
Wall Street heavyweights are sounding alarm about stock prices - xoxoy
https://www.bloomberg.com/news/articles/2020-05-13/wall-street-heavyweights-are-sounding-alarm-about-stock-prices
======
nafey
This does sound concerning however the counter arguments for an imminent stock
market crash are that there are no other good alternatives for your
investment. Even though fundamentals might not be lining up these conditions
can prevail for much longer than one would expect. As they say "markets can
remain irrational longer than you can remain solvent".

~~~
badfrog
> there are no other good alternatives for your investment

If the market is going down, then even cash is a better alternative.

~~~
mrits
If you KNOW the market is going down you certainly don't want to be holding
onto cash...

~~~
Justin_K
What should you take a position in?

~~~
ac29
If you could be 100% sure how the market was going to go (up, down, sideways),
you could make a lot of money trading options. It's when you're only 65% sure
that's difficult.

------
jinpan
> Legendary investors Stan Druckenmiller and David Tepper were the latest to
> weigh in after a historic market rebound, saying the risk-reward of holding
> shares is the worst they’ve encountered in years.

True, but what are they going to do about it?

They would be hard-pressed to find a rewarding asset class today that has
billions in liquidity, with less risk.

If they hold cash/tbills, they risk losing a good chunk to inflation from the
new monetary policies.

They could try to hedge for a market crash, but timing it seems difficult -
the market can remain irrational longer than they can remain solvent. And
hedges are aren't cheap with the higher IV levels today.

~~~
harryh
What inflation? CPI is currently _negative_.

~~~
jklein11
This was largely due to the supply glut of oil. Price of food went up by~3.5%.

Additionally CPI tends to be a lagging indicator. In other words it is a good
way to determine if we have just seen massive inflation. The stock market is
forward looking, meaning analysts are considering future risks in pricing the
assets.

~~~
harryh
_Additionally CPI tends to be a lagging indicator._

This is true, but various parties have been predicting a large increase in
inflation in the US for years and years and they keep being wrong. I expect
them to be wrong again this time too.

But we'll see!

~~~
_dps
It's simply not true that they keep being wrong. Yes, hyper-inflationists were
wrong. But "much larger inflation"-ists were not wrong.

Anything with inelastic supply has gotten more expensive by an average of
about 3% every year for the last decade: health care [0], education [1], real
estate [2]. That's 50% higher inflation than the 2% conventional target, and
arguably after the revelations of 2008 one might justifiably expect even lower
than 2% natural inflation.

Then there's the very rapid rise in the price of _stocks_ which is itself a
form of price inflation (it takes more money to buy the same share of the
productive economy).

Anything rich people/institutions hold or supply in exchange for dollars from
laborers has gotten more expensive at a substantially-higher-than-normal rate.

[0] [https://www.in2013dollars.com/Medical-care/price-
inflation](https://www.in2013dollars.com/Medical-care/price-inflation)

[1] [https://www.in2013dollars.com/College-tuition-and-
fees/price...](https://www.in2013dollars.com/College-tuition-and-fees/price-
inflation)

[2] [https://www.in2013dollars.com/Housing/price-
inflation](https://www.in2013dollars.com/Housing/price-inflation)

~~~
harryh
There will always be some subset of goods that rise in price faster than the
rest of the basket especially when those goods have artificial constraints on
supply. That doesn't mean that inflation is rising faster than the overall
basket of goods.

When we talk about the rate of inflation we aren't talking about the cost of
health care or education or real estate or really any other particular good.
We're talking about the value of money.

~~~
_dps
You're just choosing a definition that is convenient for you, and I might
mention convenient for the wealthy establishment. The things ordinary people
most need to buy with money have gotten more expensive — not as a blip, but
durably and steadily for a decade. If you want to die on the hill of "this is
not how I choose to use the word 'inflation'" then that's fine, I just don't
see it as very persuasive.

~~~
harryh
I'm not trying to claim that rising costs in health care, education and
housing are not a problem.

I'm just saying that the nature of the problem isn't runaway inflation. It's a
different problem than that.

