9 ms·

The Hazards of Asset Allocation in a Late-Stage Major Bubble

58 points by undefined1 6y ago

vmception 6y ago
pragmatic and I enjoy pretending to be a perma-bear as much as the next guy, but if the macro environment leads to more currency being created or distributed than prior times, then nothing is overvalued yet relative to how much money has to be placed into them when it is seeking yield, so that means here I will have to disagree: "But this bubble will burst in due time, no matter how hard the Fed tries to support it" this either needs to be weighted much lower, can't be the crux of the article, or has to be called out for its ambiguity and uselessness in predictive ability
- neffy 6y ago
  Yes, the bubble readers seem to ignore the money creation. However that said, the default bubble is potentially a lurking time bomb, so it's a race between inflation and loan defaults, essentially. (Inflation tends to make loan defaults less likely as it reduces the relative cost of existing loans.)
  - papabrown 6y ago
    >the default bubble is potentially a lurking time bomb Many things are potential lurking time bombs. I can't think of a single period during any bullish market where you could not point to something and claim that that could be a potential end to the bull run. The problem is when you are in the business of making predictions, if you just scream "Bear" long enough, eventually you'll be right and then you can write a book subtitled, "By the man who called the 2021 (or 2022 or 2023 or 2024 ...) stock crash" and people think you're some sort of genius.
    - webmaven 6y ago
      > The problem is when you are in the business of making predictions, if you just scream "Bear" long enough, eventually you'll be right and then you can write a book subtitled, "By the man who called the 2021 (or 2022 or 2023 or 2024 ...) stock crash" and people think you're some sort of genius. I think the point the article is making is that successful Bears, even though they can't call the peak accurately, are able to say "I am reasonably certain that if I exit the market now and wait for the bubble to go higher and then burst, the correction will drive prices below the current high, and I will have made money overall, even though I'll miss out on the tail end of the bubble rising." If you call the bubble too early (and if you are always screaming "Bear", you are by definition always too early) , the prices after the crash will still be higher than when you exited, you're completely screwed, and so is anyone who listened to you. It isn't particularly difficult to say that the next crash, even if it happens a year or two from now, will probably drive the market below the current level. You would experience major FOMO by exiting now and watching the market continue to climb, but you won't actually lose money. If it happens sooner than a year from now, it will certainly dip significantly below current valuations, and you'll be ahead by quite a bit. In this particular game of Chicken, opinions will differ as to whether it is time to lock in your gains yet, but it shouldn't be too controversial that it is definitely time to start thinking about it. If I were currently in the market, I would keep an eye out for large and quirky M&A activity along the lines of AOL+Time-Warner. Eg. Tesla decides to buy a consumer appliance, rideshare, or financial services company. Or all of the above).
      - bzbee10 6y ago
        How about Tesla buying $1.5B bitcoin?
        webmaven 6y ago
        I don't see that as fundamentally different than any other large Forex transaction. A bit unusual for a manufacturing company, but hardly unprecedented, and for all we know this is just a signal that Musk is betting he can call the Bitcoin bubble, rather than an actual hedge against USD.
        ethbr0 6y ago
        I think that's Musk realizing that the announcement that Tesla bought Bitcoin will boost Bitcoin's value. And therefore cashing out that reality by making the trade. It's not technically illegal afaik, but it certainly is making a trade because of realities inherent in the trading, rather than the underlying.
- lumost 6y ago
  A potentially more productive view is that the fed cannot support the bubble indefinitely. It's becoming clear that money can be printed without causing inflation if its unevenly distributed in the economy. This amounts to large scale wealth redistribution to support asset price increases. If you earn dollars for a living, your purchasing power in terms of future dollar income is being eroded. You will purchase a home later or never, you may not be able to afford an education, and your medical expenses will rise ( as will anything that affects future earning power ). When this ends is anyones guess, it's entirely plausible that we revert to the social systems of prior less equal times, foreign trade moves off the dollar, assets converge to an effective price of infinite dollars, or populists demand their own redistributive policies such as UBI or wealth taxes. Or the fed meets tomorrow and cuts QE entirely. What is assured is that the current trend is unsustainable and must end eventually.
  - TuringNYC 6y ago
    >> A potentially more productive view is that the fed cannot support the bubble indefinitely. The interesting thing is whether "cannot" means the point when they literally can not because the market and inflation wont bear it...or when they wise up to the tinder box they have created. The problem with the latter is -- which administration would allow this to be under their watch. Once a problem is bad enough, you might as well just kick the can a bit more until you literally can not. (yes, i realize the Fed is independent but there is still quite a bit of control)
    - lumost 6y ago
      There are many situations where the fed is forced to end its current policies prior to the expected triggers of market stability or increased CPI. Political and social risk is likely underestimated. That being said, examining the exit paths and forcing functions which would force Fed policy to change is something I'd like to see more of. There is a certain mentality floating around that there are no alternatives to being in the market, and that it's become too politically difficult to end Fed market support. If the latter is true, then there are a lot of consequences - such as returns becoming decoupled from cash flow see TSLA, Unicorns, or Hertz.
joncrane 6y ago
This is a great article. Note it's from January 5th, and it's extremely speculative. But certainly at least worth adding to the overall amount of signals that stock investors are thinking. I think I remember someone saying that in 1929 when the shoeshine boys were giving stock advice that that's how someone knew the bubble was about to burst. Lately I've been discussing investment strategies with the people that work at the gyms I'm going to. Is this the equivalent signal? The 2021 equivalent might be "When your personal trainer is giving you investment advice, that's how you know to get out?"
- papabrown 6y ago
