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Can We Survive the Next Financial Crisis?

246 points by chollida1 8y ago

acconrad 8y ago
One of the few times Bettridge's Law of Headlines doesn't apply. "Survive" is an extreme word here, but I do see a big issue w/ index funds. Perhaps an unpopular opinion - but I believe index funds will be the next major bubble that cripples the financial system. It's one massive way to persist the same inequality status quo. You know what made Bezos so rich in spite of a company that doesn't make much accounting sense? When everyone is betting on his success by blindly investing in index funds. Bet on the winners (because they're in the S&P 500 or some total market fund), even if they aren't performing that well by their accounting metrics. Everyone will be so invested in propping up the largest companies (or at least the US/China economic moneymakers) that when a few big players seem to be doing something egregious, it will be a tsunami of sells as opposed to a small wave. When everyone is playing and no one knows how to play (because why do I care what the market does? I just let the index fund manage for me), it just reminds me of the advice "if it seems too good to be true, it probably is". The current narrative is: you don't need to know how to invest (neither does your investment fund manager). Just bet on everything, and we'll all win. And by we, we mean the fat cats who are taking in that investment money you're giving us. You'll make a meager return, but we'll make oh so much more.
- Retric 8y ago
  Index funds don't necessarily need to react to price changes. If you have 2 companies A, B worth both worth X billion each and you own 1 billion$ of each. Then if A's value doubles you now own 2 billion$ of A and 1 billion$ of B which is also the correct ratio.
- the_gastropod 8y ago
  > You know what made Bezos so rich in spite of a company that doesn't make much accounting sense? When everyone is betting on his success by blindly investing in index funds. Let's see... AMZN: up 62.93% YTD S&P500: up 6.81% YTD I don't think index fund investors are the cause of Amazon's growth.
  - hndamien 8y ago
    My theory it is QE and maybe Roboinvesting.
    - the_gastropod 8y ago
      We've been (slowly) raising interest rates for the past few years. And even if it were QE, why would it (and robo investing) affect Amazon 10x more than the broader market?
      - hndamien 8y ago
        Well, not all of it. I also think Amazon is a good stock for many reasons. 10x seems like a stretch though, many other tech stocks have seen similar yields.
  - aphextron 8y ago
    >I don't think index fund investors are the cause of Amazon's growth. Sure they are. Index funds are not equally weighted. Practically every tech ETF you can buy has Amazon weighted in the top 10, sometimes over 10% of total assets [0] whereas the average for other securities is below 1% at the most. [0] https://money.usnews.com/funds/etfs/large-growth/invesco-qqq-trust/qqq https://money.usnews.com/funds/etfs/large-growth/invesco-qqq...
    - votepaunchy 8y ago
      The OP cites "S&P 500 or some total market fund", which are market-cap weighted.
      - aphextron 8y ago
        Irrelevant. The market cap is still affected by large scale automated passive investing.
    - jonknee 8y ago
      What do you consider equal weighting? Amazon is the second most highly valued public company in the world, should it be counted the same in the index as Fossil Group (one of the smallest S&P 500 companies with a market cap of $1.15b)? To me that would make no sense and would make you hugely underweight AMZN and hugely overweight FOSL.
- jorblumesea 8y ago
  If you bought an actively managed fund 30 years ago, it was literally an index fund with more fees attached. Active managers actually just index, but try hard to obfuscate this fact to justify their high fees. If you dive into their books, they are basically buying the market. I think it begs the question, how active was/is active? The math is clear, you are statistically unlikely to beat the market.
  - mikert5671 8y ago
    Some of them do beat the market. They are also producing returns that are more robust to a downturn. So even if they dont match the S&P performance, in a downturn they dont lose as much as the S&P does. It's difficult to compare index funds to hedge funds, they have different purposes. When the market is always going up, it looks like a scam.
    - jorblumesea 8y ago
      Hedge funds are also statistically unlikely to beat the market and finding one that does requires a huge capital buy in that few workers can make. You're talking 250-500k minimum buy in. Hedge funds have chronically underperformed for the last 10-15 years. Now that so much information is available, much of the market performance is priced in now. Once again, the best bet for the average person is an index fund. On a 30 year timeline all of these blips are smoothed out. If you can afford top level financial firms you're probably way wealthier than the average person.
    - nradov 8y ago
      Did they beat the market because they are actually better investors, or did they just get lucky? There are so many hedge funds now that statistically a few of them are guaranteed to have long lucky streaks.
      - Xcelerate 8y ago
        If you could decide this accurately, then you would have a strategy for your own hedge fund.
- camjohnson26 8y ago
  Looks like investor Bill Ackman, famous for shorting the housing market before the bubble burst, had the same theory back in 2016. It's an interesting perspective. https://www.marketwatch.com/story/bill-ackman-actually-had-a-point-with-his-index-fund-bubble-theory-2016-01-30 https://www.marketwatch.com/story/bill-ackman-actually-had-a...
  - airstrike 8y ago
    > famous for shorting the housing market before the bubble burst Also famous for losing more than $3 billion (or $7.7 million per day) on Valeant http://fortune.com/2017/03/15/valeant-stock-bill-ackman/ http://fortune.com/2017/03/15/valeant-stock-bill-ackman/
    - camjohnson26 8y ago
      Famous for taking big risks that sometimes pay out and sometimes fail dramatically.
      - asdfasgasdgasdg 8y ago
        Taking big risks is only laudable if you win. https://assets.pershingsquareholdings.com/media/2014/09/17123349/Pershing-Square-1Q18-Investor-Letter-PSH.pdf https://assets.pershingsquareholdings.com/media/2014/09/1712... Oof. Up 1% over a time period where the S&P is up 118%. Brutal.
        camjohnson26 8y ago
        Active funds generally underperform during periods of economic growth and we're in the longest running bull market of all time right now. Ackman makes mistakes but he is still very insightful and backs his opinions with dollars. No one who deals with risk is going to have a perfect track record, and even though his Valeant and Herbalife bets didn't pay off the opportunities/flaws he saw were real, other factors just happened to be more important such as Icahn propping up the price of Herbalife and Valeant's accounting problems.
- darawk 8y ago
  This is a real misunderstanding of how markets work. An index fund invests in everything, market-cap weighted (usually). This means that your investment merely reinforces the prices already determined by the other participants in the market. There are still huge numbers of active managers, not to mention quants and others. They, collectively, determine the prices of assets. When you invest in an index fund, you're just saying "I'll have what they're having", basically. It doesn't cause amazon to rise in price. Lots of companies are in the S&P 500, they don't have returns like Amazon does. Amazon has those returns because people allocate capital specifically to them, i.e. non-index investors. > And by we, we mean the fat cats who are taking in that investment money you're giving us. You'll make a meager return, but we'll make oh so much more. Index funds are the least fat-cat-remunerating route you have available to you. They have lower expense ratios than you'd be able to achieve on your own, unless you're using a free service like Robinhood (and if you do that, you're probably paying in other ways, like poorer execution prices).
