Author Topic: Robert Shiller doesn't know what to make of the CAPE  (Read 10612 times)

mrshudson

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Robert Shiller doesn't know what to make of the CAPE
« on: June 26, 2015, 07:48:58 AM »
http://www.bloomberg.com/news/articles/2015-06-26/the-s-p-500-p-e-is-19-unless-it-s-actually-27-as-shiller-says

“I’ve been very wary about advising people to pull out of the market even though my CAPE ratio is at one of the highest levels ever in history,” Shiller told Bloomberg in April. “Something funny is going on. History is always coming up with new puzzles.”

I've always felt that using the P/E ratio post-2008 as a catchall metric to justify stocks are pretty expensive is a little 1995, and not mathematically sound advise anyhow.

forummm

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #1 on: June 26, 2015, 08:02:16 AM »
PE 20.4 is still pretty high historically. But there could be reasons why that will remain high for a long time. But probably not quite that high.

forummm

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #2 on: June 26, 2015, 08:05:04 AM »
I read that Shiller has kept all his money in bonds--and I think Treasuries, mostly TIPS, for like 20 years. Likely due to his saying that CAPE was too high for that whole time.

Now he has plenty of money, a side business, his Nobel money, his tenured salary, a pension, etc. But interesting that he followed his own metric and what it's resulted in.

hodedofome

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #3 on: June 26, 2015, 09:58:18 AM »
Well, on an absolute basis he could have the same or less returns than being invested in stocks, but I'll bet his risk-adjusted returns (sharp ratio) are pretty good. Bonds have been a decent return/low volatility play for 30 years. Although rates are so low now, that returns will most likely not be the same, unless we're headed to 0% rates.

The CAPE is one reason to not get hooked on absolute numbers when talking about value. Value is mostly relative. Saying a PE of 10 is good and a PE of 20 is expensive doesn't mean much. If the environment changes then 20 could be cheap and 30 could be expensive.
« Last Edit: June 26, 2015, 10:00:11 AM by hodedofome »

mrshudson

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #4 on: June 26, 2015, 09:05:52 PM »
Saying a PE of 10 is good and a PE of 20 is expensive doesn't mean much. If the environment changes then 20 could be cheap and 30 could be expensive.

Thank you so much for reading my mind and translating my thoughts! :)

sol

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #5 on: June 26, 2015, 11:17:36 PM »
The more I read about this topic, the more I tend to think that the post 2005 investing world is somehow fundamentally different from the pre-1995 investing world.  It's a more efficient market, with more transparency and lower transaction costs, and a much wider base of participants.  Accounting standards have changed the way earnings are reported, interest rates are ridiculous, and the nature of the economy has shifted pretty dramatically away from the old model based on manufacturing and commodities.  Maybe these things naturally lead to higher P/E ratios as a permanent side effect of these changes?  Maybe the rules written in the age of steam engines don't apply so well in the internet age?
 
« Last Edit: June 26, 2015, 11:20:49 PM by sol »

arebelspy

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #6 on: June 26, 2015, 11:18:49 PM »

The more I read about this topic, the more I tend to think that the post 2005 investing world is somehow fundamentally different from the pre-1995 investing world.  It's a more efficient market, with more transparency and lower transaction costs, and a much wider base of participants.  Accounting standards have changed the way earnings are reported, and the nature of the economy has shifted pretty dramatically away from the old model based on manufacturing and commodities.  Maybe these things naturally lead to higher P/E ratios as a permanent side effect of these changes?  Maybe the rules written in the age of steam engines don't apply so well in the internet age?

tl;dr: It's different this time?
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sol

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #7 on: June 26, 2015, 11:23:33 PM »

The more I read about this topic, the more I tend to think that the post 2005 investing world is somehow fundamentally different from the pre-1995 investing world.  It's a more efficient market, with more transparency and lower transaction costs, and a much wider base of participants.  Accounting standards have changed the way earnings are reported, and the nature of the economy has shifted pretty dramatically away from the old model based on manufacturing and commodities.  Maybe these things naturally lead to higher P/E ratios as a permanent side effect of these changes?  Maybe the rules written in the age of steam engines don't apply so well in the internet age?

tl;dr: It's different this time?

