5 Important Things to Do Before the Market Bubble Bursts | Hacker News Reader

5 Important Things to Do Before the Market Bubble Bursts

behavioralvalueinvestor.com

124 pointsgmishuris80 comments

Whichever way it may happen, I just want it to happen already.

The recent wave of pyramid schemers and cult-like praise of NFTs/smart contracts/the holy Web3 is much more insufferable than before. I think that before, it was relatively easy to maneuver around them in the media I consumed. Now, the pyramid scheme has infected literally everywhere I go on the internet, almost as if the only way to avoid cryptocurrency ramblings is to go offline.

Please, just burst already, and let the insufferable stop their shilling.

Interesting, I hardly run into it in my personal bubble. Sure, it pops up here and there, but not much more than, say, VR when Occulous Rift was all the rage.

It's just enough to make me realize that it's something some people consider to be revolutionary, but not enough to tempt me into googling what it's all about (web3, specifically. I kinda know what NFTs and smart contracts are about, I think).

It's awful because even when I go offline, some friends keep trying to shill Web3 and try to get me to buy NFTs. I already stated that I'm not interested.

What a shitty way to burn bridges. Oh well, at least it's an easy signal.

It will get much sillier before the end.

This reminds me, strangely, of the invention of Viagra and Cialis and their subsequent total domination of spam. Any blog in the early 2000s that didn't police their comments would be full of v1agr@ and c1@lis spam.

And not many know that those were failed blood pressure drug companies. To recoup their losses their marketing groups came up with the medical term erectile dysfunction because of the well known side effect.

Was it not recognized as an actual disorder at the time?

The symptom of ED has been steadily growing on a 15 year tail following the adoption of sugary processed foods and ultimately CVD with the curve growing rapidly in the 90's. It was not called ED until their marketing team coined the term. Many new terms and diseases have been created that were already called something else previously. My favorite is gingivitis which is an early symptom of scurvy.

The new South Park did a great job on skewering NFTs

“Don’t be afraid to do nothing.”

The author doesn’t mention that his article is the latest in a long line of “bubble’s about to pop” articles that have been steadily written since around 2014. Sure the stock market is in a bubble. But I would be sad if I had spent the last 8 years waiting for it to pop.

I needed the reminder to be patient.

I was lucky during the financial crisis to have cash that I could put in a term deposit for 5 years at 7%, my first-ever term deposit, To my detriment, I took out half after a couple of years to create an online game that failed.

However, when the rest matured, I was lucky to triple that money by investing in a couple of speculative ventures. Having used up my allotted measure of luck, I now look for solid investments.

I have recently liquidated about half my shares. I am waiting for the bubble to burst. I have my eye on a couple of solid companies whose share price may fall dramatically as people need the cash. I am approaching seventy and I need a solid portfolio that I can slowly sell down to meet living expenses.

My rules:

1) Avoid bitcoin, it seems so much like the "Souk Market": https://www.livewiremarkets.com/wires/the-greatest-bubble-yo...

2) Avoid meme and NFT stocks; they seem like the new tulip craze.

3) Avoid unethical stocks; they remind me of the South Sea Company: https://www.britannica.com/event/South-Sea-Bubble

4) Avoid hugely inflated P/E ratios; remember pets.com.

In short, look for ethical* companies with strong fundamentals.

*However, I am not sure that ethical and profitable can co-exist. So my rule is to choose a company that has a product or service that I use and like, or a CEO/founder whom I admire. I try to research companies. But I find that other people's advice is rather limited, as they tend to know less about the companies than I do. In the end, you have to trust your own judgement.

It's hard to blame the companies, if a company needs investors the investors are usually going to prefer/demand increasing profits and growth instead of ethical behavior in exchange for the investment. It would be nice to be able signal with an investment that you are not looking for max. profits, but for max. ethical behavior with marginal profits.

When I researched ethical funds it looked like the best (and almost only) organization giving these signals is Triodos[0] but it is not available in all countries.

How could we solve this issue?

[0] https://www.triodos-im.com/funds/individual

If your company makes losses people will sell shares to hold money that is guaranteed to earn 0% interest. When you think about how money is just an accounting mechanism where all value and physical capital is created by working people whose time on this planet is limited you will notice that something is fundamentally wrong about our economy in a way that gives no room for ethics.

This makes it sound like there are only 2 options: maximizing profit while disregarding ethics or losing money. Isn’t there another option?

For most businesses it should be possible to be profitable and ethical at the same time, profit will not be as high as it could be but that’s ok for me and I’m sure there investors who agree (maybe not a lot).

