It will happen before 2020, the question is when exactly it will hit. My money is on late 2018 or early 2019.
What to do before then? Don't have any money in US stocks. Diversify both geographically and sector-wise, cash out, be ready to invest when stocks crash through the floor, to ride the wave when they inevitably rise again. The real trick is spotting who's going to rise again and who's going to be left behind. Tech stocks are volatile by nature, invest in renewable energy and related sectors. We're going to need solar and wind power in the future, and batteries. Lots of batteries. Then, as we near battery saturation, there is going to be big money in recycling all those depleted batteries.
people often seem to forget that mining the stuff that makes the batteries is still a thing. That's a whole different ballgame, and however you want to look at: it's finite. Couple the fact that the raw materials often come from less-than-stable geographical regions, it might become Oil 2.0 (with similar wars fought over it).
I'll admit it's my personal estimate, looking at last decade's constant up-up-up of US stocks, especially the tech sector, and (as mentioned in the article) the widening gap between the value of U.S. household assets and GDP growth.
It's unsustainable growth, and I'm afraid the crash is going to happen sooner rather than later.
Will it be as bad as in 2008? I don't know. But it's going to hurt (except if you're wealthy enough to invest heavily right after and ride the wave back up again).
I'm not an economist. But here is my arm-chair philosophizing about what is happening. To combat the economic crisis we started printing a lot of money. This had two effects: the interest on savings went way down, and the loans became very cheap. Having money = bad, having debts = good, at least for those who can carry the burden. This was done in order to incentivize investing, thus growing the economy. Obviously, that worked: property price and valuations went way up. But those are driven by the future-promise of debt repayment. The moment we stop printing the money, people will get wise and try to sell off those assets again. Because then having money is cheaper than having debt. So now there's a bit of problem: we can't keep printing money faster than the economy grows due to hyperinflation, but we can't /really/ stop doing so either because people will sell off their debts in order to cash in on cheap investments. This to me, seems problematic.
What rate do you consider hyperinflation? Are we in it now? What measure are you using? Afaik we’ve been running under 2% inflation for quite some time.
You've got some causality backwards, there. Interest rates were at basement levels before QE. QE was an inflationary measure in part intended to keep rates from going even lower into the negative.
QE was a reaction and counterpressure to low rates, not the cause.
Isn't the problem in investing in that that there's really no way to know which particular business will come out on top here since there really isn't any large barriers of entry?
That's what hedging is for, you bet that for example, in the overall energy landscape, renewals are going to go up more than "legacy" energy companies, but still protect yourself from overall sector moves.
If you don't follow the industry there are indexes and funds available for this stock. All you need to do is find the right ones and you'll be mostly insured from any individual company failure.
There's a lot of money in oil that will be captured by the 'free' energy of renewables. Renewables are just now becoming more cost effective than oil. Oil will be around for a long time but renewables are poised to overtake it in consumer and commercial energy. Might take a few decades but it's inevitable that a vastly more efficient energy source becomes the market leader.
Also, governments across the world are putting in place regulations to build and retrofit buildings to reduce emissions. That's not just energy, it's the actual building materials and techniques. That's a lot of government mandated money about to be put into green infrastructure. Again, this is over decades so the ramp time will seem slow to us humans but now is the time to get in IMO. However, I am an amateur investor and I've definitely been wrong before...
> It will happen before 2020, the question is when exactly it will hit.
What will be the catalyst? Just because we haven't had a recession in awhile is not enough. Corporate profits are up, consumer spending is up, and even though everyone on here thinks the numbers are lies, wages are starting to go up.
> My money is on late 2018 or early 2019.
So you have already either shorted the market or bought put options out in 2019?
The advice you're replying to is awful, do yourself a favor and don't follow it.
Why does everyone think buying puts or shorting stocks is as easy as going long? It's not. It's an even faster way of losing money! Go try it sometime--or even just simulate it. People who say these things are clueless.
Market overvaluation and public debt are sky-high, it's an unsustainable situation, we either reign it in by controlled means (not gonna happen), or it's going to crash.
I'm not a huge investor, but I am preparing by reducing the proportion of US stocks in my portfolio.
I think the bubble is the US dollar. Currently our debts are being serviced by issuing more debt!
Safe places IMO are deflationary assets (gold, and to a much more risky extent, bitcoin...I know this will start a flame war lol). Another option is foreign assets in countries that are not holding onto a lot of US debt.
I'm not an oracle, so I can't predict timing, although I do think it will happen relatively soon in the next 1-3 years.
Don’t forget how raising taxes in 90s wiped out all deficits and large chunk of debt in early 2000’. The worry back then was then how US would lose leverage in the world if all its debts were gone.
Not saying that current level of debt is any good, there are just multiple levels to that story.
Raising taxes didn't do it. It was the horrendous hype generated by the dot com bubble. Having a net surplus was just a blip on the radar which quickly became unattainable as soon as the resulting crash.
I've always liked Warren Buffett's explanation on why investing in gold is pretty silly[1]. Basically, owning gold as an investment is purely speculation, because earning a return requires greater demand in the future. It doesn't have the potential to provide dividends or grow exponentially like ownership in a business does. Gold earns nothing for you over time.
Instead of investing in gold, why not invest in a foreign market that's at least partially insulated from the US?
All other industrial uses are completely swamped by the creation of human ornamentation. But the thing about jewelry is that the gold in it is usually very easily recycled. So it is not as strongly consumed as the gold used in electronics, which requires a greater effort to recover, if it isn't simply landfilled a milligram at a time.
That jewelry use creates a soft reserve, such that it is usually not available to the market, but if the gold price rises high enough, it can start to liquidate, likely starting with the ugliest necklaces.
So it would seem that the majority of the value of gold comes from the human desire to possess a tangible, portable symbol of one's wealth. It cannot be taken from you, unless someone finds you and pries it out of your fingers. Paper assets are more amenable to remote interference. Your ownership of a company via stocks may be diluted. Your fiat accounts may be devalued via monetary inflation or seized with the cooperation of your bank. Your bonds may suffer default. The title to your land may be transferred against your will. But that gold necklace is yours, as long as you're the only one that knows where it is.
As such, failing to invest in gold is ignoring the risk of a major crash in the modern centrally-banked, fractional-reserved, and fiat-moneyed economy, which is subject to boom-bust cycles. Gold is the asset of choice for those that think that government bonds from too-big-to-fail countries are not actually the default lowest-risk investment. But even then, the gold bugs are undercut by the people who buy condos in underground shelters that anticipate the complete collapse of human civilization, along with barrels filled with small arms ammunition. Buffett's #3, #5, and #6--gold is going long on fear--is definitely true.
But I don't think the other quotes are 100% accurate. They have the odor of the Labor Theory of Value about them. Things don't have value because they do stuff, but because people want them. Gold has value because some people want gold, not because it delivers billions of bottles of Coke, or ferries passengers across continents, or summons a driver for you on command. People want gold for different reasons, and some reasons are more predictable than others, but none of those reasons are required to be rational or useful. And that's why the Buffett analysis of gold fails, in my opinion.
What's wrong with the Labor Theory of Value? (Never heard of it before, so I don't know)
The way I interpret Buffett's view on gold is that if I have a choice between buying a hunk of yellow metal that just sits there, or buying the same amount of shares of a (high quality) company like KO where people labor day and night trying to make more money for the shareholders, the choice is pretty obviously the latter. Of course, those people may be ineffective in their labors, or worse, stupid decisions by managers might make the company less valuable, but if I have some reasonable confidence in them, gold doesn't sound very attractive. In the case of KO, it has been steadily increasing dividends for something like 50 years, so something must be going right. That seems like pragmatism, to me, not Labor Theory of Value, though.
I don't believe it is applicable to most of the economies on this planet.
If I may analogize, Buffett is saying that a trophy spouse that does nothing but look good and impress your friends (gold) is a less worthwhile investment than one that goes away all day to bring home $80 and a distinct grease-trap odor (stocks). A Van Gogh painting that hangs on your wall, slowly oxidizing its pigments (gold) is a less worthy investment than a plastic fish on a wood-veneer plaque that can sing four different songs whenever you walk past it (stocks). A square mile out in the desert with awesome sunsets and no light pollution at night (gold) is better than a square mile that grows corn, wheat, alfalfa, and soy when dosed with sufficient amounts of chemicals (stocks).
People value things other than money and rate of return, and other purely rational criteria. Sometimes people buy things to enjoy them as they are, rather than anticipate what they could be. The lump of gold will never be anything greater or lesser than what it was when you bought it, and some people like that quality. The 1 troy ounce .9167 gold coin will always be worth at least 1 troy ounce of .9167 gold, no matter what anyone else in the world does. If you bury 10 kg of .9999 gold and dig it up 100 years later, it will still be worth 10 kg of .9999 gold. You might be able to trade your gold for differently sized baskets of goods and services in different years, and the size of future baskets will always be smaller than what you could have obtained if you had wisely invested in companies, but you will always be able to get something, even if the world has effectively ended.
Warren Buffet is one of the world's greatest investor and what he says about gold makes sense. However, there is more than one way to invest. Buffet has made fortunes taking a fundamentalist approach and values companies. There are also other successful investors that try to predict macro trends.
I also suggested foreign assets that are not holding onto a lot of US debt.
Back in 2000 in a library I saw a book by 2 economists that had Nobel Prize. The second part of the title was something like "Are you ready for the next 20 years of uninterrupted growth ?".
Historically the 2 term presidential cycle where an incumbent is elected has led to a recession within 6-18 months 100% of the time. I guess this time could be different & a recession doesn't imply a crash but that's an interesting data point.
I think it's going to happen. When, I have no idea. I invest in crypto because it's one of those rare things that I know more about than the average investor, unlike the stock market, which I know nothing about and will never know enough about to invest in confidently.
The best place to put your money is typically where nobody else wants to put theirs. IMO nobody wants cash today. They want anything except cash no matter how risky. Stocks at highest valuations ever, BTC (unregulated), emerging market high yield, bonds with negative yields (because they think it will price appreciate), art, cars, volatility selling (fixed gains & unlimited losses), etc.
The least desired asset class right now is cash. Compare that to 2009-2011 or so & cash was the prized asset class which underperformed going forward. Aside from the least desired, the cheapest asset class in the world today is volatility.
> “The government should allow zombie companies to default or go bankrupt,”
This probably means that in China, they just let the company "rot" in zombie state instead of letting it go bankrupt.
In Belgium, a company needs to submit paperwork regularly, and if this doesn't happen, afaik, the company can be declared bankrupt by the government.
Belgium has a large numbers of companies per capita. Our tax system nudges us to create companies for employment and investments, because of the high personal taxes. This skews the comparison.
