He's one if the few big managers that managed to dodge the 1989 Japan bubble, the 2000 tech bubble and the 2008 housing bubble while still making money.
He also missed out big time on tech companies’ growth after 2008, and made some bad investments in IBM and Kraft Heinz. Seems like the biggest thing propping up BRK returns is AAPL, which is currently 25% of BRK (by market cap).
He reaffirmed over and over again that he only invests within his sphere of competence and made clear that IT companies do not fall within the said sphere. Not investing in the said tech companies and remaining consistent to the markets he mastered best was a deliberate choice and one of the main reasons for his success.
If I have inflation fears, and I think we are in a stock bubble, where should I put my money. It seems like whatever you do there's more risk now than in the past.
I'm genuinely asking. It seems like I'm being forced to make bets more so than 10 years ago.
> The house is invested in keeping stock prices stable and rising,
That's not really accurate - the goal of the Fed and all central banks is to keep prices stable and employment levels optimal. If inflation is going out of control then prices won't be stable and employment won't be optimal, in such a case the stock market might have to take a hit.
Also, it's pretty clear most central bankers understand the current inequality level is not good.
More so housing prices because a large chunk of the financial system is based around house prices. If house prices drop by 25%, it can collapse entire financial systems from the fallout.
The only problem is that the fed really doesn’t have much more it can do. Interest rates are too low right now and the market can easily lose faith in the Fed which means utter chaos could occur and deflation will run rampant.
We’ve long moved past the zero rate bound being a hard constraint on monetary policy. Whether they should or not is a valid question, but money can always be created and injected into the system.
The entire edifice of the global financial system is anchored around real estate valuation (the dirt, not so much the improvements and not so much the price) and the network effects wrung out of it by the infrastructure accreted around it (most often paid by public taxation and the bulk of its monetization privatized), only made possible by the structural support embedded into credit finance, accounting and tax policies granted it as an asset class unique unto all others. There can be temporary price corrections, even deep ones, even lasting as much as a generation or two, but at this point so much is secularly bound to real estate valuation that it is one of the pins on the OR-gated-multi-pin hand grenade of single-planet-forever-growth economics.
Real-estate-the-dirt valuation is like the core tranches and/or core dynamic allocation strategy of one's investment thesis/theses, or the ballast in a ship. Forex dwarfs real estate as both a market and asset class, but policies do not treat forex as favorably over the long-term and in credit structures.
Also, for those who feel hard real estate market data (including visibility into contract terms) is opaque and inscrutably difficult to obtain, you're in for a treat when you get into the forex market (or for that matter, bonds, derivatives, etc.); pricing data is only the tip of the iceberg, and uniform cross-exchange visibility into order books is not seriously available in those markets the last time I investigated trading each of them (would love to be pointed in the right direction if I have my information wrong, though).
Depending upon how one models it, residential housing prices are like a second or third derivative off of the above opinionated, personal take on the key interrelationships with my embedded biases/prejudices/blindsights.
Once the first two tiers of Maslow's hierarchy are secured functionally into perpetuity at a stable "price", if I had to choose between putting wealth into dirt or into technological advancement to improve our mastery over energy (information being a valuable subset of energy), matter, and spacetime (solving distribution problem spaces being a valuable subset of spacetime), I'd choose the latter every time. In my personal opinion (YMMV of course), as a species we've sufficiently implemented the hypothesis that technological advancement is key to ever-improving conditions for the majority, such that it is worth at maybe a plurality subset of the species seeing where that path leads.
This. I’ve been investing professionally for almost 20 years. You know those internet memes with the bell curve iqs…. For much of my career I was contrarian to this view but after watching the government responses to repeated financial asset crises, you don’t want to be positioned too far from what the voting masses will demand if they see their home prices or 401ks sharply decline. Can governments keep this up forever? Logic would say no but then again doomsayers have been arguing about the unsustainability of trends for all five decades of my life. The “smartest” investors I know always see a climax around the corner when finally all the accumulated problems come to roost. Guess what. Last fifty years you didn’t want to be sitting out of assets holding cash. This stuff is hard.
It’s really really hard as you get older and your hopefully accumulated savings are high relative to your current income and your expected remaining working life earnings.
In your 20s you can ride up a bubble, lose it all, and chalk it up to a cruddy learning experience. Later in life it gets exponentially harder because mistakes are permanent and irrecoverable. You can play the game and risk it in what seem like expensive assets. Or you can sit it out and fall behind without any compounding to create wealth and offset inflation. The latter option isn’t really an option unless you start with so much wealth that you can just spend down principal being eroded by inflation year after year and still have enough.
Which is the jump off point for portfolio management theory and risk tolerance approximation.
The problem with the future though is wide systemic problems vastly unlike seen previously. The US population will get smaller as the baby boomer generation is larger than its successive generations. That’s almost the definition of negative market growth and in some cases (health care) it is. That also looks like what Japan has undergone for the last several decades.
Climate change is a whole other bag of large systemic change likely to increasingly play out the younger the investor is.
My point here is the future 50 years will not be as rosey as the last 50 years. And the last 50 years haven’t been exactly rosey.
Edit-my proscription would be: people, not just investors, need to be willing to put in a lot of work and potentially ever increasing work into anticipating and acclimating to the world that’s headed our way. Study up on macroeconomics, micro, portfolio theory, some climate and migration patterns, and how your governments and institutions work. Maybe then you have a chance at survival. Also look for ways to make not just your life better but the conditions for life better for your neighbors, family, and future generations. Resist “tearing down the wall keeping the century-high tide away for the sake of a few pennies a brick.” Resist tearing down “the other” because while it might feel viscerally satisfying it actually creates an environment of prosecution and suffering that you will eventually suffer. Embrace the struggle of survival because it’s what we the living must do.
> The US population will get smaller as the baby boomer generation is larger than its successive generations. That’s almost the definition of negative market growth and in some cases (health care) it is.
And all that money the boomers have accumulated, at least what they don't blow before dying, is going to be inherited. And the heirs are going to invest it, and the government is going to force them to spend it (or at least have it taxed) within 10 years of inheriting it.
No idea what effect this will have, but as usual, there are a lot of moving parts so it's hard to say how things will turn out.
The last 80 years have been a golden age. Almost a billion people raised out of poverty, hundreds of millions up to a reasonably middle class standard. Dramatic health care improvements for most of the planet. Political and economic stability unlike any previous eras. A precipitous decline in deaths from warfare. Pandemics and just plain local epidemics were frequent and caused carnage. In the 70s I knew few middle class people who had travelled internationally for leisure, now I barely know anyone who doesn’t (Here in Europe may differ from the US).
Yes I know there have been ups and downs, but nothing remotely like the utter existential devastation that would randomly strike previous generations. Just take a good look at any 80 year period prior to WW2 and compare it to the post war period. The difference is stark.
People have claimed gold was a hedge against inflation and financial asset bubbles for a long time. Sometimes it is even true. Of course gold has solidly underperformed the market for the last ten years (S&P 500 up hundreds of percent, gold flat).
The fact is there is not an investment that exist which will both perform as well as the stock market and be anti-correlated to the stock market during downturns.
Imo, this is not something to worry about too too much. If there is a big stock market crash, then you just hold on to your stock throughout. You'll get "poorer", but so will everyone else, since they are all invested the same as you are. For a member of the investor class, whose true needs are likely to be met under any foreseeable circumstance short of complete social collapse, the most important thing isn't maintaining a certain absolute level of wealth. It's maintaining a certain relative level of wealth. And the main way to do that is to avoid consumptive activities that significantly drain your capital at the bottom of a downturn.
