Three Delusions: Paper Wealth, a Booming Economy, and Bitcoin | Hacker News Reader

Three Delusions: Paper Wealth, a Booming Economy, and Bitcoin

hussmanfunds.com

218 pointsthisisit151 comments

This guy expects a market loss of about -65%, which would send the S&P 500 back down to 900. He also expects negative total returns over the next 12 years.

Of course, his Strategic Growth Fund has not only underperformed its benchmark (the S&P 500 index), the fund actually has negative returns over the past 1, 3, 5, and 10 year periods[1].

Losing money in this market is a truly remarkable feat.

[1]: https://www.hussmanfunds.com/strategic-growth-fund/

This is why I come to Hacker News.

because of the comment or the article ?

The comment showing me whether this guy knows what he is talking about or not.

How the hell do you know OP knows what they're talking about? They admit that they don't know finance in the post.

What if he's wrong?

The comment didn't include a good metric of whether the author knows what he is talking about.

How do his funds perform in bad markets? That is an important part of diversifying a portfolio. Funds that outperform the market in good markets are likely to fall even more than the rest of the market in downturns.

It doesn't matter if you make out like a bandit during a boom if you aren't able to preserve much of that accumulated wealth.

right, lots of fund managers accept that crashes happen periodically...the permabears like Hussman assume they STAY low over a long period of time yet society retains enough order to let them fulfill their thesis

if the market crashed that low for a decade, you would see massive regime change in every democratic nation and the rich would be stripped bare

actually, the corporate nanny state will just bail them out. See: Long Term Captial Management, S&L crisis/Continental Illinois under Reagan/Bush Sr, 2008 crisis

They have an implicit subsidy, Too Big To Fail: access to cheap credit because creditors know the nanny state will bail them out.

Why don't we call it welfare when we give money to the rich? Capitalism for the poor, socialism for the rich. We don't need market discipline, but YOU do

The corporate nanny state is more then willing to let individual firms collapse (bear stearns). Your examples were a systemic risk, if those organizations collapsed there was going to be a lot of collateral damage.

they could of nationalized the banks, but no instead they just give them handouts

but yeah, I wonder why they didn't decide to save bear stearns, maybe it collapsed and that was the reason they decided to save the rest

best source about the 2008 crisis? I really like noam chomsky and michael lewis' work

Hussmans scenario is far worse than 2008...more like the Great Depression x2

we basically don't know what would happen, but it's safe to say the rich might not be assured of a safe bearish trading market in a civil society

> if the market crashed that low for a decade, you would see massive regime change in every democratic nation and the rich would be stripped bare

That wouldn't happen at all in fact. We've already recently seen that kind of economic pain on a protracted time frame. See: 1967 to 1982, a time in which inflation adjusted the S&P 500 lost 2/3 of its value. Stagflation, high unemployment, high inflation, economic chaos, price controls, war in vietnam, societal upheaval, smashed real estate values - that era saw it all. The rich were not stripped bare at all.

Spain just went through an extraordinarily painful depression, the likes of which the US hasn't seen in 80 years. The rich were not stripped bare, Amancio Ortega is worth $76 billion. Portugal went through something similar. Greece arguably had it even worse. The rich were not stripped bare.

Russia is a klepto-state that freely takes whatever it wants from the private economy. They just went through a severe recession that set their economic standing back ten years, the oligarchs were not stripped bare.

Japan saw net negative economic growth over 20 years, while the median standard of living in Japan dropped by more than 1/3 thanks to currency debasement and high taxes vs no growth. The rich were not stripped bare.

You'll of course notice the common theme across all these different cultures.

The common theme is that the majority of people were not starving. That's how revolutions are fueled. None of the countries you listed were facing actual famines.

So, for the rich to keep (and make) their wealth, they just need to ensure that the serfs/plebs don't starve. Low bar for success!

Universal Basic Income

This company has ~$750mm under management, and has several funds that manage to have both a) high expense ratios and b) horrible performance over the short and long terms.

Serious question, for those who work in finance: how do companies like this stay in business? Shouldn't the transparency of their poor performance have long since driven them out of business?

Semi-serious question, also for those who work in finance: what are the barriers to entry to starting funds for those of us who could do better than this guy?

Edit: I'm also stunned that anyone running any kind of "growth" fund could manage to lose money the last few years.

He may have raised funds 20 years ago and over 20 years delivered good returns. Also, underperforming S&P is not necessarily the right metric - as part of an overall portfolio that includes S&P, his funds may provide diversification benefits. To answer the question as to why can't random joe raise that money - the answer is, raising money is harder than you think.

It's not my area of expertise, but I believe it's perhaps easier to raise money now than at any time in the past.

Somewhere in this video, David Einhorn talks about this in response to a question from the public: https://www.youtube.com/watch?v=Qvz5LS9pIjs

Apparantly there's match making events set up by banks, to introduce money managers to investors.

