I’ve been on radio silence lately, as there has been little to update.
I will do a Late Night Finance quarterly review later this month, but putting a long story short, anybody that hasn’t invested in the top tier of indexes has likely underperformed such indices – with me no exception!
We are in a very strange market environment which is pricing huge multiples in the large capitalization companies – for instance, Apple is trading at 29 times next year’s projected earnings (TTM on September 2024). The equity at that rate of earnings, gives a total yield of 3.45% for an investor, while Apple’s unsecured debt, say their May 10, 2033 maturity is at a YTM of 4.35%.
It would be an interesting thought experiment whether Apple’s stock or its debt will give more of a total return over a decade. There is a lot of expectations baked into large cap equities.
Looking at something like NVidia and most “AI” related companies, the figures are even more expensive. Even if these stocks have a multiple compression of 50% (which would result in their share prices dropping by 50%) they look healthily valued. Higher prices means higher risk.
One conclusion I can make is that index investors probably will not perform nearly as well going forward. There’s probably some more room to go to give such investors a false sense of security, however.
While central banks are continuing to tighten and QT is progressing, there is still plenty of ample liquidity available for credit creation – it is simply more expensive. Companies borrowing money have to actually generate a return in order to justify the debt. It leads one to an ironic conclusion that investment leads will come from those companies that are taking out debt financing at current rates, opposed to ones forced to roll over debt.
While headline CPI figures continue to moderate, it is not evident that base economic factors (especially the cost and quality of labour) are at all easing. Essentially until we start seeing a gross contraction of employment demand, upward wage pressure should put a floor on inflation.
Also, as I alluded to in my previous post, the aggregate economic statistics also do not capture productivity very well.
There are other tail risks out there, namely social stability and the like. It is quite underestimated how close to a “flash point” things may be.
There’s a lot more swimming in my mind with respect to the future, but I will leave it here. Right now, I’m in a holding pattern.