There is almost not a week without an article in the Economist or/and the FT about us reaching the peak of the market. I can't help thinking that it starts to look like 2006 again.
But there is also not a week that goes by without an "expert" in the financial media claiming we are due for a crash. Until there are fewer of these "warnings", the market could very well just keep on truckin.
People who write these articles I think learned from the last crash that those who "predicted" it became famous ("Did you hear, so and so called it, smack on the nose, they must be a good economist. Let's have them write a book").
So now nobody wants to be left out, and so they predict crashes every week. Eventually when a crash will happen they'll say "see I predicted it, where is my book deal".
Bitter experience has shown that debt-funded assets can magnify losses, causing financial crises. For this reason banks must be able to withstand any reversal of today’s high asset prices and low defaults. That means raising bank capital in places where it is too low, especially the euro zone, and not backsliding on strenuous “stress tests” as America’s Treasury proposes. In the end, however, there may be no escape for investors from the low future returns and even losses that high asset prices imply. They and regulators should take a leaf out of “The intelligent Investor”, and make sure that they have a margin of safety.
Joe Kennedy supposedly said he avoided the stock crash of 1929 by getting out of the market when his shoeshiner started giving him stock tips.
Multiple times recently I’ve been at restaurants recently overhearing people talk about how much money they’re going to make in Bitcoin. It’s hard to convey here, but the make-money-who-cares-how-it’s-magic came across every time in such a wow-this-is-definitely-a-bubble way.
But as they say, markets can remain irrational longer than you cane remain solvent.
As far as the stock market goes, sentiment has not yet reached a peak. There are still a lot of what I call the "wise naysayer" on CNBC and elsewhere, claiming that we are due for a big decline, or even a crash. Until there are no naysayers left, the chances of further climbs is supported by sentiment analysis.
In every single crash I know of there were lots of naysayers up until the actual crash. As a matter of fact, right after each crash I personally remember, there were some of those naysayers who got elevated to oracle-status by the press for a time, "the one who had foreseen this all". But they always failed to predict the timing of the next crash, so oracle-status didn't last.
Bottom line: still having naysayers isn't a relevant signal. Predicting that there will be a crash is easy (you are almost guaranteed to be eventually right). Predicting WHEN the crash will be is (almost?) impossible.
I agree stocks are rich/richish by most metrics, but still cheaper than bonds/real estate. And the latter have very strong negative correlation to the level of interest rates.
Plus, private equity is sitting on close to $1T of dry powder. That's a pretty strong back stop to stock prices. In short, to avoid the crash you need to figure out what causes mass PE withdrawal, and get in front of that.
"I agree stocks are rich/richish by most metrics, but still cheaper than bonds/real estate. And the latter have very strong negative correlation to the level of interest rates."
If you only invest what you can lose, it doesn't matter how long the market is irrational. Bitcoin is a high risk investment/volatile in the short term, but the question is what is it long term?
You put your money in btc and they may crash 30% in a day. If you panic then you lose money.
My projection is that this is resulting from a lot of circular investing. Fund A gives money to company B, who has more money than they can spend so it goes to fund C, and then that goes to company D, etc.
We've learned that you are not supposed to have idle capital. And yet we keep so much of our wealth as money, the only way to deploy it is to send it in a circle. Valuations go up, prices and costs don't.
Unfortunately it's a house of cards. When someone finally cashes out, they'll pull money from the whole system to the tune of the amount it's been amplified by circular investing.
That end is called raising the interest rate. When the rate hits some magic phase transition number where enough people believe you can invest in safe liquid accounts for more than the return on risky assets then the whole thing collapses.
But then it'll get propped up again afterwards and everybody believes that now.
Not sure why you are being downvoted. That's essentially how things work.
That's what FED and interest rates exist to do. Create and pop bubbles.
As the FED raises interest rates, money will start trickling out of "riskier" assets. The quicker the FED raises interest rates, the more quickly money will leave. Then we get a recession and when the FED feels they've sopped up enough money from the economy, then they will lower interest rates to get more money into the system, get more economic activity and re-inflate asset prices.
