YouBet said:

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DDub74 said:

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https://www.wsj.com/opinion/a-private-credit-winter-is-coming-cb016ec5?st=xduBu7&reflink=desktopwebshare_permalink

Any of you finance bros can tell me what this article really says?

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Not an expert on this but one thing not mentioned in that article is that Tri-Color's customer market was essentially illegal aliens. Trump got elected and that pipeline collapsed.

Lesson here is know how your money is being used. Glad they failed.

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That was the match that started the fire. The real problem was that tri-color was a private credit lender who was borrowing money from the non-private banking system multiple times using the same collateral. Different than the housing crisis where the underlying assets were risky individually but all grouped together they were said to be safe. In this case, the banks just failed to understand or take into account that tri-color was borrowing from multiple sources and pledging the same collateral over and over.

Each bank they borrowed from thought they were the only ones with claim to the collateral. There were multiple banks with warehouse lines of credit issued to tri-color all using the same collateral to justify the line. That works fine if there is 500M of collateral to support 5 100M lines...but in this case, there was 500M worth of collateral to support multiple 400M lines (just making the numbers up for illustrative purposes).

Goes back to, "you can stay illiquid forever but you can't be insolvent for a moment." Once one of the banks figured it out and called the loan, there was no money left to pay anyone off in whole.

Yukon Cornelius said:

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Name one classic sign..

Like I've said above if your model is accounting for the exponential growth of money you're likely wrong. I haven't seen any metrics showing how or why this is a bubble. Only opinion pieces.

And lines like "classic signs are there"..

Despite the fact there's so much fear in the market which is antitheses' of a bubble.

And I suspect most people with the opinion we are in a bubble are under exposed and they are hoping it's a bubble and pops so they can buy back in cheaper. Not because they are evaluating data.

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Some of them are in the article. The mere reality of the investment circularity is a sign in and of itself. Herd mentality, FOMO, etc. Yes, there is fear in the market outside of AI because AI has almost single-handedly driven positive returns in the market for the past couple of years.

Again, it may work out just fine. I just think it's disengenious to say there is flat out no way this is a bubble. It's pretty much a daily debate on CNBC if you want to pop that on and hear both sides.

I'm well diversified so under exposed is not an issue for me. Not much of a day trader, personally.

Ok name one classic sign… circular inclement by one company into a private company isn't at all relatable to what was going on wide spread before. It's one investment.

The fact it's being debated everyday on cbnc really shows the opposite of being in a bubble. There's so much fear and caution right now.

I still haven't seen any metrics apart from opinions. You also mentioned FOMO. Can you show where the FOMO is? Or data supporting there's FOMO?

I always come back to people still have no idea just how much money was made post covid. People's brains haven't recalibrated to it yet. And that's why when we hit ATHs people freak out it's a bubble.

There's TRILLIONS of dollars sidelined right now. There's so much fuel left. At some point that money will capitulate and THEN we will be in a bubble.

I do agree IF there's a bubble it's a debt bubble that still remains to be seen. The bubble certainly is not the SP500.

I'm not acting like anything. I'm just asking for data to support the idea we may be in a bubble. "Everyone piling in" is not data. It's nonsense. Lots of people even here in Texags have been talking about moving to cash at a higher clip.

If there's no data that's fine but just know it's purely an opinion not founded in reality but likely fear or justification for being sidelined.

YouBet said:

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Besides everyone piling into the stocks that are directly driving this?

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It's debateable as to how much of that is even an active choice.

The structure of passive investing (think index funds, target date funds etc) is to buy the equities in proportion to their representation in the index. If you give the passive machine money, that's what it buys. Cold, emotionless decision.

Then it creates a situation where it builds its own momentum into a narrower range of equities. Looking at the mag 7 in particular, let's say that make up 80% of the index the algorithm is tracking so 80% of the 401k contribution for all workers using that passive vehicle goes to mag 7 on any given week. Those stocks get juiced then they become 85% of the index. On the next payroll cycle, 85% of the 401k contributions go to mag 7. They climb with respect to their proportion of the index to 90% of the weight. Next payroll cycle, 90% of the 401k contributions go to mag 7.

