Salvator Mundi and stock market bubbles

Before Leonardo da Vinci’s painting, ‘Salvator Mundi’ went up for sale, this is what the New York Times wrote:

This is your chance to buy a genuine Leonardo da Vinci painting. The last da Vinci painting in private hands, “Salvator Mundi” (Saviour of the World), is expected to fetch $100m at a Christies’ auction in New York. Sotheby’s sold the painting, unaware of its true provenance, in 1958 for £45. In 2011, the work was confirmed as a genuine Leonardo and unveiled publicly — the first discovery of a painting by the artist since 1909.  [Link]

Eventually, an unknown buyer paid USD450 million for it. This comes days after Christie’s sold some impressionist art works for USD479 million. [Link]

In the meantime, Greenlight’s David Einhorn thinks that most of the problems that caused or were raised by the crisis of 2008 have not been resolved. He is right.

Conor Sen, writes for Bloomberg that the big five technology companies could destroy the tech. ecosystem. He too is likely right.

On Monday evening, Venezuela missed a deadline to make an interest payment on its bonds and thus officially defaulted.

India’s Reliance Communications missed an interest payment to China Development Bank and thus has ended up in default. RCom’s Anil Ambani has managed to do what the Indian governments in the past could not do:  hurt China’s interests! Aircel may have defaulted too.

Ajit Ranade’s piece on coal shortages in power companies confirms that India is leader nonpareil in sub-optimal functioning and turning simplicity into complexity.

India’s DMart is more expensively valued than Walmart. Indian IPOs in general are too richly praised to be sustainably rewarding to investors. [Link]

Rakesh Jhunjhunwala says that there is lot of froth in Indian IPO market. He thinks that the Indian stock market may experience a sharp, swift correction and seems to be bearish on the rupee to boot, for 2018 although he presents it differently. [Link]

Andy Mukherjee has a lovely piece on how (Mukesh) Ambani is taking on Amazon in India. A great line:

The e-commerce industry, including online food delivery, is just $15 billion a year, or 40 percent less than Alibaba Group Holding Ltd.’s Singles’ Day sales in China. [Link]

Will be an invaluable case study for B-School students.


Irrational exuberance revisited

Most people had heard of these sentences and even repeated it scores of times:

But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?

But, we have rarely heard this sentence quoted:

We should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.

They were both part of the same speech that Alan Greenspan delivered at the American Enterprise Institute in 1996. I saw these in a good blog post at the Institutional Risk Analyst website.

Indeed, one should look at Christopher Whalen’s post on ‘Loss Given Default’ as a possible metric of market overvaluation.

My colleagues at Lumen Capital in Singapore sent me this very thought-provoking table:

US market valuation


Steph Pomboy has this chart too:

Domestic stock market cap as percentage of pvt. sector GDP


We are still debating if there is a uniform asset bubble or not! Even if we do not have a uniform (or, universal or global) asset bubble, when the U.S. stock market crashes (not IF), all asset classes will be correlated.

Bloomberg overcompensates for this good and important story with this one – a horribly bad headline. I felt that it was a rather strange headline to offer to readers and I am pleased to note that someone else concurs.

Lewis on Thaler and other links

Been on the road since last Friday. Too much of travel and hence less time to think but made time to read, though.

Thanks to Tracy Alloway’s Twitter handle, saw this Michael Lewis piece on Richard Thlaer, written first in May 2015, republished early in October.

Google/Alphabet’s urban cities project is fascinating, mind-boggling or scary or something to be welcomed? I have no idea.

HSBC might have helped Guptas in South Africa to launder money.  Could be behind a paywall.

A comprehensive interview with CEO of UBS. Parts of it have a wider relevance than only to financial types.

Countries around Asia are banning sale of sand and Singapore’s land expansion is threatened.

Americans are ‘freaking out’ but, as consumers, they are feeling confident more than ever in the last seventeen years.

The scariest chart is the last one – Halloween special.

This – a similar set of scary charts – is from the bond market perspective. The information below boggles the mind:

ECB QE is currently 7 times bigger than net issuance. So is it any wonder why yields have fallen, and what happens when the ECB tries to turn off the easy money tap?