A bubble in slow motion, someone called the present economic environment. I think it's an apt description. Extreme "quantitative easing" (I refuse to take fed speak seriously) has only taken effect very, very slowly. Why? Because all it really was was recapitalizing banks which had enormous gaping holes on their balance sheets after 2008. They have been able to fill the tanks now, getting money hot off the presses for a song for a decade, and finally it has started to trickle into "the real economy" and actually lead to commercial and industrial growth.
Another dampening factor has been the regulations introduced after 2008 like S̶a̶r̶b̶a̶n̶e̶s̶-̶O̶x̶l̶e̶y̶ Dodd-Frank, the moratorium on IPOs has definitely helped to slow things down.
Now things are moving again, trouble is, history has shown time and time again that monetary policy is a ketchup bottle, once it starts having effect it is already too late to moderate it. That's why we have bubbles - suddenly there is too much money slushing around chasing finite resources, markets become crazy and regulators have to slam the brakes hard (in combination with banks predictably finding ways to overleverage, legally or not). Which leads to my prediction: Markets are still not crazy enough. Crazy, but not enough to look like the part where it all blows up. So I am betting on at least six months more of "growth" (i.e. inflation) before the inevitable crash.
The classic analogy from economics is filling water in a bathtub.
Say you've got separate hot and cold faucets and there's a delay between turning the valve and the respective water flowing. By the time you get to just the right mix, the ratio of hot water is still increasing and it'll get messed up again, which leads to increasing the cold water, which makes it too cold, which ... You get the idea.
Which is perfectly controllable if your model includes delayed feedback. Unfortunately, the dominant macroeconomic models contain neither delayed feedback nor nonlinearity, and are not capable of simulating recessions without resorting to arbitrary "exogenous shocks".
In contrast, Steve Keen is actively developing dynamic nonlinear models of macroeconomics that is actually capable of simulating endogenous recessions.
> "growth" (i.e. inflation) before the inevitable crash
What you need to know is this: Financial crashes are an eternal cycle, they will never go away. Unless there is fundamental societal change.
Here's why: Financial crashes are business to a couple of extremely powerful/rich people. After every crash, assets are undervalued. Rich people have the financial cushion to not be impacted in the slightest way by such crashes. Which means they are in a position to purchase these undervalued assets from poorer people. The rich-poor imbalance grows further, as these undervalued assets regain their "real" value. That's the reason why these crashes are manufactured. Which means a couple of powerful/rich people will continually steer society in this direction, for example by removing laws that were put in place as safeguards.
Edit: And no, this is not conspiracy, it's pure economics.
Ah yes, the Flimflam-Fo Equation with its key parameters, "rich person a" and "rich person b".
Conspiracy theories might well be defined just by the application of the fallacy, "if someone benefits, then they intended it".
And here we see this fallacy being applied. Sound like a textbook conspiracy to me. The extremely weathly are not interested in increasing their net wealth, only in specific purchases to further their goals -- which are very easy to undermine with crashes.
People who are merely wealthy might possibly wish to increase their general wealth and therefore believe a crash will help them do that. That is an incredibly outsized risk for a wealthy person to needlessly take however.
There might be a more specific named fallacy for when post-hoc happens with regard to individuals' intentions and benefits rather than causes and effects in general though.
Financial crashes don't have to be bad. The last one wasn't so bad at first, before the central banks in some countries let nominal GDP dip and caused a mild recession to become the Great Recession.
> And no, this is not conspiracy, it's pure economics.
If everything you’re postulating here is “pure economics”, would you mind placing it in the context of an economic framework for the sake of precision? Something rudimentary like the macro credit-debt cycle is fine.
As it stands, your exposition appears fairly politically loaded, and your specific claim that crashes are “manufactured” rather than an emergent side effect of market dynamics is, to me, an extraordinary claim that requires commensurately extraordinary evidence.
It’s not at all clear to me how you’re getting from (“there exist people who benefit from systemic market corrections”) to (“market corrections are manufactured by a subset of people who benefit by them”). As another question illustrating this point, would you say that people purchasing homes with overextended mortgages during the housing market bubble were contributing to that crash? If so, did they have a part in “manufacturing” it even though they didn’t benefit? How do you reconcile the ideas of market participants with agency, systemic volatility, and irrational exuberance with the idea of a conspiratorial group capable of systematically driving a market crash?
If you give a guy $10.000, x10 leverage and a trading system; and we assume he has low emotion control and is bad at math. The result is that he'll burn these $10k getting margin called.
1. You can't get all people to play this game.
2. You can't get people margin called if the stock price doesn't drop enough.
You can get 1 if you complicate loans (Mortgage based securities); and you can get 2 if you make the issue related to the whole economy. So people get bankrupted instead of margin called. Their house is sold instead of the stock.
Same game, bigger market.
That being said I don't believe the "rich" or the "powerful" are doing it. I don't believe in Conspiracy theories. I think this "movement" is inherent in the nature of the market and the humans who play around it. It burns both the poor and the rich, but it magnifies inequality whether by making the rich richer or creating new riches.
This is the really terrible problem of the push to dismantle state and company pension systems and aggressively replace them with private retirement schemes and the addition of new investment systems under the guise of "retirement" plans -- it has led to the extreme growth of the quasi-snake-oil mutual fund sales industry ("financial planners" whose only job is to sell high commission funds) and has unfortunately also led to the middle working classes being very emotionally and ideologically invested in the fortunes of the stock market. They become easy victims for the process you describe, and also will push politically for anything which "makes the stock market happy" and so the bailouts of 2008, a kind of mass corporatization -- reverse socialism -- of the state not seen in the entire 20th or 19th centuries, was politically tenable in a way it wouldn't have been before.
What were the pension funds invested in? You do understand that the reason to move to 401K style plans is because pension obligations were over-promised and under-delivered by the same snake oil salesmen you describe. You understand that, correct? At least with individual plans, when people change jobs they get to keep whatever they contributed versus a pension plan which has varying types of payouts and much longer vesting schedules.
Please don't take offence, but you've misunderstood the mechanics of how wealth is accumulated.
The wealthiest people in the world are wealthy by virtue of the gains made on the assets they already have. So, in a bull market, their assets grow while someone without assets is left behind. The inverse is true, too - they'll proportionally lose to the same degree in a crash - as while a poor person may have no investments, the wealthy person's investments will crash in line with the market. There won't be a financial cushion, at least not a significant one.
Books have been written around timing markets and it's generally accepted that it cannot be done reliably. To get out before a crash then buy cheap would require you to predict three different moments accurately: when to get in, when to get out, and then when to buy on the "cheap". Timing even one reliably requires luck or clairvoyance.
"Rich people have the financial cushion to not be impacted in the slightest way by such crashes". This is clearly false - wealthy people don't keep mountains of cash lying around as they would miss out on the growth in bull markets, and as a result their wealth would decrease relative to their peers.
Investors generally just become relatively poorer during a crash then make it back and more during the next bull market, at least that's how it's worked until now. There's an old quote I can't find the source of right now that sums it up fairly aptly:
"Stocks go down faster than they go up... but they go up further than they go down".
I agree with the thrust of your comment, but to nitpick:
> Books have been written around timing markets and it's generally accepted that it cannot be done reliably. To get out before a crash then buy cheap would require you to predict three different moments accurately: when to get in, when to get out, and then when to buy on the "cheap". Timing even one reliably requires luck or clairvoyance.
This doesn’t strike me as true, unless you’re describing the subset of academic economists who agree with EMH in some form. In particular, the first sentence on its own appears to be evidently untrue; it’s clear that there are many parties, including economists and financiers, who attempt to time the market and generally forecast macroeconomic shifts.
I completely agree that it's the role of many parties to attempt to forecast the market, but I'm skeptical of how many (even those whose job it is to do so day-to-day) really believe that it can be done reliably.
CNBC is probably a good example of this. When you don't predict anything specific, you can never be wrong.
(Clairvoyance was not meant seriously, I should have made that clear!)
I think parent and you just disagree on the amount of reliability these attempts actually have. Of course everyone tries to time the market, but the amount of evidence for anyone being able to do it reliably over and over is not that great. Professionals can guarantee a certain level of educated guessing, but a lot of the most skilled moneymakers on the planet still lost their shirt in 2008.
Attempting and succeeding are two different things. Right before the last real-estate crash I attended a seminar with an economist who spoke at length why there would not be a crash and in the coming spring there was going to be a real estate boom. Quoted lots of economic stuff to back it up (indicators and such- I don't remember but he was definitely convinced).
The field of economics seems to have a ways to go before it can be used reliably to predict things.
The difference being there is an advantage to keeping economics knowledge shady & unknowable. Information asymmetry is one way those with wealth can maintain or grow their wealth. I do not subscribe to conspiracy theories, but I do think enough independent selfish actors will result in a "conspiracy theory"-like outcome.
It is further warped by the fact that although the anti-interventionalists are probably right, the interventionalists are the ones who do all the consulting and take all the jobs and give all the advice - because they are .. interventionalists. And who wants to pay a consultant to tell them "don't do anything, and there's nothing you can do."
> This is clearly false - wealthy people don't keep mountains of cash lying around as they would miss out on the growth in bull markets, and as a result their wealth would decrease relative to their peers.
Some wealthy people do. E.g. Warren Buffett's Berkshire Hathaway was sitting on 100 billion dollar in cash last summer [1]. If he doesn't find anything that is fairly priced, he prefers to sit on his cash and wait.
See also: Apple (~256B in cash), Google (~86B in cash). This cash is mostly securities, though; their "pure" cash positions would be "mere" ~15B and ~13B, respectively.
I think they mean low risk/volatility securities like T-Bonds. You can't hold 250B in a single bank. Or maybe you'll need to create your own bank. Plus they are going to demand interest and risk clarification on that.
"the wealthy person's investments will crash in line with the market. There won't be a financial cushion, at least not a significant one."
...
"This is clearly false - wealthy people don't keep mountains of cash lying around as they would miss out on the growth in bull markets, and as a result their wealth would decrease relative to their peers."
I read with great interest the two volumes that Niall Ferguson wrote of the history of the Rothschild family.[1]
It's a fascinating work that serves well to bridge the gap of European history between Napolean and World War One.
I bring it up here because the Rothschild family did indeed do exactly what the parent comment suggested that "rich people" do. They quietly did their simple banking business year after year, piling up profits and assets that were repeatedly poured into down markets when they viewed that assets had become cheap.
This was not market timing - this was simply patience. The down market always comes and their simple, boring factoring and discounting was always reliable.
[1] _The House of Rothschild_ ("The World Banker")
Oscillation happens in many complex systems - population sizes etc.
I think the reasons for why cycles happen in economies are many. It's probably desirable to reduce the amplitude of the cycles, but I'm not convinced humans are capable of that. Due to biological reasons, reward functions are almost always short term. Humans, as individuals and societies, are not very good at optimisations at longer time scales.
I'd like to think that we are capable of more, but it may be that we are not. AI (at some stage) might be able to help us there, if it turns out to have better predictive power than humans - and doesn't lead to more ruin rather than improvement in the human condition.