I agree, and I regret waiting for the last 2 years to buy my own place:

2.5 years ago I put it on hold, because with such high prices the bubble must burst.

1.5 year ago I put it on hold, because with COVID and high prices the bubble must burst.

6 months ago I finally bought an apartment. I paid 30% more than I would have in 2019, but 10-15% less than I would have to pay today.

> I would be sad if I had spent the last 8 years waiting for it to pop.

I hear you. But later in the article he does advocate, or at least approve of, dollar cost averaging into a low cost mutual fund.

I think he has in mind as an audience his college students. I have some students who with great enthusiasm have told me how much they are using to invest in things that are, let's say, a place where historically very savvy people have lost a great deal of money. It is all so easy, they assure me.

The smart investing thesis accounts for downturns and bubbles. If you’re trying to time the market you’re doing it wrong.

I used to think this was definitely a bubble, but I've become less sure after reading about the amount of debt the US has and the ways it can pay it. The easiest way the US can pay its debts is through inflation. Given that, the fed will likely keep printing money. People know this and therefore put their money in things that are safer than cash, which is guaranteed to lose purchasing power over the next decade. At 2% inflation that is something like %10 over 10 years, but at current rates you could lose >50%. This is especially true in assets, which is what people with lots of money want to own. So while the price of food might only go up 10% per year, the price of assets could go up much more than that, and that is not included in CPI calculations. This is like a financial crisis but only for people who don't own assets, since they won't be able to get into the game. At least in 2008 everyone but the banks suffered, this time it might be everyone but the rich.

Of course, I could be completely wrong and I really hope I am because I was saving to buy a house. However this time things are different than previous bubbles because every asset type, even cash, is risky.

Ask any third-world country how inflation is the way to go if you want to have astronomical wealth inequality.

That's why I laugh when I see first-world born HN'ers who never have been in the 80's Israel, Brasil or Argentina to say we should just print more money to pay for UBI.

Yeah man, that's exactly what the bankers and all the other fat cats want you to believe.

Shouldn't one question the current monetary paradigm if it has such a terrible track record. Why are people doubling down on the very same system through cryptocurrency?

This derives from false pretenses, the US government can’t inflate away its debt; it gets rolled over and inflation expectations get baked into interest rates paid on debt (US treasuries are sold at auction).

Governments that borrow in their own currency reduce debt best via growth, since debt is stated in terms of GDP.

On the other hand, people who are short dollars — debtors with fixed debt — are helped by inflation. Have a mortgage, student loan payments, even car payments that aren’t linked to inflation? Then inflation does reduce your debt burden.

Inflation hurts those groups that are long monetary assets — those who own fixed debt, or cash. Its effects on other asset prices, like stocks, are less direct. For example, stock prices reflect changes in growth in the economy that may be hindered by high inflation (or high interest rates).

Simple models are great except when they’re wrong.

> the US government can’t inflate away its debt

Of course it can. if the government "owes" $20T, it could simply print a $20T note and pay off its creditors.

For over 10 years interest rates people pay for US debt has been below inflation. Why do you think they can't inflate away the debt when the last 10 years shows that happening?

I don't know what you mean. Inflation has been incredibly low in the past 10 years meanwhile debt has to structurally go up every year because the global economy needs more dollars.

Note, inflation also hurts those on fixed income — people whose income is set at a fixed rate, like pensioners or retirees collecting social security.

> I was saving to buy a house.

People really need a house price ETF for this - that is, a financial instrument whose value tracks house prices but can be bought for units less than one house.

There are REITs you can buy.

For example, check out VGSLX.

There's your story, why this time, it's different.

This happened exactly as the poster mentioned in the 1970s. Equities, despite a 50% real drop (they were sideways through the decade) did not experience the 70% loss that cash did.

Today multinationals are much more well... multinational, and they're currency-hedged better than they were then. This allows them to avoid much of the inflationary pain of a single currency.

Countries have been inflating their way out of bubbles for thousands of years at the expense of the currency. Acting as if that either hasn't happened many times prior or can't happen again is an article of faith

> Surveying the landscape, it seems likely that if there is a bubble that it is not in equities but rather in credit. In an environment where low single-digit positive inflation is widely expected by market participants, how can it be rational for “investors” to buy long-term bonds with negative yields? ...

It can be rational if investors believe that interest rates are headed even lower. When that happens, bond prices will appreciate still further. There is no limit, technically, to how low long term treasury yields can go. Therefore, there is no upper bound to treasury prices.

