11 ms·

Is a Crash Coming? Reasons to Be Cautious

119 points by andrewljohnson 16y ago

enjo 16y ago
Here we are again, trying to talk ourselves into another crash. I really don't understand the Journals (in particular) fascination with doomsday. For every item on the list you can point to trends that are positive for the exact same metric. Like (there are a lot of other examples): http://online.wsj.com/article/BT-CO-20100726-710938.html http://online.wsj.com/article/BT-CO-20100726-710938.html I agree that the economy is quite uncertain right now. However, waving the flag of doom isn't really productive at this point. Particularly when you're cherry picking data to arrive at what appears to be a foregone conclusion. I don't know if it's a fascination with disaster or (I suspect) more politically motivated. Either way, it makes you no better than this guy: http://lamarhowell.files.wordpress.com/2009/01/the-end-is-near.jpg http://lamarhowell.files.wordpress.com/2009/01/the-end-is-ne...
- deleted 16y ago
  [deleted]
- startuprules 16y ago
  Here we are again, trying to convince ourselves that the boat is still sinking. I really don't understand the lower galley's fascination with drowning. For every item on the list you can point to trends that are positive for the exact same metric. The boat is still afloat. I agree that the availability of fine wine is quite uncertain right now. However, waving the flag of doom isn't really productive at this point. Either way, it makes you no better than that Jack Dawson guy.
  - jerf 16y ago
    I'm really beginning to hate that argument form more than Affirming the Consequent. What exactly do you think you've demonstrated? What valuable point have you established?
    - startuprules 16y ago
      What purpose did your meta comment serve?
      - jerf 16y ago
        I gave you feedback that your argument was terrible. Step up your game.
- sbov 16y ago
  More than doomsday, they play to fears. Back in 2005 it was about DOW 30k and how what a gem real estate was. The fear then was to being "priced out forever". Buy now or lose out, because your puny income won't compare with how much a 100 square foot shack costs in 10 years. Now its about DOW 1k and losing everything you own.
  - matwood 16y ago
    I never understood how anyone could believe the priced out forever argument. A friend tried to argue it to me, but could never explain if everyone is priced out then who is left to buy? It just never made any sense to me even at the high point of the bubble. I was successful at keeping 2 of my friends from making horrible financial decisions, but a third went ahead anyway. Now she's stuck owning a crappy apartment with an upward adjusting mortgage.
- fleitz 16y ago
  We aren't talking ourselves into a crash, we're spending ourselves into a crash by allocating the funds for rebuilding the economy to those that destroyed it and hoping that they don't decide to make the same mistakes again. Wishful thinking can't save an economy, but it can create a bubble.
- jonknee 16y ago
  > I really don't understand the Journals (in particular) fascination with doomsday. Because Democrats are in control?
jsz0 16y ago
I'm skeptical of the doom & gloom stories a few months before an important election. The numbers don't look great but it could be a lot worse.
- mkramlich 16y ago
  And with the economy, perception can become reality. If a player has a large enough bullhorn they can spew forth Messages that, if enough people believe them or act on them, can nudge economic reality in whatever direction they'd like. The WSJ is one such bullhorn.
Revisor 16y ago
The crash is not coming, it's just returning. The original one was never over. Its effects were just postponed by pouring money in it (aka bailouts and buy-outs). The real reasons - ultra high debt of all players, errors in the system, for-profit players not controllable by the three political branches - were not remedied, in fact they might have been even worsened (the debt increased because of the bailouts).
- cynicalkane 16y ago
  Why does this have 23 upvotes? Nothing of any substance is stated here. Vague comments about "the players" and "the debt"--what players? Whose debt? To what extent an opinion can be extracted from this post, it's wrong. For example, I don't know who "the players" he refers to are, but my guess is they are supposed to be for profit.
  - joe_the_user 16y ago
    Because it's true?? Seriously, those who have studied this for a while pretty much know the situation. Sorry if it seems vague to you. The players are large bank, investment houses, and the Federal government at the least. But even more, the entire housing market was temporarily re-inflated to sustain the massive over-valuations that built up over the last ten-twenty years. Of course, all the other bubbles; medical, student loans, etc depended on this inflating to keep going (and there's a Chinese property bubble too btw). Did you notice the auction rate bond market cease to exist around the time of the crisis? We are in a fragile respite from result of the unsustainable economy of 2001-2007 (or longer). Seriously, in 2008, a boulder rolled half-way down a hill and massive world wide spending brought it to a halt. Sorry if I can't give a single factual pointer to all this stuff. It's more a matter of the economy's "big picture". I would recommend Doug Noland's Credit Bubble Bulletin. I'd especially recommend the earlier issue, where he extend's Hyman Minksky's idea of Ponzi finance. http://www.safehaven.com/author/2/doug-noland http://www.safehaven.com/author/2/doug-noland