  Or, it could just be that far more people are investors today than there were in 1929. According to this site, only about 10% of Americans owned stock or speculated in the markets in 1929. >In fact, only approximately 10 percent of American households held stock investments and speculated in the market; yet nearly a third would lose their lifelong savings and jobs in the ensuing depression. https://courses.lumenlearning.com/atd-hostos-ushistory/chapter/the-stock-market-crash-of-1929/ https://courses.lumenlearning.com/atd-hostos-ushistory/chapt... Yet, this poll seems to indicate that around 55% of Americans now hold stocks. >Thus far in 2020, Gallup finds 55% of Americans reporting that they own stock, based on polls conducted in March and April. This is identical to the average 55% recorded in 2019 and similar to the average of 54% Gallup has measured since 2010. https://news.gallup.com/poll/266807/percentage-americans-owns-stock.aspx https://news.gallup.com/poll/266807/percentage-americans-own... So if slightly more than one out of every two people you meet owns stocks, I would assume you're bound to run into a lot of people talking about stocks.
  - xyzzyz 6y ago
    I presume most of today’s stock owners are actually owners of 401k account which invests in something like Vanguard Target retirement fund. As a result, they know pretty much nothing about stocks, yet they do own them.
    - papabrown 6y ago
lubos 6y ago
Looking at historical S&P 500 to Gold ratio, stocks are definitely more expensive but nowhere near dotcom frenzy. Either we see market correction or gold is undervalued and will catch up. In that case there might be no stock market crash. https://www.macrotrends.net/1437/sp500-to-gold-ratio-chart https://www.macrotrends.net/1437/sp500-to-gold-ratio-chart
- fractionalhare 6y ago
  Why do you believe this is a predictive measure?
- bluedevil2k 6y ago
  Gold is not a suitable comparison to stocks - it gets brought up on here all the time. Gold is not uncorrelated to the market. Gold is not a store of value. Gold is a speculative investment with a great marketing team.
  - yarky 6y ago
    Everything is correlated when shit hits the fan. Gold has stored value since forever. These days every investment is highly speculative.
    - webmaven 6y ago
      > Everything is correlated when shit hits the fan. Gold has stored value since forever. These days every investment is highly speculative. I wouldn't want to be holding a lot of precious metals if/when asteroid mining gets going.
  - edoceo 6y ago
    BTC and Doge enter the chat...
  - Clewza313 6y ago
    Gold has two things going for it: there's a baseline of "real" value underpinning it (not just industrial use, but lots of fast-growing Asian countries relying on it for dowries etc), and historically gold holds up quite well when everything else is doing badly. However, it's also fundamentally unproductive (no dividends, no real capital growth), so it's going to be a losing bet most of the time.
reese_john 6y ago
Past discussion: https://news.ycombinator.com/item?id=25713696 https://news.ycombinator.com/item?id=25713696
Clewza313 6y ago
I agree with the basic take that stock prices are ludicrous, but what's different this time(tm) is that there don't seem to be any alternatives. Bonds are overpriced, real estate is not cheap, and Biden's $1.6T printer go brr money faucet ensures that there's going to be even more money sloshing around for the foreseeable future. Also, whereas the dotcom bubble darlings were all massively unprofitable, this time around the FAANGs are all minting money and even Tesla is eking out steady profits (if not exactly the $1M per car implied by their P/E!).
- MrPowers 6y ago
  Emerging markets and value stocks are historically cheap on a relative basis, see the What to Do? section at the end of the article.
  - Clewza313 6y ago
    If the US stock market collapses, they'll go down too. They might go down less, but if the bubble is going to burst, you'd still be better off keeping your money out until then and only buying once they're cheap. Of course, this requires being able to time the markets twice, which is... non-trivial.
    - icelancer 6y ago
      >> They might go down less, but if the bubble is going to burst, you'd still be better off keeping your money out until then and only buying once they're cheap. Not if the sure-to-follow inflation from a collapse devalues your cash faster than emerging markets and value equities.
    - ur-whale 6y ago
      >Of course, this requires being able to time the markets twice, which is... non-trivial. What's Buffet doing right now ?
MrPowers 6y ago
Jeremy Grantham co-founded the investment firm GMO. They're famous for 7 year forecasts by asset classes. Here's the bearish December 2020 forecast: https://www.gmo.com/americas/research-library/gmo-7-year-asset-class-forecast-4q-2020/ https://www.gmo.com/americas/research-library/gmo-7-year-ass... He's been overly bearish for quite some time, here's the 7 year forecast from December 2009: https://ritholtz.com/2010/01/7-year-asset-class-forecasts/ https://ritholtz.com/2010/01/7-year-asset-class-forecasts/ Here's a recent talk he gave: https://www.youtube.com/watch?v=RYfmRTyl56w&ab_channel=BloombergMarketsandFinance https://www.youtube.com/watch?v=RYfmRTyl56w&ab_channel=Bloom...
- sfblah 6y ago
  Just in case not everyone clicks it, the forecast from 2009 is actually bullish.
throw0101a 6y ago
Just keep buying. A post by Nick Maggiulli in 2017: > Many investors focus on the right time to buy stocks because they don’t want to buy near a peak in case of a future market crash. I understand the feeling. With the market near all time highs in early 2017, it can be tempting to hold off until there is a larger negative adjustment in prices. > The only problem with this approach is the market could go up for a significant period of time before a correction happens. > For example, if you search “stock market overvalued 2012” on Google you can find plenty of stories discussing how overvalued stocks were in 2012. If you had started waiting for an S&P 500 correction then, you would have missed out on the ~70+% increase in prices from 2012 through early 2017. * https://ofdollarsanddata.com/just-keep-buying/ https://ofdollarsanddata.com/just-keep-buying/ And what has the S&P 500 done since 2017? Continuing: > If I still haven’t convinced you, let me tell you a story. The story is about a man with possibly the worst luck in investing history.[0][1] He made a total of 4 large stock purchases between 1973 and 2007. He bought in 1973 before a 48% decline in stocks, bought in 1987 before a 34% decline, bought in 2000 before the dot com crash, and bought in 2007 before the Great Recession. > Despite these 4 individual purchases that totaled a little less than $200,000, how did he do? He ended up with a $980,000 profit for a 9% annualized return. What was his secret? He never sold. > That’s right. Selling out is literally selling out your future wealth. You need to hold on to your assets as you acquire more. > This is the purpose of capitalism (i.e. acquiring capital). The only time you should sell your investments is for rebalancing (annually/quarterly, etc.) or in retirement. Otherwise, you already know the mantra. * [0] https://www.cnbc.com/2015/08/27/the-inspiring-story-of-the-worst-market-timer-ever.html https://www.cnbc.com/2015/08/27/the-inspiring-story-of-the-w... * [1] https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market... And as Maggiulli shows, trying to buy the dip, even when you know when the dip will occur (which is impossible), gives worse results than simply putting away a little bit every month: * https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-cost-averaging/ https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co... Put away a little every pay cheque, in a diversified low-fee fund (S&P 500, Total Market/Russell 3000), at a comfortable risk profile that allows you to sleep at night (0/20/40% bonds), and try not to pay attention too much about what The Market™ is doing. Most of us are investing for retirement, and if you do the above, you'll probably end up with a decent nest egg. Save a little for the future, and enjoy the present.
