Is a Crash Coming? Reasons to Be Cautious
online.wsj.com
online.wsj.com
The real reasons - ultra high debt of all players, errors in the system, for-profit players not controllable by the three political branches - were not remedied, in fact they might have been even worsened (the debt increased because of the bailouts).
A bunch of my friends are traders, and it seems that the consensus right now is that as far as the stock market is concerned, nobody knows where this is going (either way), and is scared to take any real position (that's why volatility has been up lately, volumes are down (and not just because it's August).
My take is that we're most likely headed for a period of Japan-like stagnation. There are huge structural employment issues in developed countries to take care of, properties are likely very much underwater for many homeowners that do still have jobs in the US, and governments are taking the knee-jerk reaction to the stimulus needed in 08/09 by introducing austerity measures, which will only serve to slow the economy further than it is at the moment. The debt levels in developed economies are still waaay too high, but there is a very real risk of taking the crutches away before the economy can walk again (hence Bernanke returning to easing measures: he sees the writing on the wall).
So, while governments worldwide go about trying to tackle the debt problem, growth will slow and there will be little job creation in many sectors. But the real change has to come from the people learning that, fundamentally, they can only spend what they earn, and that debt is not a bottomless pit.
I've got an advantage since I have parents with a big house that's above water. My brother and his fiance are going to ride out some portion of it here with us (they both have good, stable jobs). I'm going to take this opportunity to explore the area around Atlanta (where I live) hoping to run in to some kind of opportunity.
I've also got the plan B of using this stable spot to consider cheap to create startups that don't make a lot of money, but do provide a small profit. With minimal (or no) expenses, a tiny profit can go a long way.
I think anyone who is in a relatively stable position needs to do what I'm doing and consider small entrepreneurial steps. It may put them in a better place, and it has the potential to take off and create economic activity, which could end the recession sooner.
Even if all you do is start a blog in your field of knowledge, you keep your skills sharp, improve them through interaction, and possibly give someone else the spark they needed to do something that will create jobs.
Don't know how hard it is to get a work visa though for US citizens.
A lot of technology companies in various European countries are filled with people capable of speaking English (for obvious reasons) and some with many international hires (like Opera of Norway) claim to operate their business in English full time.
Still, some language capability would make it a lot easier to make sense of what the regulations are on immigration, read the job ads, etc, and higher education (like a masters degree) is helpful. Many of the programs in wealthier Europe require a demonstration that the skills sought are not easily found domestically. More education is not a perfect proxy, but is one thing which is often used (especially for the less experienced).
Finally I understand that going to a far country is not an easy step, so at the end your choice. I just wanted to show the possibility :)
I've been looking everywhere for work in the year since graduation with nothing more than an interview at Target (the other candidates had retail experience, so I didn't get it), so starting my own cheap to run web business is starting to seem like the only way I can build a resume.
I guess as long as the Chinese are buying capital equipment, Germany will be fine.
It is not that the german government is doing anything better than others. We are just lucky that our economy is based on exporting cars.
Also, while the car industry is very important in Germany, a good part of the exports to China and other growing countries are made on big, complex machines and infrastructure-building products.
Germany has lots of problems with the long term unemployed. (Also migrants and women should be better utilized in the workforce.)
In Germany, even when they were here for a few generations, the, say, Turks are still considered Turks.
Nothing of any substance is stated here. Vague comments about "the players" and "the debt"--what players? Whose debt? To what extent an opinion can be extracted from this post, it's wrong. For example, I don't know who "the players" he refers to are, but my guess is they are supposed to be for profit.
Seriously, those who have studied this for a while pretty much know the situation. Sorry if it seems vague to you.
The players are large bank, investment houses, and the Federal government at the least. But even more, the entire housing market was temporarily re-inflated to sustain the massive over-valuations that built up over the last ten-twenty years. Of course, all the other bubbles; medical, student loans, etc depended on this inflating to keep going (and there's a Chinese property bubble too btw). Did you notice the auction rate bond market cease to exist around the time of the crisis? We are in a fragile respite from result of the unsustainable economy of 2001-2007 (or longer).
Seriously, in 2008, a boulder rolled half-way down a hill and massive world wide spending brought it to a halt.