Well, it has to be different SOME time.  Maybe not now, but eventually.

milesdividendmd

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #8 on: June 26, 2015, 11:37:28 PM »
Sol and ARS,

I think that are both of you are right on this one ( although my natural inclination would be to disagree with both of you +/- myself, as you well know!)

This time it is diferrent.  The zero lower bound/liquidity trap is a new ballgame with no manual.  And of course investors will embrace more risk in the face of record low interest rates.  (This is reflected in both the historically overvalued dividend paying stock sector, high valuations, and increased M and A activity.)

On the other hand high valuations mean that stock prices are much more likely to fall dramatically during the next inevitable crisis, and future returns are unlikely to be ven average.  High valuations are an absolute headwind because there is by definition less reward and more risk investing in equities in this "just sub bubble" environment.  So this time it is not different.

The only mature stragy is to plan for the worst, be humble in our own assessment of our risk tolerance, save more, and stick to the plan when the shit hits the fan.  (Which is pretty uncontroversial I think...simple but not easy.)


SnackDog

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #9 on: June 27, 2015, 04:48:35 AM »
Shiller also advised investing in Greece as a "spectacular investment" a few months ago.  I suspect he had his one good prediction, won his prize, and will fade to obscurity at this point.

Jack

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #10 on: June 27, 2015, 05:32:53 AM »
The other thing that helps inflate PE ratios, I think, is the shift from private pensions to 401(k)s. There are just disproportionally more investors trying to put more money in the market than there used to be, which drives up prices due to simple supply and demand.

hodedofome

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #11 on: June 27, 2015, 07:02:00 AM »
But what do you think those pensions were invested in before? I don't think a shift in vehicles is gonna change the underlying asset allocation.

ender

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #12 on: June 27, 2015, 07:07:51 AM »
The more I read about this topic, the more I tend to think that the post 2005 investing world is somehow fundamentally different from the pre-1995 investing world.  It's a more efficient market, with more transparency and lower transaction costs, and a much wider base of participants.  Accounting standards have changed the way earnings are reported, interest rates are ridiculous, and the nature of the economy has shifted pretty dramatically away from the old model based on manufacturing and commodities.  Maybe these things naturally lead to higher P/E ratios as a permanent side effect of these changes?  Maybe the rules written in the age of steam engines don't apply so well in the internet age?

I think this is a good point.

Transparency, reduced transactional costs (across the board), and better price competition for products does things to how every other industry is priced/valued.

Why should the way stocks are purchased/valued be so consistent regardless of this, when the same factors dramatically affect similar structures in other industries?

forummm

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #13 on: June 27, 2015, 07:32:30 AM »

The more I read about this topic, the more I tend to think that the post 2005 investing world is somehow fundamentally different from the pre-1995 investing world.  It's a more efficient market, with more transparency and lower transaction costs, and a much wider base of participants.  Accounting standards have changed the way earnings are reported, and the nature of the economy has shifted pretty dramatically away from the old model based on manufacturing and commodities.  Maybe these things naturally lead to higher P/E ratios as a permanent side effect of these changes?  Maybe the rules written in the age of steam engines don't apply so well in the internet age?

tl;dr: It's different this time?

Well, it has to be different SOME time.  Maybe not now, but eventually.

I have had these same thoughts. I think it could be different. But if so, another consequences of that difference is lower returns over time. Which could mean that the 4% rule is now too liberal.

I think it's just as likely that if/when the rock-bottom interest rates return to normal historical levels, valuations will normalize downwards. But perhaps not back to pre-1995 levels. Perhaps 17 is the new 15.

But none of us knows what the future holds.