  - toss1 8y ago
    > basically. It doesn't cause amazon to rise in price. Actually, it does. Whenever a company is added to one of the major indexes, it almost always increases in price, and conversely, when one is removed, it generally declines. This is specifically because of all of the index funds that suddenly must put money into/remove it from the stock when it is added/removed from the index. Supply, Demand, price curves, you know the rest ...
    - crazygringo 8y ago
      But are those short-term artifacts or do they persist? As long as stock prices are set fundamentally by deep-pocketed institutional investors buying and selling, a stock's price should only be based on expected discounted future cash flows, no? I can understand a short-term effect if demand suddenly skyrockets, but that can only last a few days, no? I'm struggling to reconcile traditional supply/demand with the efficient-market hypothesis here.
    - darawk 8y ago
      Yes, but it impacts everyone in the index equally. Index funds are not responsible for amazon in particular's performance.
- vinylkey 8y ago
  I think I'll listen to Warren Buffet's advice on index funds.
- nabla9 8y ago
  For the discussion in relatively high quality formus like HN to survive there needs to be new rule adopted: Nobody is allowed to criticize or discuss the title of the article. Only the content in the body of the article. These titles are usually written by editors who think in clicks and they are not the original titles from the writers. This was good and interesting article but unless we discuss the content (and read it) there is nothing to say.
  - wallacoloo 8y ago
    Many readers at HN find posts with interesting titles, skim the comments, and then read the article. Discussion of the title is useful for them, because if a commenter reveals that the title is misleading, the reader might choose to read something else, or approach the article with a different frame of mind. Point being: there is some value in discussing the title. Certainly different readers value that discussion more/less than discussion of the content.
    - nabla9 8y ago
      > because if a commenter reveals that the title is misleading This is rarely the case. Usually (as is the case here). The commenter uses the title title as a statement and criticizes it directly, not it's relation to the article. It seems to me that people read the title, and come here to comment the title before reading the article.
      - mrep 8y ago
        I've got 27 points on the first comment of this article [0] talking somewhat about the title and 8 points on my follow up about how the title is misleading so some people including myself definitely think the title is important. [0]: https://news.ycombinator.com/item?id=17941804 https://news.ycombinator.com/item?id=17941804
- twiceaday 8y ago
  I see a lot of issues here You are conflating the general notion of index funds with the common investing advice of buying and holding index funds. I would argue that holding here is the vast majority of the advice. Plenty of people day trade index funds. You should be explicit that your objection is to the un-informed buying and holding of index funds. Also, you should be explicit in how you think a crash would come about, instead of simply mentioning a popular investment category. Index funds do not discriminate. I don't understand how you drew the connection between them and an individual company like Amazon. You make the assumption that people who now buy index funds would otherwise be intelligent investors that would correctly set stock prices. I doubt it. The trading patterns of most people have to be near random, more noise than signal, and likely very emotional. In fact, in this way index funds reduce the chances of a crash by removing this kind of nervous money from the stock market. You make the assumption that index funds would swallow up all investments when in reality the edge that active investors have increases as the number of active vs passive investors decreases. There is a self-balancing force at play. You simply have a wrong outlook on index funds. Buying a total index fund is investing in the entire stock market; betting that it is healthy and will grow with time. That's all. It is as much "too good to be true" as a healthy economy. Yes, buying an index fund means not participating in the process of correctly allocating resources to the best companies. But the important thing is that you are not in any way harming the actual participants because you obey their prices. This means you are essentially investing as the average active investor. And lastly, it is naive to think that "fat cats" take more money from passive investors than they do from active ones.
- deleted 8y ago
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HashThis 8y ago
The surprise that is coming is that the working class won't tolerate being robbed in the next financial crisis. Working American's had to financially absorb the 2008 Mortgage crisis. 2008 was a direct robbery because Mortgage Orginators KNEW the mortgages would blow up, because their own Underwriting equations said they would. That is why they did fraud on the customer's income levels or worked with politicians to allow ignoring customer's income. It caused a $5 trillion in transfer from the wealthy away from the working classes to the investor class in that 2008 Mortgage crisis. The 2008 Mortgage crisis robbed the working classes, and transferred to the investor classes. Homes lost because of unemployment. Savings gone via rigged economy unemployment. Bail outs. Banks offloaded their worthless assets with government buying them. Wall Street over leveragged had huge wealth handed to them in money printing that was giving directly to their balance sheets. The surpise will come the next time a Financial Crisis comes and the government works to sell out the working class
- cheez 8y ago
  Not enough people felt the pain the last go around. It will be the same this time.
- badbug 8y ago
  The working class will be too busy trying to keep up. There won't be time for a revolution.
  - busterarm 8y ago
    I'm bullish on the sentiment expressed by the parent poster, actually. Like another commentator, I believe index funds are going to be ripped hard and this is what the average saver has been told to dump their money into by the banking industry since the last crisis.
    - waterphone 8y ago
      Investing in total market index funds is literally investing in the economy as a whole. (Or as much of a whole as the index represents.) So while yes, they will crash with future market crashes, of which there will be many in each of our lifetimes, historically in the U.S. so far the market has always recovered.
y-c-o-m-b 8y ago
The definition of "we" and "survive" needs to be established clearly first and I don't think all those fancy graphs and market trends will define them. There's a lot of people that ended up bankrupt, in a bottomless depression, turned to drug abuse or committed suicide because of the last crisis. Wages are still relatively low while prices continue to climb. Many people are working 2-3 jobs and having trouble affording rent across major cities in the U.S. A glimpse at American's savings accounts shows a single healthcare incident can wipe out most anyone, let alone financial crisis: https://smartasset.com/checking-account/savings-account-average-balance https://smartasset.com/checking-account/savings-account-aver...