Sorry if I can't give a single factual pointer to all this stuff. It's more a matter of the economy's "big picture".
I would recommend Doug Noland's Credit Bubble Bulletin.
I'd especially recommend the earlier issue, where he extend's Hyman Minksky's idea of Ponzi finance.
Regarding the unaccountability of the for-profit players, mind you, I'm pro-free-market as anyone here. But this piece of news[3] makes you rethink what happens at the highest level of the market, how the largest enterprises become uncontrollable institutions on their own.
[1] http://www.federalreserve.gov/releases/housedebt/
There's widely varying opinions on how much debt is bad. Unfortunately the argument gets reduced to "debt is bad" which is frankly stupid.
Now, there's a lot of uncertainty as to whether a particular investment will yield returns greater than the cost of capital, and this is why CEOs and CFOs get paid big bucks. But the fundamentals themselves are not hard. Nor is it hard to look at $9T in federal debt, $2.5T in consumer credit, or $600K mortgages taken out by families with $30K in income and realize it's virtually impossible that the additional income generated by taking out that debt will pay for the interest on it.
See the arguments surrounding for example the bailout of Swedish (previously) and British banks (currently) - some consider it generically a bad idea to bailout for fear of debt generated but in the Swedish case it paid off and appears to be paying off in the British situation too.
This sort of debt was useful right?
But because it's a difficult question the easiest answer is to consider debt generically bad, and it is absurd at at least two levels.
Firstly, one shouldn't have to describe why lending and reciprocally debt is useful. You also have to ask what else could have been done and the "all debt is bad" brigade usually waffle.
Secondly, the cause of the financial crisis was "bad debts" in the form of incredibly risky securitisation schemes. Why the hell were risky loans repackaged as triple A securities. It's like making coins out of butter and bills out of sugar paper.
The wailing and gnashing of teeth of how it's our own greed caused this is just a smoke screen for the way the regulation system, capitalism and the chain of involved politians let everyone down.
Then people think a penance should be paid in terms of austerity - unfortunately that austerity is as likely to cause even more pain down the stretch.
Do you mean the collapse of the economy or the stock market crash? They are different. The article is about the stock market which is up close to 50% since the March 2009 lows.
Almost nobody in the world can predict stock trends profitably. You especially cannot predict stock trends from articles in the paper. In general, people smart enough to predict stock trends and understand the macro factors will be working in stocks, not writing second-rate personal finance pieces for the WSJ.
(Also, the article essentially begins with, "I don't make predictions... but here are 10 reasons I predict a crash might happen". How silly.)
In general, a reputable paper like the WSJ will hire people that are smart enough to predict stock trend and understand the macro factors, people that may be working in stocks, to write finance pieces.
You provide no arguments to support your assertion that the writer is uninformed. The only argument is a single broad stroke that implies that nobody with enough understanding of the subject writes for any newspaper, which is easily refuted by all the articles written by exactly such people over the years.
This is not true at all and I don't know where this is coming from. The signal to noise ratio in the mainstream media's personal finance pages is famously low. The WSJ is known for its reporting, not its investment advice. And had you bothered to look up the author on Wikipedia, you would have seen he doesn't work in equities, and apparently never has.
Sure, the author might turn out to be a genius who identified all the factors that will lead to the next big crash--if so, how come the genius reasoning is not evident in the article? Assertions like the second item--'the Fed is buying Treasuries, must mean they're nervous'--are presented in an unconvincing way. I assumed it was self-evident that these claims were unconvincing, but apparently it wasn't so.
So here's why that claim, among others, was uninformed: the Fed's stated policy is actually to not change the size of their portfolio of securities held outright. The treasury purchases are offsetting principal payments of other debt. The neutrality of this policy does not suggest 'nervousness' at all. http://www.newyorkfed.org/markets/opolicy/operating_policy_1...
I assumed it was self-evident that these claims were unconvincing [..]
What threatens the signal-to-noise ratio of HN is that more and more people start making unsubstantiated claims concerning articles. They may be right, but I, as someone with only casual knowledge of a given subject, will never know. People responding only to state their opinion, without supporting it with possibly convincing arguments. I don't feel those kinds of comments are worthwhile.