  - Rexxar 16y ago
    I understand "all players" as "households + companies + banks + governments"
prewett 16y ago
I'm a little skeptical of claim #1. According to Reuters, the P/E of the S&P 500 is at 16.1 (see http://www.reuters.com/finance/stocks/financialHighlights?symbol=KO http://www.reuters.com/finance/stocks/financialHighlights?sy...; look in the "Valuation Ratios" section in the right-most column). If 16 is the average, then the market is fairly priced. The Schiller figure he references might include all publicly traded companies. If so, it might suggest that less well-known companies (outside the 500 most popular) are over-priced. But since the 500 most popular drive the market, you can't conclude a crash from that. Most large-cap companies I have been looking at are trading at 15 year lows for the P/E, and at close to 15 year highs for dividend ratios. They still might be over-priced in an absolute sense, but we haven't seen prices this good in 15 years.
- MikeCapone 16y ago
  "If 16 is the average, then the market is fairly priced." I'd rephrase that as something like: If 16 is the average, then the current market isn't historically overpriced. It could still be overpriced or underpriced. The historical average is just that. Current fundamentals aren't necessarily "average".
- vomjom 16y ago
  The article doesn't make it very clear, but Shiller's number is based on the average inflation-adjusted earnings of the previous 10 years. See the Excel file here: http://www.econ.yale.edu/~shiller/data.htm http://www.econ.yale.edu/~shiller/data.htm The stock market is still very highly priced compared to historical standards (excluding the past 15 or so years). See also the graphs on: http://en.wikipedia.org/wiki/Robert_Shiller http://en.wikipedia.org/wiki/Robert_Shiller
  - prewett 16y ago
    I downloaded his Excel sheet (which has more recent numbers than Wikipedia). I'm not sure what he means by "real price" and "real earnings" (as opposed to "reported earnings"?). But if I add a column for "real P/E", it puts us at just under 20, which is on the historical high end. So, following the trend in his data, I would expect the P/E to gradually decline to 15 or so, maybe even down to 10. (Under 10, buy like mad.) However, his data show gradual rises and then declines over a period of 20 - 40 years or so. These are punctuated with sharp drops, but according to these data, I would expect the next correction to drop us down to maybe 18 at most. From some cursory chart exploration on yahoo, it looks like large-caps might not follow the market moves as much. Mar 2009 was about 50% of the S&P 500's current level, but KO only differed by 30% and JNJ only varied by 10%. I'd say solid dividend companies are not necessarily overpriced.
startuprules 16y ago
Actually, the pink elephant in the room is the huge corporate debt - total domestic debts at 7.2 Trillions. "American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression. Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP. That's a postwar record. In 1945, it was just 20%. Even at the credit-bubble peaks in the late 1980s and 2005-06, it was only around 45%." http://www.marketwatch.com/story/the-biggest-lie-about-us-companies-2010-08-03 http://www.marketwatch.com/story/the-biggest-lie-about-us-co...
varjag 16y ago
Insightful piece. However I feel it is not correct to measure deflation by housing prices, since they are never factored in inflation index firstplace.
- mistermann 16y ago
  But the debt behind the houses will default, resulting in deflation. You're talking about the CPI, which always only measured owner equivalent rent (so they could hide the inflation).
  - varjag 16y ago
    But is there any widely used inflation index that takes house prices into account? It is bound to show tremendous inflation, yet we never see that kind of figures.
    - mistermann 16y ago
      Not that I know of. The Shiller index was one of the best metrics for prices themselves but didn't relate to relative inflation that I know of, the math would be easy enough.
dangrossman 16y ago
I should really avoid reading pieces like this. Tempts me to pull out of the market again even though I intended to hold my investments for decades anyway -- I only buy big ol' corporations that pay good dividends.
- rue 16y ago
  > Tempts me to pull out of the market again [...] Which is how crashes happen in an imaginary economy.
  - mkramlich 16y ago
    That's what is so crazy about the stock market. There's a strong self-fulfilling prophecy effect caused by mob decisions. If enough people think the stock market will go up, there's a surge in demand to buy stocks and so stock prices go up. If enough people think it will go down, they sell, and prices go down. Funny that. So the real money may be in being the minority better, especially if you had some way of predicting what the masses will do next so you can take a position that will be profitable for you once the masses start betting. Thus, there's incentive to do a sort of front-running operation but on a huge scale. And to do it you need a media operation of some sort, and possibly some propaganda organs. Any guesses as to whether these theoretical entities already exist?