If an economy is not growing then the value of productive capital in that economy will not grow either. That's the root of the problem in Japan, and it has little to do with temporary downturns like a stock bubble popping.
To be clear, I don't assert that maintaining relative wealth is the sole concern of an investor. There are others. But I think it's the most important aspect of sudden downturns provided that you still believe in the long term real growth of the productive capacity of the economy you're invested in. Also, if you don't believe in that, then the only practical alternative I'm aware of is to invest in an economy you believe in more, or to invest in a slice of the overall economy you think is more likely to grow. Failing that, there simply aren't any good options.
Are you saying that USA's economic productivity tripled the past 10 years? Because the stock market tripled. How many decades do you think it takes for USA to triple its productivity for real, so that it catches up to the stock market? That is how many decades the crash could set you back if this really is such a bubble.
> Are you saying that USA's economic productivity tripled the past 10 years?
No, that's obviously false. How could I believe that? I am observing that Japan's economy has had very little real growth over the 30 year period referenced by my parent commenter, and that that is the primary problem for investors over there. (The real GDP of the United States as measured by the Federal Reserve bank increased by 33% from 2010 to 2020 immediately before the pandemic, see: https://fred.stlouisfed.org/series/GDPC1.)
> How many decades do you think it takes for USA to triple its productivity for real, so that it catches up to the stock market? That is how many decades the crash could set you back if this really is such a bubble.
I think there are a bunch of assumptions here about how asset prices track the growth of GDP that may not be correct. But, the way I model it, it doesn't really matter if my absolute assets recover to a particular nominal dollar amount after a crash. What I'm mainly concerned about is that my share of the productive capacity of the US economy doesn't decrease, and that that economy as a whole (particularly the portion represented by publicly traded companies) continues to grow. As long as those two conditions are satisfied, I'm not terribly concerned about the dollar amount assigned to my portfolio.
What I'm chiefly concerned about is the amount of real consumption that my investments and labor entitle me to. And I believe that the best way to think about my investments in this context is the fraction of real production in the country that they represent, times the total amount of real production.
> What I'm mainly concerned about is that my share of the productive capital in the US economy doesn't decrease
But that can still result in negative returns on your investments, it protects you from losing everything but it doesn't protect you from losing a lot.
> But that can still result in negative returns on your investments.
Negative nominal returns, especially in the short term, yes. I don't dispute it, and if I said anything in the thread to suggest otherwise, I apologize. I'm concerned about long term real returns, in terms of something like purchasing power parity.
> Yes, the data does show that 2000-2009 was a lost decade for the S&P 500. Passive investing has been unfairly attacked in response to this data, however, because of a misperception of what a proper passive investing strategy is.
> Passive investing does not mean one should buy-and-forget, but rather that one should limit trading to periodic portfolio rebalancing. Those who proactively rebalanced their portfolios actually profited, even when investing in funds that tracked that S&P 500.
1. Bonds generally aren't there for returns, but to manage risk. When rebalancing (±5%) they end up being a form of 'dry powder' to buy equities during down turns.
2. While they may dampen returns (but also dips), one has to examine how much risk is actually needed to meet financial goals. Sure, more money is generally better, but not necessarily at the cost of other factors.
For some people, like retirees, it is not possible to hold. They will sell to limit losses and still allow themselves to retire. Give the great resignation, we just added millions of retirees who will sell to maintain their savings.
You make a good point. Nobody wants to retire during a recession, and the point of any investment is to draw upon it eventually. Waiting around for the economy to improve so you can retire is a nonstarter for a lot of folks.
Along these lines, my folks took a bath in 2008. They were using their stock holdings for cash flow. When the market tanked they had to sell more for the same cash flow. Historically, this made sense considering their class of holdings. 2008 was just a shot show.
It only seems like that because 10 years ago everything was going up. Everything is a bet. In bear markets most people lose money. Effectively here, you're just asking for "give me a sure thing" investment advice (which never works). If there was a sure thing to guarantee you wouldn't lose money everyone would do that. But yet we all still lose money.
My 2 cents is that the need for diversification is greater now than it used to be; I see both Ray Dalio and Grantham talk about this. How to and into what you should diversify is something you need to research, I'm no expert. What I'm doing is reallocating into relatively unloved assets classes (silver, emerging markets etc). Also having some cash on the side seems to make sense to me though many others disagree.
Being 100% invested in the S&P 500 is fine if you don't need the money in the upcoming decade, but the upside is likely not gonna be great.
We all know the saying that staying 100% invested in a low cost index fund (like S&P 500) is one of the best ways to increase wealth historically. And yet we all also know that in certain periods and countries this strategy failed miserably (such as investing in the U.S stock market before the great depression, before the dot com, or in Japan before Nikkei collapsed). When I say miserably I mean a lost decade or sometimes 2-3 decades like in Japan.
Grantham builds a strong case why this is now happening in the U.S. I hope he's wrong, I'm sure there will be a correction but hopefully it won't be that devastating, but I can't ignore what he's saying. Historically extreme overvaluation ended in corrections.
If you look at the 2009 crash, there is no such thing as diversification anymore. All asset classes around the world dropped except for US treasuries. There’s too much interdependency now among all asset classes. So thinking that diversification will save you from a systemic crash is wrong.
You're right. And if we look at other bubbles that burst then we can reach other conclusions than 2009. Who knows what the 2025 crash will be like; will the central banks be able to buy everyone out again? How do you do it if inflation is high? And also - if the Nasdaq takes a massive hit will people be so eager again to go in or will they prefer companies that actually have earnings?
Which is why you end up with one of the lowest risk highest return portfolios being 40% bonds, 20% gold, 40% equities. Diversification isn't dead. It may be harder to find, and a conventional bogle or 60/40 isnt the optimal answer.
Short to mid term inflation isn't that dangerous, sure ~5% loss isn't great but it's better then losing it all in the stock market. So I think being somewhat more liquid isn't the worst idea these days.
For smallish amounts (30k) you can buy i-bonds that have a 7% return.
Short horizons just hold cash or short term govt bonds/I bonds and stomach the loss. Long horizons hold index funds and ignore the ups/downs/blog posts/talking heads. Nothing’s really changed.
The answer is too complex.
I can safely say everyone in this thread knows shit about finance.
Short answer is a bunch of different uncorrrlated plays/tools such as:
-Volatility trades
-multi leg options on any asset class really
-credit markets
-algorithmic hedge funds
> If I have inflation fears, and I think we are in a stock bubble, where should I put my money.
Invest in the one thing you have the most control over -- yourself. Open or buy a business in a sector that has a clear path to profits (think laundromat, not some tech startup with unknown product market fit). Or get a degree for a new, higher paying career.
Otherwise you'll always be taking a bet on the federal reserve board, or Fortune 500 CEOs or wherever you decide to put your money.
How many new housing units are being built without laundry hookups? A laundromat is a terrible investment. The pool of customers will constantly shrink over time. They’re predatory, too: preying on people who can’t save enough money to buy a used $400 washer and dryer.
A laundromat was just an example. There are plenty of urban places where the revenue is going to be fairly stable... Or maybe increase as housing overcrowding increases due to limited apartment construction. I've lived in neighborhoods like this.
But you could also consider other commodity businesses like vending machines, cleaning services, corner stores, etc.