It's a really hard time for long short hedge funds actually. There was a Bloomberg article a few months ago saying that the number of new l/s funds is the lowest it's been in years

with 5% fees, Hussman himself is making money!

it's only the clients that are losing money

he just has to produce doomsayer screeds that are convincing enough to fool the clients. he's basically being paid to write dystopian fiction

not sure where the 5% fees number is coming from, it looks like its <1.4%. If you're adding the redemption and exchange fees those are only applicable if you hold the fund for <60 days...

https://www.hussmanfunds.com/pdf/hsgprosp.pdf

go on morningstar (or below) and look at the chart for the entire life of the fund, you'll see that he had periods of massive outperformance

http://quotes.morningstar.com/chart/fund/chart?t=HSGFX&regio...

a broken clock is right twice a day

That looks a lot more accurate than twice a day.

For a decade?

It's probably a stupid question, but doesn't that ignore the dividends?

It does not ignore dividends when you set the dropdown above the chart to "Growth" as gp has, but you can see what it looks like to ignore dividends by selecting "Price".

Funds like this tend to outperform in bad to normal markets and underperform in highly bullish markets as they have more discipline around valuation. Warren Buffett famously underperforms in very bullish markets as well

The pitch of funds like this is that for a few years out of 10, they'll underperform, and then massively outperform when everyone else is sucking. People invest in funds like this (note I don't know too much about his fund in particular but know many funds with similar styles) because when all the people who think they are expert investors bc they rode a bull market crash, these funds will be making lots of money

Underperform sure, I get that. Negative performance, when you're getting like >15% s&p 500 growth for year after year? If that's what GGP is saying that's really bad.

But it didn't outperform in 2008. At least not by much.

Losing 9% instead of 37% is quite some outperformance. Let’s say you started with $100: ending with $91 is 44% more than ending with $63.

A few years seems reasonable. However, they seem to underperform for most years out of 10. This is their best performing fund: https://www.hussmanfunds.com/strategic-total-return-fund/

On the other hand, this is their "growth" fund: https://www.hussmanfunds.com/strategic-growth-fund/ Its performance is absolutely abysmal.

What is Hussman's "PhD" in? Losing money?

Never underestimate the role of salesmanship in the success of convincing people to give you their money.

For some people a fund that only does well in bad times is their hedge. You just have no way of knowing who this funds clientele is.

> I'm also stunned that anyone running any kind of "growth" fund could manage to lose money the last few years.

Well, he's bearish, so he's only moderately long, if at all, and spends money on downside protection. That bleeds.

that funds performance is abysmal. but comparing it to a long only fund is not the right benchmark, Long/Short or Market Neutral would be more apt, making the relevant returns less egregious (as they've had a tough run as well).

As of 9/30 the fund had a gross exposure of 149% and was 32% net long [1], so he's employing leverage as well.

[1]http://www.morningstar.com/funds/XNAS/HSGFX/quote.html

Edit: looks like some of that leverage is on the form of options so maybe the actual math is different.

Predicting that a downturn will happen is easy. A downturn will probably happen if stocks are significantly inflated (by some reasonable measure). Predicting WHEN is the hard part. He's just 10 or so years off the mark :)

I've predicted 8 of the last 3 downturns.

Dooooooom I tell you.

>I've predicted 8 of the last 3 downturns.

This is a great phrase. However, ideally a good portfolio has hedges and hedging against a big downturn is something you'd want to do. You don't have to give all of your money to the doomsayer portfolio, but I imagine that it'd be wise to have just a little there.

What's interesting about Hussman these days is that he always claims that he started using a revised method for market timing since 2014. (Yes it somehow took him ~5 or 6 years to "revise his method", all the while his customers were paying. Must have been some spectacular calculations...)

Now we're 3 years into the new period, and he's still loosing money hand over fist. Not even breakeven due to being early and putting on costly hedges. But really loosing money.

I know how hard timing is. And I agree that we're in uncharted waters wrt to central banks buying bonds and the ridiculous complexity of modern finance.

But it's hard to imagine exactly who his customers are. Just staying in cash would have performed much better than going with Hussman.

http://stockcharts.com/h-sc/ui?s=hsgfx

The market can stay irrational more than you can stay solvent. That doesn’t mean he is right. He is in the business of making money with money but not figuring out if the market is sane or crazy.

His own metric is performance vis-a-vis the market over full cycles (top to top). In the past, he did well on that, but during this cycle he's so deep down the hole that it'll be difficult to catch up. Nevertheless, it'll be worth revisiting his performance after the next crash.

"This guy expects a market loss of about -65%"

Which is very possible. Or how did Mandelbrot say? "speculating on the stock market is riskier than you think"

The current highs are only possible because interest is so low and people leverage. A 2% return is no problem. Leverage times 3 and you have a decent 6%. But what happens, if interest rates rise and you get margin calls? Your have to sell. Wait, the others have to sell too....

"He also expects negative total returns over the next 12 years."

Past performances are no guarantee for future performances works both ways.

"Losing money in this market is a truly remarkable feat."

Not necessarily. Timing is tricky. The market can stay longer irrational as you can stay liquid.

Absolute return funds aim to generate returns that are uncorrelated with the broader market. You look like a fool when markets are ripping (buy any passive etf) and a hero when you generate outsized returns.

One way to generate uncorrelated returns is by being long (making money when stocks go up) and short (making money when stocks go down) -- you are effectively trying to make money on the spread between your buys and sells.

