Monthly Archives: September 2019

The 1980’s Japanese Stock Market Bubble

The Japanese stock market was booming at the end of the 1980’s. The Nikkei reached a high of 40,000.

Long term chart of the Nikkei 225
Long term chart of the Nikkei 225

Because of this boom, Japanese companies were among the most expensive companies in the world. This led to a lot of Japanese companies buying up foreign companies. Newsweek came out with this cover in 1987 capturing the zeitgeist of that time. This zeitgeist was later also captured in the movie Die Hard (the company at the center of the movie being Japanese).

Newsweek 1987 Cover Your next boss maybe Japanese
Newsweek 1987 Cover: Your next boss maybe Japanese

Ultimately the bubble burst and Japanese stocks entered a bear market. Stocks crashed almost 90% from the top and the Nikkei reached a bear market low in 2009 during the credit crisis. Japanese stocks are up 350% since then but still almost 50% below the all time high set almost 30 years ago. Japanese stocks to this day have not yet recovered.

One other way that shows how big this bubble was is how large the market capitalisation of Japanese stocks was as a percentage of global stock market capitalisation.

Japan market capitalisation as a percentage of global market capitalisation
Japan market capitalisation as a percentage of global market capitalisation

Berkshire Hathaway’s Apple Stake

Berkshire Hathaway and Apple are currently the second and fifth company in the S&P 500 by weighting in the index. The market capitalisation for these companies are currently $ 980 billion for Apple and $525 for Berkshire Hathaway.

At this moment Warren Buffet’s Berkshire Hathaway holds a $ 50 billion stake in Apple. This position is 5% of the market capitalisation of Apple and more interestingly 10% of the market capitalisation of Berkshire Hathaway. The stake in Apple is 25% of Berkshire’s equity portfolio. Meanwhile Berkshire’s has hit the enormous amount of $ 122 billion in cash.

S&P 500 top 10 holdings
S&P 500 top 10 holdings as of September 12, 2019

Berkshire’s performance over the years has been stunning, as I’ve posted before. In euro’s though, the performance is even more stunning the last decade since the effect of the dollar gaining in value has added to performance.

Berkshire Hathaway B in Euro
Berkshire Hathaway B in Euro

Historical View Of Federal Reserve Balance Sheet

The balance sheet of the Federal Reserve has been big in the past as can be seen in the below chart. This chart depicts the balance sheet to GDP ratio of the Federal Reserve from 1913 till 2012. The Federal Reserve was created in the year 1913.

After the crash of 1929 the balance sheet had to be increased in order to save the economy. The balance sheet to GDP ratio hit a high of 23% right at the start of World War II. Since then it had slowly trended lower to 5% of GDP until the financial crisis of 2008 hit.

Historical View of Federal Reserve Balance Sheet
Historical View of Federal Reserve Balance Sheet

Here is a chart which has the balance sheet since today. As can be seen from the chart is that the Fed’s balance sheet started rising after the financial crisis and hit a high of $ 4.4 trillion in 2014 when the Fed ended the QE program. In 2018 the Fed chose to unwind the balance sheet.

Federal Reserve Balance Sheet 2003 - 2019
Federal Reserve Balance Sheet 2003 – 2019

Right now the Federal Reserve balance sheet to GDP ratio sits around 18% after having hit a high of 25% in 2014. This is explained by the Fed unwinding the balance sheet from 2018 and the rise in US GDP.

Federal Reserve Balance Sheet to GDP 2003 - 2019
Federal Reserve Balance Sheet to GDP 2003 – 2019

Are Buybacks The Main Driver For The Rally In Stocks?

A fascinating chart I came across on Twitter. Since the financial crisis around $ 3 trillion has been flowing in to passive index funds which typically have a lower fee than active funds. But what is interesting about this is that there have been no net inflows in US stocks since the financial crisis.

All the money that has flowed into passive index funds have been offset by an outflow of actively managed funds. In fact, there is actually $350 billion less in US equity funds (both active and passive) than before the financial crisis.

Cumulative US Equity Fund Flows
Cumulative US Equity Fund Flows

At the same time the S&P 500 is up 300%. Even more when dividends are factored in.

S&P 500 from 2003 till September 2019
S&P 500 from 2003 till September 2019

So why then are stocks higher if demand from investors in funds actually down $ 350 billion over the last decade?