- linuxftw 8y ago
  I agree. It's I don't care if banks survive as long as I'm not negatively impacted. I'm sure the banks feel the same way. Survive also doesn't mean 'maintain standard of living.' The government has a surefire way of propping up the wealthy: Inflation. Savings accounts lose purchasing power (normal person) and the means of production gets more expensive (wealthy).
  - travisoneill1 8y ago
    This is backwards. Inflation destroys the value of debt. Poor tend to be borrowers and rich tend to be lenders, so inflation is an equalizer.
    - clairity 8y ago
      no, the wealthy keep their capital in assets with above average returns. the rest of us get to pay for that with below average returns, fees, and inflation.
      - travisoneill1 8y ago
        Yes that would explain them being rich. But I'm sure you have heard the phrase "Past performance is no guarantee of future results." What I am talking about here is debt. Owe money on your house? Inflation makes you owe less. Lend money to someone buying a house? Inflation means you get paid back less.
deleted 8y ago
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bogomipz 8y ago
The article states: >"Leverage has shifted to companies from consumers, and some risk has migrated to shadow banks from traditional lenders." Can someone explain this statement to me. The banks were the one's that were too heavily leveraged before. This is why the required the bailout. What am I missing?
- sschueller 8y ago
  What are shadow banks? Sounds to me the risk was just moved off the books using some financial trickery into "shadow banks" and when those blow they take the regular banks with them.
  - airstrike 8y ago
    Shadow banks were already a thing in 2007-2008 https://www.philadelphiafed.org/-/media/research-and-data/publications/business-review/2014/q2/brQ214_shadow_banking.pdf https://www.philadelphiafed.org/-/media/research-and-data/pu...
briatx 8y ago
Yes. The lesson of 2008-9 is that TBTF and bailouts will be applied in case of any financial crisis. Not much has been done to rein in moral hazard and so institutions will continue to offload risk to the public when they can. This works as long as the Treasury and Fed can absorb the shock and will create near term stability, at the potential cost of a currency crisis if the shock is too big to be absorbed.
- topspin 8y ago
  This is dead on correct; the precedent has been set and has no significant opposition; almost no one in power today would deviate. Questions I ponder; Is the US in the coffin corner where then next recession inevitably induces the next financial crisis or can we still have a conventional recession that doesn't strip a bunch of gears and lead to QE funded deficits and bailouts? Is the traditional recession/recovery cycle politically feasible any longer or will the great and the good open up the QE spigot at the first sign of trouble? The answers would help to predict a lower bound on the eventual currency collapse.
- gdubs 8y ago
  Part of the story of 2008-9 was that congress nearly didn't act, with Paulson famously getting down on bended knee to beg Pelosi to whip the necessary votes. The government has the capacity to act – but there's no guarantee that they'll make the correct choices in a timely manner.
  - wrycoder 8y ago
    I'm pretty sure that Hank was part of the decision to let Lehman go, so he knew he screwed up.
    - yborg 8y ago
      That was just GS thinning out the competition.
darawk 8y ago
> The leveraged loans are now being packaged into collateralized loan obligations and sold to investors. Sound familiar? And the CLO market has grown to match the size of the CDO market at its pre-crisis peak. Yet one major difference makes the CLOs of today less scary: The loans that comprise them are backed by collateral, and if one of the companies in the mix defaults, an investor can find recourse through the sale of that collateral. Pre-crisis CDOs built on mortgage-backed securities had no such backstops. Maybe this is just my ignorance of the terms of CDO agreements...but weren't they collateralized by the homes? I mean, it's in the name: Collateralized Debt Obligation. And wouldn't that make this CLO market exactly identical to the CDO market?
- travisoneill1 8y ago
  Yeah, that doesn't make any sense. The reason CDO's were underwater is because the price of housing dropped and left the collateral worth less than the principal of the loan. Loans to companies follow the same principal. If the value of companies suddenly drops same thing. It's a weird statement and is directly contradicted by the next paragraph in the article.
  - deleted 8y ago
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- topspin 8y ago
  > but weren't they collateralized by the homes? Much exaggerated in value homes, yes. > And wouldn't that make this CLO market exactly identical to the CDO market? The mortgage debt market is backed by GSEs. When the bubble popped Fannie and Freddie held over $5 trillion in mortgage securities. They are the market maker -- the buyer of last resort -- that makes the whole mortgage securities market liquid. CLOs don't have such a market maker. There are certainly market makers, but they aren't US GSEs with multiple trillion dollar balance sheets backed by the US Treasury. This limits the degree to which the CLO market can overextend. Not that corporate debt can't grow to disruptive proportions. Problems with corporate debt is how the term 'junk bonds' emerged as a household word in the 80's. Now that we're rolling BBB quality debt into CLOs (as of last April, apparently) the clock is ticking once again.
bitxbit 8y ago
People live too comfortably now for us to see anything significant. 2008 was blatant and the Occupy Wall Street movement lasted a hot summer. I know a lot of people are expecting the next crash right around the corner but it's not gonna happen until the Chinese economy collapses which I don't see unfolding without Xi putting up a fight.
acd 8y ago
Yes we will survive the next crisis but we will have to switch to a green crypto based currency. The Zero interest rate policy has made for ownership accounting errors. We will also need to consume less and make use of more recycled goods. There is a leverage issue where young people are in debt, has less house ownership compared to older people who own lots of the assets houses, stocks and derivatives. https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7706 https://researchbriefings.parliament.uk/ResearchBriefing/Sum... https://i2.cdn.turner.com/money/dam/assets/170808150752-chart-stock-market-ownership-age-780x439.jpg https://i2.cdn.turner.com/money/dam/assets/170808150752-char... There is an accounting error in the current market system of tragedy of the commons where pollutions of common assets the polluter does not pay.
based2 8y ago
https://en.wikipedia.org/wiki/Juglar_cycle https://en.wikipedia.org/wiki/Juglar_cycle
cm2187 8y ago
