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Equity Bubble About to Burst?

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
dealtn
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Re: Equity Bubble About to Burst?

#425820

Postby dealtn » July 8th, 2021, 11:37 am

NotSure wrote:Right on cue, a couple of comments from US central bank, and shares are falling while bonds are rising sharply. Gold up too. Beats me! I am fully aware that a few hours data is utterly meaningless in the scale of things, but today at least, people are selling shares to buy bonds and gold.


And in equal measure others are buying shares, and selling bonds and gold.

Every buyer (seller) has a seller (buyer).

NotSure
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Re: Equity Bubble About to Burst?

#425822

Postby NotSure » July 8th, 2021, 11:44 am

dealtn wrote:
NotSure wrote:Right on cue, a couple of comments from US central bank, and shares are falling while bonds are rising sharply. Gold up too. Beats me! I am fully aware that a few hours data is utterly meaningless in the scale of things, but today at least, people are selling shares to buy bonds and gold.


And in equal measure others are buying shares, and selling bonds and gold.

Every buyer (seller) has a seller (buyer).


Of course - is that not self-evident?

But sellers are having to drop prices on their shares to find those buyers, while for bonds, the opposite is true. I think most people know what one means when one uses the abridged version of that phrase?

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Re: Equity Bubble About to Burst?

#425830

Postby dealtn » July 8th, 2021, 11:59 am

NotSure wrote:
dealtn wrote:
NotSure wrote:Right on cue, a couple of comments from US central bank, and shares are falling while bonds are rising sharply. Gold up too. Beats me! I am fully aware that a few hours data is utterly meaningless in the scale of things, but today at least, people are selling shares to buy bonds and gold.


And in equal measure others are buying shares, and selling bonds and gold.

Every buyer (seller) has a seller (buyer).


Of course - is that not self-evident?

But sellers are having to drop prices on their shares to find those buyers, while for bonds, the opposite is true. I think most people know what one means when one uses the abridged version of that phrase?


Well as someone who was a market maker for a living in bonds I can tell you that at least in that asset class it wasn't the buying, or selling, that moved prices as often as not. Most times it was changed expectations on interest rates that moved the price, with buying (and selling) taking place thereafter.

I haven't checked what those comments you refer to are but I strongly suspect the comments, and the expectations of future interest rates, drove the change in price. I disagree on your general premise that asset price changes are the driver of switching between asset classes in the manner you describe in the short run.

NotSure
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Re: Equity Bubble About to Burst?

#425859

Postby NotSure » July 8th, 2021, 1:07 pm

dealtn wrote:I haven't checked what those comments you refer to are but I strongly suspect the comments, and the expectations of future interest rates, drove the change in price. I disagree on your general premise that asset price changes are the driver of switching between asset classes in the manner you describe in the short run.


The comments referred to reduce the asset purchase program, a pre-cursor to rising rates.

Regarding prices, if no selling/buying has occurred, how do we know the price has changed? I will defer to your infinitely superior background in this, but I assumed, that at this morning's share prices, there were more sellers than buyers, and hence the price had to drop to bring back balance?

Edited - commentators seem to have different takes, but Covid fears may have been the reason for a re-evaluation downwards in the price of shares and the yields of bonds: https://www.marketwatch.com/story/bond-rally-continues-while-dow-futures-slump-300-points-and-european-stocks-retreat-11625733060?mod=MW_article_top_stories

dealtn
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Re: Equity Bubble About to Burst?

#425951

Postby dealtn » July 8th, 2021, 6:38 pm

NotSure wrote:
dealtn wrote:I haven't checked what those comments you refer to are but I strongly suspect the comments, and the expectations of future interest rates, drove the change in price. I disagree on your general premise that asset price changes are the driver of switching between asset classes in the manner you describe in the short run.


The comments referred to reduce the asset purchase program, a pre-cursor to rising rates.

