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Subject:  Re: Market is cheap? Date:  6/17/2017  9:52 AM
Author:  howardroark Number:  1826 of 3782

I thought his argument made sense. Although, I recall pretty clearly (don't have the link) in 2006 he gave an interview where he said that we are in a bull market.

A lot of smart people seem to be saying that the market is overvalued/high. But the level of interest rates do matter (and Buffett has said the same thing recently in interviews as well as at the meeting). And the variant view might well be to actually agree with Bill Miller.

I don't really think he said anything at all. Comparing a median P/E to a period that excludes the 70s because it had inflation is as big a data strangulation felony any as you'd see from a certain unnamed overvalued, overwrought, overbearish weekly commentator. But that's not an insult, that's basically a win when you're trying to be a pundit about the stock market as a whole. This Bill Miller interview is more my speed:

Here's my only deep truth about market valuations: There is no set of empirics or batching and chopping of empirics in our current universe that can save you from the inescapable uncertainty in what constitutes the value fair of junior rights to the world's corporate assets. The forward yield right is ~5.7%. Is a 5.7% real yield good enough? You can move your lips in response but I don't think there is much to be said with force. If it was 3% or 10%, maybe. We know the real yield available on the 30-yr UST is 1%. A 4.7% real return spread for equity risk is pretty big. In 50 years it's the difference between a 16X bagger in real terms and getting only 2/3s of the way to first base. Is it big enough? BBB bonds spreads are about a point and half. So the hypothetical very long-term equity to BBB spread is ~3.2% real. Again pretty big, especially since BBBs are no guarantee to survive a true disaster.

Because it's so hard to say anything smart about whether, say, the right real return for holding stocks instead of consuming or storing at no return is 4% or 8%, it's equivalently hard to say whether the market should trade 12X or 25X equilibrium earnings. And that leaves little to say at all. So people naturally look to history. But history is smaller than we think. It's possible to imagine a world 5000 years from now where our robot's robots chuckle at how seriously we squinted for stationarity amid just a single century of discount rates. It's not that looking at historical valuations is silly, what's silly is white knuckling a few crumbs of data amid a complex, changing world into thinking we can be more precise than we probably can about what's fair value and what isn't.

If I had to create a one punch Rip Van Winkle 30-year portfolio right now at 5.7% real yields or 1% real yields from 30 Year USTs or 2.5% from hypothetically diversified 30 YR BBBs, I'm putting most of it in stocks. When you slide the Rip Van Winkle out of the hypothetical you're just hoping you can guess that the market will offer something that is even better than what you consider fair before the cost of sitting in cash overwhelms the option value. That's okay to do, I do it myself, but I wouldn't call it market valuation and I damn well wouldn't be even a little certain about it.

The other popular variable that Bill Miller doesn't mention is the idea that the 5.7% isn't a good central expectation because earnings are too high; i.e. likely to revert. This is partially implicit in the Shiller CAPE and explicit in other popular punditry like GMO. I won't rehash why I don't find these arguments as presented very persuasive, but in short I think they rely on a similarly narrow empirical fetishism that comes closer to imposing stationarity than finding it. But of course it's also not crazy to think that current earnings are for one reason or another above the base-case long term equilibrium, I just think it's a good idea to raise the bar on what gives you the ability to predict how the capital/labor ratio and returns on corporate capital will change from where they are today. Means and medians aren't enough for me.

After all that semi-BS I feel somehow feel obligated to admit that I don't have a ton of net exposure right now. This is mostly bottom-up in that I just happen to be finding more short ideas than long ideas, and maybe it says something about the distribution of valuations in the areas I gravitate towards. But when you have a big drop in net exposure there's usually some top-down angle in there, somewhere, whether you admit it or not. And there is with me but there's no there, there. Meaning it's nothing more than market looking a little more expensive than normal despite a seemingly crazy person having become the nation's tweeter in chief. You know, the usual garbage. But if I find a few things next month, I would go back to being fully invested without blinking. Because I know I don't know.
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