The article dismissed bailin in a short sentence at the end when I think it is one of the most significant difference between 2007 and now. Bail-in is the right given to the regulator to declare a bank non viable and to impose an instantaneous, extrajudicial, chapter-11. Basically writing down bond holders over the course of a week end, and possibly any unsecured, non deposit-guaranteed creditor of a bank, and in this way auto-recapitalising the bank. It has been used a few times in Europe already, though not on major institutions yet. I am not aware that in the US only holdco debt is bail-inable, so I am not sure why the article infers that the tightening in borrowing cost between holdco and opco means investors don't believe in a bailin. I'd say that they rather don't believe in a bailin of the holdco only. In the UK the regulator stated its approach of bailin-ing the holding company first before considering the operating company (bank), and you see a clear spread between the two, particularly initially as banks are starting to issue debt out of the holding company (and therefore a lot of bailin risk is concentrated on a small amount of debt). Another important difference is that unlike 2007, a default risk of banks is priced in. The market has the capacity to absorb losses, in fact it is designed for that. The issue comes when losses occurs in places where they were not expected (money market funds, "AAA" MBS, bonds issued by major financial institutions, these were what cause the 2008 run on the banks). Then it gets really messy. But even now (in rather benign credit markets), bank credit spreads are still significant. What worries me is not banks themselves, but sovereign debt and central bank capacity to react. We forget that as recently as 2011, investors were getting seriously worried of a country like Italy defaulting. Italy has now even more indebtedness, and a populist government that wouldn't think twice about making a radical action on its foreign debt. And other countries like France aren't that far behind, with a massive reliance on short term borrowing and no political willingness to control public deficits. Central banks on the other hands are still all-in on QE (at the current rhythm the Fed will have fully retired QE well after the next cycle kicks in), and with very low rates. So what levers are they going to use next? And yeah if states collapse, the financial system under them will be wiped out.
- asdfasgasdgasdg 8y ago
  > And yeah if states collapse, the financial system under them will be wiped out. That's not a thing that is foreseeable. Default? Perhaps. Collapse? Plenty of states have defaulted and not failed.
adreamingsoul 8y ago
Just my opinion, but... Our survival depends on local farms and businesses that are able to produce real value for people. I define "real value" as resources having the ability to be bought, sold, and traded for other resources. For example, one hour of labor is worth X pounds of produce from a local farmer. Our culture has too much of a dependence on global supply chains that will become increasingly expensive and scarce in the coming years. So yeah, the next financial crises will be just the beginning. Add to it climate change, trade wars, unstable governments, and I start to see a troubling future that will affect us all in some way or another.
- gruez 8y ago
  >Our survival depends on local farms and businesses that are able to produce real value for people. "real value" - that's a vague term. can you expand on that more? how does $6/lb (random guess at the price) bananas from california , provide more "real value" than $0.4/lb bananas from central america? >Our culture has too much of a dependence on global supply chains that will become increasingly expensive and scarce in the coming years. so globalized stuff is going to get more and more expensive, relative to more local stuff. isn't that supposed to be good, given how much you like local goods?
  - adreamingsoul 8y ago
    Yes, in the long term having less of a dependence on the global supply chain is better for the local economy, climate, and people. But during that transition, a lot of people are going to be negatively affected. Today, it's my opinion that our culture has an unhealthy fascination and addiction towards products and goods that have a cost that is not reflective of the real value to sustainable supply the demand. Too many things these days are subsidized to create consumer demand and those dependencies are unhealthy and unsustainable. "Like the links in a chain, one by one they will start to give until the chain collapses." Ideally, consumers will have to pay the real value for those products and goods or go without until they can afford it. It's entirely possible that in your example, both prices are reflective of the real cost to grow, maintain, and distribute bananas. As a consumer, the price of $0.4/lb is cheaper and will keep more money in my pocket (or does it?) when compared to the $6/lb price. However, as a consumer I should take into account the other factors of that cost, for example, how much did it cost to ship those bananas to my local store? How much does it cost for the farmers to support their families? Should I even be eating bananas right now? Can I take a break from bananas and save up to afford the bananas that are closer to me? Is it better to support the local farmers in my region, or the farmers across the world? Maybe both? We need to be asking more questions about the big picture.
brianpgordon 8y ago
> The leveraged loans are now being packaged into collateralized loan obligations and sold to investors. Sound familiar? And the CLO market has grown to match the size of the CDO market at its pre-crisis peak. Yet one major difference makes the CLOs of today less scary: The loans that comprise them are backed by collateral, and if one of the companies in the mix defaults, an investor can find recourse through the sale of that collateral. Pre-crisis CDOs built on mortgage-backed securities had no such backstops. Wait, what's the difference here? Mortgages had collateral- the homes. That's the C in CDO. The problem was that when home prices fell, the collateral wasn't enough to cover the loan defaults. It seems like the same thing could happen for a structured product based on other types of debt if the collateral turns out to not be as valuable as we thought.
adiusmus 8y ago
Short answer: Yes. Survival is a very low bar. Going bankrupt qualifies as surviving since being alive along with having faith in the future can be enough to rebound successfully. Plenty of millionaires exist now because they learnt from failure from bad luck or poor execution of a plan. Whether we taxpayers will be able to bail out various institutions that should have failed dismally last time is another matter. According to the article, banks are better off now but that remains to be seen. Nothing like reality to expose a gap in planning or regulations. Multiple institutions have likely not learnt their lesson and are probably unbalanced or unstable right now. The downturn is likely already happening in some sectors in some obscure way and what the flashpoint will be is anyone’s guess. Possibly student loans but that’s a slow burn safely covered by the government and people who can’t escape paying so it’s effectively already bailed out. Might be the unpaid pensions which are already hitting the budgets of multiple states. Petrodollar consequences may be a factor since it might cause moneyprinting to be less effective. Interesting times ahead I’m sure.
m3kw9 8y ago
Just because is human nature to think history could repeat itself, he is looking at the next crisis from a similar angle, which is implying lighting striking twice. I would look at polical or after shocks from a melt down from another super power.
qaq 8y ago
There is a lot of blame to go around but It would be nice for people to actually realize what is obvious post-factum was not really obvious at the time. I had friend who was VP at JPM and prior to crisis when all the banks were posting record profits Jamie Dimon started unwinding some risky positions and taking write downs, there was a lot of heat from shareholders and if it was someone of lesser statue that person most likely would back down or even get ousted.
solomondrix 8y ago
Let's hope we don't have to 'survive'
tmaly 8y ago
I think its worth reading or getting the audio for the book Antifragility. It raises some good points about the financial system.

