The mother of all crashes is coming and it won’t be fun
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There is always someone predicting an upcoming market crash. People like Grantham (cited in the post) have been predicting a mega crash for most of the last decade. Market crashes occur every 10-20 years but the thing is, over that 10-20 year cycle the market is always net up, so if you sit out the cycle because of worries about an upcoming crash you could easily miss out on 5-10 years of great returns.
The post author frequently compares flow variables (eg earnings, GDP) to stock variables (eg market cap). That’s not necessarily terrible, but the ratio is always sensitive to interest rates (because the stock variable discounts future values of the flow variable, and when rates are low the discounting has less of an effect). Market cap/earnings and market cap/GDP are high now because interest rates are low (asp because growth expectations are high, but that’s not necessarily incorrect). Before the dot com crash US interest rates were 6%, compared to 0.25% now — of course that skews the statistics.
Michael Burry is cited as “someone with a proven track record of predicting market crashes” but in fact he predicted exactly one crash. Well, so did John Paulson, and the ensuing decade proved that it was just luck. Mark Cuban “predicted” the dot com crash. It doesn’t mean they are geniuses, it means they got lucky once.
Growth in margin debt is cited as a reason to worry. But margin debt has grown because assets have grown. The S&P 500 has double since the lows of March 2020, so the fact that margin debt has doubled is not a cause for concern. As a percentage of assets, margin debt has been stable for the last decade.
This post is pointless fearmongering, nothing more. Of course, there will be a crash at some point. It could be in six months, a year, five years or ten years. This guy can’t predict it any better than anyone else can.
Did you mean to say low, or are you talking about nominal rates?
This is simply not true especially if you take inflation into account.
And even more so if you look outside the US (one of the top 1% of market performers over the last 100 years - hindsight bias).
For example Japan total return index had a 30 year drawdown post 1989 even in nominal terms. The US market from 1966-1992 total inflation adjusted return (26 years) was zero. http://www.simplestockinvesting.com/SP500-historical-real-to...
The original claim is 10-20 years. That's a valid ballpark estimate. There can be lost decades, but when you get closer to 20 years, it has been all good.
ps. If you spread the entry into market into 5-10 years there has never been a decade of zero or negative returns (total, inflation adjusted).
Japan (population 125 million) is third in the world in GDP, with China (population over 1 billion) and the US (population 330 million) ahead of it. More remarkably this is from a tectonically unstable, volcanic island chain with limited natural resources, which is in stark contrast to either the US or China. This is probably an underestimate as they have a considerable secondary investment/production effort going on across Asia.
Japan's priorities are the same as everybody else's, they're just rather good at disguising that.
I mean if you think about it, 6 of the top 10 oldest companies are Japanese [1]. That says something about the value of continuity and stability in Japan's mindset. I don't see that changing any time soon tbh. (And yes, some of them are a "thousand" year old, though of course not thousand"s")
[1] : https://en.m.wikipedia.org/wiki/List_of_oldest_companies
This was during a period when high dividend stocks were in fashion. I'm willing to bet that during that period stocks probably beat almost every other form of investment with regards to profits.
This illustrate why makes me uneasy of current times, that blind faith in the stock market as the ultimate investment. From FIRE communities to r/wallstreetbets to regular retirement to professional fund manager, don't ask question and join the dance, it always was and always will be 6-8% per year, it's a law of nature.
Could be a simple monthly subscription which buys managed basket of options (call on VIX, puts on SP500, Nasdaq, etc)
Or should the average retail investor get into the Black Swan ETF (https://www.amplifyetfs.com/swan.html) or similar to protect against these events?
Even if SPY would be better than any less diverse or hand picked options from retail under the same crash market conditions
Paper currency, FDIC insured bank accounts, CDs, TIPS, Treasuries, VCSH…
Biggest of all, having a network of people that can and will help you (such spouse, kids, grandkids, cousins friends, political allies, etc)
my idea is that if you have a stock portfolio, you could get "insurance" on it
Big banks and investment funds certainty do it, one way or another
I'was simply thinking of a more accessible approach to retail investors
"insurance as a service", pay 50$ per month for protection against stock crashes
Technically, I'm guessing this would not be called "insurance" but a financial instrument or investment which buyers/investors would get benefits under certain conditions.
I do not know what you mean by this, but hedge funds hedging their positions is not “insurance”.
You cannot earn a return with no risk. If you want to de risk, the counter party is going to want commensurate payment to take on the risk plus a profit premium.
