(BPS) Basis points: This is a bond market term used to convert percentages into this form. A 100 basis points, sometimes called bips, is equal to 1 full percentage point.
EIA (The U.S. Energy Information Administration): Per the Congressional Research Service: “The EIA is the lead federal agency for collecting, analyzing, and disseminating data on U.S. and world energy supply and consumption. The EIA was established in 1977 by the Department of Energy Organization Act.”
ESG (Environmental, Societal, Governance): This is a relatively new investing criterion meant to rate companies on their adherence to these standards. Particular focus is placed on the environmental friendliness of publicly traded businesses’ operations.
EVA (Evergreen Virtual Advisor): This is a newsletter written primarily by David Hay since 2005 and through which some earlier versions of Bubble 3.0 were published from the start of 2018 through May 2020.
FCF and FCF yield (Free cash flow and free cash flow yield): These relate to the amount of cash flow generated by a company over and above its capital spending needs. It is also known as excess cash flow. Certain super-investors like Warren Buffett consider it to be a better measure of actual profitability than officially reported (often over-reported) earnings. The FCF yields is calculated by dividing free cash flow by the market price of the company in question.
Fed’s balance sheet expansion (another term for QE) and rate cut equivalency: Each trillion dollars of QE or LSAPs is equivalent to a certain amount of interest rate reductions. The exact correlation is hotly debated.
Fed funds rate: the overnight lending rate set by the Federal Reserve to which nearly all short-term interest rates are calibrated.
Fed put: The concept here is that the Federal Reserve intervenes with major monetary support when the financial markets are under severe downward pressure. Typically, this applies to stocks, but it has now been expanded to include corporate bonds. It’s considered to be “asymmetrical” because the Fed seems to have no problem when excessive optimism/euphoria produces bubbles.
GARP (Growth At a Reasonable Price): This refers to stocks that offer a combination of faster than normal growth and moderate valuation. This can also be a function of another acronym: the PEG ratio. This measures a stock’s PE relative to its assumed earnings growth (G) rate. The lower the ratio, the better; thus, low PEG stocks are typically GARP plays. Accordingly, if a company is trading at 15 times earnings (P/E of 15) with a 15% projected growth rate, the PEG is 1. If it was trading at 30 times earnings, the PEG would be 2.
GFC (Global Financial Crisis of 2008/2009): The payback for Bubble 2.0, the housing and mortgage mania. It occurred concurrently with the Great Recession of that era.
GGET (The Great Green Energy Transition): The name this author has given to what others call the New Green Deal. Objectively, it is an exceedingly ambitious attempt to decarbonize the Western world’s energy sources on a very rapid time scale. It is already leading to severe price increases and power disruptions in many regions.
Growth stocks: These typically are associated with exciting stories that often lead to extremely high valuations such as P/E ratios. In fact, they are often known as “story stocks”, frequently with negligible profits. Frequently, they actually generate losses. However, they can also be consistent growth companies with long track records of superior earnings increases.
Growth vs value: The common division of the stock market between those companies perceived to be faster growing and those that are slower growing. The former typically trade at a premium (like higher P/E ratio) than the latter. Making the separation between these two major styles is often more art than science.
IEA (The International Energy): Confusingly similar to “EIA”, this refers to an international energy forum made up of 29 industrialized countries under the organization popularly known as the OECD (Organization for Economic Development and Cooperation). The IEA was established in 1974, in the wake of the 1973-1974 oil crisis, to help its members respond to major oil supply disruptions, a role it continues to fulfill today. Unfortunately, much of the data it has put out in recent years has been grossly inaccurate, leading to a massive oil demand understatement since 2014 (currently, nearly 3 billion barrels). Its persistent retroactive upward revisions to its previously far-too-low demand numbers receive scant media attention.
Mark-to-market rule: This accounting change, FASB 157, just prior to the Global Financial Crisis (GFC), forced banks and insurance companies to adjust the carrying values of their loans and securities portfolio based on market prices and not assumed default rates. It was a prime factor in nearly crashing the financial system. At one point, even AAA-rated mortgage-backed securities with little chance of material defaults plunged to as low as 30 cents on the dollar, due to the liquidation of leveraged positions in them. This price crash created a doom loop due to FASB 157 which forced financial institutions to essentially mark to panic-stricken prices. Its suspension in March of 2009 was a substantial factor behind the powerful and almost instantaneous rally that occurred that month, ending the short but vicious bear market triggered by the housing bust.
MMM (The Fed’s “Magical Money Machine” and a key enabler of MMT): It is the mechanism by which the U.S. central bank creates trillions of dollars of de facto fake money from its computer banks in order to buy treasury bonds and government-backed mortgages from real banks. These then go onto its balance sheet which has risen from $700 billion pre-GFC/Great Recession to roughly $8.4 trillion at the end of 2021.