What is more obviously manufactured is bad tax policy, as in way too low top end tax rates. That has incentivized wealthy people to invest in real estate and the stock market, rather than in the working class. That's why a house costs on average 24 times more today than in 1960, and yet wages are only 8 times more today than in 1960. And the tax rates on these capital gains are lower than middle class payroll and income tax combined. Tax policy has incentivized top end hoarding. This is not investing. It's a neo-feudal give away.
The top end tax bracket needs to go well above 50% to make it riskier to invest what's left in those markets, rather than taking a risk on starting or growing a business, the expenses of which are 100% tax deductible.
>...That's why a house costs on average 24 times more today than in 1960,
There might be isolated cases of that happening, but in general, nothing close to that.
>...In fact, if you look at a fifty-year period after World War II, home prices were absolutely steady. In 1947 the Case-Shiller index stood at 110, and in 1997, adjusted for inflation, it stood at 110 again.
In terms of wages, it is more realistic to focus on total compensation:
>...Economists long have noted that focusing on AHE rather than total compensation yields an inaccurate picture of labor compensation due to the omission from AHE of employer-provided benefits.
The page has 2 charts showing the differences when you compare wages to total compensation.
The tax burden has basically gone opposite of what you imply. For example, the top 10% paid 49% of taxes in 1980 and paid 70% in 2014. (http://www.ntu.org/foundation/page/who-pays-income-taxes) The "top marginal rate" means very little by itself. What matters is the effective rate which takes into account the credits/deductions that are allowed, the other lower tax rates, etc.
>...The top end tax bracket needs to go well above 50% to make it riskier to invest what's left in those markets, rather than taking a risk on starting or growing a business, the expenses of which are 100% tax deductible.
If the effective federal tax rate would be > 50% and there would likely be state taxes also, why would anyone invest in a small business? The vast majority of new businesses fail in the first 5 years. With such high tax rates, why take a risk when the vast majority of the time almost all the money will be lost and if you are able to make a successful business, taxes will take almost all the profit? Much more rational to invest in government bonds.
>There might be isolated cases of that happening, but in general, nothing close to that.
Where people want to live and work are cities. If you look at urban housing vs wages, housing has grown 3x compared to wages. Considering urban areas isolate cases is somewhere in between funny and absurd.
>The tax burden has basically gone opposite of what you imply.
I have neither stated nor implied anything about tax burden. I've only stated incentives and their consequences.
The top marginal rate is a threat, with a real consequence. Of course the vast majority will try to avoid it, it's how they avoid it that matters.
> What matters is the effective rate which takes into account the credits/deductions that are allowed, the other lower tax rates, etc.
No, that's not what matters. I'm not trying to make sure the effective rate is either fair or equal among people who make the same income. What I want to do is incentivize a greater velocity of money, rather than rich people who don't need to save another dime, causing inflated housing and stock prices by stashing money there. I want the risk of saving money at the top end to be at least equal to that of starting or growing a business. And right now top end tax rates are so damn cheap it is way less risky to pay that cheap ass tax, and stuff the rest in real estate or stocks, than it is to take a 100% tax deduction and start or grow a business. That's bad.
And you increase the risk of being a hoarder with the real threat of taking most of that income away, above a certain amount. It doesn't matter that in 1928 probably only 5 people in the whole country paid 90+% income tax on their last $100,000 earned. The very fact that insane rate existed was the incentive for most everyone else to do something with their money rather than nothing. And it's the something else that is the benefit to society. Not how much revenue the government raised from it.
>...Considering urban areas isolate cases is somewhere in between funny and absurd.
What you said was
"That's why a house costs on average 24 times more today than in 1960,"
You didn't say you were only taking about urban areas, and you have given no evidence that a house costs on average 24 times more today than 1960 when adjusted for inflation. You also haven't given any evidence that the increases in the house prices are due to the tax rates especially when there are more obvious factors.
>...I have neither stated nor implied anything about tax burden.
What you said was "It's a neo-feudal give away."
>...What I want to do is incentivize a greater velocity of money,
Increasing aggregate demand isn't some magic solution to every economic problem. Long term what makes a country wealthy is increased productivity.
>...The very fact that insane rate existed was the incentive for most everyone else to do something with their money rather than nothing.
The WW II rates of 90+ percent don't mean "...incentive for most everyone else to do something with their money rather than nothing". It actually means the opposite of what you mean. If the government will take any gains you make, you invest the money in bonds that won't be taxed. If, for example, you want to incentive people to invest in new businesses, you would look at lowering the tax rates for that investment - not increase them.
As a rule, most economists are opposed to very high marginal tax rates due to the inefficiencies they introduce - compensation being moved to non-salary, money wasted on CPAs, lawyers and lobbying congress for special deductions, dead weight losses for economic activity that isn't done, etc.
Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111–203, H.R. 4173, commonly referred to as Dodd–Frank) was signed into federal law by President Barack Obama on July 21, 2010.
The problem is a lot of people are momentum investing, hold and forget. kind of a variations on greater fool theory. eventually if I wait long enough someone will come along and buy this for what I paid or maybe more.
I worry what if the entire market is made of fools that will buy their next slightly smaller share of the market at ever increasing prices.
It used to be that traders set pricing enough that if things got out of hand then traders would come in to sell/short. But what if most people just used buy and hold?
People are doing that because of the ridulous interest rate situation. If rates go up, that balloon will spring a leak as people move away from equities.
It's curious that something that was done as a measure to alleviate the effects of a previous crash is creating another bubble and (probably) another eventual crash.
My guess is the explosion in money going into cryptocurrencies is partly because of that - more loose capital chasing gains - but there are other reasons behind it too. It's a combination of things. Genuine excitement of something new and potentially transformational, desire to move assets away from places they are at risk of being seized (China), FOMO, promise of Lambos, disappointment in the traditional financial system by young people, many reasons.
People get excited when something goes up quickly, and it's been very easy to jump on that speculative train in the case of cryptocurrencies.
I’d argue most of the run up in the last year is driven almost purely by price, with people embracing and then purveying the ‘Bitcoin story’ because it helps rationalize their decision and not because they necessarily understand or believe it.
The funny thing is how said people often then come to genuinely believe they believe or understand Bitcoin, when in reality they’ll scatter at the first sign of a major correction. In fact, increasing conviction about an outcome after a person has paid money to bet on it is a well studied cognitive bias.
I think it's a mix of different reasons.. I think there is a correlation between events in North Korea and trading volume in South Korean exchanges too
I wouldn't read into that beyond pure coincidence.
US investors are only a portion of the Bitcoin market, and the price action of the past year or so isn't at all out of line with the general growth trend.
The notion that Bitcoin would serve as a 'safe haven' during a market crash is also far from a foregone conclusion. Certainly possible, but I have difficulty accepting that traditional financial institutions would see it that way.
The next market recession will happen the same as the previous ones: some lucky people will predict it, most won't, and everyone will in hindsight declare how obvious the signs were.
The best strategy is still to diversify your investments, keep enough emergency assets to ride the wave, and not worry about it.
Completely agree with this mindset. All the non-cash assets and investments I hold onto I intend to keep for over 20 years. Short term corrections in the market even as bad as 2008/9 don't concern me. As long as you're not speculating debt against market performance and have emergency cash on hand you can hold and buy the assets at a lower valuation.
but frankly even trying to time a bottom as a buying opportunity can be dangerous, because it can prevent you from making common sense investments at decent prices.
I buy assets on a consistent scheduled basis and am not waiting for some big crash to happen. But if I do notice the market is pretty bearish then I may decide to purchase more beyond that regular investment schedule.
Yep. This is a problem for people like my parents, who are 80+ and living off investments. A big downward correction is very scary for people in that situation, but not at all worrying for me.
Yeah agreed I know some folks in that situation back in 08/09. I'm still in my 20's so not sure how I'm going to deal with investing as I get into my retirement years. It can be scary to have over half your retirement wipe out with no time for correction. Probably a more cash heavy asset allocation would be the solution. Not sure though.
I think dividend income is a typical solution. It doesn't matter what the stock price does if the company continues paying dividends. If the company is strong and pays a dividend, the stock can be looked at like a low-yield bond. Except that dividend-companies tend to increase the dividend every year when possible, so it's also a bond where the yield increases. Coca-Cola has paid about 3% for years and years.
That's not something worth worrying about in your 20's. Just set up a recurring investment in index funds or similar and forget it exists until you're at least in your 50's or later.
Random catastrophes do happen to younger folks, of course, but those are something to deal with if and when they happen.
That's a good point. My mother is 80 (in a few months) and it's all about life expectancy. Her mother lived to 95. She is in good health. Should she assume the best or worst case? The choice she makes will greatly effect her lifestyle.
exactly! you should really only be worried about a need to time some action if you are very close to retirement. otherwise just watch and wait, markets tend to rise and they will rise again eventually.
The benefits of having assets in cash during a crash only outweigh the downsides if you know when the crash is going to happen. Since you don't know that timing, you're statistically better off investing anything beyond your emergency funds.
This is not necessarily true. To avoid volatility, invest across asset classes with low correlation [1]. E.g., bonds will probably not tank when U.S. equities do.
I would call Bitcoin a "speculative asset" right now, actually. Compared to major currencies, it is highly volatile.
Bitcoin also is, in some sense, similar to a fiat currency (Bitcoin has no intrinsic value) without having the typical fiat currency backing (a supporting government, complete with armies, laws and their enforcement agencies, etc. sponsoring the currency). This adds a degree of risk to Bitcoin most other currencies do not have.
Not being government backed does add risk? Bitcoin cannot declare bankrupty, but governments can (ok, affecting bonds primarily). Also, governments can abandon currencies and use different ones.
Governments can attempt to legislate away / restrict Bitcoin at any time, and have muscle power to attempt to enforce this. The converse is not true. This is the main reason I say that there is added risk.
You are correct that government backed currency is indeed absolutely not risk free either in all cases; if confidence in the government is lost, the "official" currency might end up as worthless, and alternatives may prosper even despite heavy-handed government efforts in some cases. There is such a thing as speculative fiat currency.
Having said that, even though forex is generally considered more risky than other sorts of investments, the likelihood of the governments of the major currency players executing the sort of serious humdingers to move their currencies into the "speculative" category seems quite low to me. (Of course, nothing in investing is guaranteed, but still...)
I'll also add that, from what I see, Bitcoin "governance" -- the technical code decisions (https://www.economist.com/blogs/freeexchange/2017/09/not-so-...) -- is somewhat in flux right now, eg the dramas over bitcoin blocksize limits. This also adds risk.
Sure it does. During a recession, people will lose their jobs, the value of their assets will go down, etc. Do you think they won't cash out any of their BTC in order to cover expenses?
Even in a recession people look for investments. If stocks, bonds, etc all go down they look further. Gold has gained value during the last recessions.
