Comment by aedron | Hacker News Reader

Comment by aedron | Hacker News Reader

A bubble in slow motion, someone called the present economic environment. I think it's an apt description. Extreme "quantitative easing" (I refuse to take fed speak seriously) has only taken effect very, very slowly. Why? Because all it really was was recapitalizing banks which had enormous gaping holes on their balance sheets after 2008. They have been able to fill the tanks now, getting money hot off the presses for a song for a decade, and finally it has started to trickle into "the real economy" and actually lead to commercial and industrial growth.

Another dampening factor has been the regulations introduced after 2008 like S̶a̶r̶b̶a̶n̶e̶s̶-̶O̶x̶l̶e̶y̶ Dodd-Frank, the moratorium on IPOs has definitely helped to slow things down.

Now things are moving again, trouble is, history has shown time and time again that monetary policy is a ketchup bottle, once it starts having effect it is already too late to moderate it. That's why we have bubbles - suddenly there is too much money slushing around chasing finite resources, markets become crazy and regulators have to slam the brakes hard (in combination with banks predictably finding ways to overleverage, legally or not). Which leads to my prediction: Markets are still not crazy enough. Crazy, but not enough to look like the part where it all blows up. So I am betting on at least six months more of "growth" (i.e. inflation) before the inevitable crash.

> "growth" (i.e. inflation) before the inevitable crash

What you need to know is this: Financial crashes are an eternal cycle, they will never go away. Unless there is fundamental societal change.

Here's why: Financial crashes are business to a couple of extremely powerful/rich people. After every crash, assets are undervalued. Rich people have the financial cushion to not be impacted in the slightest way by such crashes. Which means they are in a position to purchase these undervalued assets from poorer people. The rich-poor imbalance grows further, as these undervalued assets regain their "real" value. That's the reason why these crashes are manufactured. Which means a couple of powerful/rich people will continually steer society in this direction, for example by removing laws that were put in place as safeguards.

Edit: And no, this is not conspiracy, it's pure economics.

Ah yes, the Flimflam-Fo Equation with its key parameters, "rich person a" and "rich person b".

Conspiracy theories might well be defined just by the application of the fallacy, "if someone benefits, then they intended it".

And here we see this fallacy being applied. Sound like a textbook conspiracy to me. The extremely weathly are not interested in increasing their net wealth, only in specific purchases to further their goals -- which are very easy to undermine with crashes.

People who are merely wealthy might possibly wish to increase their general wealth and therefore believe a crash will help them do that. That is an incredibly outsized risk for a wealthy person to needlessly take however.

> the fallacy, "if someone benefits, then they intended it".

Slightly tangential, but neat: that fallacy has a name! It's the "Post hoc ergo propter hoc" fallacy: https://en.wikipedia.org/wiki/Post_hoc_ergo_propter_hoc

There might be a more specific named fallacy for when post-hoc happens with regard to individuals' intentions and benefits rather than causes and effects in general though.

post hoc ergo sher lock

I don't think "after it, therefore because of it" describes the fallacy identified by the GP.

Financial crashes don't have to be bad. The last one wasn't so bad at first, before the central banks in some countries let nominal GDP dip and caused a mild recession to become the Great Recession.

See eg http://econlog.econlib.org/archives/2017/11/old_classical_m....

Some countries like Israel, Australia (or to a lesser extent the UK) had more competent central banks. See https://marketmonetarist.com/2014/04/24/how-stan-fischer-pre... for a piece about the example of Israel.

> And no, this is not conspiracy, it's pure economics.

If everything you’re postulating here is “pure economics”, would you mind placing it in the context of an economic framework for the sake of precision? Something rudimentary like the macro credit-debt cycle is fine.

As it stands, your exposition appears fairly politically loaded, and your specific claim that crashes are “manufactured” rather than an emergent side effect of market dynamics is, to me, an extraordinary claim that requires commensurately extraordinary evidence.