There's probably some retail FOMO out there on the margins but I would be willing to bet we're just seeing the inevitable outcome of passive investing having a greater than 50% share of all transactions in the market.

Fair point.

To me, there's a couple main macro measurements to watch:

1. Do productivity gains due to AI outpace valuation growth in the AI sector?
2. Are jobs lost due to AI replaced by real new jobs created?

#1 is a crude measure of "is AI worth it?", and if it's a negative, there WILL be an AI bubble bursting at some point.

#2 is an overall economic indicator, which if the answer is negative, a recession will hit us hard, which may trigger a "bubble-type" reaction.

If we stay ahead of either of these, all is well, generally. I think the money supply argument is overblown myself, but the drag of the national debt service and declining credit quality are the other big wildcards.

Unfortunately, there's no real trustworthy way to measure both of these, except way after-the-fact, which is why I insist that we won't know until sometime well into the future.

Sims said:

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YouBet said:

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DDub74 said:

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https://www.wsj.com/opinion/a-private-credit-winter-is-coming-cb016ec5?st=xduBu7&reflink=desktopwebshare_permalink

Any of you finance bros can tell me what this article really says?

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Not an expert on this but one thing not mentioned in that article is that Tri-Color's customer market was essentially illegal aliens. Trump got elected and that pipeline collapsed.

Lesson here is know how your money is being used. Glad they failed.

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That was the match that started the fire. The real problem was that tri-color was a private credit lender who was borrowing money from the non-private banking system multiple times using the same collateral. Different than the housing crisis where the underlying assets were risky individually but all grouped together they were said to be safe. In this case, the banks just failed to understand or take into account that tri-color was borrowing from multiple sources and pledging the same collateral over and over.

Each bank they borrowed from thought they were the only ones with claim to the collateral. There were multiple banks with warehouse lines of credit issued to tri-color all using the same collateral to justify the line. That works fine if there is 500M of collateral to support 5 100M lines...but in this case, there was 500M worth of collateral to support multiple 400M lines (just making the numbers up for illustrative purposes).

Goes back to, "you can stay illiquid forever but you can't be insolvent for a moment." Once one of the banks figured it out and called the loan, there was no money left to pay anyone off in whole.

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I read this and am not convinced this particular issue is a big driver in the market. If I understand the problem correctly (please correct me if I'm wrong), but this issue involves lending to privately held companies (ONLY), who are also committing massive mortgage fraud by pledging assets multiple times (ONLY). How many privately held companies are trying to destroy themselves at the moment with this kind of fraud? I would think not many. Cargill and Koch are the two largest privately held companies. Are they doing this right now? I don't think so. They're too well managed to pull this crap. So, this only applies to those privately held companies that are willing to pull this crap right now. The fact that all banks are massively changing their loan approval process to all privately held companies does not necessarily mean all privately held companies are doing this. I could see some exposure to a few banks that got caught heavily in these two companies (and maybe a couple more that we don't know about), but I don't see this being a massive shake-up to even those few banks, much less the entire market and economy.

Just to clarify I by no means am criticizing or critiquing you. I'm speaking generally.

I certainly believe being in a bubble is possible. I'm not discounting it. I'm saying there's a lot of TALK of being in a bubble and I've seen next to zero data to support that thesis. And what we often get is little quips and catchy sayings but at the end of day hold little merit.

I don't think the problem is necessarily endemic fraud by the borrowers but more systemic lack of complexity and oversight in the underwriting process.

On one end of the spectrum, you've got a mortgage loan held in house by a bank. Title search, individual underwriting, deed assignment etc etc. Very small, closed end transaction.