dennisgorelik 16y ago
I totally lost any trust to the author of that article after I've read this: > 9. We're looking at gridlock in Washington. Gridlock in Washington is a good thing for economy. Government is not capable to interfere with business and spends less -- the result -- boom in the economy which we observed in ~1994-2000 ("Clinton with Republican Congress" era).
- akadien 16y ago
  Beware the blanket assumption of 'gridlock is good". Gridlock in DC is good when it meant the rate of damage done is scaled back. It's not good when it means hard choices (spending reductions) aren't made. I read 'gridlock' as more of the same: kicking the can down the road, more pork, etc. But, I'm kidding myself to think that DC would make the hard choices.
- leot 16y ago
  All the unemployed could, and probably should, be put to work building/restoring public infrastructure. None are now because that would be "socialism". It is a fun/depressing exercise to imagine how you would improve the US if you had 14.5 million (http://www.bls.gov/news.release/empsit.t12.htm http://www.bls.gov/news.release/empsit.t12.htm) people to order about.
  - leot 16y ago
    Well, I suppose that came out sounding a bit communist, and OT. Fwiw, the point was that, if there's gridlock, then there's no hope of seeing any of the needed job-and-value-creating investment in public infrastructure development.
cynicalkane 16y ago
This just in: an uniformed writer has ten reasons not to invest. In other news, there's unrest in the Middle East. Almost nobody in the world can predict stock trends profitably. You especially cannot predict stock trends from articles in the paper. In general, people smart enough to predict stock trends and understand the macro factors will be working in stocks, not writing second-rate personal finance pieces for the WSJ. (Also, the article essentially begins with, "I don't make predictions... but here are 10 reasons I predict a crash might happen". How silly.)
- Confusion 16y ago
  In general, people smart enough to predict stock trends and understand the macro factors will be working in stocks, not writing second-rate personal finance pieces for the WSJ. In general, a reputable paper like the WSJ will hire people that are smart enough to predict stock trend and understand the macro factors, people that may be working in stocks, to write finance pieces. You provide no arguments to support your assertion that the writer is uninformed. The only argument is a single broad stroke that implies that nobody with enough understanding of the subject writes for any newspaper, which is easily refuted by all the articles written by exactly such people over the years.
  - cynicalkane 16y ago
    In general, a reputable paper like the WSJ will hire people that are smart enough to predict stock trend and understand the macro factors This is not true at all and I don't know where this is coming from. The signal to noise ratio in the mainstream media's personal finance pages is famously low. The WSJ is known for its reporting, not its investment advice. And had you bothered to look up the author on Wikipedia, you would have seen he doesn't work in equities, and apparently never has. Sure, the author might turn out to be a genius who identified all the factors that will lead to the next big crash--if so, how come the genius reasoning is not evident in the article? Assertions like the second item--'the Fed is buying Treasuries, must mean they're nervous'--are presented in an unconvincing way. I assumed it was self-evident that these claims were unconvincing, but apparently it wasn't so. So here's why that claim, among others, was uninformed: the Fed's stated policy is actually to not change the size of their portfolio of securities held outright. The treasury purchases are offsetting principal payments of other debt. The neutrality of this policy does not suggest 'nervousness' at all. http://www.newyorkfed.org/markets/opolicy/operating_policy_100810.html http://www.newyorkfed.org/markets/opolicy/operating_policy_1...
c1sc0 16y ago
Wow, a top 10 list article the the WSJ. I totally expect the US market to go down again for the simple reason that right now, the US looks like a failing empire that can't pay its bills on all levels from consumers to government.
- phjohnst 16y ago
  Indeed, but remember that there as long as the collectors don't come knocking, whether or not you can pay at any one moment is irrelevant. In this case, it would take China calling in its US loans to adversely affect the States' ability to maintain, and even extend their levels of debt. For various reasons (the least of which is not that the US is the largest importer of goods from China) this isn't likely to happen. At worst China just moves away from holding US Dollars and more reasonably distributes its holdings worldwide. This will likely move the dollar lower, but is unlike to cause any long-term distress.
  - eru 16y ago
    The US will always be able to pay debts in US$. At least as long as they can live with inflation.
ww520 16y ago
Hmm, would this be a contrarian signal to invest?
- hugh3 16y ago
  Only if this article represented the conventional wisdom, rather than a pseudo-contrarian view in itself. Actually it's a difficult time for contrarian investors, since I'm not sure there is a conventional wisdom. But if I had spare money I'd be sticking it all into "socially irresponsible" companies: alcohol, gambling and oil.
