Market Update


The Market

The overall market continues to rally. I think ya’ll are crazy.

Let’s look at where we are today:

  • Market cap/GDP is 132%. This is near the 139% level at the peak of tech bubble in 2000. GDP is also likely to decline significantly this year, so this is likely even higher.
  • Price/sales is 2x. The median since 2001 is 1.48x. This also represents a 20-year period where stocks have been historically expensive. For the entire period from 2003-2017, the market traded below this price/sales ratio.
  • The Shiller PE is currently 26.81. Not quite at internet bubble extremes, but still crazy considering the contraction that is taking place in the real economy. This is where the Shiller PE was before the crash of 1929 and in 2007 before the market fell apart.

Price/sales and market cap/GDP are near internet bubble extremes. This is really crazy.

I remember 1999 and 2000. It was a pretty incredible boom. I remember that it wasn’t about whether or not you could get a job – it was about whether or not you wanted one. The economy was in incredibly awesome condition.

I would not describe the condition of today’s economy as “awesome”.

I expect markets to trade at these kind of valuations when the economy is red-hot and everything is going swimmingly. I don’t expect these kind of valuations during a global pandemic in which unemployment is surging to 20% and we’ve eliminated a decade of job creation in a few weeks.

It’s like we’re selling a house that’s on fire on yesterday’s estimate of value from Zillow.

I think of valuations in terms of expectations. It tells you what the market expects to happen. Right now, the market is predicting a very optimistic future. This likely assumes that stimulus will work and the economy will quickly re-open, with unemployment dropping to 5% or so in short order.

This strikes me as an unrealistic fantasy. An unrealistic fantasy like winning the lottery, or scientists inventing chocolate sundaes that don’t make me gain weight.

It would be one thing to bet on that fantasy if I were being paid for that fantasy with a cheap valuation, but that’s not the case.

The bull case is that reality doesn’t matter and we should buy stocks because the Fed is providing so much stimulus.

Counting on the Fed to prop up an expensive market with deteriorating fundamentals doesn’t strike me as investing. It strikes me as speculation.

Maybe I’m wrong. It wouldn’t be the first time. Most people certainly seem like they disagree with me.

I don’t see why I need to participate in what I think is absolute madness.

I’ll continue to seek out positions where the risk/reward makes sense to me and hold cash if I can’t find these opportunities. Maybe I’ll under-perform. I don’t really care. No one has a gun to my head and is forcing me to participate in what I think is absolute madness. I don’t have a mandate forcing me to be fully invested.


Value investors are pumped.

Unfortunately, I think they’re like a starving man who is presented with a Snickers bar and thinks it’s an all-you-can-eat buffet. We have spent years out in the desert trying to find opportunities in a rich market where growth is rewarded at any price and value has been taken to the woodshed.

We’re jumping for joy at the first semblance of a bargain. I get it.

Of course, I’m talking about deep value investors. The value investors that succeeded in the last five years are those that quote Buffett’s 10x investment in Coke and 5x investment in See’s as a rationale to buy some SaaS company at a P/E of 200.

During economic calamities, we ought to be presented with a 2009-style opportunity. During a moment of total economic metldown the likes of which we haven’t seen in 100 years – we ought to have a 1974 style opportunity.

What we’re getting is a 2000-style opportunity.

I don’t think this is 2000. Value performed well in the early 2000’s because value was cheap and the economy wasn’t so bad. In the early 2000’s, unemployment peaked around 6%. The fact that the economy was doing alright caused value to chug along and deliver returns. Pricey stocks were annihilated because they were priced for the ’90s boom to last for 50 years.

Unemployment is likely to peak above 20%. I think that cyclical value stocks will continue to get killed in that kind of environment.


Goldfrapp – Felt Mountain




The new Dune movie looks awesome.

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