Wednesday, September 9, 2015

Deutsche Bank's Jim Reid: I guess he failed economics so we can ignore him from now on


Reformed Borker (Bork Bork Bork!) - a brief rant about "historical valuation". Thankfully someone has the balls to put the boots to the clowns at Deutsche:

One of the dumbest things I’ve seen this entire summer (no small feat) is this thing where Deutsche Bank says that the combination of stocks, bonds and real estate haven’t been as overvalued as they are now in 200 years.

I’m sure the DB researches are smart guys and that they mean well,

No Josh, they're utterly incompetent idiots who would get flunked out of university if they tried bullshit like this.

but comparing stock and bond and real estate valuations to 200 years ago (or 100 years ago) is as meaningless an endeavor as you can think up. Because a hundred years ago, there were no investors. Just speculators and the company founders who owned the majority of the shares. There was no such thing as retirement, nor were there portfolios or IRAs or 401(k)s.

More generally, the money supply was a lot smaller (in fact, it was fixed to gold) and there was less capital stock per capita. In fact, most wealth back then was tied up in land, not money or stock or bonds, which you know because you've read Piketty, right?

Therefore, of course valuations for these assets had lower baselines in general. There wasn’t a need for hundreds of millions of people to hold onto trillions of dollars’ worth.

You know what your retirement plan was a hundred years ago? You fucking died.

And don’t even get me started on the valuations of two hundred years ago. I know of the guys who originally put this data together. They’re geniuses at the London Business School (Dimson, Staunton and Marsh). Even they would tell you, these historic indices weren’t exactly carved into stone tablets and left in a storage locker somewhere. All of this stuff had to be pieced together and pulled from hugely varying sources with all sorts of restorative methodologies. We have a good approximation of what historical prices were and even some sense of earnings, book value and revenue – but an approximation is not a fact.

Even today we don’t know what real earnings are. 20% of the S&P 500 is made up of tech companies and about half of them play games with GAAP on a regular basis. They pretend that employee and executive comp can be expensed as an item that may or may not appear in future quarters. Cisco does it. Google does it. Anything that might lower reported EPS is treated like a non-recurring freak accident of some sort. And then bathtubs full of stock options are handed out and they do the same thing 90 days later. And then there’s goodwill, and tax-advantaged write-downs and all sorts of other fun stuff that wasn’t going on even a decade ago. And you’re going to tell me you feel good about the PE multiples of railroad monopolies from the fucking Civil War era?

Stop it.

And I won’t even get into the massive differences in profit margins between a company like Facebook, which makes millions of dollars per employee, and the S&P 500 of the 1970’s, which was dominated by steel companies and oil companies and mining companies and other low-margin, capital-intensive “filthy” industries.

To reiterate, even recently as the 1970s, the stock market then was not the stock market now. Nor was the bond market, nor even was money. I'd like to add that nor was the balance of savings and investment the same: in the 1970s we were on the exact opposite end of the investment/savings seesaw, as tens of millions of new fathers struggled to house their families by competing to borrow money from a depleted rentier class whose net wealth was still recovering from the capital destruction of a major international war.

Now, on the other hand, the world is full of rich old fucks who want to earn interest, yet nobody wants to borrow anymore. Not even European governments.

And the savings/investment equilibrium drives the long-run neutral real interest rate, which is the basis for equity valuations (really FFS read Kocherlakota's speech and you'll get a few "ooh" moments, especially when he talks about the effect of low interest rates on future flow valuations).

So of course equities are at a high P/E right now! Why not? Future flows become undiscounted at the zero lower bound, fucktard. When's the last time interest rates were zero?

200 years ago, there was no indoor plumbing or electricity. Married couples had eleven children each with the expectation that only three or four of them would make it to junior high school, after which they’d become chimney-sweeps or horse-dentists or whatever the hell you did in those days.

No similarities with the modern era.

Historical context is excellent for understanding financial markets. But let’s remember that the numbers on a spreadsheet don’t exist in a vacuum. They are a function of what’s happening in the world, as progress steadily mows down the economic realities of the past.

And the clowns at DB would have been fucking flunked out of school if they'd tried to imply utterly false correspondence across history.


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