Asset allocation in a US stock market bubble
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SquirrelChaser
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That seems likely. Nobody is currently talking about increasing interest rates- or as of yet a return to quantitative easing.
There are other elements to the equation though- economic factors of production. Of those labour is increasing and arguably so is enterprise. Technology (which effectively leverages land, labour, capital and enterprise) is advancing exponentially. All of which points to a growing world economy (Google says only 2 years of negative growth since 1961) in future, which will likely be much greater in those countries which have the greatest share of the factors of production- and it's difficult to argue that the US doesn't have the lions share of capital and technology, and its labour pool isn't exactly small either.
And it's also difficult to argue that the US doesn't encourage the growth of oligopolistic megacorps which dominate the stock markets. So US indices go up faster and attract more capital providing more opportunity growth etc in a feedback loop.
This isn't a voice in support of the US economic model- economy and society (ie people) are synonymous, and I'd far rather live in Europe with an excellent social safety net (which I've needed before and am likely to need again).
But while I hate the thought of living in the US, it's certainly where I put my money to work. Hypocrisy at its finest i admit.
but thats exactly what happened after dot com crash, it was more that the US markets full of tech stocks and which had the super performance during 1990s fell along with the dollar a double whammy for international investors. Europe became a relative safe haven, also the oil price actually rose during the early 2000s as commodity stocks were re priced upwards after hitting historic lows, this also happened during covid when the oil price hit an historic low in 2020 with Russia Saudi oil price war.
I maintain it is a big mistake to just focus on the US markets.
Dr Strangelove
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But the US equity markey is basically the world excluding Russia and China. Look at the top 25% of S&P now:
All of the above (except United Health Group) have revenue from basically all over the world.
Top 20 S&P 500 companies by market cap in 2000
(as of 1/1/2000, in millions USD)
2000
Total: 4,193,260
604,410Microsoft397,930General Electric
355,120Cisco Systems
307,880Walmart
280,120Exxon Mobil
274,430Intel
200,660Citigroup
184,060IBM
158,090Oracle
157,880Home Depot
148,930Merck
143,970Coca-Cola
142,370Procter & Gamble
140,330AIG
129,410Johnson & Johnson
124,740Qualcomm
121,060Bristol-Myers Squibb
118,220Pfizer
117,540AT&T
86,110Verizon
it was the same in 2000 remember, all the top tech stocks were global,
It was probably a bit more diversified in 2000 than it is today though. I wouldn't consider Berkshire to be a truly global stock it is mainly invested in the Us with a smattering of Jap and european holdings. Also eurostoxx 600 would have big corporations with global earnings too
Dr Strangelove
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I am eyeballing here but I would say that the top 20 in the S&P500 today get more revenue from outside the US than they did in 2000. Look at on your list GE, Walmart, Citi, Home Depot, etc, which all got vat majority of revenue from the US market.
My point is that US stocks are inherently diversified globally.
These can both be true at the same time.
Hard to know - I think the case for higher rates due to inflationary forces (deglobalization, labour markets, re-armament, greenification) appears like the most compelling thesis I've seen for where rates are headed in the next decade.....on the other side of that you've got deflationary AI and simply the debt levels on sovereign balance sheets....that need lower long term interest rates to make the fiscal math work for the politicians.......and so you'll get the Japanification of the US/EU's...low short term rates + yield curve control via CB targeting/interventions further out....
Yep - the US undoubedtly has the finest set of cards a nation could hold when you factor in access to financial capital, human capital, energy, reserve currency status, geographic location ala security, strategic autonomy via military strength ......it's a very envious position......but no asset or asset class is so good that it cant be made a bad investment by raising its price sufficiently.
No.
Future returns will be based on the success or failure of the electric conversion, AI, revolution in healthcare.
