Shiller: high earnings growth and low volatility typical before bear markets

Professor Robert Shiller came to fame when he published his book Irrational Exuberance in 2000 warning that the stock market had become a bubble which could lead to a sharp decline. In response, he has described how stock-loving little old ladies, and others, verbally assaulted him for his bearish tones on his speaking tour that year.

In 2005 as the US realty market was entering a Fed-enabled bubble of its own, Shiller again warned that double digit price rises could not outstrip inflation long term because, except for land restricted sites, price increases have tended to be constrained by the rate of wage inflation over time.  In 2006 he wrote: “there is significant risk of a very bad period, with slow sales, slim commissions, falling prices, rising default and foreclosures, serious trouble in financial markets, and a possible recession sooner than most of us expected.”   Comments like these are fighting words in Canada, Australia, Britain and other debt-fueled hot spots today, to be sure.

Over the past 5 years, as repeated Central Bank interventions and stock buy-backs elongated the current market cycle years beyond the global manufacturing peak in 2011,  Shiller has been more hesitant to warn about above-average asset valuations.  (It is thought that his business ties to Standard & Poor’s and mainstream finance academia may also have become a subduing force in his commentary over the years.)

Still, his historically reliable cyclically adjusted price-to-earnings (CAPE) ratio (in orange below) versus the S&P 500 price index (in blue), speaks for itself, as shown here.  Today it’s just one of the many historically reliable valuation measures screaming about capital risks in investment markets.

This week in Project Syndicate, Shiller ventured the most bearish article he has written in some time, see The U.S. stock market looks a lot like it did before most of the previous 13 bear markets.

And to all the long-always stock lovers who argue that a bear market can’t arrive because real earnings growth are double digit and volatility at record lows.  Looking at data since 1881, Shiller bursts their narrative fallacy:

“…high growth does not reduce the likelihood of a bear market. In fact, peak months before past bear markets also tended to show high real earnings growth: 13.3% per year, on average, for all 13 episodes. Moreover, at the market peak just before the biggest ever stock-market drop, in 1929-32, 12-month real earnings growth stood at 18.3%.

Another piece of ostensibly good news is that average stock-price volatility — measured by finding the standard deviation of monthly percentage changes in real stock prices for the preceding year — is an extremely low 1.2%. Between 1872 and 2017, volatility was nearly three times as high, at 3.5%.

Yet, again, this does not mean that a bear market isn’t approaching. In fact, stock-price volatility was lower than average in the year leading up to the peak month preceding the 13 previous U.S. bear markets…before the 1929 crash, volatility was only 2.8%.

This is not to say that a bear market is guaranteed…

But my analysis should serve as a warning against complacency. Investors who allow faulty impressions of history to lead them to assume too much stock-market risk today may be inviting considerable losses.”

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Welcome to The Everything Bubble 2017

Good visual summary of some of the many asset bubbles today.  Thanks central bankers!

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Ted: Developing our conversational competence

Good conversation skills seem to be a dying art, but we can build them if we care. Controlling our own ego and self-focused tendencies is a critical first step.

When your job hinges on how well you talk to people, you learn a lot about how to have conversations — and that most of us don’t converse very well. Celeste Headlee has worked as a radio host for decades, and she knows the ingredients of a great conversation: Honesty, brevity, clarity and a healthy amount of listening. In this insightful talk, she shares 10 useful rules for having better conversations. “Go out, talk to people, listen to people,” she says. “And, most importantly, be prepared to be amazed.” Here is a direct video link.

Also see 10 ways to have a better conversation:
“It took me years to realize I was much better at the game of catch than I was at its conversational equivalent. Now I try to be more aware of my instinct to share stories and talk about myself. I try to ask questions that encourage the other person to continue. I’ve also made a conscious effort to listen more and talk less.