On the other end, you've got something akin to what Tri-Color was doing... Multiple banks, opaque collateral, highly complex contract structure with financial derivatives being claimed by multiple entities. I think it's one of the potential breakthroughs of blockchain in the securitzation of collateral that can be tracked easily at scale. Currently, you'd be looking at UCC searches amongst different databases across different states in order to just start the process of seeing who has a perfected lien against those assets. I'd have to go back and search but I started a thread about rehypothecation of collateral at some point and got some good feedback. Rehypothecation is common in private credit and it's hard to know who is going to be left holding the bag when things go belly up. Many of these private lenders have the ultimate source of funds in the public banking system. The traditional banking system in the US is roughly $150T in assets and the shadow bank system (NDFI) has surpassed that currently at about $200T in assets.

The hard part is figuring out what risk is out there and what could trigger it. It took a collapse in illegal immigration for Tri-Color to be exposed otherwise we would have just assumed there was no issue.

ETA: A follow on effect of these types of issues may be PE/NDFIs being forced to mark to market on a lot of these assets they would be able to just tell us what they think they're worth otherwise.

Well articulated.

But what is considered a high PE? That's ultimately the question. People say things are at high PE but that's based on historically high PE. Those PEs were high when there were 1000s more publicly traded companies and trillions fewer dollars.

NoahAg said:

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Yukon Cornelius said:

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We have less publicity traded companies today then we did in 2007. Roughly a 1000 less.

We have about 3000 less publicity traded companies then in 1999.

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That's wild.

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Idiocracy's food pyramid in a nutshell. Pretty soon, everything will be one stock... BRAWNDO!

Yukon Cornelius said:

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Name one classic sign..

Like I've said above if your model is not accounting for the exponential growth of money you're likely wrong. I haven't seen any metrics showing how or why this is a bubble. Only opinion pieces.

And lines like "classic signs are there"..

Despite the fact there's so much fear in the market which is antitheses' of a bubble.

And I suspect most people with the opinion we are in a bubble are under exposed and they are hoping it's a bubble and pops so they can buy back in cheaper. Not because they are evaluating data.

Like your article. Not single piece of data is given to show we're in a bubble. It's 100% opinion based off nvida investing in openAI.

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There are multiple signs of a richly valued market. Doesn't necessarily mean we are poised for a deep correction immediately, but markets seldom correct sideways. Expect lower returns.

- CAPE of 41. Dot com peaked at 44. We are right there

- Concentration coincides with bubbles - see: 70s, 00s

- Narrowing market returns

- Circular deals - See Dot Com

- High degree of speculation in assets with no cash flows (Crypto/Pokemon vs Beanie Babies)

- High degrees of leverage

This is mostly true for a US or Tech focused investor. Being more diversified in other assets such as international or value, and you're not seeing the same irrational exuberance in terms of stretched valuations

Yukon Cornelius said:

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But what is considered a high PE? That's ultimately the question. People say things are at high PE but that's based on historically high PE. Those PEs were high when there were 1000s more publicly traded companies and trillions fewer dollars.

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the number of publicly traded companies is irrelevant

It doesn't matter if there are less of them today, and that companies are bigger. You value them the same exact way by discounting future cash flows

Less companies does not justify much higher P/E ratios. Less risk MAY justify higher PE ratios, but also Lower expected returns.

NASDAQ is bubblicious

https://www.google.com/finance/quote/.IXIC:INDEXNASDAQ?window=MAX

JSKolache said:

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NASDAQ is bubblicious

https://www.google.com/finance/quote/.IXIC:INDEXNASDAQ?window=MAX

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Are you posting a NASDAQ linear scale graph as visual evidence of a bubble? All stock graphs look parabolic when plotted on linear scales (as they should). Nobody can discern much meaning from viewing a linear scale curve plot of stocks. To "see" trends intuitively in stock indices correctly, you need to observe them on a logarithmic scale like this:

https://www.macrotrends.net/1320/nasdaq-historical-chart#google_vignette

Not such an obvious bubble when "viewed" correctly.