The thing about bubbles is that at the top few are calling out "bubble." Instead, every bear whose mind can be changed has thrown in the towel and joined the party. It's all about how the old rules don't apply anymore. A new paradigm. The only voices of caution are the parma-bears with their tinfoil hats. They will eventually be right, but will have missed booking profits during the entire insane event in the process.

He's probably right but the criteria is somewhat wishy washy. E.g.

"Belief replaces analysis among many market participants"

Many? How many?

I am not sure how much analysis there really is in the market. I doubt there is too much with the small investors -- not only is it complicated anyway but companies have too many tricks to pretty up their books. So even if you're diligent it's a good question if you're reading the real data. Most people don't have the time to learn that much. As for the big institutions, it's not my world, but I doubt there is a total lack of bias. There is obviously a lot of momentum trading.

I also became somewhat sceptical if such a thing as a bubble really exists if we can only identify it after the fact, and only under certain conditions. E.g. last year in March the market crashed badly but it recovered quickly and there was no long term problem. Thus it wasn't a bubble bursting event. The very same thing could've happened without the "investors" getting confident again, and then everybody would've concluded that covid finally popped the bubble. Both of those can't be real.

I don’t disagree with any of this as it is pretty much Finance 101. But what I feel like this sort of analysis tends to lack, is that the markets have always been decoupled from “reality”. The only difference is that, historically, there were less retail investors and more professional traders. These pros shared a consensus reality regarding valuation etc. But at the end of the day, the price of the stock has always been based on the supply and demand of the asset which can have absolutely no connection to the actual performance the underlying company. Think about it, a stock price rises or falls based on people buying and selling the stock. That typically happens when there is news about company performance but there is no direct correlation between company performance and stock price. If we all decided we actually value poor performing companies, their stock price would be through the roof, a la Tesla. It’s all smoke and mirrors, and it always has been.

It's not _all_ smoke and mirrors, but only on the low level of P/E ratios.

E.g. companies paying dividends -- if company has no money, it won't pay dividends, so the stock goes down. But if investors see dividends as a good income source, then the stock price goes up.

But that only works with dividend-paying stocks, obviously.

Well, that was all good up until the point that CDS's exposed the Ratings Agencies as corrupt, and LIBOR imploded, again due to corruption.

Definitely an interesting read but I'm surprised he doesn't even approach the notion of asset price inflation being the primary form of inflation from all this money printing that's been going on.

Oddly enough, gold is one asset whose price is flat to down over the past few years. This ain't the usual kind of inflation, where people start to buy gold because too much money is being printed.

These days gold prices seem to be driven by fear: gold tends to spike up on market crashes, as a flight to quality. I think people aren't afraid enough yet; they're still feeling greedy.

I think crypto took a lot of money that would've gone to commodities, along with the speculative money.

I'm inclined to agree with this.

The problem with investing in gold is that there's actually a lot of it to dig up, it's just expensive to do so, there's always a lot of natural ceiling pressure on the market, if the price goes up enough we'll be extracting trace amounts from seawater.

I think he does though. He mentions that many assets are priced on a level that is only realistic if interest rates remain on the current level for decades.

I don't think most people do. For the howver many years of QE I remember that critics were met with finger-pointing to flat PCI and CPE. Few outside of finance seem to recognize summary P/E growth as inflation.

> Few outside of finance seem to recognize summary P/E growth as inflation.

Because it's not “inflation” as that term is used without modifiers, which is increase in the nominal price of final consumer goods and services.

Asset inflation is a different thing than general inflation and it makes no sense to conflate them.

Agreed, but, in fairness, the inflation numbers that are currently being used by the press explicitly exclude the real cost of housing, which is an asset that has definitely increased in nominal price.

Instead, they’re using “non market rent” or some such nonsense to estimate housing costs. Measured as it was then, our current inflation rates are significantly higher than they were at the end of the seventies, even though they’re reported as being lower.

Inflation has been redefined to exclude asset prices, and that directly broke its traditional relationship with the actual cost of living. Given that, I’d argue it’s fair game to point at asset prices as evidence of out of control inflation.

This situation is textbook Orwellian Doublespeak: Rational conversations about inflation are now nearly impossible to have, since all the useful vocabulary has been sabotaged. Instead of talking about inflation, we get tripped up on vocabulary and semantics.

> housing, which is an asset

No, it's not.

Residential real estate is an asset, housing is service.