In bullish markets, being short can hurt -- a lot. Hence you end up with negative returns (Your shorts did a lot worse, than your longs did good).

Hussman's funds satisfy a need in the marketplace for uncorrelated funds -- he did really well in the dot com bust and the years after that, but has really lagged behind not just the market but other peer market neutral funds which should be the true yardstick to measure his success.

I believe the man is essentially saying that past performance does not indicate future performance. Ironically, most of the comments here are saying he is wrong, because of his past performance.

Can we instead talk about his specific points and why they are wrong instead of just focusing on his past performance?

Also, it looks to me that his performance was good during the great recession. So if another recession is coming, shouldn't the critics here be flocking to him? Or is everyone stuck in the current bull market feedback loop?

Most people think he is unreliable as a source of market prediction, because he has been absolutely horrible at it, which is somehow his main occupation.

Seeing as the market always recovers and then some, you are going to need to make very, very good returns in the downturns to make up for all the list potential on the upside.

In other words, the overall return of the markets over their entire lifetime is positive, not negative.

It would be great to ride the bull and then switch to the bear in a down market. But that would require timing the market.

The market always recovers? Japan must not have gotten the memo. Or is the U.S. too special to ever have the same problems as Japan?

By "the market", I was referring to the US Markets. We have a few hundred years of history of always recovering. Japan is the special case though. Small and landlocked, rather xenophobic with an aging population. Things that could happen in the US, but the US is just a completely different, and much larger animal.

I look beyond the “there’s a crash coming” sentiment. In that opinion, he is like all other pundits yammering on CNBC: entertaining rather than enlightening.

What I like about his article is the insight — new to me — about the nature of paper wealth vs real wealth. He described it in a way that is useful and enlightening to me. The assertion that a security (stock, bond) is not an addition to net wealth — just a zero sum transfer between individuals over time — is a provocative statement that I will ponder for some time.

And I think it is wrong. On initial offering, it moves money to a potential value adding activity. Even after that, stock can be used as an incentive to increase productivity (and hence add value to an economy). Certainly a single trade is in some sense "zero-sum", but the entire point is to provide efficient access to capital that can be (and is) used productively.

Thank you for this comment. There's so much negativity in the most-voted comments that it's refreshing to see an approach that tries to learn instead of discredit.

It’s zero sum for the individual buyer and seller, but in aggregate it’s how the economy decides what work to do.

I think I understand what you are saying but in macroeconomics it's usually stated the other way. On the aggregate debt and financial instruments net to zero. One person's debt is another person's saving and if you add all financials up, you get zero (or depending on what you are counting, you get the value of the physical assets behind the financial assets such as stuff, factories etc. On the other hand, for sub parts of the economy or for individuals there can be positive or negative financial equity or debt meaning some individuals or parts of the economy owe are are owed more than others.

Correct me if I'm wrong though: equity is issued in net positive supply. And while the company has equity on the book as a liability, that liability does not go up when the stock price goes up, right.

Thus, when stock price doubles, it is wealth creation for the shareholders (and if they'd sell to someone else, it would be realised).

Edit to add: unlike derivatives (like call options), which are in net zero supply, thus their payouts are always zero-sum.

Trade is a wealth creation mechanism, because different people assign different values to things. When a baker exchanges some loaves of bread with a carpenter for a table, wealth is created: they're both rational actors who know that the thing they're getting is worth more (to them) than the thing they're giving away. The same is true when the baker sells bread for money. The same is true when they issue a bond for their baking business. Of course the bond just moves money around, but a lot of wealth creation consists of moving things around rather than directly building a physical thing.

Correct, but the article specifically referred to securities as zero-sum transfers. A security is linked to something that has value, and exchanging the security doesn’t alter the value of what the security is linked to.

A particular stream of payments with a particular risk profile is an asset that has different (present) value to different entities like any other.

I may not be using the proper terminology here, but would I be correct in restating this as:

The underlying value of the asset is just one component, but the vehicle the asset is traded through can change that value equation by adding or removing its own value.

No, I don't think that's correct. A security doesn't have its own value independently of the payment stream it represents, any more than the deed to a house has its own value independently of the house. But the same payment stream (or house) might be of different value to different people, so buying or selling it can create wealth.

So the risk and form that the payment stream takes (ie. bond coupons are different from rental property income) might both be $100 for example, but if someone is overindexed in real estate in their portfolio, there may be more value to them in the bond?

Yeah. A risk profile isn't just a percentage, it's also a question of what it's correlated with.

Yes that is a key insight to understand about macroeconomics and the reason why growth in financial equity and other instruments is not counted in GDP, only production of real things, creation of factories and accumulation of inventories.

One party's debt is another party's saving (the party that the debt is owed to) so debt nets to zero in the aggregate economy.

It is also why cryptocurrencies are potentially dangerous to the economy if they become too popular. The situation could become similar to how gold hoarding caused the great depression (though I don't think it will be that catastrophic unless governments start tying their currencies to crypto tokens like they had done with gold.

