8 ms·

Interpreting a market plunge

141 points by Nuance 9y ago

the-dude 9y ago
Tldr; we have no idea
- ekianjo 9y ago
  thats the right summary of this article.
- dboreham 9y ago
  I'm surprised that nobody has mentioned what seems to me to be the obvious precipitating factor: that some guy went on national TV on Jan 30 and boasted that he was responsible for a massive increase in the stock market. When I saw that I immediately felt a warm and fuzzy feeling for the fact I had decided not to buy any stocks (except AMD) over the previous few months. I think that many people who had only half been following the market heard that claim in the speech, causing them to pay renewed attention to market values, check on their portfolio, realize that there was clearly a bubble, then decide to sell.
willvarfar 9y ago
I can't see this economist article - the usual paywall. But this short snippet by the BBC explains that the market anticipates that interest rates will rise as wages rise faster than expected - http://www.bbc.com/news/av/world-us-canada-42955578/us-market-meltdown-explained http://www.bbc.com/news/av/world-us-canada-42955578/us-marke...
- simias 9y ago
  The article mentions that but half dismisses it by saying that nobody can know for sure: >The swoon set tongues to wagging, about its cause and likely effect. There can be no knowing about the former. Markets may have worried that rising wages would crimp profits or trigger a faster pace of growth-squelching interest-rate increases, but a butterfly flapping its wings in Indonesia might just as well be to blame.
EGreg 9y ago
Guys, here is my analysis (which, after reading this article, may shed more light on the matters). We have had an asset bubble due to low interest rates. Because people don't want to keep money in banks. So we have had a bubble in crypto and stocks etc. As interest rates rise - and they will, because the government will need to reload for the next QA or whatever - asset markets will keep taking hits. The question is - why does the central bank really need to raise interest rates? Why not just keep things as they are and not load up on QA ammo? That depends - are you an Austrian economist? :)
- aceinaday 9y ago
  I think you answered your question in the sentence above. If the fed keeps interest rates low, and we still hit another recession, they won't have the ability to react by lowering rates again.
  - EGreg 9y ago
    But if reacting and lowering them will ease the recession, why not just keep them low in the first place? That way the recession doesn't materialize. Maybe raising interest rates is what causes the recession in the first place!
    - krrrh 9y ago
      Because they tried that and it ended up in inflation and slow growth. The Phillips curve broke.
    - fwdpropaganda 9y ago
      Raising interest rates is what causes a recession. But if you don't lower two bad things eventually happen: large inflation and associated of purchasing power, and debt keeps on ballooning. Regarding the second point, you always have to deleverage sooner or later. The current view is that sooner and smoothly is better than later and abruptly.
- oculusthrift 9y ago
  because inflation will start and we need to fight it with high interest rates
chmike 9y ago
I guess some people have borrowed to invest in crypto money, or worse in stocks, and so need liquidity to anticipate credit raise. The reason the credit rate might be increased (my guessing) is because lending money creates vritual money and thus inflation. The other reason is because it would allow banks to profit from the european economy recovery. America has currently enough growth to absorb the negative effect of a credit rate increase.
drawkbox 9y ago
The tax cuts passed, sell the news. Tax cut hype subsides to actual technicals again. Interest rates are going to be increasing, always dings the market and debt. A re-trench helps the stock buy backs coming from the tax cuts, hedge funds probably helping engineer that volatility.
thisisit 9y ago
The bigger concern is on the interest rate hikes. Low rates were expected to help kickstart the economy and prices and wages to increase. What has happened instead is that all the cheap money has caused asset inflation. US companies now have record amount of debt. Too fast increase in interest rates will cause their debt obligations to balloon and lower profitability. Though this will take couple of quarters to fully manifest. So, this is just a reaction in line with Amara's law applied to stock markets- We tend to overestimate the effect of a news item (technology) in the short run and underestimate the effect in the long run. I expect media to be soon cheering another round of upward zag.
- fwdpropaganda 9y ago
  You see, the problem that I have with these kind of "explanations", is that those facts have been around for a long time. Why is it that precisely today (well, yesterday) was the day that everyone decided "right guys, we're selling equities"? The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it.
  - guiriduro 9y ago