At this point, pretty much everyone has to participate in stocks in one way or another. We wouldn't have to do this if all the wealth wasn't going somewhere. If people aren't getting by unless there are multiple incomes and investments then they're being robbed at some level. Now the current advice is to throw your earnings into index funds. What next? Some kind of double-or-nothing grift?
I call this the "spaceship earth" problem: we're on a bounded planet with a heavily linked global economy. We're all linked together. The risks we're facing are also to a great extent global; pandemics, fuel supplies, climate change, local wars going nonlocal.
After a certain point you can't buy your way out of that. Do you think you could guarantee your fuel prices for the rest of your life, no matter what happens? Can you guarantee that your consumer goods prices will remain the same despite a global shipping jam? Do you think the prices of labour that you buy can be kept stable when a million more people are dead than expected in the US due to a pandemic? So how can you really inflation-protect an investment?
You have to invest in other things; personal, community and national resilience. Got to plant the occasional tree in whose shade you will not sit.
Thanks - I'm influenced by Keynes and "anything we can actually do we can afford" / the view that money maps to a share of real resources. The contrapositive of that is "if it can't actually be done, it doesn't matter how much money you have". The pandemic has reminded people that supply shocks are real and the market cannot magic capacity from nowhere at zero notice.
Growth provides more wealth. If the economy contracts - degrowth - somebody has to lose wealth. You can insure against that, move it to someone else, but like any kind of risk transfer that also costs money.
I also note there are very few things you can buy a 25 year supply of and store conveniently in your house (apart from "housing" itself as a good!), but solar panels almost count as this and are a good hedge against inflation.
Well target date funds can cushion the impact of market drops while still giving you most of the benefits of a rising market. I use vfifx but pick a year that coincides with when you may want to exit.
I also have a larger buffer of cash these days, and have a scheduled purchase of the target date funds weekly.
There's no magic safety net. You could try to bet against the market through the options market, but timing is everything.
I moved some bonds to Wellington Fund early in 2021 and got hit with it in December. I wasn't expecting a big capital gain w/o selling and am also re-thinking whether I want to be in this for 2022.
Ben Felix of the Rational Reminder podcast looked at different asset types as possible inflation hedges and came to the conclusion that there really aren't any:
> I'm genuinely asking. It seems like I'm being forced to make bets more so than 10 years ago.
You're no worse off than any other human being that has ever lived. The fact that we have better understanding of economics simply allows us to actually know about the problems that people in the past went through blindly.
Generally speaking, humans have never had it so good as we do now:
> ou can't make people happy by law. If you said to a bunch of average people two hundred years ago "Would you be happy in a world where medical care is widely available, houses are clean, the world's music and sights and foods can be brought into your home at small cost, travelling even 100 miles is easy, childbirth is generally not fatal to mother or child, you don't have to die of dental abcesses and you don't have to do what the squire tells you" they'd think you were talking about the New Jerusalem and say 'yes'.
You probably have a warm and comfortable place to live that doesn't take much effort/energy to keep going. You have easy access to food and aren't subsistence farming or worrying about starvation. You have clean water and sanitation. You have the access to the best medicine that humanity has ever known.
Take a step back and reflect on the blessings you have compared to your (great-(great-)grand-parents.
For money, personal finance isn't that complicated: spend less than you make and save a little each month for retirement:
I think this is actually unlikely in the 10-year horizon because everyone is so paranoid about it.
Right now mostly we're seeing supply-chain shocks, not durable inflation.
There is some data to back up the great resignation that there are fewer workers now and they have greater negotiation power. But we're a ways off from a general wage-price spiral, and I suspect that we're more likely to see aggressive policy action to kill that off, even if it tanks the economy.
Short term though I don't think this is the top of the bubble. Realistically the Fed isn't going to do that much over the next year or two, they move slowly. This correction will probably make them scared to act too quickly and they'll wait to see if it causes a reversion to stagnant wage growth.
What I would be most worried about right now is that over the next 2 years the wage growth seems to stick. That will cause the Fed to really panic about inflation and act like Volker to pop the bubble, which should unwind in a deflationary depression. The alternative is that the Fed does nothing and watches a 1970s-style wage-price spiral evolve (which I think would be the actual best outcome since it would be debt relief and would reduce wealth inequality). I don't think the Fed will do nothing though very clearly given how literally everyone is terrified of inflation and wants the Fed to tighten. Austerity is probably coming.
I don't know what you mean by significant problem. But the market is a bet on future global growth. If you can buy and hold (e.g. hold for 20-30 years in a retirement account) then I personally wouldn't worry. I'm still putting as much as I can in to my retirement which is 98% stock and 2% bonds (I'm in my early 30s).
Depends what stock market you're talking about. The GDP is a flow-variable measure of how much money traded hands in a year in an economy (national). It's supposed to function as a measure of yearly production. The market cap of companies within the NYSE, LSE, etc are stock variables. Literally the sums of all the current trading prices times the number of outstanding shares of each company (roughly).
There's lots of noise in all those variables. i.e. You probably couldn't fully liquidate every stock of a company at the exact, same price in one transaction. Talking about GDP for a nation can be varying levels of politically manipulated or just noisy from messy data. There's further noise introduced when trying to figure out a GDP for something like the global economy.
i.e. taking a ratio of stock market cap to a GDP is more like creating a metric without too much intrinsic theory for why to create the metric.
Even if it was 10x US GDP and it was only US stocks, there wouldn't be an obvious reason why that's a problem. The GDP measures yearly output. Why is it concerning for the stock market to be priced at 10 years of output?
The stock market valuation is essentially how much money will trickle up to the owners in the future. If owners expects to extract 10 years of productivity then that is a huge red flag, basically means that working isn't valued and instead all the value goes to the asset owners instead of the workers. So you can see the valuation multiple as the tax workers pays to asset owners, high taxes are bad for the economy.
People are betting US companies will outperform rest of the world by a huge margin, over the years US companies rely on huge influx of cheap money to sustain their growth. US stock market is propped up by a dozen of huge companies. About 75% of companies are valued below their 200 day average price, but you can’t see that looking at stock market. So what happens next is, growth of huge companies hits a wall. Take a look at Netflix price to get an idea how it looks like.
And as most of stock market is kept up by few companies, what happens if they start failing? US stock market crash.
Of course, that might happens soon, but it might be kept up for years. Bond yields are the key, they must not go down, not by a long shot.
I have no idea whether we’re in a massive bubble (or whether everything is simply more expensive because of inflation or both), but I have learned you should never blindly trust the advice of someone who uses terms like “two sigma” and “three sigma” without showing any of the math/statistics about what the mean is and why we are multiple standard deviations from it.
The market cap to US GDP indicator is probably a bit dated in that the world is so globalised these days so companies like Apple are getting a cut of global GDP rather than US GDP.
One of the (many) things I don't really understand is why whether the fed will raise interests rates or not is somewhat of an open question - Does anyone think these psychological games end up helping the economy long term?
You'd think that in such a system stable planning & execution would one of the more important aspects.
> Does anyone think these psychological games end up helping the economy long term?
Color me undecided, but I thought this argument was interesting. It's not directly related to the Fed, but it is about using mind games to benefit the economy.
It’s a pivotal question because so many things are coupled to it (tightly or loosely). If you guess correctly and position your investments to be helped by the next Fed announcement, it’s worth real money.
Note that no amount of changing the “openness” of this will help. If the Fed commits to announcing policy earlier, they make that commitment with less information and merely change the date on which investors’ outcomes are determined; there’s still value in predicting before whatever the new date is.