It's the kind of thing that isn't obvious at present, at least given most discussions of money, equities, and wealth. But with a different economic paradigm, some of things concepts become more obvious. Henry George was commenting on precisely this some 140 years ago:

http://fortfairfieldjournal.com/mpl_hgeorge_money.htm

I think the critical distinction to make is that if I trade you fish for wood, we are both getting something we need more than what we have. But if I trade two securities with you, we are essentially making a bet- and with a bet, one party wins and the other loses. It's a truly zero sum game.

Understanding Bitcoin is hard. Here is a response to some of the criticism:

> Every time a block is validated, a single node in the network gets a reward, and everyone else’s computing time is completely wasted.

This is a misunderstanding of what PoW is http://www.truthcoin.info/blog/pow-cheapest/

> The system already features a rather steep cost per transaction, and hardly any of those transactions are for the purchase of goods and services

Second-layer scaling allows an arbitrary number of off-chain transactions based for a single on-chain transaction. See https://lightning.network

Only if "arbitrary number" doesn't include an arbitrary number of addresses. You still need a transaction to set up a channel. Lightning shifts a cap on transactions to a cap on users while assuming that most people transact repeatedly with the same person and that btc users will be happy to lose the trust guarantees that btc brings over traditional services.

You are missing the "network" part of lightning network.

A "payment channel" only allows unlimited "transactions" between 2 people, the "lightning network" allows you to chain those together similar to an IP network where you can transact with anyone that has a route to you through anyone else. So if I have a channel open with my friend, who has a channel open with coinbase, who has a channel open with gemini, who has a channel open with you, we can transact over LN without opening or closing a channel.

In addition to what my sibling comment says, LN channels retains trustlessness.

Great Zappa album btw.

>> Every time a block is validated, a single node in the network gets a reward, and everyone else’s computing time is completely wasted.

>This is a misunderstanding of what PoW is http://www.truthcoin.info/blog/pow-cheapest/

Honest question: I tried to find the problem with that view in the link you provided, but couldn't. Can you explain it to others who may share the same belief? I think that's what the Bitcoin white paper describes, but could be mistaken.

You need opportunity cost in order to secure the network. Without that, there is no incentive to keep the network secure. There is no cheaper solution to solve this problem, therefore there is no waste.

Are claiming that the Bitcoin solution is the ideal solution to distributed trust? I don't know that that is not the case, but it seems unlikely that the first working solution was the best one doesn't it?

I doubt it's the "ideal" solution, but I do feel it's the "best" we currently have.

You also need to remember that bitcoin is upgradable. If in the future we find better ways of doing distributed trust, and we can prove it, that doesn't mean that bitcoin is done and gone. If the vast majority of the users of bitcoin believe a change to whatever other "distributed trust" system that is better, the network can be upgraded to take advantage of it.

"Bitcoin is inherently wasteful, therefore it's not wasteful." What?

Welcome to Bitcoin advocate logic. Clearly using more energy than a moderate sized european country in order to process 3 or 4 transactions per second isn't wasteful. Right?

I mean in absolute numbers, says the bitcoin advocate, the fiat banking system has to use more, right?....

....nevermind the fact they do something that is not driven by pure speculation and do it at thousands of times larger scales.

Bitcoin -- the perfect intersection of people who don't understand finance, economics, computer science, scaling, politics, socio-economics, or math.

PS: People only quote Bitcoin's energy use and often times they leave out things like air conditioning. Nobody seems to sum up the total energy required to power the entirety of the crypto "space" including Ethereum, Litecoin, etc.

Yes our financial system isn't based on speculation. Good one

Maybe people are defining waste differently (equating "high cost" with waste).

What you may call waste is in a way the cost of the operation of the network (and its properties and guarantees and so on).

Waste suggests that there is an easy, equivalent, much more efficient solution around the corner but no one cares and wastes resources instead when they could have been doing the same thing with fewer resources.

Waste is something that is unnecessary. Competing for PoW solution is critical. There is no waste. If you know a different way of solving the consensus problem, tell us.

Is there a simple way to explain why trusting the developers of the software to manage the network is meaningfully different than trusting the Fed to manage the dollar?

I mean, I understand (I think) that Bitcoin doesn't require a given node to trust another node. But what if there is a change to the software that trickles down to all the nodes without them realizing the consequences until it is too late? Either a bug or intentional subversion.

Probably not what OP meant, but mining pools are a way to address that. You team up with N other miners, and if one of them finds a solution then the reward is divided among the pool based on the work that was contributed

Which is actually the exact same system as mining, but with a fractional difficulty.

So instead of having to mine a block with a difficulty of 10 million, you are allowed to mine invalid "miniblocks" with a difficulty of 1 thousand. Then when someone in the pool happens to mine a block that is difficult enough to be valid globally, the mining pool software takes that reward and splits it proportionally among all users based on how many "miniblocks" they generated (with different pools doing different weighting).

Isn't it a complexity optimization? In the broader system there is no coordination of attempts so multiple nodes 'waste' resources trying the same invalid solutions if I understand correctly.

Yes, but the number of possible "solutions" (valid or invalid) is so large that it's extremely unlikely that 2 people are getting the same invalid solutions (assuming the software is working correctly). so you don't need any coordination.

