Both Japanese & Korean equity markets at new highs

Investment Analysis Clubs Macro Economic Trends and Risks
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Both Japanese & Korean equity markets at new highs - as has the US S&P index. All of these are a fixture of an expectation of a Federal Reserve interest rate cut this week.

Berkshire Hathaway has benefited (as have I personally) by acquiring significant in Japan’s main trading companies (Itochu Corp, Marubeni Corp, Mitsui, Sumitomo and Mitsubishi)

On a parallel post on Shrewd’m:
“Berkshire Could See $3 Billion Hit to Interest Income If Fed Slashes Rates in Next Year.”

This brings up a discussion I recently had with WendyBG about how to structure a balanced approach to insulating us from a substantial reduction in US equity prices. Of course what causes the US equity market to revert to the mean will matter, but at some point, revert it will.

Depending on our age, we both remember decades of “normal” financial conditions with %4-ish interest rates, stock P/E ratios of sub-10 being normal and recession/“equity crashes” every decade or so - but the banking system was rock-solid under Glass-Stiegel (though a credit union crisis did point to potential vulnerabilities). A gross-oversimplification, but just making a point.

Then inflation gripped the economy and banks/bonds paid substantial interest rates. Many got used to “making money” from the interest payments - ignoring the fact that inflation was higher than the interest rates and, adding insult to injury, you paid income taxes on the interest.

Volker brought this under control by the Fed increasing the cost of investor’s ability to borrow money. Those whose strategy included buying long-bonds at the higher rates benefited for years afterwards (and, frankly created my kid’s college fund).

I won’t bore you with the ups and downs of the markets since then other than to state that we are now in unprecedented times which combine a lack of banking regulation not seen since the 1920’s, stock valuations which are “frothy” to be polite and a Fed which is likely to become increasingly “accommodating” considering the likelihood that it will become politicized.

Many berate Buffet for holding a relatively huge cash hoard - partly created from unspent income and partly by the sale of appreciated equities. The truism that “nobody can time the market” is used to promote complete investment. While neither Buffet nor I can predict when, or even how, a major decline in the stock market (actually markets, as it has been demonstrated that the global markets are bound like Siamese twins to the US ones), we both, apparently, feel it is beneficial to hold an oversized powder keg in preparation for the inevitable decline from these lofty heights.

So, the question is not only what to hold to maximize portfolio value today, but possibly more imports, what will be most resilient by providing income (or equivalent benefit) as well as survivability. Choosing the best time to redeploy cached resources will have to wait for the point of maximum pain and fear.

So, the moral is not to lament that money’s utility to make maximum profit today is a waste, but rather that it is a prudent policy at this point of time.

Within that context, what should a prudent equity portfolio look like today? Likely, it should have some growth stuff. I’m not smart enough to choose which AI play will be the chosen one, but have put more chips onto electrical infrastructure plays. I have no idea which manufacture will benefit, so I have invested in general miners (RIO, BHP, Vale, etc.) as stuff will have to be made from “something”. Considering the current state of geopolitics, I have elected (actually for decades) to diversify beyond the US dollar and and currently have over half of my equity portfolio invested in foreign companies.

Most of my current bond portfolio is invested in TIPs as I believe the Fed will be forced politically to allow inflation to become rampant - as paying back US bonds with depreciated bucks will appeal to the same crowd as a lower USD.

There is no rest for the weary, despite my selling of a chunk of my portfolio (including half my Berkshire Hathaway), the rest has done well and the portion of liquid assets invested in equities is back to 36.5%. Well, as I continue the waiting game, it just means that the fall of Icarus will be from a more lofty position when the sun explodes.

Jeff

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Good question. All I can say is what I am invested in now. And I am EASILY at the most conservative portfolio I have had in a decade. This is what my IRA is invested in:

60% Stocks, 40% bonds/cash/Treasuries/GLD/SLV

40% of the entire portfolio is VGK and VXUS - foreign equities. 5% is BNDX, foreign bonds. Gold and Silver ETFs make 12%. Less than half is domestic of any sort.

10% is in VFMV, a minimum volatility domestic equity ETF.

Year to date I am barely trailing the S&P 500 and I am happy with that.

In the taxable brokerage accounts I have some CDs, some Treasuries, two short-term tax deferred short duration annuities, shares in VTEB, and an actively managed portfolio of individual municipal bonds. Plus too much in money markets. Zero equity exposure, as a good chuck of this money is targeted to fund an early retirement and that money is not to be risked.

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What a good thread, thank you Jeff (so good when you drop by!!) and bjurasz, as in sharing and explaining your carefully thought through portfolios your opinions of our current conditions become far more clear and useful.

Years ago I sent my investments in the opposite direction, mostly abandoning securities for bare or minimally developed land. I left the USA long before it fell into its current flirtation with authoritarian oligarchic madness, mainly because my best USAian urban land investments increasinglty faced inevitable huge escalation in property taxes, and my USAian rural investments had already climbed beyond what I calculated as a reasoned target. My Mexican and European land investments, carefully located in the path of ongoing industrial and residential development, still make me quite happy, especially as Mexico and Spain (close call a few years ago) have refrained from the USAian trek into political insanity. The only reason I am not yet a Mexican citizen is the difficulty of satisfying their unfortunately inherited Habsburgian habitual bureaucratic insanity, like getting an all too easily forged golden medallion dangle on my birth certificate that the US Army hospital I was born in found utterly incomprehensible.

I am now beginning to shift my USA funds into TIPS. (Thank you Wendy for your persistent education on this valuable instrument.) Despite insanity I expect the dollar will continue to be the lingua franca of monies for some years to come.

Be really careful out there!

