Transcription
Where are we now?
We're in a catastrophic situation.
Catastrophe seems strong.
Yeah. Well, you I I think you can make arguments the economy has a lot of problems and and and there's there's a paradoxical problem with the economy and that is you can go up to any 7-Eleven and they can't hire. They there there's help wanted ad. So, it looks like an economy burning burning hot. But if you look at the high end, there's layoffs going everywhere. there's foreshadowing of of real trouble coming.
So, college graduates, even Ivy League graduates, humanities graduates, not engineers or chemists, but you know, the mark the business guy or whatever, they're having trouble getting jobs.
The kind that they're trained for.
Certainly.
Yeah. But there's just I mean I know a bunch of them and but you see it in the numbers. Educated 22 year olds are having trouble getting jobs, but 7-Eleven can't hire.
Right?
So, what what is that? Well, so this is a normal sort of it's a distorted version of of I think a recession coming or we're in. Now, where it gets complicated is if you don't believe the inflation numbers, which I don't, and you've got Chapwood index and shadow stats that give inflation numbers that are probably on average 6 or 7% higher than the official numbers. The official numbers are corrupted and I don't want to go into it because it's technical, but
But the CPI is
The CPI is crap, right?
I agree with that.
Now, here's the problem. If the economy has been growing 2 and a half% and the inflation numbers are underestimated by four, means we've been in a recession the whole way.
Yeah. Moving backwards.
We're moving backward. And you say, "Well, that can't happen. The recessions last, you know, two quarters, whatever." And I go, "No, the British Empire was in a recession for a century, right? They just shrunk and shrunk and shrunk." And so, so no, you can be in you can you can be in a slow decline.
Um, so so but that's not what we're that's not the
Catastrophic decline.
Yeah, actually I I think it's a stupid word because agree it's like you play golf.
No.
Well, if you play golf and you you go down into the sand trap, according to the definition of a recession, once you start climbing out, you're out. You ask a golfer if he's out of the sand trap because he's on the ups slope of the trap. He's not.
No. So the fact that your economy is now growing again, if it's coming out of a hole, as far as I'm concerned, you're not out until you've gotten past that previous period.
So you're at par.
Yeah. So you're at par, right? No, that's not the catastrophe because they happen all the time. And we've been able to either cover them or fake them or prevent them through very bad monetary policy policies, right? And what's bad? Um pumping the stock market is just stupid. But but you know private equity buys private equity um buys uh has bought up 80% of the hospitals the health care and what they do is they go in and they they they buy some organization. They strip it of its assets. They load it with debt. They pay themselves huge fees and bonuses. And then they sell the shell of a company which is now effectively worthless into the marketplace like to pension funds who are not smart enough to recognize that they just bought a piece of crap. And according to um Gretchen Morgansson a 47% bankruptcy rate now
Post sale.
Post sale. Now, as long as it's profitable to buy viable companies, destroy them, sell the shell, and make money, monetary money's too loose. Precious capital, if capital is is of real value, um it's a moat. So, a good businessman can get capital, bad businessman can't. the fact that Black Rockck could get get buy single family dwellings, which is a terrible business. You really can't make money unless you can unless there's a housing boom and you leverage up to hell. The fact that they could get it for at an interest rate of 0.15%. Is a highly flawed system. And that's where the inventory went after 07 to09. And it got bought up by these guys who could lever up and then charge rents to people. So they basically scoop scoop up the housing market
With with free with free money.
With free money kind of free money unlike you know credit cards which are 25%. Right.
And not just free I mean if once you factor in inflation
It's it's a gift.
Yeah. It's it's it's it's profitable money.
Literally just taking the loan is profitable. You don't have to do anything with it.
Yes. Yes.
Right. Yeah. So, so here here's what happened. Somehow um the market has ceased to respond. And the reason the market's important is because um is because of the wealth effect. And that is that if you own equities, you own a house and they're soaring in price, your spending habits change. You you I'm having a great year, for example. So when the bank of dad has to provide some liquidity to the children, I feel okay about it, right?
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So, what happened? Well, I'm getting tired of seeing these. I see four-year plots of the equity market and they make various comparisons. I go, don't go back four years. Don't go back 40 years. go back 120 years. So I follow about 25 metrics of valuation. Valuation is inherently a price of the market relative to something it ought to track. Whether it's the earnings, the revenues, the book value, um a thing called Tobin's Q, the GDP, which is a fictional number as I've heard you recently say.
Um, but I found about 25 of them. So you can kind of track whether the markets have gotten expensive relative to the thing it ought to track. Now um around 1981 the markets were at the cheapest valuation arguably in history. Inflation was scaring everyone which is why they were cheap.
