Thoughts on Asset Price Inflation

[mike878]

First time posting, but wanted to see if others felt that most investment assets seem relatively expensive. 

So I became serious about savings and investments in about 2004.  At the time I was living in the D.C area, and was amazed how expensive real estate was relative to average income.  Many of my peers were heavily invested in real estate spending 4-6X their earnings on either primary residences or combinations of primary residences and investment properties.  I thought the world had gone mad.  For better or worse I never bought anything in D.C, and by 2008 I had moved to Atlanta where prices were much more reasonable.  Prior to the financial markets imploding I had bought a house and was investing some of my money in gold.  By the time the markets imploded, I had already moved most of my 401K out of stock funds and into money market/bond funds.  Needless to say, I felt great at having made those calls.  However, I missed most of the rebound as I invested very little in stock funds between 2008-2012 (opting for gold/money market).  Somewhere along the way I discovered the permanent portfolio, and my investments today largely reflect this strategy. 

As I reflect on the past, and think about the future I still feel that assets are intrinsically overvalued in the same way I originally felt about D.C real estate .  I did a little research comparing various assets compared to average household wage.  Here's what I found :

Housing

Year : Median Income : Median Price : Years of income to own house
1950 :  $3300 : $7354 : 2.23 years
1965 : $6882  : $18000 : 2.62 years
1980 : $16166 : $64600 : 4.00 years
1995 : $32422 : $133900 : 4.13 years
2010 : $47222 : $195500 : 4.14 years
2015 : $52250 : $221200 : 4.23 years

Granted the homes are nicer today than they were in 1950, but for the average household it will take 4.23 years of your income to own a house vs 2.23 years in 1950.  And what does this mean for Americans who are counting on home appreciation as part of their retirement plan.  Will the next generation be willing to pay 6-8 times their average salary for a home?

DJIA

Year : Median Income : End of Year Close : # of Units one could purchase
1950 :  $3300 : 235.42 : 14.02 Units
1965 : $6882  : 969.26 : 7.10 Units
1980 : $16166 : 963.99 : 16.77 Units
1995 : $32422 : 5117 : 6.34 Units
2010 : $47222 : 11577.50 : 4.08 Units
2015 : $52250 : 17425 : 3.00 Units

To me this shows how much more the stock market has appreciated versus household income.  Again it points to a market that seems overvalued.

Gold

Year : Median Income : Year End Price of Gold : Salary in Oz
1950 :  $3300 : 34.72: 95.04 Ozs
1965 : $6882  : 35.12 : 195.96 Ozs
1980 : $16166 : 615 : 26.29 Ozs
1995 : $32422 : 384 : 84.43 Ozs
2010 : $47222 : 1224 : 38.59 Ozs
2015 : $52250 : 1060 : 49.29 Ozs

10 Year Treasury Yield

Year : Yield
1950 :  2.32%
1965 : 4.19%
1980 : 10.80%
1995 : 7.78%
2010 : 3.73%
2015 : 1.88%

Avg Dividend Yield

Year : Yield
1950 :  7.44%
1965 : 2.97%
1980 : 4.61%
1995 : 2.24%
2010 : 1.83%
2015 : 2.11%

I guess I'm finding it difficult to feel good about any of my investments.  It almost seems mathematically impossible that any of the major asset classes will experience the same type of returns that they have for the last 50 years.  The way I interpret this is that the the major government's monetary policies have resulted in trillions of additional dollars/yen/etc... being created.  It hasn't caused consumer price inflation because the money is flowing primarily into the bond and stock markets and also into real estate.  That's where the inflation is.  You would think that at some point this would have to reverse at which point we would experience deflating asset prices.  I thought this was going to happen in 2008, but completely underestimated the government's ability to prop up the financial markets.  It seems like the permanent portfolio provides some protection with cash/gold.  What do you guys think...is massive deflation a valid worry that you have? Are you making any other changes in your investment allocation to protect against this?

[Pointedstick]

I'm 100% with you on asset price inflation being the politically-acceptable substitute for consumer goods price inflation. I don't know what the future holds either. Interesting times we live in.

[Libertarian666]

First time posting, but wanted to see if others felt that most investment assets seem relatively expensive.
...
I guess I'm finding it difficult to feel good about any of my investments.  It almost seems mathematically impossible that any of the major asset classes will experience the same type of returns that they have for the last 50 years.  The way I interpret this is that the the major government's monetary policies have resulted in trillions of additional dollars/yen/etc... being created.  It hasn't caused consumer price inflation because the money is flowing primarily into the bond and stock markets and also into real estate.  That's where the inflation is.  You would think that at some point this would have to reverse at which point we would experience deflating asset prices.  I thought this was going to happen in 2008, but completely underestimated the government's ability to prop up the financial markets.  It seems like the permanent portfolio provides some protection with cash/gold.  What do you guys think...is massive deflation a valid worry that you have? Are you making any other changes in your investment allocation to protect against this?

I'm a heretic here, but I agree with you... other than on gold, which I think is getting ready for another of its "patented" moonshots.

[barrett]

It seems like the permanent portfolio provides some protection with cash/gold.  What do you guys think...is massive deflation a valid worry that you have? Are you making any other changes in your investment allocation to protect against this?

Thanks for stopping by, mike878. Great topic.

I think most investors are concerned that making much money from investments (as opposed to income) looks really unlikely over the next five to ten years. Asset prices have to be supported by something. Stocks need earnings. Bonds are more complicated but they need some combination of expectation that they might outperform inflation, plus faith in the issuing entity (for PPers, that's the US government). Cash is good unless the whole system implodes and it's replaced by something like gold.

I do believe that the PP protects against deflation better than almost any other balanced mix because of all the cash and long bonds. Deflation is terrible for both stocks and gold but gold at least has all this history of saving asses. It's the biggest baddest ass-saving asset out there.

As far as what I might do, well, I'm real estate heavy (I have two places... long story) and I am thinking of selling the more expensive place, taking a big capital gains hit and parking a bunch of $ in cash for a bit. And I'd also like to up my physical gold holdings. Sometimes major economic events have very few winners and we have to think in terms of being one of the people/families, etc. that are the least battered.

Of course it could all play out just fine which is why I'll hold onto my stocks.

And, because you are a first-time poster, I'll give my standard disclaimer which is that I very well may not know what the hell I am talking about.

[Dieter]

I'm 100% with you on asset price inflation being the politically-acceptable substitute for consumer goods price inflation. I don't know what the future holds either. Interesting times we live in.

+1

[sophie]

mike878, that is a really nifty set of numbers.  Some additional thoughts to what barrett posted...

The gold #s needs more data points.  It's kind of hard to tell if there's a trend from those few samples.

For the bond yields, you need to subtract inflation at the time to get the real return.  The raw numbers look great in the 1970s, but real returns were not so great (and were mostly negative).

The PP is a real return portfolio.  It would be perfectly fine to have lower nominal returns in the near future than in past decades where inflation was higher.

And barrett:  I LOVE that description of gold!!!  And, still debating about selling your place?  I think I said something like this last time:  if selling it means you could retire right now, and you want to retire now, then ... why not.

[I Shrugged]

I've been contending the same thing.  In Zirpville, the risk:return is horrible.  If you make any positive real return, consider yourself lucky.