Just like you cannot profit off of auto insurance (unless you have inside knowledge of their premium pricing and can game it), you would not be able to profit off of “insuring” your investments, which would defeat the whole point of investing. At that point, just invest in less risky things, like bonds or cash.
Note that risk has a time component, so risk for an equity index fund for year 0 to 3 will be higher than a bond fund, but for years 20 to 30 it might be basically the same. So insuring yourself against risks for an investment in an equity index fund you do not need for 2+ decades is pointless.
this goes to my last point
> Technically, I'm guessing this would not be called "insurance" but a financial instrument or investment which buyers/investors would get benefits under certain conditions.
I would not expect to have this insurance for long periods of time
But could be interesting when it feels like we hit the peak of the market
You only have a loss when you sell a security. So if you are interested in needing to be able to sell securities in the next 3 years, then invest it in a security that will not lose value in the next 3 years, such as bonds or FDIC insured accounts or cash. If you are not selling in the next 3 or 5 or 10 years, then historically, equities do not lose money that far in the future. The further out into the future, the lower the probability of loss.
So you “insure” yourself by making appropriate investments for the appropriate time horizon.
and I'd be interested to compare performance of both approaches (probably you're right, anything else is too difficult or expensive for retail investors and doesn't give extra return)
thank you for the exchange so far
More complex the product, higher the counterparty risk.
Obviously that’s only true in the long term. There were some times when buying insurance may have been a good idea (eg early 2020) but that’s easier to say in hindsight. If you’re managing savings for a pension then this kind of thing could make sense as you get old because you mightn’t live long enough for the costs to average out. But the normal way to deal with that is adjusting the balance between equities and bonds.
It's 90% of treasure bonds and some small percent of options
On a bulish market, you loose some performance (insurance costs) for renewing the options
On a bearish market (crash) your bonds loose market value, but the options will go up N amount of times. which will give you overall positive performance.
If the market stagnates, you'll loose money as the options continue to be renewed while the bonds are stable.
And you don't need to allocate all your portfolio to this ETF, can simply combine it with everything else you have. ----
Anyway
I've done this before, I believed the market could become wild
I bought VIX options and got lucky with a 20x score
Obviously this is not that easy or accessible to retail investors (and it's gonna cost at least 100$ monthly)
But if one's to believe we're near the peak, and the crash could be coming any time soon (next couple of months), buying this kind of insurance would make sense (I think about it as Insurance as a Service, because I just want a simple monthly subscription for the work behind the scenes)
in the end it's just another market traded instrument, and you can sell it before expiration for a possibly better price
This was an incredibly clear way to put it. I can't believe I haven't thought of it that way before! Thanks.
Your conflating it with one data point, as those differing viewpoints that predicted 2008 is in a group is than one data point as they all covered a different mechanism of a set of systems as it was not just one system that crashed but several.
We have the same problem in medicine, ritalin is based on one system solution of ADHD...however if you foloow a multiple system approach you can take Phenyanalinine and Darek chocolate, L-glutamine, etc and actually have a better solution of managing adhd without having to do drug holidays.
Crashes are convergence of several data points of crashes in multiple systems that converge together to produce abig crash.
Is the Log4j vun one tiny crash of one system or a crash of several?
BTW, Michael Burry seems completely unhinged and I can't help but wonder if he just had pure luck.
Any real reasons, like 2008 where people started to realize security products were built on fraud at a massive scale? I mean crypto is a ponzi scheme but when that implodes 1 to 100 years from now, that's not going to make a big denty in the economic
FINRA Margin Debt shows $940 Billon. There is an additional shadow margin of unknown size. Margin debt, shadow margin, taking loans against properties and buying stocks, ... the size of leverage may surprise us.
There may be even larger systemic risk in the corporate debt market. The liquidity of high-yield is questionable and rating agencies (again) seem to be again part of the problem in rating junk as BBB. Bond market is not as boring as it used to be.
His "proven track record" would be less than 10%, I'd imagine.
Returns? Or prices?
Unless you actually cash out you are still supporting the collective delusion. That is true even over booms and busts.
I know people that have been waiting for a crash for so long that it would take something like a 75% drop in markets to now vindicate their strategy of waiting on the sidelines.
And to add to this, dollar cost averaging means if you drop from 300% gains to 200% gains (let's say the market drops 100% for a laugh), you're not only still up 200%, but as your (automated) investment strategy continues to buy stocks you're now buying them at a massive discount. When they climb again, you won't be up 300% again, you'll be up closer to 1,000% (a lot, anyway.)