Jeremy

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #14 on: June 27, 2015, 08:07:07 AM »
This article is a good read on pros/cons of CAPE in current environment
http://www.philosophicaleconomics.com/2013/12/shiller/

thedayisbrave

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #15 on: June 27, 2015, 09:53:39 AM »
This article is a good read on pros/cons of CAPE in current environment
http://www.philosophicaleconomics.com/2013/12/shiller/

Learned a ton reading this article.  Thank you for the link!

Indexer

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #16 on: June 27, 2015, 03:30:58 PM »
I recently read the latest version of Irrational Exuberance. 

Shiller himself actually makes a really good argument for why it is different this time.  He doesn't ever come back to it in the book and build on it or try to disprove it(which I felt he should have done one of the two), but it is a really strong argument.

CAPE and PE have been above their historic averages for almost all of the time since the 90s.  Why?   It isn't just the tech bubble or the housing bubble... but those did account for some of it.  What else changed? 

401ks & the internet.
401ks have been around for awhile, but they started to get really popular in the late 80s/early 90s.  Instead of a pension where the company is investing the money individuals get to choose what to invest in.  This lead to the popularity of mutual funds.  Through mutual funds more people than ever before in history are investing in the markets. 

The internet accomplished a few things to boost the stock market, and I'm not referring to Amazon or the tech bubble.  Information is free.  If you want to learn how to trade stocks or find information on a stock its a google search away.  The days of requesting all the reports from a company are over.  You can read them on your computer.  The internet also opened the door to online discount brokers.  Where you use to pay 5% to a broker to buy a stock for you now you can trade through Fidelity/Schwab/Vanguard/etc.....  for about $7/trade.  If you want to play the stock market you are an internet connection and a few clicks away.  I personally see a lot of problems with this, but you can't ignore the fact that the number of people investing in stocks has increased. 

More people are investing.  People who would have never bought anything more risky than a bank CD are now buying stocks and bonds on a regular basis.  The vast majority of professional & skilled labor jobs have retirement plans with mutual funds as investment options. 

Its all supply and demand.  The demand for stocks by the population has went up.  Now right now(today) valuations may be a little on the high end, but I would expect PE and CAPE to both remain over their historic averages for most of the next decade... or two or three or forever.

Are forever higher valuations bad for returns?  Well the dividend will likely make up a smaller % of the return and I don't see growth making up for it so we might well enter a new normal where stock market average returns are only in the 6-8% range instead of 10%. 
« Last Edit: June 27, 2015, 03:33:50 PM by Indexer »

forummm

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #17 on: June 27, 2015, 04:44:58 PM »
Yeah, more people hold individual accounts invested in stocks. But in the past, as hodedofome points out, those people had pensions. Some of those pension funds were invested in stocks too. And some were funded from the current revenues of the company. I think it's just moving from one pocket to another.

And if we believe all the reports, hardly anyone has enough saved up to replace the pensions that they lost. So maybe there's even less money in stocks than there would otherwise be.

On the other hand, people like us have way more money in stocks than our parents' generation did. But we are nowhere near typical.

Jack

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #18 on: June 27, 2015, 04:54:10 PM »
But what do you think those pensions were invested in before? I don't think a shift in vehicles is gonna change the underlying asset allocation.

Maybe it's not true, but I always sort of assumed that private company pensions just paid out from company operating assets (i.e., equivalent to 100% company stock, but not actually stock)...? If that was the case, then that money wouldn't have been "in the market" and thus counted in CAPE. Doubly so if the company were not publicly traded.

hodedofome

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #19 on: June 27, 2015, 07:12:40 PM »
Most pensions are invested roughly 60/40

TomTX

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #20 on: June 28, 2015, 07:57:56 AM »
The more I read about this topic, the more I tend to think that the post 2005 investing world is somehow fundamentally different from the pre-1995 investing world.  It's a more efficient market, with more transparency and lower transaction costs, and a much wider base of participants.  Accounting standards have changed the way earnings are reported, interest rates are ridiculous, and the nature of the economy has shifted pretty dramatically away from the old model based on manufacturing and commodities.  Maybe these things naturally lead to higher P/E ratios as a permanent side effect of these changes?  Maybe the rules written in the age of steam engines don't apply so well in the internet age?

