. Its becoming better known and seen as the bear rag that it is. And it has cost readers enormous wealth over this wonderful bull market. Is it any surprise that the bear readers are frustrated with its useless rants and conspiracy theories about world governments plotting to do something harmful?

Josh H said...

I think a site loses credibility when it only presents one sided arguments, so I stopped following ZH. Fortunately for ZH owners, most americans are not like this...

I think that 2015 is the year that the market goes down.

Energy sector profits will be negative (even with some companies having hedges). While lower gasoline prices help consumers discretionary income, it takes time for that money to be spent vs paying down debt or saving etc.

Other businesses that benefit from lower energy prices do not see those benefits immediately.

I read somewhere (but didn't verify) that foreign profits are about 40% of the S&P. With the dollar up strongly, there will be headwinds on profits of 4-8% (10-20% rise x 40%).

So the only way for the market to go up is for PE expansion. While that could happen, I wouldn't bet on it.

I am net short, but I am by no means super bearish. I still see plenty of long opportunities. There are plenty of stocks that are trading at 10-12x earnings while plenty of stocks trading at 20-25x to put the average multiple at 16-18x.

Anonymous said...

The market is really overvalued but I have no idea when it will peak. In 2000 and 2007 there were signs of an impending crisis before the market peaked, and I don't see the same thing today... falling oil prices seem like a net negative for the economy, but I don't think that by itself will be enough to generate a systemic crisis. My guess is that the next blowup will begin somewhere overseas and ripple over to the US.

CP said...

Government debt is the bubble. If you take federal, state, municipal and add in pensions and healthcare, it clearly can never be repaid in real terms.

Yet the "Big Truth" (a concept in Atwater's book that I reviewed yesterday) is that the government obligations are risk free, as good as cash. (M1 and M2 are much rarer and probably will be more valuable than government bonds.)

The bond bears/equity bulls may not own government bonds - but they have priced their equities off of bond yields (e.g. the US 10 year yield) which is just as bad.

The question is: what is the best store of value? What can we buy today to have the most purchasing power in 1,5,10, or 30 years from now?

I think on the short end of that spectrum it is USD. But keep a close eye on potential substitutes.

Silver went from being a fantastic buy (and store of value) in 2009 to a delusional joke in 2011 - only two years!

The best store of value can change fast.

Forget about Russia and Germany creating a joint, gold-backed currency and economic alliance (which the US elite would stop at literally nothing to prevent).

Gold backing isn't even needed. All it would take is for a country, or group of countries, with ~$10 trillion in GDP and a real legal system to credibly promise not to create any more currency units. (Like the Bitcoin promise.)

Then that store of value would blow USD away.

The problem is that if some store of value trumps USD, then people will sell USD to buy it, and sell Treasuries to buy debt denominated in that currency. And then the welfare-warefare state would implode because its borrowing costs would rise to appropriately reflect the fact that the money is being borrowed for consumption rather than investment.

Steve said...

"The best store of value can change fast."

Blech, if it changes fast, then by definition it was never a store of value.

"All it would take is for a country, or group of countries, with ~$10 trillion in GDP and a real legal system to credibly promise not to create any more currency units."

As soon as that happened, the currency would appreciate so much it would destroy export industries and lose all credibility. Look at what happened to Swissy after then refused to piggyback on Euro QE. QED, its not possibly to credibly promise no more currency units.