And "extremely unlikely" doesn't quite get across the magnitude here. We are talking about the likelihood of 2 people generating the same SHA256 hash of what is basically an absurdly large random number.

Trying to mine a block is basically just generating an SHA256 hash of (the previous block + a nonce) that has a given number of 0's on the front of it. (this is crazy oversimplified) The nubmer of zeros is basically the difficulty.

So everyone starts off trying to generate a SHA256 hash of "ABCD" and a random number, that has at least 4 zeros on the front. So a mining pool is setup that says anyone that generates a SHA256 hash of the same thing with 1 or more zeros on the front gets a "share", and when anyone generates an SHA256 hash with 4 or more zeros on the front, the pool submits that share, then gives the profits to everyone that was able to generate "shares" based on how many they generated.

Difficulty can't actually correspond to the number of leading zeros required in the hash, can it? Then there would only be 256 levels of difficulty, and the average block time would have to double whenever difficulty increases. Yet I see this "leading zeros" explanation everywhere. So maybe it is the case, but if so, why was this way chosen rather than just requiring that the hash be less than some value, with that value being a function of difficulty? That would give you more granularity at very little additional complexity.

The "number of leading 0's" is just a gross oversimplification of the actual difficulty mechanism. It's a lot easier to explain, and it's somewhat correct (it's easy to look at the hash for a block and see that it has a bunch of zeros at the front)

The reality is closer to what you say at the end there, it is calculated so that the resulting hash must be under a given value, and is pretty damn granular. Sadly many people trip over the idea of one hash being "less" than another, and it's just easier to go with the "number of zeros" explanation rather than spend time explaining how a hash just represents a bigass number.

For example, the current difficulty as of this comment is 1873105475221.611

> many people trip over the idea of one hash being "less" than another, and it's just easier to go with the "number of zeros" explanation rather than spend time explaining how a hash just represents a bigass number.

Aha! I knew there was a reason people prefer the leading zeros explanation. Thanks for pointing it out.

No ones computing time is wasted, you don't do any progress while mining, you just have a one in 8481426187000000000 chances of finding a valid hash each time you generate a hash.

Everyone else's computing time is wasted, in the sense that all that electricity and processor time (both of which cost money) have not contributed even one bit to the blockchain.

The point of the article (and I'm surprised that it takes them so long to explain it) is that regardless of the blockchain building process you choose, the entities responsible for adding blocks to the blockchain form a highly competitive market, and in these kinds of markets the costs grow very close to their expected income.

For Bitcoin, those entities are the miners, and costs grow because if you don't buy the latest high-powered hash-nozzle, your neighbor will, and your expected revenue will drop. It's an arms race that only stops once the costs exceed the revenue, meaning that most of the revenue from each block dissipates into electricity and hardware, and the electricity and hardware that doesn't contribute to a block is waster.

But even for a different blockchain model, designed to not waste anything, the same thing would happen: block-adders are incentivized to spend as much money as possible to increase their slice of the pie. In the end, the same amount of money (the revenue for a block) would still be spent in electricity, hardware, bespoke lava lamps or golf sessions with senators, anything that lets miners get one step ahead in the arms race.

Of course, if you were to drive down transaction costs, the available revenue for each block would go down, and the amount of wealth that can be wasted would decrease as well.

There seems to be no timeline for LN’s release, and no sense of urgency from the devs. It feels very amateurish. There’s a good chance that by the time it comes out Bitcoin could be left in the dust by a different crypto currency.

What are you talking about? The protocol is standardized, there are 3 implementations in testing, they're sending multi-hop transactions across all 3 different implementations on the Bitcoin mainnest, there's at least one client plus an explorer.

https://news.bitcoin.com/lightning-networks-new-infrastructu...

It's clearly on track for a 2018 release.

"On track for a 2018 release" is not a timeline, IMO.

Elizabeth Stark said we were <6 months away in Dec 2015.

https://twitter.com/starkness/status/676599570898419712

And for the downvoters: I am no shill. I've been holding BTC long-term. I am just a realist with a good understanding of the reliability of software engineers' estimates, esp. in this case.

You can ignore what people say and just look at the evidence, which in this case is pretty clear. Segwit made LN a lot easier, the software is here and working, the fact that they can send a) multihop tx's b) across multiple different clients is a substantial signal about the project's progress. And yeah, don't expect anyone to commit to a more concrete timeline than "in 2018 sometime" when folks like you hold them to it.

I find myself in agreement with most of the author's statements, especially regarding bitcoin and paper wealth.

I also like the following statement -- "If our policy makers are interested in boosting long-term structural U.S. GDP growth, they should be providing direct and targeted tax incentives for real investment, education, research & development, and other factors that could, over time, increase our nation’s productive capacity."

Too bad our political system no longer has that capability, if it ever did. It seems tax incentives find their way to the most powerful factions instead of the most productive ends.

Real Investment - too many parasitic factors. Education - too many parasitic factors. R&D - too many parasitic factors.

