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Robert Shiller had an interesting analysis of the current stock market's "frothiness": http://www.businessinsider.com/robert-shiller-stock-market-b...

Basically, the stock market is a bit overvalued, and people expect that trend to continue. However, peoples' level of confidence in the stock market pricing is very low. To me, if there's a coming crash, it's going to be because investors are overly anxious rather than because valuations are so stratospheric.




Hopefully gradual increase in interest rates will result in stabilization of stock value as people pull out for safer low-rate returns (which are basically non-existent now).

Then again the fed sure is taking their time...


The problem is that banks are leveraged to the hilt.

If you have 30x leverage in 5 year duration bonds, and interest rates go up 1%, you lose 150%!

ZIRP (0% interest rates) is a wealth transfer to big banks, a backdoor bailout.


Can you elaborate on this last statement?


A bank borrows at the Fed Funds Rate (say 0.1%) and buys one year Treasuries (currently 0.26%). On Treasury trades, banks can do leverage of 100x or more. So the bank's profit is 0.16 times 100 or 16%.

If the Federal Reserve raised the Fed Funds Rate to 1%, then the bank would be borrowing at 1% and lending at .26%, and they'd be .74% in the hole per bond, 74% accounting for 100x leverage. Big banks are comfortable doing this trade right now, because they know the Federal Reserve isn't going to raise interest rates. (It is more accurate to say that the Federal Reserve is owned by the big banks, rather than acting independently.)

Instead of buying Treasuries, they could invest in stocks, futures, corporate bonds, mortgages, houses, whatever. The bank borrows at zero and buys stuff that yields (on average) greater than zero. The bank can lend money to hedge funds who in turn invest in VC funds or startups. (ZIRP indirectly causes a startup valuation bubble.)

Most of the time, the banks make huge profits (borrowing low and lending high).

Every 20 years, there's a severe recession, and the big banks get a bailout.

When interest rates are lowered, that's an indirect bank bailout. Suppose the bank owns a 5 year duration bond, uses 10x leverage, and interest rates go down 1%. The bond prices go up 5*1 = 5%. With 10x leverage, that's 50% profit.


the problem with this theory is the bank doesn't borrow at zero. Goldman Sachs has 380 Bln of outstanding debt, and is paying roughly AA corporate rates on that debt. Overnight bank rate is 0.13 right now, which is the Fed Funds rate


That's only corporate bonds. Federal Reserve transactions are not publicly disclosed, which is one of the issues.


Banks get the money at 0%, lend it out at above 0%. Profit.

(And if they don't find anything, they only pay 0% while they wait.)


The average retail investor is still licking their wounds from 2008. Many, like myself, put our tiny blood soaked wads in CD's, at .01 percent. There are millions of Americans who can't gamble on a rigged stock market, and relied on a healthy 5% interest rate.

This free money being doled out by the Fed to a select few entities will have consequences. My biggest fear is market will finally win over retail investors from 2008. Then, and only then will the big boys pull out leaving us holding the empty bag. Big boys who should gave bleed out if Bush Administration didn't throw them a coagulant? (I know a cheezy metaphor.) Oh yes, My America--you are the picture boy of Capitalism?


The average retail investor is doing just fine. Anyone who did something as basic as hold an S&P 500 ETF is up quite a bit from the crash.


Well, yes. But that dies to fit the narrative of markets bad! Capitalism bad!


well, public markets have gone up dramatically since the trough in 2008/2009


Robert Shiller is an academician not an investor. During 2009 when the market was at an all time low he told Steven Schwarzman that the market would remain low for many years, Steven said no, it would bounce back in less than a year.

Steven was right.




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