Buybacks

The answer could be because of demand for stocks from buybacks. Buybacks have become more popular since the financial crisis. With buybacks a company uses its own money to buy back its own shares in the market. Buybacks are popular because they are a very tax efficient way to generate shareholder value.

When a company performs a stocks buyback program the company buys back their shares on the stock market. This way the amount of outstanding shares is reduced. Remaining shareholders will share their profits with less shareholders. This should lead to an increase in the price of the remaining shares.

If a dividend is paid out a tax must be paid in this received dividend. A capital gains tax only has to be paid when the shares are sold. So during the period which an investor holds his shares no taxes have to be paid (which is different from when a dividend is paid).

S&P 500 Quarterly Buybacks
S&P 500 Quarterly Buybacks

The Greatest Asset Bubbles In History

The chart below depict some of the greatest asset bubbles of all time. Among them are the Dutch Tulip Mania and the Mississippi Company bubble. The bubble in gold in the 1980’s and the 1929 stock market bubble look tiny compared to those two bubbles.

The tulip bubble record was set in 1637 and has been beat recently in 2017 by the bubble in Bitcoin. Bitcoin was first introduced around 2009 for a few dollar cent per Bitcoin but the price quickly rose to an all time high of $20,000 per Bitcoin in 2017.

The greatest asset bubbles in history (Bitcoin bubble, tulip bubble, Mississippi bubble, South Sea bubble, Gold bubble, 1929 stock market bubbel)
The greatest asset bubbles in history

Back in 2013 I wrote on this blog how the price action in Bitcoin looked like the price action expected of an average bubble. That was way to early (Bitcoin was only trading around $60 back then). Bitcoin and other cryptocurrencies such as Ethereum and Litecoin ultimately reached their peak at the end of 2017.

Since then the price of Bitcoin dropped from $ 20,000 to around $ 3,000. A drop of 85%. Which can be expected to happen when a bubble pops.

The chart above is showing something different from what normally happens after a bubble ends though. The price of Bitcoin has been steadily rising from the low of $3,000 in 2018 till almost $ 14,000 in 2019. Right now Bitcoin is trading around $ 10,000.

Maybe Bitcoin has more room to run and we haven’t seen the all time high yet?

Bitcoin 1 Year price: September 2018 - September 2019
Bitcoin 1 Year price: September 2018 – September 2019

U.S. House Prices vs. the S&P 500

Is investing in real estate more profitable than investing in the S&P 500 over a long period? This long term chart shows that for much of the last century investing in the S&P 500 returned much greater returns than investing in real estate did. This chart only misses one thing in my opinion. This chart does not show possible rental income and the re-investment of this rental income in other houses. At the same time it also doesn’t show possible costs and taxes associated with homeownership and thus with investing in real estate. Nonetheless it is a nice chart to view.

US House prices vs. S&P 500 long term
Long term US House Prices vs. S&P 500

Here is another chart showing US house prices from 1987 till April, 2019. This is the Case Shiller Index.

Case Shiller National and Composite Indices Nominal
Case Shiller National and Composite Indices

Here is the same Case Shiller index with year-over-year percentage change until April 2019. This chart is showing that the rise of house prices has declined the last few years. A cause for this has been the Federal Reserve which has raised rates from 2016 till 2019. This has caused mortgage rates to rise over that same period.

Case Shiller National and Composite Index year-over-year percentage change
Case Shiller National and Composite Index year-over-year percentage change

Here’s a chart of the average fixed rate on 15 year and 30 year US mortgages. It will be interesting to see whether the drop in rates will lead a pick up in house prices later this year. From the end of 2018 mortgage rates have been dropping lower as it has been anticipated that the Federal Reserve will lower rates (which they have done with 0.25% in July, 2019.

15 Year and 30 Year Fixed Rate Mortgage Average in the United States
15 Year and 30 Year Fixed Rate Mortgage Average in the United States

The Herengracht Index

Here’s two different charts of the Herengracht Index. The Herengracht Index is a very long index showing the value of house prices along the Herengracht in Amsterdam. The Herengracht is a street in the center of Amsterdam alongside the Herengracht canal and has since the beginning of the 1600s always been a street on which people have been eager to live.