I don't value the outcome (you call it luck), but the reasoning behind.
Yes, there will be a crash, there always is, but it will play out differently than the ones before. History only rhymes, never repeats itself.
There have been calls for a big crash for decades now but no crash in this millennium was the big one.
"The S&P 500 fell 57% during the 2008 crisis, 49% in the dot-com bubble, and 34% during the COVID-19 crash. So if the most pessimistic predictions prove true, the next one would be the most dramatic crash since the Great Depression."
We already had big crashes in the last decades but we always came round (more or less). We are no longer on the gold standard, governments have plenty of experiences with crashes. I'm not convinced that we'll be seeing a crippling crash again.
This is a key thing. A Great Depression-level crash is basically impossible in any modern country with a decent credit rating and even vaguely competent financial management.
This strategy of financializing governments debt to deal with financial difficulties led to the south sea bubble. MMT is an old lie, oft repeated.
In fact if you have a strong enough tax collection system, printing is actually good because it cleans up debt by inflating it, provides liquidity, and has other benefits.
You just need to pull it back from the public intelligently.
- Many companies and individuals had lost their money and desperately needed cash to meet ongoing obligations.
- Many banks had failed, and were not available to make loans.
- Banks that hadn't failed were much more cautious about extending loans.
- Faith in banks had cratered, and people were far less likely to deposit their money in banks, leading to even the banks that wanted to make loans not having sufficient deposits with which to meet demands for loans.
- Without access to loans, many businesses failed, leading to mass unemployment, creating strong downward pressure on wages.
- Large numbers of people lost their jobs and couldn't find new ones. They spent down their savings and didn't deposit any new money in banks.
- etc.
With the value of the dollar rapidly increasing, there was no incentive for banks to loan out their deposits or for investors to risk making investments in a shaky economy. Better to sit on your cash if you had it. This vicious cycle was only eventually broken by the massive federal spending programs of the New Deal, and arguably not until the even more significant spending and hiring programs of WWII.
---
So why was the gold standard at the root of the Great Depression? It allowed what should have been limited to a stock market crisis to metastasize into a depression by toppling banks and crippling the availability of dollars. At that point in time very few people owned stocks, so the blast radius of a market crash should have been very limited. But huge swaths of the economy had exposure to banks, and so bank failures had far-reaching impacts. If the federal government had not been constrained by the artificial limitation of the gold standard, it would have been able to step in and provide a liquidity backstop to prevent banks from failing, preventing a financial panic and the knock-on effect of mass bank failure. This is also why something (exactly) like the Great Depression can't happen anymore, it's impossible in a world where the federal government (or its proxy, the Federal Reserve Bank) can extend loans to tide consumer banks over until panic subsides. A stock market crash will not cause consumer banks to fail, people to lose their deposits, lending to cease, and the economy to grind to a halt.
And we've seen this in action in the great financial crisis. A financial market crisis threatened the stability of banking in general, lending froze up in response to uncertainty about what banks might be insolvent, and the federal government and federal reserve stepped in with loans, bailouts, and forced consolidation of failing banks to mitigate economic disruption, with the result that the impact of the great financial crisis was far less than that of the great depression.
By 1929, people finally realized that they could double their money by cashing in their dollars for gold. Hence the runs on the banks, which only stopped when FDR repudiated the gold backing.
HN, on both sides, left and right gets economics profoundly wrong as though it was being taught in the year 1850. Its a science, not a belief, you just have to like… you know, put effort into it and your intuition is probably wrong.
Meanwhile, if WalterBright's explanation is to be believed we'd expect it to have manifested as high inflation rates during the period 1913-1929, and spiking inflation during the 1929-1930 economic crisis as everyone realizes that the jig is up and their dollars aren't actually backed by gold and are worth less than expected.
Instead, that's not at all what happens [2]. The inflation rate is all over the place between 1913 and 1929, dramatically positive from 1916 to 1920, dramatically negative from 1921 to 1923, and then relatively stable until the Great Depression, including being slightly negative for the 4 years leading up to the Great Depression. Then the Great Depression hits and inflation becomes dramatically negative. The Great Depression starts in 1929, but FDR doesn't suspend the gold standard until 1933 in the interest of being able to expand the money supply and cause inflation. Inflation finally goes above 0% in late 1933, but even then doesn't spike dramatically - it spends a couple months in the 5% range before falling back and spending the next several years in the 2%-4% range.
So WalterBright's explanation just doesn't line up.
Credit to user the_why_of_y for pulling up sources in a different thread.