  - artsrc 16y ago
    There is always some conventional wisdom, even if it is not a directional view on the market as a whole. Here is some conventional wisdom: "eBook readers will be cheap enough (<$99) that most people (>50%) will own one in less than 36 months." So the contrarian would buy shares in physical book manufacturers?
- harscoat 16y ago
  good luck with it
gaika 16y ago
Here's a more scientific way of predicting crashes: http://videolectures.net/risc08_sornette_fcrm/ http://videolectures.net/risc08_sornette_fcrm/ "Most attempts to explain market failures seek to pinpoint triggering mechanisms that occur hours, days, or weeks before the collapse. Sornette proposes a radically different view: the underlying cause can be sought months and even years before the abrupt, catastrophic event in the build-up of cooperative speculation, into an accelerating rise of the market price, otherwise known as a "bubble." "
sdh 16y ago
WSJ ... DOOM TERROR CRASH ... "GOP a 62% chance of taking control" hmmm, wha?!
mark_l_watson 16y ago
Sort of an OK article, but he misses the big point: the USA spends more money on their war department than the rest of the world combined, and we don't get any decent kind of return on that investment (although the defense industry and the congress members who they bribe do). Sorry to sound cynical, but when talking about the economy, people tend to ignore the proverbial 800 pound gorilla in the room: 'defense' spending. This should be the center of conversation about the economy.
- GrandMasterBirt 16y ago
  And defense spending is where billions are lost on side-projects which if made in the public sector, would lead to tons of innovation, but in the defense sector only lead to innovations on killing, which never helps the economy.
  - Encosia 16y ago
    If you believe - as many do - that our "defense" agenda is much of what protects the dollar's continued status as a nearly universal reserve currency, our defense budget is an amazing investment (notwithstanding the terrible, non-monetary costs that accompany defense spending).
    - loewenskind 16y ago
      Wait, so you're saying that the dollar stays relevant because the US is using violence to ensure it stays so? And you're calling such activity an "investment"?
      - Encosia 16y ago
        That's trying to pin a bit of an exaggerated worst interpretation on me, isn't it? We don't have to endorse or approve of things to see them for what they are. Moreover, defense spending doesn't necessarily equate to violence. Look at the trillions spent during the cold war, paradoxically spent to avoid violence.
stretchwithme 16y ago
Yeah, all they did was interrupt the correction, not stop it. And they're using the same unsound policies that created the bubble, trading our longterm economic health to get short term consumption-driven phony growth. And its not just in the US: http://seekingalpha.com/article/219542-china-the-mother-of-all-bubbles?source=article_sb_popular
artsrc 16y ago
Crashes can always come. Efficient markets have already priced in all these well known reasons for one. This article makes the classic mistake of exaggerating the known risks. Actually the crash is just as likely to be caused by something unknown. Maybe the US market will crash because the introduction an old age pension in China means they don't need to invest as much, and they just use the money buy Sushi instead.
- loewenskind 16y ago
  > Efficient markets have already priced in all these well known reasons for one. Too bad there's no such thing as an efficient market [1]. [1] http://arxiv.org/abs/1002.2284 http://arxiv.org/abs/1002.2284
  - artsrc 16y ago
    Thanks for the link. I think this paper does help put bounds on the upper limits to creating efficiency through some mechanisms. Using those bounds you can think about the limits to which reasons for crashes are not reflected, based on size of the time series of crashes. I always think of efficient markets as an idea like a frictionless surface, an invalid, simplifying model to make the mathematics tractable. So the question would be is the market close enough to efficient that well understood crashes are reasonably well reflected in it, most of the time: implying you should be thinking about something else. I guess I should not believe in efficient markets since I work for a large active fund manager. Our definition of "weakly efficient" is different that the paper you site. Our definition is "close enough to efficient to make exploitation infeasible". And I can't simultaneously believe in that, and believe in our products.
- c1sc0 16y ago
  Trust me, the Chinese won't be buying Sushi.
  - artsrc 16y ago
    When I was a young child, Australians did not eat much Sushi either. http://www.thebeijinger.com/blog/2009/08/26/Raw-Power-Beijings-Best-Sushi http://www.thebeijinger.com/blog/2009/08/26/Raw-Power-Beijin...
jrockway 16y ago
This article is crap. He didn't even try to blame the oil spill.
ANH 16y ago
I read this last week and promptly expunged it from my brain. Any "Ten Reasons..." list should be automatically suspect.
herval 16y ago
If you're into contrary thinking, that's probably a great moment to BUY...
deleted 16y ago
[deleted]

