Everything Is Crazy and the Markets Aren’t Freaking Out
bloomberg.com
bloomberg.com
On the other hand, many of the stories you read in the media are true. Discounting or ignoring them because you associate them with emotionality or hysteria would be fallacious.
In fact, it pretty much still is.
Free money is to capitalism what "let's just use a random function as a cost function" is to a neural network. It takes away the intelligence, the adaptation. It will explode, slowly. It does not make much sense, however, that the economy takes/took this long to crash as a result.
We should (and do, according to quite a few economic journals, and that's in a way also what this article is complaining about) have an economy that doesn't make sense given the world we live in. That the connection between reality and our economic system acting on reality is getting looser and looser. There must come a point where it suddenly, violently stops working and vast shortages suddenly manifest everywhere. Just like any learning algorithm when you take away it's direction: it goes insane, and not in a way you can debate whether it's insane. Think epileptic seizure, not general weirdness.
The consequences will be greatest in the long term. That we aren't feeling them yet does not absolve the situation.
Without specifics and concrete problems, it's just more hysteria like the OP was talking about.
As a single example to start, I would recommend looking into the staffing problems at the the state department. A lot of people don't think about the state department, but they are the first line of diplomacy on the world stage. There are hundreds of positions left unfilled, a severe lack of focus, the requirement of keeping up with major foreign policy pronouncements through twitter by the POTUS and a disengaged secretary of state with very little experience. World diplomacy is the kind of thing that does not blow up overnight, but has a ripple effect for years and possibly even decades to come, as we've seen with our middle east policies.
All of American democracy shouldn't have to crumble into ashes before we express concern.
Tillerson has also proposed a 31 per cent cut to the department’s budget and an 8 per cent staff cut.
So the context you provide requires it's own context.
All of which does not speak to the volatile situation of the commander-in-chief of the most powerful military in the world making improvised foreign policy declarations over twitter.
https://www.nytimes.com/2017/10/17/magazine/rex-tillerson-an...
The only thing I can think of that might actually have caused some issues for some businesses would be the rejection of TPP. And that is something almost all Americans wanted abolished.
Tweets, Executive Orders, and hyperventilating journalists do not actually affect US policy.
Not sure if that’s proximal enough for you. It’s true it will take some time to feel the effects of Trump’s choices. That doesn’t mean they’re not quite harmful some of them.
It’s sometimes easier and cheaper to demolish and build a new house than remodel the existing one.
Though it will be interesting to put together what the print edition of newspapers are predicting - boom or bust?
I used to read print edition newspapers everyday till 2008/10.
Let me clarify what I mean by negativity. Newspapers were (are?) about popular opinion. So, when the markets were doing great, you get all caps, huge typeset about the new highs markets were making. Anyone who questioned that was relegated to inside pages.
Same was true when market tanked. All caps, huge typeset words about "blood in the street" or "Black x day". Anyone who disagreed and said - time to buy stocks was relegated to inside pages.
They were about reflecting or shaping popular opinion. Same was true for Bush Sr and his tax pledge.
Nowadays, I can link to a some blog which says this is a high and market will crash soon. In which case, the metric of waiting for "to the moon" article might no longer hold true.
The 3.4 million American citizens living in Puerto Rico probably don’t feel like everything is normal. The president has mocked them as lazy, criticized them for straining the budget, made a joke (Christ, I hope it was a joke) that all the money being spent is a loan that Puerto Rico will have to repay, etc.
Things probably don’t seem normal for a lot of our allies. Trump has pledged to decertify our nuclear arms deal with Iran, despite the fact that virtually his entire cabinet is begging him to stop. Trump says he wants to decertify the deal because he doesn’t like it, but that’s not how deals work. Once you enter into an agreement, you have to abide by it. If you routinely break your agreements, why would anyone ever enter into an agreement with you? This kind of behavior could damage our ability to negotiate with other countries for decades.
Things probably also don’t seem normal for the 20-30 million Americans whose health insurance premiums are about to go up by 25% because the president defunded ACA cost-sharing payments for no discernible reason. Cutting the payments will increase the deficit, and make life worse for tens of millions of Americans. The only reason I can see for this is that the President wants to undo all of his predecessor’s accomplishments, even if his changes make things objectively worse.
Then we get into bizarre things. I don’t remember previous presidents feuding with sports teams, saying that Neo-Nazis were “very fine people,” nominating a drug czar who was deeply involved in the opioid crisis, or any number of other things that are unimaginable from any other president. None of this is normal.