    I think context is important - think power laws, faultline stress in plate tectonics, or as in this case magnitude of movement when the move actually comes. As to what triggers the move itself - my feeling is that some kind of crowd effect occurs, i.e. once we get over some resistance level, then the movement implied in the imbalances described by the context takes over; the crowd creates its own impetus. But it is very difficult or even impossible to determine ahead of time what minor movement will become the catalyst, in much the same way that determining which butterfly flap vortex will become a hurricane.
  - thisisit 9y ago
    Why today(and Friday)? People track government data to form opinions. and first Friday of the month is very important because of a data point called Non-Farm Payroll or NFP. It is known to cause a lot of movement in the markets. Lot of brokers will tell you not trade during the announcement. You can see a lot of opinions on what was expected to happen on Monday by googling for NFP. Case in point: https://www.cnbc.com/2018/02/02/best-wage-growth-since-2009-spurs-talk-of-more-fed-rate-hikes.html https://www.cnbc.com/2018/02/02/best-wage-growth-since-2009-... Second, it seems you think these decisions are binary - to be or not to be or rather sell or not sell. It's not that simple. Lower markets doesn't mean everyone has sold off all their shares. They just reduce probabilities of their losses by reducing exposure. Then people go back to their drawing boards and see if the hypothesis holds up. If not, they come back and market moves higher.
sethgecko 9y ago
Dow Jones had just had it's biggest intraday drop in history and no one has any idea why. I blame quants and their trading bots. Nothing makes sense any more.
reallymental 9y ago
It's really interesting that the yield curve has risen. There's been a huge amount of negative sentiment on it's flattening, and more talk about the bonds being overbought... China's sell off [0] was interesting and generated a lot of chatter about the value of the bonds, but it was to serve their interest (S&P lowered their ratings[0]), rather than them acting on some information. But now, the yield curve has risen even if it's overbought? [0] https://www.ft.com/content/a1ad3848-ba05-11e7-8c12-5661783e5589 https://www.ft.com/content/a1ad3848-ba05-11e7-8c12-5661783e5...
EliRivers 9y ago
HODL, right! I am, anyway. The standard advice ("Buy low-cost index funds with dividends reinvested, keep buying on a regular basis, let it ride and don't worry about the plunges and the peaks") told us this would happen, and here we are. How to interpret it? I'd go so far as to ask should we interpret it? They get paid for coming up with reasons why things happened (after the fact, I note, although the Economist has hardened up and just said "nobody knows"). We [1] get paid for leaving our pennies in low-cost index funds with dividends reinvested for a decade. [1] Apologies for the generalisation; I needed a bigger word than "I"
- f_allwein 9y ago
  Had to Google HODL and learned it means 'hold', in the context of crypto currencies losing value. Can't comment on that, but for stocks, definitely yes. Historically, the market has always recovered from slumps. I know this does not mean it always will, but lots of people dropped out of the stock market after the crashes in 2001 or 2008 - for them, it would have been wiser to hodl.
  - topmonk 9y ago
    FYI, the origin of HODL: https://bitcointalk.org/index.php?topic=375643.0 https://bitcointalk.org/index.php?topic=375643.0
  - mhroth 9y ago
    HODL is "hold", but it's also "Hold On for Dear Life".
    - saagarjha 9y ago
      As far as I know, “Hold On for Dear Life” is a backronym conceived to provide explanation for “HODL”.
  - pbhjpbhj 9y ago
    The market as a whole recovers, but what proportion of [indexed] stock? What's the expected recovery time? (Say average for a randomly selected 10 indexed stocks). FWIW this is an academic enquiry, I'm too poor to gamble.
Apocryphon 9y ago
Here's a question - people often refer to the 2008 recession as a once in a lifetime event. On what basis do they make that statement- because mortgages can't possibly pop as massively twice? What's to prevent another industry (in recent years often rumored to be student loans) from doing the same? Who's to say not another sector is as rotten as real estate was?
- isolli 9y ago
  It was certainly a once-in-a-lifetime event looking back: the greatest economic shock since the Great Depression [0]. As to why it is different now, this article [1] contains some answers (anyone can decide whether they agree or not). [0] https://en.wikipedia.org/wiki/Comparisons_between_the_Great_Recession_and_the_Great_Depression https://en.wikipedia.org/wiki/Comparisons_between_the_Great_... [1] http://cepr.net/blogs/beat-the-press/it-actually-doesn-t-feel-at-all-like-2006-refusing-to-learn-the-lesson-of-the-housing-bubble http://cepr.net/blogs/beat-the-press/it-actually-doesn-t-fee...
- rtpg 9y ago
  I haven't heard that claim too often. In fact I've heard a hell of a lot of "CDOs are back and as interwoven as ever!" things. Though in theory we've learned a lot, who knows what will happen From my understanding, American student loans can't be defaulted upon? They might be a bit too particular to hit the issues that happened with mortgages
- kmfrk 9y ago
  It's usually referred to as an "x sigma event". A paper I really like on this is "How Unlucky is 25-Sigma?" https://arxiv.org/abs/1103.5672 https://arxiv.org/abs/1103.5672.
