Surveying the current condition of the financial markets, we presently observe a combination of still historically-extreme valuations, rising yet still only normalizing interest rates, measurably inadequate risk-premiums in both equities and bonds, and ragged, unfavorable market internals, suggesting continued risk-aversion among investors (View Highlight)
In this context, it’s worth repeating what I’ve noted across decades of market cycles – a market collapse is nothing but risk-aversion meeting an inadequate risk-premium; rising yield pressure meeting an inadequate yield. (View Highlight)
In that context, the only thing a decade of zero-interest policy did was to remove any reliable upper “limit” to valuations or risk-taking. Even we’ve adapted our discipline to reflect that reality. The danger comes when investors continue to ignore extreme valuations even after investor psychology has shifted to risk-aversion. (View Highlight)
At the 2000 market peak, a broad range of reliable valuations implied negative estimated S&P 500 total returns for over a decade, as they did in 1929, and as they unfortunately do today. This is what a decade of zero interest rate policy has set up for investors. (View Highlight)
Keep in mind that periods of hypervaluation are not resolved in one fell swoop. To imagine otherwise is to minimize the discomfort, uncertainty, and alternation between fear and hope that the collapse of a bubble entails. The way that bubbles unfold into preposterous losses – 89%, 82%, 50%, 55%, and I expect this time between 50-70% – is through multiple periods of decline and even free-fall, punctuated by fast, furious “clearing rallies” that offer hope all the way down (View Highlight)
Every security is a claim some set of future cash flows that investors expect to be delivered over time. The higher the price an investor pays for those cash flows, the lower the long-term return they can expect. The lower the price an investor pays for those cash flows, the higher the long-term return they can expect. Holding the future cash flows constant, the only way to drive the expected long-term return higher is to move the current price lower. (View Highlight)