246 points by chollida1 8y ago

One of the few times Bettridge's Law of Headlines doesn't apply. "Survive" is an extreme word here, but I do see a big issue w/ index funds. Perhaps an unpopular opinion - but I believe index funds will be the next major bubble that cripples the financial system. It's one massive way to persist the same inequality status quo. You know what made Bezos so rich in spite of a company that doesn't make much accounting sense? When everyone is betting on his success by blindly investing in index funds. Bet on the winners (because they're in the S&P 500 or some total market fund), even if they aren't performing that well by their accounting metrics. Everyone will be so invested in propping up the largest companies (or at least the US/China economic moneymakers) that when a few big players seem to be doing something egregious, it will be a tsunami of sells as opposed to a small wave. When everyone is playing and no one knows how to play (because why do I care what the market does? I just let the index fund manage for me), it just reminds me of the advice "if it seems too good to be true, it probably is". The current narrative is: you don't need to know how to invest (neither does your investment fund manager). Just bet on everything, and we'll all win. And by we, we mean the fat cats who are taking in that investment money you're giving us. You'll make a meager return, but we'll make oh so much more.

Retric 8y ago
Index funds don't necessarily need to react to price changes. If you have 2 companies A, B worth both worth X billion each and you own 1 billion$ of each. Then if A's value doubles you now own 2 billion$ of A and 1 billion$ of B which is also the correct ratio.
the_gastropod 8y ago
> You know what made Bezos so rich in spite of a company that doesn't make much accounting sense? When everyone is betting on his success by blindly investing in index funds. Let's see... AMZN: up 62.93% YTD S&P500: up 6.81% YTD I don't think index fund investors are the cause of Amazon's growth.
- hndamien 8y ago
  My theory it is QE and maybe Roboinvesting.
  - the_gastropod 8y ago
    We've been (slowly) raising interest rates for the past few years. And even if it were QE, why would it (and robo investing) affect Amazon 10x more than the broader market?
    - hndamien 8y ago
      Well, not all of it. I also think Amazon is a good stock for many reasons. 10x seems like a stretch though, many other tech stocks have seen similar yields.
- aphextron 8y ago
  >I don't think index fund investors are the cause of Amazon's growth. Sure they are. Index funds are not equally weighted. Practically every tech ETF you can buy has Amazon weighted in the top 10, sometimes over 10% of total assets [0] whereas the average for other securities is below 1% at the most. [0] https://money.usnews.com/funds/etfs/large-growth/invesco-qqq-trust/qqq https://money.usnews.com/funds/etfs/large-growth/invesco-qqq...
  - votepaunchy 8y ago
    The OP cites "S&P 500 or some total market fund", which are market-cap weighted.
    - aphextron 8y ago
      Irrelevant. The market cap is still affected by large scale automated passive investing.
  - jonknee 8y ago
    What do you consider equal weighting? Amazon is the second most highly valued public company in the world, should it be counted the same in the index as Fossil Group (one of the smallest S&P 500 companies with a market cap of $1.15b)? To me that would make no sense and would make you hugely underweight AMZN and hugely overweight FOSL.
jorblumesea 8y ago
If you bought an actively managed fund 30 years ago, it was literally an index fund with more fees attached. Active managers actually just index, but try hard to obfuscate this fact to justify their high fees. If you dive into their books, they are basically buying the market. I think it begs the question, how active was/is active? The math is clear, you are statistically unlikely to beat the market.
- mikert5671 8y ago
  Some of them do beat the market. They are also producing returns that are more robust to a downturn. So even if they dont match the S&P performance, in a downturn they dont lose as much as the S&P does. It's difficult to compare index funds to hedge funds, they have different purposes. When the market is always going up, it looks like a scam.
  - jorblumesea 8y ago
    Hedge funds are also statistically unlikely to beat the market and finding one that does requires a huge capital buy in that few workers can make. You're talking 250-500k minimum buy in. Hedge funds have chronically underperformed for the last 10-15 years. Now that so much information is available, much of the market performance is priced in now. Once again, the best bet for the average person is an index fund. On a 30 year timeline all of these blips are smoothed out. If you can afford top level financial firms you're probably way wealthier than the average person.
  - nradov 8y ago
    Did they beat the market because they are actually better investors, or did they just get lucky? There are so many hedge funds now that statistically a few of them are guaranteed to have long lucky streaks.
    - Xcelerate 8y ago
      If you could decide this accurately, then you would have a strategy for your own hedge fund.
camjohnson26 8y ago
Looks like investor Bill Ackman, famous for shorting the housing market before the bubble burst, had the same theory back in 2016. It's an interesting perspective. https://www.marketwatch.com/story/bill-ackman-actually-had-a-point-with-his-index-fund-bubble-theory-2016-01-30 https://www.marketwatch.com/story/bill-ackman-actually-had-a...
- airstrike 8y ago
  > famous for shorting the housing market before the bubble burst Also famous for losing more than $3 billion (or $7.7 million per day) on Valeant http://fortune.com/2017/03/15/valeant-stock-bill-ackman/ http://fortune.com/2017/03/15/valeant-stock-bill-ackman/
  - camjohnson26 8y ago
    Famous for taking big risks that sometimes pay out and sometimes fail dramatically.
    - asdfasgasdgasdg 8y ago
      Taking big risks is only laudable if you win. https://assets.pershingsquareholdings.com/media/2014/09/17123349/Pershing-Square-1Q18-Investor-Letter-PSH.pdf https://assets.pershingsquareholdings.com/media/2014/09/1712... Oof. Up 1% over a time period where the S&P is up 118%. Brutal.
      - camjohnson26 8y ago
        Active funds generally underperform during periods of economic growth and we're in the longest running bull market of all time right now. Ackman makes mistakes but he is still very insightful and backs his opinions with dollars. No one who deals with risk is going to have a perfect track record, and even though his Valeant and Herbalife bets didn't pay off the opportunities/flaws he saw were real, other factors just happened to be more important such as Icahn propping up the price of Herbalife and Valeant's accounting problems.
darawk 8y ago
This is a real misunderstanding of how markets work. An index fund invests in everything, market-cap weighted (usually). This means that your investment merely reinforces the prices already determined by the other participants in the market. There are still huge numbers of active managers, not to mention quants and others. They, collectively, determine the prices of assets. When you invest in an index fund, you're just saying "I'll have what they're having", basically. It doesn't cause amazon to rise in price. Lots of companies are in the S&P 500, they don't have returns like Amazon does. Amazon has those returns because people allocate capital specifically to them, i.e. non-index investors. > And by we, we mean the fat cats who are taking in that investment money you're giving us. You'll make a meager return, but we'll make oh so much more. Index funds are the least fat-cat-remunerating route you have available to you. They have lower expense ratios than you'd be able to achieve on your own, unless you're using a free service like Robinhood (and if you do that, you're probably paying in other ways, like poorer execution prices).
- toss1 8y ago
  > basically. It doesn't cause amazon to rise in price. Actually, it does. Whenever a company is added to one of the major indexes, it almost always increases in price, and conversely, when one is removed, it generally declines. This is specifically because of all of the index funds that suddenly must put money into/remove it from the stock when it is added/removed from the index. Supply, Demand, price curves, you know the rest ...
  - crazygringo 8y ago
    But are those short-term artifacts or do they persist? As long as stock prices are set fundamentally by deep-pocketed institutional investors buying and selling, a stock's price should only be based on expected discounted future cash flows, no? I can understand a short-term effect if demand suddenly skyrockets, but that can only last a few days, no? I'm struggling to reconcile traditional supply/demand with the efficient-market hypothesis here.
  - darawk 8y ago
    Yes, but it impacts everyone in the index equally. Index funds are not responsible for amazon in particular's performance.
vinylkey 8y ago
I think I'll listen to Warren Buffet's advice on index funds.
nabla9 8y ago
For the discussion in relatively high quality formus like HN to survive there needs to be new rule adopted: Nobody is allowed to criticize or discuss the title of the article. Only the content in the body of the article. These titles are usually written by editors who think in clicks and they are not the original titles from the writers. This was good and interesting article but unless we discuss the content (and read it) there is nothing to say.
- wallacoloo 8y ago
  Many readers at HN find posts with interesting titles, skim the comments, and then read the article. Discussion of the title is useful for them, because if a commenter reveals that the title is misleading, the reader might choose to read something else, or approach the article with a different frame of mind. Point being: there is some value in discussing the title. Certainly different readers value that discussion more/less than discussion of the content.
  - nabla9 8y ago
    > because if a commenter reveals that the title is misleading This is rarely the case. Usually (as is the case here). The commenter uses the title title as a statement and criticizes it directly, not it's relation to the article. It seems to me that people read the title, and come here to comment the title before reading the article.
    - mrep 8y ago
      I've got 27 points on the first comment of this article [0] talking somewhat about the title and 8 points on my follow up about how the title is misleading so some people including myself definitely think the title is important. [0]: https://news.ycombinator.com/item?id=17941804 https://news.ycombinator.com/item?id=17941804
twiceaday 8y ago
I see a lot of issues here You are conflating the general notion of index funds with the common investing advice of buying and holding index funds. I would argue that holding here is the vast majority of the advice. Plenty of people day trade index funds. You should be explicit that your objection is to the un-informed buying and holding of index funds. Also, you should be explicit in how you think a crash would come about, instead of simply mentioning a popular investment category. Index funds do not discriminate. I don't understand how you drew the connection between them and an individual company like Amazon. You make the assumption that people who now buy index funds would otherwise be intelligent investors that would correctly set stock prices. I doubt it. The trading patterns of most people have to be near random, more noise than signal, and likely very emotional. In fact, in this way index funds reduce the chances of a crash by removing this kind of nervous money from the stock market. You make the assumption that index funds would swallow up all investments when in reality the edge that active investors have increases as the number of active vs passive investors decreases. There is a self-balancing force at play. You simply have a wrong outlook on index funds. Buying a total index fund is investing in the entire stock market; betting that it is healthy and will grow with time. That's all. It is as much "too good to be true" as a healthy economy. Yes, buying an index fund means not participating in the process of correctly allocating resources to the best companies. But the important thing is that you are not in any way harming the actual participants because you obey their prices. This means you are essentially investing as the average active investor. And lastly, it is naive to think that "fat cats" take more money from passive investors than they do from active ones.
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HashThis 8y ago