If I understand right, this is basically merging s&p 500 [1] and dollar value index [2]. The value of the dollar has been dropping all year, at a higher rate than the value of the s&p 500 has been going up.
Basically, the market's dollar denominated value is going up, but dollars are becoming less valuable. This combines to mean that market value has actually down this year, not up.
Perhaps op can correct me on anything I got wrong.
Yes, and as a European, this is very visible in my portfolio. S&P 500 ETF is the worst performing part of my savings portfolio, when nominated in euros. China, Nordics, rest of the Europe & emerging markets are all doing fine.
Of course, the falling dollar price benefits US exports in the future, so it could be a good time to invest in US, now that it has been performing less stellar compared to the rest of the world.
But you would certainly like to have some kind of explanation on why the dollar is so weak before calling this a good time to invest? Like - what exactly is going on over there?
The US economy seems to be less dependent on exports as other countries, and the fortunes of US (tech) companies seem to hinge on other things than exchange rates.
That is very true. And in general, contrary to what Wall Street at least used to think, I think Trump administration will cause damage in the long run for the US economy, especially if he is re-elected.
OTOH, the US economy is very dependent on one special "export": dollars, which for now the rest of the world accepts to sell goods on credit (see negative trade balance). If the dollar continues to devalue, this mechanism could break at some point.
Being in the UK, witnessing the pound devalue massively, my S&P investments have done stupidly well. As have my Japanese index investments. And my European index investments. Global index investments. If I thought the UK was going to sort itself out, I might sell off some of those and put them back into pounds.
That I blew most of last month's pay on European indices suggests I think the Maybot and chums are not done wrecking the UK yet :)
Well I'm just going on what the governor of the Bank of England says, but what do I know eh?
'In the clearest indication yet that there could be a rate rise as early as November, Mark Carney suggested that it was time for the bank to "ease its foot off the accelerator".'
Perhaps easier to conceptualize in Europe indices. Imagine European stocks go up but so does the strength of the euro vs the dollar. You, as a US resident (ok presumably) wouldn't be realizing those stock gains on the top line numbers because when you sell the position and convert back to dollars, the worse FX rate erodes your returns.
When OP talks about dollar adjusted returns of S&P, an analogous mechanism is at work.
The real value is the nominal value adjusted for the rate of inflation (using an agreed definition of inflation and against some agreed monetary base - see M0, M1... and other types of monies)
Inflation means the purchasing power of the unit of currency is reduced. iirc it was Keynes who noted that government financing can utilise the margin between real and nominal values, with the benefit of also maintaining animal spirits (bullishness/confidence) as the public sees only price.
For economist perspectives: Paul Krugman's blog elaborates on this in a readable way. Mises.org provides one critique. David Harvey another.
Dan Amerman provides an CFA/investor perspective (http://danielamerman.com/va/Dow36.html)
The graph linked to above could be viewed as a decline in real value of equities - or the value preserving market response to inflationary pressures (with some degree of non-market support)
The combination of inflation and tax rates is important to understanding the interplay between government, markets and the wider economy. Which is the dog and which the tail is a moot point. Not endorsing, and not by any means the last word, but David Graeber provides an alternative starting point before exploring further: https://www.theguardian.com/commentisfree/video/2015/oct/28/...
Very interesting. I watched the video; the flaw there is that, to simplify things, it doesn't consider international trade and capital movements, which make the "simple matter of mathematics" not such a simple matter at all...
I also read the Amerman article now. His analysis completely forgets one very important thing: stock dividends, which are also higher during periods of high inflation, and compound if you reinvest them. I didn't run the math, but that would for sure change the results a lot.
Agree on the oversight. From his CFA perspective (which I'm not in any way), divs are somewhat diminished in the new normal (as your link shows), and minority of companies account for the majority of divs. Of course, fiscal policy also impacts div gains. Double whammy. Creates a great climate for the development of productive assets, rather than resting on protective assets.
But the "new normal" includes very low price inflation, while his analysis is based on a period of high inflation and high dividends. With that overlook, his predictions look very shaky to me.