Regarding prices, if no selling/buying has occurred, how do we know the price has changed? I will defer to your infinitely superior background in this, but I assumed, that at this morning's share prices, there were more sellers than buyers, and hence the price had to drop to bring back balance?



Nothing infinitely superior at all.

So you appear to be saying bond prices are going up because there is a reduction in (future) demand from buybacks, and that interest rates are "rising" - neither of which typically would be bond market positive, so without seeing the comments I am at a disadvantage.

However let me show a typical bond market reaction to a previously unforeseen change in (expectations of) interest rates. Lets say rates are now going up unexpectedly, current and expected yields are likely higher, and this new knowledge will be factored into bond prices almost immediately either directly by market makers, but also via other related markets such as interest rate futures and swaps. Bond prices might fall 1-5%. Very little will trade in the market at all, spreads will widen, and volatility spike. However within a few minutes the new equilibrium prices will establish, often by market makers "guessing" and tempting new buyers/sellers to transact.

Over the course of the day the market will generally be lower than its open - ahead of the new news. Typically as most of the new trading will be at new lower prices, and lower prices, generally attract buyers, a market maker will typically see 60% business from end user buyers and 40% from sellers. Instead of "bad news" (for bond prices) meaning more sellers and lower prices, you actually have a day more reflective of lower prices leading to more buyers.

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Re: Equity Bubble About to Burst?

#425955

Postby SalvorHardin » July 8th, 2021, 6:49 pm

NotSure wrote:Regarding prices, if no selling/buying has occurred, how do we know the price has changed? I will defer to your infinitely superior background in this, but I assumed, that at this morning's share prices, there were more sellers than buyers, and hence the price had to drop to bring back balance?

Market makers adjust their prices to allow for new information.

Buys and sells are one kind of new information.

Very often news is the key bit of information. Which is why prices often move without any trades, particularly before markets open, because the market makers incorporate the new information into the price

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Re: Equity Bubble About to Burst?

#425975

Postby taken2often » July 8th, 2021, 7:58 pm

I have been thinking about the possible bubble, and decided that there were no big signs that we were in fact still struggeling to get up past 8000. Decided to just buy IT's instead of individual companies where they can be bubbles as peopl pile in whilst the smart ones move out. The Tech bubble was areal one . Companies no assets, no Sales, No income, just hype. Made a few bob but realised what was happening, so bailed out on time.

I consider Gold a bubble, everone is pushing it. I think the big boys are all holding massive amounts of gold. Amazon,Google, Apple and god knows who and they can manipulate the market and trim out a nice profit every few months as long as the market grows. As always it will be the small investors left holding the bag.

As soon as the market really turns, gold price will plummet. The scarything is a computer could do it if say four or five of the big boys all sold a chunk durin say a few days and triggered an unload.. They of course will just buy back in at the lower price and take profit.

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Re: Equity Bubble About to Burst?

#425993

Postby Spet0789 » July 8th, 2021, 10:32 pm

taken2often wrote:I have been thinking about the possible bubble, and decided that there were no big signs that we were in fact still struggeling to get up past 8000. Decided to just buy IT's instead of individual companies where they can be bubbles as peopl pile in whilst the smart ones move out. The Tech bubble was areal one . Companies no assets, no Sales, No income, just hype. Made a few bob but realised what was happening, so bailed out on time.

I consider Gold a bubble, everone is pushing it. I think the big boys are all holding massive amounts of gold. Amazon,Google, Apple and god knows who and they can manipulate the market and trim out a nice profit every few months as long as the market grows. As always it will be the small investors left holding the bag.

As soon as the market really turns, gold price will plummet. The scarything is a computer could do it if say four or five of the big boys all sold a chunk durin say a few days and triggered an unload.. They of course will just buy back in at the lower price and take profit.


Care to share any evidence that Amazon, Google and Apple hold massive amounts of gold? Interesting theory.

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Re: Equity Bubble About to Burst?

