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The Hazards of Asset Allocation in a Late-Stage Major Bubble
- lixtra 6y agoAsset prices are just one parameter in a complex system. Inflation is another. For example commodity prices could inflate so fast that earnings of companies grow into their valuations. Another parameter is whether you’re free to spend your money. Currently in lockdown, all my money doesn’t buy me a dinner with friends in a restaurant (okay, I could pay a hefty fine, so restaurant dinners have inflated 1000%s in price!). It’s not clear to me how the future will unfold and therefore I spread my worth in various assets and consume what may be unavailable soon.
- ethbr0 6y agoMost of the stock market focused writing recently appear to be from one of two perspectives, with very little big picture that unifies both. 1) The monetary perspective, in which stock prices are what they are, but there's a broader game (the real economy) of primary concern 2) The stock market analyst perspective, in which stock prices ebb and flow within a given range according to somewhat understood patterns The issue is that (1) has been taking monetary actions never before seen (not even to support WWII), and (2) is crying from the rooftops that nothing makes sense when analyzed under historical pricing standards. Well, yes. Both of these are true.
- dasudasu 6y agoYou have the democrats calling for "trillions" in stimulus: https://www.bloomberg.com/news/articles/2021-01-08/biden-calls-for-quick-pandemic-relief-minimum-wage-increase https://www.bloomberg.com/news/articles/2021-01-08/biden-cal... You have Jerome Powell telling you that "stocks are not that high" considering that the risk free rate just collapsed: https://www.cnbc.com/2020/12/16/powell-says-stock-prices-are-not-necessarily-high-considering-the-low-level-of-interest-rates.html https://www.cnbc.com/2020/12/16/powell-says-stock-prices-are... If they want to go by history, they just have to look back at the last decade to see what this does to a stock market. There is no alternative.
- mxschumacher 6y agoMuch higher commodity prices would eat into the margins of any company using those resources, thereby decreasing their value
- lixtra 6y agoThat depends on the pricing power of the company. But true, I rather meant broad inflation than commodities only.
- freddie_mercury 6y agoGMO is a perfect example of HackerNews's cognitive bias towards cynical and pessimistic takes and thinking they signal intelligent commentary. GMO's assets under management have collapsed by well over 50% over the years as they've been consistently wrong about, well essentially everything, in the markets for 10+ years now. But they wrap up their pessimism in technocratic mumbo-jumbo so it sounds like an objective take and a certain kind of audience eats it up.
- JohnJamesRambo 6y agoWell if you read the article they mention these things. > Far more typically, I was three years too early in the Japan bubble. We at GMO got entirely out of Japan in 1987, when it was over 40% of the EAFE benchmark and selling at over 40x earnings, against a previous all-time high of 25x. It seemed prudent to exit at the time, but for three years we underperformed painfully as the Japanese market went to 65x earnings on its way to becoming over 60% of the benchmark! But we also stayed completely out for three years after the top and ultimately made good money on the round trip. It’s really really hard to call tops and bottoms but that doesn’t mean I just blindly invest no matter how irrational the market has become. Some of these things are just plain math, something Hacker News readers should be good at. > As a Model 3 owner, my personal favorite Tesla tidbit is that its market cap, now over $600 billion, amounts to over $1.25 million per car sold each year versus $9,000 per car for GM. What has 1929 got to equal that?
- viktorcode 6y ago>> As a Model 3 owner, my personal favorite Tesla tidbit is that its market cap, now over $600 billion, amounts to over $1.25 million per car sold each year versus $9,000 per car for GM. What has 1929 got to equal that? This example shows how shallow this analysis is. They totally ignoring shift to green energy and that Tesla is a participant in this market. They are also considering Tesla as just another carmaker in the market, not paying enough attention to the many core differences. GM in my view is as far anti-Tesla as you can get.
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- viktorcode 6y agoThankfully, there's a measure of how correct a financial strategist is: fund performance. You believe Epic Bubble is nigh? Then you know how to make the most of it. Don't just preach, lead by example.