- ChicagoBoy11 9y ago
  Mostly on the basis that it is the only way they can justify to clients/viewers/etc to "not have seen it." One would very reasonably conclude that the failure of banks/regulators/analysts to see any of this would likely be a good sign that they prob. don't really know what they are talking about, and predicting the market is actually kinda impossible, and consequently the value they add to their clients is minimal/none. So, in order to not give that impression, it is much easier to say that your models are in fact correct, but it just so happens that the financial crises was a "once in a lifetime" event.
dustinmoris 9y ago
I think we will see a bigger correction very soon. Markets crash periodically and we haven't had a crash for a while now. A periodic crash is not uncommon and actually makes a lot of sense when you think about the high level picture of what really goes on in stock markets. Stock markets are essentially dominated by greed (to get a higher ROI from stocks than through more traditional ways) and this greed leads to an increasing over valuation of assets over a period of time (multiple years). At some point the over valuation is so big that it becomes very visible to investors, at which point they get cold feet and start selling, and then... boom. The markets drop to the point where the majority of investors agrees that the current valuation matches the expected ROI again and therefore stop further selling. After a couple years of conservative trading the markets return to become slightly more optimistic again and the game starts from scratch again. It is a natural cycle and nothing we can do to change, just embrace a crash every 10-20 years or so... http://macromarkets.ie/wp-content/uploads/2016/09/Asset-Prices-GDP.jpg http://macromarkets.ie/wp-content/uploads/2016/09/Asset-Pric...
- TekMol 9y ago
  stock markets are dominated by greed Greed is "an inordinate or insatiable longing for unneeded excess". I doubt one can show that this is what drives the stock market. What we probably can agree on is that the stock market is driven by the actions of many actors who try to maximise the utility value of the assets under their control. an increasing over valuation of assets We cannot show that assets are overvalued at any time. The value of an asset is very different to every actor. Everybody puts different expectations into the assets they control. Even if we apply some 'simple' mathematical definition like the NPV of future returns, we could not say if an asset is overvalued in regards to that. Because the future returns are unkown. And we cannot say in hindsight either. Because the value of an asset is a statistical function of possible future outcomes. So the actual outcome does not tell us what the statistical function looked like.
  - dustinmoris 9y ago
    I never said that we can show that an asset is overvalued, I simply described what actually has happened in the past multiple times and what seems to be happening again. The truth is that investors will always pump as much money into a stock as long as there is still a logical explanation for a positive ROI. However at some point the stock becomes so hot that the general public will also start pumping money into it (with the simple hope of making some quick and easy $), at which point the value will skyrocket even further until there is no logic explanation anymore and it becomes very difficult to justify the value in any logical way... and that's when it bursts. Just look at Bitcoin and tell me I'm wrong...
TekMol 9y ago
I hold 50% of my assets in shares and 50% in money. I cannot decide if I should hope for the stock market to go up or down. What do the wise people of HN think?
- maaaats 9y ago
  Up. If you hope for a crash so that you can invest your other money in a dip, you are foolish to try to time the market and would probably be better of to invest it earlier and just spend more time in the market.
  - TekMol 9y ago
    Would you argue the same way if I was holding 99.9% of my assets in money and 0.1% in shares? Would you still say I should hope for the stock market to go up? Or is it related to the percentages? If so, where is the threshold?
    - maaaats 9y ago
      My answer was under the assumption that you were interested in changing your allocation.
- tyingq 9y ago
  Guessing the bottom is hard. Spreading risk, like you have done, is a better idea. Maybe be more granular than "money market" and "stocks" though. There's bonds, annuities, real estate, foreign derivitives, and other vehicles too.
  - TekMol 9y ago
    You seem to imply that I am looking for investment advice or that my approach of asset allocation might change. Neither is the case. I will simply continue to hold 50% in shares and 50% in money. My question is what is better for me. If stocks go up or if stocks go down.
nurettin 9y ago
Sales of stocks means that the main market movers want to liquidate their assets. Escaping a possible crash or fear of overvaluation are not the only reasons you want cash. You could also be preparing for a huge investment. Considering how privatized USA is, they could be preparing to invest in some government related action or venue. This could even mean an impending war.