Taht is the key to my mind. Current accounting standards are significantly stricter. An company in 1988 would report much higher earnings than the identical company (ie same earnings) today due to the way earnings are calculated. That company in 1988 would report earnings of $1 while today it would report $0.50. If they were both valued $10, in 1988 the P/E would be 10, while today it would be 20. Just from the change in how earnings are calculated.

Scandium

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #21 on: June 29, 2015, 07:15:32 AM »
Shiller PE is still counting earnings during 2008-09, so won't it come down as that is moves past 10 years old? I read articles saying that many companies "took out the trash" and did huge write-offs during the crisis, during management changes etc (which many did after 09). Dump it all on the previous guy, and next year will look like a turnaround. I don't know how much they can fake low earnings though. Maybe it's canceled out by "fake" high earnings the year after. But intuitively still counting earnings during -09 seems like it would skew results some. I'm curious to see how this looks in 2019..

hodedofome

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #22 on: June 29, 2015, 08:04:22 AM »
Shiller PE is still counting earnings during 2008-09, so won't it come down as that is moves past 10 years old? I read articles saying that many companies "took out the trash" and did huge write-offs during the crisis, during management changes etc (which many did after 09). Dump it all on the previous guy, and next year will look like a turnaround. I don't know how much they can fake low earnings though. Maybe it's canceled out by "fake" high earnings the year after. But intuitively still counting earnings during -09 seems like it would skew results some. I'm curious to see how this looks in 2019..

So this isn't the exact way to calculate the CAPE, but if we exclude 2009 and just take the average of the other 9 years, that comes up to 18.20. Average of the past 10 years is 23.47. CAPE is actually 26.77 according to http://www.multpl.com/shiller-pe/.

CorpRaider

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #23 on: June 29, 2015, 08:04:51 AM »
Yeah, valuing the market on earnings is tough.  Right when things are cheapest, cyclical earnings are at a trough, perhaps even negative with losses and write downs.  The Shiller/Graham PE is better than using one year or using forward estimates IMOP, but I like to look at P/E 10; Market Cap to GDP (and GNP) as well as price to book and Tobin's Q, just to get a sense of where the market valuation is.  Of course, I only allow myself 20% adjustments to AA and only in certain accounts to minimize the impact of any timing/valuation adjustments.

BTW, I don't think Shiller has been out of the market this whole time.  What I have read indicates that the PE 10 would  have had you out of the market for long stretches, but every time I've heard him speak about it he couches it as "maybe one should lighten up on U.S. stocks."  He's a pretty humble guy and has noted that he really admired that Gene Fama said "I don't know or we don't know," a lot during interviews around the Nobel.
« Last Edit: June 29, 2015, 08:09:08 AM by CorpRaider »

forummm

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #24 on: June 29, 2015, 09:26:40 AM »
Vanguard says the PE (I assume it's TTM) on the VFIAX is 20.4 as of 5/31. That obviously doesn't have any of the 2008/9 crisis data in it. That's still pretty high historically.

What I'd heard about Shiller is that he personally isn't in the market. Given his other income sources, there's probably no need for him to be. Whether that has any relationship to what he tells others they may want to do is a different subject.

mizzourah2006

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #25 on: June 29, 2015, 09:56:05 AM »
Great discussion. Another thing that could cause increased P/Es moving forward is the globalization of the economy. It's now possible for Chinese, Indian, European, South American, etc. investors to move money into the US market. While I'm sure it was possible for the very rich from these countries to do this 2 decades ago, it is likely much more possible for just the well off in these countries to invest in the US today. Could it shift to another country? Perhaps, but it does make sense that technology and globalization may prop up the P/E of the largest market in the world as more foreign investors have access to that market.

nereo

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #26 on: June 29, 2015, 10:04:08 AM »
Yeah, more people hold individual accounts invested in stocks. But in the past, as hodedofome points out, those people had pensions. Some of those pension funds were invested in stocks too. And some were funded from the current revenues of the company. I think it's just moving from one pocket to another.

