We thought we had it all figured out before this week started.
We were wrong.
The top minds in the investment business offered some novel analysis, broke conventional wisdom, and even opened our eyes to some misperceptions.
This particular week, we learned cheap stocks aren’t always cheap, top experts have Reinhart and Rogoff all wrong, the bond market may be in a bubble, and that the biggest bond funds are almost guaranteed to underperform this year.
What follows are excerpts from such stories this week. All of the important stuff you might’ve missed this week is right here.
'...What you can see is that the stock market has grown considerably more optimistic, pricing in growth, and perhaps some inflation. Yields on the other hand indicate a massive, ongoing bid for Treasuries, suggesting fear and scepticism about growth...'
'...According to the latest read (h/t Bespoke), crash confidence is at its lowest level since early 2009. In other words, investors are increasingly worried about an imminent market crash.
However, this could also be a bullish contrarian indicator. Back in 2009, this similarly low reading in the crash confidence index was followed by a monster bull run in the stock markets...'
'Yale professor and economist Robert Shiller famously called two of the biggest bubbles of all time: the dot-com bubble and the housing bubble. ...So when Shiller talks about asset bubbles, people listen...The U.S. bond market surge that has pushed debt yields to record lows may constitute a 'bubble,' he says...'
'...'For the first 144 years of real estate enclosure in the U.S., land sales and/or real estate construction peaked almost consistently, every 18 years,' Anderson writes. 'The world's worst downturns are always preceded by land speculation (the chasing of the economic rent) fuelled by misguided credit creation courtesy of the banks.'...'
'...Barclays is out with its Skyscraper Index, which shows a correlation between construction of the next world's tallest building and an impending financial crisis. In fact the report even suggests that the rate of increase in height could also reflect the extent of that economic crisis...'
'...First of all, Reinhart and Rogoff did not write about the 90% threshold in This Time is Different; they published research about that threshold only after the book was written, in two separate articles (found here and here).
The more important problem with the claims that Gross and others have made about the 90% threshold is that they ignored Reinhart's and Rogoff's own words of caution with respect to the special situation of the US, and they failed to consider the limits inherent in Reinhart and Rogoff's dataset of countries with high debt levels...'
'...However, the historical relationship between low P/E ratios and 12-month returns isn't exactly linear. Citigroup's Tobias Levkovich provides the graphic below. It turns out that since 1940, the 12-month return for the S&P 500 higher during periods when the P/E ratio ranged from 12 to 16 than when it ranged from 8 to 12...'
'...And if there's no financial crisis in the US... then it's hard to see how the US gets slammed from Europe, since really the US isn't too Euro-dependent. At least when it comes to trade.
This chart is from Goldman...'
'...The Fed on the other hand doesn't have a CREATE INFLATION button*. It might have some tools that are quasi-proxies for this, such as lowering rates, or buying assets, or some other mechanisms, but these are crude, at best. Even if the Fed could just print dollars and throw them from helicopters (a proposition that's legally dicey), that still wouldn't be the same as creating actual inflation, though it may, possibly feed into that...'
'..Here's a look at US unemployment vs. Japanese (adult) unemployment. Not only does the US have much higher unemployment, the swings are much more extreme, whereas Japan's slowly has ground worse. On the one hand, you might argue that the US 'adjusts' or takes its 'medicine' faster. On the other hand, when things get tough in the US, workers feel it a lot harsher, and faster...'
'Investment bank Jefferies takes a non-consensus bullish view on U.S. competitiveness in a new report. Chief Equity Strategist Sean Darby predicts a U.S. industrial renaissance 'through a combination of higher wage inflation overseas, a weaker U.S. dollar and better productivity gains.' '
'...The University of Michigan index closely follows the stock market, so a strong start to 2012 may have buttressed the figure.