While US stocks have done well, so far, in 2021, the market is caught between two forces, a stronger than expected economy as a positive and worries about inflation as a negative. After a decade of benign inflation, are we ill-prepared for the latter? bit.ly/2RLARxQ
Expectations that inflation will rise are becoming more broad based, as can be seen in both a bond market based measure (T.Bond - TIPs) and consumer surveys. bit.ly/2RLARxQ
Inflation is currency specific, & differences explain why interest rates vary across currencies and exchange rates. Here are expected inflation rates for 2021-26, by country, from the IMF. Given the noise in measuring inflation, take with a grain of salt! bit.ly/2RLARxQ
Higher-than-expected inflation inflicts direct damage on bonds, as rates rise. Their effect of stocks is more complex, with discount rates and cash flows rising, but the net effect, at least in the aggregate, is more likely to be negative than positive. bit.ly/2RLARxQ
The effects of higher-than-expected inflation on nominal & real returns on stocks and bonds can be seen in historical returns over time. Take a look at annual returns in the 1970s (highest inflation) and 2010-19 (lowest inflation): bit.ly/2RLARxQ
Gold and real estate are posited to be inflation-protected, and the evidence is stronger for gold than for real estate, when you look at historical returns. As for cryptos, bitcoin is not behaving like millennial gold yet, but the jury is still out. bit.ly/2RLARxQ
For those who are nostalgic for an era when low PE and PBV stocks delivered superior returns, the silver lining in a high-inflation scenario may be a tilt back, albeit a small one, to old-time value stocks. bit.ly/2RLARxQ
Inflation is here & no one knows whether it is transitory or permanent. If permanent, we could be reverting to more normal inflation, but there is a non-trivial chance that it could be higher. The Fed's happy talk may get in the way of a robust response. bit.ly/2RLARxQ
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I like writing and I am verbose, an occupational hazard when time is your ally and you have a captive audience. Most of my books are long and stretch on forever, but my Little Book of Valuation (Wiley) is the exception.
That 2011 edition is aging. I just finished an update, and the new edition is now available at booksellers (online or physical) near you. Much of the original material is intact, but the valuations have been updated with a new chapter on story telling. bit.ly/49y0kgd
I have a YouTube series that supports the book, with a session for each chapter. Chapter one lays out the big picture and lists the three biggest impediments to a good valuation – bias, uncertainty and complexity.
As the market climbs, the implied ERP for the S&P 500 drops to 4.23%, its lowest value since 2008. As a forward-looking price of risk, the ERP drives everything in markets. I have a review that I do on ERP, and my fifteenth annual update is now available: bit.ly/49fSBU0
The paper is verbose (155 pages) and not riveting reading, but it does include everything I know about equity risk premiums and their estimation. My first update was written in 2009, during the financial crisis, and I have updated it annually since. bit.ly/49fSBU0
The equity risk premium is the ultimate market barometer, reflecting the battle between greed and fear that animates market. More generally, its level is determined by macro forces, information disclosure and behavioral forces. bit.ly/49fSBU0
A data hack at 23andMe, a volcanic eruption in Iceland and a global pandemic are all catastrophes, the first to just one firm, the second to a country and the third to the world. I look at catastrophic risks, and how they play out in valuation and pricing. bit.ly/3SJi9Th
As humans, we are not good at dealing with catastrophic risks, swinging between denial when it is dormant and panic when it is imminent. Living in a home on an earthquake fault, two blocks from the ocean, I am no exception. bit.ly/3SJi9Th
Catastrophic risks have many sources (acts of God, manmade, regulatory or legal), can affect just a few or many, and can be low-chance or high-likelihood events. Those differences can affect how we deal with them. bit.ly/3SJi9Th
Seven stocks (Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia, Tesla) added $5.1 trillion to their market cap in 2023, accounting for about 55% of the $9.2 trillion added during the year by all 6658 US firms. bit.ly/4bsNEcB
Going back a decade, these seven stocks have climbed from 8% of the value of all US firms to more than 24% of the value, with 2022 the only serious drawdown year. At a $12 trillion market cap, the Mag Seven are now worth more than all listed Chinese stocks. bit.ly/4bsNEcB
A US stock portfolio created in Dec 2012 without the Mag Seven stocks in it, would have had a shortfall of about 18% in cumulated value by the end of 2023, relative to a portfolio with these stocks. Small stock and value investors suffered! bit.ly/4bsNEcB
In my fifth data update for 2024, I look at the profitability of companies, scaled to both sales and invested capital, broken down by sector, region and corporate age. bit.ly/3Uo4mns
There are multiple stakeholders in businesses, but we give shareholders primacy in businesses, not because we are playing favorites, but because they are only stakeholders whose claims are residual, not contractual. bit.ly/3Uo4mns
The notion of stakeholder wealth maximization sounds good, but in practice, it and allows managers to escape accountability and contributes to "confused corporatism". bit.ly/3w0C34s
In my fourth data update for 2024, I look at risk, a central player in any discussion of business & investing, and examine how to measure it, why it varies across companies, countries & sectors and how it plays out in hurdle rates. bit.ly/48QlJ4O
Finance has advanced the study of risk, but it has skewed too much to price-based measures & putting a number on risk more than recognizing how it affects investor psyche. Ultimately, risk is neither good nor bad. It is a pairing of danger & opportunity. bit.ly/48QlJ4O
Modern risk and return models are elegant, but they are built on two key assumptions, that marginal investors are diversified and that price changes convey information about risk. Both are debatable! bit.ly/48QlJ4O