And if we believe all the reports, hardly anyone has enough saved up to replace the pensions that they lost. So maybe there's even less money in stocks than there would otherwise be.

On the other hand, people like us have way more money in stocks than our parents' generation did. But we are nowhere near typical.
The other thing that helps inflate PE ratios, I think, is the shift from private pensions to 401(k)s. There are just disproportionally more investors trying to put more money in the market than there used to be, which drives up prices due to simple supply and demand.

No, no, no, no, no!
Sorry, this is just a sore spot for me - one of those oft-repeated economic myths that almost everyone assumes is true.  I swear I'm going to write a detailed post about this in the near future.  At no point in history did the majority of workers receive a private or public pension (excluding SS).  In 1975 only 15% of retirees 65 and older had pension income. Those are people who worked in the 50s, 60s and 70s, the supposed 'golden years' for pensions when you could count on it as a major source of income.  That percentage of workers who had pension income increased until 1990, when about 38% of workers had non-SS pension income.  Today, about 20% of senior citizens have non-SS pension income.  According to the Dept of Labor Statistics, about 28% of workers today are participating in a pension plan.  The amount that will actually receive pension income in the future will be slightly less due to job-hopping, premature deaths and bankruptcies, but the participation rate has been roughly stable for two decades.

Congress created 401(k)s in 1978 and IRAs were introduced in 1974. Both became popular in the 1980s.  One could argue that this contributed to the decline pension-income form 1990 to 2015, but pensions are still more common today than they were pre-1978 (pre 401(k)s and IRAs).  It's a mistake to think that "silent generation" and early "baby-boomers" somehow were helped more in retirement by pension plans.

adamwoods137

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #27 on: June 29, 2015, 01:47:05 PM »
Shiller also advised investing in Greece as a "spectacular investment" a few months ago.  I suspect he had his one good prediction, won his prize, and will fade to obscurity at this point.

Anyone willing to take a bet that Shiller will turn out to be very right on this as measured by GREK vs S&P500 over a five year time period?  You'd be getting to start out ahead 20%, that's got to count for something!

forummm

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #28 on: June 29, 2015, 01:55:10 PM »
Shiller also advised investing in Greece as a "spectacular investment" a few months ago.  I suspect he had his one good prediction, won his prize, and will fade to obscurity at this point.

Anyone willing to take a bet that Shiller will turn out to be very right on this as measured by GREK vs S&P500 over a five year time period?  You'd be getting to start out ahead 20%, that's got to count for something!

You're taking Shiller's side--as of a few months ago? It's more like a 30% advantage for your counterparty at this point (depending on where you measure from--it's been volatile as you can expect).

adamwoods137

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #29 on: June 29, 2015, 02:05:46 PM »
Anyone willing to take a bet that Shiller will turn out to be very right on this as measured by GREK vs S&P500 over a five year time period?  You'd be getting to start out ahead 20%, that's got to count for something!

You're taking Shiller's side--as of a few months ago? It's more like a 30% advantage for your counterparty at this point (depending on where you measure from--it's been volatile as you can expect).

I don't think anyone will take the bet, let alone give me odds.  To be fair its far better just to buy greece at the moment, so I wouldn't do it in an extremely large size, but I'd absolutely take a $20 bet at even odds on the subject.


nereo

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #30 on: June 29, 2015, 02:07:43 PM »
Shiller also advised investing in Greece as a "spectacular investment" a few months ago.  I suspect he had his one good prediction, won his prize, and will fade to obscurity at this point.