It’s not at all clear to me how you’re getting from (“there exist people who benefit from systemic market corrections”) to (“market corrections are manufactured by a subset of people who benefit by them”). As another question illustrating this point, would you say that people purchasing homes with overextended mortgages during the housing market bubble were contributing to that crash? If so, did they have a part in “manufacturing” it even though they didn’t benefit? How do you reconcile the ideas of market participants with agency, systemic volatility, and irrational exuberance with the idea of a conspiratorial group capable of systematically driving a market crash?

If you give a guy $10.000, x10 leverage and a trading system; and we assume he has low emotion control and is bad at math. The result is that he'll burn these $10k getting margin called.

1. You can't get all people to play this game.

2. You can't get people margin called if the stock price doesn't drop enough.

You can get 1 if you complicate loans (Mortgage based securities); and you can get 2 if you make the issue related to the whole economy. So people get bankrupted instead of margin called. Their house is sold instead of the stock.

Same game, bigger market.

That being said I don't believe the "rich" or the "powerful" are doing it. I don't believe in Conspiracy theories. I think this "movement" is inherent in the nature of the market and the humans who play around it. It burns both the poor and the rich, but it magnifies inequality whether by making the rich richer or creating new riches.

This is the really terrible problem of the push to dismantle state and company pension systems and aggressively replace them with private retirement schemes and the addition of new investment systems under the guise of "retirement" plans -- it has led to the extreme growth of the quasi-snake-oil mutual fund sales industry ("financial planners" whose only job is to sell high commission funds) and has unfortunately also led to the middle working classes being very emotionally and ideologically invested in the fortunes of the stock market. They become easy victims for the process you describe, and also will push politically for anything which "makes the stock market happy" and so the bailouts of 2008, a kind of mass corporatization -- reverse socialism -- of the state not seen in the entire 20th or 19th centuries, was politically tenable in a way it wouldn't have been before.

Please don't take offence, but you've misunderstood the mechanics of how wealth is accumulated.

The wealthiest people in the world are wealthy by virtue of the gains made on the assets they already have. So, in a bull market, their assets grow while someone without assets is left behind. The inverse is true, too - they'll proportionally lose to the same degree in a crash - as while a poor person may have no investments, the wealthy person's investments will crash in line with the market. There won't be a financial cushion, at least not a significant one.

Books have been written around timing markets and it's generally accepted that it cannot be done reliably. To get out before a crash then buy cheap would require you to predict three different moments accurately: when to get in, when to get out, and then when to buy on the "cheap". Timing even one reliably requires luck or clairvoyance.

"Rich people have the financial cushion to not be impacted in the slightest way by such crashes". This is clearly false - wealthy people don't keep mountains of cash lying around as they would miss out on the growth in bull markets, and as a result their wealth would decrease relative to their peers.

Investors generally just become relatively poorer during a crash then make it back and more during the next bull market, at least that's how it's worked until now. There's an old quote I can't find the source of right now that sums it up fairly aptly:

"Stocks go down faster than they go up... but they go up further than they go down".

I agree with the thrust of your comment, but to nitpick:

> Books have been written around timing markets and it's generally accepted that it cannot be done reliably. To get out before a crash then buy cheap would require you to predict three different moments accurately: when to get in, when to get out, and then when to buy on the "cheap". Timing even one reliably requires luck or clairvoyance.

This doesn’t strike me as true, unless you’re describing the subset of academic economists who agree with EMH in some form. In particular, the first sentence on its own appears to be evidently untrue; it’s clear that there are many parties, including economists and financiers, who attempt to time the market and generally forecast macroeconomic shifts.

I completely agree that it's the role of many parties to attempt to forecast the market, but I'm skeptical of how many (even those whose job it is to do so day-to-day) really believe that it can be done reliably.

CNBC is probably a good example of this. When you don't predict anything specific, you can never be wrong.

(Clairvoyance was not meant seriously, I should have made that clear!)

https://www.youtube.com/watch?v=V9EbPxTm5_s

I think parent and you just disagree on the amount of reliability these attempts actually have. Of course everyone tries to time the market, but the amount of evidence for anyone being able to do it reliably over and over is not that great. Professionals can guarantee a certain level of educated guessing, but a lot of the most skilled moneymakers on the planet still lost their shirt in 2008.

