The Paper Anniversary
Congratulations to the stock market on the one-year anniversary of the lows. And congratulations to all of you who are net sellers of stocks, and will be as you enter your retirement. For you, an overvalued stock market is absolute gold. For those of us who expect to be net investors for many years, of course, an overvalued stock market is bad news, since we are buying at higher-than-fair values, but we still congratulate those of you who are lucky enough to be able to sell high while we buy high.
I never have understood why young people – certainly anyone under 50 – get so excited when stocks rally. If these same people walk into a 7-11 and see the price of a Slurpee rising every day, or go to fuel up the car and watch the price of gasoline going up every day, they’d be depressed and/or outraged. Even if they already own a car, they hate to see car prices rise because they know they will be buying another car eventually. So why does it make people so darn happy to see stocks rise when they know that they will be buying on balance for many years?
Maybe it’s the recency effect, whereby we tend to exaggerate the importance of local improvements simply because they happened recently. Interestingly, not all institutions have this bias; the etiquette books say that if a marriage breaks up before two years are out, the bride and groom should return the gifts to the givers. So the paper anniversary really is not such a big deal. It’s the second year that counts. I would say the same is true in this case, with the stock market. The one-year rally was impressive; a second year would be incredible.
Some people think that the conditions are right to extend this bull market because the economy is developing so nicely. After Deutsche more or less led the way by forecasting that 350,000 new jobs will be reported next month, a number of other economists have joined the chorus with better-than-200,000 forecasts. While Census hiring will certainly provide a boost, I have trouble seeing where the sudden growth is coming from. But then, at economic turns it is always difficult to see I suppose.
So equity bulls (who chased stocks higher today until a late-day fade left them up only 0.2%) opine that the stock market might not be overvalued if the economy is in fact beginning another 4-5 year expansion and we value on forward earnings estimates. That’s a lot of “ifs” for me, and I rather think that the one-year rally in stocks just might discount some of that growth, don’t you think? Surprisingly, bonds did fine despite the new-found economic exuberance, with June Notes +4.5/32nds and the 10y yield down to 3.70%.
Investors (and that’s most of us, even if you’re only putting aside a few dollars a month in a 401(k) plan), as I said, tend to focus on the short-term growth in their fortunes rather than trust in the fact that if they systematically make good decisions, then over the long run they’ll pull ahead. Buying low and selling high, systematically, is lots more important than what your net worth did this month, but it is hard not to look at that broker statement and feel elation or depression. Ironically, this is one reason that surveys of consumer confidence are such effective early reads of changes in the economy: consumers tend to be very sensitive to small changes that don’t mean much in the big picture, and often do better at filtering out the “noise” than all of our Kalman filters and other fancy econometric methods.
But perhaps this time they feel like they are stuck in the bottom of a well and can be excused if they don’t get excited the moment they set foot on the first rung of the ladder out? The chart below (Source: Federal Reserve) shows the net worth of American households and nonprofits (I have no idea, by the way, why these two groups are lumped together), which have obviously taken quite a hit this decade.
Still, really, households aren’t doing too shabbily. Sure, net worth is well off the highs but is probably reasonably close to the long-term trend. You may have left the casino without that wad of cash, but you still have what you came in with.
Or do you? As an inflation guy, I am not really comfortable with measuring my wealth in terms of dollars. The purpose of investing isn’t the accumulation of money, after all. As Marie (Bernadette Peters) said to Navin (Steve Martin) in the movie The Jerk, “I don’t care about losing all the money. It’s losing all the stuff.” Investing is about accumulating stuff, and if you don’t agree then look at those Zimbabwean dollars I posted last month and tell me how those trillionaires feel about the phenomenal return on investment they have had.
Deflating wealth by CPI is one way to look at “real wealth,” but while I think CPI is a very well-done number it is undeniably complex. Another way to look at real wealth is simply to convert into units of other stuff (of course, this is what CPI is trying to do, where the ‘other stuff’ units are standard baskets of consumption goods). One popular unit of stuff is an ounce of gold, which (as any number of gold bugs will tell you) is an efficient store of value compared to fiat money, even if subject to occasional fits of speculative euphoria. So let’s look at the same chart of household wealth denominated in ounces of gold (Source: Bloomberg, Federal Reserve):
Hmmm. Well, I guess people can be excused, perhaps, for feeling a bit down in the dumps. If they had simply converted their wealth into bullion in the early 1990s, then they would be in the same place they are today in terms of wealth without all the angst – even though gold pays no dividend and (thus) has an expected long-run real return of zero.
Of course, the story doesn’t stop there; by the same measure (see below, Source: Bloomberg and National Association of Realtors) houses are screamingly cheap. That is somewhat hard for me to believe; the alternative is that gold is expensive. Yes, both of these statements are true, since gold is expensive relative to housing and housing is cheap relative to gold. It’s really just a question of your choice of yardstick. But, since many more people own houses than own gold, this is another reason that consumer surveys could be a little more morose than the level of economic growth (at least according to Deutsche) would lead us to believe. I remain to be convinced on this point, but need to keep an open mind.
No data that is due out tomorrow will affect that view. The calendar is again quite sparse and the weather in New York due to be quite nice. Expect another slow session.