~~~
_dps
I don't want to belabor this, and I'm sure that your intentions here are good.
I'm very aware of various technical definitions of inflation, and I understand
where you're coming from.

I will leave you with this — do you think there might be a _reason_ why the
conventionally promoted inflation definitions and measures allow rapid
increase in cost of living on fixed income to be called "not inflation"? Do
you think that's a good definition, if it means someone with a fixed future
cash flow can now buy a smaller stream of future goods? What/who is served by
sticking to these (IMO gerrymandered) definitions of "value of money"?

We've gone deep enough and I will leave my contribution at that (though
obviously feel free to reply). I too was educated on these technical
definitions of inflation and I have become extremely skeptical of them as I
have seen the mismatch with lived reality.

Edit: I won't make any more points, but I will say that I consider the
implications in the response below here uncharitable and unresponsive to the
points above.

~~~
harryh
No, I don't believe that conventional measures of inflation are a conspiracy
by the rich and powerful to keep the working man down.

I do understand that there are others with this point of view including,
apparently, you.

I have tended to notice that people who believe these things don't tend to
defend them on technical merits but tend to retreat into accusations against
the rich and powerful instead, because _of course_ that group of people must
be pulling a fast one on everyone else. I do not find these sorts of arguments
persuasive.

------
hhs
This is a small group of people and may suffer from sampling bias. Is there
someplace that keeps track of what more people are saying over time in a
systematic manner?

~~~
pmorici
The problem with listening to these kinds of things is that you are only
getting their opinion at a discreet point in time and their opinion might
change quickly one week to the next. Druckenmiller openly talks about how he
often changes his mind and does a complete 180.

~~~
hhs
Indeed, wonder if there’s a term for this type of hedging behaviour, which the
article also references when citing the president’s tweet. Is this studied in
the economics literature over time?

------
ericmcer
There wont be another crash like March, probably just a slow bleed over the
next 6 months. My personal plays are Put option Leaps (2022) on a few
retailers whose stocks have semi-recovered for now but are definitely destined
for the graveyard in the next few years. Don't try to predict the next
crash/recovery.

~~~
save_ferris
> There won’t be another crash like March.

This too sounds like a prediction to me. Keep in mind that a bunch of huge
companies like Google, Amazon, Wal Mart, etc. own a ton of commercial real
estate. If commercial real estate does collapse, it’s going to have impact.
The tech giants seem to be sitting on massive piles of cash, but I guarantee
that’s not true for everyone.

We all saw how devastating the CDO monstrosities were in 2008, and it’s hard
to see how this outcome will fare much better if the commercial real estate
sector has been playing the same games since the last crisis.

~~~
ericmcer
The Fed is actively watching now. Stimulus bills can and will be pushed
through in a day or two. The Fed reaction to this was also much faster and
more aggressive than 2008, there’s no way they let another 30% drop happen as
quickly as in March. That’s not really a prediction other than assuming that
they aren’t going to completely change their position and strategy and let it
collapse.

------
malandrew
I found this article about a global dollar short squeeze particularly useful
to better understand why the US market may have decoupled:

[https://www.lynalden.com/global-dollar-short-
squeeze/](https://www.lynalden.com/global-dollar-short-squeeze/)

------
HenryKissinger
The stock market has turned into a get rich quick scheme in the minds of many
retail investors. The WallStreetBets subreddit isn't helping. They even made
the cover of Bloomberg recently. People with little to no financial education
see someone make +5,000% returns with a lucky trade or options contracts, and
it becomes hard to resist the pull. WSB is the 39th most active subreddit
today. At the beginning of the lockdown I overheard two people on the street -
likely not finance professionals - chatting casually about stocks. That
triggered a red flag in my head. If stock trading becomes a mass popular
hobby, like video games and movies, I have a nagging feeling that people are
in for a rude awakening.