The wealthiest generation in U.S. history (boomers) are exiting the workforce, where will they park their retirement nest egg? Bonds and savings products (CDs etc) are paying historically low rates, and lose value as interest rates rise. There are few places for the typical boomer to park that capital other than the equity markets which have served them well for the last 30 years. It is unlikely they will exit the markets and hoard cash, especially with inflation fears.
Jeremy Grantham has a megaphone right now. Every single news site keeps repeating this. They also ignore the fact that the guy is a perpetual doomsayer.
> The wealthiest generation in U.S. history (boomers) are exiting the workforce, where will they park their retirement nest egg?
They will probably do what EU boomers in Spain, Greece, and Italy do, which is: suck as much money out of the younger generations as possible. Spain in particular is egregious. Older workers have every protection in the world, young have none. Pensions are 3x the salary of new workers. Taxes much higher on young people.
> The wealthiest generation in U.S. history (boomers) are exiting the workforce, where will they park their retirement nest egg?
This seems like a demographic argument for a downturn. Standard financial advice is to transition more into bonds as you approach and enter retirement. I suspect most boomers with retirement accounts will do so; either explicitly, because they are in a target date fund, or because their pension fund decides it needs to de-risk. The known downside of inflation is less of a concern than the risk of a loss if you are forced to sell during a downturn.
However, I suspect that will be a relativly minor effect compared with the bigger issue. Workers park their retirement money. Retirees spend it. Demand (and therefore prices) of both stocks and bonds will fall as the boomers switch from buying to selling in order to fund their lifestyle without working.
At a societal level, the idea of retirement savings is little more than an accounting trick. As a generation, the boomers are going to stop working, but continue consuming. Society needs to pay for that (in goods and services) somehow, which means that there will be comparatively less stuff available for everyone else.
What’s the hedge for this bubble? Cause I’ll be honest looks like most if not all assets classes are going to take a hammering. There seems to be no safe ports available.
Real estate is the safe harbor. It has intrinsic value. Low mortgage interest rates means cash flow can be manageable even if real asset prices drop. Population trends are predictable, so the future demand is basically a known factor.
Downsize is that it’s much less liquid than the average asset class.
It seems to me that real estate will be one of the first bubbles to pop big like it did in 2008. Long term you might be ok, but it could take 10 years to recover what you paid for it when considering inflation. If you are pessimistic, moving into real estate as a hedge seems like a bad idea.
You have to invest in something the herd isn't investing in. But since the herd currently is investing in index funds it means that basically everything will get hit once the herd changes their mind.
Real wealth is the hedge. Organizations which through there operations generate greater value than they consume. Lots of these are doing badly right now, but they have the potential to endure and provide small but steady payouts during a correction when all the big players get called on their bets.
If you think we're in a bubble and you think you might be able to exit it at just the right time, I highly recommend you read "A Short History of Financial Euphoria" by John Kenneth Galbraith.[a]
Here's one of my favorite passages from the book:
> There are those who are persuaded that some new price-enhancing circumstance is in control, and they expect the market to stay up and go up, perhaps indefinitely. It is adjusting to a new situation, a new world of greatly, even infinitely increasing returns and resulting values. Then there are those, superficially more astute and generally fewer in number, who perceive or believe themselves to perceive the speculative mood of the moment. They are in to ride the upward wave; their particular genius, they are convinced, will allow them to get out before the speculation runs its course. They will get the maximum reward from the increase as it continues; they will be out before the eventual fall.
> For built into this situation is the eventual and inevitable fall. Built in also is the circumstance that it cannot come gently or gradually. When it comes, it bears the grim face of disaster. That is because both of the groups of participants in the speculative situation are programmed for sudden efforts at escape. Something, it matters little what -- although it will always be much debated -- triggers the ultimate reversal. Those who had been riding the upward wave decide now is the time to get out. Those who thought the increase would be forever find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. Thus the collapse. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang. There will be occasion to see the operation of this rule frequently repeated.
> Although only a few observers have noted the vested interest in error that accompanies speculative euphoria, it is, nonetheless, an extremely plausible phenomenon. Those involved with the speculation are experiencing an increase in wealth -- getting rich or being further enriched. No one wishes to believe that this is fortuitous or undeserved; all wish to think that it is the result of their own superior insight or intuition. The very increase in values thus captures the thoughts and minds of those being rewarded. Speculation buys up, in a very practical way, the intelligence of those involved.
> This is particularly true of the first group noted above -- those who are convinced that values are going up permanently and indefinitely. But the errors of vanity of those who think they will beat the speculative game are also thus reinforced. As long as they are in, they have a strong pecuniary commitment to belief in the unique personal intelligence that tells them there will be yet more. In the last century, one of the most astute observers of the euphoric episodes common to those years was Walter Bagehot, financial writer and early editor of The Economist. To him we are indebted for the observation that "all people are most credulous when they are most happy."
Jeremy Grantham, the author of the OP, is the kind of person who never, ever wants to be in the first nor the second group.
One thing that is not clear is if the current run up has some inherent defect or economic malfunction it's relying on. Of course its a bubble because we don't know and we will know only when it pops. However, what I am trying to get at is, the economists and fed is acting as if the free money (at close to 0 rates) given over the last decade and even more so the last 2-3 yrs is causing this run up in prices. If that is the case and the fed raises rates, I saw another report which says the market always goes up when rates are raised -- https://www.marketwatch.com/story/get-ready-for-the-climb-he...
Point is, even though intuitively it feels like the bubble is close to popping we are not sure about it.
If economists can't make reliable predictions any better than randos on HN, then aren't they all essentially frauds? I don't care ehat school they went to; the occupation of "economist" seems rather worthless in 2022. It's one of those fields where no one's feet is held to the fire, there's no accountability, and they can make up all sorts of specious predictions.
There are a couple of reasons for popping now. Firstly some speculative stuff seems to have already peaked such as Quantumscape which he mentions. More fundamentally we have an issue with inflation. They can only really reign that back by raising rates which will be bad for the markets.
It would be nice to have a registry of predictions about the stock market, so one could group them by person doing the predicting and their track record. Without that I personally cannot take seriously the stories about impeding stock market crash that appear basically all the time.
The market is full of bulls and bears, and a large portion of why the market behaves how it behaves is how people expect the market to behave. This is a persuasive piece, attempting to manifest the future.
Unfortunately, you still can't trust someone who's been correct every single time. Considering that there's thousands of people giving predictions, there's likely going to be one person "winning" the coinflips.
We are fourteen years into an extraordinary boom in asset prices and fourty years into the bond bubble because boomers are frankly greedy and want to pillage as much of their respective country's wealth before they die.
However, the only thing stopping them, the only boomer boogeyman that has ever existed (other than maybe WWIII) has come out of the woodwork: inflation. And now it is somehow still "bears are wrong lol cassandra lol" or whatever? You have to be kidding me.
It must be really convenient to live during a time where your generation have large-scale control of media, politics, and the economy from when they turn 25 until they retire, conveniently inflating financial markets and selling the future of your children's generation so that you can retire early and spend more than your fair share of society's wealth on things that don't matter, just because you were jealous of your parents, who were actually needed in a time of real crisis.
I don't think that's true. He's been saying the market is high and will pop one day for a good part of the last 10 years but this is the first letter in that period to say it's popping. His record compared to other predictors is very good.
This is in opposition to the nature of markets. It is possible to detect overhang, but impossible to predict when a correction will occur or what the trigger will be. Articles like this talk about the nature of overhang and how it is corrected. What you are talking about is when the correction happens and at what velocity which is something else well apart from what this article discusses and potentially impossible to predict.