And had you bothered to look up the author on Wikipedia
I also don't like how the financial news seems to lead people to throw their money away to traders by investing randomly and panicking every time the stock market burps. Even though the writers are probably mostly well-meaning, the stuff they write isn't helpful.
The Schiller figure he references might include all publicly traded companies. If so, it might suggest that less well-known companies (outside the 500 most popular) are over-priced. But since the 500 most popular drive the market, you can't conclude a crash from that.
Most large-cap companies I have been looking at are trading at 15 year lows for the P/E, and at close to 15 year highs for dividend ratios. They still might be over-priced in an absolute sense, but we haven't seen prices this good in 15 years.
See the Excel file here: http://www.econ.yale.edu/~shiller/data.htm
The stock market is still very highly priced compared to historical standards (excluding the past 15 or so years).
See also the graphs on: http://en.wikipedia.org/wiki/Robert_Shiller
From some cursory chart exploration on yahoo, it looks like large-caps might not follow the market moves as much. Mar 2009 was about 50% of the S&P 500's current level, but KO only differed by 30% and JNJ only varied by 10%. I'd say solid dividend companies are not necessarily overpriced.
And as far as the market being expensive in relation to historics, again you have to compare apples with apples. There are more people investing now than 50 years ago, and there are more big companies. Both of these facts will drive up the price of the mainstream companies' shares.
I'd rephrase that as something like:
If 16 is the average, then the current market isn't historically overpriced.
It could still be overpriced or underpriced. The historical average is just that. Current fundamentals aren't necessarily "average".
http://www.google.com/finance/stockscreener#c0=PE&min0=1...
(There were 3891 total companies when viewing the whole market.)
The distribution skews high though, so it's quite possible that the mean is about 20. OTOH, just what does a "mean" mean for P/E? Capitalization-weighted? Earnings-weighted?
If you look only at companies with a market cap > $1B, there are 1626 firms, and the median is again about 16. Same with $10B - this seems remarkably consistent.
http://videolectures.net/risc08_sornette_fcrm/
"Most attempts to explain market failures seek to pinpoint triggering mechanisms that occur hours, days, or weeks before the collapse. Sornette proposes a radically different view: the underlying cause can be sought months and even years before the abrupt, catastrophic event in the build-up of cooperative speculation, into an accelerating rise of the market price, otherwise known as a "bubble." "
Sorry to sound cynical, but when talking about the economy, people tend to ignore the proverbial 800 pound gorilla in the room: 'defense' spending. This should be the center of conversation about the economy.
I hate wasteful defense spending and the military-industrial complex as much as anyone, but saying that innovations in killing never help the economy is just patently false.
EDIT: Ok, weapons sure, but most of the entries in that list aren't weapons.
The problem is that these organizations will never be given similar funds. People respond to fear; they don't respond to the Higgs Boson. The only way to get billions invested basic science is to say that without it, we're at risk of nuclear annihilation from the Russians/Iraqis/Afghans/Chinese.
Is there no hope that we can educate people to be more rational? To look past the short term? And to stop seeing boogy men everywhere?
It doesn't much matter if something else "could". What matters is whether something else "will".
Past performance is no guarantee of future results, but it is a constructive argument.
I'd love to see other sources of innovation. (And there is one, but it's often military-associated.) However, it's dumb to rely on them until after they've produced.
If earth was for certain doomed in a short term astronomical sense, I'd wager that NASA would see all the funding and then some that the military complex sees.
The inventions listed are all beneficial spin offs of ones that were designed to further the military's main goal: killing. It is unlikely that something such as RADAR is invented when it is if one does not need to shoot down aircraft carrying thousands of pounds of bombs.
There are simpler and easier ways to accomplish everything else we use RADAR for.
Moreover, defense spending doesn't necessarily equate to violence. Look at the trillions spent during the cold war, paradoxically spent to avoid violence.
No, I'm trying to get you to look at what you just said. Spending money on killing people isn't an "investment" no matter what you find out in doing so.
>Look at the trillions spent during the cold war, paradoxically spent to avoid violence.
I think if you look into it you'll find that that money was indeed spent on violence. Just by violence by proxy.
Even today, during two active wars, if you look through the appropriations bills you'll find that a surprisingly large amount of US defense spending is not spent on violence. Back in the cold war, the proportion spent on maintaining that detente was even greater.
