Paul Mc Culley talked about how the Fed had severely reduced the fat tail by the Bear Stearns bailout. In the latest Bill Gross PIMCO missive though, he talks of PIMCO considering a possibility, not the probability, of a fat-tail. Clearly something these guys are watching closely.
Bob Doll talked about uncertainty being good, because maximum uncertainty usually coincides with a low.
I enjoyed listening to John Bogle. When a fundamental long term index investor like John Bogle talks of headwinds to the economy and a tough slog ahead, it pays to take note. With the S&P 500 yielding around 2.2% as opposed to the historical norm of 4%, and a price multiple of 16 to 19 times earnings, he's clearly not optimistic about intermediate term returns. (He said that he's been through 9 bear markets and never seen one like this before.) He's worried about a weak financial system, and the slippage of financial concerns into the real economy.
On turnover in the stock markets:
Bogle talked of a huge speculative environment, with turnover in the stock market reaching 275% last year, as opposed to the 1929 peak of 140%. I'm not sure if a high turnover is a sign of excessive speculation. A lot of things have changed over the decades. We've had new financial instruments which are based on the underlying stock (ETFs, options, futures and other derivatives). Trades which are a combination of these tend to drive up the market turnover. Products which package and sell different types of risks and volatility are not necessarily a bad thing. 40% or more of the transactions are through program trading. A lot these are seeking out arbitrage plays amongst the different financial products, exploiting short term pricing inefficiencies. Turnover has enhanced market liquidity and made the markets more efficient. Hence I disagree with the fundamental assertion that turnover points to speculation. Also keep in mind that the cost of a transaction has come down to almost zero in today's world.
Bogle: "What bothers me about commodities is that they have no internal rate of return. It is rank speculation. All that's behind is someone's willingness to pay more or less. In a booming world, people will pay more for everything, and I don't like the idea of speculating on price."
Abby Joseph Cohen: "All commodities combined are about 10% of the business costs in the US industries. The impact here is not as high as compared to other countries "
Remained a long term bull on commodities, but with oil trading at $100 based on fundamentals.
Bogle complained about the understatement of inflation numbers, with inflation being a lot higher than the recorded numbers shown, and a lot higher than the expected numbers seen. For instance, he considered the inflation protected 10 year treasury yielding 2.3% "mind boggling conservative".
An interesting exchange took place between Kennneth Heebner and Bogle, where Heebner remarked about the current situation reminding him of August 1982, and Bogle retorting back about the current valuations. Heebner's response: Global opportunities are a lot greater today than they were 30 years ago. I think this is an important consideration in any historical study of valuations. Even Jeremy Grantham concedes that given the global linkages and the increased market liquidity, a higher long term price earnings multiple is warranted.
I certainly hope we don't see 12 times earning on the S&P 500. Could this be the fat-tail PIMCO is considering?
Full Disclosure: No position in any securities mentioned.