slt2021 6y ago
it is not equity that is overpriced. it is that printed dollar that is overpriced (cash is trash). any bond guarantees long-term loss. In 1990, 2k, 2008 investors could escape from equities to bonds with 6% yield, but now they have nowhere to go. That concludes that this bubble will continue as long as interest rate remains near zero. Federal Reserve basically cornered the entire market into equities, investors have literally nowhere to go. even if 1% of equities capital escape into any other asset class - emerging markets, real estate, alternatives, crypto, whatever - it will create even more gigantic bubble in that asset class that will surely pop without the FED's support
- viburnum 6y ago
  Why were bond interest rates ever that high in the first place?
  - freeone3000 6y ago
    The overnight lending rate in 2007 was 5.5%. If that was the cheapest possible you could ever borrow money for even the shortest term, 6% for a long-term bond is downright cheap.
    - viburnum 6y ago
      Right, why was that the overnight lending rate?
      - freeone3000 6y ago
        The federal reserve sets this rate directly. They chose it to be at 5.25% (correcting my error in the above) because the economy was going well, we had less than 5% unemployment, and a high rate was generally considered necessary to fight inflation. https://www.federalreserve.gov/newsevents/pressreleases/monetary20070321a.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... is their statement.
        6y ago
nabla9 6y ago
>Robert Shiller – who correctly and bravely called the 2000 and 2007 bubbles and who is one of the very few economists I respect – is hedging his bets this time, recently making the point that his legendary CAPE asset-pricing indicator (which suggests stocks are nearly as overpriced as at the 2000 bubble peak) shows less impressive overvaluation when compared to bonds. Bonds, however, are even more spectacularly expensive by historical comparison than stocks. Oh my! Banks are OK, household debt levels are OK. Corporate bonds are the issue in the current economy. Nonfinancial corporate debt to GDP ratio: hhttps://fred.stlouisfed.org/graph/?g=B5NG https://fred.stlouisfed.org/graph/?g=B5NG * There are too many zombie companies walking around (indebted company that is able to repay the interest on its debts but not repay the principal) * Institutional bond investors have chased profits to the lowest possible bond rating they are allowed to invest. When something changes and ratings are downgraded, institutional investors are forced to sell these companies at the same time. Corporate bond market liquidity freezes overnight. Berkshire Hathaway will by bonds for cents per dollar...
- lumost 6y ago
  Wouldn't this force the fed to become the lender to these zombie firms or let the institutions take a bath? I can't imagine corporate bankruptcies resulting in corrective change if the fed is the principal lender.
  - nabla9 6y ago
    Fed already opened corporate bond-buying program and used it. It's called Secondary Market Corporate Credit Facility (SMCCF). It only applies to investment-grade debt. Going below that and buying junk would be a big step.
- icelancer 6y ago
  Yeah, this has been my impression for quite some time now. Future projection for company equity seems fine enough, though quite obviously overvalued (but good luck betting against uncapped QE). Corporate debt on the other hand has been scary for a few years and is getting ridiculous. Your point lowest possible bond ratings is a solid one, I think, and one I hadn't considered. The chaining effect of some failures will be significant given how much leverage is inherent in the system. I think bond market spreads will become quite large as liquidity dries up.
imnotlost 6y ago
Do you want to under-perform during all bull markets so it hurts less during the corrections? If you stayed invested in the broad market through any bubble-pop you would be better off than aggressive diversification and hedging. Unless you can reliably time the tops and bottoms. Where else will you invest? China? India? Rest of Asia? Europe? South America? Africa? Specific commodities? Do you believe the next generations in the US will continue to create value or do you think this is the beginning of a perpetual decline?
- papabrown 6y ago
  I'm not sure if they're still around, but I remember back in the 1990s there was a family of mutual funds that aimed to do exactly what you're describing. They actually advertised the fact that they won't have the best returns in bull markets because they were protecting people in down markets. The idea was that people benefitted more from staying in the market over a long period of time rather than maximizing their returns in any particular year. So the fund was aimed to smooth out the peaks and valleys along the ride so investors would be more inclined to leave their money parked in the fund rather than getting a statement that said that they're down 30% and going to cash and missing the next run up.
viburnum 6y ago
Where else are rich people going to park their money? The demand for investable assets has gone way up because rich people have gotten much richer, and rich people around the world (such as newly minted emerging market billionaires) often prefer American assets for liquidity and good legal protections. I'm sure these investors would prefer that stocks earn more than 2.5% but that's just the going rate now. What alternatives do they have? Bonds yield basically nothing.
- TuringNYC 6y ago
  Not only do bonds yield nothing, they yield less than zero once you consider inflation. And long bonds yield near zero but...you have huge bond price risk if rates rise again. There is no real choice now, you have to park the cash somewhere...and so it ends up everywhere from stocks to commercial real estate to VC (and eventually into our tech salaries, into rent, to the landlord, to the bank, and back into MBS in institutions :-)
- AngrySkillzz 6y ago