~~~
valuearb
Anyone can pull off a hugely profitable trade and become a WallStreetBets god.
This is what you do:

1) Open 20 different Reddit accounts.

2) In each of them claim to make a different crazy bet, preferably using
options and “document” it. Doesn’t matter if you actually make the bet,
photoshop works fine too.

3) Once the trades close, abandon all your losing accounts, and start posting
photos of “your” new Ferraris and luxury yachts on your winning accounts.

4) Announce you are using your magical trading skills to open your own trading
fund open to a select few redditers who wire you money first.

------
cft
Since about 2008 stock prices have officially decoupled from the fundamentals,
in the post-divident, Sarbanes-Oxley and QE era. The stock market no longer
serves as a collective economic planning mechanism. This won't end up well.

~~~
harryh
On Jan 1 2018 the Shiller PE ratio was 24.02. Today it is 26.81. That's hardly
a decoupling from fundamentals.

[https://www.multpl.com/shiller-pe/table/by-
year](https://www.multpl.com/shiller-pe/table/by-year)

~~~
robomartin
It absolutely is. P/E ratios of 20 to a zillion to one only happen in the
stock market. Don't believe me? Build a company, keep it private and then go
sell it to someone. If you ask for anything more than about 5x you'll be
laughed out of the room.

The stock market is about speculation, plain and simple. At some level is
people playing "business owner" without having a clue how to build value or
where it comes from. Go back to my prior 5x scenario for context.

Nothing wrong a speculative market, it's just a matter of accepting that
reality and everything that comes with it. I made a pretty nice living a
couple of decades back day trading full time. Traditional investors putting
their money into the market have no clue what goes on in the speculative
battleground they trust with their savings.

Again, to clarify, I am _not_ saying it is a negative. One can do very well in
a speculative market. The key point is that it is important not to confuse it
with reality in any way.

~~~
harryh
Private companies get sold for over 5x all the time. Just to pick the obvious
recent example: Giphy.

~~~
cft
A top VC funded company obeys the same pricing laws as a public market one.
It's part of the establishment. He is talking about bootstraped non-sanctioned
S corps.

~~~
harryh
Financial numbers are harder to come by for private companies but I have no
reason to believe that PE ratios for companies like Bloomberg or Mars or
Deloitte are hugely out of line with similar public companies.

But if you mean small businesses like a restaurant or a dentist's office or
whatever I would say that the comparison you are making doesn't really make
much sense in the first place. Large companies have huge economies of scale
and brand value compared to a mom & pop enterprise who's revenues are just as
much labor income of the owners as return on capital.

~~~
robomartin
No, I am not talking about small businesses necessarily. I am talking about
the reality of non-VC businesses. That doesn't mean bootstrapped either.

I do realize private data is hard to come by, but this is known to people in
the business world. It's very, very hard to sell a company for more than about
5x. I am talking from personal experience as well a from knowledge of friends
who have sold non-VC tech businesses.

One way to look at it is that in the real world the buyer has an expectation
of ROI that has to align with reality. Buy the business, run it, make money,
pay for your investment and make money beyond that. People paying 123 times
P/E for stocks have no connection to reality whatsoever, it's pure
speculation.

BTW, I am not using "in the real world" as a pejorative. It simply means "non
VC, non public".

~~~
harryh
_It 's very, very hard to sell a company for more than about 5x._

Indeed this is definitely true. That doesn't, however, mean that firms with
higher multiples are not connected to reality. It just means they have
achieved some form of economy of scale or market dominance where there is a
reasonable expectation that the ROI on the investment will be worth the risk.

 _have no connection to reality whatsoever, it 's pure speculation._

Speculation isn't inherently unconnected to reality. There can be very real
reasons to believe that a business currently making very little money (or even
losing money) will, at some point in the future, make lots and lots of money.
In these cases, it's very reasonable to see shares trade at very high PE
multiples.