I'm not an expert, farm from it, I'm just curious and I've been following some assets classes for some years now, and I have to say that some markets have been acting crazy for quite some time.
And the pattern I've noticed was the shift from a type of investment, to a gamble.
For example, the collectibles market became insane, like everyone - including kids - thinking they will make a bank on Pokemon cards. Try to buy some old Nintendo games - all of a sudden everyone became retro game players? Or they are just selling stuff to each other? Or maybe a new hoard of investors thinks they can gamble and make bank on older games?
Real estate market the same thing, the amount of people that became millionaires because their house got a bump of 50%+ in value... even companies were willing to pay a premium to get access to housing.
Stock market has been pushing through, with lots of gamble stocks popping.
Either a big portion of the people got financially educated over the past few years a lot more people are smart investors and this is all normal because it's the price people are willing to pay to play the game in the long run, and this is all solid and sustainable, or a lot of these things are just bloated.
> Economists have predicted 10 of the last 3 crashes and all that.
There is some irony in this statement that many people do not realize. It was the economist Paul Samuelson that came up with the original saying:
> To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties.[18]
Anecdotally I sold all of my non retirement stocks and am sitting on cash. With climate change, an aging and contracting workforce, and asset bubbles due to the recent wealth transfers, I don't think we'll see these kind of stock market highs again without serious inflation.
I'll ride it out until there's more information on the Fed's plan to stem inflation, maybe wait for the midterms to shake out too.
Unlike 2008, there are multiple existential threats against the current status quo of the market--labor unrests and progressive movements, rising inflation that must be reduced, a fed committing to raising interest rates, antitrust busting that could/should tear apart the top S&P companies, and uber drivers giving folks stock advice. Smells like a crash to me.
It’d have to be physical, wouldn’t it? Otherwise it’s only a promise to give you the gold and a lot of pressure to accept some sort of exchange currency instead.
> Looking at data going back to 1930, the firm found that if an investor sat out the S&P 500′s 10 best days per decade, total returns would be significantly lower than the return for investors who waited it out.
> J.P. Morgan Asset Management's 2019 Retirement Guide[1] shows the impact that pulling out of the market has on a portfolio. Looking back over the 20-year period from Jan. 1, 1999, to Dec. 31, 2018, if you missed the top 10 best days in the stock market, your overall return was cut in half. That's a significant difference for only 10 days over two decades!
If I have cash, I can purchase other lucrative opportunities. Land. Businesses. Rental housing. Luxury properties. Real assets, income-generating assets.
Another thought: apparently meme-stock people are finding out that they don’t actually own their stock. Asking their broker to transfer their stock to the DRS, their trading representative has said “No.”
It turns out these retail investors do not effectively own the stock. They own an entry in the broker’s book. The broker controls the stock. They decide what to do do with it. Maybe they want to lend it to a friend for a few days. If you ask for it today, they’ll get it to you in a week. Promise. Definitely by corporate year-end!
Could be interesting times if there’s a high retail demand to have stocks directly registered to the DRS. Who really owns the stocks?
I honestly wonder if the Fed knows that the only way out of the current predicament is to cause large scale inflation such that incomes and earnings "catch up" to asset prices. Playing the current situation forward a couple things could happen.
1. Asset prices stay elevated, rates rise but find equilibrium - those who own assets will get paid more, but those who rent or earn income from assets will have to give a greater share of their money to those who own. Millenials who as a generation only own 2% of assets will get locked out of asset ownership for another 10+ year economic cycle. Millenials find that they only start accumulating assets through inheritance - with the vast majority of the generation locked out of entrepreneurship and meaningful equity.
2. Inflation rises, asset prices relative to incomes fall. Retirees lose most of their wealth while income earners in the Millenial generation are able to buy into the economy through savings. Due to the imbalance in asset ownership millenials on the whole do not suffer from inflation, but benefit through higher wages. Retirees will suffer due to substantially reduced purchasing power over 10-20 years as inflation eats into their stored wealth.
3. Asset prices fall, wages don't rise - This looks like the deferred deleveraging of '08 Everyone takes a hit - with large bankruptcies wiping out asset prices and employment suffering during the downturn. The only positive is that wage earners would once again be able to buy into the economy.
Given this outlook inflation seems like the best choice for policy makers. I'd doubt that it's sustainable to have an entire generation get locked out of the economy.
Do their records go public after a number of years (guessing many, like 50)? It would be interesting to have discussions like this enter the historical record and be available to researchers too.
> I honestly wonder if the Fed knows that the only way out of the current predicament is to cause large scale inflation such that incomes and earnings "catch up" to asset prices. Playing the current situation forward a couple things could happen.
I lived through periods of hyperinflation and constant high inflation, and in neither case income "caught up" with asset prices - in fact they made things much worse, throwing tons of people in absolute poverty.
Where has this worked as a solution, historically?
The thing is that the economy cannot go up and up forever. One of these guys will always be correct, and if you say something a couple of decades then you are bound to be right eventually.
There are some compelling points in the article, however the particular picture he sees those points forming is not necessarily that seen by all. We have all heard convincing alternative views regarding some of the assertions made ; thus cynicism (in the form of curious research and discussion) may be warranted here, regardless of author credentials. "The stakes are high" is rarely truer after all, in the pure economic sense.
Two points I considered additional:
- Let us not forget, regarding Japan's past 30yr economic situation (oft-cited in the article), the important co-factor of Japan's virtually unchanging population since 1990... vs the World's cumulative 50% population increase since 1990, with wider Asia the major contributor.
- I wonder how well 1929 really fits, in forming the group 1929-2000-2006-2021, called here "the 4 super-bubbles of the past century". What weighting it deserves within the set, considering it's anomalous temporal, cultural and political separation from the rest; perhaps reducing the already low n of the set around which the article hinges.
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[ 2.9 ms ] story [ 198 ms ] threadHe now says we are approaching the end of a “superbubble”
The stock market at 2x US GDP has concerned many for quite some time
https://www.forbes.com/sites/nicksargen/2021/09/02/us-stock-...
The “Buffett indicator“
https://en.m.wikipedia.org/wiki/Buffett_indicator
Mean reversion is a powerful force.
I'm genuinely asking. It seems like I'm being forced to make bets more so than 10 years ago.
That's not really accurate - the goal of the Fed and all central banks is to keep prices stable and employment levels optimal. If inflation is going out of control then prices won't be stable and employment won't be optimal, in such a case the stock market might have to take a hit. Also, it's pretty clear most central bankers understand the current inequality level is not good.
The only problem is that the fed really doesn’t have much more it can do. Interest rates are too low right now and the market can easily lose faith in the Fed which means utter chaos could occur and deflation will run rampant.
The entire edifice of the global financial system is anchored around real estate valuation (the dirt, not so much the improvements and not so much the price) and the network effects wrung out of it by the infrastructure accreted around it (most often paid by public taxation and the bulk of its monetization privatized), only made possible by the structural support embedded into credit finance, accounting and tax policies granted it as an asset class unique unto all others. There can be temporary price corrections, even deep ones, even lasting as much as a generation or two, but at this point so much is secularly bound to real estate valuation that it is one of the pins on the OR-gated-multi-pin hand grenade of single-planet-forever-growth economics.
Real-estate-the-dirt valuation is like the core tranches and/or core dynamic allocation strategy of one's investment thesis/theses, or the ballast in a ship. Forex dwarfs real estate as both a market and asset class, but policies do not treat forex as favorably over the long-term and in credit structures.