jnsaff2 9y ago
"But because everyone worries and saves a little more, and invests and spends a little less, the economy gets stuck in a downturn. Recessions are an outbreak of collective madness." Or maybe "Recessions are an outbreak of collective sanity."
- Economics4u 9y ago
  Perhaps you can explain how everyone can save in aggregate? Where do people get this idea that "saving" is somehow virtuous?
  - gbacon 9y ago
    The notion that savers hoard their money in mattresses is a caricature, not serious economics.
  - taneq 9y ago
    > Where do people get this idea that "saving" is somehow virtuous? Savings are a form of safety net, since individuals don't have access to unlimited funds or unlimited credit. The higher the perceived risk of financial trouble (loss of job, a surge in cost of living, etc.) the more savings you need in order to mitigate that risk. Do you really need this explained to you?
    - grasshopperpurp 9y ago
      Good post. Americans have to build their own safety nets, because the societal safety nets are so poor. If you're standing on the edge of a tall building, you're probably not going to practice gymnastics - unless you mean to post it on Instagram (x_x).
      - Bromskloss 9y ago
        Presumably – hopefully – people save anyway to avoid plunging into said safety net. It might be unpleasant, both the knowledge of having not been able to provide for yourself, and the standard of living that you might be limited to if you're deep in the net.
minikites 9y ago
You know you live in the best country in the world when rising wages cause the market to plunge: https://www.nytimes.com/2018/02/02/business/stock-market-interest-rates.html https://www.nytimes.com/2018/02/02/business/stock-market-int... >The immediate catalyst was the jobs report, which showed the strong United States economy might finally be translating into rising wages for American workers. We even punish individual companies for this: https://www.vox.com/new-money/2017/4/29/15471634/american-airlines-raise https://www.vox.com/new-money/2017/4/29/15471634/american-ai... >American Airlines agreed this week to do something nice for its employees and arguably foresighted for its business by giving flight attendants and pilots a preemptive raise, in order to close a gap that had opened up between their compensation and the compensation paid by rival airlines Delta and United. >Wall Street freaked out, sending American shares plummeting. After all, this is capitalism and the capital owners are supposed to reap the rewards of business success. >“This is frustrating. Labor is being paid first again,” wrote Citi analyst Kevin Crissey in a widely circulated note. “Shareholders get leftovers.”
cs702 9y ago
The specter of rising interest rates in the US (driven by higher inflation expectations) appears to be a factor. Fast-growing companies which are investing aggressively today and whose profits lie far in the future, in particular, are exposed to rising interest rates, due to the higher duration of such companies' cash flows. Duration, for those here who don't know, is a measure of the sensitivity of present value to interest rates.[a] Duration rises with the amount of time an investor must wait for cash flows, and vice versa. For example, the present value of $100,000 of cash flow to be generated in 10 years, if the 10-year rate is 2%, is equal to $100,000/(1.02^10) = $82,000; if the 10-year rate rises, say, from 2% to 3%, the present value declines to $100,000/(1.03^10) = $74,000, or a -10% decline. However, if the $100,000 in cash flow is to be generated in 30 years, and the 30-year rate rises from 2% to 3%, the present value declines from $100,000/(1.02^30) = $55,000 to $100/(1.03^30) = $41,000, or a -25% decline. In this example, an increase in duration from 10 to 30 years changes the sensitivity of present value to a 1 percentage-point rise in interest rates from a -10% decline to a -25% decline. The longer an investor has to wait for cash flows, the greater the sensitivity of present value to changes in interest rates. The same ruthless logic applies to companies. The present value of companies whose profitability is in a distant future declines much faster when interest rates rise than the present value of companies certain to generate cash flows in the near future. Until recently, due to historically low interest rates and no prospects for inflation, the stock market has been rewarding high-investment companies that are sacrificing current profits for growth. If interest rates continue to rise (along with inflation expectations), I would expect this pleasant state of affairs to change abruptly -- in which case, strap on your seat belts! [a] https://www.investopedia.com/terms/d/duration.asp https://www.investopedia.com/terms/d/duration.asp
- Talyen42 9y ago
  If you compare something like Netflix or Tesla, whose valuations are based on the proposition of 10x-ing profits sometime in the future, to something like Apple or GM, whose profits are here and now and may not even increase, would that mean Apple/GM (as an example) might fare better while the market adjusts to rising rates? So far, everything is dropping kind of evenly, it seems, but wouldn't companies with near term cash flows be worth more in a rising rates environment?