Attempting and succeeding are two different things. Right before the last real-estate crash I attended a seminar with an economist who spoke at length why there would not be a crash and in the coming spring there was going to be a real estate boom. Quoted lots of economic stuff to back it up (indicators and such- I don't remember but he was definitely convinced).

The field of economics seems to have a ways to go before it can be used reliably to predict things.

It occurs to me that economics today is roughly at the same level of development medicine was circa 1500CE.

The difference being there is an advantage to keeping economics knowledge shady & unknowable. Information asymmetry is one way those with wealth can maintain or grow their wealth. I do not subscribe to conspiracy theories, but I do think enough independent selfish actors will result in a "conspiracy theory"-like outcome.

Completely agree.

It is further warped by the fact that although the anti-interventionalists are probably right, the interventionalists are the ones who do all the consulting and take all the jobs and give all the advice - because they are .. interventionalists. And who wants to pay a consultant to tell them "don't do anything, and there's nothing you can do."

> This is clearly false - wealthy people don't keep mountains of cash lying around as they would miss out on the growth in bull markets, and as a result their wealth would decrease relative to their peers.

Some wealthy people do. E.g. Warren Buffett's Berkshire Hathaway was sitting on 100 billion dollar in cash last summer [1]. If he doesn't find anything that is fairly priced, he prefers to sit on his cash and wait.

[1] http://fortune.com/2017/08/07/warren-buffett-berkshire-hatha...

See also: Apple (~256B in cash), Google (~86B in cash). This cash is mostly securities, though; their "pure" cash positions would be "mere" ~15B and ~13B, respectively.

I think they mean low risk/volatility securities like T-Bonds. You can't hold 250B in a single bank. Or maybe you'll need to create your own bank. Plus they are going to demand interest and risk clarification on that.

I think Mark Cuban also said he keeps a lot of his money as cash for buying opportunies.

"the wealthy person's investments will crash in line with the market. There won't be a financial cushion, at least not a significant one."

...

"This is clearly false - wealthy people don't keep mountains of cash lying around as they would miss out on the growth in bull markets, and as a result their wealth would decrease relative to their peers."

I read with great interest the two volumes that Niall Ferguson wrote of the history of the Rothschild family.[1]

It's a fascinating work that serves well to bridge the gap of European history between Napolean and World War One.

I bring it up here because the Rothschild family did indeed do exactly what the parent comment suggested that "rich people" do. They quietly did their simple banking business year after year, piling up profits and assets that were repeatedly poured into down markets when they viewed that assets had become cheap.

This was not market timing - this was simply patience. The down market always comes and their simple, boring factoring and discounting was always reliable.

[1] _The House of Rothschild_ ("The World Banker")

Oscillation happens in many complex systems - population sizes etc.

I think the reasons for why cycles happen in economies are many. It's probably desirable to reduce the amplitude of the cycles, but I'm not convinced humans are capable of that. Due to biological reasons, reward functions are almost always short term. Humans, as individuals and societies, are not very good at optimisations at longer time scales.

I'd like to think that we are capable of more, but it may be that we are not. AI (at some stage) might be able to help us there, if it turns out to have better predictive power than humans - and doesn't lead to more ruin rather than improvement in the human condition.

aka disaster capitalism.

What is more obviously manufactured is bad tax policy, as in way too low top end tax rates. That has incentivized wealthy people to invest in real estate and the stock market, rather than in the working class. That's why a house costs on average 24 times more today than in 1960, and yet wages are only 8 times more today than in 1960. And the tax rates on these capital gains are lower than middle class payroll and income tax combined. Tax policy has incentivized top end hoarding. This is not investing. It's a neo-feudal give away.

The top end tax bracket needs to go well above 50% to make it riskier to invest what's left in those markets, rather than taking a risk on starting or growing a business, the expenses of which are 100% tax deductible.

>...That's why a house costs on average 24 times more today than in 1960,

There might be isolated cases of that happening, but in general, nothing close to that.

>...In fact, if you look at a fifty-year period after World War II, home prices were absolutely steady. In 1947 the Case-Shiller index stood at 110, and in 1997, adjusted for inflation, it stood at 110 again.

http://www.motherjones.com/kevin-drum/2010/08/chart-day-hous...