I think this is no longer true. Many bonds would default and even if they don't the yields on bonds is so small right now that you might as well just keep cash.
Here's something odd I noticed. The previous crisis obviously had a lot of detrimental effects. However, it also made some people /very/ rich. Basically if you invested smartly right after, you would have more than recovered the losses by now. I think people are anticipating that, I know I certainly am. Next crisis, hopefully sell before it happens and then buy for longs. I'm not quite sure if that /anticipation/ was just as ingrained before. Maybe I've just gotten older and notice it more, maybe it's a real thing. But whatever it is, it's quite dangerous, because it's a catalyst: if people want it, it will happen faster than before. Couple that with real externalities (geo-political tensions, climate change, resource depletion, overpopulation) we might be in for a dangerous disconnect between market movement and "looking out of the window".
Do we consider a case where a "crash" doesn't happen?
Say we might have a war or some other global disaster at some point, but not an economic crash.
Is that so improbable?
Without defining a timescale, yes, it's very improbable. Feedback loops tend to develop in the markets, where eventually asset prices rise because people buy the assets since they've been rising for a long time. If nothing else happens, that at least is sure to lead to a crash at some point.
Now, whether there's probably going to be a crash in the next 10 years is not something I'd care to bet on, although the odds are far from 0. Overall, the game is not predicting crashes as much as it is being prepared for them when they do come.
I guess I meant that looking back in history, I'd say there's a good chance that we'll start a world war, or upset the climate or something, and that will "crash" economy, not economy itself.
Sanctions have always been a pretty good indicator of war when levied from one sovereign to another. That indicator has probably gone from flashing yellow to red recently.
"Public Debt" is not an issue. It is probably one of the biggest economic advantages the US has. US dollars(which all US debt is denominated in) are issued by the US government. This means that it is impossible to "default", unless the government willingly chooses to default. The US doesn't owe anyone "real" resources. On the other hand, the US has acquired huge amounts of real resources(cars, services, electronics, clothing...) from (foreign) holders of US debt like China, Japan etc.
Yes, these dollars are capable of purchasing any resources available for sale in the US, but again, as a sovereign nation, the US is capable of imposing customs and taxes to regulate this flow as they see fit.
Debt issued by a sovereign nation which controls its own currency is completely unlike household debt. The US government is not revenue constrained. This means that it does not need to collect taxes in order to spend. Indeed, since all US dollars come from the government, the US government must spend first in order that there be any money to tax away.
Sort of, it's not an issue until becomes one. They way out historically is run away inflation, aggressive taxation, war, and/or violent societal reorg. These all really suck compared to just living within your means like most working households try to do.
I wonder what makes them think the stock market is overvalued. Increasing inequality combined with market saturation and the current difficulty to start a competitive business means it makes perfect sense that stock prices are historically high. Combine with the fact that passive index investing has become the norm, and it seems like it will be a new normal.
It explains each of the indicators on the page. Click the "Market Overvaluation" button (albeit with a pretty poor UI and terrible URL support so I can't link it).
It's basically the value of US companies on the stock market divided by the GDP, $27 trillion / $20 trillion = 135%.
Although it makes you wonder about if all that stashed money overseas is having a significant impact on that.
Wouldn’t companies with a strong international presence (e.g. Apple) contribute to that? It seems like increased globalization could explain that high ratio rather than “overvaluation.”
Exports contribute to GDP but sales between foreign subsidiaries do not. So a Toyota made in Toyota-owned Kentucky factory contributes to the US GDP. This is in contrast to GNP; that US-made Toyota would count towards Japan's GNP.
It is my understanding that the value of a stock should be equal to present value of future cash flows. If those future cash flows are growing faster than the discount rate then a value higher than 100% of GDP is to be expected.
Agreed. I've never come across this particular metric before, but intuitively I would have expected something more akin to a P/E ratio in the 10's or even 20's, not a factor of 1x.
Can anyone explain here why the stock market cap isn't much, much higher than a single year's GDP?
Is it because GDP is essentially "revenue" while market cap is "discounted future profits" -- and thus 20 years of 5% profit is going to be on the same order of magnitude of 1 year of revenue?
There are only ~5,000 publicly traded companies in the U.S. There are about 25 Million small businesses in the U.S. The stock market cap represents a tiny portion of the entire U.S. economy.
Instead of market cap/GDP, wouldn't market cap/earnings (p/e ratio) more directly capture "market overvaluation" and "how much the stock market costs vs how much it is providing"?
If so, it seems like we're at a fairly average place for the last 30 years:
"Market cap as % of GDP" is a pretty strange way to determine whether the stock market is over/undervalued. The usual yardstick is Price/Earnings ratio. In that regard we are a little above average right now, but certainly not in outlier or "DEFCON 2" territory. http://www.multpl.com/
Is market cap / GDP really a right measure for overvaluation? So it looks like current stocks are 7% more overvalued than dot com peak with this measure! In fact current market is likely more overvalued than any other time in the history of stock market.
Nobody knows, but if I were to guess I think they'd rise. If you're someone who loves Bitcoin (and it would make sense to think the people buying Bitcoin love it), then it's likely you think of it as a safe haven.
I see Bitcoin (and ETH, and others to a lesser degree) as a safe haven. I personally have been selling off stock and moving into BTC, ETH, and others because I think the traditional stock and bond market is grossly overvalued and lacks the utility, censorship resistance, and security of Bitcoin. Nearly 10 years of the Federal Reserve buying up whatever crap people are selling, and building a $4 trillion balance sheet, means the current market prices don't reflect what the market can support.
> If you're someone who loves Bitcoin (and it would make sense to think the people buying Bitcoin love it), then it's likely you think of it as a safe haven.
The problem with this statement is that many people getting into Bitcoin don't understand the underlying concept behind it, nor do they really care. I've spoken to several people who are treating BTC as a new stock investment, and only care about the steadily increasing value and think they can make a quick buck. If Bitcoin crashes (and I think it'll crash to some degree fairly soon) it won't be the core BTC enthusiasts who will leave, it'll be these opportunists getting frightened and leaving in droves.
Now, this may actually be healthy for the long-term state of BTC, but I still think it'll have to happen.
> The problem with this statement is that many people getting into Bitcoin don't understand the underlying concept behind it
A lot of the people proclaiming "Bubble! Stay away!" are in the same category. Or I'd go as far as to say they don't really understand market dynamics, and the fact that the value of anything is only the price someone else is willing to pay for it. And then there's the people who spread anti-Bitcoin FUD because they are either a) mad they missed out or b) threatened by what Bitcoin offers (maybe they're a rent-seeking middleman who would be rendered obsolete).
Depends on if there is a kind of liquidity crunch. People could be called on to sell BTC to offset problems that arise out of an issue with other markets.
My guess is the price would fall quite a bit, since the value of BTC currently is largely speculative. Like stocks, there would be a frenzy to turn these risky investments into cash ASAP.
Stranger stuff has happened though. Maybe the value would hold, and BTC really does become the "new gold".
None of us can know since it would require seeing into the future & bitcoin has no historical precedence of trading during a recession.
My hunch is it gets absolutely slaughtered. It's a guage of risk seeking appetite IMO & historically when the "turn" occurs the assets folks are holding with the most gains are liquidated the most aggressively because they need to finance the losses.
.com stocks in the late 90's got smoked & it's where people had the most gains. housing in 07-09 got smoked & it's where people had the most gains. Safe haven trades even got smoked like low yield & gold because they could be used as a source of funds.
Another illustration was Bernie Madoff. He didn't close up shop because he got busted - he turned himself in because he had no money left. People were using him as an ATM during the crisis. He had very nice slow & steady returns that you'd think in a crisis would be great in a portfolio that's getting smashed. Nope. It's a source of funds. People withdrew from him like crazy cause they needed the money & it's only then that he turned himself in.
I'm of the opinion that BTC will actually increase relative to all other currencies if a market crash occurs. I expect people to see a huge influx of people purchasing BTC when they see the market start its tumble and then we'll see a dip until it stabilizes.
What is the best thing to do with my savings?
I am thinking about investing, and read up on it.
One thing I don't understand is where to put money to minimize the impact of a recession. Government bonds? But then Graham says, I think, bonds prices also rise in a bull market, and fall afterwards.
If you truly, deep down in your heart, believe there is a crash coming soon then the best thing you can do with your money is to keep it in cash. Invest after the crash. If, like most people, you aren't absolutely certain there will be a crash then you invest for the long haul. You have a diversified set of investments. You put in a little bit each month. After 30 years, barring a civilization destroying event, you'll be fine.
Cash (a strong, value holding currency like the USD, CHF, maybe Euro but it also depends where the spark will be of the crisis), wait it out and when the biggest panic goes buy the undervalued assets when they're near the bottom. Gold is also an option but physical, a paper guarantee is nothing
If you started this strategy 7 or 8 years ago, you probably didn’t expect the market to climb for so long. Who knows how much longer they’ll have to wait till you can make your move? In the meantime, inflation is slowly gnawing away at your cash horde.
you should only be trying to reduce the harm of a recession if you plan on liquidating assets in the near term. if you are under forty and saving for retirement, do nothing...the recession will be far in the rear view mirror by time you want to sell
10% gov bonds and rest in Vanguard S&P 500 index funds, and just ride the market average for next 30 years is Buffet's advice since it has the least management fees https://news.ycombinator.com/item?id=14259538
Traditionally bonds and stocks move inversely: stocks are higher risk and correspondingly higher returns. But of course they have to add up to the overall economy; fundamentally you should expect to make more money when the world is being more productive and less money when the world is being less productive, and any investment that doesn't have that behaviour is going to be artificial and disconnected from actual productivity, making it unlikely to be a good bet in the long run. (See Buffet's comments about a gold cube). If you're investing for more than 10 years, the best thing is not to worry about recessions: they're part of the cycle, and even out in the long run; just buy and hold and eventually you'll come out ahead. If you're investing with a particular deadline less than 10 years in the future (e.g. as you get towards retirement) then it's traditional to shift your portfolio towards lower-risk, lower-return investments (indeed government bonds as you suggest); some retirement accounts do this "automatically".
Traditional advice is to invest largely within your own country so that you're not taking on extra currency risk, to keep a certain amount of cash/gold/what-have-you just in case of a huge general crash, and to get appropriate exposure to property. There are two contradictory schools of thought on this: 1) treat it as an asset class, hold a similar proportion what you hold in stocks/bonds 2) you will need one home for the rest of your life, ensure you have exactly one home's worth of exposure to the property market, otherwise property makes no sense as an investment for the same reason as the gold cube.
There are only a couple of free lunches in investment: tax efficiency and low fees. So those are the main places to look to optimise: your local legal environment will probably offer various tax-advantaged forms of savings to encourage particular kinds of saving (e.g. retirement accounts), and while most funds will have average performance in the long run, a low-fee fund means you'll keep more of the benefits (if you're in the US, Vanguard is commonly recommended).
