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Jake Huneycutt

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  • Why The Shiller P/E Is Useless [View article]
    Thanks to the author for the perspective, but I have to disagree.

    Personally, I don't use Shiller P/E for anything. It has several limitations and doesn't have much of a function within my investment process. That said, nearly every single article I've read criticizing Shiller P/E seems to try to turn the metric into more than it's supposed to be.

    Shiller P/E is not a "market timing" mechanism. It's not meant to be a flawless measure of market valuation. It's merely one metric and like all other metrics in the universe, it has flaws. If you follow any metric mindlessly, you'll do poorly.

    Some of the criticisms in this article are true, but not necessarily relevant. Yes, if you use Shiller P/E on SBUX, it won't make much sense, but it was never designed to measure valuation of individual stocks. Similarly, if you use a traditional P/E with a cyclical company, it often will yield absurd results. There's nothing wrong with using these metrics when you understand the weaknesses. The basic goal of Shiller P/E is show when there are broad market valuation risks that might be resulting from cyclical macroeconomic expansion.

    Yes, there are reasons why a higher P/E might be justified (such as technological progress), but I don't think Shiller has ever argued otherwise. Is 10 years a perfect timeframe? No. It is reasonable? Yes.

    Like I said, I don't really use Shiller P/E in any meaningful way, and I personally think there are better measures, but I don't see it as "useless." I think it's useful in the context of examining many broad market valuation measures for investment managers that are examining asset allocation from a 10,000 foot view.
    Nov 3, 2014. 11:35 AM | 1 Like Like |Link to Comment
  • America's Disinflationary Future? [View article]
    Thanks for the comments everyone. Lot of good thoughts in there. A few responses to general criticisms I've seen:

    (1) I've noticed a few have critiqued my article because they say "we have a demand problem." If you actually read and digest my article, I'm saying precisely the same thing. We do have a demand problem. QE has increased supply, not demand. If QE were increasing demand, we wouldn't see falling interest rates and disinflation. The fact that we are seeing that suggests its only increasing the former, and not the latter.

    (2) The demand issue goes straight to my hypothesis on bubbles. Bubbles generally form because of distortionary monetary and / or currency policies that jack-up IRRs on investments in the short-term, but do not generate equivalent increases in end-user demand. The result is short-term asset price inflation, but long-term disinflation, as investment returns fall to below-average levels.

    (3) Notice that the demand issue also comes into play with the public pension funds. My argument is that interest rate suppression results in lower returns, which then forces governments to either cut benefits or raise taxes. Tax increases obviously harm demand, but I think you can argue benefit cuts do, as well.

    Most of the criticisms I'm seeing seem to misunderstand the article. The problem with economics is that it's not a hard science and there's no way to conduct "scientific experiments" per se. However, we can take a scientific approach to trying to explain why Japan's experiments with quantitative easing resulted in disinflation, rather than the predicted result of greater growth and / or higher inflation. We're already seeing evidence that this seems to be occurring here in the US, as well.

    My article provides one logical explanation as to why disinflation may be the result. That, in essence, QE is creating a short-term boost in investment, which increases supply, but this basically "steals" future investments and results in long-term disinflation. I do not claim that there are not other possible reasons (such as demographics), but I also think people underestimate how small changes in interest rates by a central bank can have a dramatic impact on the investment environment. These minor changes can alter the economics of an investment radically, which means the Fed is making asset allocation preferences that may not be beneficial. This becomes particularly noteworthy when done on such a dramatic scale as QE has been.
    Oct 27, 2014. 04:05 PM | Likes Like |Link to Comment
  • America's Disinflationary Future? [View article]
    Your narrative says that the Federal Reserve 'took the right action' by taking a radical new approach to monetary policy and dramatically buying up treasury bonds to reduce the risk-free rate. My narrative says that the Federal Reserve has no evidence that this would result in sustainable economic growth. In my book, the people who are dramatically trying to re-engineer the American economy through centralized directives have the burden of proof.

    So we don't have a lot of evidence here, but the one piece of evidence is that these same policies have been used in Japan. And the result has been continual disinflation. Interest rates have continued to fall, growth has remained stagnant, and taxes have continually been increased to make up for government shortfalls. That's the one piece of evidence we have.

    When you start to analyze why that happened, it does start to make sense. If a central bank continues to suppress interest rates, then it makes all other investments attractive in comparison. However, this results in asset prices rising, and investment returns falling over time. Lower returns create higher risks and fewer incentives to invest. Less investment results in lower economic growth. Lower economic growth results in lower tax receipts. Lower tax receipts often result in higher taxes, which further stifle private investment, and further knocks down demand, growth, and interest rates.

    How do I know the US Fed isn't shifting the market interest rates to their natural levels? I don't for certain. But I also know that they are taking these actions without a single ounce of evidence to support the idea that these are the "natural levels" for interest rates right now and that their rational is that they can "create growth" through lower interest rates (a flawed rational no matter how you slice it). The fact that they have to purchase an un-Godly amount of treasury bonds to engineer this outcome is pretty good evidence that this isn't being driven by the market.

