Trying to make sense out of Shiller P/E Ratio

[chuckrob]

Looking at the Shiller P/E, we see that it is around 36, which pretty much denotes a massive bubble in equities and signals doomsday. Or does it?

Maybe others can offer some insight on this, but I think we need to look at a couple other things in addition to earnings. Let's look at the all-time high for the Shiller, which was 44 right before the dot com bust in Feb/March 2000.

In early 2000 we had:

• Average corporate AAA bond yield at 7.6% with inflation running at around 3.2%
• Unemployment rate at 4.0%

In early 2022 we have

• Average corporate AAA bond yield at around 3% with inflation running at 7.5%
• Unemployment rate at 3.9%

So we can easily see that if one were to pull his money out of equities, there simply isn't anywhere else to put the money. Corporate bonds look terrible because of awful yields and inflation, and are vulnerable to rate hikes. This was not the case in 2000, where one could dump his money into PIMCO funds and ride out the crash in equities.

Now some will say "put money into real estate"! --well that sector is in an even worse bubble than stocks, and there is a building shortage, rising property taxes etc. Going from one overheated sector on the verge of a crash or correction and into another ins't a solution.

At the end of the day, it needs to be a massive crisis in the financial markets and doomsday before I sell all my stocks and hold cash or bonds, which will guarantee I lose (lots) of money. Municipals are better, but yields are still below inflation

so is this one reason the market is holding at these levels?

 

[rescued2]

@chuckrob Yup, it is a massive "TINA" situation - there is no alternative. The Fed is unable to move rates enough to make debt a rational option for investors seeking yield - all government debt and most all high quality private debt are still negative real yields. The only tool the Fed has left is to try to manipulate the expectations around rate moves. The moves themselves are nearly meaningless in relation to the big picture of actually moving money away from equities.

Stocks are a "bubble", real assets are a "bubble", and there is nowhere you can put capital that isn't getting rapidly eroded by inflation. So, no one is selling equities.

 

[kati]

@karenmonique Why would private markets sell mortgage debt at 10% IRR to someone when they could turn around and sell to public markets at far lower rates? Ie, why wouldn't someone be arbitraging this? Seems the seller would be leaving a ton of money on the table by going private.

 

[karenmonique]

@rescued2 Debt is absolutely a rational option for investors. Just not public investors.

I'm structuring a debt fund worth north of 2 billion right now that has an expected IRR of 10+ percent. And this is mortgage debt, not more risky stuff.

We are a bunch of suckers sitting in the public markets crying for returns. The actual money is made in private markets.

 

[karenmonique]

@kati They dont sell the debt at 10%.

The fund leverages its investments in debt instruments at short term rates and lends long term.

Public companies do this here and there. NLY is an example of that. But anyone who can do this stuff effectively isn't gonna go work for some randomass mortgage REIT and be happy with half a million a year in bonuses. The very best go do this in private markets and collect massive carried interest and fees.

 

[randomx45]

@karenmonique Michael Burry would like a word.

 

[karenmonique]

@randomx45 He is in the private markets.... he runs a fund...

 

[randomx45]

@karenmonique Sorry. Didn’t mean to reply to you. Was merely insinuating that private markets seeking max yield on fancy debt packages—what could go wrong?

 

[zeroempathy]

@karenmonique Can you please eli5 how they leverage the investments at short term and lend at long term? Or provide some link. I'm just curious to understand how this world of debt works

 

[karenmonique]

@zeroempathy There is seed money that comes in, the fund then goes out and issues different layers of notes carrying different risks with the intention of using the proceeds of those notes to buy or initiate mortgages.

The notes are for 1 to 5 years, but the mortgages are for 5 to 30 years.

Consider this,

The fund raises $100. It goes out and borrows $900 with an average interest rate of 2% for 1 year. It then turns around and lends that $1,000 at 5% average.

At the end of the year, the fund has paid 18 bucks in interest, but has collected 50.

That's a 32 dollar return on 100 bucks per year. Now, there are expenses and all that, but you get the idea.

 

[calla]

@karenmonique What’s the catch? How does it all go south using all that leverage? Massive increases in interest rates, screwing your long term ones?

 

[karenmonique]

@calla Part of those expenses I mentioned are premiums paid for hedges against exactly that situation.

 

[thirstyfollower]

@karenmonique So do u think there’s an everything bubble rn

 

[sonchoy]

@karenmonique

The fund leverages its investments in debt instruments at short term rates and lends long term.

can you eli5, how is this different from a ponzi scheme?

 

[karenmonique]

@sonchoy Are you running a ponzi scheme when you borrow money from the bank to pay for a home?

 

[sonchoy]

@karenmonique ?

 

[karenmonique]

@sonchoy I'm too old for this shit.

Blocked.

 

[sherriemae]

@karenmonique rofl, right

 

[sadie08]

@sonchoy It’s the government’s fault. They are lending money at lower rates than what the market would provide. Bankers have taken advantage of this.

 

[resjudicata]

@rescued2 I love it when people say we can't be in a bubble because there is nowhere else to put the money. Think about the ridiculousness of that statement and how it means, more than anything, you are in a bubble. The paper money in equities can always just be flushed down the toilet because it isn't real and the prices aren't accurate. People can sell to cash scared and undercut each other the whole way down trying to get out.