Imputed rent (the cost of rent forgone as a result of choosing to reside in the property you own rather than renting it out) is the cost (the money given up in exchange for) that service, for homeowners choosing to reside in the home they own.

> Inflation has been redefined to exclude asset prices,

Inflation has generally excluded asset prices for the entire 102 years for which the US has measured it, as the fundamental concept has always been measuring final consumer goods and services prices, not assets. The exception, for a 30 year period in the middle (starting in 1953 and abandoned in 1983) was homeownership costs, which was a clumsy way of dealing with the fact that only counting direct rent, as had been done from 1919, was completely of ignoring housing costs for the growing group of homeowners. The switch to the owners equivalent rent method in 1983 returned the measure of inflation to it's core purpose, while not excluding homeowners actual costs of housing.

Right I don't dispute any of that. However, you're just making the last guy's point about semantics.

I'm no socialist, but I think a common interpretation of the american dream (or prosperity in general, really) is that a hard, reasonably intelligent & frugal worker can one day employ what they've earned to enable others to to meaningful work. I.E. they can own a small but meaningful part of the economy above and beyond what they require for sustenance.

Common investments have ballooned disproportionately to the value of goods and services they provide to society. The companies aren't making the world that much better, but the people who own them are reaping rewards as if they are.

There's no real price discovery anymore. Don't low interest that stimulate the economy fundamentally mean keeping inefficient businesses afloat?

The classes that rely on wages and salary are getting priced out of financial mobility. I'm not super familiar with programs outside the US, but our dual mandate of 'stable prices and max employment' seems to translate to 'keep the poors working as hard as they can, and make sure the basic feed (market basket of goods) is cheap'.

Stuff like housing, cars, health care, and higher education (stuff that really matters) either isn't in the market basket or seems to under-measure an average person's lived reality. Tons of people have heard of the 'burrito index'. Seeking alpha is mostly trash, but even a quick glance-over of this guy's graphs is telling:

https://seekingalpha.com/amp/article/4419060-dollars-purchas...

The only "natural" interest rate is zero when saving and investment balance each other out.

I though savings = investment?

> Right I don't dispute any of that. However, you're just making the last guy's point about semantics.

No, I’m making the point that if “ a redefinition of the basic structure of inflation as to whether it includes any assets or not renders discussion meaningless because it invites semantics argument, then the “last guy” is wrong that is the effect of the 1983 change to exclude homeownership costs, because that ship had already sailed in 1953 when changes were made to include them in the first place.

> I'm no socialist, but I think a common interpretation of the american dream (or prosperity in general, really) is that a hard, reasonably intelligent & frugal worker can one day employ what they've earned to enable others to to meaningful work. I.E. they can own a small but meaningful part of the economy above and beyond what they require for sustenance.

Like, why is the “I’m no socialist” disclaimer even there when you go on to articulate exactly the standard, capitalist interpretation of the “American dream”: if I spend enough time on the treadmill of wage labor, I get to become a microcapitalist.

It's like saying “I’m no secularist, but I think people should be obliged to follow the Ten Commandments on pain of death”; the lead-in disclaimer is unnecessary.

Were you a socialist, you’d think people were entitled to a share of control ab initio as a worker, as a matter of right, not as a reward for slaving away at wage labor for a sufficient time for which they would sacrifice accumulated surplus wages, and that your entire statement was silly. (I know, I checked with a socialist.)

In any case, that has nothing to do with cost of living.

> The classes that rely on wages and salary are getting priced out of financial mobility.

To the extent that's true, it's a problem of fiscal not monetary policy. Monetary policy (at least, the levers Congress has chosen to provide the Fed to address it) is a too blunt instrument to be used effectively to control that well, that's the domain of the much wider array of economic tools that remain in Congress’ sole control, like the whole of taxing and spending policy.

> I'm not super familiar with programs outside the US, but our dual mandate of 'stable prices and max employment' seems to translate to 'keep the poors working as hard as they can, and make sure the basic feed (market basket of goods) is cheap'.

No, it doesn't really do either of those.

OTOH, the first part is the effect of a whole lot of downward relative tax burden shifts over the last four decades.

> Stuff like housing, cars, health care, and higher education (stuff that really matters) either isn't in the market basket

All of that in, in fact, in the market basket. (Used cars have actually been the largest component, IIRC, of the recent aggregate inflation increase.)

> or seems to under-measure an average person's lived reality

Claims about what things subjectively seem to do relative to subjective impressions are...slippery, at best. But the concrete effects you blame on inflation have much more clear policy sources, that are neither inflation nor monetary policy.