If AI lives up to its hype, current earnings multiples and profit margins will be irrelevant, if it doesn't, current earnings multiples and profit margins will be irrelevant.
yes I agree fully with this, because of high government debt globally inflation is needed to wipe out the effect of that debt, therefore we will have an inflationary environment for a long time to come. With all the advances in AI and technology etc these are all energy intensive endeavors yet no real advances have been made in energy generation, Microsoft are going back to nuclear as the only effective and reliable energy source to power all this technology, they are even looking at the 3 mile island site to restart nuclear reactors that were stopped in 1979. Very little advancement has been made in energy throughout this period therefore energy prices are likely to be very high into the future (I am contradicting myself here somewhat regarding european energy prices I know). You just have to look at irish electricity prices the highest in Europe even with all those renewables on the grid , so renewables are contributing to this whole inflationary environment we are now in. Therefore whatever about US stocks I definitely would not be buying government bonds in this environment
Yep the book says - you run the economy hot to get out from under your debt pile.....nominal GDP growth at say 6%...2.5% real growth, 3.5% inflation....while your Central Bank keeps rates lower than they ordinarily should......with some likely yield curve control on the mid to long dated issues required....in effect your really just 'burning' the bondholders (in Celtic Tiger speak).....well less burning.......and more boiling them slowly so they barely notice they're being cooked.
The formula only works of course if the US government shrinks its budget deficit back down to 2 or 3% annually......lower than nominal GDP growth......such that debt to GDP is shrinking YoY.....no mean feat....when the demands on social security and medicare are rising with retirees.
The one thing not talked about so often though is just how poorly the Treasury in the US has termed out its debt pile.....they did an amazingly poor job of this with something like 60% of the federal debt pile coming up for renewal in the next few years.....interestingly lots of US corporates too are coming into a maturity wall too where their debts roll into much higher paper...2025 into 2026
Our own NTMA - should be applauded...I looked at Ireland's maturity profile and its benign by comparison.
Look at the price per MWh over time for Wind Solar and Batteries, they have been falling off a cliff. There have been huge developments in renewable energies in this time, both in terms of price, efficiency and the amount deployed. Solar is now the cheapest form of energy that you can deploy.
??????? The price of electricity is determined by the most expensive generator needed to meet demand. This is NEVER renewables. The reason electricity is expensive is because fossil fuels are expensive. (look at the long term chart for the price of oil/gas/coal). It is a verifiable fact that Wholesale electricity prices are cheapest when there is more renewables on the grid and most expensive when there is less renewables on the grid.
With a new president on the way, who is known for protectionism and is already making noises about new tarrifs against China, Mexico and Canada, many US businesses may see trade from abroad reduce. This could lead to the bubble "bursting"...
So, with the above in mind, what's the recommended strategy?
So, with the above in mind, what's the recommended strategy?
SquirrelChaser
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I have renewables on the roof of my house. This investment has reduced the cost to me of electricity by 100% or €1,300 a year. On a 7kw system & a €7k investment.
So no. Not even near to being close to accurate...
While it's probably not causal, Ireland has the _lowest_ percentage of renewable energy in the EU: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Renewable_energy_statistics
thats your personal circumstance, thats very different from the irish electricity market which has the most expensive electricity in Europe, thats a fact. Its not just about renewables but the fact that we have alot of small inefficient power stations , a large and weak grid for the size of population, and have installed alot of emergency expensive generators (diesel generators basically) to keep the lights on. So rather than building efficient power stations we have been putting in emergency generators. Here is an article explaining it
Ireland now has EU’s highest electricity prices – Here’s how you can save
Electricity prices for Irish households are now €500 higher than the EU average, according to new data from Eurostat.
www.newstalk.com
SquirrelChaser
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The simple fact is that probably the majority of householders in the country can eliminate or greatly reduce their electricity bills through installation of solar panels.
You don't have lidl, aldi etc, or farmers and householders up and down the country installing renewables on their property because it increases their energy costs or because of ideology. They're installing it because they can do the basic maths which says it makes financial sense.
You said renewables on the Irish grid are contributing to inflation. I'm stating why that's clearly not true.
That graph includes "electricity, heating and cooling, and transport", the renewable stat for electricity market in 2022 was just shy of 40%.