6 ms·

The Market Is Poised For Catastrophic Losses (Part 1)

28 points by iooi 8y ago

hsienmaneja 8y ago
Why can’t the fed keep interest rates low for the next, say, 15 years? That seems implied from their statements. The market can remain irrational longer than you can remain solvent. Any bet that involves unlimited or outsized risk needs to always consider the possibility of being catastrophically wrong. This includes selling volatility, shorting delta, etc
- dragonwriter 8y ago
  > Why can’t the fed keep interest rates low for the next, say, 15 years? Because inflation, the same reason the Fed has started raising rates and signalled that more raises are likely. (Of course, that could change of inflation crashed or the other side of the Fed mandate created pressure by unemployment spiking, but those each present issues, too.)
- HIPisTheAnswer 8y ago
  Because the fed isnt in control. They just made enough people feel like they were, whih creates a feedback loop. Just look at how the BOJ lost control of their rate curve, and now trillions of long bonds with a zero yield (only potential financial loss) are held by all their major banks... Its an avalanche in the waiting. Can you borrow for 0%?? So the fed doesnt control credit that much after all.
- HIPisTheAnswer 8y ago
  Shorting isnt a good idea either since all the counterparties to those contracts will be insolvent. Buy lead, gasoline, gold and seeds. Collect rainwater and plant food. That s how bad its going to be this time. 1929 was childs play in comparison.
  - hndamien 8y ago
    Buy Bitcoin.
daggerhashimoto 8y ago
this will be the very first economic crisis where we as people have a life boat. Crypto. This will be very interesting. I have plenty of popcorn.
habitue 8y ago
Can anyone qualified/knowledgeable offer commentary on this? It sounds compelling, but since I don't know much about this I am suspicious of making too much of an argument where all the relevant background was provided to me by a person trying to make a point. (that is, the fact that it sounds compelling to me as a layman is very weak evidence that it's true)
- gamblor956 8y ago
  He starts off with specific facts, but within 3 or 4 paragraphs it is all supposition. By the midway point, it's supposition based on supposition. At the end, its a dozen layers of supposition. Also doesn't help his case that he misunderstands the role of equity in the Federal Reserve. Unlike equity in a private company, equity in the Federal Reserve is not an ownership interest. It's essentially a group insurance policy similar to Lloyd's.
- nodesocket 8y ago
  I have been a hobbyist investor in the market since I was 20. Take my thoughts with a grain of sand as I by no-means am a professional. Full disclosure; I am also bullish. While I will agree the market has been on an absolute rip roaring tear the last 1 1/2 years, YTD the S&P is only up 5.75%, which is marginally above pace for the historical average. 2018 has been much more volatile, with big swings, and until the last couple of week rally we've been trading nearly sideways. The good news is there are fundamental economic reasons for the rally. Unemployment is at 10 year record lows[1]. The Trump tax cuts really improved fundamentals for companies, allowing many to repatriate capital, increase hiring, and ramp up R&D spending. The GDP growth for the second quarter of this year was an astonishing 4.1%[2]. The US is growing faster than China, and comparing markets is winning the "trade war". Have some high tech growth stocks gotten ahead of themselves? Absolutely, look at their valuations and P/E. With that said, are we on a the verge of a recession and economic collapse, I'd argue firmly no. There are many sectors that are still undervalued in the market, chiefly banks. [1] https://data.bls.gov/timeseries/LNS14000000 https://data.bls.gov/timeseries/LNS14000000 [2] https://www.wsj.com/articles/strong-economic-growth-boosts-u-s-in-trade-battles-1533087875 https://www.wsj.com/articles/strong-economic-growth-boosts-u...
HIPisTheAnswer 8y ago
Yea and dont forget that 'limited liability' is illegitimate, hence equity can go below zero in case of lawsuits. This will eventually be recognized, then watch the stampede out of equity markets.
- gamblor956 8y ago
  Courts only pierce the veil of limited liability when the opposing party can show that the company was deliberately undercapitalized (meaning, insufficiently funded to satisfy its liabilities).
  - HIPisTheAnswer 8y ago
    There are no courts if law in our time. Theyll soon come back on the dark web I hope.
dragonwriter 8y ago
On his key point: “The Federal Reserve Has Lost Control”: it never had control. Monetary policy has limited power, mostly to moderate short-term effects and stop them (or slow them) from becoming runaway catastrophes. The real power is in fiscal policy, which requires the government (as opposed to central bank) to act, usually through Congress. Recently—despite modest and inadequate action in the Great Recession—Congress has been basically asleep at the switch on fiscal stimulus, leaving the Fed on its own with monetary policy as the only lever. Whether this is a limited-time historic aberration or a durable condition is unclear. He's probably right to the extent that collapse is inevitable, even if the timing is far from clear, if the Fed continues to be left alone with monrtary policy as the only took available. He's also right that if Congress were to respond to that by obliterating the Fed and taking on monetary policy itself, things would go from bad to worse.
pesmhey 8y ago
Maybe encouraging riskier bets is a feature not a bug. With a lot of ‘free’ capital floating around, we’ve got people building rockets and AI, people researching how to bring the material resources on an asteroid back to earth. Really ridiculous shit, tbh. But maybe that’s the intent - encouraging risk-taking in search of the next big thing. I could be talking out of my ass though, or I could be completely right and those bets fail anyways.

