bubble Archives - the patient investor

September 29, 2024October 4, 2024

The Great Pumpkin | Eric Cinnamond

Great stock market analogy from Eric Cinnamond at Palm Valley Capital:

As a kid I always looked forward to Halloween. Growing up in a health-conscious “no sweets” household, Halloween was an opportunistic time to load up on my favorite chocolate bars and candy. If I played my bag of treats right, my sweet tooth could be satisfied until Christmas!

Another thing I enjoyed about Halloween was the television special, It’s the Great Pumpkin, Charlie Brown. It was and remains a classic. Released in 1966, the Peanuts special follows its cast members as they celebrate Halloween. Some of the Peanuts crew go trick-or-treating, while others attend a party. But not Linus—he does his own thing.

Instead of celebrating with his friends, Linus spends his Halloween waiting in a pumpkin patch for the Great Pumpkin. According to Linus, “On Halloween night, the Great Pumpkin rises from his pumpkin patch and flies through the air with his bag of toys to all the children.” Unfortunately, the Great Pumpkin never arrives, and Linus is ridiculed by his friends. He’s even called a blockhead!

Our belief in full market cycles, including a bull and bear market, is beginning to feel more and more like Linus’s belief in the Great Pumpkin. However, instead of pumpkins, we sit in a patch of T-bills waiting for the return of sensible equity valuations. And rather than bringing a bag of toys, we expect this cycle’s Great Pumpkin (bear market) will bring patient investors the gift of lower prices and opportunity.

From the outside looking in, believing in full market cycles, bear markets, and even recessions, probably looks foolish. To some, we might even look like blockheads! Nevertheless, we continue to believe equity valuations are very expensive, exposing investors to considerable risk. In fact, we consider this stage of the market cycle to be an asset bubble—the third stock market bubble of our careers. The first two bubbles were verified by significant losses, with the S&P 500 losing half of its value during both bear markets (2000-2002 -49% and 2007-2009 -56%).

Our latest page on stock market valuation supports his view:

Stock Market Value Indicator

February 27, 2017

Chinese real estate bubble “slows”

Elliot Clarke at Westpac reports that home price growth in tier-1 cities “slowed materially” in January 2017:

From 29%yr in September 2016, tier-1 new home price growth has slowed to 23%yr. Similarly for the tier-1 secondary market, price momentum has slowed from 33%yr to 26%yr since September.

Tier-2 and tier-3 cities have far lower annual growth rates: 12% and 9% respectively for new homes and 9% and 6% for existing dwellings.

When we compare tier-1 price growth to Sydney and Melbourne, the Chinese bubble is in a different league. From CoreLogic: “Sydney home prices surged 15.5 per cent and Melbourne’s 13.7 per cent over the year [2016]”.

It is hard to imagine a soft landing when property prices have been growing at 30% a year.

Even 15%….

February 24, 2013

Bernard Connolly: Why the Euro Crisis Isn't Over | WSJ.com

From Brian Carney’s weekend interview with Bernard Connolly:

…But even if the Greeks were undisciplined, he says, “both the sovereign-debt crisis and the banking crisis are symptoms, not causes. And the underlying problem has been that there was a massive bubble generated in the world as a whole by monetary policy—but particularly in the euro zone” by European Central Bank policy.

The bubble formed like this: When countries such as Ireland, Greece and Spain joined the euro, their interest rates immediately dropped to near-German levels, in some cases from double-digit territory. “The optimism created by these countries’ suddenly finding that they could have low interest rates without their currencies collapsing, which had been their previous experience, led people to think that there was a genuine rate-of-return revolution going on,” he says.

There had been an increase in the rates of return in Ireland “and to some extent in Spain” in the run-up to euro membership, thanks to structural reforms in those countries in the pre-euro period. But by the time the euro rolled around, money was flowing into these countries out of all proportion to the opportunities available…..

October 29, 2012

A Hard Landing Down Under | The Big Picture

Andy Xie has a bearish outlook on China and believes 2013 could be a tough year for Australia:

The market went from not believing in China’s growth story a decade ago to extrapolating past performance into the infinite future……The year 2008 should have been the end of this boom cycle. China’s stimulus misled the market into believing otherwise…..The Australian economy is probably a bubble on top of China’s overinvestment bubble. The latter’s unwinding will sooner or later trigger the former to do so, too…..

via A Hard Landing Down Under | The Big Picture.