  Exactly. Asset prices are not determined by central bank actions, there is a third component that pushes both asset prices and central bank policy - the global supply/demand of savings vs investment opportunities. Which is driven mostly by demographics. China's massive working class, and the unprecedented rate at which they are getting wealthier, and their savings rate which is like >10x the average US citizen means there is a huge increase in the global supply of savings. Which bids up asset prices and pushes down yields, as savers compete with each other to buy up the extant profitable and safe opportunities. Central banks are the on the receiving end of this too: over-saving pushes down the natural rate of interest, which means policy rates must be lower to respond (unless you want to condemn some working Americans to unemployment).
curiousllama 6y ago
Greenspan said in '97 that the market reflected a state of "irrational exuberance." If, on that day, you said "oh, cool , I'm exuberant too!" and dumped all your money into random stocks, then you'd still have made money at the bottom of the .com bubble crash. I totally agree with this guy, but my only reaction is "of course... so what?" I think any educated observer is wowed by the stock market right now. Anything other than "wow!" is voodoo
yellowstuff 6y ago
> I expect once again for my bubble call to meet my modest definition of success: at some future date, whenever that may be, it will have paid for you to have ducked from midsummer of 2020. Two can play at this game. I predict that at some future date the stock market will be higher than it is today.
- boh 6y ago
  His quote, like the whole article, is just feigned insight. I guess if stocks go down 6 months or five years from now he can say: "see I told you so".
- koolba 6y ago
  > Two can play at this game. I predict that at some future date the stock market will be higher than it is today. If you said that about the Nikkei 225 in 1990, you’d still be waiting for it to come true. Though as of a few hours ago it’s within 30% of the peak: https://www.bloomberg.com/news/articles/2021-02-15/japan-s-nikkei-225-touches-30-000-yen-for-first-time-since-1990 https://www.bloomberg.com/news/articles/2021-02-15/japan-s-n...
  - xnx 6y ago
    Given the Nikkei, I've never understood the fundamental law that everyone believes about the US stock market going up long term. I'm genuinely looking for a convincing answer so I could feel comfortable investing.
    - nine_k 6y ago
      USD being the world reserve currency, so printing it with abandon for last few years does not remove the demand?
      - gammarator 6y ago
        That’s true until it isn’t, right? The pound sterling once held a similar role...
exabrial 6y ago
I'm sorta skeptical. With 12% of the usa vaccinated and things on the verge of opening, I really don't see things going into a recession unless the powers at be do something stupid. I think this is fundamentally different than other bubbles because there's a guaranteed light at the end of the tunnel.
- icelancer 6y ago
  The tunnel has been flooded with QE methods' light. The tunnel is hardly dark... for asset owners.
- YZF 6y ago
  This bubble started well before Covid. I do agree that if the vaccination campaign is successful the mood will be such that it might sustain it a little longer. That should factor into the calculation. Though on the other hand, governments may hold back a little on stimulus once that happens as they've been throwing money all over the place during Covid.
samingrassia 6y ago
Skip the article, read this tweet instead - compresses the current state of affairs into its simplest form: https://twitter.com/vol_christopher/status/1358792731464720388 https://twitter.com/vol_christopher/status/13587927314647203...
DoubleDerper 6y ago
Serious question: why would the bubble /need/ to "burst"?
- YZF 6y ago
  It always does? It's partly a psychological phenomena and partly just a question of running out of greater fools. The first one is that once there's a change in mood for some reason (some event happens, e.g. a recession which in some ways is its own psychological phenomena) everyone convinces themselves that equities are too expensive, the prices start declining and that feeds a further decline. Just look at the GME stock as a microcosm of that situation. In terms of the greater fool thing, you can only keep buying and selling the same thing for a 10% profit every year without eventually running out of people who will buy it. I guess see also the GME stock as a microcosm of that? And so, all bubbles must burst.
- akvadrako 6y ago
  I don't think it needs to burst. Though there will certainly be times when it goes down there is no reason it'll even go below current prices. Historically prices have always gone up, so as long as you aren't near a peak it's probably the lowest the total market will ever be.
boh 6y ago
Bubbles suggest "irrational exuberance" but in this instance, equity values are actually operating off of a legitimate logic. Bond yields are low so investors are putting more of their money into equities. Equity centered index funds and ETFs have also grown in popularity. Sure individual stocks might be bubbling, but the market as a whole is operating within an environment that's narrowed growth within certain asset classes. Saying "we're in a bubble" is always technically right since stock prices rarely reflect actual company value, unfortunately this article doesn't offer much insight beyond the obvious.
zhoujianfu 6y ago
So, if the goal of investing is to get rich and the goal of being rich is to be happy, I have a good strategy. Your overall net worth is not what makes you happy, it’s the CHANGE in net worth (up). If you’re always heavily invested in the market, you are most of the time happy, because most of the time, the market goes up. This is punctuated by (relatively) quick periods of great loss/sadness. But overall, you end up with a lot more happy times than sad. So a net positive to happiness. Not being invested in the market (at all or trying to beat a crash) means you have a period of net zero happiness. Which is worse on average than being in the market. So, let it ride people... on average you’ll be happier! (And actually, on average you’ll do better financially too.)
- ur-whale 6y ago
  > Your overall net worth is not what makes you happy, it’s the CHANGE in net worth (up). Two unfunded assumptions that seem to be based on your own experience. Here's another, based on my own experience: a component of what makes you happy is to not have to worry about money at all, either because you live a lifestyle that require little of it, or because you have enough that a 50% change in wealth has zero impact on your life.
rich_sasha 6y ago
Very interesting article, and has some very poignant observations. That said, it's not that hard to say we are in a bubble. Frankly, almost any time the market isn't at the bottom, it's in a bubble. The real questions are, when will it pop, and how do you invest accordingly. These are super-hard, and a (cursory) read of the article doesn't really address that. The general, boring observation, is that unless you can do much, much better, you should just be long the market, throughout all the bubbles and busts. You won't get the 50%-in-a-month payout, but you can get your consistent 10% a year or whatnot. So I'm not just nay-saying, I thought S&P is about to crash ever since it crossed 2,000 after the crisis. If I followed my (weak) gut feeling, I would have lost 50% on that trade. Thank goodness I didn't. Even when it crashes, eventually, probably (???) not as low as 2,000.