The surprise that is coming is that the working class won't tolerate being robbed in the next financial crisis. Working American's had to financially absorb the 2008 Mortgage crisis. 2008 was a direct robbery because Mortgage Orginators KNEW the mortgages would blow up, because their own Underwriting equations said they would. That is why they did fraud on the customer's income levels or worked with politicians to allow ignoring customer's income. It caused a $5 trillion in transfer from the wealthy away from the working classes to the investor class in that 2008 Mortgage crisis. The 2008 Mortgage crisis robbed the working classes, and transferred to the investor classes. Homes lost because of unemployment. Savings gone via rigged economy unemployment. Bail outs. Banks offloaded their worthless assets with government buying them. Wall Street over leveragged had huge wealth handed to them in money printing that was giving directly to their balance sheets. The surpise will come the next time a Financial Crisis comes and the government works to sell out the working class

cheez 8y ago
Not enough people felt the pain the last go around. It will be the same this time.
badbug 8y ago
The working class will be too busy trying to keep up. There won't be time for a revolution.
- busterarm 8y ago
  I'm bullish on the sentiment expressed by the parent poster, actually. Like another commentator, I believe index funds are going to be ripped hard and this is what the average saver has been told to dump their money into by the banking industry since the last crisis.
  - waterphone 8y ago
    Investing in total market index funds is literally investing in the economy as a whole. (Or as much of a whole as the index represents.) So while yes, they will crash with future market crashes, of which there will be many in each of our lifetimes, historically in the U.S. so far the market has always recovered.

y-c-o-m-b 8y ago

The definition of "we" and "survive" needs to be established clearly first and I don't think all those fancy graphs and market trends will define them. There's a lot of people that ended up bankrupt, in a bottomless depression, turned to drug abuse or committed suicide because of the last crisis. Wages are still relatively low while prices continue to climb. Many people are working 2-3 jobs and having trouble affording rent across major cities in the U.S. A glimpse at American's savings accounts shows a single healthcare incident can wipe out most anyone, let alone financial crisis: https://smartasset.com/checking-account/savings-account-average-balance https://smartasset.com/checking-account/savings-account-aver...