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BTW, the reason I rarely post on TMF is that, shortly after they moved to their new platform, the did something (neither I nor their tech support department can figure out what) which prevented virtually every browser I own from being able to log in. They went as far as to “lend me” a paid subscription account to see if it was limited to being a freeloader - to no avail. BTW, it is likely that it’s the assortment of anti-malware/security stuff that I use which is interfering - but not really sure.

The only way I have found to log in is to use the Tor Onion browser - which works like a charm (I’m using it now). That said, it is also the preferred tool to use on the Dark Web and I’m guessing that every time I fire it up, lights start blinking on panels in places where I wish they didn’t.

That said, Manlobi has done an incredible job of cloning the look/feel of the legacy TMF site at shrewdm.com and many of the heavy hitters (as well as a couple of recent light-weights) who used to post on TMF are now regulars there. I do admit to posts like Wendy’s “Control Panel” being more useful on the graphics-heavy TMF site, so I tend to lurk to read her posts.

One of these days, I’ll have to venture south of the border and say “hello”.

Jeff

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I agree that valuations are high.

If we simply look at what the data says since at least 2008, we can say the following.

S&P 500 and Nasdaq 100 indexes have outperformed USD returns in developed and emerging market indexes for a long time (of course one should be able to find individual companies or maybe narrow sector or country indexes that might have done better than the US).

I’ve done a small amount of EWJ (Japan) and EWZ (Brazil) this year, selling puts and covered calls:

Valuations have been trending higher across US assets at least since 2008, and even across some instruments that many do not consider to be assets, such as gold and bitcoin.

Excessive asset valuations say to me that there is an excess of capital relative to the most productive uses of capital. Such an excess will lead to asset prices being bid up.

In the US, we see it in stocks (eg, AI stocks), bonds, real estate as well as alternatives such as gold and bitcoin. Private equity is running out of stuff to buy: physicians groups, hvac/plumbers/electrical businesses, single-family homes, probably many other things.

So, my main points are:

USD index returns have been better, for a long time, than many main international index returns (eg, EFA, EEM, many others).

Why wouldn’t this continue?
What’s the specific event(s) to change it?

I think one can easily argue that most other economies and business climates (and investment outlook) are worse off than the US, many very much so (debt, demographics, over-investment, wealth inequality).

Asset valuations have trended higher for a long time. Central banks, such as the US, lowering policy rates will only work to increase valuations.

Why wouldn’t this continue?
What’s the specific event(s) to change it?

As long as tax and regulatory environments favor the investing class (and increasingly favors capital over labor), I have a difficult time seeing major changes to the above (doesn’t mean it can’t change).

Will excess gov spending per se be the catalyst for a change?

We can say it has not so far, at least in the US. If gov spending flows into the economy and an exorbitant share of that benefit flows to the investing class, and they in turn continue to buy Treasurys (and other assets), why can’t this just continue? Like it has continued?

I’m not saying that it can’t blow up.

I’m just saying it has continued in recent history and an argument can be made that it further continues, just like it has been continuing.

What to do?

A standard financial advisor response would be “stay diversified within your desired asset allocation.” This would mean some level of international stock and bonds plus alternatives.

Berkshire Hathaway says hold a bunch of Treasurys while waiting for valuations to improve (they have been waiting for some time, no? and their returns are not very different from the S&P 500 for some time now, there is perhaps a tax benefit with no dividends paid so investors have more control over tax consequences).

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Mostlylong has said that valuations have (with obvious hiccups) been rising pretty steadily since 2008 - and is absolutely correct.

Both of us have used the phrase “valuations” have risen and are expected to continue to rise as long as money is sloshing around with nowhere better to go.

The reason for the quotes is that the word should have been “prices”. In my opinion, we should have reserves the term “valuation” for the intrinsic numerical value of a company when you evaluated the proportion per share of its assets minus liabilities and add to the the present value of the expected cumulative profitability over time. If the share is selling appreciably higher, then we find ourself in “greater fool” territory. As prices increase without commensurate better expected prospects, the price becomes extremely fragile.

What could go wrong? There is a long list of things - some likely, some not so much - which can overturn the apple cart - and the pyramid of those apples has gotten very high indeed.

Jeff

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Every day in the financial press when people write/talk “stock prices are expensive” and “stock valuations are high,” I think everyone understands these to be the same concept.

I believe it is because every day financial instruments are traded in the market at some price which represents the actual value to some of the active market participants.

Hence the price that we observe these instruments to trade at today is our best available, current measure of the value the marketplace assigns to these instruments.

We don’t have real-time surveys of every relevant market participant’s estimate of value for every (or any) instrument, so observing actual transaction prices in the current market is the best measure of current value we have, even if, in theory, it might be incomplete because it doesn’t include relevant estimates from entities not currently trading (maybe some clever economist will devise a way to resolve that gap in information in some kind of new marketplace pricing design/structure).

And, I’ll add, even if a bunch of folks believe stock ABC’s true value is 80 and are long the stock, I bet they are all happy enough to mark the value at 100 on their books if that is were the price is trading currently.

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Yup - semantics can be fuzzy. The point I was trying to make is that, when the commodity that you are buying is shares with a company’s name on them based on everyone else’s opinion of them, that decision is definitely very different from buying the shares based on their underlying worth.

In the first case, you are betting that everyone involved has been smarter than you until you buy. In the second, you are generally looking for stocks which have been mis-priced by the same people - proving that you may be brighter than they are :slight_smile: .

Jeff

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I had these problems. A few weeks ago I was fed up. I neded to renew my vpn. They wanted a lot of money including a dedicated ip. It was not working properly.

I went to another vpn. I am happy now.

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Great depression here we come. Not because I am smart. Things are obscene right now.

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