Diversify yo' assets. I recommend starting with ETFs, ensuring you aren't locked into specific companies. And ETFs don't have the specific conditions of mutual funds.
Several stock ETFs; I suggest one tuned for growth and one tuned for dividends. If you aren't sure, the Vanguard VOO ETF is a solid starting point.
At least one bond ETF: I'm inexperienced there, but they tend to move in inverse correlation to stocks.
Some cash: 6 months of income, if you can swing it.
You'll want to set up a plan to invest regularly, and a regular rebalanceing of the portfolio to ensure one asset class doesn't dominate the others and expose you to too much risk.
If you want to allocate 10% to things like gold ETFs, futures, Bitcoin, etc, that's not unreasonable, but you should do so with the understanding that such a play is a high risk one and likely to result in monetary loss without quite a bit of care.
edit: you have two kinds of risk: downside risk and counterparty risk.
Downside with investing is your money might go away. Barring radical economic collapse, it'll come back, eventually (> 5-10 year span), if you've diversified enough.
Counterparty risk is what if the event you're worried about doesn't happen. Suppose you're worried about a recession. What if it doesn't happen? People were seriously worried about Total Economic Meltdown in 2008. Lot of people got out of the market or didn't get in, and they wound up with a lot less money than if they'd held on. On the other side, guns, ammo, and food supply companies went gangbusters. And, looking back on it, pointlessly.
It's reasonable to assume the bull market will end. It's running a bit long as it stands now. Fine. Do you care if your stock money all drops by half, so long as it's back and more within a decade?
Make a plan designed to optimize for your goals and rigidly stick to it in the face of irrationality.
US ETFs are no longer diversification. Now that everybody is doing it, when market goes down ETFs will fall from sky as well at same or faster rates. More importantly, most ETFs are tied with one market, one country and one currency. For true diversification, you want to have gold, oil, Chinese, Russian, Asian along with usual American ETFs.
You expose yourself to currency risk as well with that strategy. I primarily worry about single company failures and wobbles; if the US economy implodes, the rest of the world will be caught up in it.
But you're right, you should balance with non-US as well. I've steered clear of them, myself, but that's not per se ideal practice and I'm overdue for a rebalancing.
But, to be clear, I was sketching an entry level into investing, not a more sophisticated approach.
One more on the list: the end of quantitative easing. I think QE has largely pushed the markets up since 2009, and the withdrawal of liquidity from the system (if it ever happens, but normally should start this year) combined with increasing rates should at the very least create market volatility, if not apply a downward pressure.
It's scary what QE did. Inflated the largest stock market bubble & bond market bubble at the same time. While most portfolios are split across them for diversity.
It's more likely they both get crushed unless of course bonds continue to do what they've done in the past meaning nominal yields go to -3% & real yields -5%. It's possible I guess.
After basically 0% net growth in the market for over a year leading up to the election, there has been a 25% boom beginning exactly on the day after Trump won. That is no coincidence. The markets are anticipating Trump's promised massive deregulatory push (already well underway), tax cuts, a more union-hostile Justice Department and NLRB, and other business-friendly changes.
The funny thing is that most of those things have not happened yet and the first market reaction on election night was that Trump’s victory was a very bad thing.
Markets price in expectations of future events. Yes, there was indeed a panicked frenzy in the futures market. But by the next morning, the consensus clearly emerged that the result was a positive thing for the stock market.
I agree, but people forecast the stock market to go up again in the next year due to the tax reform but that was alredy the reason for most of the gains in the last year... And it's not yet a sure thing.
Look at the market at virtually any larger timeframe, and you'll see that the market is marching along almost exactly as it has over the past ten years. To attribute all gains since Nov 8th to the market's confidence in Donald Trump is completely ridiculous.
Ah yeah, the old "let's take the last year in isolation and ignore the other 7 years of uninterrupted growth before that" approach to economics. Sound methodology.
There's the question of whether pro short-term profit policies are really business friendly? Is increased likelihood of a banking debacle business friendly? Higher chance of a major ecological disaster? Is nigh surrendering Puerto Rico to the elements good for Puerto Rican businesses? I'll say charitably that the jury is still out but we've been down this road before in the not so distant past.
Honest question: is there any unavoidable reason why there cannot be a permanent bull market? I mean, apart from empirical/historical observation reasons (I don't find those very compelling, as some stuff in economics seems to never happen until it happens).
Given the low interest rates, people are growingly investing in diversified stocks to obtain profits in the long term. Index funds are growing, which don't even try to speculate to outperform the average, but just go with the flow. Taking that into account, could a slow and steady rise not just become a system equilibrium and go on an on?
Unless the economy fully decouples from energy and matter [1], then Thermodynamics [2]. Solutions to this include Steady State Economy, reduction of population or the decoupling mentioned above (for example making our lives virtual)
Economy is tied to real consumption of finite resources. As we mine, fish, over harvest, burn, etc. our way out of some resources, we tend to find substitutes or other efficiencies to begin again.
But... there is the question of whether our economic growth brings us closer to the absolute carrying capacity of spaceship Earth.
So yeah, economic growth can’t continue forever without hitting some bio-physical constraints. But then maybe we’ll take to the stars. Or maybe we’ll crash hard and have exhausted the readily available and easily used resources, and be unable to sustain a large technological society.
>But... there is the question of whether our economic growth brings us closer to the absolute carrying capacity of spaceship Earth.
Are we inching up on the absolute carrying capacity of Earth? Perhaps. But what about the carrying capacity of the Sun?
We are barely capturing a fraction of the energy the Sun sends our way. Think about what we could do if our ability to harvest renewable energy in the next two decades increased not tenfold or even a hundredfold, but a thousandfold.
The smartphones in our pockets are almost unfathomably more powerful than those of a few decades ago, yet we still power them by burning rocks we found in the ground, eking out barely a day of usage before plugging them back into the grid. There is so much about our digital world that is limited by energy in ways we don't fully appreciate.
Imagine a miniaturized particle accelerator [1] that could actually turn lead into gold [2]. Imagine this done at a scale powered by energy production several orders of magnitude greater than what we have today. Obviously, this is an implausible scenario, but the fact that it could even brush up against the possible makes me wonder. How would such a system affect the value of gold? Our perception of what gold is? How would such a system applied to any resource, design, good, or service fundamentally change the way we interact with our world?
The digital revolution we have seen is something to behold, but perhaps it is only a stepping stone to something larger.
The following blog post[1] should be required reading for everyone everywhere. It talks about physical constraints on economic growth.
The main point he makes is that, regardless of how inexhaustable our sources of energy are, increases in our rate of energy use are still necessarily limited.
He notes:
1. Economic growth is always accompanied by increase in energy consumption.
2. Nearly all energy consumption (whether that be running current through computer chips, burning fuel in combustion engines, or just metabolizing food) has the effect of heating the surrounding land, air, or water.
3. If humanity's rate of energy use increases 2.3% every year, then the associated heat dissipation will be enough to cook us all within about 4 centuries.
4. Economic growth without an increased rate of energy use is not obviously impossible a priori, but it's definitely hard to imagine.
Great blog post, but I had to take pause at this line:
>Economist: More than happy to keep our discussion grounded to Earth.
Of course we can't just keep ramping up terrestrial energy production ad infinitum. All evidence points to us trying to leave spaceship Earth. The entire discussion was grounded in a reality we are trying to move past.
Credit cycle is one reason. Low interest rates mean higher bond prices (this is an inherent attribute of debt pricing, look at pricing of high yield debt the last few years vs fed funds rate as an example), lower interest rates also lead to lower expected return / higher stock prices (CAPM), and higher interest rates lead to falls in those prices
When interest rates are low and money is cheap, people take on more debt. Investors also invest in riskier assets because more money is available and competition for assets is greater. Eventually, default rates rise as there are more bad credits, and equity markets build up a lot of negative "potential energy" as prices rise based on increasing money supply. When interest rates rise, the reverse happens
This is probably not exactly what you were looking for, but it's one reason why we have cycles
>Taking that into account, could a slow and steady rise not just become a system equilibrium and go on an on?
There's positive feedback inherent in the system under control. Specifically, lower volatility makes it safer and more profitable to use leverage. This leverage will force people to overreact to negative market movement.
As the market falls, their portfolio value falls while the loan amount remains constant, increasing leverage. All levered positions must either sell into corrections or let their leverage increase to unacceptable levels. And at some point, the folks lending you money will have the right to call in the loans you took to buy securities.
This automatic buy high / sell low effect is why people like using less leverage in more volatile markets. When volatility is high enough, it starts becoming advantageous to hold cash to buy the dip / sell the peak. The breakeven point between "more money in the market" and "volatility cleans out my position" can be calculated with the Kelley Criterion.
The article actually mentions the index funds phenomenon; they become less diverse when 20 million people are buying into the same 'asset class' (index funds being an asset class). They consider it one of the potential warning signs.
We're approaching year-end when there's typically some inflows resulting from 401k and IRA investments. Does this cash sit on the sidelines waiting for the crash, or does it go into the market?
401k and investments from people who think their IRAs need to be contributed during the calendar year (and have the ability to) will go in because even with high prices, you only get to contribute a certain amount per year.
The PEOPLE VS COUNTRY graph is a little concerning. Household wealth rising faster than USA GDP. Is there some normal, boring reason why this would happen?
I like the idea of bitcoin, but I can't help but worry that the fact it's both unregulated and has no intrinsic value, couple that with the general volatility and it looks less appealing.It's tough to think of something as a safe haven when it has such wild fluctuation.
If it had one of those things I'd be tempted to invest, but the fact it lacks either makes me fearful of it.
One of the good way to find out if there is a bubble is to simply plot a graph of total earnings growth vs stock index. If these two are out of sync by huge margins, it's a sell time.
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[ 2.1 ms ] story [ 85.3 ms ] threadAnd where they think is a safe place to put money when that happens.
What to do before then? Don't have any money in US stocks. Diversify both geographically and sector-wise, cash out, be ready to invest when stocks crash through the floor, to ride the wave when they inevitably rise again. The real trick is spotting who's going to rise again and who's going to be left behind. Tech stocks are volatile by nature, invest in renewable energy and related sectors. We're going to need solar and wind power in the future, and batteries. Lots of batteries. Then, as we near battery saturation, there is going to be big money in recycling all those depleted batteries.
It's unsustainable growth, and I'm afraid the crash is going to happen sooner rather than later.
Will it be as bad as in 2008? I don't know. But it's going to hurt (except if you're wealthy enough to invest heavily right after and ride the wave back up again).
Stuff we actually need like housing, healthcare (in the US), and education have been rising faster than 2%.
Assets too like stocks have risen much higher as well.
QE was a reaction and counterpressure to low rates, not the cause.
Isn't the problem in investing in that that there's really no way to know which particular business will come out on top here since there really isn't any large barriers of entry?