Education is in a bubble of its own at the moment, partly because it's fun out of proportion to its economic value. We're churning out PhDs who then have nothing to do. "Innovation" tax incentives reward companies for registering patents, but if patents ever did reflect innovation that's long since fallen to Goodhart's law.

Infrastructure investment is usually a good idea; so is direct government funding of real research, the kind that NIH or DARPA put out. But if, as the article claims, the biggest issue is the number of people in the labour force, then the best way to improve growth would be to ensure more people can participate in the labour force. That means encouraging things like public transport and flexible working hours, and finding a way to square our current approach to unemployment and medical insurance with the so-called gig economy (i.e. people working multiple part-time jobs). That would be win-win, and is unquestionably the government's area of responsibility.

The economy is just a mechanism to have a predictable environment in which to raise children.

In that case it's an exceptionally bad one.

Compared to what?

Almost anything? Even the market's most ardent defenders would not claim it is a system of constant predictability. If it were predictable investing would be a lot easier.

I guess it depends on how you see it. In the past, the system may have fluctuated less, but the bottoms went very low; the current economy (which is broader than "the market") may fluctuate more, but it's also better at providing a predictable baseline.

In my European country, even less than a century ago, it was unpredictable for large swaths of the population whether they'd have enough to eat to survive next year. That's not true for the vast majority nowadays.

Even in the US, apparently, up to 12% of the population[1] is sometimes in a position where they have to skip meals, so even there, I'd say the depths someone can fall to are, potentially, very low. And a lot of what makes our current system at least somewhat predictable is controls restricting the unfettered operation of the market. A truly unrestricted market would be very unpredictable. All in all, I don't see predictability as a particular strong suit of markets, even with the most optimistic assumptions -- and I'd also say that, contrary to the original post, promoting stability is not the reason they came about. Enclosure was not a particularly stability-promoting maneuver, for instance.

[1]https://www.ers.usda.gov/topics/food-nutrition-assistance/fo...

You keep arguing about the market, when the topic was the economy as a whole, as I've pointed out in my last post. A multitude of markets are certainly part of the economy, but they're not "the economy".

And those 12% are certainly terrible (although only 5% were significantly affected, if you read a bit bellow), but I'd say it pales in comparison to what people went through in a year of bad harvest in the past. That people having to skip a few meals is obscene nowadays is a sign of progress.

OK, fair enough. I had gotten some of the prior posts jumbled in my head, I guess. Still, we live under a market economy, which does not maximize for "a stable environment in which to raise one's children," although in aggregate it has made our society wealthy.

The most striking moment to me in my IPE class was when the professor, after we'd covered how governments and, in democracies (by proxy), We the People, bring modern economies into being and choose, to some degree (other governments and a variety of natural factors have more than a little say), the shape they'll take, innocently asked, "so, why have an economy?"

Yours is a better answer than what any of us came up with at the time.

Every society has to have some kind of apportionment and exchange of resources, which might be called an economy, so I find the question strange.

That's a perfect statement. I wish the reality were as perfect.

Is this a joke?

To further generalize your statement: In life any set of relations may be the basis of continuity.

The economy is not a mechanism. It's just a term we use to generalize about the production of goods and services.

Capitalism, socialism, fiscal policies and such are mechanisms that are used to influence the economy.

Fund managers are just scammers - plain and simple. He loses his clients money, he makes money. He earns his clients money, he makes more money. Either way he wins. It’s all sales and bullshit.

Source: worked at a hedge fund

There is a lot to dissect but I would focus on labor force. Our labor force used to be all human labor. Now it includes a large number of bots, both physical and software, that take care of business. The (output = labor . x) doesn't work anymore.

Great. But that begs for more questions. Money is a unit of trade between humans for getting something from the other human in exchange for your money. If an entire class of humans is no longer needed, how will they receive money to pay for what they need? How much is your legal tender worth when large swaths of the country whose denomination you claim your wealth from are no longer "part of the economy"?

Not that I have answers to these questions. But we do live in interesting times.

I believe these questions are exactly what is driving the current crisis. Let's not be confused here. People getting more rich, and prices rising doesn't mean we don't have a crisis.

The problem is that nobody knows yet, what this world will look like, where the formula value = number_of_people * output_per_person holds true. So where to put all the capital, power, and information wealth that one has created in a system based on that formula? So everything that gives the impression it may make it over the leap into the next system, start-ups, new currency, tech gimmicks, gives some of the people hope that they have finally found something that will protect them and bring them into a good position for the next cycle of politcal evolution.

Truth though is, there are no systems that hold forever, or which could predict something which is not part of their system. There is only flexibility, intelligence, and a few tricks that sometimes work. E.g. making fire will probably the same, even if capitalism has ended. A useful trick to surivive cold and food-sickness. Also the ability to build trust relationships may survive as long as humanity survives. But few of these really enable one to continue living in the luxuries wealthy people are used to.

"Bots" don't have a separate economic existence. They are a productivity multiplier like any other tool.

His chart "Nonfarm business sector: Real output per person" shows a notable _slowing_ of the growth rate of per-capita productivity, consistently, over the last 70 years.

I was under the impression that the opposite has occurred - we've achieved mind-boggling amounts of per-person productivity, and rapid rates of growth in productivity, fueled by advances in automation and communication technologies.