Also, for those who feel hard real estate market data (including visibility into contract terms) is opaque and inscrutably difficult to obtain, you're in for a treat when you get into the forex market (or for that matter, bonds, derivatives, etc.); pricing data is only the tip of the iceberg, and uniform cross-exchange visibility into order books is not seriously available in those markets the last time I investigated trading each of them (would love to be pointed in the right direction if I have my information wrong, though).
Depending upon how one models it, residential housing prices are like a second or third derivative off of the above opinionated, personal take on the key interrelationships with my embedded biases/prejudices/blindsights.
Once the first two tiers of Maslow's hierarchy are secured functionally into perpetuity at a stable "price", if I had to choose between putting wealth into dirt or into technological advancement to improve our mastery over energy (information being a valuable subset of energy), matter, and spacetime (solving distribution problem spaces being a valuable subset of spacetime), I'd choose the latter every time. In my personal opinion (YMMV of course), as a species we've sufficiently implemented the hypothesis that technological advancement is key to ever-improving conditions for the majority, such that it is worth at maybe a plurality subset of the species seeing where that path leads.
It’s really really hard as you get older and your hopefully accumulated savings are high relative to your current income and your expected remaining working life earnings.
In your 20s you can ride up a bubble, lose it all, and chalk it up to a cruddy learning experience. Later in life it gets exponentially harder because mistakes are permanent and irrecoverable. You can play the game and risk it in what seem like expensive assets. Or you can sit it out and fall behind without any compounding to create wealth and offset inflation. The latter option isn’t really an option unless you start with so much wealth that you can just spend down principal being eroded by inflation year after year and still have enough.
Good luck!
The problem with the future though is wide systemic problems vastly unlike seen previously. The US population will get smaller as the baby boomer generation is larger than its successive generations. That’s almost the definition of negative market growth and in some cases (health care) it is. That also looks like what Japan has undergone for the last several decades.
Climate change is a whole other bag of large systemic change likely to increasingly play out the younger the investor is.
My point here is the future 50 years will not be as rosey as the last 50 years. And the last 50 years haven’t been exactly rosey.
Edit-my proscription would be: people, not just investors, need to be willing to put in a lot of work and potentially ever increasing work into anticipating and acclimating to the world that’s headed our way. Study up on macroeconomics, micro, portfolio theory, some climate and migration patterns, and how your governments and institutions work. Maybe then you have a chance at survival. Also look for ways to make not just your life better but the conditions for life better for your neighbors, family, and future generations. Resist “tearing down the wall keeping the century-high tide away for the sake of a few pennies a brick.” Resist tearing down “the other” because while it might feel viscerally satisfying it actually creates an environment of prosecution and suffering that you will eventually suffer. Embrace the struggle of survival because it’s what we the living must do.
And all that money the boomers have accumulated, at least what they don't blow before dying, is going to be inherited. And the heirs are going to invest it, and the government is going to force them to spend it (or at least have it taxed) within 10 years of inheriting it.
No idea what effect this will have, but as usual, there are a lot of moving parts so it's hard to say how things will turn out.
Yes I know there have been ups and downs, but nothing remotely like the utter existential devastation that would randomly strike previous generations. Just take a good look at any 80 year period prior to WW2 and compare it to the post war period. The difference is stark.
The fact is there is not an investment that exist which will both perform as well as the stock market and be anti-correlated to the stock market during downturns.
Imo, this is not something to worry about too too much. If there is a big stock market crash, then you just hold on to your stock throughout. You'll get "poorer", but so will everyone else, since they are all invested the same as you are. For a member of the investor class, whose true needs are likely to be met under any foreseeable circumstance short of complete social collapse, the most important thing isn't maintaining a certain absolute level of wealth. It's maintaining a certain relative level of wealth. And the main way to do that is to avoid consumptive activities that significantly drain your capital at the bottom of a downturn.
To be clear, I don't assert that maintaining relative wealth is the sole concern of an investor. There are others. But I think it's the most important aspect of sudden downturns provided that you still believe in the long term real growth of the productive capacity of the economy you're invested in. Also, if you don't believe in that, then the only practical alternative I'm aware of is to invest in an economy you believe in more, or to invest in a slice of the overall economy you think is more likely to grow. Failing that, there simply aren't any good options.
No, that's obviously false. How could I believe that? I am observing that Japan's economy has had very little real growth over the 30 year period referenced by my parent commenter, and that that is the primary problem for investors over there. (The real GDP of the United States as measured by the Federal Reserve bank increased by 33% from 2010 to 2020 immediately before the pandemic, see: https://fred.stlouisfed.org/series/GDPC1.)
> How many decades do you think it takes for USA to triple its productivity for real, so that it catches up to the stock market? That is how many decades the crash could set you back if this really is such a bubble.
I think there are a bunch of assumptions here about how asset prices track the growth of GDP that may not be correct. But, the way I model it, it doesn't really matter if my absolute assets recover to a particular nominal dollar amount after a crash. What I'm mainly concerned about is that my share of the productive capacity of the US economy doesn't decrease, and that that economy as a whole (particularly the portion represented by publicly traded companies) continues to grow. As long as those two conditions are satisfied, I'm not terribly concerned about the dollar amount assigned to my portfolio.
What I'm chiefly concerned about is the amount of real consumption that my investments and labor entitle me to. And I believe that the best way to think about my investments in this context is the fraction of real production in the country that they represent, times the total amount of real production.
But that can still result in negative returns on your investments, it protects you from losing everything but it doesn't protect you from losing a lot.
Negative nominal returns, especially in the short term, yes. I don't dispute it, and if I said anything in the thread to suggest otherwise, I apologize. I'm concerned about long term real returns, in terms of something like purchasing power parity.
Or the folks who held S&P 500 in the 2000s. But the lesson is simple: diversify.
A 60/40 Japan equities/bonds portfolio would have ben fine:
* https://gfmasset.com/2020/01/60-40-has-worked-well-even-in-j...
Same as for the S&P 500:
> Yes, the data does show that 2000-2009 was a lost decade for the S&P 500. Passive investing has been unfairly attacked in response to this data, however, because of a misperception of what a proper passive investing strategy is.
> Passive investing does not mean one should buy-and-forget, but rather that one should limit trading to periodic portfolio rebalancing. Those who proactively rebalanced their portfolios actually profited, even when investing in funds that tracked that S&P 500.
* https://www.forbes.com/sites/investor/2010/12/17/the-lost-de...
these days 60/40 is considered pretty conservative. in this environment holding to bonds means you're losing out to inflation.
2. While they may dampen returns (but also dips), one has to examine how much risk is actually needed to meet financial goals. Sure, more money is generally better, but not necessarily at the cost of other factors.
It's hardly ever been true. Erb and Harvey wrote two papers on this and found gold isn't useful:
* https://www.nber.org/papers/w18706
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2639284
Harvey's main claim to fame is his observation of the yield curve inversion occurrence before US recessions.
> If there is a big stock market crash, then you just hold on to your stock throughout.
Good investing fable that runs the numbers:
> Meet Bob.
> Bob is the world’s worst market timer.
> What follows is Bob’s tale of terrible timing of his stock purchases.
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
In the accumulation phase of your financial journey there is only one rule:
* https://ofdollarsanddata.com/just-keep-buying/
We all know the saying that staying 100% invested in a low cost index fund (like S&P 500) is one of the best ways to increase wealth historically. And yet we all also know that in certain periods and countries this strategy failed miserably (such as investing in the U.S stock market before the great depression, before the dot com, or in Japan before Nikkei collapsed). When I say miserably I mean a lost decade or sometimes 2-3 decades like in Japan.