There's a lot of money in oil that will be captured by the 'free' energy of renewables. Renewables are just now becoming more cost effective than oil. Oil will be around for a long time but renewables are poised to overtake it in consumer and commercial energy. Might take a few decades but it's inevitable that a vastly more efficient energy source becomes the market leader.
Also, governments across the world are putting in place regulations to build and retrofit buildings to reduce emissions. That's not just energy, it's the actual building materials and techniques. That's a lot of government mandated money about to be put into green infrastructure. Again, this is over decades so the ramp time will seem slow to us humans but now is the time to get in IMO. However, I am an amateur investor and I've definitely been wrong before...
What will be the catalyst? Just because we haven't had a recession in awhile is not enough. Corporate profits are up, consumer spending is up, and even though everyone on here thinks the numbers are lies, wages are starting to go up.
> My money is on late 2018 or early 2019.
So you have already either shorted the market or bought put options out in 2019?
Why does everyone think buying puts or shorting stocks is as easy as going long? It's not. It's an even faster way of losing money! Go try it sometime--or even just simulate it. People who say these things are clueless.
I'm not a huge investor, but I am preparing by reducing the proportion of US stocks in my portfolio.
Have you really put your own money on that?
We're going to need solar and wind power in the future, and batteries. Lots of batteries.
Do you really think you have some big insight here that the rest of the investment community hasn't thought about?
Safe places IMO are deflationary assets (gold, and to a much more risky extent, bitcoin...I know this will start a flame war lol). Another option is foreign assets in countries that are not holding onto a lot of US debt.
I'm not an oracle, so I can't predict timing, although I do think it will happen relatively soon in the next 1-3 years.
Not saying that current level of debt is any good, there are just multiple levels to that story.
Instead of investing in gold, why not invest in a foreign market that's at least partially insulated from the US?
[1] http://www.minyanville.com/trading-and-investing/commodities...
All other industrial uses are completely swamped by the creation of human ornamentation. But the thing about jewelry is that the gold in it is usually very easily recycled. So it is not as strongly consumed as the gold used in electronics, which requires a greater effort to recover, if it isn't simply landfilled a milligram at a time.
That jewelry use creates a soft reserve, such that it is usually not available to the market, but if the gold price rises high enough, it can start to liquidate, likely starting with the ugliest necklaces.
So it would seem that the majority of the value of gold comes from the human desire to possess a tangible, portable symbol of one's wealth. It cannot be taken from you, unless someone finds you and pries it out of your fingers. Paper assets are more amenable to remote interference. Your ownership of a company via stocks may be diluted. Your fiat accounts may be devalued via monetary inflation or seized with the cooperation of your bank. Your bonds may suffer default. The title to your land may be transferred against your will. But that gold necklace is yours, as long as you're the only one that knows where it is.
As such, failing to invest in gold is ignoring the risk of a major crash in the modern centrally-banked, fractional-reserved, and fiat-moneyed economy, which is subject to boom-bust cycles. Gold is the asset of choice for those that think that government bonds from too-big-to-fail countries are not actually the default lowest-risk investment. But even then, the gold bugs are undercut by the people who buy condos in underground shelters that anticipate the complete collapse of human civilization, along with barrels filled with small arms ammunition. Buffett's #3, #5, and #6--gold is going long on fear--is definitely true.
But I don't think the other quotes are 100% accurate. They have the odor of the Labor Theory of Value about them. Things don't have value because they do stuff, but because people want them. Gold has value because some people want gold, not because it delivers billions of bottles of Coke, or ferries passengers across continents, or summons a driver for you on command. People want gold for different reasons, and some reasons are more predictable than others, but none of those reasons are required to be rational or useful. And that's why the Buffett analysis of gold fails, in my opinion.
The way I interpret Buffett's view on gold is that if I have a choice between buying a hunk of yellow metal that just sits there, or buying the same amount of shares of a (high quality) company like KO where people labor day and night trying to make more money for the shareholders, the choice is pretty obviously the latter. Of course, those people may be ineffective in their labors, or worse, stupid decisions by managers might make the company less valuable, but if I have some reasonable confidence in them, gold doesn't sound very attractive. In the case of KO, it has been steadily increasing dividends for something like 50 years, so something must be going right. That seems like pragmatism, to me, not Labor Theory of Value, though.
I don't believe it is applicable to most of the economies on this planet.
If I may analogize, Buffett is saying that a trophy spouse that does nothing but look good and impress your friends (gold) is a less worthwhile investment than one that goes away all day to bring home $80 and a distinct grease-trap odor (stocks). A Van Gogh painting that hangs on your wall, slowly oxidizing its pigments (gold) is a less worthy investment than a plastic fish on a wood-veneer plaque that can sing four different songs whenever you walk past it (stocks). A square mile out in the desert with awesome sunsets and no light pollution at night (gold) is better than a square mile that grows corn, wheat, alfalfa, and soy when dosed with sufficient amounts of chemicals (stocks).
People value things other than money and rate of return, and other purely rational criteria. Sometimes people buy things to enjoy them as they are, rather than anticipate what they could be. The lump of gold will never be anything greater or lesser than what it was when you bought it, and some people like that quality. The 1 troy ounce .9167 gold coin will always be worth at least 1 troy ounce of .9167 gold, no matter what anyone else in the world does. If you bury 10 kg of .9999 gold and dig it up 100 years later, it will still be worth 10 kg of .9999 gold. You might be able to trade your gold for differently sized baskets of goods and services in different years, and the size of future baskets will always be smaller than what you could have obtained if you had wisely invested in companies, but you will always be able to get something, even if the world has effectively ended.
I also suggested foreign assets that are not holding onto a lot of US debt.
Then one year later we had the .com crash :-)
https://www.vanguard.ch/privateinvestors/indv/loadPDF?countr...
Economists have predicted 15 of the last 10 crashes.
Just before a crash the best place to keep your money is in cash. Those who are liquid after a crash can clean up by investing at that time.
The least desired asset class right now is cash. Compare that to 2009-2011 or so & cash was the prized asset class which underperformed going forward. Aside from the least desired, the cheapest asset class in the world today is volatility.
This is amazing, how can a country so big as China, have less bankruptcies than a micro state as Belgium. Unbelievable.
> “The government should allow zombie companies to default or go bankrupt,”
This probably means that in China, they just let the company "rot" in zombie state instead of letting it go bankrupt.
In Belgium, a company needs to submit paperwork regularly, and if this doesn't happen, afaik, the company can be declared bankrupt by the government.
Belgium has a large numbers of companies per capita. Our tax system nudges us to create companies for employment and investments, because of the high personal taxes. This skews the comparison.
Another dampening factor has been the regulations introduced after 2008 like S̶a̶r̶b̶a̶n̶e̶s̶-̶O̶x̶l̶e̶y̶ Dodd-Frank, the moratorium on IPOs has definitely helped to slow things down.
Now things are moving again, trouble is, history has shown time and time again that monetary policy is a ketchup bottle, once it starts having effect it is already too late to moderate it. That's why we have bubbles - suddenly there is too much money slushing around chasing finite resources, markets become crazy and regulators have to slam the brakes hard (in combination with banks predictably finding ways to overleverage, legally or not). Which leads to my prediction: Markets are still not crazy enough. Crazy, but not enough to look like the part where it all blows up. So I am betting on at least six months more of "growth" (i.e. inflation) before the inevitable crash.
Say you've got separate hot and cold faucets and there's a delay between turning the valve and the respective water flowing. By the time you get to just the right mix, the ratio of hot water is still increasing and it'll get messed up again, which leads to increasing the cold water, which makes it too cold, which ... You get the idea.
In contrast, Steve Keen is actively developing dynamic nonlinear models of macroeconomics that is actually capable of simulating endogenous recessions.
If you're interested in learning more about Steve Keen's work, I highly recommend watching his presentation to the OECD: https://www.patreon.com/posts/my-speech-to-new-14735058
What you need to know is this: Financial crashes are an eternal cycle, they will never go away. Unless there is fundamental societal change.
Here's why: Financial crashes are business to a couple of extremely powerful/rich people. After every crash, assets are undervalued. Rich people have the financial cushion to not be impacted in the slightest way by such crashes. Which means they are in a position to purchase these undervalued assets from poorer people. The rich-poor imbalance grows further, as these undervalued assets regain their "real" value. That's the reason why these crashes are manufactured. Which means a couple of powerful/rich people will continually steer society in this direction, for example by removing laws that were put in place as safeguards.
Edit: And no, this is not conspiracy, it's pure economics.
Conspiracy theories might well be defined just by the application of the fallacy, "if someone benefits, then they intended it".
And here we see this fallacy being applied. Sound like a textbook conspiracy to me. The extremely weathly are not interested in increasing their net wealth, only in specific purchases to further their goals -- which are very easy to undermine with crashes.
People who are merely wealthy might possibly wish to increase their general wealth and therefore believe a crash will help them do that. That is an incredibly outsized risk for a wealthy person to needlessly take however.
Slightly tangential, but neat: that fallacy has a name! It's the "Post hoc ergo propter hoc" fallacy: https://en.wikipedia.org/wiki/Post_hoc_ergo_propter_hoc
There might be a more specific named fallacy for when post-hoc happens with regard to individuals' intentions and benefits rather than causes and effects in general though.
See eg http://econlog.econlib.org/archives/2017/11/old_classical_m....
Some countries like Israel, Australia (or to a lesser extent the UK) had more competent central banks. See https://marketmonetarist.com/2014/04/24/how-stan-fischer-pre... for a piece about the example of Israel.
If everything you’re postulating here is “pure economics”, would you mind placing it in the context of an economic framework for the sake of precision? Something rudimentary like the macro credit-debt cycle is fine.
As it stands, your exposition appears fairly politically loaded, and your specific claim that crashes are “manufactured” rather than an emergent side effect of market dynamics is, to me, an extraordinary claim that requires commensurately extraordinary evidence.
It’s not at all clear to me how you’re getting from (“there exist people who benefit from systemic market corrections”) to (“market corrections are manufactured by a subset of people who benefit by them”). As another question illustrating this point, would you say that people purchasing homes with overextended mortgages during the housing market bubble were contributing to that crash? If so, did they have a part in “manufacturing” it even though they didn’t benefit? How do you reconcile the ideas of market participants with agency, systemic volatility, and irrational exuberance with the idea of a conspiratorial group capable of systematically driving a market crash?
1. You can't get all people to play this game.
2. You can't get people margin called if the stock price doesn't drop enough.
You can get 1 if you complicate loans (Mortgage based securities); and you can get 2 if you make the issue related to the whole economy. So people get bankrupted instead of margin called. Their house is sold instead of the stock.
Same game, bigger market.
That being said I don't believe the "rich" or the "powerful" are doing it. I don't believe in Conspiracy theories. I think this "movement" is inherent in the nature of the market and the humans who play around it. It burns both the poor and the rich, but it magnifies inequality whether by making the rich richer or creating new riches.