You'd have to do your research. When everything's gone to hell and people are cursing the markets is probably a good time, though. But when others are selling, as Buffett and probably a good number of other investors say.
I think Buffet said something to the effect of "be fearful when others are greedy, but be greedy when others are fearful".
Having lots of dry powder in a downturn is a very good place to be for a professional investor. That said, most folks are not professional investors, so buy and hold is relatively simple strategy that performs fairly well for non-professionals.
No it isn't! It's better to buy and hold and ride it out. Otherwise you tend to miss the gains on the other side. Decades of research by now has shown that buy-and-hold beats timing the market every time.
Only barely (see "What if we could perfectly time the market?" in [0] which cites [1]), and it is the height of self-delusion for anyone to think he or she will time it correctly, when professionals fail to do so. Don't try!
> Rather than putting it immediately into the market, he waited and invested after month-end January 1993—that year's monthly low point for the S&P 500. At the beginning of 1994, Peter received another $2,000. He waited and invested the money after March 1994, the monthly low point for the market for that year. He continued to time his investments perfectly every year through 2012.
That's hardly "perfectly timing the market" in the usual sense. I'd consider "perfectly timing" to be sell at every peak and buy at every trough, so you're always holding stocks when they're gaining versus the dollar and holding dollars when stocks are losing versus the dollar.
It's impractical, but it's a much better result -- the theoretical limit to how much you could have made with perfect knowledge of all the pricing ahead of time.
That analysis, by contrast, only looks at what happens if you have a little perfect information -- and the answer is "not much".
That entirely depends on your timeframe. If you are an older person at or near retirement and planning on using your investments to pay for your living expenses you are much better off going into cash and low risk investments like treasuries. If you plan on having investments for the next 40+ years your outlook is totally different, and so should be your trading strategy.
That's entirely different from trying to time the market upturns and downturns. If you need less risk and more liquidity then you should adjust your stocks/bonds asset allocation to match your risk tolerance and life goals, but within each bucket you should buy low-cost diversified index funds and hold them.
yes, yes, decades of research by nerds in their labs, who don't trade and live on public welfare has shown that conclusively. in the meantime, here is what the real world is like:
* people falsely believe that due to having learned about the myth of the buy&hold investor, they are now 100% in control of their psychology and will not succumb to 'this time is different' panic selling when things get serious. their own psychology will be the biggest surprise to young investors, who have entered the market after 2008 and haven't experienced even a single correction.
* people aren't properly accounting for being forced to sell at a loss due to unexpected expenses, which are dramatically more likely to occur during a downturn, i.e. the probability of losing their job during a recession is >> than any other time. same thing with divorces, probably. maybe even illness. distant relatives asking for money. etc etc
* people aren't entirely wrong to panic sell when mass hysteria breaks out. most of the research is based on the US stock market, which is exceptionally long-lived and uninterrupted. if you asked tsarist bureaucrats retiring in France how well their portfolios are doing, they would sing you a different song.
* [personal] if I had to put a monetary value on the psychological relief I feel since reducing my exposure to equities by half, it is very well worth whatever grandiose compounding fortune I am forgoing because of it, not to mention that should I be lucky with the timing, that may not even be the case. as a rule of thumb: when you repeatedly find yourself checking financial news, you are invested too much (and are now longer a 'passive investor')
the only good thing to be said about the 'buy & hold' meme is that it drives people away from the even worse active management industry, but that doesn't make it unconditionally good advice.
> No it isn't! It's better to buy and hold and ride it out
No. Decades of research has shown that it's better to sell early and get back in late. It has shown that selling late and buying back in early is worse than riding out. It has shown that selling and never buying back in is worse than riding out.
> Decades of research by now has shown that buy-and-hold beats timing the market every time.
No. It has shown that people are bad at timing the market. Nobody can buy at the lows and sell at the highs. That's why you sell early and buy back in late.
For most people, they should just buy dated mutual funds and not even think about the markets.
The simplest thing to do is to start liquidating your stock positions when the fed starts ramping up interest rates ( maybe a few quarters of consistent interest rate hikes ) and then start buying back in slowly when the FED starts lowering interest rates.
