(01-26-2018, 01:40 PM)David Horn Wrote: I agree that this is an asymmetric era. Why is arguable, but the results seem plain. At the same time the GOP is trotting out its standard talking points, it's also wallowing in conspiracy theories -- more every day. We have unhinged politics and a radically tilted economy coexisting, and that can't be a stable condition under any circumstances.Here is the nub. That the stock market is at 1929 valuations is not deniable. You can see it for yourself using the handy calculator as Measuring worth.com: The Dow peaked at 381 in 1929.
In 2016, the relative price worth of $381.00 from 1929 is:
$5,340.00 using the Consumer Price Index
$25,600.00 using the nominal GDP per capita
Stocks rise in price because of inflation and economic growth. The first figure only accounts for inflation. The second for both. This is the one to use. The calculator only goes to 2016. You can add about 4% to these figures to get the 2017 value. So the 1929 market level in today's terms is about 26-27K. Current level is about 26.3 K
If we compare to previous market peaks (here the values are S&P500 since I have data for that index) we find the great bull market peaks in 1881, 1901, 1929, 1966 and 2000 correspond to 1800, 1830, 2320, 1540, and 2510 today, respectively. S&P500 is at 2880 today.
Now the supply side tax cut just passed is designed to (and almost certainly will) increase investment in capital assets, including stocks. So this tax cut is expected (by design) to increase the index values. It should have similar investment-stimulating effects of the 1997 capital gains tax cut, which was made six months after the Fed had warned of irrational exuberance in the stock market. In today's terms, the Fed's warning came when the S&H was at 1540 and the tax cut was made when the S&P was at 1770. Compare to the figures above. The Fed's warning came when the market levels was reaching the 1960's peak, which was the most recent one. The tax cut came when the market has risen further to levels approaching previous highs in the 19th and early 20th century, but still well below 1929 levels. When the tax cut was passed I concluded that the 1990's would reach all time high valuation by my P/R measure. I starting pulling out in early 1999, when the S&P was at 2340 in today's terms.
After 2000 I believed the stock market was in a secular bear market which would last until around 2020. During such periods the market does not rise back to the sorts of highs seen at secular bull market peaks like the ones I showed above. When i wrote my "irrational exuberance" article in 2015 the S&P was at 2320 in today's terms, that is about the same level at which I pulled out in 1999. I had pulled out before 2015 because I still thought the market was in a secular bear market and would never get to the levels it got to in 2015, much less what has happened after.
So here we are. Twenty years ago Republicans pass a "bubble act" when the market was at 1770 and got it to go up to 2510 (both values in today's terms) after which we went through two crashes and a financial panic. Why did they pass a "bubble act" in the first place? The answer is they did not think old valuations applied. The case for this belief was laid out in this book co-authored by Kevin Hassett which argued that stocks in 1999 (today's value 2340) were grossly undervalued and that the Dow would go to about 53K (in today's value) in the next five years. Hassett is Trump's chief economic advisor. They have not given up on their thesis.
Look what happened when they passed the 1997 bublble act. The market went from 1770 to 2510. If this happens again the Dow would go to about 35K in today's term, which is STILL undervalued by Hasset's assessment. Thus, Republicans in Congress honestly do not think their 2017 tax cut is a "bubble act" at all. After all, it is the work of a well-respected economist who was a top advisor not only to the current president, but to the last two Republican nominees. So he is a completely mainstream Republican figure.
The view I have given is a Bearish or "Value-investor" take. Safe haven is a bear site. Gold Eagle (where I have also published) is a bear site. Bears or value investors tend to be either gold standard paleoconservatives or Democrats (e.g. Mr. Buffet). So it reflects a certain personality type. "Bubbly" folks (at least in economics) tend to be Republicans.
As long as the market moves up, there will be no recession and the Republicans will be right, which you can be sure they will crow about. But suppose they really ARE right? What does that say? Read the wiki article on Dow 36K. The core of their argument is that the risk premium (the extra return from stocks over that of bonds) should be zero. Their tax cut is a big bet that this argument is right (if they are wrong the market will crash we will get a depression and Trump will be another Hoover). So they really believe in the Dow 36K thesis.
The return on a retirement savings account consisting of a mix of stock and bonds will deliver, on average, a real return equal to 1.5 + P*R percent, where P is the fraction in stocks and R is the risk premium. Historically R was 4.5, and so a retirement account 100% in stocks would yield a 6%. Go to one of those online retirement calculators. Here's one that has the necessary features https://retirementplans.vanguard.com/VGA...meCalc.jsf
I ran the numbers for an after-tax income 100K assuming a 6% return and one choses to live on 75K of that income and saves 30K (the extra 5K comes from maxing out his before tax 401K contribution). If he starts at 30 and retires at 65K he will have enough generate a 75K retirement income and he will never feel any effects of retirement. (Here I am ignoring SS and any pensions, just looking at pure savings)
In a world where R = 0, the return falls from 6% to 1.5%. In this situation, the worker lives on 55K and saves 50K and they will generate about 55K of retirement income. But note than their standard of living has fallen from 75K to 55K for the same income, simply because of the fall in R. So why would then *want* R to fall?
We now come to *why* R is falling. It's NOT because of rich people. Rich people have *always* invested in the markets and they did so for a century during whiich R stayed at a nice high 4.5. So what's changed? 401Ks, IRAs, and the rise of the idea that *everyone* (not just the rich) should save for retirement. This has resulted in a steady fall in R over the past 35 years (you can track it in falling dividend yields and rising market valuations). The whole Dow 36K thesis depends on people mindlessly throwing more and more money into retirement accounts, of which most goes into stocks because bond yields are shit nowadays so that they end up cutting their standard of living down to near poverty levels so that can continue to live at that level after they retire.
I suspect people are going to want to keep their living standards and vote against the Republican plan, by sliding that %stock component in tens of millions of 401Ks down a bit "taking some money off the table" as the market continues to rise.
Republicans are betting their party's future that their base voters won't do that.
Quote:I doubt that the economy, or even the stock market, will collapse in the near term, but they may. That moves us into the territory that Warren Buffet noted: the receding tide will exposed all the naked swimmers. Let's assume that this long, non-stop run-up released all the gambling spirits. If that happens, the reckoning will be nasty. With the US less interconnected to the rest of the world, would the US be taking a solo bath, or are we still a big enough elephant that we would take the rest of the world down with us?Perhaps