The wealthiest people in the world are wealthy by virtue of the gains made on the assets they already have. So, in a bull market, their assets grow while someone without assets is left behind. The inverse is true, too - they'll proportionally lose to the same degree in a crash - as while a poor person may have no investments, the wealthy person's investments will crash in line with the market. There won't be a financial cushion, at least not a significant one.
Books have been written around timing markets and it's generally accepted that it cannot be done reliably. To get out before a crash then buy cheap would require you to predict three different moments accurately: when to get in, when to get out, and then when to buy on the "cheap". Timing even one reliably requires luck or clairvoyance.
"Rich people have the financial cushion to not be impacted in the slightest way by such crashes". This is clearly false - wealthy people don't keep mountains of cash lying around as they would miss out on the growth in bull markets, and as a result their wealth would decrease relative to their peers.
Investors generally just become relatively poorer during a crash then make it back and more during the next bull market, at least that's how it's worked until now. There's an old quote I can't find the source of right now that sums it up fairly aptly:
"Stocks go down faster than they go up... but they go up further than they go down".
> Books have been written around timing markets and it's generally accepted that it cannot be done reliably. To get out before a crash then buy cheap would require you to predict three different moments accurately: when to get in, when to get out, and then when to buy on the "cheap". Timing even one reliably requires luck or clairvoyance.
This doesn’t strike me as true, unless you’re describing the subset of academic economists who agree with EMH in some form. In particular, the first sentence on its own appears to be evidently untrue; it’s clear that there are many parties, including economists and financiers, who attempt to time the market and generally forecast macroeconomic shifts.
CNBC is probably a good example of this. When you don't predict anything specific, you can never be wrong.
(Clairvoyance was not meant seriously, I should have made that clear!)
The field of economics seems to have a ways to go before it can be used reliably to predict things.
It is further warped by the fact that although the anti-interventionalists are probably right, the interventionalists are the ones who do all the consulting and take all the jobs and give all the advice - because they are .. interventionalists. And who wants to pay a consultant to tell them "don't do anything, and there's nothing you can do."
Some wealthy people do. E.g. Warren Buffett's Berkshire Hathaway was sitting on 100 billion dollar in cash last summer [1]. If he doesn't find anything that is fairly priced, he prefers to sit on his cash and wait.
[1] http://fortune.com/2017/08/07/warren-buffett-berkshire-hatha...
...
"This is clearly false - wealthy people don't keep mountains of cash lying around as they would miss out on the growth in bull markets, and as a result their wealth would decrease relative to their peers."
I read with great interest the two volumes that Niall Ferguson wrote of the history of the Rothschild family.[1]
It's a fascinating work that serves well to bridge the gap of European history between Napolean and World War One.
I bring it up here because the Rothschild family did indeed do exactly what the parent comment suggested that "rich people" do. They quietly did their simple banking business year after year, piling up profits and assets that were repeatedly poured into down markets when they viewed that assets had become cheap.
This was not market timing - this was simply patience. The down market always comes and their simple, boring factoring and discounting was always reliable.
[1] _The House of Rothschild_ ("The World Banker")
I think the reasons for why cycles happen in economies are many. It's probably desirable to reduce the amplitude of the cycles, but I'm not convinced humans are capable of that. Due to biological reasons, reward functions are almost always short term. Humans, as individuals and societies, are not very good at optimisations at longer time scales.
I'd like to think that we are capable of more, but it may be that we are not. AI (at some stage) might be able to help us there, if it turns out to have better predictive power than humans - and doesn't lead to more ruin rather than improvement in the human condition.
The top end tax bracket needs to go well above 50% to make it riskier to invest what's left in those markets, rather than taking a risk on starting or growing a business, the expenses of which are 100% tax deductible.
There might be isolated cases of that happening, but in general, nothing close to that.
>...In fact, if you look at a fifty-year period after World War II, home prices were absolutely steady. In 1947 the Case-Shiller index stood at 110, and in 1997, adjusted for inflation, it stood at 110 again.
http://www.motherjones.com/kevin-drum/2010/08/chart-day-hous...
There is a chart at the bottom of the article.
In terms of wages, it is more realistic to focus on total compensation:
>...Economists long have noted that focusing on AHE rather than total compensation yields an inaccurate picture of labor compensation due to the omission from AHE of employer-provided benefits.
https://files.stlouisfed.org/files/htdocs/publications/es/07...
The page has 2 charts showing the differences when you compare wages to total compensation.
The tax burden has basically gone opposite of what you imply. For example, the top 10% paid 49% of taxes in 1980 and paid 70% in 2014. (http://www.ntu.org/foundation/page/who-pays-income-taxes) The "top marginal rate" means very little by itself. What matters is the effective rate which takes into account the credits/deductions that are allowed, the other lower tax rates, etc.
>...The top end tax bracket needs to go well above 50% to make it riskier to invest what's left in those markets, rather than taking a risk on starting or growing a business, the expenses of which are 100% tax deductible.
If the effective federal tax rate would be > 50% and there would likely be state taxes also, why would anyone invest in a small business? The vast majority of new businesses fail in the first 5 years. With such high tax rates, why take a risk when the vast majority of the time almost all the money will be lost and if you are able to make a successful business, taxes will take almost all the profit? Much more rational to invest in government bonds.
Where people want to live and work are cities. If you look at urban housing vs wages, housing has grown 3x compared to wages. Considering urban areas isolate cases is somewhere in between funny and absurd.
>The tax burden has basically gone opposite of what you imply.
I have neither stated nor implied anything about tax burden. I've only stated incentives and their consequences.
> For example, the top 10% paid 49% of taxes in 1980 and paid 70% in 2014. (http://www.ntu.org/foundation/page/who-pays-income-taxes) The "top marginal rate" means very little by itself.
The top marginal rate is a threat, with a real consequence. Of course the vast majority will try to avoid it, it's how they avoid it that matters.
> What matters is the effective rate which takes into account the credits/deductions that are allowed, the other lower tax rates, etc.
No, that's not what matters. I'm not trying to make sure the effective rate is either fair or equal among people who make the same income. What I want to do is incentivize a greater velocity of money, rather than rich people who don't need to save another dime, causing inflated housing and stock prices by stashing money there. I want the risk of saving money at the top end to be at least equal to that of starting or growing a business. And right now top end tax rates are so damn cheap it is way less risky to pay that cheap ass tax, and stuff the rest in real estate or stocks, than it is to take a 100% tax deduction and start or grow a business. That's bad.
And you increase the risk of being a hoarder with the real threat of taking most of that income away, above a certain amount. It doesn't matter that in 1928 probably only 5 people in the whole country paid 90+% income tax on their last $100,000 earned. The very fact that insane rate existed was the incentive for most everyone else to do something with their money rather than nothing. And it's the something else that is the benefit to society. Not how much revenue the government raised from it.
What you said was "That's why a house costs on average 24 times more today than in 1960,"
You didn't say you were only taking about urban areas, and you have given no evidence that a house costs on average 24 times more today than 1960 when adjusted for inflation. You also haven't given any evidence that the increases in the house prices are due to the tax rates especially when there are more obvious factors.
>...I have neither stated nor implied anything about tax burden.
What you said was "It's a neo-feudal give away."
>...What I want to do is incentivize a greater velocity of money,
Increasing aggregate demand isn't some magic solution to every economic problem. Long term what makes a country wealthy is increased productivity.
>...The very fact that insane rate existed was the incentive for most everyone else to do something with their money rather than nothing.
The WW II rates of 90+ percent don't mean "...incentive for most everyone else to do something with their money rather than nothing". It actually means the opposite of what you mean. If the government will take any gains you make, you invest the money in bonds that won't be taxed. If, for example, you want to incentive people to invest in new businesses, you would look at lowering the tax rates for that investment - not increase them.
As a rule, most economists are opposed to very high marginal tax rates due to the inefficiencies they introduce - compensation being moved to non-salary, money wasted on CPAs, lawyers and lobbying congress for special deductions, dead weight losses for economic activity that isn't done, etc.
It used to be that traders set pricing enough that if things got out of hand then traders would come in to sell/short. But what if most people just used buy and hold?
I'm having trouble imagining that. Every time someone buys, some one else is selling, after all.
Is this a sign of a bubble or people trying to hedge against a crash?
It's curious that something that was done as a measure to alleviate the effects of a previous crash is creating another bubble and (probably) another eventual crash.
My guess is the explosion in money going into cryptocurrencies is partly because of that - more loose capital chasing gains - but there are other reasons behind it too. It's a combination of things. Genuine excitement of something new and potentially transformational, desire to move assets away from places they are at risk of being seized (China), FOMO, promise of Lambos, disappointment in the traditional financial system by young people, many reasons.
People get excited when something goes up quickly, and it's been very easy to jump on that speculative train in the case of cryptocurrencies.
The funny thing is how said people often then come to genuinely believe they believe or understand Bitcoin, when in reality they’ll scatter at the first sign of a major correction. In fact, increasing conviction about an outcome after a person has paid money to bet on it is a well studied cognitive bias.
US investors are only a portion of the Bitcoin market, and the price action of the past year or so isn't at all out of line with the general growth trend.
The notion that Bitcoin would serve as a 'safe haven' during a market crash is also far from a foregone conclusion. Certainly possible, but I have difficulty accepting that traditional financial institutions would see it that way.
The best strategy is still to diversify your investments, keep enough emergency assets to ride the wave, and not worry about it.
Random catastrophes do happen to younger folks, of course, but those are something to deal with if and when they happen.
Hard problem.
Diversify into what though? Once market crashes, it takes everything down with it.
[1] https://www.investopedia.com/terms/c/coefficientofvariation....
Bitcoin also is, in some sense, similar to a fiat currency (Bitcoin has no intrinsic value) without having the typical fiat currency backing (a supporting government, complete with armies, laws and their enforcement agencies, etc. sponsoring the currency). This adds a degree of risk to Bitcoin most other currencies do not have.
Definitely I'd see it as an asset though.
You are correct that government backed currency is indeed absolutely not risk free either in all cases; if confidence in the government is lost, the "official" currency might end up as worthless, and alternatives may prosper even despite heavy-handed government efforts in some cases. There is such a thing as speculative fiat currency.
Having said that, even though forex is generally considered more risky than other sorts of investments, the likelihood of the governments of the major currency players executing the sort of serious humdingers to move their currencies into the "speculative" category seems quite low to me. (Of course, nothing in investing is guaranteed, but still...)
I'll also add that, from what I see, Bitcoin "governance" -- the technical code decisions (https://www.economist.com/blogs/freeexchange/2017/09/not-so-...) -- is somewhat in flux right now, eg the dramas over bitcoin blocksize limits. This also adds risk.
It will be so interesting how Bitcoin price behaves in the next recession.