[1] https://www.swcs.com.au/goldreserves.htm#Table1
[2] https://www.longtermtrends.net/m2-money-supply-vs-inflation/
There's no way you can talk your way out of that.
Pegging a currency against something one has no control over, then inflating the heck out of the currency, always results in a crash. The banks continued to fail until FDR suspended convertibility to gold.
You can check inflation 1914-1929 for yourself:
https://www.in2013dollars.com/us/inflation/1914?endYear=1929...
Dollars were exchangeable for gold at $20.67 from 1914-1927:
https://onlygold.com/gold-prices/historical-gold-prices/
Anyone can see this will cause a collapse of the banks. Why do you think FDR suspended gold exchanging? This sort of thing happens every time a country pegs their currency to a fixed exchange rate and then inflates it.
US reserves went from 2293 to 6358 tonnes.
https://www.swcs.com.au/goldreserves.htm#Table1
Scroll down to table 8, sum of the newly mined gold is ~8800 tonnes from 1915-1929.
For more evidence, consider the gold bonds. The US government sold gold bonds and dollar bonds. The gold bonds offered a lower interest rate than the dollar bonds, because the buyers trusted the gold more than they trusted the fiat money.
The buyers were right. But the buyers were wrong about trusting the government. FDR repudiated the gold bond contracts, paying the holders off in inflated dollars. They basically stole the money from the bond holders.
This wouldn't have happened if gold had inflated along with the dollar.
I found that M2 in 1914 was 24.62, up to 66.61 in 1929. This is quite similar to the increase in gold reserves, not much of a surprise.
Second graph here:
https://www.longtermtrends.net/m2-money-supply-vs-inflation/
Meanwhile, the actual ideologists are the persistent minor branch of heterodox economists with an ideological incentive to resist any explanation that suggests that the cause was the gold standard or that the fix was government spending (and thus oppose both the consumption crisis and monetary supply crisis explanations), because they hold various libertarian-ish sorts of political views and would like to believe that high government spending and government control of the money supply are both uniformly bad. I get the impression from how your comment is worded that perhaps you endorse the heterodox position on this topic.
The intro to this wiki article has a decent summary of the various positions.
https://en.wikipedia.org/wiki/Causes_of_the_Great_Depression
I don't know enough about the Great Depression to have a good opinion, but the discussion seems to rage on in present times, and there certainly are points of views that I consider unlikely to be correct. As an example, I don't think Krugman's babysitting circle is sufficient proof to bet the fate of nations on printing money.
Economics is also not my specialisation, I only find it interesting.
Science is also not a democracy - scientific truth is not decided by democratic vote, and there are many examples throughout history when the mainstream consensus was wrong. Therefore I admit I find statements like "only ideologists still peddle other theories" a bit odd. Not saying ideology does not affect things, I said so myself. It may be more likely that a theory is affected by ideology than not.
To preface this, I think a combination of the two mainstream proposals (Keynesian, Monetarist) provide the best explanation, rather than an either/or approach.
* https://en.wikipedia.org/wiki/Causes_of_the_Great_Depression...
* https://en.wikipedia.org/wiki/Causes_of_the_Great_Depression...
The Keynesian and Monetarist explanations are slightly different, but both point fingers at insufficient money supply. But why was the money supply insufficient? Well, because of the gold standard. The federal government would trade dollars for gold at a fixed conversion rate, so the supply of dollars was fixed against the supply of gold that the treasury was holding. As demand for dollars grew faster than the treasury could expand its gold reserves, deflation happened. As banks started to fail the need to keep the money supply proportional to the gold reserves prevented the Federal Reserve from creating money to extend loans to failing banks, touching off waves of failures and economic crisis. And then with the economy stagnated due to demand shocks, business failures, and unemployment, the need to keep the money supply proportional to the gold reserves prevented the Federal Reserve from creating money to loan to the federal government to boost spending. Instead the federal government raised taxes to strengthen government finances, taking even more money out of the economy at a critical time, because it could not originate money without buying gold from somewhere, and nobody was selling, including other countries that themselves needed gold for their gold-backed currencies. (The money shortage was at this point basically global.)
