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The Everything Bubble: Stocks, Real Estate & Bond Implosion - Mike Maloney

https://www.youtube.com/watch?v=w0Oz2R0u4VM

Is everything overpriced? Are we going to crash soon? When? Discussion.

It sounds stupid but everything can't be overpriced because if everything is overpriced then nothing is. Overpriced means that the price of something is higher than its actual value, and this is the defining characteristic of bubbles. However, really ultimately the "value" of anything comes down to how much people are willing to pay for it. It gets almost philosophical, or at least theoretical. All calculations of value are relative, and ultimately boil down to how much people are willing to pay for something

I basically agree that the notion of overpriced loses its relevance if everything is overpriced. But as you yourself say, it all comes down or amounts to how much people are willing to pay for something, so there cannot be a reason the very existence of such notion in the first place. But since it, nevertheless, exists there should necessarily be a reason for its existence, right? As to me, overpriced relates to prices above the ones which would be there it the buying (selling) decisions were made via rational reasoning given the available info

That is, without being affected by market sentiment, hype, or hysteria

Yeah but what is a rational price for, for example, a bank stock? If they are all pretty close to having a price/sales ratio of 2 then would that be over or under priced? What if they were all 3, or 4? We can use fundamental data about an asset to determine its value, but only to the extent of determining value compared to other similar assets. Ultimately it all comes down to how much people are willing to pay. What makes one p/s ratio more rational than another?

There can be quite a few factors at play

They may not be easily quantifiable but this doesn't in the least mean that they are not real or inconsequential. For example, if a company has been there for ages (like IBM) and has been showing consistent profits year after year, we could well expect its PS ratio or any such metric higher than an average value across the markets. In this way, a company with a higher PS can be considered as undervalued while another company with a lower PS as overvalued. Indeed, in real life it all comes down to how much people are willing to pay, but people are not rational on the whole and susceptible to hype and unfounded optimism as well as pessimism. That's why there is some substance behind such claims (i.e. something being undervalued or overvalued)

What you are saying in your IBM example is true, but once again it is relative. You are saying it is over or under valued compared to the market. But what should the average value of the market be? This is where it just comes down to how much people are willing to pay. You can say an asset is overvalued compared to other similar ones, but ultimately the calculation of value is based on how much people are willing to pay, just indirectly

In fact, I expected that you would come up with something like that

But I specifically didn't address that point beforehand, to let you speak it out loud. Basically, these ratios (PS, PE, PC, etc) mean the same thing, i.e. how long it will take to break even with investments in a company stock if the company earnings remain the same over years. And break even times are an objective measure, more or less (since the mean life span of people is known, and it remains in a pretty narrow range, i.e. 75-80 years). Obviously, if a company is rock-solid through decades, it is expected that it will remain stable and profitable in the future, and therefore people could wait longer till they break even (in essence, by investing in such stocks they are just insuring their future). If people are paying more than is reasonable given these terms, it means that the stock is overvalued and overpriced (read hyped up) and vice versa. In other words, what people are willing to pay is nowhere near being an objective measure, thus the notion of overpriced