Is this chart wrong? Is my impression opposite to reality?

I'd say yes, your impression is wrong, but you're not alone.

Productivity growth in the 50s and 60s was consistently higher than it is now. Then it did slow down while IT was taking off, which is known and studied as the productivity paradox [1]: "Academic studies of aggregate U.S. data from the 1970s and 1980s failed to find evidence that IT significantly increased overall productivity."

There are many attempts to explain it, including

* lag: productivity started to pick up in the 90's (which you can see in Hussman's graph, but it's fallen back now...)

* "hedonistic" improvements: IT makes many things better, but they do not show up in GDP measurements

Bottom line, though, that arguably earlier technical advances (electricity & machinery, assembly lines & mass production, etc.) had much bigger impact than yet another Tinder for dogs.

[1] https://en.wikipedia.org/wiki/Productivity_paradox

You're referring to the 'Productivity Paradox'[0] as summarized by Robert Solow in 1987: "You can see the computer age everywhere but in the productivity statistics."

Summary of possible explanations from the wikipedia article: 1. Computers made the biggest productivity gains early in their life (50s-70s) when they were used by banks and airlines. 2. Industrialization was a far bigger revolution. 3. Computers demand more training and attention than dumb machines which reduces their benefits.

[0] https://en.wikipedia.org/wiki/Productivity_paradox

The writer makes a few good points -- I liked his quoted selection "Faced with extreme valuations, the first impulse of investors..."

However, I think there is a fundamental flaw in his analysis -- specifically when he makes this a majority foundation of his point:

"Every security is an asset to the holder, and an equivalent liability to the issuer."

That's not true right? A few moments reflection makes me think of stocks -- which are equity, not a asset nor liability. [1]

What do you guys think? That point seemed to be a big part of his analysis, right?

[1] https://www.quora.com/What-makes-a-common-stock-an-asset-or-...

He’s just saying it’s an IOU, I think.

but shares aren't an IOU. They are points that represent a company, and can be traded at a later date dependent on the market. They can't just redeem it for a promised cash amount at a later date -- they are tradeable at what someone else is willing to buy -- with no guarantee that someone else will be willing to buy...

I disagree, somewhat.

Shares are an "I owe you dividends, if and when" and they also represent voting control that a buyer could use to extract value from the company. Those both mean the holder of the paper is owed something even if it's much more vague than a bond.

I guess there are stocks these days that have neither dividends nor votes, though. That seems like a scam though.

Companies issue shares. These shares are listed as a liability on the company's balance sheet. Each share represents a liability to the company because it entitle its holder to a share of any dividends paid by the company.

The intrinsic value of a share is the net present value of this future stream of dividend payments, not its current market price. OP's point is that the market price of a share can be significantly above its intrinsic value in periods of irrational exuberance, such as now, creating "paper wealth" that doesn't really exist and which will evaporate when the speculators head for the exit.

The present value of future dividends is highly dependent on the terminal state of the company, and the future of the economy. So I don't find wild fluctuations in stock prices to be proof that the market is inefficient or over/undervalued because the far future is very uncertain.

Every stock chart is an invitation to assume false precision, because unlike a scientific measurement there is no explicit +/- range. But the true value must have a range of uncertainty, and it can easily be many orders of magnitude.

Also, every time I see the phrase "irrational exuberance" I am reminded that while there was a bubble in the late 90s, at the time Greenspan famously was worrying about the market in public, the Dow was around 5,000 or so IIRC, a long time before the peak.

Wait till you see how much more money is in the world's money supply since 2001, thanks to derivatives [1].

[1] https://pavlok.com/moneysupply

What the bubble callers miss is that in the middle of a bubble, only cranks call bubble.

The opposite is the case now. Every other armchair investor (and their ivory tower counterparts) is calling bubble now: on Bitcoin; on stocks; on bonds.

Here's how to identify a real bubble. The conventional wisdom says go all in on a single asset. If you don't, you will get rekt. The only people who disagree with this position are cranks.

That's a bubble. It happened in 1999 with stocks and it happened in 2007 with real estate.

No asset is in a bubble at the moment based on this definition because the conventional wisdom is against all of them.

What matters more - the size of the theatre or the size of its exits?

Depends - is there a fire?

There's always a risk of a fire.

And in our case the risk is huge.

Coinbase sent me an email saying that they cannot guarantee uptime during high volatility. The exits are locked.

Oh please, people have had months and months to cash out nearly any time they please.

Yep, except for when they might want to... y'know. When the price is crashing.

https://www.theverge.com/2017/12/22/16810614/coinbase-tradin...

Ok, so if you think the hell thing is going to hell, just go SHORT, it's one click away. How simple is that?

And that's why these predictions never pan out, if it's SO EASY to make a ton of cash off a crashing market, then EVERYONE will go short, since it's so EASY to make money.

And that's why markets are generally stable and it's what humans do best, we go LONG. :-)

> Ok, so if you think the hell thing is going to hell, just go SHORT, it's one click away. How simple is that?

Uh, how? Also, the hard part about making money on a short is knowing WHEN the price is going to crash. You can call an obvious speculative bubble what it is without knowing exactly when it's going to pop.