    Monetary policy can and should be shifted to prevent a liquidity crisis. But after 2009, there was absolutely no evidence that the US was experiencing a "liquidity crisis" any more. The purpose of monetary policy magically shifted to "create growth"; and that's something it can't do.
    Oct 23, 2014. 11:54 AM | 4 Likes Like |Link to Comment
  • America's Disinflationary Future? [View article]
    "which then reduces the overall cost of goods and services over time"

    You're getting desperate, Lawrence. I challenge you to prove that QE has driven down the cost of goods and services since 2009. At best, you can say that the rate of growth has fallen.

    Even that's debatable. If you exclude food and energy, CPI is at 1.7% growth right now. Does that differ in any substantial way from the past 20 years? During the boom years of the late 90's, CPI was at 2.3% for 1997, 2.3% for 1998, and 2.1% for 1999. .

    In 2002, CPI excluding energy and food was 2.0%, in 2003 it was 1.1%, and in 2004 it was 2.3%. If you look at the data over the long-term, you might be able to argue that CPI growth is just a smidge below where it was in the late 90's or in the 2000's, but nearly every stat on economic growth and income growth is uglier.
    Oct 23, 2014. 11:27 AM | 4 Likes Like |Link to Comment
  • America's Disinflationary Future? [View article]

    Great comment.

    I do think there's a bit of the "chicken and the egg" conundrum here. Are millennials thriftier because they inherently possess those qualities, or are they thriftier because they are becoming adults in an environment that demands it? I'd view it as more the latter than the former. People adapt to the situation in front of them.

    I thought about mentioning population growth, as well. That's certainly a distinction from Japan. However, there does seem to be a significant deal of evidence suggesting that population growth is tied to economic growth. This is to say, Japan's low (or negative) population growth rate may as much be a result of their low economic growth rate. For proof of this, see Italy, which has experienced a wave of outward migration as a result of its horrible economics. Of course, Japan's restrictive immigration policies also keep their population growth rate low, so that's certainly different from the US.

    I'd largely agree with you on the fiscal policy (and EIC vs min wage). That's really a main prong of my argument here. That QE creates fiscal stress, and that governments tend to respond to this with higher taxes, putting further pressure on economic growth. It's a vicious cycle. If anything, we should've been lowering and streamlining the tax code over the past few years. This is where I have to call out so-called "Keynesians", as Keynesian policies would favor tax cuts, but nearly every self-described "Keynesian" I've encountered supports raising taxes coupled with monetary stimulus.
    Oct 23, 2014. 11:08 AM | 2 Likes Like |Link to Comment
  • America's Disinflationary Future? [View article]

    I try to take a much more scientific approach than you. You believe that the Federal Reserve has no burden to prove its actions are beneficial. I disagree and view the Fed as having the burden to prove these extraordinary measures work.

    I look at the evidence from this experiment and other similar experiments. Japan provided the most similar experiment. The result has been continual low-growth and disinflation.

    So why did Japan's monetary stimulus result in low growth and disinflation? How is the Fed's attempt different? What are the reasons why Japan's stimulus created the opposite result than the one anticipated?

    This article provides one possible answer to the last question. It makes sense once you start to piece it together. Japan's constant attempts at stimulus resulted in disinflation. This is likely because constantly lowering interest rates merely resulted in weaker investment returns. Weaker investment returns result in lower private investment. Lower private investment results in lower growth and lower demand for loans. Lower growth and lower demand for loans results in lower interest rates. And all of this also results in weaker government revenues, which have typically been countered by tax increases, which further sap growth, private investment, and demand.

    It's a vicious cycle, and we're making very similar mistakes as Japan did. Central banks can not "grow" the economy. They can merely insure that there is enough liquidity for the economy to function normally. By intervening into the market in this haphazard fashion, the Fed has made disinflation and low-growth more likely --- not less.
    Oct 22, 2014. 01:26 PM | 15 Likes Like |Link to Comment
  • America's Disinflationary Future? [View article]

    I think the reason people focus more on the Fed is because we can see a very close connection between Fed policies, markets, and asset prices. The 2008 crash was precipitated by Fed tightening. The 2009 - 2014 bull market began after the Fed aggressively loosened policy. The lulls in the market have often been closely linked to Fed tightening (i.e. tapering easing programs). It's very easy to see how markets and Fed policy are connected.

    Taxes, spending, and regulatory issues all have a bigger long-term impact on the economy than the Fed's moves, but the average person (even the average educated investor) has difficulty seeing the connection. If the Federal government passes large tax cuts today, it could be 5 - 10 years before this results in significant growth, since the extra money that goes towards private investment would in many cases not earn positive returns for a few years. At that point, people will normally credit the new growth to something else. And yet, we can see throughout history that raising taxes during a weak economic environment has frequently resulted in disaster (World War I, Great Depression, 1937-38, etc).