linuxftw 8y ago
I agree. It's I don't care if banks survive as long as I'm not negatively impacted. I'm sure the banks feel the same way. Survive also doesn't mean 'maintain standard of living.' The government has a surefire way of propping up the wealthy: Inflation. Savings accounts lose purchasing power (normal person) and the means of production gets more expensive (wealthy).
- travisoneill1 8y ago
  This is backwards. Inflation destroys the value of debt. Poor tend to be borrowers and rich tend to be lenders, so inflation is an equalizer.
  - clairity 8y ago
    no, the wealthy keep their capital in assets with above average returns. the rest of us get to pay for that with below average returns, fees, and inflation.
    - travisoneill1 8y ago
      Yes that would explain them being rich. But I'm sure you have heard the phrase "Past performance is no guarantee of future results." What I am talking about here is debt. Owe money on your house? Inflation makes you owe less. Lend money to someone buying a house? Inflation means you get paid back less.

deleted 8y ago

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bogomipz 8y ago

The article states: >"Leverage has shifted to companies from consumers, and some risk has migrated to shadow banks from traditional lenders." Can someone explain this statement to me. The banks were the one's that were too heavily leveraged before. This is why the required the bailout. What am I missing?

sschueller 8y ago
What are shadow banks? Sounds to me the risk was just moved off the books using some financial trickery into "shadow banks" and when those blow they take the regular banks with them.
- airstrike 8y ago
  Shadow banks were already a thing in 2007-2008 https://www.philadelphiafed.org/-/media/research-and-data/publications/business-review/2014/q2/brQ214_shadow_banking.pdf https://www.philadelphiafed.org/-/media/research-and-data/pu...

briatx 8y ago

Yes. The lesson of 2008-9 is that TBTF and bailouts will be applied in case of any financial crisis. Not much has been done to rein in moral hazard and so institutions will continue to offload risk to the public when they can. This works as long as the Treasury and Fed can absorb the shock and will create near term stability, at the potential cost of a currency crisis if the shock is too big to be absorbed.

topspin 8y ago
This is dead on correct; the precedent has been set and has no significant opposition; almost no one in power today would deviate. Questions I ponder; Is the US in the coffin corner where then next recession inevitably induces the next financial crisis or can we still have a conventional recession that doesn't strip a bunch of gears and lead to QE funded deficits and bailouts? Is the traditional recession/recovery cycle politically feasible any longer or will the great and the good open up the QE spigot at the first sign of trouble? The answers would help to predict a lower bound on the eventual currency collapse.
gdubs 8y ago
Part of the story of 2008-9 was that congress nearly didn't act, with Paulson famously getting down on bended knee to beg Pelosi to whip the necessary votes. The government has the capacity to act – but there's no guarantee that they'll make the correct choices in a timely manner.
- wrycoder 8y ago
  I'm pretty sure that Hank was part of the decision to let Lehman go, so he knew he screwed up.
  - yborg 8y ago
    That was just GS thinning out the competition.

darawk 8y ago

> The leveraged loans are now being packaged into collateralized loan obligations and sold to investors. Sound familiar? And the CLO market has grown to match the size of the CDO market at its pre-crisis peak. Yet one major difference makes the CLOs of today less scary: The loans that comprise them are backed by collateral, and if one of the companies in the mix defaults, an investor can find recourse through the sale of that collateral. Pre-crisis CDOs built on mortgage-backed securities had no such backstops. Maybe this is just my ignorance of the terms of CDO agreements...but weren't they collateralized by the homes? I mean, it's in the name: Collateralized Debt Obligation. And wouldn't that make this CLO market exactly identical to the CDO market?

travisoneill1 8y ago
Yeah, that doesn't make any sense. The reason CDO's were underwater is because the price of housing dropped and left the collateral worth less than the principal of the loan. Loans to companies follow the same principal. If the value of companies suddenly drops same thing. It's a weird statement and is directly contradicted by the next paragraph in the article.
- deleted 8y ago
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topspin 8y ago
> but weren't they collateralized by the homes? Much exaggerated in value homes, yes. > And wouldn't that make this CLO market exactly identical to the CDO market? The mortgage debt market is backed by GSEs. When the bubble popped Fannie and Freddie held over $5 trillion in mortgage securities. They are the market maker -- the buyer of last resort -- that makes the whole mortgage securities market liquid. CLOs don't have such a market maker. There are certainly market makers, but they aren't US GSEs with multiple trillion dollar balance sheets backed by the US Treasury. This limits the degree to which the CLO market can overextend. Not that corporate debt can't grow to disruptive proportions. Problems with corporate debt is how the term 'junk bonds' emerged as a household word in the 80's. Now that we're rolling BBB quality debt into CLOs (as of last April, apparently) the clock is ticking once again.

bitxbit 8y ago

People live too comfortably now for us to see anything significant. 2008 was blatant and the Occupy Wall Street movement lasted a hot summer. I know a lot of people are expecting the next crash right around the corner but it's not gonna happen until the Chinese economy collapses which I don't see unfolding without Xi putting up a fight.

acd 8y ago

Yes we will survive the next crisis but we will have to switch to a green crypto based currency. The Zero interest rate policy has made for ownership accounting errors. We will also need to consume less and make use of more recycled goods. There is a leverage issue where young people are in debt, has less house ownership compared to older people who own lots of the assets houses, stocks and derivatives. https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7706 https://researchbriefings.parliament.uk/ResearchBriefing/Sum... https://i2.cdn.turner.com/money/dam/assets/170808150752-chart-stock-market-ownership-age-780x439.jpg https://i2.cdn.turner.com/money/dam/assets/170808150752-char... There is an accounting error in the current market system of tragedy of the commons where pollutions of common assets the polluter does not pay.