That will give you far better returns than buying and holding.
There's a tremendous amount of motivation to keep speculative bubbles running as long as possible. I'm not certain that expresses itself as self-delusion or attempts to manipulate others, though I suspect bits of both.
Oh, and Galbraith covers that in his short, very readable, book.
I think that anyone in markets such as Bitcoin or Ethereum should be getting out now. It's obvious that we're at the peak and the bubble is soon to pop.
80 comments
[ 3.0 ms ] story [ 121 ms ] threadSo now nobody wants to be left out, and so they predict crashes every week. Eventually when a crash will happen they'll say "see I predicted it, where is my book deal".
Multiple times recently I’ve been at restaurants recently overhearing people talk about how much money they’re going to make in Bitcoin. It’s hard to convey here, but the make-money-who-cares-how-it’s-magic came across every time in such a wow-this-is-definitely-a-bubble way.
But as they say, markets can remain irrational longer than you cane remain solvent.
Bottom line: still having naysayers isn't a relevant signal. Predicting that there will be a crash is easy (you are almost guaranteed to be eventually right). Predicting WHEN the crash will be is (almost?) impossible.
Plus, private equity is sitting on close to $1T of dry powder. That's a pretty strong back stop to stock prices. In short, to avoid the crash you need to figure out what causes mass PE withdrawal, and get in front of that.
https://www.bloomberg.com/news/articles/2017-09-01/why-priva...
Bond prices go down. Yields go up.
You put your money in btc and they may crash 30% in a day. If you panic then you lose money.
"Markets can remain irrational a lot longer than you and I can remain solvent."
As for BTC, approach with caution, short or long.
https://www.eventbrite.com/e/bitcoin-investmentwhat-how-when...
We've learned that you are not supposed to have idle capital. And yet we keep so much of our wealth as money, the only way to deploy it is to send it in a circle. Valuations go up, prices and costs don't.
Unfortunately it's a house of cards. When someone finally cashes out, they'll pull money from the whole system to the tune of the amount it's been amplified by circular investing.
There will be an ugly correction.
But then it'll get propped up again afterwards and everybody believes that now.
That's what FED and interest rates exist to do. Create and pop bubbles.
As the FED raises interest rates, money will start trickling out of "riskier" assets. The quicker the FED raises interest rates, the more quickly money will leave. Then we get a recession and when the FED feels they've sopped up enough money from the economy, then they will lower interest rates to get more money into the system, get more economic activity and re-inflate asset prices.
http://ei.marketwatch.com/Multimedia/2017/10/04/Photos/NS/MW...
Basically, the market's dollar denominated value is going up, but dollars are becoming less valuable. This combines to mean that market value has actually down this year, not up.
Perhaps op can correct me on anything I got wrong.
[1] http://www.marketwatch.com/investing/index/spx [2] http://www.marketwatch.com/investing/index/dxy
Of course, the falling dollar price benefits US exports in the future, so it could be a good time to invest in US, now that it has been performing less stellar compared to the rest of the world.
The US economy seems to be less dependent on exports as other countries, and the fortunes of US (tech) companies seem to hinge on other things than exchange rates.
That I blew most of last month's pay on European indices suggests I think the Maybot and chums are not done wrecking the UK yet :)
I keep hearing that, over and over, for years and years. Eventually it'll be true.
'In the clearest indication yet that there could be a rate rise as early as November, Mark Carney suggested that it was time for the bank to "ease its foot off the accelerator".'
http://www.bbc.co.uk/news/business-41439349
http://www.telegraph.co.uk/business/2017/09/14/bank-england-...
When OP talks about dollar adjusted returns of S&P, an analogous mechanism is at work.