If killing or threatening to kill others keeps the dollar strong it's an investment? So in that case mafia violence is also an investment, right?
We seem to be on a subjective, slippery slope here. What would you call it, if not an investment? You skipped that part.
Which is how crashes happen in an imaginary economy.
There's a strong self-fulfilling prophecy effect caused by mob decisions. If enough people think the stock market will go up, there's a surge in demand to buy stocks and so stock prices go up. If enough people think it will go down, they sell, and prices go down. Funny that.
So the real money may be in being the minority better, especially if you had some way of predicting what the masses will do next so you can take a position that will be profitable for you once the masses start betting. Thus, there's incentive to do a sort of front-running operation but on a huge scale. And to do it you need a media operation of some sort, and possibly some propaganda organs. Any guesses as to whether these theoretical entities already exist?
And its not just in the US:
http://seekingalpha.com/article/219542-china-the-mother-of-all-bubbles?source=article_sb_popularFor every item on the list you can point to trends that are positive for the exact same metric. Like (there are a lot of other examples):
http://online.wsj.com/article/BT-CO-20100726-710938.html
I agree that the economy is quite uncertain right now. However, waving the flag of doom isn't really productive at this point. Particularly when you're cherry picking data to arrive at what appears to be a foregone conclusion. I don't know if it's a fascination with disaster or (I suspect) more politically motivated.
Either way, it makes you no better than this guy:
http://lamarhowell.files.wordpress.com/2009/01/the-end-is-ne...
Now its about DOW 1k and losing everything you own.
I was successful at keeping 2 of my friends from making horrible financial decisions, but a third went ahead anyway. Now she's stuck owning a crappy apartment with an upward adjusting mortgage.
Because Democrats are in control?
For every item on the list you can point to trends that are positive for the exact same metric. The boat is still afloat.
I agree that the availability of fine wine is quite uncertain right now. However, waving the flag of doom isn't really productive at this point.
Either way, it makes you no better than that Jack Dawson guy.
This article makes the classic mistake of exaggerating the known risks.
Actually the crash is just as likely to be caused by something unknown. Maybe the US market will crash because the introduction an old age pension in China means they don't need to invest as much, and they just use the money buy Sushi instead.
Too bad there's no such thing as an efficient market [1].
I think this paper does help put bounds on the upper limits to creating efficiency through some mechanisms. Using those bounds you can think about the limits to which reasons for crashes are not reflected, based on size of the time series of crashes.
I always think of efficient markets as an idea like a frictionless surface, an invalid, simplifying model to make the mathematics tractable. So the question would be is the market close enough to efficient that well understood crashes are reasonably well reflected in it, most of the time: implying you should be thinking about something else.
I guess I should not believe in efficient markets since I work for a large active fund manager.
Our definition of "weakly efficient" is different that the paper you site. Our definition is "close enough to efficient to make exploitation infeasible". And I can't simultaneously believe in that, and believe in our products.
http://www.thebeijinger.com/blog/2009/08/26/Raw-Power-Beijin...
Gridlock in Washington is a good thing for economy. Government is not capable to interfere with business and spends less -- the result -- boom in the economy which we observed in ~1994-2000 ("Clinton with Republican Congress" era).
But, I'm kidding myself to think that DC would make the hard choices.
It is a fun/depressing exercise to imagine how you would improve the US if you had 14.5 million (http://www.bls.gov/news.release/empsit.t12.htm) people to order about.
The Shiller index was one of the best metrics for prices themselves but didn't relate to relative inflation that I know of, the math would be easy enough.
Actually it's a difficult time for contrarian investors, since I'm not sure there is a conventional wisdom. But if I had spare money I'd be sticking it all into "socially irresponsible" companies: alcohol, gambling and oil.
Here is some conventional wisdom: "eBook readers will be cheap enough (<$99) that most people (>50%) will own one in less than 36 months."
So the contrarian would buy shares in physical book manufacturers?
"American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression.
Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP. That's a postwar record. In 1945, it was just 20%. Even at the credit-bubble peaks in the late 1980s and 2005-06, it was only around 45%."
http://www.marketwatch.com/story/the-biggest-lie-about-us-co...
hmmm, wha?!