#426026

Postby GoSeigen » July 9th, 2021, 8:07 am

Spet0789 wrote:Care to share any evidence that Amazon, Google and Apple hold massive amounts of gold? Interesting theory.


taken2often never posts evidence of his claims.

GS

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Re: Equity Bubble About to Burst?

#426038

Postby NotSure » July 9th, 2021, 8:43 am

dealtn wrote:...So you appear to be saying bond prices are going up because there is a reduction in (future) demand from buybacks, and that interest rates are "rising" - neither of which typically would be bond market positive, so without seeing the comments I am at a disadvantage....


If you look back, you will see I was actually completely baffled by the market movements. I'm pretty good at physics and engineering (if I say so myself), but find economics well beyond my understanding, so thank you for your patience and explanations.

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Re: Equity Bubble About to Burst?

#426046

Postby GoSeigen » July 9th, 2021, 8:55 am

NotSure wrote:
dealtn wrote:...So you appear to be saying bond prices are going up because there is a reduction in (future) demand from buybacks, and that interest rates are "rising" - neither of which typically would be bond market positive, so without seeing the comments I am at a disadvantage....


If you look back, you will see I was actually completely baffled by the market movements. I'm pretty good at physics and engineering (if I say so myself), but find economics well beyond my understanding, so thank you for your patience and explanations.


If you are good at maths and physics then bond maths will be well within your comfort zone. Why not read a really good book about bond valuation, one that exposes a bit of the maths in calculating yield, future prices, modified duration, convexity and other aspects of bonds? When you are familiar with these I think you will find it largely demystifies the working of markets.

GS

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Re: Equity Bubble About to Burst?

#426063

Postby NotSure » July 9th, 2021, 9:36 am

GoSeigen wrote:If you are good at maths and physics then bond maths will be well within your comfort zone. Why not read a really good book about bond valuation, one that exposes a bit of the maths in calculating yield, future prices, modified duration, convexity and other aspects of bonds? When you are familiar with these I think you will find it largely demystifies the working of markets.

GS


Thanks GoSeigen - I understand the relationships between yield, duration and price. What I do not understand is why people seem happy to pay well over face value for a long duration bond that had a negative real yield at face value! (or in some cases, a negative nominal yield - other than the belief that someone else will pay an even bigger premium at some point in the future. One is not buying meaningful income at current valuations, just hoping for, I'm tempted to say, a 'bigger fool' to be around in the future).

(But that attitude will get me nowhere - hence mainly passive and diversified, including some bonds, seems the best way forward in my case.)

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Re: Equity Bubble About to Burst?

#426070

Postby dealtn » July 9th, 2021, 9:43 am

NotSure wrote: What I do not understand is why people seem happy to pay well over face value for a long duration bond that had a negative real yield at face value! (or in some cases, a negative nominal yield - other than the belief that someone else will pay an even bigger premium at some point in the future. One is not buying meaningful income at current valuations, just hoping for, I'm tempted to say, a 'bigger fool' to be around in the future).



Not everyone buying a financial asset is looking for an income (or a bigger fool, and subsequent capital gain). Quite a number, particularly over the last few years, are looking for "return of capital", not "return on capital". Outside of retail investors that isn't easy to achieve. If that is your priority a safe place to invest, even with a (relatively small) loss of capital can be appealing over the alternative of a more volatile and uncertain outcome.

With typical herding, and relative measurement of return against a peer group, rather than a focus on absolute return, coupled with a belief there is compulsion to be risk averse, particularly in the pensions field, it isn't a surprise there are still buyers of fixed income at negative real (and in some cases nominal) yield. Bizarre how that appears to many.

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Re: Equity Bubble About to Burst?

#426071

Postby BT63 » July 9th, 2021, 9:46 am

NotSure wrote:....What I do not understand is why people seem happy to pay well over face value for a long duration bond that had a negative real yield at face value! (or in some cases, a negative nominal yield - other than the belief that someone else will pay an even bigger premium at some point in the future.....


