Good points that you will have other asset classes to invest in. I personally maintain enough liquidity at current economic levels to be able to live off liquid assets for years. I am certain my financial means are below the vast majority on here (though I'm on the younger side too, early 30s). For the market, it will drop, just a question of when. Typical cycle is 7-10 years. We are somewhere in the later innings of the current cycle based on historical averages. The degree of the drop doesn't need to be severe ... in fact, I would guess the next correction will be somewhat more mild. Household leverage is a bit better overall, expectations / lifestyles have not aggressively rebounded to pre-crisis levels, and frankly most of the bubbles are concentrated in high wealth areas (tech investing / VC / broader equities / only certain RE markets). When the tech bubble burst there were a few pockets of great wealth that evaporated but much of it was less levered... ie, the middle class got burned, but they never really had much opportunity to leverage themselves off that wealth (which was mostly in tech stocks). The last bubble was worse because people re-levered off their new "equity" based off higher home values... the newfound wealth got squandered. If people just bought and held, at normal historical leverage levels, foreclosures would have been lower, and less knock-on effects. As for brokerage account being halved, etc... the prudent thing is to change asset mix depending on where we are in the cycle and where someone's income is being generated from. If I were a physician (I'm not) then I could be more aggressive in buying/holding equity across cycles, so long as not overly levered. If my job were more markets driving / cyclical (frankly most high paying jobs are) then I'd want to reduce my investment exposure to the broader market as it heats up. That way my income continues to rise/benefit, and I'm converting that income into more stable / secure assets. When the market drops, my income falls, but assuming I adjusted my allocation previously, I can now deploy some capital back into the market. Essentially, you want your capital flows to gently do the opposite of what others do... As for those of you with 288 GTOs and F40s now. I too would likely NOT sell those today... unless I needed the cash... and I would buy more / add in the next correction. I would just not be a buyer in today's market. These are first world problems to the nth degree to have btw. And also, at my stage in life, I'm better off with the market continuing to go up to help boost my income... but I like to think I am entirely unbiased in my investment logic as I have absolutely zero emotional attachment to it. Those of you who play poker at high levels, particularly tournaments, know that to be a dominant player you need to emotionally detach yourself from the money / chips to be maximally effective. You can then rely on the emotions of others... since few people can do this effectively
BTW, and I hope this is clear from my posts, but I don't disagree with your approach at all. Especially with those wonderful cars. It is important to remove the personal situation from the overall perspective of prices and value over time. I can say that a market is overvalued, and still be okay with buying into that market (or retaining assets in that market). I get the feeling some people can't step back and see the difference. Again, need to reiterate you have supreme taste in cars. I have 288GTO and F40 model cars from when I was a kid (in the 80s). That is the ultimate pairing to me and frankly I'd be thrilled just to sit in one of those in the flesh (despite having sat in Aventadors, Carrera GTs and a host of other uber expensive cars).
I don't know if you've conflated me and FerrariPete into "Super Pete..." If so, and you are saying I'm convoluted, I apologize. In reality, this stuff is both very simple but also very complex. Anytime, however, someone says "I see no way that the market will be in decline for the next five years at least..." even with your exception, it is a red flag. I have no interest in pushing my view onto you or anyone else. My income level is much higher on a relative basis than my asset position (on a relative basis) at this stage in my life, so I'm actually better off if the market just keeps booming. To summarize, I think the prices have risen too fast, too far, with too much buying occurring to flip at higher prices. Simple. I don't think we will enter a depression in the next cyclical downturn, but I do think some markets will fall meaningful. They will eventually bounce back too. BTW, your comment on interest rates... you are in Europe, correct? I want to note that prices in Euros may not have to fall for values to fall. If US rates continue to outpace European increases over the next couple years, we can see the USD potentially breaking through parity. In global PPP terms, you can end up with car prices correcting, but less impact in Europe if Europe doesn't raise rates. The way the global economy is entangled is complex. Valuing something on a global basis is complex too. This isn't the place to delve into the implications of the low rate environment for a very extended period of time either... I still think it's healthy to discuss things like this in a thread like this.