It wasn't until FDR suspended redemption of dollars for gold and forced everyone with gold to turn it over to the treasury in exchange for dollars that the money supply could be meaningfully expanded (and then only in proportion to the amount of surrendered gold). Then, with the nation's stock of gold under the control of the treasury and redemptions of dollars for gold suspended, the federal government could go about meaningfully expanding the money supply, which it did by announcing that the value of gold had increased from $20/ounce to $35/ounce, which allowed the federal government to issue 70% more dollars, since the money supply was still actually restricted to the amount of gold held by the treasury. (Though if the government owns all the gold, and doesn't actually allow redemptions of dollars for gold, and gets to set the price of gold, you basically have a fiat currency with additional steps).
Also isn't printing money equivalent to raising taxes?
Ultimately, isn't the issue how to distribute and produce goods, not spending in itself? It seems to me there needs to be some indication that spending even helps with the distribution.
I can imagine the economy needing a kickstart like a motor, but whether simply distributing money is sufficient to do that seems not obvious.
Also couldn't people still get into debt, no matter how high the monetary supply? Like if the government says "build this bridge for us, and we owe you 100000$", what does it matter if the 100000$ are backed in gold or not?
Banking panics and deflation ceased in 1933/1934 with FDRs gold-confiscating shenanigans, and at that point things started to recover, which was well before WWII.
> Also isn't printing money equivalent to raising taxes?
No, because creating money expands the money supply and raising taxes does not.
> Ultimately, isn't the issue how to distribute and produce goods, not spending in itself?
The Keynesian approach says that government spending is necessary to restore the confidence of businesses that demand will be high, so that private investment will resume, businesses will hire, and unemployment will fall. Once velocity is restored to the cycle of businesses earning money and using it to pay wages, the government can step out of the picture as the workers with their wages will take up the demand slack. Per this argument, what goods are being created and distributed doesn’t actually necessarily matter, which is why even government spending on economically worthless things like war equipment (much of which was abandoned in Europe as not worth bringing back after the war) will still work.
> Also couldn't people still get into debt, no matter how high the monetary supply? Like if the government says "build this bridge for us, and we owe you 100000$", what does it matter if the 100000$ are backed in gold or not?
Not if the government won’t deficit spend, and doesn’t have an institution to borrow from that can loan money by creating it rather than borrowing it.
Maybe all the bad banks had been consolidated by then, after years of Depression?
"No, because creating money expands the money supply and raising taxes does not."
But why would money supply matter - you can simply raise the value of the existing supply to the same effect? What does "money supply" mean, the number of coins?
"The Keynesian approach "
yeah but that is "just" the Keynesian approach. I know he is popular, but that doesn't make it automatically correct.
For starters, why does "economy" even depend on a government? It sounds like a special case where a meddling government is present.
"Per this argument, what goods are being created and distributed doesn’t actually necessarily matter, which is why even government spending on economically worthless things like war equipment (much of which was abandoned in Europe as not worth bringing back after the war) will still work."
You have to admit it does sound slightly crazy, though? Interesting point about the useless war equipment, but again it seems like that is not the only thing war does. Maybe it simply took millions of otherwise useless workers out of the picture by killing them, for example? There seem to be more aspects to war than useless spending. "Confidence" may have risen by winning the war, too, not just by government spending?
After all, if the government spends too much, then trust in the money is also being eroded.
"Not if the government won’t deficit spend"
But then you can't say it is the gold standard, but the unwillingness to deficit spend?
Sure, maybe after 4 years of issues things just happened to naturally get better right when the federal government carried out a targeted intervention.
> But why would money supply matter - you can simply raise the value of the existing supply to the same effect?
This is called deflation, and tends to both cause and worsen economic contractions for reasons discussed previously.
If all financial obligations happened to somehow be pegged to inflation, then the actual money supply wouldn’t matter. But the purpose of a currency is denominating prices and debts, so it does matter.
> What does "money supply" mean, the number of coins?
Literally the number of dollars that exist. At that point in time this would have been the sum of all cash and all bank accounts balances.
> yeah but that is "just" the Keynesian approach. I know he is popular, but that doesn't make it automatically correct.
Profound insights today in the HN comments section.
> For starters, why does "economy" even depend on a government?
Perhaps look into Locke or Hobbes for some background here. Economic activity is for the most part predicated on some concept of property rights, which are a legal construct and thus predicated on the existence of a government and its monopoly on the use of force.
> You have to admit it does sound slightly crazy, though?
Does it? The argument isn’t that paying people to dig holes and fill them back in (or build warships and sink them in the ocean) creates economic value, only that it creates demand, which is self-evidently true.
Usually, demand from workers earning wages drives businesses to supply goods, so an economy generally sits at a supply/demand equilibrium. But a bunch of people who are unemployed and have no money do not contribute to demand. A negative demand shock can cause an economy to contract to a new lower equilibrium. A positive demand shock can drive it back to a higher equilibrium.