> if it's SO EASY to make a ton of cash off a crashing market, then EVERYONE will go short, since it's so EASY to make money

If the market is already crashing, why would someone sell you the stock to short sell? Don't you have to short before the price starts to drop?

> And that's why markets are generally stable and it's what humans do best, we go LONG. :-)

What?

Might explain his bad fund performance.

I found this reading very interesting, and novel.

However, he lost me when he wrote: "With regard to Bitcoin, my view is that the Blockchain algorithm itself is brilliant. Bitcoin itself, however, is just one application of Blockchain, and a rather awkward one."

Every time I read a comment like this, my eyes roll up.

Lots of permabears will go long when it's obvious markets are headed up, not Hussman.

https://www.hussmanfunds.com/strategic-growth-fund/

As always, Hussman manages the near impossible feat of reliably losing money in virtually any market environment

The Dow has risen 5k in a year and Hussman still manages to be in the red....I'm sure his clients are thrilled

on top of the how-is-that-possible string of losses in every fund he manages across any time frame...his expense ratio is insane! 5% fee ratio to lose money in a bull market...sign me up?

his clients would be better off maxing out a string of savings accounts to earn 0.1% interest but get FDIC coverage

most permabears since the 80s realized you can't fight the Fed, even if the whole system is based on BS

It’s a canary in the coal mine IMO. Sure, he’s early; but he’s not wrong. A very significant portion of growth over the last decade has been the growing ability of US companies to avoid paying US taxes. That growth eventually caps out until you reach a 0% corporate tax rate — the problem here is that shifts the tax burden 100% onto the populace, which absolutely destroys consumer spending and ultimately the economy as a whole.

Right now they’re just turning these changes in the tax rate into enterprise value, but it’s a one-time shot. And if you do too much of it, you undermine the economy. But the corporations can’t help themselves, so we will have yet another boom-bust cycle.

sorry but the only answer any investor should care about is achieving their financial goals over the expected investment timeframe.

markets tend to rise and as a result market declines tend to be temporary

the permabear thesis appeared in the early 80s when the US was in a rut and we also became a debtor nation. the permabear thesis -that debt and fiat currency would produce an economy favoring the pessimistic (but not completely imploding to the point of collapse, because you can't invest in that), proved to be wrong over a thirty year window

if you have an axe to grind, you will always find a permabear manager willing to tell you tales of doom...it will cost you your financial goals though

I think these funds are useful as a risk hedge — there is some non-zero risk every year that the economy will collapse. If you invest in a fund that will help offset some of that risk by performing above average in a downturn, you might want to do it as part of a portfolio strategy.

Nobody should be putting their life savings into one of these. Hedge funds like this aren’t for that; they’re a risk management lever that gets set according to the economic model an investor is using.

lots of people here keep using the term "hedge"...none of the permabears market these as hedge funds...they do not internally hedge their own risk positions

these are what they appear to be - bear market funds

Giving a bear market fund a % of your total investment capital is the hedge. They don't need to be hedging their positions, you've already done that on the macro level by diversifying your investment portfolio.

I'm in favor of a (more) progressive tax system, but I'm not sure that means we should tax corporations heavily or at all. The thing about a corporation is that its costs are borne by some combination of customers, employees, and shareholders, some of whom are rich and some of whom aren't. If we want to soak the rich, we should do that, rather than go after entities that are imperfectly correlated. Of course, it is then important to not let rich people shield their income with corporations.

That's what the British thought about the East India Company. Then what happened?

then everyone who lost some money in the East India Company invested in everything else rising as the British Empire expanded and made fortunes, that's what

Since Inception (07/24/00): 0.54% It truly is amazing. You'd have to really try to do that bad.

It seems to me whether that is good depends on what you conceive of as counterfactuals. If you truly believe that the investments would have made you a zillion dollars in a worst case scenario for the economy, then the fact that they've made almost nothing when the market has gone up & up & up doesn't seem that bad.

This fund's performance is objectively bad because there are alternatives with less risk that provide much better returns for much lower fees. Also, since the markets, long term, generally go up, investing in something that expects the opposite is foolish.

You can't judge risk by outcomes, so I don't think it can ever be quantified objectively. Risk always depends on what you know and what you don't know and what you think might have happened if things were different.

What was the risk of Trump winning the election? Some people think that after it happened, the odds are retroactively 100%. I think that the odds were probably about 30%, since that's what polling implied on the eve of the election. But then one may argue that we know things we didn't know then, that it might have been rigged and therefore the probability was higher than 30%.

If you imagine repeating anything 1000 times, to find out the odds of an outcome, you have to decide what you are holding the same and what you are not. If you hold nothing the same, it makes no sense to compare. If you hold everything the same, you trivially expect the exact same outcome.

I think the fact that you can spin different stories about what risks were actually taken is why investing, and life in general, is hard to optimize.

Your probabilities for anything after an event depend on your probabilities assumed prior.

I should add Fiat currency...

Sure, but that'll get downvoted in a jiffy in HN.

It's included in "Paper Wealth Delusion", btw.

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