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by dforrestwilson
1744 days ago
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Valuations have been stretched for almost half a decade now according to old market metrics. All of these valuation metrics were originally derived when actively managed mutual funds ruled the roost. Passive ETFs are imposing an entirely different trading/investing ruleset on the system. This should not be underestimated. |
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The $64 questions in today's economy are:
1. Will multiple expansion continue indefinitely, thereby enabling investors to achieve higher profits than one would expect via fundamentals alone (GDP growth, profit margins, tax rates)?
2. Is the risk in the index really so low that it makes it worth an investment, even if the return absent multiple growth is something like 3-4% a year nominal?
3. When risks do emerge, can the federal government indefinitely reward investors with lower discount rates without triggering any negative consequences?
None of these is directly tied to passive investment. In fact, I'd argue the fact that investors no longer actively track what's going on in indexed portfolios creates a benign neglect situation that is contributing to the current bubble and the risk of collapse.
My biggest concern here is that the bubble is so large that, if it collapses and the government stops being able to print money to "correct" that, even those with marketable skills and decent savings won't be able to escape the undertow of the recession/depression that follows.