119 points by andrewljohnson 16y ago

enjo 16y ago

Here we are again, trying to talk ourselves into another crash. I really don't understand the Journals (in particular) fascination with doomsday. For every item on the list you can point to trends that are positive for the exact same metric. Like (there are a lot of other examples): http://online.wsj.com/article/BT-CO-20100726-710938.html http://online.wsj.com/article/BT-CO-20100726-710938.html I agree that the economy is quite uncertain right now. However, waving the flag of doom isn't really productive at this point. Particularly when you're cherry picking data to arrive at what appears to be a foregone conclusion. I don't know if it's a fascination with disaster or (I suspect) more politically motivated. Either way, it makes you no better than this guy: http://lamarhowell.files.wordpress.com/2009/01/the-end-is-near.jpg http://lamarhowell.files.wordpress.com/2009/01/the-end-is-ne...

deleted 16y ago
[deleted]
startuprules 16y ago
Here we are again, trying to convince ourselves that the boat is still sinking. I really don't understand the lower galley's fascination with drowning. For every item on the list you can point to trends that are positive for the exact same metric. The boat is still afloat. I agree that the availability of fine wine is quite uncertain right now. However, waving the flag of doom isn't really productive at this point. Either way, it makes you no better than that Jack Dawson guy.
- jerf 16y ago
  I'm really beginning to hate that argument form more than Affirming the Consequent. What exactly do you think you've demonstrated? What valuable point have you established?
  - startuprules 16y ago
    What purpose did your meta comment serve?
    - jerf 16y ago
      I gave you feedback that your argument was terrible. Step up your game.
sbov 16y ago
More than doomsday, they play to fears. Back in 2005 it was about DOW 30k and how what a gem real estate was. The fear then was to being "priced out forever". Buy now or lose out, because your puny income won't compare with how much a 100 square foot shack costs in 10 years. Now its about DOW 1k and losing everything you own.
- matwood 16y ago
  I never understood how anyone could believe the priced out forever argument. A friend tried to argue it to me, but could never explain if everyone is priced out then who is left to buy? It just never made any sense to me even at the high point of the bubble. I was successful at keeping 2 of my friends from making horrible financial decisions, but a third went ahead anyway. Now she's stuck owning a crappy apartment with an upward adjusting mortgage.
fleitz 16y ago
We aren't talking ourselves into a crash, we're spending ourselves into a crash by allocating the funds for rebuilding the economy to those that destroyed it and hoping that they don't decide to make the same mistakes again. Wishful thinking can't save an economy, but it can create a bubble.
jonknee 16y ago
> I really don't understand the Journals (in particular) fascination with doomsday. Because Democrats are in control?

jsz0 16y ago

I'm skeptical of the doom & gloom stories a few months before an important election. The numbers don't look great but it could be a lot worse.

mkramlich 16y ago
And with the economy, perception can become reality. If a player has a large enough bullhorn they can spew forth Messages that, if enough people believe them or act on them, can nudge economic reality in whatever direction they'd like. The WSJ is one such bullhorn.

Revisor 16y ago

The crash is not coming, it's just returning. The original one was never over. Its effects were just postponed by pouring money in it (aka bailouts and buy-outs). The real reasons - ultra high debt of all players, errors in the system, for-profit players not controllable by the three political branches - were not remedied, in fact they might have been even worsened (the debt increased because of the bailouts).

cynicalkane 16y ago
Why does this have 23 upvotes? Nothing of any substance is stated here. Vague comments about "the players" and "the debt"--what players? Whose debt? To what extent an opinion can be extracted from this post, it's wrong. For example, I don't know who "the players" he refers to are, but my guess is they are supposed to be for profit.
- joe_the_user 16y ago
  Because it's true?? Seriously, those who have studied this for a while pretty much know the situation. Sorry if it seems vague to you. The players are large bank, investment houses, and the Federal government at the least. But even more, the entire housing market was temporarily re-inflated to sustain the massive over-valuations that built up over the last ten-twenty years. Of course, all the other bubbles; medical, student loans, etc depended on this inflating to keep going (and there's a Chinese property bubble too btw). Did you notice the auction rate bond market cease to exist around the time of the crisis? We are in a fragile respite from result of the unsustainable economy of 2001-2007 (or longer). Seriously, in 2008, a boulder rolled half-way down a hill and massive world wide spending brought it to a halt. Sorry if I can't give a single factual pointer to all this stuff. It's more a matter of the economy's "big picture". I would recommend Doug Noland's Credit Bubble Bulletin. I'd especially recommend the earlier issue, where he extend's Hyman Minksky's idea of Ponzi finance. http://www.safehaven.com/author/2/doug-noland http://www.safehaven.com/author/2/doug-noland
- Rexxar 16y ago
  I understand "all players" as "households + companies + banks + governments"