based2 8y ago

https://en.wikipedia.org/wiki/Juglar_cycle https://en.wikipedia.org/wiki/Juglar_cycle

cm2187 8y ago

The article dismissed bailin in a short sentence at the end when I think it is one of the most significant difference between 2007 and now. Bail-in is the right given to the regulator to declare a bank non viable and to impose an instantaneous, extrajudicial, chapter-11. Basically writing down bond holders over the course of a week end, and possibly any unsecured, non deposit-guaranteed creditor of a bank, and in this way auto-recapitalising the bank. It has been used a few times in Europe already, though not on major institutions yet. I am not aware that in the US only holdco debt is bail-inable, so I am not sure why the article infers that the tightening in borrowing cost between holdco and opco means investors don't believe in a bailin. I'd say that they rather don't believe in a bailin of the holdco only. In the UK the regulator stated its approach of bailin-ing the holding company first before considering the operating company (bank), and you see a clear spread between the two, particularly initially as banks are starting to issue debt out of the holding company (and therefore a lot of bailin risk is concentrated on a small amount of debt). Another important difference is that unlike 2007, a default risk of banks is priced in. The market has the capacity to absorb losses, in fact it is designed for that. The issue comes when losses occurs in places where they were not expected (money market funds, "AAA" MBS, bonds issued by major financial institutions, these were what cause the 2008 run on the banks). Then it gets really messy. But even now (in rather benign credit markets), bank credit spreads are still significant. What worries me is not banks themselves, but sovereign debt and central bank capacity to react. We forget that as recently as 2011, investors were getting seriously worried of a country like Italy defaulting. Italy has now even more indebtedness, and a populist government that wouldn't think twice about making a radical action on its foreign debt. And other countries like France aren't that far behind, with a massive reliance on short term borrowing and no political willingness to control public deficits. Central banks on the other hands are still all-in on QE (at the current rhythm the Fed will have fully retired QE well after the next cycle kicks in), and with very low rates. So what levers are they going to use next? And yeah if states collapse, the financial system under them will be wiped out.

asdfasgasdgasdg 8y ago
> And yeah if states collapse, the financial system under them will be wiped out. That's not a thing that is foreseeable. Default? Perhaps. Collapse? Plenty of states have defaulted and not failed.

adreamingsoul 8y ago

Just my opinion, but... Our survival depends on local farms and businesses that are able to produce real value for people. I define "real value" as resources having the ability to be bought, sold, and traded for other resources. For example, one hour of labor is worth X pounds of produce from a local farmer. Our culture has too much of a dependence on global supply chains that will become increasingly expensive and scarce in the coming years. So yeah, the next financial crises will be just the beginning. Add to it climate change, trade wars, unstable governments, and I start to see a troubling future that will affect us all in some way or another.

gruez 8y ago
>Our survival depends on local farms and businesses that are able to produce real value for people. "real value" - that's a vague term. can you expand on that more? how does $6/lb (random guess at the price) bananas from california , provide more "real value" than $0.4/lb bananas from central america? >Our culture has too much of a dependence on global supply chains that will become increasingly expensive and scarce in the coming years. so globalized stuff is going to get more and more expensive, relative to more local stuff. isn't that supposed to be good, given how much you like local goods?
- adreamingsoul 8y ago
  Yes, in the long term having less of a dependence on the global supply chain is better for the local economy, climate, and people. But during that transition, a lot of people are going to be negatively affected. Today, it's my opinion that our culture has an unhealthy fascination and addiction towards products and goods that have a cost that is not reflective of the real value to sustainable supply the demand. Too many things these days are subsidized to create consumer demand and those dependencies are unhealthy and unsustainable. "Like the links in a chain, one by one they will start to give until the chain collapses." Ideally, consumers will have to pay the real value for those products and goods or go without until they can afford it. It's entirely possible that in your example, both prices are reflective of the real cost to grow, maintain, and distribute bananas. As a consumer, the price of $0.4/lb is cheaper and will keep more money in my pocket (or does it?) when compared to the $6/lb price. However, as a consumer I should take into account the other factors of that cost, for example, how much did it cost to ship those bananas to my local store? How much does it cost for the farmers to support their families? Should I even be eating bananas right now? Can I take a break from bananas and save up to afford the bananas that are closer to me? Is it better to support the local farmers in my region, or the farmers across the world? Maybe both? We need to be asking more questions about the big picture.

brianpgordon 8y ago

> The leveraged loans are now being packaged into collateralized loan obligations and sold to investors. Sound familiar? And the CLO market has grown to match the size of the CDO market at its pre-crisis peak. Yet one major difference makes the CLOs of today less scary: The loans that comprise them are backed by collateral, and if one of the companies in the mix defaults, an investor can find recourse through the sale of that collateral. Pre-crisis CDOs built on mortgage-backed securities had no such backstops. Wait, what's the difference here? Mortgages had collateral- the homes. That's the C in CDO. The problem was that when home prices fell, the collateral wasn't enough to cover the loan defaults. It seems like the same thing could happen for a structured product based on other types of debt if the collateral turns out to not be as valuable as we thought.

adiusmus 8y ago

Short answer: Yes. Survival is a very low bar. Going bankrupt qualifies as surviving since being alive along with having faith in the future can be enough to rebound successfully. Plenty of millionaires exist now because they learnt from failure from bad luck or poor execution of a plan. Whether we taxpayers will be able to bail out various institutions that should have failed dismally last time is another matter. According to the article, banks are better off now but that remains to be seen. Nothing like reality to expose a gap in planning or regulations. Multiple institutions have likely not learnt their lesson and are probably unbalanced or unstable right now. The downturn is likely already happening in some sectors in some obscure way and what the flashpoint will be is anyone’s guess. Possibly student loans but that’s a slow burn safely covered by the government and people who can’t escape paying so it’s effectively already bailed out. Might be the unpaid pensions which are already hitting the budgets of multiple states. Petrodollar consequences may be a factor since it might cause moneyprinting to be less effective. Interesting times ahead I’m sure.

m3kw9 8y ago

Just because is human nature to think history could repeat itself, he is looking at the next crisis from a similar angle, which is implying lighting striking twice. I would look at polical or after shocks from a melt down from another super power.

qaq 8y ago

There is a lot of blame to go around but It would be nice for people to actually realize what is obvious post-factum was not really obvious at the time. I had friend who was VP at JPM and prior to crisis when all the banks were posting record profits Jamie Dimon started unwinding some risky positions and taking write downs, there was a lot of heat from shareholders and if it was someone of lesser statue that person most likely would back down or even get ousted.

solomondrix 8y ago

Let's hope we don't have to 'survive'

tmaly 8y ago

I think its worth reading or getting the audio for the book Antifragility. It raises some good points about the financial system.