“The Herengracht has been dug in three phases, of which the first was in 1585, the second in 1612, and the third in 1660. By 1680, nearly all the lots on the canal had been developed. The properties built during the first development phase between 1585 and 1612 were relatively small and insignificant, but from the second construction phase in 1612, the Herengracht was meant to be the most fashionable and beautiful of all the canals in Amsterdam. It has been Amsterdam’s finest location until present times.

Nearly all the properties on the Herengracht practice of trades was prohibited, many also were for residential use, but, although the contained the office of the owner. In this century, the buildings along the canal have been increasingly put to use as offices, especially in the more expensive areas. The first building specifically constructed for office use dates from 1858, while the first time an existing building was transformed into an office was in 1808. Especially in the first half of the twentieth century were many properties transformed into offices. For all properties, ownership of the building and the land on which it stands go together.

The number of properties has gradually decreased over time. Originally, there were 614 lots, but already during the first development phase, lots were combined to allow for the construction of bigger buildings. This has continued until the present, and there are now some 487 properties.” Source: A Long Run House Price Index: The Herengracht Index, 1628-1973

Herengracht Index

Herengracht Index

Herengracht Index

Herengracht Index

Herengracht Amsterdam overview
Birdseye view of the Herengracht in the center of Amsterdam

US debt to GDP and household debt service ratio

A few days ago I made a post about European debt to GDP ratio’s and how they did not show any signs of excess. Hereby are the same charts but this time for the USA. The first chart is a long term chart which shows the debt to GDP ratio for US non-financial corporations, the US government and US households from 1975 till 2019. As can be seen households have been deleveraging since the start of the Financial Crisis in 2008 while corporations and the US government have been steadily getting more in to debt.

US debt to GDP ratios for US non-financial corporations, the US government and US households from 1975 till 2019
US debt to GDP ratios for US non-financial corporations, the US government and US households from 1975 till 2019

Thanks to low rates and the above mentioned deleveraging of households debt service ratios for US households are the lowest in 40 years.

US household debt service ratio (Debt payments as % of disposable personal income)
US household debt service ratio (Debt payments as % of disposable personal income)

Via Guide to the Markets – United States

AEX index since inception with and without dividends re-invested

The AEX index is an index grossly composed of the 25 largest listed companies by market capitalisation on the Amsterdam Stock Exchange (Euronext). As of today the company with the highest weighting in the index is ASML. As can be seen in the table below is that the top 5 companies in the index have a total weighting of almost 50% while the top 10 has a total weighting of almost 70% in the index.

Top 10 AEX Index components by weight
Top 10 AEX Index components by weight as of September 3, 2019 (source iShares AEX ETF)

In the past I’ve shared a chart which showed the AEX index since inception with dividends re-invested and without. It’s time to share an updated version of that chart. This chart is a great example of how the compounding of dividends positively impacts long term investment returns. Via Twitter.

AEX index since inception with and without dividends re-invested March 1983 - September 2019 (Dutch: AEX herbeleggings index)
AEX index since inception with and without dividends re-invested March 1983 – September 2019

Is the performance of Japanese bank stocks in a low interest rate environment an omen for European bank stocks?

Japan has been experiencing very low interest rates for more than 20 years now. The yield on 10 year Japanese bonds first dropped below 2% in 1997 and has since then steadily trended lower over the years. In 2016 these bonds first went in to negative territory, meaning that the interest rate dropped below 0%. Currently Japanese 10 year bonds have been at or below 0% for almost 4 years now.

Long term chart of 10 year Japanese government bonds
Long term chart of 10 year Japanese government bonds

The performance of Japanese bank stocks has been horrible over that same period to say the least. The index is at the lowest point in its existence.

Long term chart of Tokyo Stock Exchange (TOPIX) Banks Index
Long term chart of Tokyo Stock Exchange (TOPIX) Banks Index

The ECB has kept interest rates below 0% since 2014. In this period yields on most government bonds of Eurozone countries have steadily declined below zero. Countries like Germany and the Netherlands even have their whole yield curve below zero.

negative German yield curve
Chart showing negative German yield curve

So the question arises. Does the performance of Japanese banks show what future holds for the performance of European bank stocks? Lately, European banking stocks hit their lowest price in the last 30 years. Wiping out all gains made since the ’80’s.

STOXX Europe 600 Banks index (SX7E) long term chart
STOXX Europe 600 Banks index (SX7E) long term chart

Further reading: Bloomberg Opinion. Via Twitter