- ProjectArcturis 6y agoNo, these only happen once or twice in a career. The sample size is too small. They are hard for anyone to get exactly right. Someone who nails the top this time around is much more likely to have been lucky than skillful.
- jokethrowaway 6y agoI'm not following. Let's assume there's a big bubble. What do you recommend? Currency kept getting printed by idiotic governments and distributed to mainly rich people which invest in stock, crypto and gold, overinflating their value. Shorting the market is risky, how long can you keep shorting until you run out of money? I don't see a slam dunk anywhere even if you think there's a epic bubble
- pembrook 6y agoWord of caution to anybody reading this, GMO has been saying this for years...and they will be right eventually of course...but it doesn’t mean you should do anything different with your money. A tale of the worlds worst market timer: https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market...
- dash2 6y agoThe problem with the story is it works if you invest in stocks and don't use margin. Lots of people are playing options and using margin. They risk getting called, and at that point they don't have the ability to buy-and-hold.
- pembrook 6y agoSo maybe don’t buy speculative zero-sum option contracts on margin then? Play stupid games, win stupid prizes.
- emteycz 6y agoThere's nothing zero sum about it.
- pembrook 6y agoIf used as part of a holistic risk-hedging strategy, they aren’t necessarily zero sum from a portfolio theory perspective. But purchased on their own as a stand-alone bet, all options and futures contracts are by definition zero-sum games. So 99.999% of the retail investors (robinhood et al.) trading options are playing a zero sum game. Hence why I didn’t feel the need to elaborate.
- seibelj 6y agoIt isn’t like a coin flip though. You can sell the option before expiration. And the seller of the option is harvesting premiums for their own reasons. The whole game is much more complex. I haven’t thought about whether it’s zero sum in super great detail but my gut says it isn’t.
- jgalt212 6y agoIt pretty much comes down to how long can Fed keep printing $100B+ a month of money. Nothing else matters. https://www.goodreads.com/book/show/27191691-the-only-game-in-town https://www.goodreads.com/book/show/27191691-the-only-game-i...
- kruxigt 6y agoCorrect answer!
- lumpy28 6y agoI think he is right to mention the unprecendent gap between the economic fundamentals and their financial representations. Plus > The single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behavior, especially on the part of individuals. That trend is even "truer" today, fostered by Robinhood and Co (eToro, Revolut, etc.). The access to markets was not as easy in 2008, limiting the role individuals could play in a bubble.
- lotsofpulp 6y ago> unprecendent gap between the economic fundamentals and their financial representations. The fundamental fundamental is the house always wins, and the leaders of the US have indicated they will do whatever it takes to maintain broad market asset prices.
- lumpy28 6y agoSo who is going to lose? There are always winners and losers in markets.
- quickthrowman 6y agoThe people who don’t hold/own risk assets.
- lumpy28 6y agoIn other words, the poors, social outcasts, people left on the sidelines, as usual. The inequalities are just increasing as a result. That makes me sick.
- quickthrowman 6y agoAgreed, what has been happening lately (Wednesday) is a symptom of wealth inequality
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- lordnacho 6y agoAs a former fund manager, I think this is a well written essay by a well respected guy. He gives a lot of pointers to evidence as to why it's a bubble. He tells us why it's hard to time, but remarkably he gives a relatively tight timeframe (weeks to months) as well as a trigger: widespread vaccination. Of course it's just a summary of conventional thought about bubbles, but it's a good summary.
- CapriciousCptl 6y agoIn 2021, everything's a bubble. Bonds... 10-year treasury after tax amounts to less than inflation. Holding cash... The USG keeps giving out money for nothing, meaning more money chasing the same amount of goods, services and investments. Index funds... Earnings yields are at all time lows, about 3%.
- kyleblarson 6y agoIf pundits like this guy are so wise, why are they 1) Always on CNBC talking about stuff like this rather than trading it and making a killing 2) Still working when they are as old as the author of this article?
- wcoenen 6y agoThis man was recently in the news for having made $200M on Quantumscape by accident, obviously he doesn't need to work. He's said to work "primarily in environmental philanthropy". https://www.ft.com/content/faedd2a1-2008-4f1e-9198-7694fba791b0 https://www.ft.com/content/faedd2a1-2008-4f1e-9198-7694fba79...