58 points by undefined1 6y ago

pragmatic and I enjoy pretending to be a perma-bear as much as the next guy, but if the macro environment leads to more currency being created or distributed than prior times, then nothing is overvalued yet relative to how much money has to be placed into them when it is seeking yield, so that means here I will have to disagree: "But this bubble will burst in due time, no matter how hard the Fed tries to support it" this either needs to be weighted much lower, can't be the crux of the article, or has to be called out for its ambiguity and uselessness in predictive ability

neffy 6y ago
Yes, the bubble readers seem to ignore the money creation. However that said, the default bubble is potentially a lurking time bomb, so it's a race between inflation and loan defaults, essentially. (Inflation tends to make loan defaults less likely as it reduces the relative cost of existing loans.)
- papabrown 6y ago
  >the default bubble is potentially a lurking time bomb Many things are potential lurking time bombs. I can't think of a single period during any bullish market where you could not point to something and claim that that could be a potential end to the bull run. The problem is when you are in the business of making predictions, if you just scream "Bear" long enough, eventually you'll be right and then you can write a book subtitled, "By the man who called the 2021 (or 2022 or 2023 or 2024 ...) stock crash" and people think you're some sort of genius.
  - webmaven 6y ago
    > The problem is when you are in the business of making predictions, if you just scream "Bear" long enough, eventually you'll be right and then you can write a book subtitled, "By the man who called the 2021 (or 2022 or 2023 or 2024 ...) stock crash" and people think you're some sort of genius. I think the point the article is making is that successful Bears, even though they can't call the peak accurately, are able to say "I am reasonably certain that if I exit the market now and wait for the bubble to go higher and then burst, the correction will drive prices below the current high, and I will have made money overall, even though I'll miss out on the tail end of the bubble rising." If you call the bubble too early (and if you are always screaming "Bear", you are by definition always too early) , the prices after the crash will still be higher than when you exited, you're completely screwed, and so is anyone who listened to you. It isn't particularly difficult to say that the next crash, even if it happens a year or two from now, will probably drive the market below the current level. You would experience major FOMO by exiting now and watching the market continue to climb, but you won't actually lose money. If it happens sooner than a year from now, it will certainly dip significantly below current valuations, and you'll be ahead by quite a bit. In this particular game of Chicken, opinions will differ as to whether it is time to lock in your gains yet, but it shouldn't be too controversial that it is definitely time to start thinking about it. If I were currently in the market, I would keep an eye out for large and quirky M&A activity along the lines of AOL+Time-Warner. Eg. Tesla decides to buy a consumer appliance, rideshare, or financial services company. Or all of the above).
    - bzbee10 6y ago
      How about Tesla buying $1.5B bitcoin?
      - webmaven 6y ago
        I don't see that as fundamentally different than any other large Forex transaction. A bit unusual for a manufacturing company, but hardly unprecedented, and for all we know this is just a signal that Musk is betting he can call the Bitcoin bubble, rather than an actual hedge against USD.
        ethbr0 6y ago
        I think that's Musk realizing that the announcement that Tesla bought Bitcoin will boost Bitcoin's value. And therefore cashing out that reality by making the trade. It's not technically illegal afaik, but it certainly is making a trade because of realities inherent in the trading, rather than the underlying.
lumost 6y ago
A potentially more productive view is that the fed cannot support the bubble indefinitely. It's becoming clear that money can be printed without causing inflation if its unevenly distributed in the economy. This amounts to large scale wealth redistribution to support asset price increases. If you earn dollars for a living, your purchasing power in terms of future dollar income is being eroded. You will purchase a home later or never, you may not be able to afford an education, and your medical expenses will rise ( as will anything that affects future earning power ). When this ends is anyones guess, it's entirely plausible that we revert to the social systems of prior less equal times, foreign trade moves off the dollar, assets converge to an effective price of infinite dollars, or populists demand their own redistributive policies such as UBI or wealth taxes. Or the fed meets tomorrow and cuts QE entirely. What is assured is that the current trend is unsustainable and must end eventually.
- TuringNYC 6y ago
  >> A potentially more productive view is that the fed cannot support the bubble indefinitely. The interesting thing is whether "cannot" means the point when they literally can not because the market and inflation wont bear it...or when they wise up to the tinder box they have created. The problem with the latter is -- which administration would allow this to be under their watch. Once a problem is bad enough, you might as well just kick the can a bit more until you literally can not. (yes, i realize the Fed is independent but there is still quite a bit of control)
  - lumost 6y ago
    There are many situations where the fed is forced to end its current policies prior to the expected triggers of market stability or increased CPI. Political and social risk is likely underestimated. That being said, examining the exit paths and forcing functions which would force Fed policy to change is something I'd like to see more of. There is a certain mentality floating around that there are no alternatives to being in the market, and that it's become too politically difficult to end Fed market support. If the latter is true, then there are a lot of consequences - such as returns becoming decoupled from cash flow see TSLA, Unicorns, or Hertz.

joncrane 6y ago

This is a great article. Note it's from January 5th, and it's extremely speculative. But certainly at least worth adding to the overall amount of signals that stock investors are thinking. I think I remember someone saying that in 1929 when the shoeshine boys were giving stock advice that that's how someone knew the bubble was about to burst. Lately I've been discussing investment strategies with the people that work at the gyms I'm going to. Is this the equivalent signal? The 2021 equivalent might be "When your personal trainer is giving you investment advice, that's how you know to get out?"