Grantham builds a strong case why this is now happening in the U.S. I hope he's wrong, I'm sure there will be a correction but hopefully it won't be that devastating, but I can't ignore what he's saying. Historically extreme overvaluation ended in corrections.
> All asset classes around the world dropped except for US treasuries
kind of invalidate your first statement?
> there is no such thing as diversification anymore
https://portfoliocharts.com/portfolio/golden-butterfly/
https://portfoliocharts.com/portfolio/risk-and-return/
https://portfoliocharts.com/portfolio/portfolio-matrix/
This time there's a good chance of runaway US dollar inflation getting worse. In the 2008 crash, the dollar was reasonably steady.
For smallish amounts (30k) you can buy i-bonds that have a 7% return.
Short answer is a bunch of different uncorrrlated plays/tools such as: -Volatility trades -multi leg options on any asset class really -credit markets -algorithmic hedge funds
Etc
Invest in the one thing you have the most control over -- yourself. Open or buy a business in a sector that has a clear path to profits (think laundromat, not some tech startup with unknown product market fit). Or get a degree for a new, higher paying career.
Otherwise you'll always be taking a bet on the federal reserve board, or Fortune 500 CEOs or wherever you decide to put your money.
But you could also consider other commodity businesses like vending machines, cleaning services, corner stores, etc.
Backed by the United States Government, yield is some low percentage plus the inflation rate.
After a certain point you can't buy your way out of that. Do you think you could guarantee your fuel prices for the rest of your life, no matter what happens? Can you guarantee that your consumer goods prices will remain the same despite a global shipping jam? Do you think the prices of labour that you buy can be kept stable when a million more people are dead than expected in the US due to a pandemic? So how can you really inflation-protect an investment?
You have to invest in other things; personal, community and national resilience. Got to plant the occasional tree in whose shade you will not sit.
Growth provides more wealth. If the economy contracts - degrowth - somebody has to lose wealth. You can insure against that, move it to someone else, but like any kind of risk transfer that also costs money.
I also note there are very few things you can buy a 25 year supply of and store conveniently in your house (apart from "housing" itself as a good!), but solar panels almost count as this and are a good hedge against inflation.
I also have a larger buffer of cash these days, and have a scheduled purchase of the target date funds weekly.
There's no magic safety net. You could try to bet against the market through the options market, but timing is everything.
https://www.mymoneyblog.com/vanguard-target-retirement-funds...
Ben Felix of the Rational Reminder podcast looked at different asset types as possible inflation hedges and came to the conclusion that there really aren't any:
* https://rationalreminder.ca/podcast/150
> I'm genuinely asking. It seems like I'm being forced to make bets more so than 10 years ago.
You're no worse off than any other human being that has ever lived. The fact that we have better understanding of economics simply allows us to actually know about the problems that people in the past went through blindly.
Generally speaking, humans have never had it so good as we do now:
> ou can't make people happy by law. If you said to a bunch of average people two hundred years ago "Would you be happy in a world where medical care is widely available, houses are clean, the world's music and sights and foods can be brought into your home at small cost, travelling even 100 miles is easy, childbirth is generally not fatal to mother or child, you don't have to die of dental abcesses and you don't have to do what the squire tells you" they'd think you were talking about the New Jerusalem and say 'yes'.
* Terry Pratchett, http://groups.google.com/group/alt.fan.pratchett/msg/ee9e9fb...
You probably have a warm and comfortable place to live that doesn't take much effort/energy to keep going. You have easy access to food and aren't subsistence farming or worrying about starvation. You have clean water and sanitation. You have the access to the best medicine that humanity has ever known.
Take a step back and reflect on the blessings you have compared to your (great-(great-)grand-parents.
For money, personal finance isn't that complicated: spend less than you make and save a little each month for retirement:
* https://en.wikipedia.org/wiki/The_Index_Card
It'll work out if you don't go crazy/stupid with your paycheque.
Not financial advice...
Pay off your mortgage faster than required, if you have one?
If interest rates might go up significantly, I figure every $/£/€ you don't owe is a good one.
Keep the money in the market and ride it out for the long term.
I see no signs that this is going to change in the short term.
I think this is actually unlikely in the 10-year horizon because everyone is so paranoid about it.
Right now mostly we're seeing supply-chain shocks, not durable inflation.
There is some data to back up the great resignation that there are fewer workers now and they have greater negotiation power. But we're a ways off from a general wage-price spiral, and I suspect that we're more likely to see aggressive policy action to kill that off, even if it tanks the economy.
Short term though I don't think this is the top of the bubble. Realistically the Fed isn't going to do that much over the next year or two, they move slowly. This correction will probably make them scared to act too quickly and they'll wait to see if it causes a reversion to stagnant wage growth.
What I would be most worried about right now is that over the next 2 years the wage growth seems to stick. That will cause the Fed to really panic about inflation and act like Volker to pop the bubble, which should unwind in a deflationary depression. The alternative is that the Fed does nothing and watches a 1970s-style wage-price spiral evolve (which I think would be the actual best outcome since it would be debt relief and would reduce wealth inequality). I don't think the Fed will do nothing though very clearly given how literally everyone is terrified of inflation and wants the Fed to tighten. Austerity is probably coming.
What exactly you buy to achieve that I'm not sure.
It really looks like it's too stretched, and more volitile in recent years.
[1] https://cmv.imgix.net/2022-01-13-BI-3-Mkt-to-GDP.png?w=660&d...
Genuinely curious, since the stock market is global, can’t it be twice the US GDP without it being a significant problem?
There's lots of noise in all those variables. i.e. You probably couldn't fully liquidate every stock of a company at the exact, same price in one transaction. Talking about GDP for a nation can be varying levels of politically manipulated or just noisy from messy data. There's further noise introduced when trying to figure out a GDP for something like the global economy.
i.e. taking a ratio of stock market cap to a GDP is more like creating a metric without too much intrinsic theory for why to create the metric.
And as most of stock market is kept up by few companies, what happens if they start failing? US stock market crash.
Of course, that might happens soon, but it might be kept up for years. Bond yields are the key, they must not go down, not by a long shot.
You'd think that in such a system stable planning & execution would one of the more important aspects.
Color me undecided, but I thought this argument was interesting. It's not directly related to the Fed, but it is about using mind games to benefit the economy.
https://www.interfluidity.com/v2/2669.html
Note that no amount of changing the “openness” of this will help. If the Fed commits to announcing policy earlier, they make that commitment with less information and merely change the date on which investors’ outcomes are determined; there’s still value in predicting before whatever the new date is.
Jeremy Grantham has a megaphone right now. Every single news site keeps repeating this. They also ignore the fact that the guy is a perpetual doomsayer.
I imagine a good part of it is already parked in stocks.
But since it's s retirement nest egg and they're getting retired, won't they just start spending it?
They will probably do what EU boomers in Spain, Greece, and Italy do, which is: suck as much money out of the younger generations as possible. Spain in particular is egregious. Older workers have every protection in the world, young have none. Pensions are 3x the salary of new workers. Taxes much higher on young people.
This seems like a demographic argument for a downturn. Standard financial advice is to transition more into bonds as you approach and enter retirement. I suspect most boomers with retirement accounts will do so; either explicitly, because they are in a target date fund, or because their pension fund decides it needs to de-risk. The known downside of inflation is less of a concern than the risk of a loss if you are forced to sell during a downturn.