> But then you can't say it is the gold standard, but the unwillingness to deficit spend?
Deficit spending doesn’t expand the money supply if the government has to borrow to spend, it just draws money out of the private sector. Hence we’re back to the gold standard as the root of the problem.
It seems possible that the story is more complicated than that.
"But the purpose of a currency is denominating prices and debts, so it does matter."
I don't think currencies can change the value of things, so I am not convinced the denomination aspect is really the most important aspect of what currencies do.
"Economic activity is for the most part predicated on some concept of property rights, which are a legal construct and thus predicated on the existence of a government and its monopoly on the use of force."
That seems obviously false. Animals have territories, and they don't have governments. It requires use of force, but that doesn't require governments. Just because governments tend to monopolize use of force, doesn't imply they are required for enforcing property "rights".
"The argument isn’t that paying people to dig holes and fill them back in (or build warships and sink them in the ocean) creates economic value, only that it creates demand, which is self-evidently true."
What demand does the hole digging worker create - demand for shovels?
"A negative demand shock can cause an economy to contract to a new lower equilibrium"
I would agree that equilibriums are the right way to look at it, and "pushing to a higher equilibrium" would be what I called "kickstarting" like a motor. Still not convinced that simply distributing money does the trick, though.
"Deficit spending doesn’t expand the money supply if the government has to borrow to spend, it just draws money out of the private sector. Hence we’re back to the gold standard as the root of the problem."
If you assume money supply is the problem.
Like we previously abandoned the gold standard to get to the current system, there is a good chance, that we will need to abandon the current system to get to a post-current system to avoid a "depression-level crash".
What could be the cause for the need to abandon the current system? Well, this is where we go into the realm of prediction. But there are quite some technological tooling to outperform current economic and governmental structures. Those are currently in their infancy, but we will probably be forced to make some serious changes when they reach maturity.
That's the thing... what happens next year when Biden in a lame-duck President and the GOP end up blocking the next debt ceiling raise? The US would then be unable to pay bond coupons which would trigger a default. This would cause America's credit rating to tank.
To the psychology of "the market always go up" we've now collectively added - through our interconnected hivemind - "buying the dip", and on the opposite end we have inflation coming after those who are more conservative, pushing them into taking uncomfortable risks.
So we shall read your comment as irony?
I don't know anything about the stock market, mind. But I get their analogy.
Jus because they make a big part of the index doesn't automatically mean they're overvalued. Apple, Alphabet, Amazon, Meta are huge, highly profitable, and with high growth. Their valuations make more or less sense. Tesla is certainly an outlier though, and highly overvalued.
What scale would you recommend using to decide proportionality of one’s investments? The arbitrary number of publicly listed companies? Divvy up between 500 or 3,000? An arbitrary blend of net income and number of publicly listed US companies?
My point is if 6 companies are each growing their profits for 10+years in amounts equal to or greater than profits of entire other industries, you might want to weight it a bit higher.
From tone I'm assuming this is a rhetorical question, but I believe the answer is obviously yes?
Statistical variance is orthogonal to profit. You'd do even better by investing all your money in the single highest earning company, but you won't cause it's a huge risk.
I also believe that what scale to use to decide proportionality is not an open an shut case and is actually an important question for each investor.
Not an expert, corrections welcome.
No, I meant to bring up how weird it sounds that investing more in businesses that earn more profit is volatile.
> Statistical variance is orthogonal to profit.
I do not know what this means.
> You'd do even better by investing all your money in the single highest earning company, but you won't cause it's a huge risk.
It is a huge risk to invest in the single highest earning company, but that is not what an equity index fund tracking the sp500 or russel 3000 is doing.
What equity index funds are doing is investing money in the entire market, all of the options, at the proportion that everyone else as a collective is investing into them.
If there were a scenario where 99% of the equity index fund was invested in 1 company, then the entire investing world is basically saying the safest investment is only the 1 public company.
What I think you are actually referring to is the volatility of the accuracy of the investing world’s opinion as a whole, or efficient market hypothesis. Which is the basis of investing in index funds (that you know only as much or less than what the entire market knows). If you do not assume that, then index funds do not make sense.
1. The Roaring Twenties market peaked in August 1929 with a ~6100 Dow.
2. Market low in November 1929 at ~3800, a ~38% drop. The "big crash" was just ~4400 to ~3800.
3. Then it RECOVERED to ~4700 by March 1930, a ~24% gain.
4. It then dropped over a year to ~3000 by March 1931, a ~37% drop.
5. Then the real crash to ~900 in June 1932, a ~70% additional drop.
People had a LOT of time and a LOT of additional information about the economy to decide to get their funds out of the market.