There is a chart at the bottom of the article.

In terms of wages, it is more realistic to focus on total compensation:

>...Economists long have noted that focusing on AHE rather than total compensation yields an inaccurate picture of labor compensation due to the omission from AHE of employer-provided benefits.

https://files.stlouisfed.org/files/htdocs/publications/es/07...

The page has 2 charts showing the differences when you compare wages to total compensation.

The tax burden has basically gone opposite of what you imply. For example, the top 10% paid 49% of taxes in 1980 and paid 70% in 2014. (http://www.ntu.org/foundation/page/who-pays-income-taxes) The "top marginal rate" means very little by itself. What matters is the effective rate which takes into account the credits/deductions that are allowed, the other lower tax rates, etc.

>...The top end tax bracket needs to go well above 50% to make it riskier to invest what's left in those markets, rather than taking a risk on starting or growing a business, the expenses of which are 100% tax deductible.

If the effective federal tax rate would be > 50% and there would likely be state taxes also, why would anyone invest in a small business? The vast majority of new businesses fail in the first 5 years. With such high tax rates, why take a risk when the vast majority of the time almost all the money will be lost and if you are able to make a successful business, taxes will take almost all the profit? Much more rational to invest in government bonds.

>There might be isolated cases of that happening, but in general, nothing close to that.

Where people want to live and work are cities. If you look at urban housing vs wages, housing has grown 3x compared to wages. Considering urban areas isolate cases is somewhere in between funny and absurd.

>The tax burden has basically gone opposite of what you imply.

I have neither stated nor implied anything about tax burden. I've only stated incentives and their consequences.

> For example, the top 10% paid 49% of taxes in 1980 and paid 70% in 2014. (http://www.ntu.org/foundation/page/who-pays-income-taxes) The "top marginal rate" means very little by itself.

The top marginal rate is a threat, with a real consequence. Of course the vast majority will try to avoid it, it's how they avoid it that matters.

> What matters is the effective rate which takes into account the credits/deductions that are allowed, the other lower tax rates, etc.

No, that's not what matters. I'm not trying to make sure the effective rate is either fair or equal among people who make the same income. What I want to do is incentivize a greater velocity of money, rather than rich people who don't need to save another dime, causing inflated housing and stock prices by stashing money there. I want the risk of saving money at the top end to be at least equal to that of starting or growing a business. And right now top end tax rates are so damn cheap it is way less risky to pay that cheap ass tax, and stuff the rest in real estate or stocks, than it is to take a 100% tax deduction and start or grow a business. That's bad.

And you increase the risk of being a hoarder with the real threat of taking most of that income away, above a certain amount. It doesn't matter that in 1928 probably only 5 people in the whole country paid 90+% income tax on their last $100,000 earned. The very fact that insane rate existed was the incentive for most everyone else to do something with their money rather than nothing. And it's the something else that is the benefit to society. Not how much revenue the government raised from it.

>...Considering urban areas isolate cases is somewhere in between funny and absurd.

What you said was "That's why a house costs on average 24 times more today than in 1960,"

You didn't say you were only taking about urban areas, and you have given no evidence that a house costs on average 24 times more today than 1960 when adjusted for inflation. You also haven't given any evidence that the increases in the house prices are due to the tax rates especially when there are more obvious factors.

>...I have neither stated nor implied anything about tax burden.

What you said was "It's a neo-feudal give away."

>...What I want to do is incentivize a greater velocity of money,

Increasing aggregate demand isn't some magic solution to every economic problem. Long term what makes a country wealthy is increased productivity.

>...The very fact that insane rate existed was the incentive for most everyone else to do something with their money rather than nothing.

The WW II rates of 90+ percent don't mean "...incentive for most everyone else to do something with their money rather than nothing". It actually means the opposite of what you mean. If the government will take any gains you make, you invest the money in bonds that won't be taxed. If, for example, you want to incentive people to invest in new businesses, you would look at lowering the tax rates for that investment - not increase them.