Anyone willing to take a bet that Shiller will turn out to be very right on this as measured by GREK vs S&P500 over a five year time period?  You'd be getting to start out ahead 20%, that's got to count for something!

I like Shiller and find his insights facinating.  But his latest 'prediction' that: “Something funny is going on. History is always coming up with new puzzles.” reads like a fortune-teller's advice.  A few years from now certainly something will happen that was unexpected, and people will say "see, Shiller was on to something! He said something funny was going on and it turns out that there was!"

nereo

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #31 on: June 29, 2015, 02:09:52 PM »

I don't think anyone will take the bet, let alone give me odds.  To be fair its far better just to buy greece at the moment, so I wouldn't do it in an extremely large size, but I'd absolutely take a $20 bet at even odds on the subject.

Speaking of Greece... Greek Bonds hit 14.7% today.  Just wondering where they'd have to be in order for you (or anyone who wants to chime in) to buy them today.

adamwoods137

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #32 on: June 29, 2015, 02:19:04 PM »

I don't think anyone will take the bet, let alone give me odds.  To be fair its far better just to buy greece at the moment, so I wouldn't do it in an extremely large size, but I'd absolutely take a $20 bet at even odds on the subject.

Speaking of Greece... Greek Bonds hit 14.7% today.  Just wondering where they'd have to be in order for you (or anyone who wants to chime in) to buy them today.

0%? The concern there is that any value would get inflated away.  Owning the 20 biggest businesses in greece however? I'd bet they'll be making money whatever the currency is.  Even if inflation goes nuts, a coke is going to cost about $1 USD, and the folks who get to bottle it will make money.

forummm

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #33 on: June 29, 2015, 02:23:52 PM »

I don't think anyone will take the bet, let alone give me odds.  To be fair its far better just to buy greece at the moment, so I wouldn't do it in an extremely large size, but I'd absolutely take a $20 bet at even odds on the subject.

Speaking of Greece... Greek Bonds hit 14.7% today.  Just wondering where they'd have to be in order for you (or anyone who wants to chime in) to buy them today.

0%? The concern there is that any value would get inflated away.  Owning the 20 biggest businesses in greece however? I'd bet they'll be making money whatever the currency is.  Even if inflation goes nuts, a coke is going to cost about $1 USD, and the folks who get to bottle it will make money.

If they leave the Euro do the bonds get wiped 100% clean?

The companies may make money, but they will be making rapidly deflating Drachmas, and valued in rapidly deflating Drachmas compared to the USD. I don't think the Coke will cost $1 USD.

nereo

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #34 on: June 29, 2015, 02:24:32 PM »

I don't think anyone will take the bet, let alone give me odds.  To be fair its far better just to buy greece at the moment, so I wouldn't do it in an extremely large size, but I'd absolutely take a $20 bet at even odds on the subject.

Speaking of Greece... Greek Bonds hit 14.7% today.  Just wondering where they'd have to be in order for you (or anyone who wants to chime in) to buy them today.

0%? The concern there is that any value would get inflated away.  Owning the 20 biggest businesses in greece however? I'd bet they'll be making money whatever the currency is.  Even if inflation goes nuts, a coke is going to cost about $1 USD, and the folks who get to bottle it will make money.
Um... I'm not certain you understand how bonds work, but sure, if you want to buy Greek Bonds for 0% today I'm certain you'll have no shortage of sellers.

nereo

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #35 on: June 29, 2015, 02:26:43 PM »

I don't think anyone will take the bet, let alone give me odds.  To be fair its far better just to buy greece at the moment, so I wouldn't do it in an extremely large size, but I'd absolutely take a $20 bet at even odds on the subject.

Speaking of Greece... Greek Bonds hit 14.7% today.  Just wondering where they'd have to be in order for you (or anyone who wants to chime in) to buy them today.