I have finally drilled into my skull that I am unable to time the markets with reliability. So I hold across corrections. In 1930 I wouldn't have done anything -- I wasn't born yet.
Also, precisely because macro is hard, these analyses often feel superficial.
Inflation, especially if exogenous, can negatively impact the economy but at the same time cash-alternative assets become more attractive. What's the ultimate effect there?
And what about historically low interest rates? Don’t they warrant a shift in investment preferences towards stocks?
Wether a macro prediction turns out to be right or wrong it’s rare to read a deeper argument than “things are too high must go down”.
It seems the safest option was to cash out and buy gold or land.
Also there is no one out there who can predict crashes one after the other with accuracy, no matter how right they were in 2008.
The reason I think that is if the pandemic didn't manage it than nothing short of a global war will be enough to shake people's belief in infinite growth (which is what keeps the market alive).
Without the pandemic the market would be lower right now. Of course, the pendulum is about to swing the other way with both fiscal and monetary support ending.
It's statistically likely that there will be one eventually, they seem to be some sort of Poisson process, just as it is likely there will eventually be another earthquake that destroys the Bay Area again. That doesn't mean it can be predicted even to the nearest year.
People were predicting a crash several years before the 2008 mortgage crash, and even so house prices have rebounded since then.
I do regard the arrival of major brands into NFTs and the purchase of crypto-themed sports teams and stadiums as a leading crash indicator, but a lot of people have lost money trying to predict crypto crashes.
and anecdotally, yeah, seeing crypto go up has similar impact on me as seeing stocks go up: i feel more comfortable making larger purchases whenever my wealth goes up, doesn’t matter if crypto v.s. equity (if volatility impacts your comfort, then you just cash out your gains and soend those).
So ... it just feels like a sizeable but still very small minority.
either way, a $2T crypto market (i don't know where GP got $3T from: CoinMarketCap.com lists 2.2T) is substantially smaller than a $50T stock market. Governments can and have just straight up injected that demand equivalent in value to that $2T figure into markets in the past, so if we have a crash localized to crypto, it's not as though govts have no recourse.
As a holder of Tesla stock, I do not want to make bad decisions. So I don’t want to shrug off the points being raised. There are no simple explanations. Nobody can predict the future. And whether I like a message or not says nothing about how valid it is.
So I tried to do my homework. I wrote it up here[1], if anyone is interested.
[1] https://leobg.medium.com/should-you-sell-your-tsla-holdings-...
But what if the shoeshine boys say a crash is coming and it's time to get out of the market?
How does one even get out of the market? There seems to be a huge inflation issue going on, so simply exchanging stocks for money does not seem the way to go, either?
Uh. What is your definition of a meme stock?
Did we learn how to tame and limit the blast radius of crashes or am I misunderstanding QE?
What it is is an exchange of assets that pay, say, 2.5% for once that pay federal funds rate. That's a net reduction in income for banks.
QE is just an assets swap attempting to reshape the longer term yield curve that hasn't been pulled down by setting rates near zero. It's got nothing to do with 'injecting money'.
For that you need to look at the fiscal flow data: spending less taxes.
Whatever the current perceived cause, if we do see massive inflation then it's not a bubble.
I doubt they're willing to bet the money.
Edit: this is not investment advice; I am not qualified to give investment advice.
and assumes you've already bought the house or can do so in the near future while mortgage rates remain low, while the struggle is that the cost to get into the market is rising at crazy multiples (30% yoy?)
and assuming enough economic stability that you can be sure to make the payment even if your job moves.
I've missed out on a great deal of money hoarding cash instead of stocks, but I have peace of mind. The cost of inflation is worth that to me. I have felt that a crash -- a real crash, i.e. a change in public opinion about the equity markets -- has been just around the corner since 2016. I'm much less worried about the prospect of a dollar crash, even with today's inflation.
This is not investment advice and is only my personal opinion.
The idea is not to get rich quick, nor is it to avoid any risk (because both are statistically impossible.)
The idea is to limit how much a crash of any type hurts, by having some savings also in other types of assets.
So for example, if your savings are $100 and you buy stocks for $30 of that, and the stock market crashes so you're down to $10 in stocks, now you only have $80 in savings. But you can use your cash savings to bootstrap your stock position back to 30 % again. If the market recovers, you get an outsize benefit from that.