As a rule, most economists are opposed to very high marginal tax rates due to the inefficiencies they introduce - compensation being moved to non-salary, money wasted on CPAs, lawyers and lobbying congress for special deductions, dead weight losses for economic activity that isn't done, etc.

Minor correction: Sarbanes-Oxley was introduced in 2002 after the Enron/Worldcom crises, not after the 2007/2008 financial crises: https://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act

Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111–203, H.R. 4173, commonly referred to as Dodd–Frank) was signed into federal law by President Barack Obama on July 21, 2010.

Yeah SOX did nothing to moderate markets, it was just aimed at (looking like they were) purging crooks out of the system.

Dodd-Frank it was indeed, thanks.

That ketchup bottle analogy is wonderful, thank you :)

The classic analogy from economics is filling water in a bathtub.

Say you've got separate hot and cold faucets and there's a delay between turning the valve and the respective water flowing. By the time you get to just the right mix, the ratio of hot water is still increasing and it'll get messed up again, which leads to increasing the cold water, which makes it too cold, which ... You get the idea.

Which is perfectly controllable if your model includes delayed feedback. Unfortunately, the dominant macroeconomic models contain neither delayed feedback nor nonlinearity, and are not capable of simulating recessions without resorting to arbitrary "exogenous shocks".

In contrast, Steve Keen is actively developing dynamic nonlinear models of macroeconomics that is actually capable of simulating endogenous recessions.

If you're interested in learning more about Steve Keen's work, I highly recommend watching his presentation to the OECD: https://www.patreon.com/posts/my-speech-to-new-14735058

The problem is a lot of people are momentum investing, hold and forget. kind of a variations on greater fool theory. eventually if I wait long enough someone will come along and buy this for what I paid or maybe more.

I worry what if the entire market is made of fools that will buy their next slightly smaller share of the market at ever increasing prices.

It used to be that traders set pricing enough that if things got out of hand then traders would come in to sell/short. But what if most people just used buy and hold?

> But what if most people just used buy and hold?

I'm having trouble imagining that. Every time someone buys, some one else is selling, after all.

Clearly there are fewer and fewer people selling now causing prices to go up?

People are doing that because of the ridulous interest rate situation. If rates go up, that balloon will spring a leak as people move away from equities.

Why is that a problem? Isn't "buy and hold" a sound strategy that is recommended by financial experts. Rather than "buy and constantly trade"

Depends on your time frame- there's a big difference between optimizing for year over year gains vs. 25+ years.

But if this was only the US policy how come there is such a bubble in bitcoin?

Is this a sign of a bubble or people trying to hedge against a crash?

Expansive monetary policy has happened in many places around the world, Europe, UK, Japan - not just the US. https://en.wikipedia.org/wiki/Quantitative_easing

It's curious that something that was done as a measure to alleviate the effects of a previous crash is creating another bubble and (probably) another eventual crash.

My guess is the explosion in money going into cryptocurrencies is partly because of that - more loose capital chasing gains - but there are other reasons behind it too. It's a combination of things. Genuine excitement of something new and potentially transformational, desire to move assets away from places they are at risk of being seized (China), FOMO, promise of Lambos, disappointment in the traditional financial system by young people, many reasons.

People get excited when something goes up quickly, and it's been very easy to jump on that speculative train in the case of cryptocurrencies.

I’d argue most of the run up in the last year is driven almost purely by price, with people embracing and then purveying the ‘Bitcoin story’ because it helps rationalize their decision and not because they necessarily understand or believe it.

The funny thing is how said people often then come to genuinely believe they believe or understand Bitcoin, when in reality they’ll scatter at the first sign of a major correction. In fact, increasing conviction about an outcome after a person has paid money to bet on it is a well studied cognitive bias.

I think it's a mix of different reasons.. I think there is a correlation between events in North Korea and trading volume in South Korean exchanges too

I wouldn't read into that beyond pure coincidence.

US investors are only a portion of the Bitcoin market, and the price action of the past year or so isn't at all out of line with the general growth trend.

The notion that Bitcoin would serve as a 'safe haven' during a market crash is also far from a foregone conclusion. Certainly possible, but I have difficulty accepting that traditional financial institutions would see it that way.

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