141 points by Nuance 9y ago

the-dude 9y ago

Tldr; we have no idea

ekianjo 9y ago
thats the right summary of this article.
dboreham 9y ago
I'm surprised that nobody has mentioned what seems to me to be the obvious precipitating factor: that some guy went on national TV on Jan 30 and boasted that he was responsible for a massive increase in the stock market. When I saw that I immediately felt a warm and fuzzy feeling for the fact I had decided not to buy any stocks (except AMD) over the previous few months. I think that many people who had only half been following the market heard that claim in the speech, causing them to pay renewed attention to market values, check on their portfolio, realize that there was clearly a bubble, then decide to sell.

willvarfar 9y ago

I can't see this economist article - the usual paywall. But this short snippet by the BBC explains that the market anticipates that interest rates will rise as wages rise faster than expected - http://www.bbc.com/news/av/world-us-canada-42955578/us-market-meltdown-explained http://www.bbc.com/news/av/world-us-canada-42955578/us-marke...

simias 9y ago
The article mentions that but half dismisses it by saying that nobody can know for sure: >The swoon set tongues to wagging, about its cause and likely effect. There can be no knowing about the former. Markets may have worried that rising wages would crimp profits or trigger a faster pace of growth-squelching interest-rate increases, but a butterfly flapping its wings in Indonesia might just as well be to blame.

EGreg 9y ago

Guys, here is my analysis (which, after reading this article, may shed more light on the matters). We have had an asset bubble due to low interest rates. Because people don't want to keep money in banks. So we have had a bubble in crypto and stocks etc. As interest rates rise - and they will, because the government will need to reload for the next QA or whatever - asset markets will keep taking hits. The question is - why does the central bank really need to raise interest rates? Why not just keep things as they are and not load up on QA ammo? That depends - are you an Austrian economist? :)

aceinaday 9y ago
I think you answered your question in the sentence above. If the fed keeps interest rates low, and we still hit another recession, they won't have the ability to react by lowering rates again.
- EGreg 9y ago
  But if reacting and lowering them will ease the recession, why not just keep them low in the first place? That way the recession doesn't materialize. Maybe raising interest rates is what causes the recession in the first place!
  - krrrh 9y ago
    Because they tried that and it ended up in inflation and slow growth. The Phillips curve broke.
  - fwdpropaganda 9y ago
    Raising interest rates is what causes a recession. But if you don't lower two bad things eventually happen: large inflation and associated of purchasing power, and debt keeps on ballooning. Regarding the second point, you always have to deleverage sooner or later. The current view is that sooner and smoothly is better than later and abruptly.
oculusthrift 9y ago
because inflation will start and we need to fight it with high interest rates

chmike 9y ago

I guess some people have borrowed to invest in crypto money, or worse in stocks, and so need liquidity to anticipate credit raise. The reason the credit rate might be increased (my guessing) is because lending money creates vritual money and thus inflation. The other reason is because it would allow banks to profit from the european economy recovery. America has currently enough growth to absorb the negative effect of a credit rate increase.

drawkbox 9y ago

The tax cuts passed, sell the news. Tax cut hype subsides to actual technicals again. Interest rates are going to be increasing, always dings the market and debt. A re-trench helps the stock buy backs coming from the tax cuts, hedge funds probably helping engineer that volatility.

thisisit 9y ago

The bigger concern is on the interest rate hikes. Low rates were expected to help kickstart the economy and prices and wages to increase. What has happened instead is that all the cheap money has caused asset inflation. US companies now have record amount of debt. Too fast increase in interest rates will cause their debt obligations to balloon and lower profitability. Though this will take couple of quarters to fully manifest. So, this is just a reaction in line with Amara's law applied to stock markets- We tend to overestimate the effect of a news item (technology) in the short run and underestimate the effect in the long run. I expect media to be soon cheering another round of upward zag.