~~~
robomartin
No, high P/E's only exist the stock market. Nobody would pay 27 times earnings
to buy Starbucks. Nobody. I mean, write one big check and you own it. No
shareholders. It would literally take a century to break even, if even
possible.

And so, what are people paying for when they pay 27x earnings in the stock
market? It isn't real value. The stock is already grotesquely overpriced.

They are speculating that someone else is going to be willing to pay 28x or
more. And the person who decides to pay 28x is hoping for someone to pay 29x.

~~~
harryh
In 2013 Dell was taken private with one really big check for ~25B. I don't
know off the top of my head what the earnings multiple was on that deal, but I
know that it was done at a significant premium to the public price on the
stock so I'm sure it was up in the range that you just said doesn't happen.

This deal is obviously notable for its size, but companies being taken private
are pretty common.

Panera Bread is another recent example and a good one since its business is
pretty similar to Starbucks. That deal was for about 7B. Also a pretty big
check. Also at a high multiple.

~~~
robomartin
Easy: Once the stock is valued at x nobody is going to sell it for x/2.

We have to separate the reality of the price of a stock from the value of a
company.

I mean, the numbers don’t have to be very complicated: If a company makes $1MM
per year, how much would you pay to buy it? $5MM? $30MM?

In the first case you get your money back in 5 years (simplified). In the
other case in 30 years. A lifetime.

Another way to look at it: The guy who paid 5x will make $25MM in 30 years.
The one who paid 30x walks away with zero profits in 30 years.

When people pay 20x, 30x, 100+x for stocks all they are betting on is that
someone will be willing to pay more in the future.

~~~
harryh
_Easy: Once the stock is valued at x nobody is going to sell it for x /2._

Well sure. But you said no one would be willing to _buy_ it at typical public
valuation levels. And here are my counterexamples showing how that assertion
was wrong.

And yes, there are lots of investments that take a long time to pay off. You
ever invest in real estate? You aren't paying off that mortgage in 5 years in
the vast majority of cases.

~~~
robomartin
I think what I said is perfectly congruent. Without the distortion of
speculation nobody in their right mind would pay 30x or 100x earnings for a
company.

Price over Earnings. Earnings: What a company makes in one year.

Multiple: How many years of annual earnings you are willing to pay for the
company. 5, 10, 30, 100.

This number doesn't exist int he vacuum, it very directly means --to a rough
order of magnitude-- that you will need to wait 30 to 100 years to break even,
assuming you take 100% of earnings every year for that duration of time, there
are no economic downturns, the company remain viable and competition does not
chip away at earnings.

Think about that for a moment, an investment that produces no gains whatsoever
for at least 30 to 100 years.

This isn't hard to reason. Would you take everything you own, invest it into
buying a company and know you are paying so much that it would take 100 years
to break even? Or 30 years? Or 15? 10? 5? Ah. There you go. most people will
say yes somewhere between 5 and 10, and that's because this is the real world.

I've said many times now, the only way these multiples exist is because the
stock market is the domain of uninformed speculation. VC's and others love it
because they can get ridiculous valuations for investments, for companies,
that would have never produced those kinds of returns in the real world.
Individual investors love it because the promise of of other speculators
willing to pay more for their already inflated purchases would earn them
money.

The whole thing is a speculative house of cards. I say this as someone who has
been very involved in the markets for years. I very much like the reality that
others are willing to pay more for things I buy. I also like the reality that
these valuations are driven by emotion. I have made a ton of money recognizing
and playing emotion in day trading by shorting stocks. I made money playing
the emotion going up and emotion going down. Once you have that perspective it
is impossible to look at the stock market as anything other than Las Vegas
with different rules.

Today there's algorithmic trading. When I was day trading this wasn't so
prevalent. People like me were using custom software tools to help make
decisions but nothing even close to what exists today was in place back then.
I am not sure I would do well day trading today. Not sure it would be easy to
read emotion.