It's not a static issue - this thread could and should be updated weekly forever. That's like saying a thread about the stock mkt or economy should stop - it changes daily.
sure...I agree. how about the title change to the market at a glance? not nearly as sensational as the sky is falling or will fall however.
Sensational in this situation is healthy. Greenspan tried to use every word imaginable to avoid using the word bubble. I was on the trading desk in that era and it was pretty transparent what he was getting at ... but he had to avoid using the word because of the fear that he would open pandora's box. Frankly, it was a massive, massive misstep and will forever tarnish his legacy. He should have called it when he saw it, and let the market correct. There is less harm in openly calling out a bubble. The first post was early 2013 and we're more than 2 years on from someone calling that out. If you read posts from the 08-09 era there were many people who implied or outright said that F40 prices would remain at the $400k point or drop further, etc... What harm, if there is no bubble, in saying there's a bubble? I've never seen a bubble caused by people talking about the bubble existing...
"Performance" is not drag-racing times, nor top speed. Referring back to an ancient track comparison between a Pontiac 2+2 and a Ferrari 330 GT, the Pontiac had a BIG advantage in HP, 1/4 mile time, and top speed. The Ferrari had a better track time. Which had better "performance"? Cheers Warren
Agreed. And to take it a step further. Performance is not track times. A ferrari vs a pontiac test once eluded/concluded that a ferrari was faster on the track but the pontiac had a faster 1/4 mile time, acceleration and higher top speed. But which had the better performance? Which had better performance on the street? Which had better performance towing? Does an enzo or a Raptor perform better at the track? (Answer, depends on which track, off road? Paved?) Performance is as you were eluding to relative to the test. Im just having fun with you
Bad form to quote yourself I know, but todays WSJ article updates these earlier observations in the thread, with some interesting detail. One message that is loud and clear again is how very thin the market is at the very tip top; at one auction another Christopher Wool hits a new record, the next auction another Wool is no sale with no bidders. I also thought the art consultant's words at the end were interesting, he says he's calling his clients with advice to 'Sell, Sell, Sell!' Global Art Free-For-All Sends Prices Soaring - WSJ
I had the same reaction. That said if I knew someone with a 250 GTO my advice would not be to sell...
umm every asset, every minute of the day, is a function of the risk free rate. this is an absolute...its non debatable.
This thread is 2 1/2 years old now. I guess the bubble was not due to burst. Maybe things are different today than they were on 1/18/13. Not sure what things those would be. Economy is basically the same. Desire for blue chip sports cars is the same. Interest rates are pretty much the same (a little higher). The bubble continues to inflate. -F
Im as familiar with CAPM as anyone. I am not going to go through the details but suffice it to say that investors looking for value will entirely discard CAPM and substitute with their own long-term discount rate. To illustrate, I will give a very succinct example of the logical flaw of applying a closed system mathematical model here, without looking at it with context. The ERP in the market changes over time; it is effectively the inverse of the P/E multiple in the market. Because of this, in any CAPM you will be justifying a rise in market valuation by using a lower and lower ERP as prices rise relative to earnings. In a bubble, the willingness to have a lower ERP (ie lower implied returns to every dollar of equity invested) would flow through any pricing model as a lower discount rate. Result... a higher valuation! Of course, pricing theory is premised on markets being in equilibrium and rational though dominating. The supporting logic is that there must be lower forward-looking risk... But these are all implied variables and there is nothing that in fact dictates any basis at all! For example, pre-crisis, the VIX was near its all time low. Discount rates reflected extremely low ERP and implied very low forward looking volatility. When I looked at the market (I was a "quant" analyst) I saw underlying factors that suggested the exact opposite. Many others did too, and the directional trade was clearly to short, and the discount rate in the market was clearly N/A. Timing this is tricky because the market can be wrong for a while... the old Keynesian expression of market remaining irrational longer than an individual can remain solvent holds true. Blindly inputting variables into an excel model is one thing. Giving it contextual thought is another. I am as familiar with finance theory as anyone, and have built my share of highly complex models. Stepping outside the box and applying general logic is often far more valuable than replicating the same model that anyone on Wall Street does or can do. Cheers
The bubble can last another 12-24 months too. We are now 2 years further along in the economic cycle. Pent up demand for cars and houses has driven good rebounds in both those key markets, including in the past 24 months. At some point, people have caught up on replacing things. Here is the key... look at wage growth. Very, very weak... the underlying economy has rebounded but not like the USA is suddenly a much higher earning place. Sure, China keeps adding to its middle class but there is a whole story that can be told about economic fragility there too. Im not a doomsayer but there isnt enough fundamental growth to support these markets. The first to falter is unclear, but my guess is that the DJIA will be flat to down in 12 months... and that could be a catalyst.