(Similarly, if there should be some sort of dollar crash, you can probably use your stock market savings to bootstrap your dollar position again, putting you in a good position for recovery.)
This psychological phenomenon also applies to prediction of stock market crashes.
After reading articles like this you always have to remember that the market can remain irrational longer than you can remain solvent.
You can use something like https://recessionalert.com/ or a combination of your own signals to time the exit of the market. Of course, it will never be perfect and there will be times where you will get a false positive, but being right most of the time can still massively reduce risk.
Big drawdowns really hurt the geometric compounding of returns. A 50% loss requires a 100% gain to offset.
(I'm saying "even just holding" because a constant-fraction rebalanced portfolio is a disciplined way of actually buying low and selling high, and not only in a bear market.
https://earlyretirementnow.com/2018/02/21/market-timing-and-...
https://earlyretirementnow.com/2018/04/25/market-timing-and-...
In the second one he simulates a momentum strategy which does pretty well, which can be used along with multiple other signals to increase confidence.
I was thinking of simulating using leverage after these kind of drops to try to increase returns even further.
I think you meant 2020 March?
You'll always have the people standing on top of the soap box predicting the end of the world. They're not wrong. The end of the world will come one day. Its just close to impossible to figure out when.
As the economist Keynes would say, “The stock market can remain irrational longer than you can remain solvent."
Also, considering 2 things: first, timing the market perfectly is near impossible. second, market moves from the bottom left to the top-right of the graph over a very long term. If you are a long term investor, the safest, smartest, best thing you can do is to do nothing.
And corresponding correction in 2022 if you think through the macro picture logically.
We injected 4T of fiscal stimulus over ~2 years, which is about to completely end over the next two months (though some programs already over).
A large amount of corporate earnings growth was due to distortions in consumer income, which fed into retail sales.
Personal Income: https://fred.stlouisfed.org/series/PI
Retail sales have been about 20% elevated from a very smooth and consistent trend since the pandemic hit: https://fred.stlouisfed.org/series/RSXFS
(This chart alone is enough to understand the inflation situation, the quickness and magnitude of the increase is unreal)
So we inject 4T in stimulus at one pont in time, why would we extrapolate the impact of that in perpetuity? It seems pretty obvious a large portion of that money will end up in low velocity places and thus the higher goods sales won't be maintained.
In the next two months, the child tax credit will expire, and student loan payments will resume. This amounts to close to 30B/month in effective consumer income that will disappear essentially overnight.
There will certainly be a recession/earnings recession next year due to these factors.
An alternative outcome is that the one time fiscal injection led to excess liquidity trading hands, thus we have persistently high inflation and new normal of earnings is maintained through deflated value of currency. But in this scenario the Fed must tighten much more aggressively, which leads to the same result.
There are many perma-bears out there that call doom without sufficiently specific reasoning, but in this case the macro picture looks very clear and easy to predict. The market doesn't appear to be pricing it in, however.
If you disagree, what logical mechanism could explain an alternative outcome?
If you expect to make the same returns in 2 years that a past stock market investor would get in 20, you probably should expect to survive as many market crashes as he did, just on a shorter time frame. There is no free lunch, you pay for high returns with high volatility.
A multi-year recession? S&P dropping by 50%?
We saw this with Covid, where GDP dropped but stocks stayed high. So if there is a stock crash it won't necessarily be noticeable for the median person.
A lot of people seem to like getting rich even it means some of them wind up poor /shrug
wouldn't be that bad, but replace "some of them" with most of them.
Some of the fundamentals make that hard to avoid, I suppose: natural events and people's tendency to self-reinforce behaviour within their groups.
The environment is a chaotic dynamic system. There are massive non-linearities, phase shifts, etc, and yes, massive damping feedback loops as well. Don't forget the 2nd order, 3rd order, and 4th order effects.
You could build an economic system which did not have periodic crashes, it just would have to be very limited in scope (by keeping it in a highly controlled and isolated environment) and would thus only have one crash, when the containing vehicle breaks apart.
A one-off is not periodic.
The trick is predicting where the top and the bottom are. If you can do that with precision you are a wealthy man.
Seriously, people who actually decide on whether the crisis will happen (that is, starting with the guys like you and up the value chain), don't make decisions based on that sort of bullshit, they read their news at Bloomberg/AP/Reuters terminals. So it can safely be ignored indeed.
Always goto another source of information and be critical all the time, that helps a lot as you point out.