A typical counterargument is: Well, you buy the company, inject Y capital into
it and increase earnings.

OK. Assume you buy the company for 100x earnings, inject Y and now increase
earnings by a factor of 2. It will take a minimum of 50 years to break even.
And, BTW, doubling earnings isn't that easy. Sure, yes, there are a bunch of
internet companies who fly high and have done such things, but at some point
earnings become somewhat asymptotic due to various factors, including
competition, market size, etc. And it takes time, lots of time, for earnings
to increase once a product offering starts to mature. In other words, from
startup to flight altitude the rate of change can be incredible, once at
flight altitude the scenario is very different.

In the VC world that's where the speculation lies. They are betting that these
companies are going to be able to grow at a >45 degree slope for just enough
time to go public, grab a really nice multiple and convert risk to cash, lots
of it. Hey, more power to them, they are providing a valuable service
(capital) and deserve to make money. However, I firmly believe individual
investors have to be very careful about the idea of actually believing these
valuations are real. They are only real if someone else is willing to pay more
for what you just bought, otherwise the entire things is imaginary and fueled
by speculation. Just like baseball cards.

The most fundamental question might be: What is reality?

~~~
cft
Also in the VC and IPO world, there are companies with infinite PE, like
Pinterest. I am curious how much of the total stock market cap these account
for, because to be in S&P 500 you need to have positive earnings for 4
quarters. These companies may have an infinite PE for a decade (lifetime of a
VC fund), then onloaded onto public and continue to have 0 EPS till the
founders and VCs cash out. The "modest" PEs of S&P 500 of 25 are an indication
of increasing centralization, where a diminishing number of companies attract
an increased share of the public investment (not mentioning that even this
modest PE of 20-25 is unachievable for a non-VC tech company in the event of
sale)

~~~
harryh
_not mentioning that even this modest PE of 20-25 is unachievable for a non-VC
tech company in the event of sale_

I literally mentioned Panera Bread upthread which was taken private at these
multiples.

~~~
cft
Not sure what you are talking about: in 1993 Panera's predecessor was bought
by Au Bon Pan, a public company, and it has since remained in that orbit
[https://en.wikipedia.org/wiki/Panera_Bread](https://en.wikipedia.org/wiki/Panera_Bread)

I would not compare the later acquisitions or Panera to that of a bootstrapped
non-VC businesses. I am thinking of LiveJournal, HotOrNot, Airliners.net etc -
I am personally familiar with those multiples, and they are not 20 PE.

This Main St economy has as much in common with current public Wall St economy
as Cessna 172 and the F-22. They both fly, but the rules are different..

~~~
harryh
_This Main St economy has as much in common with current public Wall St
economy_

Well obviously. There is a fundamental different in the economics of a single
location coffee shop and a multinational company like Starbucks. The
difference in these economics provides more than enough justification for one
being worth a small multiple on earnings and the other a large multiple.

------
raspasov
You can find people who have been "sounding the alarm" since 1980 about stock
prices.

This is no coherent analysis in this article, just a random collection of out-
of-context opinions.

I generally expect better from Bloomberg.com .

------
chadmeister
These guys are just as prone to bandwagon and herd mentality as those in
Venture Capital. When they're all saying the same thing I feel it's the best
time to do the opposite of what they say.

~~~
edoceo
When they yelling, I'm selling.

When they crying, I'm buying.

~~~
lucb1e
When they timing, I'm staying the course.

------
polote
Article is 3 days old and nothing different than before has happened

------
ThrowMeAwayOkay
There’s been other discussions if we are in a Black Swan event. My opinion is
we are not. We are in a series of Black Cygnet events.

------
RickJWagner
Bloomberg has correctly called 9 of the last 4 market corrections.

------
tryptophan
They are just mad that they didn't get to buy in at low prices.

~~~
code_duck
My first thought is that they're just attempting to manipulate markets so
prices will drop and they can buy some more.