Um, it turns out that the boomers were just hitting the workforce. So, demographics was a huge tailwind starting around then. And most economists agree demographics is huge. Now, I I'm disingenuous in that I quote economists selectively. In the next sentence, I'll probably say something horrible about them. And so, I'm obviously cherry-picking my data, but economists like demographics.
Um, so the boomers hit the workplace. So it was almost guaranteed. I think Reagan was not important. I think I I think he did some very important things, but I think whoever got to be president was going to be at the beginning of a boom.
Um, it turns out that um China was coming out of the dark ages. They started selling labor at slave wages. They were so desperate for capital when they sent their leader, don't make me pronounce his name, to the United Nations when he first started opening up
Was it Deng Xiaoping?
Yes. And um they had to scrge to get the money to send them. I mean, they really didn't have any foreign capital. And so I remember when China said, "We're going to let our workers keep some of their profits." And it's like, whoa.
Um, Russia was had Soviet Union hadn't collapsed, but they were in trouble. So, they were obviously cranking a resource base as hard as they could, and we had our guys in there helping them and stuff like that.
Um, and interest rates were at all-time highs. And if you read a 1999 article by Buffett, who I think is um a hoser, I think he's much more of a stock jobber, much more of a conniver than he is. He loves to be the the mafia down walking around in a bathrobe saying I'm harmless. He is not harmless. When when when when we're in a bottom, he breaks all sorts of laws. They do all sorts of insider crap to bail the system out. But he pretends to just like Dairy Queen and Coca-Cola, whatever. He wrote an article in 99 that said, "You want to understand secular big long bull versus bare markets. It's all interest rates." He said, "It's not GDP." He said, "From 67 to 81, everything sucked. it treaded water uh not accounting for inflation and the markets dropped 75% accounting for inflation. So it was a horrible period. He said the GDP grew faster during that period than from 81 to 99. But interest rates from 67 to 81 went up
Monotonically.
Monotonically. From 81 to 99 they went down. So we started in '81 with interest rates in the high teens and over the next 40 years they dropped to zero. That is absolutely the story. So when interest rates are dropping risk assets go up.
Yep.
Because they're competing against and as they get cheaper. So bottom line is that um we just enjoyed 40-year recency bias.
Can you just explain that principle right there? You said as interest rates drop risk assets go up. Or are you going to buy shares of a stock that by the way's treated you like crap over the previous 14 years or a bond that pays you 17%.
Right. Right. So the bonds become less the fixed income becomes less and less attractive steadily for 40 years. Now take the K Schiller PE which is which is just one of the metrics but I happen to like it. It's a kind of an averaged earnings price earnings ratio. It also doesn't allow you to cheat because it doesn't use the immediate and forward PEs are stupid but K Schiller averages so so I like it. If you take the K Schiller from n from 1880 to 1990 it just channels it. It just it's it's a valuation metric and it just goes up and down and up and down and that's what it should do. It it responds to things but it stays in a channel. It's flat. Valuation metrics shouldn't trend. They should trend for a while but then they should regress to the mean unless you can someone can give me an argument why they should trend and I don't think there is one and I've tried to find one and then in 1990 they just kind of started to take off and the K Schiller so the K Schiller P the K Schiller PE averaged around 12 13% for 110 years and around 1990 oddly 1994 in every metric is when things left I think it was because of a bond problem or something. I haven't been able to quite figure out why, but the valuations went up. Now, here's the problem with valuations going up and and now they're astronomical. So, the Quesp average 13, which meant it was priced to return about 8% a year, right? If you think of it as a gas station and you're paying, you know, 13 to1 earnings, you're getting about 8%. And and and it keeps pumping gas every year, you get about 13%.
Um, it is now 38. It's way above where it should be. It's a factor of three 200%. Now, if you assume it's never going to regress to the mean, now you're accepting, crudely speaking, a 2 and a half% return, not an eight. Now, if you're okay with 2 and 1 half%, that's fine. But by the way, most pensioners, most boomers are not planning on 2 and a half%. They're not
Right now. If it regresses to the mean, it's a 70% correction. Assuming if it's fast, assuming nothing else changes, no damage to the economy, you know, all the bad things that happen when you lose 70% off the equity market, which is a questionable assumption. Another way to think about it which I think is much clearer is if you say look we'll just grow our way. I think I go up or down or up and down. You don't worry about the path. You say if we grow 2 and a half% a year which I just questioned as being valid but let's assume it's valid. If we grow 2 and a half% a year to get back to historical average of 13 will take 45 years. Now here's the thing. I made no assumptions about good news bad news. I assume it's going to be like the 20th century 2 and a half% a year. It'll be 45 years from now. I don't care what path you follow. If we are at the average case shield or PE and the economy grew 2 and a half% a year, the equity markets will have returned capital gains zero.
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