The only things that are normal are things which generally change slowly. The economy is still strong, unemployment is low, gas is cheap, and the stock market is high. Some of that has to do with big investors and companies expecting hefty tax cuts. Should that plan fail (at least one senate republican has come out against the current tax plan, so they can only afford 1 more defector) then I think we’re going to see a sea change amongst investors and employers.
Not to say the market won't revert.
But it feels hysterical to declare that "everything is crazy."
For comparison, we had hurricanes, presidential scandals, yada yada in the late 1990s.
Well, yes, and then we had a recession right after the late 90s. Is your comparison supposed to be reassuring?
Do you think that in Bill Clinton's second term "everything was crazy?"
(I mean, maybe not everything, but not everything is crazy now.)
https://www.youtube.com/watch?v=PHe0bXAIuk0
I’m not sure if every bull has to end with a crash. Perhaps it just peters out?
From about 1965 to 1982, the market had basically 0% return. There were no big crashes (except for 1973), but the market simply "petered out" for about 20 years. On an inflation-adjusted basis, someone who started investing in 1965 wouldn't have broken even until 1995.
[1] http://www.businessinsider.com/index-fund-assets-under-manag...
It's crazy to think that we can look at the market and opine over the lack of animal spirits.
The last one needs explanation. Suppose indexers think they should own 10% of your company. Issue stock, and "sell" that stock in a self-dealing manner at current market prices. Indexers now should buy stock, since your company is bigger on paper (more shares outstanding at the same price). In the degenerate case, >90% of the stock isn't actually available for sale on the public markets, and the indexers have to buy literally more shares than they can buy.
Note that this pattern of strategies happens organically. Whenever there's a population filled with agents that pay costs to enforce rules, there's a superior local strategy of free-riding on their rule enforcement, since defectors cannot operate in a enforcer-heavy environment. This also is what'll cause a drop in index funds - wide-scale losses due to fraud and prices temporarily disconnected from fundamentals.
i like to believe indexers are not that easily fooled.
broad market indexers (think 2-5k stocks like the russell) normally use an approximation portfolio that holds significantly fewer assets in order to minimize transaction cost. the correlation between a 500-asset portfolio and a 5000-asset portfolio is something like 98%, maybe more. a lot of replication portfolios don't even bother with the underlying nowadays, they just load up on cash settled equity swaps with the dealers and let them deal with the basis.
and narrow market indexers track indices that won't bother including corporates with tiny floats.
In the dot com bubble, not everything popped. Many stocks went up as people fled tech and went into "safer" sectors. So it does seem that broad index hegemony has the potential to exacerbate a nasty crash.
Stay the course.
As an individual, they are obviously the best bet. But I'm just trying to read in some possible externalities.
The world financial system is printing money, they are moving trillions around several nations to hide the fact that this money does not exist.
How would you know how much value in U$ is hidden in Brazil by international banks? How would you know how much U$ is hidden in Singapore, South Africa, Mexico?
You don't know. The US reserves are audited, the European economies are regulated, but the capital movement around the world is impossible to track.
This money does not exist in reality, there is no record of it anywhere. But does anyone care? Has anyone read the Panama papers? Billionaires and world leaders are hiding trillions in bank accounts that you can open remotely, without hassle. This money is unaccounted for.
Banks are free to move as much money as they please around the world, they just print money and move it.
The trillions in funds around the world do not exist. The markets are rigged.
What on earth are you talking about? Are you saying the U.S. Treasury doesn't know how many dollars it has printed? Or the Federal Reserve doesn't know many dollars banks hold with it in reserve? Or how many dollars the banks it has under its jurisdiction have created? Note that apart from cash, the latter two categories are digital and intensely tracked.
> You don't know
Are you presuming or asking? $1.58 trillion of which $1.53 trillion are Federal Reserve notes and the rest coinage [1]. While estimating the exact amounts in any given country is not easy [2], just as estimating the exact number of dollars any person knows is far from definitive, the aggregates are tightly controlled.
[1] https://www.federalreserve.gov/faqs/currency_12773.htm
[2] https://www.federalreserve.gov/pubs/bulletin/1996/1096lead.p...
When was the last time you moved a trillion printed dollars?
"Printing money" today means moving virtual money around.
Banks can make money appear in Cayman Islands. "Here is a billion dollar SWIFT money order", that is it. There is no billion printed dollars. They "print" money at will.
There are three types of money: central bank reserves, physical currency and commercial bank money. The U.S. government (Fed and Treasury, respectively) directly controls the first two down to the cent. Commercial banks "make" the final one, but to get the right to do that they have to agree to Federal Reserve jurisdiction (internationally, this happens with central banks entering into swap agreements with the Fed, i.e. opening "accounts" with the Fed into which the Fed deposits U.S. dollars whose--since this needs to be said--quantities it gets to track).