fwdpropaganda 9y ago
You see, the problem that I have with these kind of "explanations", is that those facts have been around for a long time. Why is it that precisely today (well, yesterday) was the day that everyone decided "right guys, we're selling equities"? The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it.
- guiriduro 9y ago
  I think context is important - think power laws, faultline stress in plate tectonics, or as in this case magnitude of movement when the move actually comes. As to what triggers the move itself - my feeling is that some kind of crowd effect occurs, i.e. once we get over some resistance level, then the movement implied in the imbalances described by the context takes over; the crowd creates its own impetus. But it is very difficult or even impossible to determine ahead of time what minor movement will become the catalyst, in much the same way that determining which butterfly flap vortex will become a hurricane.
- thisisit 9y ago
  Why today(and Friday)? People track government data to form opinions. and first Friday of the month is very important because of a data point called Non-Farm Payroll or NFP. It is known to cause a lot of movement in the markets. Lot of brokers will tell you not trade during the announcement. You can see a lot of opinions on what was expected to happen on Monday by googling for NFP. Case in point: https://www.cnbc.com/2018/02/02/best-wage-growth-since-2009-spurs-talk-of-more-fed-rate-hikes.html https://www.cnbc.com/2018/02/02/best-wage-growth-since-2009-... Second, it seems you think these decisions are binary - to be or not to be or rather sell or not sell. It's not that simple. Lower markets doesn't mean everyone has sold off all their shares. They just reduce probabilities of their losses by reducing exposure. Then people go back to their drawing boards and see if the hypothesis holds up. If not, they come back and market moves higher.

sethgecko 9y ago

Dow Jones had just had it's biggest intraday drop in history and no one has any idea why. I blame quants and their trading bots. Nothing makes sense any more.

reallymental 9y ago

It's really interesting that the yield curve has risen. There's been a huge amount of negative sentiment on it's flattening, and more talk about the bonds being overbought... China's sell off [0] was interesting and generated a lot of chatter about the value of the bonds, but it was to serve their interest (S&P lowered their ratings[0]), rather than them acting on some information. But now, the yield curve has risen even if it's overbought? [0] https://www.ft.com/content/a1ad3848-ba05-11e7-8c12-5661783e5589 https://www.ft.com/content/a1ad3848-ba05-11e7-8c12-5661783e5...

EliRivers 9y ago

HODL, right! I am, anyway. The standard advice ("Buy low-cost index funds with dividends reinvested, keep buying on a regular basis, let it ride and don't worry about the plunges and the peaks") told us this would happen, and here we are. How to interpret it? I'd go so far as to ask should we interpret it? They get paid for coming up with reasons why things happened (after the fact, I note, although the Economist has hardened up and just said "nobody knows"). We [1] get paid for leaving our pennies in low-cost index funds with dividends reinvested for a decade. [1] Apologies for the generalisation; I needed a bigger word than "I"

f_allwein 9y ago
Had to Google HODL and learned it means 'hold', in the context of crypto currencies losing value. Can't comment on that, but for stocks, definitely yes. Historically, the market has always recovered from slumps. I know this does not mean it always will, but lots of people dropped out of the stock market after the crashes in 2001 or 2008 - for them, it would have been wiser to hodl.
- topmonk 9y ago
  FYI, the origin of HODL: https://bitcointalk.org/index.php?topic=375643.0 https://bitcointalk.org/index.php?topic=375643.0
- mhroth 9y ago
  HODL is "hold", but it's also "Hold On for Dear Life".
  - saagarjha 9y ago
    As far as I know, “Hold On for Dear Life” is a backronym conceived to provide explanation for “HODL”.
- pbhjpbhj 9y ago
  The market as a whole recovers, but what proportion of [indexed] stock? What's the expected recovery time? (Say average for a randomly selected 10 indexed stocks). FWIW this is an academic enquiry, I'm too poor to gamble.

Apocryphon 9y ago

Here's a question - people often refer to the 2008 recession as a once in a lifetime event. On what basis do they make that statement- because mortgages can't possibly pop as massively twice? What's to prevent another industry (in recent years often rumored to be student loans) from doing the same? Who's to say not another sector is as rotten as real estate was?

isolli 9y ago
It was certainly a once-in-a-lifetime event looking back: the greatest economic shock since the Great Depression [0]. As to why it is different now, this article [1] contains some answers (anyone can decide whether they agree or not). [0] https://en.wikipedia.org/wiki/Comparisons_between_the_Great_Recession_and_the_Great_Depression https://en.wikipedia.org/wiki/Comparisons_between_the_Great_... [1] http://cepr.net/blogs/beat-the-press/it-actually-doesn-t-feel-at-all-like-2006-refusing-to-learn-the-lesson-of-the-housing-bubble http://cepr.net/blogs/beat-the-press/it-actually-doesn-t-fee...
rtpg 9y ago
I haven't heard that claim too often. In fact I've heard a hell of a lot of "CDOs are back and as interwoven as ever!" things. Though in theory we've learned a lot, who knows what will happen From my understanding, American student loans can't be defaulted upon? They might be a bit too particular to hit the issues that happened with mortgages
kmfrk 9y ago
It's usually referred to as an "x sigma event". A paper I really like on this is "How Unlucky is 25-Sigma?" https://arxiv.org/abs/1103.5672 https://arxiv.org/abs/1103.5672.
ChicagoBoy11 9y ago
Mostly on the basis that it is the only way they can justify to clients/viewers/etc to "not have seen it." One would very reasonably conclude that the failure of banks/regulators/analysts to see any of this would likely be a good sign that they prob. don't really know what they are talking about, and predicting the market is actually kinda impossible, and consequently the value they add to their clients is minimal/none. So, in order to not give that impression, it is much easier to say that your models are in fact correct, but it just so happens that the financial crises was a "once in a lifetime" event.