prewett 16y ago

I'm a little skeptical of claim #1. According to Reuters, the P/E of the S&P 500 is at 16.1 (see http://www.reuters.com/finance/stocks/financialHighlights?symbol=KO http://www.reuters.com/finance/stocks/financialHighlights?sy...; look in the "Valuation Ratios" section in the right-most column). If 16 is the average, then the market is fairly priced. The Schiller figure he references might include all publicly traded companies. If so, it might suggest that less well-known companies (outside the 500 most popular) are over-priced. But since the 500 most popular drive the market, you can't conclude a crash from that. Most large-cap companies I have been looking at are trading at 15 year lows for the P/E, and at close to 15 year highs for dividend ratios. They still might be over-priced in an absolute sense, but we haven't seen prices this good in 15 years.

MikeCapone 16y ago
"If 16 is the average, then the market is fairly priced." I'd rephrase that as something like: If 16 is the average, then the current market isn't historically overpriced. It could still be overpriced or underpriced. The historical average is just that. Current fundamentals aren't necessarily "average".
vomjom 16y ago
The article doesn't make it very clear, but Shiller's number is based on the average inflation-adjusted earnings of the previous 10 years. See the Excel file here: http://www.econ.yale.edu/~shiller/data.htm http://www.econ.yale.edu/~shiller/data.htm The stock market is still very highly priced compared to historical standards (excluding the past 15 or so years). See also the graphs on: http://en.wikipedia.org/wiki/Robert_Shiller http://en.wikipedia.org/wiki/Robert_Shiller
- prewett 16y ago
  I downloaded his Excel sheet (which has more recent numbers than Wikipedia). I'm not sure what he means by "real price" and "real earnings" (as opposed to "reported earnings"?). But if I add a column for "real P/E", it puts us at just under 20, which is on the historical high end. So, following the trend in his data, I would expect the P/E to gradually decline to 15 or so, maybe even down to 10. (Under 10, buy like mad.) However, his data show gradual rises and then declines over a period of 20 - 40 years or so. These are punctuated with sharp drops, but according to these data, I would expect the next correction to drop us down to maybe 18 at most. From some cursory chart exploration on yahoo, it looks like large-caps might not follow the market moves as much. Mar 2009 was about 50% of the S&P 500's current level, but KO only differed by 30% and JNJ only varied by 10%. I'd say solid dividend companies are not necessarily overpriced.

startuprules 16y ago

Actually, the pink elephant in the room is the huge corporate debt - total domestic debts at 7.2 Trillions. "American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression. Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP. That's a postwar record. In 1945, it was just 20%. Even at the credit-bubble peaks in the late 1980s and 2005-06, it was only around 45%." http://www.marketwatch.com/story/the-biggest-lie-about-us-companies-2010-08-03 http://www.marketwatch.com/story/the-biggest-lie-about-us-co...

varjag 16y ago

Insightful piece. However I feel it is not correct to measure deflation by housing prices, since they are never factored in inflation index firstplace.

mistermann 16y ago
But the debt behind the houses will default, resulting in deflation. You're talking about the CPI, which always only measured owner equivalent rent (so they could hide the inflation).
- varjag 16y ago
  But is there any widely used inflation index that takes house prices into account? It is bound to show tremendous inflation, yet we never see that kind of figures.
  - mistermann 16y ago
    Not that I know of. The Shiller index was one of the best metrics for prices themselves but didn't relate to relative inflation that I know of, the math would be easy enough.

dangrossman 16y ago

I should really avoid reading pieces like this. Tempts me to pull out of the market again even though I intended to hold my investments for decades anyway -- I only buy big ol' corporations that pay good dividends.

rue 16y ago
> Tempts me to pull out of the market again [...] Which is how crashes happen in an imaginary economy.
- mkramlich 16y ago
  That's what is so crazy about the stock market. There's a strong self-fulfilling prophecy effect caused by mob decisions. If enough people think the stock market will go up, there's a surge in demand to buy stocks and so stock prices go up. If enough people think it will go down, they sell, and prices go down. Funny that. So the real money may be in being the minority better, especially if you had some way of predicting what the masses will do next so you can take a position that will be profitable for you once the masses start betting. Thus, there's incentive to do a sort of front-running operation but on a huge scale. And to do it you need a media operation of some sort, and possibly some propaganda organs. Any guesses as to whether these theoretical entities already exist?