28 points by iooi 8y ago

Why can’t the fed keep interest rates low for the next, say, 15 years? That seems implied from their statements. The market can remain irrational longer than you can remain solvent. Any bet that involves unlimited or outsized risk needs to always consider the possibility of being catastrophically wrong. This includes selling volatility, shorting delta, etc

dragonwriter 8y ago
> Why can’t the fed keep interest rates low for the next, say, 15 years? Because inflation, the same reason the Fed has started raising rates and signalled that more raises are likely. (Of course, that could change of inflation crashed or the other side of the Fed mandate created pressure by unemployment spiking, but those each present issues, too.)
HIPisTheAnswer 8y ago
Because the fed isnt in control. They just made enough people feel like they were, whih creates a feedback loop. Just look at how the BOJ lost control of their rate curve, and now trillions of long bonds with a zero yield (only potential financial loss) are held by all their major banks... Its an avalanche in the waiting. Can you borrow for 0%?? So the fed doesnt control credit that much after all.
HIPisTheAnswer 8y ago
Shorting isnt a good idea either since all the counterparties to those contracts will be insolvent. Buy lead, gasoline, gold and seeds. Collect rainwater and plant food. That s how bad its going to be this time. 1929 was childs play in comparison.
- hndamien 8y ago
  Buy Bitcoin.

daggerhashimoto 8y ago

this will be the very first economic crisis where we as people have a life boat. Crypto. This will be very interesting. I have plenty of popcorn.

habitue 8y ago

Can anyone qualified/knowledgeable offer commentary on this? It sounds compelling, but since I don't know much about this I am suspicious of making too much of an argument where all the relevant background was provided to me by a person trying to make a point. (that is, the fact that it sounds compelling to me as a layman is very weak evidence that it's true)

gamblor956 8y ago
He starts off with specific facts, but within 3 or 4 paragraphs it is all supposition. By the midway point, it's supposition based on supposition. At the end, its a dozen layers of supposition. Also doesn't help his case that he misunderstands the role of equity in the Federal Reserve. Unlike equity in a private company, equity in the Federal Reserve is not an ownership interest. It's essentially a group insurance policy similar to Lloyd's.
nodesocket 8y ago
I have been a hobbyist investor in the market since I was 20. Take my thoughts with a grain of sand as I by no-means am a professional. Full disclosure; I am also bullish. While I will agree the market has been on an absolute rip roaring tear the last 1 1/2 years, YTD the S&P is only up 5.75%, which is marginally above pace for the historical average. 2018 has been much more volatile, with big swings, and until the last couple of week rally we've been trading nearly sideways. The good news is there are fundamental economic reasons for the rally. Unemployment is at 10 year record lows[1]. The Trump tax cuts really improved fundamentals for companies, allowing many to repatriate capital, increase hiring, and ramp up R&D spending. The GDP growth for the second quarter of this year was an astonishing 4.1%[2]. The US is growing faster than China, and comparing markets is winning the "trade war". Have some high tech growth stocks gotten ahead of themselves? Absolutely, look at their valuations and P/E. With that said, are we on a the verge of a recession and economic collapse, I'd argue firmly no. There are many sectors that are still undervalued in the market, chiefly banks. [1] https://data.bls.gov/timeseries/LNS14000000 https://data.bls.gov/timeseries/LNS14000000 [2] https://www.wsj.com/articles/strong-economic-growth-boosts-u-s-in-trade-battles-1533087875 https://www.wsj.com/articles/strong-economic-growth-boosts-u...

HIPisTheAnswer 8y ago

Yea and dont forget that 'limited liability' is illegitimate, hence equity can go below zero in case of lawsuits. This will eventually be recognized, then watch the stampede out of equity markets.

gamblor956 8y ago
Courts only pierce the veil of limited liability when the opposing party can show that the company was deliberately undercapitalized (meaning, insufficiently funded to satisfy its liabilities).
- HIPisTheAnswer 8y ago
  There are no courts if law in our time. Theyll soon come back on the dark web I hope.

dragonwriter 8y ago

On his key point: “The Federal Reserve Has Lost Control”: it never had control. Monetary policy has limited power, mostly to moderate short-term effects and stop them (or slow them) from becoming runaway catastrophes. The real power is in fiscal policy, which requires the government (as opposed to central bank) to act, usually through Congress. Recently—despite modest and inadequate action in the Great Recession—Congress has been basically asleep at the switch on fiscal stimulus, leaving the Fed on its own with monetary policy as the only lever. Whether this is a limited-time historic aberration or a durable condition is unclear. He's probably right to the extent that collapse is inevitable, even if the timing is far from clear, if the Fed continues to be left alone with monrtary policy as the only took available. He's also right that if Congress were to respond to that by obliterating the Fed and taking on monetary policy itself, things would go from bad to worse.

pesmhey 8y ago

Maybe encouraging riskier bets is a feature not a bug. With a lot of ‘free’ capital floating around, we’ve got people building rockets and AI, people researching how to bring the material resources on an asteroid back to earth. Really ridiculous shit, tbh. But maybe that’s the intent - encouraging risk-taking in search of the next big thing. I could be talking out of my ass though, or I could be completely right and those bets fail anyways.