dustinmoris 9y ago

I think we will see a bigger correction very soon. Markets crash periodically and we haven't had a crash for a while now. A periodic crash is not uncommon and actually makes a lot of sense when you think about the high level picture of what really goes on in stock markets. Stock markets are essentially dominated by greed (to get a higher ROI from stocks than through more traditional ways) and this greed leads to an increasing over valuation of assets over a period of time (multiple years). At some point the over valuation is so big that it becomes very visible to investors, at which point they get cold feet and start selling, and then... boom. The markets drop to the point where the majority of investors agrees that the current valuation matches the expected ROI again and therefore stop further selling. After a couple years of conservative trading the markets return to become slightly more optimistic again and the game starts from scratch again. It is a natural cycle and nothing we can do to change, just embrace a crash every 10-20 years or so... http://macromarkets.ie/wp-content/uploads/2016/09/Asset-Prices-GDP.jpg http://macromarkets.ie/wp-content/uploads/2016/09/Asset-Pric...

TekMol 9y ago
stock markets are dominated by greed Greed is "an inordinate or insatiable longing for unneeded excess". I doubt one can show that this is what drives the stock market. What we probably can agree on is that the stock market is driven by the actions of many actors who try to maximise the utility value of the assets under their control. an increasing over valuation of assets We cannot show that assets are overvalued at any time. The value of an asset is very different to every actor. Everybody puts different expectations into the assets they control. Even if we apply some 'simple' mathematical definition like the NPV of future returns, we could not say if an asset is overvalued in regards to that. Because the future returns are unkown. And we cannot say in hindsight either. Because the value of an asset is a statistical function of possible future outcomes. So the actual outcome does not tell us what the statistical function looked like.
- dustinmoris 9y ago
  I never said that we can show that an asset is overvalued, I simply described what actually has happened in the past multiple times and what seems to be happening again. The truth is that investors will always pump as much money into a stock as long as there is still a logical explanation for a positive ROI. However at some point the stock becomes so hot that the general public will also start pumping money into it (with the simple hope of making some quick and easy $), at which point the value will skyrocket even further until there is no logic explanation anymore and it becomes very difficult to justify the value in any logical way... and that's when it bursts. Just look at Bitcoin and tell me I'm wrong...

TekMol 9y ago

I hold 50% of my assets in shares and 50% in money. I cannot decide if I should hope for the stock market to go up or down. What do the wise people of HN think?

maaaats 9y ago
Up. If you hope for a crash so that you can invest your other money in a dip, you are foolish to try to time the market and would probably be better of to invest it earlier and just spend more time in the market.
- TekMol 9y ago
  Would you argue the same way if I was holding 99.9% of my assets in money and 0.1% in shares? Would you still say I should hope for the stock market to go up? Or is it related to the percentages? If so, where is the threshold?
  - maaaats 9y ago
    My answer was under the assumption that you were interested in changing your allocation.
tyingq 9y ago
Guessing the bottom is hard. Spreading risk, like you have done, is a better idea. Maybe be more granular than "money market" and "stocks" though. There's bonds, annuities, real estate, foreign derivitives, and other vehicles too.
- TekMol 9y ago
  You seem to imply that I am looking for investment advice or that my approach of asset allocation might change. Neither is the case. I will simply continue to hold 50% in shares and 50% in money. My question is what is better for me. If stocks go up or if stocks go down.

nurettin 9y ago

Sales of stocks means that the main market movers want to liquidate their assets. Escaping a possible crash or fear of overvaluation are not the only reasons you want cash. You could also be preparing for a huge investment. Considering how privatized USA is, they could be preparing to invest in some government related action or venue. This could even mean an impending war.

jnsaff2 9y ago

"But because everyone worries and saves a little more, and invests and spends a little less, the economy gets stuck in a downturn. Recessions are an outbreak of collective madness." Or maybe "Recessions are an outbreak of collective sanity."