papabrown 6y ago
Or, it could just be that far more people are investors today than there were in 1929. According to this site, only about 10% of Americans owned stock or speculated in the markets in 1929. >In fact, only approximately 10 percent of American households held stock investments and speculated in the market; yet nearly a third would lose their lifelong savings and jobs in the ensuing depression. https://courses.lumenlearning.com/atd-hostos-ushistory/chapter/the-stock-market-crash-of-1929/ https://courses.lumenlearning.com/atd-hostos-ushistory/chapt... Yet, this poll seems to indicate that around 55% of Americans now hold stocks. >Thus far in 2020, Gallup finds 55% of Americans reporting that they own stock, based on polls conducted in March and April. This is identical to the average 55% recorded in 2019 and similar to the average of 54% Gallup has measured since 2010. https://news.gallup.com/poll/266807/percentage-americans-owns-stock.aspx https://news.gallup.com/poll/266807/percentage-americans-own... So if slightly more than one out of every two people you meet owns stocks, I would assume you're bound to run into a lot of people talking about stocks.
- xyzzyz 6y ago
  I presume most of today’s stock owners are actually owners of 401k account which invests in something like Vanguard Target retirement fund. As a result, they know pretty much nothing about stocks, yet they do own them.
  - papabrown 6y ago

lubos 6y ago

Looking at historical S&P 500 to Gold ratio, stocks are definitely more expensive but nowhere near dotcom frenzy. Either we see market correction or gold is undervalued and will catch up. In that case there might be no stock market crash. https://www.macrotrends.net/1437/sp500-to-gold-ratio-chart https://www.macrotrends.net/1437/sp500-to-gold-ratio-chart

fractionalhare 6y ago
Why do you believe this is a predictive measure?
bluedevil2k 6y ago
Gold is not a suitable comparison to stocks - it gets brought up on here all the time. Gold is not uncorrelated to the market. Gold is not a store of value. Gold is a speculative investment with a great marketing team.
- yarky 6y ago
  Everything is correlated when shit hits the fan. Gold has stored value since forever. These days every investment is highly speculative.
  - webmaven 6y ago
    > Everything is correlated when shit hits the fan. Gold has stored value since forever. These days every investment is highly speculative. I wouldn't want to be holding a lot of precious metals if/when asteroid mining gets going.
- edoceo 6y ago
  BTC and Doge enter the chat...
- Clewza313 6y ago
  Gold has two things going for it: there's a baseline of "real" value underpinning it (not just industrial use, but lots of fast-growing Asian countries relying on it for dowries etc), and historically gold holds up quite well when everything else is doing badly. However, it's also fundamentally unproductive (no dividends, no real capital growth), so it's going to be a losing bet most of the time.

reese_john 6y ago

Past discussion: https://news.ycombinator.com/item?id=25713696 https://news.ycombinator.com/item?id=25713696

Clewza313 6y ago

I agree with the basic take that stock prices are ludicrous, but what's different this time(tm) is that there don't seem to be any alternatives. Bonds are overpriced, real estate is not cheap, and Biden's $1.6T printer go brr money faucet ensures that there's going to be even more money sloshing around for the foreseeable future. Also, whereas the dotcom bubble darlings were all massively unprofitable, this time around the FAANGs are all minting money and even Tesla is eking out steady profits (if not exactly the $1M per car implied by their P/E!).

MrPowers 6y ago
Emerging markets and value stocks are historically cheap on a relative basis, see the What to Do? section at the end of the article.
- Clewza313 6y ago
  If the US stock market collapses, they'll go down too. They might go down less, but if the bubble is going to burst, you'd still be better off keeping your money out until then and only buying once they're cheap. Of course, this requires being able to time the markets twice, which is... non-trivial.
  - icelancer 6y ago
    >> They might go down less, but if the bubble is going to burst, you'd still be better off keeping your money out until then and only buying once they're cheap. Not if the sure-to-follow inflation from a collapse devalues your cash faster than emerging markets and value equities.
  - ur-whale 6y ago
    >Of course, this requires being able to time the markets twice, which is... non-trivial. What's Buffet doing right now ?

MrPowers 6y ago

Jeremy Grantham co-founded the investment firm GMO. They're famous for 7 year forecasts by asset classes. Here's the bearish December 2020 forecast: https://www.gmo.com/americas/research-library/gmo-7-year-asset-class-forecast-4q-2020/ https://www.gmo.com/americas/research-library/gmo-7-year-ass... He's been overly bearish for quite some time, here's the 7 year forecast from December 2009: https://ritholtz.com/2010/01/7-year-asset-class-forecasts/ https://ritholtz.com/2010/01/7-year-asset-class-forecasts/ Here's a recent talk he gave: https://www.youtube.com/watch?v=RYfmRTyl56w&ab_channel=BloombergMarketsandFinance https://www.youtube.com/watch?v=RYfmRTyl56w&ab_channel=Bloom...

sfblah 6y ago
Just in case not everyone clicks it, the forecast from 2009 is actually bullish.

throw0101a 6y ago

Just keep buying. A post by Nick Maggiulli in 2017: > Many investors focus on the right time to buy stocks because they don’t want to buy near a peak in case of a future market crash. I understand the feeling. With the market near all time highs in early 2017, it can be tempting to hold off until there is a larger negative adjustment in prices. > The only problem with this approach is the market could go up for a significant period of time before a correction happens. > For example, if you search “stock market overvalued 2012” on Google you can find plenty of stories discussing how overvalued stocks were in 2012. If you had started waiting for an S&P 500 correction then, you would have missed out on the ~70+% increase in prices from 2012 through early 2017. * https://ofdollarsanddata.com/just-keep-buying/ https://ofdollarsanddata.com/just-keep-buying/ And what has the S&P 500 done since 2017? Continuing: > If I still haven’t convinced you, let me tell you a story. The story is about a man with possibly the worst luck in investing history.[0][1] He made a total of 4 large stock purchases between 1973 and 2007. He bought in 1973 before a 48% decline in stocks, bought in 1987 before a 34% decline, bought in 2000 before the dot com crash, and bought in 2007 before the Great Recession. > Despite these 4 individual purchases that totaled a little less than $200,000, how did he do? He ended up with a $980,000 profit for a 9% annualized return. What was his secret? He never sold. > That’s right. Selling out is literally selling out your future wealth. You need to hold on to your assets as you acquire more. > This is the purpose of capitalism (i.e. acquiring capital). The only time you should sell your investments is for rebalancing (annually/quarterly, etc.) or in retirement. Otherwise, you already know the mantra. * [0] https://www.cnbc.com/2015/08/27/the-inspiring-story-of-the-worst-market-timer-ever.html https://www.cnbc.com/2015/08/27/the-inspiring-story-of-the-w... * [1] https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market... And as Maggiulli shows, trying to buy the dip, even when you know when the dip will occur (which is impossible), gives worse results than simply putting away a little bit every month: * https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-cost-averaging/ https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co... Put away a little every pay cheque, in a diversified low-fee fund (S&P 500, Total Market/Russell 3000), at a comfortable risk profile that allows you to sleep at night (0/20/40% bonds), and try not to pay attention too much about what The Market™ is doing. Most of us are investing for retirement, and if you do the above, you'll probably end up with a decent nest egg. Save a little for the future, and enjoy the present.