    Spending is an even more complex issue. The sudden drop in spending after both World Wars helped create a poor environment. Yet, what was the alternative? Should the US have continued wasting money on "defense" that was generating negative long-term returns?

    I more or less agree with you, but I do think there's quite a bit of nuance to it, as well. And I think the idea that the Fed can create "growth" is one of the worst ideas to gain acceptance over the past few decades. I think the evidence is that the Fed's "growth" policies not only fail to create growth, but actively hamper it.
    Oct 22, 2014. 12:48 PM | 6 Likes Like |Link to Comment
  • I Feel Like A Thief Buying IBM At Today's Low Valuation [View article]
    Great article, Chuck.

    IBM is one of my favorites right now, as well. The way I see it, even if the "growth story" doesn't pan out, it still looks reasonably priced. The growth from their moves into BI, cloud computing, etc, provide a significantly upside, too, if things start to improve significantly.

    Most of the concerns seem overblown or short-sighted to me. Debt levels are reasonable, the share buybacks aren't at excessive valuations, the near term earnings growth problems are coming largely from areas they are shifting away from. Can't say I know whether the upside will pan out, but a high-upside investment that has low-downside risk is my favorite type of play.
    Aug 8, 2014. 07:41 PM | Likes Like |Link to Comment
  • Genworth Financial: A Great Buy Amid Uncertainty [View article]
    I hadn't even noticed GNW had plunged so much till I spotted this article.

    I had gotten completely out of it by early July, as I thought it was fairly valued around $18, and had some fears on the macro level (I'm a bit contrarian in expecting interest rates to stay subdued). It's a stock that I've been slowly selling out of for most of the past six months. Certainly more attractive now that it's quickly fallen back to $13.
    Aug 8, 2014. 05:06 PM | Likes Like |Link to Comment
  • Bank Of America Is My Best Subversive Dividend Idea [View article]

    I'm interested in specific examples. "Toxic derivatives" seems to have become a catch-all buzzword to scare uninformed investors.
    Jul 11, 2014. 11:26 AM | 2 Likes Like |Link to Comment
  • Bank Of America Is My Best Subversive Dividend Idea [View article]

    What sort of "toxic derivatives" are on BofA's books? Do you have any specific examples?
    Jul 11, 2014. 08:48 AM | 3 Likes Like |Link to Comment
  • Bank Of America Is My Best Subversive Dividend Idea [View article]
    Great article, Tim. Last inflated market (2007 -8), the big banks were some of the worst investments. This inflated market, the big banks actually appear to be one of the few classes with a reasonable "margin of safety." BAC and C, in particular, still look cheap.
    Jul 11, 2014. 07:56 AM | 3 Likes Like |Link to Comment
  • Seeking Alpha Strikes A Victory For Free Speech [View article]
    Great news! Thanks for sharing this, Eli.
    Jul 7, 2014. 06:57 PM | 1 Like Like |Link to Comment
  • What Would Benjamin Graham And John Neff Pay For Realty Income? [View article]
    Great article, Tim. In this market, don't think there are many stocks that fit Ben Graham's strict criteria, unfortunately. But I like O --- agree it's probably about fairly valued.
    Jun 15, 2014. 03:55 PM | Likes Like |Link to Comment
  • Washington State's Minimum Wage Experience [View article]
    This article has major issues.

    First off, Washington state's real minimum wage hasn't even changed in the past 12 months. It was increased from $9.19 per hour to $9.32 per hour, a 1.4% increase, that is based off of an inflation index. Therefore, posting a chart showing that Washington state's unemployment rate has fallen is kind of irrelevant.

    Even if Wash state had raised the real minimum wage, you'd have to look further than the unemployment rate over a 12-month period to reach any conclusions. For starters, the unemployment rate does not factor into account labor force participation. Likewise, the headline unemployment number examines people of all skill levels. You wouldn't expect an accountant making $50 / hour or an engineer making $75 / hour to be affected by a minimum wage of $9.32 / hour.

    In order to even begin to quantify the effects, you'd need to look at unemployment on a group of unskilled laborers. Unfortunately, there's no perfect measure but the employment to population ratio for individuals aged 16 - 19 years old is probably the best proxy.

    Since a series of Federal minimum wage hikes from 2007 - 2009, the employment ratio has dropped from around 35% to 26%, a very significant decline.

    There's also a bit research showing that European nations with minimum wages have higher unemployment than European nations without minimum wages.

    So far as I know, there are no major studies that look at the long-term impact of minimum wage laws on long-term income. My guess is that it results in reduced income over the long-term, since many younger individuals would prefer to accept lower wages, in exchange for experience and skills that would lead to higher income growth in the future. In fact, it's sort of silly that we make kids take out tens of thousands of dollars in loans to acquire technical skills that a century ago, they would've been able to acquire while earning a small wage (apprenticeship).

    Minimum wage's biggest legacy is the death of apprenticeship and the rise of student debt.
    Jun 3, 2014. 07:25 PM | 19 Likes Like |Link to Comment