Economics4u 9y ago
Perhaps you can explain how everyone can save in aggregate? Where do people get this idea that "saving" is somehow virtuous?
- gbacon 9y ago
  The notion that savers hoard their money in mattresses is a caricature, not serious economics.
- taneq 9y ago
  > Where do people get this idea that "saving" is somehow virtuous? Savings are a form of safety net, since individuals don't have access to unlimited funds or unlimited credit. The higher the perceived risk of financial trouble (loss of job, a surge in cost of living, etc.) the more savings you need in order to mitigate that risk. Do you really need this explained to you?
  - grasshopperpurp 9y ago
    Good post. Americans have to build their own safety nets, because the societal safety nets are so poor. If you're standing on the edge of a tall building, you're probably not going to practice gymnastics - unless you mean to post it on Instagram (x_x).
    - Bromskloss 9y ago
      Presumably – hopefully – people save anyway to avoid plunging into said safety net. It might be unpleasant, both the knowledge of having not been able to provide for yourself, and the standard of living that you might be limited to if you're deep in the net.

minikites 9y ago

You know you live in the best country in the world when rising wages cause the market to plunge: https://www.nytimes.com/2018/02/02/business/stock-market-interest-rates.html https://www.nytimes.com/2018/02/02/business/stock-market-int... >The immediate catalyst was the jobs report, which showed the strong United States economy might finally be translating into rising wages for American workers. We even punish individual companies for this: https://www.vox.com/new-money/2017/4/29/15471634/american-airlines-raise https://www.vox.com/new-money/2017/4/29/15471634/american-ai... >American Airlines agreed this week to do something nice for its employees and arguably foresighted for its business by giving flight attendants and pilots a preemptive raise, in order to close a gap that had opened up between their compensation and the compensation paid by rival airlines Delta and United. >Wall Street freaked out, sending American shares plummeting. After all, this is capitalism and the capital owners are supposed to reap the rewards of business success. >“This is frustrating. Labor is being paid first again,” wrote Citi analyst Kevin Crissey in a widely circulated note. “Shareholders get leftovers.”

cs702 9y ago

The specter of rising interest rates in the US (driven by higher inflation expectations) appears to be a factor. Fast-growing companies which are investing aggressively today and whose profits lie far in the future, in particular, are exposed to rising interest rates, due to the higher duration of such companies' cash flows. Duration, for those here who don't know, is a measure of the sensitivity of present value to interest rates.[a] Duration rises with the amount of time an investor must wait for cash flows, and vice versa. For example, the present value of $100,000 of cash flow to be generated in 10 years, if the 10-year rate is 2%, is equal to $100,000/(1.02^10) = $82,000; if the 10-year rate rises, say, from 2% to 3%, the present value declines to $100,000/(1.03^10) = $74,000, or a -10% decline. However, if the $100,000 in cash flow is to be generated in 30 years, and the 30-year rate rises from 2% to 3%, the present value declines from $100,000/(1.02^30) = $55,000 to $100/(1.03^30) = $41,000, or a -25% decline. In this example, an increase in duration from 10 to 30 years changes the sensitivity of present value to a 1 percentage-point rise in interest rates from a -10% decline to a -25% decline. The longer an investor has to wait for cash flows, the greater the sensitivity of present value to changes in interest rates. The same ruthless logic applies to companies. The present value of companies whose profitability is in a distant future declines much faster when interest rates rise than the present value of companies certain to generate cash flows in the near future. Until recently, due to historically low interest rates and no prospects for inflation, the stock market has been rewarding high-investment companies that are sacrificing current profits for growth. If interest rates continue to rise (along with inflation expectations), I would expect this pleasant state of affairs to change abruptly -- in which case, strap on your seat belts! [a] https://www.investopedia.com/terms/d/duration.asp https://www.investopedia.com/terms/d/duration.asp

Talyen42 9y ago
If you compare something like Netflix or Tesla, whose valuations are based on the proposition of 10x-ing profits sometime in the future, to something like Apple or GM, whose profits are here and now and may not even increase, would that mean Apple/GM (as an example) might fare better while the market adjusts to rising rates? So far, everything is dropping kind of evenly, it seems, but wouldn't companies with near term cash flows be worth more in a rising rates environment?