slt2021 6y ago

it is not equity that is overpriced. it is that printed dollar that is overpriced (cash is trash). any bond guarantees long-term loss. In 1990, 2k, 2008 investors could escape from equities to bonds with 6% yield, but now they have nowhere to go. That concludes that this bubble will continue as long as interest rate remains near zero. Federal Reserve basically cornered the entire market into equities, investors have literally nowhere to go. even if 1% of equities capital escape into any other asset class - emerging markets, real estate, alternatives, crypto, whatever - it will create even more gigantic bubble in that asset class that will surely pop without the FED's support

viburnum 6y ago
Why were bond interest rates ever that high in the first place?
- freeone3000 6y ago
  The overnight lending rate in 2007 was 5.5%. If that was the cheapest possible you could ever borrow money for even the shortest term, 6% for a long-term bond is downright cheap.
  - viburnum 6y ago
    Right, why was that the overnight lending rate?
    - freeone3000 6y ago
      The federal reserve sets this rate directly. They chose it to be at 5.25% (correcting my error in the above) because the economy was going well, we had less than 5% unemployment, and a high rate was generally considered necessary to fight inflation. https://www.federalreserve.gov/newsevents/pressreleases/monetary20070321a.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... is their statement.
      - 6y ago

nabla9 6y ago

>Robert Shiller – who correctly and bravely called the 2000 and 2007 bubbles and who is one of the very few economists I respect – is hedging his bets this time, recently making the point that his legendary CAPE asset-pricing indicator (which suggests stocks are nearly as overpriced as at the 2000 bubble peak) shows less impressive overvaluation when compared to bonds. Bonds, however, are even more spectacularly expensive by historical comparison than stocks. Oh my! Banks are OK, household debt levels are OK. Corporate bonds are the issue in the current economy. Nonfinancial corporate debt to GDP ratio: hhttps://fred.stlouisfed.org/graph/?g=B5NG https://fred.stlouisfed.org/graph/?g=B5NG * There are too many zombie companies walking around (indebted company that is able to repay the interest on its debts but not repay the principal) * Institutional bond investors have chased profits to the lowest possible bond rating they are allowed to invest. When something changes and ratings are downgraded, institutional investors are forced to sell these companies at the same time. Corporate bond market liquidity freezes overnight. Berkshire Hathaway will by bonds for cents per dollar...

lumost 6y ago
Wouldn't this force the fed to become the lender to these zombie firms or let the institutions take a bath? I can't imagine corporate bankruptcies resulting in corrective change if the fed is the principal lender.
- nabla9 6y ago
  Fed already opened corporate bond-buying program and used it. It's called Secondary Market Corporate Credit Facility (SMCCF). It only applies to investment-grade debt. Going below that and buying junk would be a big step.
icelancer 6y ago
Yeah, this has been my impression for quite some time now. Future projection for company equity seems fine enough, though quite obviously overvalued (but good luck betting against uncapped QE). Corporate debt on the other hand has been scary for a few years and is getting ridiculous. Your point lowest possible bond ratings is a solid one, I think, and one I hadn't considered. The chaining effect of some failures will be significant given how much leverage is inherent in the system. I think bond market spreads will become quite large as liquidity dries up.

imnotlost 6y ago

Do you want to under-perform during all bull markets so it hurts less during the corrections? If you stayed invested in the broad market through any bubble-pop you would be better off than aggressive diversification and hedging. Unless you can reliably time the tops and bottoms. Where else will you invest? China? India? Rest of Asia? Europe? South America? Africa? Specific commodities? Do you believe the next generations in the US will continue to create value or do you think this is the beginning of a perpetual decline?

papabrown 6y ago
I'm not sure if they're still around, but I remember back in the 1990s there was a family of mutual funds that aimed to do exactly what you're describing. They actually advertised the fact that they won't have the best returns in bull markets because they were protecting people in down markets. The idea was that people benefitted more from staying in the market over a long period of time rather than maximizing their returns in any particular year. So the fund was aimed to smooth out the peaks and valleys along the ride so investors would be more inclined to leave their money parked in the fund rather than getting a statement that said that they're down 30% and going to cash and missing the next run up.

viburnum 6y ago

Where else are rich people going to park their money? The demand for investable assets has gone way up because rich people have gotten much richer, and rich people around the world (such as newly minted emerging market billionaires) often prefer American assets for liquidity and good legal protections. I'm sure these investors would prefer that stocks earn more than 2.5% but that's just the going rate now. What alternatives do they have? Bonds yield basically nothing.