There's always an asset class that outperforms during a crash.
Now, whether there's probably going to be a crash in the next 10 years is not something I'd care to bet on, although the odds are far from 0. Overall, the game is not predicting crashes as much as it is being prepared for them when they do come.
Posted this here a while ago and people seemed to like it.
I think I'd lean towards public debt...
Yes, these dollars are capable of purchasing any resources available for sale in the US, but again, as a sovereign nation, the US is capable of imposing customs and taxes to regulate this flow as they see fit.
Debt issued by a sovereign nation which controls its own currency is completely unlike household debt. The US government is not revenue constrained. This means that it does not need to collect taxes in order to spend. Indeed, since all US dollars come from the government, the US government must spend first in order that there be any money to tax away.
It's basically the value of US companies on the stock market divided by the GDP, $27 trillion / $20 trillion = 135%.
Although it makes you wonder about if all that stashed money overseas is having a significant impact on that.
The metric as designed is more flawed, because not all companies are public.
It is my understanding that the value of a stock should be equal to present value of future cash flows. If those future cash flows are growing faster than the discount rate then a value higher than 100% of GDP is to be expected.
Can anyone explain here why the stock market cap isn't much, much higher than a single year's GDP?
Is it because GDP is essentially "revenue" while market cap is "discounted future profits" -- and thus 20 years of 5% profit is going to be on the same order of magnitude of 1 year of revenue?
If so, it seems like we're at a fairly average place for the last 30 years:
http://www.multpl.com/
https://seekingalpha.com/article/4056553-25-p-e-s-and-p-500-...
I see Bitcoin (and ETH, and others to a lesser degree) as a safe haven. I personally have been selling off stock and moving into BTC, ETH, and others because I think the traditional stock and bond market is grossly overvalued and lacks the utility, censorship resistance, and security of Bitcoin. Nearly 10 years of the Federal Reserve buying up whatever crap people are selling, and building a $4 trillion balance sheet, means the current market prices don't reflect what the market can support.
The problem with this statement is that many people getting into Bitcoin don't understand the underlying concept behind it, nor do they really care. I've spoken to several people who are treating BTC as a new stock investment, and only care about the steadily increasing value and think they can make a quick buck. If Bitcoin crashes (and I think it'll crash to some degree fairly soon) it won't be the core BTC enthusiasts who will leave, it'll be these opportunists getting frightened and leaving in droves.
Now, this may actually be healthy for the long-term state of BTC, but I still think it'll have to happen.
A lot of the people proclaiming "Bubble! Stay away!" are in the same category. Or I'd go as far as to say they don't really understand market dynamics, and the fact that the value of anything is only the price someone else is willing to pay for it. And then there's the people who spread anti-Bitcoin FUD because they are either a) mad they missed out or b) threatened by what Bitcoin offers (maybe they're a rent-seeking middleman who would be rendered obsolete).
Stranger stuff has happened though. Maybe the value would hold, and BTC really does become the "new gold".
My hunch is it gets absolutely slaughtered. It's a guage of risk seeking appetite IMO & historically when the "turn" occurs the assets folks are holding with the most gains are liquidated the most aggressively because they need to finance the losses.
.com stocks in the late 90's got smoked & it's where people had the most gains. housing in 07-09 got smoked & it's where people had the most gains. Safe haven trades even got smoked like low yield & gold because they could be used as a source of funds.
Another illustration was Bernie Madoff. He didn't close up shop because he got busted - he turned himself in because he had no money left. People were using him as an ATM during the crisis. He had very nice slow & steady returns that you'd think in a crisis would be great in a portfolio that's getting smashed. Nope. It's a source of funds. People withdrew from him like crazy cause they needed the money & it's only then that he turned himself in.
Traditional advice is to invest largely within your own country so that you're not taking on extra currency risk, to keep a certain amount of cash/gold/what-have-you just in case of a huge general crash, and to get appropriate exposure to property. There are two contradictory schools of thought on this: 1) treat it as an asset class, hold a similar proportion what you hold in stocks/bonds 2) you will need one home for the rest of your life, ensure you have exactly one home's worth of exposure to the property market, otherwise property makes no sense as an investment for the same reason as the gold cube.
There are only a couple of free lunches in investment: tax efficiency and low fees. So those are the main places to look to optimise: your local legal environment will probably offer various tax-advantaged forms of savings to encourage particular kinds of saving (e.g. retirement accounts), and while most funds will have average performance in the long run, a low-fee fund means you'll keep more of the benefits (if you're in the US, Vanguard is commonly recommended).
The other is whether you have expensive debt, like credit cards.
Dollar cost averaging might be a way to reduce risk a little bit (deciding on a regular amount / interval and sticking to that whatever happens.)
Finally, do you have an adequate safety net? (6m - 1yr of expenses in an insured account.)
Several stock ETFs; I suggest one tuned for growth and one tuned for dividends. If you aren't sure, the Vanguard VOO ETF is a solid starting point.
At least one bond ETF: I'm inexperienced there, but they tend to move in inverse correlation to stocks.
Some cash: 6 months of income, if you can swing it.
You'll want to set up a plan to invest regularly, and a regular rebalanceing of the portfolio to ensure one asset class doesn't dominate the others and expose you to too much risk.
If you want to allocate 10% to things like gold ETFs, futures, Bitcoin, etc, that's not unreasonable, but you should do so with the understanding that such a play is a high risk one and likely to result in monetary loss without quite a bit of care.
edit: you have two kinds of risk: downside risk and counterparty risk.
Downside with investing is your money might go away. Barring radical economic collapse, it'll come back, eventually (> 5-10 year span), if you've diversified enough.
Counterparty risk is what if the event you're worried about doesn't happen. Suppose you're worried about a recession. What if it doesn't happen? People were seriously worried about Total Economic Meltdown in 2008. Lot of people got out of the market or didn't get in, and they wound up with a lot less money than if they'd held on. On the other side, guns, ammo, and food supply companies went gangbusters. And, looking back on it, pointlessly.
It's reasonable to assume the bull market will end. It's running a bit long as it stands now. Fine. Do you care if your stock money all drops by half, so long as it's back and more within a decade?
Make a plan designed to optimize for your goals and rigidly stick to it in the face of irrationality.
But you're right, you should balance with non-US as well. I've steered clear of them, myself, but that's not per se ideal practice and I'm overdue for a rebalancing.
But, to be clear, I was sketching an entry level into investing, not a more sophisticated approach.
It's more likely they both get crushed unless of course bonds continue to do what they've done in the past meaning nominal yields go to -3% & real yields -5%. It's possible I guess.
Look at the market at virtually any larger timeframe, and you'll see that the market is marching along almost exactly as it has over the past ten years. To attribute all gains since Nov 8th to the market's confidence in Donald Trump is completely ridiculous.
Given the low interest rates, people are growingly investing in diversified stocks to obtain profits in the long term. Index funds are growing, which don't even try to speculate to outperform the average, but just go with the flow. Taking that into account, could a slow and steady rise not just become a system equilibrium and go on an on?
Unless the economy fully decouples from energy and matter [1], then Thermodynamics [2]. Solutions to this include Steady State Economy, reduction of population or the decoupling mentioned above (for example making our lives virtual)
[1] https://jancovici.com/wp-content/uploads/2016/04/energie_gra...
[2] https://dothemath.ucsd.edu/2011/07/galactic-scale-energy/
edit: Obviously my answer is meant long term, as in a couple hundred years.
But... there is the question of whether our economic growth brings us closer to the absolute carrying capacity of spaceship Earth.
So yeah, economic growth can’t continue forever without hitting some bio-physical constraints. But then maybe we’ll take to the stars. Or maybe we’ll crash hard and have exhausted the readily available and easily used resources, and be unable to sustain a large technological society.
Are we inching up on the absolute carrying capacity of Earth? Perhaps. But what about the carrying capacity of the Sun?
We are barely capturing a fraction of the energy the Sun sends our way. Think about what we could do if our ability to harvest renewable energy in the next two decades increased not tenfold or even a hundredfold, but a thousandfold.
The smartphones in our pockets are almost unfathomably more powerful than those of a few decades ago, yet we still power them by burning rocks we found in the ground, eking out barely a day of usage before plugging them back into the grid. There is so much about our digital world that is limited by energy in ways we don't fully appreciate.
Imagine a miniaturized particle accelerator [1] that could actually turn lead into gold [2]. Imagine this done at a scale powered by energy production several orders of magnitude greater than what we have today. Obviously, this is an implausible scenario, but the fact that it could even brush up against the possible makes me wonder. How would such a system affect the value of gold? Our perception of what gold is? How would such a system applied to any resource, design, good, or service fundamentally change the way we interact with our world?
The digital revolution we have seen is something to behold, but perhaps it is only a stepping stone to something larger.
[1] https://spectrum.ieee.org/nanoclast/semiconductors/devices/n...
[2] https://www.scientificamerican.com/article/fact-or-fiction-l...
The main point he makes is that, regardless of how inexhaustable our sources of energy are, increases in our rate of energy use are still necessarily limited.
He notes:
1. Economic growth is always accompanied by increase in energy consumption.
2. Nearly all energy consumption (whether that be running current through computer chips, burning fuel in combustion engines, or just metabolizing food) has the effect of heating the surrounding land, air, or water.
3. If humanity's rate of energy use increases 2.3% every year, then the associated heat dissipation will be enough to cook us all within about 4 centuries.
4. Economic growth without an increased rate of energy use is not obviously impossible a priori, but it's definitely hard to imagine.
[1] https://dothemath.ucsd.edu/2012/04/economist-meets-physicist...
>Economist: More than happy to keep our discussion grounded to Earth.
Of course we can't just keep ramping up terrestrial energy production ad infinitum. All evidence points to us trying to leave spaceship Earth. The entire discussion was grounded in a reality we are trying to move past.
When interest rates are low and money is cheap, people take on more debt. Investors also invest in riskier assets because more money is available and competition for assets is greater. Eventually, default rates rise as there are more bad credits, and equity markets build up a lot of negative "potential energy" as prices rise based on increasing money supply. When interest rates rise, the reverse happens
This is probably not exactly what you were looking for, but it's one reason why we have cycles
There's positive feedback inherent in the system under control. Specifically, lower volatility makes it safer and more profitable to use leverage. This leverage will force people to overreact to negative market movement.
This automatic buy high / sell low effect is why people like using less leverage in more volatile markets. When volatility is high enough, it starts becoming advantageous to hold cash to buy the dip / sell the peak. The breakeven point between "more money in the market" and "volatility cleans out my position" can be calculated with the Kelley Criterion.
If it had one of those things I'd be tempted to invest, but the fact it lacks either makes me fearful of it.
I really liked this write-up on crypto-currencies, it's a nice way of thinking about the taxonomy of money and where it sits. https://www.bis.org/publ/qtrpdf/r_qt1709f.htm
(can't find a source, saw it somewhere)