That's exactly what's happening; central banks appear willing to buy bonds in any quantity, at any price, at any yield in order to keep rates down and money flowing. Potential buyers of bonds have no choice but to accept or look at a different asset class which may not be suitable for them, or may also be overvalued.

Also many pension funds have a legal obligation to hold a certain proportion of assets in government bonds.

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Re: Equity Bubble About to Burst?

#426075

Postby dealtn » July 9th, 2021, 9:51 am

BT63 wrote:
Also many pension funds have a legal obligation to hold a certain proportion of assets in government bonds.


Not sure that's true actually, although many have mandates and investment policies that reflect that approach.

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Re: Equity Bubble About to Burst?

#426088

Postby GoSeigen » July 9th, 2021, 10:14 am

NotSure wrote:
GoSeigen wrote:If you are good at maths and physics then bond maths will be well within your comfort zone. Why not read a really good book about bond valuation, one that exposes a bit of the maths in calculating yield, future prices, modified duration, convexity and other aspects of bonds? When you are familiar with these I think you will find it largely demystifies the working of markets.

GS


Thanks GoSeigen - I understand the relationships between yield, duration and price.

Okay then, rhetorical question based on the above posts: where in all that maths does a term representing the amount of buying or selling in the market appear? Hopefully it becomes crystal clear why dealtn is correct.

What I do not understand is why people seem happy to pay well over face value for a long duration bond that had a negative real yield at face value! (or in some cases, a negative nominal yield - other than the belief that someone else will pay an even bigger premium at some point in the future. One is not buying meaningful income at current valuations, just hoping for, I'm tempted to say, a 'bigger fool' to be around in the future).

(But that attitude will get me nowhere - hence mainly passive and diversified, including some bonds, seems the best way forward in my case.)


It is what it is. Your assessment is right; your attitude is right -- but I hope whatever gilts or bonds you have at sub-zero yields are no more than a hedge-sized holding. As someone has pointed out, the main buyer of gilts in the market right now is the BoE. What the UK government is actually selling to the market these days is money, not gilts. So the questions to ask oneself are: why are investors buying that money, and who are those investors? And are they laying it off to other investors once bought? What risks are associated with holding said money? What upside is there? It's not a debate we see very much on TLF.

GS

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Re: Equity Bubble About to Burst?

#426121

Postby NotSure » July 9th, 2021, 11:27 am

Going rather OT (but at least the right forum)

GoSeigen wrote:Okay then, rhetorical question based on the above posts: where in all that maths does a term representing the amount of buying or selling in the market appear? Hopefully it becomes crystal clear why dealtn is correct.




There is nothing in the equations. I'm not trying to be argumentative here, just to understand, but the price that is paid is still surely subject to supply and demand? If a large number of people suddenly decide that they wish to sell their shares and buy bonds instead, for those trades to take place, the price of shares must drop, and the price of bonds increase, so that the sellers of shares can find buyers and vice versa? Hence the glib and strictly inaccurate phase "people are selling shares and buying bonds"


GoSeigen wrote:
It is what it is. Your assessment is right; your attitude is right -- but I hope whatever gilts or bonds you have at sub-zero yields are no more than a hedge-sized holding. As someone has pointed out, the main buyer of gilts in the market right now is the BoE. What the UK government is actually selling to the market these days is money, not gilts. So the questions to ask oneself are: why are investors buying that money, and who are those investors? And are they laying it off to other investors once bought? What risks are associated with holding said money? What upside is there? It's not a debate we see very much on TLF.

GS


I hold a little under 20% bonds, commercial and government, as part of multi-asset trackers in my work pension. (I am in my fifties). My bond allocation is decreasing with time as all new money is buying shares, and, for now at least, the shares I already have are appreciating more quickly than the bonds.

I see a lot of risk in bonds - a premium is being paid such that even if held to maturity, my capital will not be returned. If the premium reduces, or even becomes a discount, my capital is most certainly at risk. Just not as much risk as shares, and, debatably, cash. The only upside I see is if premiums grow yet further (as it has in the last week, and over the last decade), and that the bond element of multi-asset funds could be gainfully employed if the share element takes a big hit (rebalanced).