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More lawsuits against oil cos for knowingly inflicting climate harm

San Fransisco and Oakland issued claims against 5 major oil companies in the state courts on Wednesday in the latest attempts to hold fossil fuel producers accountable for the effects of climate change.  The lawsuits call for the oil cos to pay billions into a fund for the coastal infrastructure necessary to protect property and neighborhoods against sea level rise in the sister cities, which face each other across San Francisco Bay.

These suits follow others filed by California’s Marin and San Mateo counties and by the city of Imperial Beach in San Diego County against 37 fossil fuel companies earlier this summer.  See:  San Fransisco, Oakland sue oil giants over climate change:

“These fossil fuel companies profited handsomely for decades while knowing they were putting the fate of our cities at risk,” San Francisco City Attorney Dennis Herrera said in announcing the lawsuits. “Instead of owning up to it, they copied a page from the Big Tobacco playbook. They launched a multi-million dollar disinformation campaign to deny and discredit what was clear even to their own scientists: global warming is real, and their product is a huge part of the problem.”

The legal task of apportioning responsibility for damage was aided by a peer-reviewed paper in the journal Climatic Change this month which quantifies the amount of sea level rise and increase in global surface temperatures that can be traced to the emissions from specific fossil fuel companies. It concludes that nearly 30% of the rise in global sea level between 1880 and 2010 resulted from emissions traced to the 90 largest carbon producers. While six percent resulted from emissions traced to Exxon Mobil, Chevron and BP, the three largest contributors.

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Preet Bharara: That Time President Trump Fired Me

Interesting to hear Bharara’s side of the story in first being asked to stay on, and then being fired by Trump.

On March 11, 2017 President Donald Trump fired US Attorney Preet Bharara. Preet tells the story in detail for the first time. Then, a conversation with former Secretary of Defense and former CIA Director Leon Panetta about how to clean up a chaotic White House, trade Russian spies, and stand up for what’s right, even if it means defying a president.

Here is a direct audio link.

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Most elevated global assets prices ever in history–what’s your move?

Deutsche Bank strategists are out with a new report stating the obvious:  “We’re in a period of very elevated global asset prices – possibly the most elevated in aggregate through history” and there are “a number of areas of the global financial system that look at extreme levels.”

Unless one is in complete denial, and/or paid to keep selling risky, low yielding assets to others at every price–there is simply no denying the clear and present dangers at hand:

“This includes valuations in many asset classes, the incredibly unique size of central bank balance sheets, debt levels, multi-century all-time lows in interest rates and even the level of potentially game changing populist political support around the globe. If there is a crisis relatively soon (within the next 2-3 years), it would be hard to look at these variables and say that there was no way of spotting them.”

The test for every individual at the moment–whether in the financial management and advice business, a client of one, or a do-it-yourselfer–is given the facts before us, what is your response?

For most in the financial business, the answer is keep buying and holding and hope for the best. Very few ever take active steps to seek meaning capital defense, because first it requires proactive, independent thinking, and second it means having the courage to step out of rising markets and look dumb while you wait for lower prices to return, however long that takes.

Even the few who express a bearish view or talk about massive global risks, tend to keep their clients and followers fully invested in the most vulnerable securities as they tumble into bear markets (Seriously, check their performance in 2008 for some insight).  The business is set up to collect the highest fees and commissions on the most risky assets and funds, so reducing exposure means a pay cut, and who wants that?

Others have learned that trying to be defensive will get you fired when your ‘performance’ lags others on the upside, even though indiscriminately buying and tracking indices up, means you also track them down.  When prices finally do mean revert, clients are most likely to sell at the bottom, fire and look to sue you, their long-always leader.

We each pick our poison.  The truth is that investing in publicly traded securities is a devil’s bargain of sorts.  No one gets through a full market cycle without regret or periods of frustration.  But it’s not a race, it’s a contest of our own personal discipline.

In the end, it’s not what markets do, but what we do in response to each part of the cycle that defines our longer term financial success or failure.  Today more than ever in our lives, we should choose very carefully.  Also see:  Stock Market Bubbles in Perspective.

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