Aswath on Bitcoin and other links

Aswath Damodaran provides an excellent tutorial while explaining what Bitcoin is all about.

Andy Mukherjee’s piece on Yes Bank having had to restate its NPA by a multiple of 4X is a MUST READ.

Billionnaires becoming richer thanks to QE. Surprising piece in FT. Hope FT Free Lunch journalist Martin Sandbu read it.

Good friend Srinivasan Varadarajan sent me this paper – speech by John Taylor, one of the candidates to replace the Federal Reserve chairperson, Janet Yellen, at the Conference on monetary policy hosted by the Federal Reserve Bank of Boston. My forthcoming column for MINT is based on this speech. I was underwhelmed.

Market Mania

Bloomberg has an article with some excellent charts on the ongoing Market Mania. The article is aptly titled, ‘It’s Market Mania for Assets All Around the World’ [Link]

This article has a dual message. On the one hand, it appears to feel that there is a ‘mania’. Manias are, by definition, not rational.  On the other hand, it does point out that global economies are booming in a synchronized fashion:

From Germany to South Africa, stocks around the world are in the throes of a spirited bull run, with global growth firmer and more synchronized in years….. …. investors bet the bullish business cycle will offset the hawkish monetary-policy outlook.

It wants to have it both ways. But, if we are left confused as to whether this is all rational or a mania (bubble), look no further than this article. Company changes name and the stock flies! – sounds familiar from 1999?

If you are still not convinced, check out this article too:

Wednesday morning, Amicus Therapeutics Inc. reported a final-stage failure on a rare-disease drug and said it was abandoning the medicine. But market reactions to these disappointments have been relatively muted. Amicus shares actually rose on Wednesday despite its bad news….

…. One of the best examples of the sentiment shift is Alnylam. Back in 2016, it stopped development on a leading drug due to a different safety issue, and its already weak shares plunged nearly 50 percent. In contrast, Alnylam shares fell nearly 16 percent after it announced its trial pause last week, but have since recovered nearly 10 percent. It’s true that last year’s news was much more significant than last week’s. Still, the fact that investors are mostly shrugging now says a lot.

Thoughts on the latest GMO Asset class return forecast

I got GMO’s July 2017 update of Return Expectation over the next seven years. This form the basis of their asset allocation. You just need to set up a simple login to see their Asset Class Return forecasts.

The best way to read it is to compare it with their forecasts in recent months. I have compared it to May and March 2017.

U.S. large cap stocks, U.S. High Quality Stocks, International Large cap stocks, Emerging stocks and emerging debt have all become more overpriced in the last few months. Hence, GMO forecast of returns from these asset classes has become progressively lower over the months.

If we compare it to the situation in August 2016 – one year ago – Emerging market bonds and U.S. bonds have become somewhat less overvalued. That is, the return expectations from these two asset classes have improved in the last twelve months.

However, please note that the return expectations are still negative in the case of U.S. bonds. So, according to their model, it is still overvalued but somewhat less so than in August 2016.

10th anniversary awards

On the 10th anniversary of the beginning of the Global Financial Crisis of 2008 (it began in 2007), we have a few awards to give.

The top prize for market efficiency goes to the Eurozone BB rated BofA Merrill Euro High Yield index whose yield is the same as that of the U.S. Treasury index of BofA-Merrill. [Link]. See chart below.

european high yield

Second prize goes to the Bank of Japan for becoming the market all by itself – both the buyer and the seller – in Japanese stocks and thereby enhancing the working of the market mechanism itself! [Link]

Third prize goes to the Swiss National Bank for becoming the buyer of first and last resort for FAANG stocks. 20% of its Reserves are held in U.S. stocks now! [Link]. From central planning of interest rates to public sector ownership of public markets!

Fourth place should go to investors themselves – who can still teach a trick or two to these central banks.

An $800 million subprime auto bond sale from Westlake Financial Services Inc. last week was priced at some of the highest valuations — as measured by the extra yield the notes offered compared with the benchmark rate — since 2014, the analysts wrote in a note Monday. The portion of the security rated BB, or two steps below investment grade, offered the least additional yield for a deal of its size and rating on record. Demand for the offering was strong enough to increase its size from a planned $700 million. [Link]