If rando Brazilian bank says "I have a billion U.S. dollars" and doesn't tell the Fed, they counterfeited. They can spend it in Brazil if nobody checks (hint: everyone checks, this is what the SWIFT and Fedwire protocols were designed to facilitate). But if they try to wire those funds to anyone else (or any other Fedwire or SWIFT member), the books won't balance and the message will be rejected. Someone will then have to (a) get real dollars to cover their crime or (b) risk having themselves, and/or their central bank, booted from the Fed's international system.
I had wondered if they would bring this up. It's my understanding that an unprecedented percent of the market is plain old passive index funds.
That bet started in 2007 and Buffet won, trivially. The S&P index was up 85% in that time. And the managed funds were up 55%. Perhaps more importantly, that excludes management fees. Managed funds often demand quite ridiculous fees with hedge fund managers often taking a large percent of all profits just for themselves. When accounting for the fees of the funds Seides chose, the return for an investor in his managed funds would have seen just 22% versus the 85% for an index fund.
As time goes on people are beginning to understand variance. Take 'x' hot managed funds and in any given year some percent of them are going to outperform the market as a whole by a ridiculously large amount. And the next year some small percent of those that did this last year will again do the same the next year. And so on. The problem is that it seems as we extend to the time frame onward, the number of individuals or organizations that can genuinely beat the market approaches 0 -- and becomes a pretty good proxy for illegal behavior such as insider knowledge. The only thing that masks this is that each year as we lose 100 'underperforming' managed funds they're replaced by 110 new hot, amazing funds being managed by the next big thing.
It's unlikely to result in a crash, though, rather a period of sustained underperformance and a few people getting fantastically wealthy. You could argue that the tech-billionaire phenomena is the primary capital markets example of this: there's a widespread belief that founding a new business is foolhardy and you're better off working for an established company, so people who buck this belief and are right end up making a lot of money off it, which draws a lot of people away from employment and into entrepreneurship, which drives down average returns to entrepreneurship as most of the new startups wash out and fail to beat the market.
Real economics are never quite as easy as a single equation. A more proper model would be similar to weather modelling.
As well, I've also been lead to believe that many hedge funds aren't simply trying to make the most money, but are trying to ensure a safety net. They are promising they won't lose more than X% no matter how crazy things get. There's value in that.
That’s probably fine. I don’t see why active traders should get any money at all from outside sources other than venture capital here and there when they have a proven opportunity to scale that’s bigger than their market cap can fund. And those opportunities should be an easy sell to almost anyone with restless cash.
Why should good traders be rewarded with sales? Good traders can make their own money. The only traders who need sales to survive are bad/exploitative ones.
I think this is it. We're collectively ignoring a lot of risk (remember "No one defaults on their mortgage!") and it's going to bite us eventually.
Companies are growing their revenues, and are making healthy profits.
A good chunk of those profits are paid out as dividends. If dividend yield is much higher than those tiny interest rates, why wouldn't you borrow money, invest, and enjoy dividends? It's the rational thing to do, and hence, demand for stock is up, stock price is up. But as long as the corporations keep distributing, it makes sense.
Further, the US government can literally inject money at will into the market. That is what is happening when you have interest rates less than or equal to 0. They're saying "we don't really need money back until it starts helping you make money from the various levels of abstraction (options, futures, etc.) that enable literal money creation."
Money is being printed by banks and it is being moved around the world so no one notices in national audits.
China is printing money, US banks are printing money.
World debt is bigger than world economies, the US owes more than it produces, banks are free to simply borrow and speculate more and more.
Only the average citizens keep adding and subtracting money. Banks do not worry about money, they can print as much as they need, either by borrowing or by moving vapor money around the world to mask the true origin.
The world financial system is rigged. Money does not matter higher up, they are simply inventing value out of ether. 99,99% of the world works day in and out to support this rigged system.
Imagine we live in a world with a total of $100 in existence, owned by Bill. Bill deposits that $100 in a bank. With fractional reserve banking in our current system the bank only needs to keep 10% of deposits on hand. So they can legally lend out $90 of that money, even if they don't have the money to cover it. So Travis takes a loan from the bank of $90 and spends it buying stuff from Slim. Slim then spends that $90 deposits it at bank B. Bank B then keeps his $90 and lends out $81, and so on.
Think about what's happening there. You started with just $100 yet now Bill has his $100 but Slim also has $90. In the end, with a 10% fractional reserve requirement, Bill's $100 of "real" money will end up being turned into $1000. Of course in this process of this you also end up creating $1000 of debt - but that debt is not directly tied to the money it created. E.g. Slim's money is, from his perspective, debt free.