Inflation means the purchasing power of the unit of currency is reduced. iirc it was Keynes who noted that government financing can utilise the margin between real and nominal values, with the benefit of also maintaining animal spirits (bullishness/confidence) as the public sees only price. For economist perspectives: Paul Krugman's blog elaborates on this in a readable way. Mises.org provides one critique. David Harvey another. Dan Amerman provides an CFA/investor perspective (http://danielamerman.com/va/Dow36.html)
The graph linked to above could be viewed as a decline in real value of equities - or the value preserving market response to inflationary pressures (with some degree of non-market support)
The combination of inflation and tax rates is important to understanding the interplay between government, markets and the wider economy. Which is the dog and which the tail is a moot point. Not endorsing, and not by any means the last word, but David Graeber provides an alternative starting point before exploring further: https://www.theguardian.com/commentisfree/video/2015/oct/28/...
http://www.multpl.com/s-p-500-dividend-yield/table
Having lots of dry powder in a downturn is a very good place to be for a professional investor. That said, most folks are not professional investors, so buy and hold is relatively simple strategy that performs fairly well for non-professionals.
If you can time the market correctly, that is obviously the optimal strategy.
[0] https://www.bogleheads.org/blog/bogleheads-principles-never-...
[1] https://www.schwab.com/resource-center/insights/content/does...
> Rather than putting it immediately into the market, he waited and invested after month-end January 1993—that year's monthly low point for the S&P 500. At the beginning of 1994, Peter received another $2,000. He waited and invested the money after March 1994, the monthly low point for the market for that year. He continued to time his investments perfectly every year through 2012.
That's hardly "perfectly timing the market" in the usual sense. I'd consider "perfectly timing" to be sell at every peak and buy at every trough, so you're always holding stocks when they're gaining versus the dollar and holding dollars when stocks are losing versus the dollar.
It's impractical, but it's a much better result -- the theoretical limit to how much you could have made with perfect knowledge of all the pricing ahead of time.
That analysis, by contrast, only looks at what happens if you have a little perfect information -- and the answer is "not much".
* people falsely believe that due to having learned about the myth of the buy&hold investor, they are now 100% in control of their psychology and will not succumb to 'this time is different' panic selling when things get serious. their own psychology will be the biggest surprise to young investors, who have entered the market after 2008 and haven't experienced even a single correction.
* people aren't properly accounting for being forced to sell at a loss due to unexpected expenses, which are dramatically more likely to occur during a downturn, i.e. the probability of losing their job during a recession is >> than any other time. same thing with divorces, probably. maybe even illness. distant relatives asking for money. etc etc
* people aren't entirely wrong to panic sell when mass hysteria breaks out. most of the research is based on the US stock market, which is exceptionally long-lived and uninterrupted. if you asked tsarist bureaucrats retiring in France how well their portfolios are doing, they would sing you a different song.
* [personal] if I had to put a monetary value on the psychological relief I feel since reducing my exposure to equities by half, it is very well worth whatever grandiose compounding fortune I am forgoing because of it, not to mention that should I be lucky with the timing, that may not even be the case. as a rule of thumb: when you repeatedly find yourself checking financial news, you are invested too much (and are now longer a 'passive investor')
the only good thing to be said about the 'buy & hold' meme is that it drives people away from the even worse active management industry, but that doesn't make it unconditionally good advice.
No. Decades of research has shown that it's better to sell early and get back in late. It has shown that selling late and buying back in early is worse than riding out. It has shown that selling and never buying back in is worse than riding out.
> Decades of research by now has shown that buy-and-hold beats timing the market every time.
No. It has shown that people are bad at timing the market. Nobody can buy at the lows and sell at the highs. That's why you sell early and buy back in late.
For most people, they should just buy dated mutual funds and not even think about the markets.
The simplest thing to do is to start liquidating your stock positions when the fed starts ramping up interest rates ( maybe a few quarters of consistent interest rate hikes ) and then start buying back in slowly when the FED starts lowering interest rates.
That will give you far better returns than buying and holding.
http://www.worldcat.org/title/great-crash-1929/oclc/93339017...
So far I've seen four posts that are spot on, downvoted.
The general sentiment is towards hype and bubble, and it's just another echo chamber reinforcing the spiral.
Not just here, and a lot more pronounced lately.
Oh, and Galbraith covers that in his short, very readable, book.