AggiEE said:

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Yukon Cornelius said:

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But what is considered a high PE? That's ultimately the question. People say things are at high PE but that's based on historically high PE. Those PEs were high when there were 1000s more publicly traded companies and trillions fewer dollars.

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the number of publicly traded companies is irrelevant

It doesn't matter if there are less of them today, and that companies are bigger. You value them the same exact way by discounting future cash flows

Less companies does not justify much higher P/E ratios. Less risk MAY justify higher PE ratios, but also Lower expected returns.

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With fewer productive companies and more competition for those companies (ie more dollars) the premium placed on future cash flows will steadily increase. We see that already with "high" PE ratios. But the question really is what is high. Or what's the appropriate value/premium on productive companies.

People see some of the current PE levels and are saying they are high based on historically high PEs. But they don't take into account the amount of equities and the amount of dollars in tbe market.

Yukon Cornelius said:

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AggiEE said:

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Yukon Cornelius said:

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But what is considered a high PE? That's ultimately the question. People say things are at high PE but that's based on historically high PE. Those PEs were high when there were 1000s more publicly traded companies and trillions fewer dollars.

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the number of publicly traded companies is irrelevant

It doesn't matter if there are less of them today, and that companies are bigger. You value them the same exact way by discounting future cash flows

Less companies does not justify much higher P/E ratios. Less risk MAY justify higher PE ratios, but also Lower expected returns.

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With fewer productive companies and more competition for those companies (ie more dollars) the premium placed on future cash flows will steadily increase. We see that already with "high" PE ratios. But the question really is what is high. Or what's the appropriate value/premium on productive companies.

People see some of the current PE levels and are saying they are high based on historically high PEs. But they don't take into account the amount of equities and the amount of dollars in tbe market.

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There's not "more competition" if those companies are larger, their earnings should be higher and so P/E should not change. Secondly, capital has plenty of private markets and international markets to allocate to.

I guess we'll see what happens. I'm positioning with the expectations PEs ratios will continue to grow.

Nvidia hits $5T in market value. Lawd!

YouBet said:

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Nvidia hits $5T in market value. Lawd!

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Just wait until they announce their plan to repurchase $10T in company stock, they'll be worth $100T by the time the following made up forward guidance comes out!

Principal Uncertainty said:

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JSKolache said:

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NASDAQ is bubblicious

https://www.google.com/finance/quote/.IXIC:INDEXNASDAQ?window=MAX

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Are you posting a NASDAQ linear scale graph as visual evidence of a bubble? All stock graphs look parabolic when plotted on linear scales (as they should). Nobody can discern much meaning from viewing a linear scale curve plot of stocks. To "see" trends intuitively in stock indices correctly, you need to observe them on a logarithmic scale like this:

https://www.macrotrends.net/1320/nasdaq-historical-chart#google_vignette

Not such an obvious bubble when "viewed" correctly.

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A bit of a sidebar question/discussion:

I'm not a statistical wizard, but I don't understand why a logarithmic scale is "correct"? Wouldn't a comparison chart of stock performance over time net of inflation, or versus the average S&P performance be more "correct"? I understand discounting value over time, but I don't see how your method isn't just a blunt instrument to illustrate and isolate performance blips more clearly?

NOTE: I'm not arguing pro- or anti- bubble, here, just want to understand the reasoning behind your declarative statement.

So that a stock going from $10 to $20 (100%) looks different that a stock that goes from $100 to $110 (10%)

AggieT said:

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So that a stock going from $10 to $20 (100%) looks different that a stock that goes from $100 to $110 (10%)

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I think my eyesight is good enough to tell the difference between those two using a linear scale chart. Again, how is it more "correct"?

Yukon Cornelius said:

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I guess we'll see what happens. I'm positioning with the expectations PEs ratios will continue to grow.

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We can look back at a history of countries where CAPE exceeded 40 and counting on it to continue to grow is not what the historical record shows. All countries exceeding that mark have seen valuations fall, in many cases dramatically so. It's not a high probability move that this time is different for US markets, in the long term