dennisgorelik 16y ago

I totally lost any trust to the author of that article after I've read this: > 9. We're looking at gridlock in Washington. Gridlock in Washington is a good thing for economy. Government is not capable to interfere with business and spends less -- the result -- boom in the economy which we observed in ~1994-2000 ("Clinton with Republican Congress" era).

akadien 16y ago
Beware the blanket assumption of 'gridlock is good". Gridlock in DC is good when it meant the rate of damage done is scaled back. It's not good when it means hard choices (spending reductions) aren't made. I read 'gridlock' as more of the same: kicking the can down the road, more pork, etc. But, I'm kidding myself to think that DC would make the hard choices.
leot 16y ago
All the unemployed could, and probably should, be put to work building/restoring public infrastructure. None are now because that would be "socialism". It is a fun/depressing exercise to imagine how you would improve the US if you had 14.5 million (http://www.bls.gov/news.release/empsit.t12.htm http://www.bls.gov/news.release/empsit.t12.htm) people to order about.
- leot 16y ago
  Well, I suppose that came out sounding a bit communist, and OT. Fwiw, the point was that, if there's gridlock, then there's no hope of seeing any of the needed job-and-value-creating investment in public infrastructure development.

cynicalkane 16y ago

This just in: an uniformed writer has ten reasons not to invest. In other news, there's unrest in the Middle East. Almost nobody in the world can predict stock trends profitably. You especially cannot predict stock trends from articles in the paper. In general, people smart enough to predict stock trends and understand the macro factors will be working in stocks, not writing second-rate personal finance pieces for the WSJ. (Also, the article essentially begins with, "I don't make predictions... but here are 10 reasons I predict a crash might happen". How silly.)

Confusion 16y ago
In general, people smart enough to predict stock trends and understand the macro factors will be working in stocks, not writing second-rate personal finance pieces for the WSJ. In general, a reputable paper like the WSJ will hire people that are smart enough to predict stock trend and understand the macro factors, people that may be working in stocks, to write finance pieces. You provide no arguments to support your assertion that the writer is uninformed. The only argument is a single broad stroke that implies that nobody with enough understanding of the subject writes for any newspaper, which is easily refuted by all the articles written by exactly such people over the years.
- cynicalkane 16y ago
  In general, a reputable paper like the WSJ will hire people that are smart enough to predict stock trend and understand the macro factors This is not true at all and I don't know where this is coming from. The signal to noise ratio in the mainstream media's personal finance pages is famously low. The WSJ is known for its reporting, not its investment advice. And had you bothered to look up the author on Wikipedia, you would have seen he doesn't work in equities, and apparently never has. Sure, the author might turn out to be a genius who identified all the factors that will lead to the next big crash--if so, how come the genius reasoning is not evident in the article? Assertions like the second item--'the Fed is buying Treasuries, must mean they're nervous'--are presented in an unconvincing way. I assumed it was self-evident that these claims were unconvincing, but apparently it wasn't so. So here's why that claim, among others, was uninformed: the Fed's stated policy is actually to not change the size of their portfolio of securities held outright. The treasury purchases are offsetting principal payments of other debt. The neutrality of this policy does not suggest 'nervousness' at all. http://www.newyorkfed.org/markets/opolicy/operating_policy_100810.html http://www.newyorkfed.org/markets/opolicy/operating_policy_1...

c1sc0 16y ago

Wow, a top 10 list article the the WSJ. I totally expect the US market to go down again for the simple reason that right now, the US looks like a failing empire that can't pay its bills on all levels from consumers to government.

phjohnst 16y ago
Indeed, but remember that there as long as the collectors don't come knocking, whether or not you can pay at any one moment is irrelevant. In this case, it would take China calling in its US loans to adversely affect the States' ability to maintain, and even extend their levels of debt. For various reasons (the least of which is not that the US is the largest importer of goods from China) this isn't likely to happen. At worst China just moves away from holding US Dollars and more reasonably distributes its holdings worldwide. This will likely move the dollar lower, but is unlike to cause any long-term distress.
- eru 16y ago
  The US will always be able to pay debts in US$. At least as long as they can live with inflation.

ww520 16y ago

Hmm, would this be a contrarian signal to invest?