0%? The concern there is that any value would get inflated away.  Owning the 20 biggest businesses in greece however? I'd bet they'll be making money whatever the currency is.  Even if inflation goes nuts, a coke is going to cost about $1 USD, and the folks who get to bottle it will make money.

If they leave the Euro do the bonds get wiped 100% clean?

The companies may make money, but they will be making rapidly deflating Drachmas, and valued in rapidly deflating Drachmas compared to the USD. I don't think the Coke will cost $1 USD.
That's the big unknown.  For certain creditors will try to get some of their investment back if they completely leave the Euro and go back to the Drachmas, but how successful they will be is completely unknown.  To my knowledge there aren't many/any good historical cases to draw conclusions from here. 

adamwoods137

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #36 on: June 29, 2015, 02:45:12 PM »

I don't think anyone will take the bet, let alone give me odds.  To be fair its far better just to buy greece at the moment, so I wouldn't do it in an extremely large size, but I'd absolutely take a $20 bet at even odds on the subject.

Speaking of Greece... Greek Bonds hit 14.7% today.  Just wondering where they'd have to be in order for you (or anyone who wants to chime in) to buy them today.

0%? The concern there is that any value would get inflated away.  Owning the 20 biggest businesses in greece however? I'd bet they'll be making money whatever the currency is.  Even if inflation goes nuts, a coke is going to cost about $1 USD, and the folks who get to bottle it will make money.
Um... I'm not certain you understand how bonds work, but sure, if you want to buy Greek Bonds for 0% today I'm certain you'll have no shortage of sellers.

Oops I thought we were quoting a percentage of par, rather than yield!  It seems to me for distressed debt, I'd be thinking in terms of discount to par as the owners might take some sort of fixed percentage haircut, though I confess I'm not that familiar with how countries typically default.

adamwoods137

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #37 on: June 29, 2015, 02:53:27 PM »

I don't think anyone will take the bet, let alone give me odds.  To be fair its far better just to buy greece at the moment, so I wouldn't do it in an extremely large size, but I'd absolutely take a $20 bet at even odds on the subject.

Speaking of Greece... Greek Bonds hit 14.7% today.  Just wondering where they'd have to be in order for you (or anyone who wants to chime in) to buy them today.

0%? The concern there is that any value would get inflated away.  Owning the 20 biggest businesses in greece however? I'd bet they'll be making money whatever the currency is.  Even if inflation goes nuts, a coke is going to cost about $1 USD, and the folks who get to bottle it will make money.

If they leave the Euro do the bonds get wiped 100% clean?

The companies may make money, but they will be making rapidly deflating Drachmas, and valued in rapidly deflating Drachmas compared to the USD. I don't think the Coke will cost $1 USD.

$0.50?  The point is that a can of coke will have a cost related to its production cost which are actual resources, not to some fixed number of Drachmas.  This is part of the reason that stocks were/are viewed as an inflation hedge.

CorpRaider

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #38 on: July 01, 2015, 08:04:57 AM »
http://finance.yahoo.com/news/robert-shiller-stocks-pricey-heres-134833084.html

Article summarizing Shiller interview on elevated PE/10.  Money quote relevant to above discussion:  "he does have personal investments in U.S. stocks, but warned of being too overexposed.  'Some people are not very diversified internationally. This is a good time to rethink that.'"

Monkey Uncle

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Re: Robert Shiller doesn't know what to make of the CAPE
« Reply #39 on: July 03, 2015, 12:30:09 PM »
This article is a good read on pros/cons of CAPE in current environment
http://www.philosophicaleconomics.com/2013/12/shiller/

If you didn't click on this link when Jeremy first posted it, please go back and read the article.  It lays out a pretty clear case that the CAPE is broken due to changes in accounting standards and dividend payout ratios.

One other thing that no one has mentioned yet is US tax policy.  It changed substantially over the last two decades or so such that capital gains and dividends get much more favorable treatment than they did for most of the history of the US stock market.  Seems like this would lead to increased demand for stocks.