Now factor in the issue that banks not only lend out money they don't actually have, but they also charge interest on that money. Bill's $100 of "real" money will create not only $1000 of other new "real" money, but well over $1000 + interest of debt. In other words, if all money was collected into a pot, it would no longer be even remotely close enough money to pay off all debts. So old debts are only being paid off by new debts which in turn are only payable by even more debts.
This is one reason I'm not entirely sure how private banks actually make sense. This system empowers banks, private for profit institutions, to enormously profit from activities that would be of dubious legality for private individuals. Even our language has adopted this bizarre notion. For instance a 'run on the bank' has a very negative connotation today -- in reality it's just people withdrawing the money they deposited, only to find it's no longer there. And that's totally legal.
That's what a supporter of the current system would say. Personally I think the whole setup stinks and any benefit the average person gets is merely a side effect of a system designed for the benefit of the rich.
I would really like to invest in stocks, but I'm afraid of current valuations and cannot possibly time such an odd and manipulated market. I'm afraid of many bonds as well. Where to invest? Real estate? Maybe just carefully select stock-by-stock case-by-case? I know index funds are weird right now. Ugh.
In the city of Detroit, whole swaths of neighborhoods could be purchased for the price of a 2 bedroom SF condo
Everyone except banks hurt in 2008. Banks then went in buying everything cheap. The people could not buy at all, since everyone was robbed. But banks were bailed out, so they had the money to buy cheap stocks around the world after the crisis they themselves created.
Is it not obvious? The crashes and the pumps are architected by banks. The people who lost homes got hurt, but banks didn't. Banks made trillions of $ from the 2008 crisis.
That's a big if, though, depending on your (or "you" in aggregate) market power. And if you've got less than $1K in savings, you probably don't have a lot.
If you look at any crypto exchange, you will see BTC-fiat currency pairs for USD, EUR, CNY, JPY, etc. Not sure what more of an "attachment to fiat" you could ask for.
- speculation, as you say (sells outside a window)
- savings (sells after a period of time)
- float to cover transactions (sells continuously but also buys continuously, netting out to a stable holding)
They are all somewhat interrelated... speculation decreases savings value if it has volatility on a timescale bigger than typical vests. Float is constituted in part by the other two, although much of its cap is pure in/our money transfers. Speculators get most of their value from other speculators, but also react to changes in the float and savings market.
And any individual transaction will usually be some combination of the three. A saver might also be hoping for some return on top of the storage value. Someone who is moving money overseas might leave it in BTC for some additional time if they don’t have a better place to store that money.
Still, the mix of those motivations will lead to very different trading profiles. And only a small portion of those decisions are deterministic on the spot price of BTC, which is why calling them “100% speculative” is wrong.
Ask the people who lost homes in 2008 if it works.
99,99% of world wealth is held by less than 1000 people.
Can you wrap your head around that? Less than 1000 people control all the wealth for the other 7 billion people who happen to be alive on this planet.
The environment is a wreck, the world is being destroyed, entire coral reefs are dying, we are pouring radiation into the sea, there are artificial islands of trash in the ocean.
We as a species will not last more than 100 more years on this planet.
What exactly "works" in your opinion? You have an iPhone built by slaves in China? Is that it? What works?
Plastic in the ocean won't stop that, coral reefs dying won't stop that, global warming won't stop that, nuclear war won't stop that.
Not saying we shouldn't try to solve problems but lets keep things in perspective here.
You've gotta tell 'em!
Citation needed.
https://www.theguardian.com/global-development/2017/jan/16/w...
[0] https://washingtonmonthly.com/magazine/novdec-2015/bloom-and...
A man whose standard of life was increasing at (for example) 0.01% suddenly finds it increasing at 1.0%?
Or a family of 7 in some famine-stricken, war-torn nightmare now has half a bag of rice instead of a third?
At the same time your share in the overall wealth, prosperity and power of your nation is decreasing and being consolidated in the hands of fewer and fewer people.
A gradually increasing quality of life is something that should be an absolute minimum expectation for society, short of the effects of natural disasters and war. This is not something you should be proud of or use as an excuse to avoid the discomfort of recognising the abuses and excesses of the obscenely wealthy.
Sure the GDP of any given nation might be rising, but that only tells you how wealthy it is, not who actually benefits from that wealth.
You have traded your right to the prosperity of your nation for a an absolute minimum baseline of what will keep people docile and subservient.
And this;
> Life is getting better for everyone all the time.
Is just offensively naive to the extreme.