hugh3 16y ago
Only if this article represented the conventional wisdom, rather than a pseudo-contrarian view in itself. Actually it's a difficult time for contrarian investors, since I'm not sure there is a conventional wisdom. But if I had spare money I'd be sticking it all into "socially irresponsible" companies: alcohol, gambling and oil.
- artsrc 16y ago
  There is always some conventional wisdom, even if it is not a directional view on the market as a whole. Here is some conventional wisdom: "eBook readers will be cheap enough (<$99) that most people (>50%) will own one in less than 36 months." So the contrarian would buy shares in physical book manufacturers?
harscoat 16y ago
good luck with it

gaika 16y ago

Here's a more scientific way of predicting crashes: http://videolectures.net/risc08_sornette_fcrm/ http://videolectures.net/risc08_sornette_fcrm/ "Most attempts to explain market failures seek to pinpoint triggering mechanisms that occur hours, days, or weeks before the collapse. Sornette proposes a radically different view: the underlying cause can be sought months and even years before the abrupt, catastrophic event in the build-up of cooperative speculation, into an accelerating rise of the market price, otherwise known as a "bubble." "

sdh 16y ago

WSJ ... DOOM TERROR CRASH ... "GOP a 62% chance of taking control" hmmm, wha?!

mark_l_watson 16y ago

Sort of an OK article, but he misses the big point: the USA spends more money on their war department than the rest of the world combined, and we don't get any decent kind of return on that investment (although the defense industry and the congress members who they bribe do). Sorry to sound cynical, but when talking about the economy, people tend to ignore the proverbial 800 pound gorilla in the room: 'defense' spending. This should be the center of conversation about the economy.

GrandMasterBirt 16y ago
And defense spending is where billions are lost on side-projects which if made in the public sector, would lead to tons of innovation, but in the defense sector only lead to innovations on killing, which never helps the economy.
- Encosia 16y ago
  If you believe - as many do - that our "defense" agenda is much of what protects the dollar's continued status as a nearly universal reserve currency, our defense budget is an amazing investment (notwithstanding the terrible, non-monetary costs that accompany defense spending).
  - loewenskind 16y ago
    Wait, so you're saying that the dollar stays relevant because the US is using violence to ensure it stays so? And you're calling such activity an "investment"?
    - Encosia 16y ago
      That's trying to pin a bit of an exaggerated worst interpretation on me, isn't it? We don't have to endorse or approve of things to see them for what they are. Moreover, defense spending doesn't necessarily equate to violence. Look at the trillions spent during the cold war, paradoxically spent to avoid violence.

stretchwithme 16y ago

Yeah, all they did was interrupt the correction, not stop it. And they're using the same unsound policies that created the bubble, trading our longterm economic health to get short term consumption-driven phony growth. And its not just in the US: http://seekingalpha.com/article/219542-china-the-mother-of-all-bubbles?source=article_sb_popular

artsrc 16y ago

Crashes can always come. Efficient markets have already priced in all these well known reasons for one. This article makes the classic mistake of exaggerating the known risks. Actually the crash is just as likely to be caused by something unknown. Maybe the US market will crash because the introduction an old age pension in China means they don't need to invest as much, and they just use the money buy Sushi instead.

loewenskind 16y ago
> Efficient markets have already priced in all these well known reasons for one. Too bad there's no such thing as an efficient market [1]. [1] http://arxiv.org/abs/1002.2284 http://arxiv.org/abs/1002.2284
- artsrc 16y ago
  Thanks for the link. I think this paper does help put bounds on the upper limits to creating efficiency through some mechanisms. Using those bounds you can think about the limits to which reasons for crashes are not reflected, based on size of the time series of crashes. I always think of efficient markets as an idea like a frictionless surface, an invalid, simplifying model to make the mathematics tractable. So the question would be is the market close enough to efficient that well understood crashes are reasonably well reflected in it, most of the time: implying you should be thinking about something else. I guess I should not believe in efficient markets since I work for a large active fund manager. Our definition of "weakly efficient" is different that the paper you site. Our definition is "close enough to efficient to make exploitation infeasible". And I can't simultaneously believe in that, and believe in our products.
c1sc0 16y ago
Trust me, the Chinese won't be buying Sushi.
- artsrc 16y ago
  When I was a young child, Australians did not eat much Sushi either. http://www.thebeijinger.com/blog/2009/08/26/Raw-Power-Beijings-Best-Sushi http://www.thebeijinger.com/blog/2009/08/26/Raw-Power-Beijin...

jrockway 16y ago

This article is crap. He didn't even try to blame the oil spill.

ANH 16y ago

I read this last week and promptly expunged it from my brain. Any "Ten Reasons..." list should be automatically suspect.

herval 16y ago

If you're into contrary thinking, that's probably a great moment to BUY...

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