However, I suspect that will be a relativly minor effect compared with the bigger issue. Workers park their retirement money. Retirees spend it. Demand (and therefore prices) of both stocks and bonds will fall as the boomers switch from buying to selling in order to fund their lifestyle without working.
At a societal level, the idea of retirement savings is little more than an accounting trick. As a generation, the boomers are going to stop working, but continue consuming. Society needs to pay for that (in goods and services) somehow, which means that there will be comparatively less stuff available for everyone else.
Maybe best bet is to choose some less overheated areas which are stable enough to carry through any type of upheaval.
Downsize is that it’s much less liquid than the average asset class.
Here's one of my favorite passages from the book:
> There are those who are persuaded that some new price-enhancing circumstance is in control, and they expect the market to stay up and go up, perhaps indefinitely. It is adjusting to a new situation, a new world of greatly, even infinitely increasing returns and resulting values. Then there are those, superficially more astute and generally fewer in number, who perceive or believe themselves to perceive the speculative mood of the moment. They are in to ride the upward wave; their particular genius, they are convinced, will allow them to get out before the speculation runs its course. They will get the maximum reward from the increase as it continues; they will be out before the eventual fall.
> For built into this situation is the eventual and inevitable fall. Built in also is the circumstance that it cannot come gently or gradually. When it comes, it bears the grim face of disaster. That is because both of the groups of participants in the speculative situation are programmed for sudden efforts at escape. Something, it matters little what -- although it will always be much debated -- triggers the ultimate reversal. Those who had been riding the upward wave decide now is the time to get out. Those who thought the increase would be forever find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. Thus the collapse. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang. There will be occasion to see the operation of this rule frequently repeated.
> Although only a few observers have noted the vested interest in error that accompanies speculative euphoria, it is, nonetheless, an extremely plausible phenomenon. Those involved with the speculation are experiencing an increase in wealth -- getting rich or being further enriched. No one wishes to believe that this is fortuitous or undeserved; all wish to think that it is the result of their own superior insight or intuition. The very increase in values thus captures the thoughts and minds of those being rewarded. Speculation buys up, in a very practical way, the intelligence of those involved.
> This is particularly true of the first group noted above -- those who are convinced that values are going up permanently and indefinitely. But the errors of vanity of those who think they will beat the speculative game are also thus reinforced. As long as they are in, they have a strong pecuniary commitment to belief in the unique personal intelligence that tells them there will be yet more. In the last century, one of the most astute observers of the euphoric episodes common to those years was Walter Bagehot, financial writer and early editor of The Economist. To him we are indebted for the observation that "all people are most credulous when they are most happy."
Jeremy Grantham, the author of the OP, is the kind of person who never, ever wants to be in the first nor the second group.
--
[a] https://www.amazon.com/History-Financial-Euphoria-Penguin-Bu...
Point is, even though intuitively it feels like the bubble is close to popping we are not sure about it.
However, the only thing stopping them, the only boomer boogeyman that has ever existed (other than maybe WWIII) has come out of the woodwork: inflation. And now it is somehow still "bears are wrong lol cassandra lol" or whatever? You have to be kidding me.
I'm not an expert, farm from it, I'm just curious and I've been following some assets classes for some years now, and I have to say that some markets have been acting crazy for quite some time.
And the pattern I've noticed was the shift from a type of investment, to a gamble.
For example, the collectibles market became insane, like everyone - including kids - thinking they will make a bank on Pokemon cards. Try to buy some old Nintendo games - all of a sudden everyone became retro game players? Or they are just selling stuff to each other? Or maybe a new hoard of investors thinks they can gamble and make bank on older games?
Real estate market the same thing, the amount of people that became millionaires because their house got a bump of 50%+ in value... even companies were willing to pay a premium to get access to housing.
Stock market has been pushing through, with lots of gamble stocks popping.
Either a big portion of the people got financially educated over the past few years a lot more people are smart investors and this is all normal because it's the price people are willing to pay to play the game in the long run, and this is all solid and sustainable, or a lot of these things are just bloated.
There is some irony in this statement that many people do not realize. It was the economist Paul Samuelson that came up with the original saying:
> To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties.[18]
* https://en.wikipedia.org/wiki/Paul_Samuelson#Aphorisms_and_q...
I'll ride it out until there's more information on the Fed's plan to stem inflation, maybe wait for the midterms to shake out too.
This is a bad idea. Even if you could predict when the dip occurs—which is impossible—it's still better to be in the market:
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
While you may miss the bad days, you will almost certainly miss the good days—and those are key to getting good long-term returns:
> If you missed just the 25 strongest days in the stock market since 1990, you might as well have been in five year treasury notes.
* https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-...
> Looking at data going back to 1930, the firm found that if an investor sat out the S&P 500′s 10 best days per decade, total returns would be significantly lower than the return for investors who waited it out.
* https://www.cnbc.com/2021/03/24/this-chart-shows-why-investo...
> J.P. Morgan Asset Management's 2019 Retirement Guide[1] shows the impact that pulling out of the market has on a portfolio. Looking back over the 20-year period from Jan. 1, 1999, to Dec. 31, 2018, if you missed the top 10 best days in the stock market, your overall return was cut in half. That's a significant difference for only 10 days over two decades!
* https://www.fool.com/investing/2019/04/11/what-happens-when-...
Just a thought.
It turns out these retail investors do not effectively own the stock. They own an entry in the broker’s book. The broker controls the stock. They decide what to do do with it. Maybe they want to lend it to a friend for a few days. If you ask for it today, they’ll get it to you in a week. Promise. Definitely by corporate year-end!
Could be interesting times if there’s a high retail demand to have stocks directly registered to the DRS. Who really owns the stocks?
1. Asset prices stay elevated, rates rise but find equilibrium - those who own assets will get paid more, but those who rent or earn income from assets will have to give a greater share of their money to those who own. Millenials who as a generation only own 2% of assets will get locked out of asset ownership for another 10+ year economic cycle. Millenials find that they only start accumulating assets through inheritance - with the vast majority of the generation locked out of entrepreneurship and meaningful equity.
2. Inflation rises, asset prices relative to incomes fall. Retirees lose most of their wealth while income earners in the Millenial generation are able to buy into the economy through savings. Due to the imbalance in asset ownership millenials on the whole do not suffer from inflation, but benefit through higher wages. Retirees will suffer due to substantially reduced purchasing power over 10-20 years as inflation eats into their stored wealth.
3. Asset prices fall, wages don't rise - This looks like the deferred deleveraging of '08 Everyone takes a hit - with large bankruptcies wiping out asset prices and employment suffering during the downturn. The only positive is that wage earners would once again be able to buy into the economy.
Given this outlook inflation seems like the best choice for policy makers. I'd doubt that it's sustainable to have an entire generation get locked out of the economy.
I lived through periods of hyperinflation and constant high inflation, and in neither case income "caught up" with asset prices - in fact they made things much worse, throwing tons of people in absolute poverty.
Where has this worked as a solution, historically?
Two points I considered additional:
- Let us not forget, regarding Japan's past 30yr economic situation (oft-cited in the article), the important co-factor of Japan's virtually unchanging population since 1990... vs the World's cumulative 50% population increase since 1990, with wider Asia the major contributor.
- I wonder how well 1929 really fits, in forming the group 1929-2000-2006-2021, called here "the 4 super-bubbles of the past century". What weighting it deserves within the set, considering it's anomalous temporal, cultural and political separation from the rest; perhaps reducing the already low n of the set around which the article hinges.