that's exactly what im doing - applying simple logic and stepping outside the text book - if libor was 2.5 and the US 10 yr was paying 8% all of us wld own less cars and less real estate - everyone wants the same thing - to get paid to do nothing. rates aren't going materially higher for probably a generation. the fed had to reflate the system - they didn't allow ANY asset to reach its intrinsic value - best way to for them to reflate was to get equity and home prices higher as that makes the commoner feel secure....in theory they've achieved that even thought most of the equity volumes form 09 on have been companies buying back their own stocks. equity prices don't reflect intrinsic value - that's a different debate point is - if rates stay low for another 1o yrs, there's no ceiling on where prime real estate, cars, and art can go - I cant say the same for equities and you seem to like math so I don't need to tell you what returns from bonds will look like. maybe we are saying the same thing
go talk to the guys running delis, pizzerias, small businesses - there is tremendous wage pressure to the upside. same for wall st, hedge funds, private equity, silicon valley - jobs are bid up where do you live?
One additional question / quiz... what do YOU use for the risk free rate? I can tell you that the answer varies. As an absolute, even this defined / mechanical input changes. Do you use the 10y or 30y? and why? And which do you think better approximates the duration characteristics of equity, and why? And would you be surprised if I told you that valuation approaches and choices between those two options have shifted over different times?
Jobs are not bid up. That is why these forced absurdly high minimum wage issues ($15/hr) are so troubling. Comp in all the areas you listed was higher in 07, pre crash. PE currently pays about half of what it did to entry level associates at the top firms (Apollo, KKR) in 07... and the ultimate all-in comp at places like Google used to be much, much higher (they have only shifted more to cash now because the stock is no longer as attractive). Wall street comp is also still below 07... and we are here 8 years later. Inflation-adjusted, it is all much worse. Real-estate price adjusted, even worse. I live in Manhattan.
not surprised - dude no offense but you come off like a young ivy league text book brat - im young too, I went to the ivy league, and ive amassed good success by doing it on my own and paying taxes so lets set that straight. if ur so much smarter than everyone else, you know the answer to your question. in normal non QE periods, the US 10 yr is a good measure of risk free. during unprecedented financially engineered QE markets id say LIBOR, pick which one, is a better indicator of risk free.
let me give you a piece of advice - those who think they are the smartest guy at the table - aren't. why are you using peak 07 values as ur point of reference - why not you bottom 2010 levels? who cares about entry level associate roles - go see what real PNL guys at the private equity firms and the hedge funds are pulling down - way more than 07 as assets at those firms are way higher this is a silly debate - you are right on all fronts, as you are way smarter than everyone else on the board...and im sure you are worth at least 200M all made on ur own
Sorry if I struck a nerve... yikes. No need for the personal attacks but I know the young ivy league types and they are the ones that get hung up on the basic finance math. My point is to step back and think contextually. That takes maturity.
that's very good advice I agree nothing personal - but when someone goes CAPM in geek space its the equivalent of an arm wrestle challenge
