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If you go back to pre-COVID times, you will see that we have lost a lot of economic strength. We have fewer people working, we have a reduced flow of goods and services, and yet prices are much higher. So, if you believe in market efficiency, what is wrong with this ? Was it a mistake before, or is it a mistake now?
But is it really justified that we have dealt a serious blow to the global economy, while the global stock market has risen significantly? This looks wrong . I think we all know that. This is a monetary game, and you can only sustain these little money bubbles as long as you keep confidence growing.
But when trust reaches such levels, the history textbooks speak quite clearly. It's very difficult to boost enthusiasm while in a state of mild hysteria like today. You know, I once saw 30- year bonds at 16 %. And now I see them, I don't know how many there are, 2.5%. And we saw real rates, in 2000 real rates on TIPS were 4.1, 4.2, guaranteed forever , and now they're gone.
Of course, they are negative. And they are negative all over the world. And so you're effectively saying that we have an artificial interest rate structure, clearly artificial. And it was driven into a negative zone all over the world. 20% of government bonds have negative real yields. And we're going to use that as a criterion.
We're going to say that stocks are cheap because they're less meaningless than 30- year bonds or cash, which have deeply negative returns. This is usually not the way to measure things— by comparing it to a ridiculously overvalued asset, which is exactly what we are doing. It makes people happy. I'm not happy about this.
I suspect selling everything would be entirely appropriate. However, having said that, there are big differences, just like in 2000, between American technology companies, which are overvalued just as they were in 2000, and everyone else. So value stocks, or low-growth stocks if you will, are as cheap relative to high-growth stocks as it is possible to be, so they don't suffer the same pain.
But I suspect they are still under some threat. The good news is that abroad there was not such a huge " bull" market and the same overvaluation as here. And this, of course, is an incredible opportunity because you can enter emerging markets. and they are not that expensive at all, despite the ridiculous arguments about comparing them to an overvalued bond market.
They are just that good . And compared to the S&P index, they are as cheap as ever. They've been this cheap two or three times, and it's worked out really well each time. So, you can buy emerging markets , or you can look for the intersection of these two ideas: low-growth stocks or value stocks in these markets.
And they are, um, attractively priced. You can get a really decent profit there in 10-20 years. You won't get a decent 10-year return from US growth stocks. In the end, it's simple arithmetic. The higher you raise the price of an asset, the lower your long-term profit will be. There is nothing you can do to change this equation.
Every day that the market goes up, you know only one thing: the long-term returns will be lower than they were the day before. What if after the bubble bursts, growth stocks are still ahead and there is no escape for the value investor ? What will happen if this happens? Then there will be many upset value managers .
So the question is, will it happen? It would be historically unprecedented if this were to happen. I'm pretty sure not. However, having said that , let me say one thing about cost. I have no confidence, and haven't had any for over 20 years, in price-to- book, PE, price-to-cash flow, or price-to- sales ratios as indicators of true value.
An indicator of true value is the long-term discounted value of the future dividend stream. A growth stock is, of course, worth a higher multiple on these metrics than a low- growth stock. But that doesn't mean they can't be overrated. So the cost should be cheap for what you get. You have to consider growth and quality, and if it's overvalued , then it's overvalued.
But using a simplified book value measure is a crazy idea. Cheap book value is the market's verdict on the worst assets in the market. The lowest PE is the market's verdict on the worst earnings, which are likely to be overstated or understated. Same with yields—it's the market's verdict on what's most likely to be cut.
All of this cannot be a good indicator of future results. By the way, I'm also worried about inflation. If you think you live in a world where production doesn't matter, and you can just print paper, then sooner or later you will do the impossible— bring back inflation that we haven't seen in 20 years.
And if you continue this on a global scale, you will have inflation. And I can't help but notice that prices for all kinds of goods, especially critical food and metals, are rising around the world. And if this is happening against the backdrop of a rapid decline in labor force growth rates to zero and negative values , then you are really preparing yourself for the fact that this time things will be different.
So, we are not just in a market bubble situation, but we are observing a global economy that has reached a tipping point for a decline in long-term growth rates. Therefore, now is a bad time to fall into the trap of excessive speculation. Yes, first of all , it is very difficult. And secondly, of course, diversification is always a huge advantage.
And third, surprisingly, low-growth stocks in emerging markets are a perfectly reasonable choice, if you need to own stocks, and most people do, that would be a great way to go. I also believe that stocks of companies that benefit from the " greening" of the economy will perform much better than others.
Everything related to renewable energy, electrification of systems, electric vehicles, etc. will have revenues that will overshadow the low growth rates of the rest of the world economy. It will take trillions of dollars to decarbonize the global system. This will become a staple in every portfolio.
And if you must own US stocks, then these are the ones to hold. Find a good foundation that deals with climate change issues. Glad to say GMO has one. And they are showing great results now that the focus has shifted; It took 20 years to wake up, but in the last year people have really started to understand the scale of the problem and the need to channel funds into “greening” the economy.
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