TuringNYC 6y ago
Not only do bonds yield nothing, they yield less than zero once you consider inflation. And long bonds yield near zero but...you have huge bond price risk if rates rise again. There is no real choice now, you have to park the cash somewhere...and so it ends up everywhere from stocks to commercial real estate to VC (and eventually into our tech salaries, into rent, to the landlord, to the bank, and back into MBS in institutions :-)
AngrySkillzz 6y ago
Exactly. Asset prices are not determined by central bank actions, there is a third component that pushes both asset prices and central bank policy - the global supply/demand of savings vs investment opportunities. Which is driven mostly by demographics. China's massive working class, and the unprecedented rate at which they are getting wealthier, and their savings rate which is like >10x the average US citizen means there is a huge increase in the global supply of savings. Which bids up asset prices and pushes down yields, as savers compete with each other to buy up the extant profitable and safe opportunities. Central banks are the on the receiving end of this too: over-saving pushes down the natural rate of interest, which means policy rates must be lower to respond (unless you want to condemn some working Americans to unemployment).

curiousllama 6y ago

Greenspan said in '97 that the market reflected a state of "irrational exuberance." If, on that day, you said "oh, cool , I'm exuberant too!" and dumped all your money into random stocks, then you'd still have made money at the bottom of the .com bubble crash. I totally agree with this guy, but my only reaction is "of course... so what?" I think any educated observer is wowed by the stock market right now. Anything other than "wow!" is voodoo

yellowstuff 6y ago

> I expect once again for my bubble call to meet my modest definition of success: at some future date, whenever that may be, it will have paid for you to have ducked from midsummer of 2020. Two can play at this game. I predict that at some future date the stock market will be higher than it is today.

boh 6y ago
His quote, like the whole article, is just feigned insight. I guess if stocks go down 6 months or five years from now he can say: "see I told you so".
koolba 6y ago
> Two can play at this game. I predict that at some future date the stock market will be higher than it is today. If you said that about the Nikkei 225 in 1990, you’d still be waiting for it to come true. Though as of a few hours ago it’s within 30% of the peak: https://www.bloomberg.com/news/articles/2021-02-15/japan-s-nikkei-225-touches-30-000-yen-for-first-time-since-1990 https://www.bloomberg.com/news/articles/2021-02-15/japan-s-n...
- xnx 6y ago
  Given the Nikkei, I've never understood the fundamental law that everyone believes about the US stock market going up long term. I'm genuinely looking for a convincing answer so I could feel comfortable investing.
  - nine_k 6y ago
    USD being the world reserve currency, so printing it with abandon for last few years does not remove the demand?
    - gammarator 6y ago
      That’s true until it isn’t, right? The pound sterling once held a similar role...

exabrial 6y ago

I'm sorta skeptical. With 12% of the usa vaccinated and things on the verge of opening, I really don't see things going into a recession unless the powers at be do something stupid. I think this is fundamentally different than other bubbles because there's a guaranteed light at the end of the tunnel.

icelancer 6y ago
The tunnel has been flooded with QE methods' light. The tunnel is hardly dark... for asset owners.
YZF 6y ago
This bubble started well before Covid. I do agree that if the vaccination campaign is successful the mood will be such that it might sustain it a little longer. That should factor into the calculation. Though on the other hand, governments may hold back a little on stimulus once that happens as they've been throwing money all over the place during Covid.

samingrassia 6y ago

Skip the article, read this tweet instead - compresses the current state of affairs into its simplest form: https://twitter.com/vol_christopher/status/1358792731464720388 https://twitter.com/vol_christopher/status/13587927314647203...

DoubleDerper 6y ago

Serious question: why would the bubble /need/ to "burst"?

YZF 6y ago
It always does? It's partly a psychological phenomena and partly just a question of running out of greater fools. The first one is that once there's a change in mood for some reason (some event happens, e.g. a recession which in some ways is its own psychological phenomena) everyone convinces themselves that equities are too expensive, the prices start declining and that feeds a further decline. Just look at the GME stock as a microcosm of that situation. In terms of the greater fool thing, you can only keep buying and selling the same thing for a 10% profit every year without eventually running out of people who will buy it. I guess see also the GME stock as a microcosm of that? And so, all bubbles must burst.
akvadrako 6y ago
I don't think it needs to burst. Though there will certainly be times when it goes down there is no reason it'll even go below current prices. Historically prices have always gone up, so as long as you aren't near a peak it's probably the lowest the total market will ever be.

boh 6y ago

Bubbles suggest "irrational exuberance" but in this instance, equity values are actually operating off of a legitimate logic. Bond yields are low so investors are putting more of their money into equities. Equity centered index funds and ETFs have also grown in popularity. Sure individual stocks might be bubbling, but the market as a whole is operating within an environment that's narrowed growth within certain asset classes. Saying "we're in a bubble" is always technically right since stock prices rarely reflect actual company value, unfortunately this article doesn't offer much insight beyond the obvious.

zhoujianfu 6y ago

So, if the goal of investing is to get rich and the goal of being rich is to be happy, I have a good strategy. Your overall net worth is not what makes you happy, it’s the CHANGE in net worth (up). If you’re always heavily invested in the market, you are most of the time happy, because most of the time, the market goes up. This is punctuated by (relatively) quick periods of great loss/sadness. But overall, you end up with a lot more happy times than sad. So a net positive to happiness. Not being invested in the market (at all or trying to beat a crash) means you have a period of net zero happiness. Which is worse on average than being in the market. So, let it ride people... on average you’ll be happier! (And actually, on average you’ll do better financially too.)

ur-whale 6y ago
> Your overall net worth is not what makes you happy, it’s the CHANGE in net worth (up). Two unfunded assumptions that seem to be based on your own experience. Here's another, based on my own experience: a component of what makes you happy is to not have to worry about money at all, either because you live a lifestyle that require little of it, or because you have enough that a 50% change in wealth has zero impact on your life.

rich_sasha 6y ago

Very interesting article, and has some very poignant observations. That said, it's not that hard to say we are in a bubble. Frankly, almost any time the market isn't at the bottom, it's in a bubble. The real questions are, when will it pop, and how do you invest accordingly. These are super-hard, and a (cursory) read of the article doesn't really address that. The general, boring observation, is that unless you can do much, much better, you should just be long the market, throughout all the bubbles and busts. You won't get the 50%-in-a-month payout, but you can get your consistent 10% a year or whatnot. So I'm not just nay-saying, I thought S&P is about to crash ever since it crossed 2,000 after the crisis. If I followed my (weak) gut feeling, I would have lost 50% on that trade. Thank goodness I didn't. Even when it crashes, eventually, probably (???) not as low as 2,000.