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Re: Equity Bubble About to Burst?

#426158

Postby GoSeigen » July 9th, 2021, 12:21 pm

NotSure wrote:Going rather OT (but at least the right forum)

GoSeigen wrote:Okay then, rhetorical question based on the above posts: where in all that maths does a term representing the amount of buying or selling in the market appear? Hopefully it becomes crystal clear why dealtn is correct.




There is nothing in the equations. I'm not trying to be argumentative here, just to understand, but the price that is paid is still surely subject to supply and demand?


That's like saying "surely there's an answer to zero divided by zero?" No, share price is not related to supply and demand. That's an old canard which is really unhelpful for understanding securities trading.

If a large number of people suddenly decide that they wish to sell their shares and buy bonds instead, for those trades to take place, the price of shares must drop, and the price of bonds increase, so that the sellers of shares can find buyers and vice versa? Hence the glib and strictly inaccurate phase "people are selling shares and buying bonds"


There is zero cost in "producing" shares for someone to buy. All you do is present them to the exchange. Not only that, you can do so whether the price is going up or down and you can produce as few or as many as you wish. e.g. Price goes down so investor is scared and places a million shares for sale. Price goes up, investor's made enough profit for now so places a million shares for sale. Here "supply" increases no matter what the price does!!?? The correct way to look at this is to understand what the investor and her fellows think about the value of their investment. Then their behaviour becomes quite rational and understandable. In both cases the investor believes that over her preferred timescale the value presented by the asset will be less in risk-adjusted terms than the alternatives. Hence the same behaviour whether the price has risen or has fallen.

So I think this concept of supply and demand is deeply unhelpful, as are the related "investors are buying" and "investors are selling". It's so so much more logical to think in terms of valuation (aka yield) and the closely related market allocation.

Supply and demand is about producing goods and services where there IS a non-zero cost to producing those things.

GS

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Re: Equity Bubble About to Burst?

#426348

Postby GeoffF100 » July 10th, 2021, 9:56 am

Vanguard gives the total return for the the past 3 years (including the Covid dip) in $ terms (which is not helpful). I have converted that to £ terms. It comes out at about 16% p.a., and it was rising strongly for many years before that. The stock market can be crazy at times, but I doubt whether that will continue for much longer.

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Re: Equity Bubble About to Burst?

#426477

Postby AWOL » July 10th, 2021, 3:41 pm

GoSeigen wrote:
Mike4 wrote:
GoSeigen wrote:EDIT 2: I'll admit to one legitimate use of the word bubble: to point to an analogue with previous events which are popularly named bubbles: South Sea Bubble, etc


Your post prompted me to look up what the South Sea Bubble was all about, and it seems the term "bubble" (in the context of runaway share prices) dates back at least as far as 1720, when the 'Bubble Act 1720' was passed, as a result of the SSB debacle!

https://en.wikipedia.org/wiki/Bubble_Act


Thanks Mike4, and correct me if I am wrong, but didn't that use of the word bubble refer to something empty which contained nothing of substance but was superficially attractive. This might apply well to an isolated phenomenon like bitcoin/crypto, but I don't believe it has application to "proper" markets like property or entire share markets.

GS


Extraordinary Popular Delusions and the Madness of Crowds, 1841 writing on the South Sea Bubble: "In the mean time, innumerable joint-stock companies started up every where. They soon received the name of Bubbles, the most appropriate that imagination could devise. The populace are often most happy in the nicknames they employ. None could be more apt than that of Bubbles. Some of them lasted for a week or a fortnight, and were no more heard of, while others could not even live out that short span of existence"

Initially the term was applied to the companies themselves but I would love to know when the term "bubble" was first applied to the market. It was sometime after between the event (when I believe it was called the South Sea Scheme) and the "...Madness of Crowds" publication 121 years later.


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