MMT (Modern Monetary Theory): This is the new-age economic thesis that the U.S. government can spend nearly without restraint, financed by MMM (see above).
Money velocity: This is a derived measure of the rapidity, or lack thereof, with which money circulates through the economy. As noted in the Appendix to Chapter 4, money velocity is the value added by the economy per year in nominal terms — GDP including inflation, or nominal GDP – divided by the money supply.
Nominal GDP (Gross Domestic Product): This includes inflation. The more commonly cited GDP number is after inflation, otherwise known as Real GDP. Both are often expressed as a growth rate, like 5%, to reflect how much the economy has grown, or contracted, during a specific timeframe, usually a quarter or a year.
Non-fungible tokens (NFTs): Since I don’t understand these, I’m totally relying on Wikipedia: “A non-fungible token is a non-interchangeable unit of data stored on a blockchain, a form of digital ledger. Types of NFT data units may be associated with digital files such as photos, videos, and audio. Because each token is uniquely identifiable, NFTs differ from blockchain cryptocurrencies, such as Bitcoin.”
OER (Owners’ Equivalent Rent): This is a measure of housing- or shelter-related inflation calculated by the Fed. It uses survey responses of homeowners asking how much they feel their home would rent for; this methodology is often criticized as imprecise and is widely believed to have understated the rising costs of homeownership and of renting.
(OT) Operation Twist: This is a Fed monetary management technique similar to QE. However, in this case the Fed is striving to lower long-term interest rates relative to short-term rates. The progression from short-term to long-term rates, usually measured in years until maturity for the treasury bond market, is known as the yield curve. With OT, the Fed is essentially “twisting the yield curve” by selling short-term treasury obligations to buy longer-term issues. It did this first after WWII and then again after the Global Financial Crisis. This can be done, for example, to aid the housing market.
P/E ratio (Price/Earnings ratio): This is one of the oldest and most widely applied measures of a stock’s valuation, as well as of sectors and the overall market.
Price-to-sales ratio: This is similar to the CAPE in its approach, though it uses sales versus earnings. The idea is that revenues are much less volatile than profits, thus giving a “purer” reading of under- or over-valuation. Also, sales are harder to inflate with creative accounting which many companies tend to resort to, particularly late in an expansion/bull market.
QEs (Quantitative Easings): This is the popular term for what the Fed prefers to call Large Scale Asset Purchases (LSAPs). This the aforementioned multi-trillion-dollar purchase of government backed securities with its MMM.
Real interest rates: The net rate after taking inflation into consideration.
Risk assets: This refers to any investment that has the potential to materially decline in price. Stocks are a classic example of this; short-term, high-grade bonds are an example of a non-risk asset, at least exclusive of inflation.
Shadow banking system: This refers to the unregulated financial system, largely made up of mutual funds, hedge funds, Business Development Companies (BDCs), among other non-bank entities (though this term also extends to the unregulated activities of banks, as well). This system has grown to be a major source of credit extension and many fear it may at some point pose systemic risk should there be acute funding stress and a high level of defaults.
Shiller P/E (CAPE): Famed Yale Professor Robert Shiller created this metric to smooth out the earnings cycle in order to arrive at a more accurate P/E ratio. This takes a smoothed 10-year average of inflation-adjusted profits as the denominator. The idea is that earnings vary considerably as a function of economic conditions. When the economy is very strong, profits can be unusually, and unsustainably, elevated. This can make the overall market P/E look lower — thus, more attractive — than it truly is; conversely, in the depths of a deep recession, profits plunge, elevating the P/E to a misleadingly high level.
SPACs (Special Purpose Acquisition Companies): In this case, I’ll refer to the SEC’s definition thereof: "A SPAC is created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe. The opportunity usually has yet to be identified". SPACs are sometimes referred to as “blank check” entities because of their purposely vague structure. They are often used by companies seeking to go public to skirt the more onerous reporting requirements of a traditional Initial Public Offering (IPO).
Technical analysis: This is in contrast to traditional fundamental analysis that focuses on considerations such as cash flow, dividend yield, return on capital invested, competitive advantages, profit margins, etc. Technical analysis primarily concerns price and volume patterns. In this author’s opinion, one of the most valuable pertains to breakouts above multi-year resistance and breakdowns below multi-year support (usually three years). Some refer to these as “range expansion” events, where a long-existing trading range is broken either on the upside or the downside. When this occurs, prices generally keep trending in the direction of the breakdown or breakout. The longer the trading range has been in place, the more valuable the signal, at least as far as this theory is concerned.
Value stocks: These issues typically possess a slower growth profile and, consequently, trade at much lower multiples of their earnings per share, i.e., they are low P/E stocks. Occasionally, however, value stocks experience a surprising growth acceleration, leading to an upward re-rating into the growth stock categorization. This transformation can be particularly lucrative for investors.