- mensetmanusman 6y agoIt’s possible to mistake a bubble forming for intentional inflation. The Fed has pumped a few trillion dollars into the global economy. This will inflate some prices somewhere. The inflation has hit equities and real estate but kept consumer prices mostly intact. The trillions aren’t going anywhere for a long time...
- godzillabrennus 6y agoReal estate prices always go up... same mentality as 2007/2008 housing crisis...
- paulmendoza 6y agoYes, 24% of all US dollars ever created were created last year. Very little went to poor people.
- mensetmanusman 6y agoYes, the US printed like $20k per citizen. Our world would be a lot more interesting if that had went directly into the hands of citizens instead of the hands of real estate and Wall St.
- lemonspat 6y ago> instead of the hands of real estate and Wall St. Is the Fed buying real estate now? I knew they expanded to ETFs and bonds, but are they actually buying land/buildings or REITs?
- missedthecue 6y agoFeed hasn't bought any ETFs or stocks. Just a minor amount of bonds.
- midhhhthrow 6y agoAbsolutely. Money has to go somewhere. The feds and gov of the world have ensured that no one can be in cash for long. So, money must go into equities, gold or bitcoin
- hacker_9 6y agoPeople forget the stock market is just a device to turn money into more money, which creates (and requires) sustained bubbles. There will be a blow off the top from time to time, but this just gives you a chance to buy at lower prices and so get better returns when it ticks up.
- akkartik 6y agoThe most useful part of this for me: "my definition of success for a bear market call.. It is simply that sooner or later there will come a time when an investor is pleased to have been out of the market.. requiring that you get the timing right is overreach. If the hurdle for calling a bubble is set too high, so that you must call the top precisely, you will never try. And that condemns you to ride over the cliff every cycle, along with the great majority of investors and managers."
- eloff 6y agoGMO has pounding this drum for years[1][2]. Eventually, they'll be right, but not because they were able to call it correctly. In fact given the run-up since they started calling for the bubble to burst you'd likely still be ahead if the bubble burst tomorrow and stocks halved in value. Now a lot of what they say has some truth to it, and they might actually be right. But they might also continue being wrong for years to come. Timing the market is a fools errand. Good advice is invest mostly by value or underestimated growth stocks, invest continuously, and only with money you don't need for at least 10 years. And finally, when the inevitable plunge does come, don't sell no matter how bad it gets. You only lose or make money when you sell, before that it's just points on paper. [1] 2018 https://www.institutionalinvestor.com/article/b1743d0x0ms3yx/why-is-no-one-listening-to-jeremy-grantham https://www.institutionalinvestor.com/article/b1743d0x0ms3yx... [2] 2017 https://www.gmo.com/americas/research-library/is-the-u.s.-stock-market-bubble-bursting/ https://www.gmo.com/americas/research-library/is-the-u.s.-st...
- segmondy 6y agoI agree with the article that we are in a bubble, but what it doesn't talk about is about inflation and also that the dollar could be rapidly declining in value, which will cause the price of things to rise. I have witnessed and experienced in my lifetime in under a decade country that had a currency value of 1:1 with USD have their currency lose value and end up at a ratio of 100:1USD. Meaning price of everything goes up 100x. If dollar is falling compared to yuan and say EU, let's even say it only falls 5x. That means price of milk can go up to $10, $100k houses can go up to $500k, and $100 stocks $500. Of course the price in commodities are often slower than stocks, but as the stocks go up and "everyone" get's reach and some gains are coming out, those gains turn into actually cash that also drive up price of commodities. So as the market melts up, if you stay out, you are going to get very poor. You want to melt up with it, in the future tho, all that money will be worth very less or near the same of what it was worth. Frankly it's a big casino, and all one can do is hedge. I see folks beating the article up, but the title captures the environment. "The hazard of asset allocation in a late-state major bubble". You can do the right thing and completely lose. I suppose one key thing he's pointing out is that you don't want to get wiped out, have enough to get back in the game.