Huh, you seem to know a lot more than me. Can you elaborate on the relationship between interest rate interventions and price discovery?

People can withold money from the economy and then install the equivalent of a toll booth where they charge a fee to anyone who wants the money known as interest. As long as these people to get to abuse their power they will force interest rates to be above zero, this is effectively an interest rate intervention.

When these people get paid interest they will repeat the process which means there is an insufficient supply of money in the real economy to repay loans forcing people to borrow to service their interest payments.

This means debts grow faster than the economy. When people eventually spend the money the value of the economy gets adjusted upwards .e.g. prices rise via inflation.

Alternatively inflation stays low forever. There is an excess of savings hitting a limited number of investments that can only earn negative yields. By simply not investing people can isolate themselves from these losses which should be impossible ( cough deposit insurance). This forces interest rates into negative territory.

> withold money from the economy

How? Where do you park more than 250k to keep it outside the economy?

If the $250k is a reference to the FDIC limit, remember that is for a single account. There are products like Fidelity's Cash Management account that spread deposits to multiple sub accounts with pass through insurance and can FDIC insure much more than $250k.

Does anyone have a recommendation on what to do with their cash while they're waiting to buy shares using dollar cost averaging?

Like, let's say I have $120, and I plan on buying $10 of stock per month. Is there a good way thing that you can do with the money while it just sits?

I've been in the same boat. I ended up putting it in a robo account with my risk profile set to be very conservative. Most of it ends up getting invested in a bond ETF under the covers, like $BND. Unfortunately with interest rates so low, it's not going to keep up with inflation.

I can see why crypto is so attractive--every other "safe" investment seems like it's bound to lose money when considering inflation.

If you are slightly risk-tolerant you can use services like nexo or blockfi to earn interest on fiat. You don't take crypto price risk and they generally only lend out money on an over-collateralized basis, so the default risk is small.

You can earn interest on stablecoins, not fiat. Theres a big difference there, since the stablecoin itself has risk in addition to the risk of whatever those services do with it to generate returns.

My portfolio is cash-heavy these days, but I don't believe a crash is coming, I'm just not comfortable being fully invested at the moment; and I hate that because the cash is losing purchasing power every quarter.

I get the feeling that investing in a quality company with a solid balance sheet is the better long term risk proposition because even if it goes nowhere for 10 years, what are the chances that my savings are going to grow in purchasing power? Probably zero.

This market has made me more comfortable with risk than I probably should be, but that is another reason why I refuse to go "all in", to protect me from myself. :D

> I get the feeling that investing in a quality company with a solid balance sheet is the better long term risk proposition

From a risk perspective, you are better off investing in an index. Any individual company might stagnate or go bust, but an index is highly diversified and constantly rebalanced to track the best performing companies. The risk reduces even further as your horizon increases.

That's true, and good advice.

I've only used index investing to get exposure to specific markets or segments where I find it difficult to do decent research, but you're right that it's a better way to park funds over a longer term.

The best way to improve your odds of success is to stay invested over time, no matter when you start.

https://www.schwab.com/resource-center/insights/content/is-t...

>> the cash is losing purchasing power every quarter

I Bonds are paying over 7% right now. You are limited in the amount you can buy but could buy $10,000 now and $10,000 next year (i.e., in a couple weeks) plus another $5,000 if you are getting a tax refund. You've got to lock your money up for a year but worth looking at if you've got money sitting around in a savings account that you don't need next year.

So if everyone thinks it's a bubble stocks must be undervalued? Time to buy? Actually enjoyed the article preamble, the five actual points less so.

The problem is, people have different, mutually-exclusive ideas of what area is going to "pop". Is it going to be the currency? (in which case you should buy assets), is it going to be assets? (in which case you should buy currency)

This article is so cringey. The author is using Tesla as an example of a bubble stock, for which he is sure Offers no attractive returns in the future. He dismisses a “naïve” student who presents the opposite picture.

I will bet anyone $1,000 this author will look like the idiot in 5 years while the student was right all along.

The point of the article is that bubbles involve belief in the superiority of an equity without reference to fundamental value.

You and the student appear to have a large amount of belief in this equity, but neither one of you offers evidence...

Tesla has a forward looking 12mo P/E of only 100 just with its current operation selling 1 million vehicles per year. It's growth rate is 50%+ per year, by 2030 it should be selling 15-20 million vehicles per year. Tesla can justify it's current valuation solely with its automotive business, but that's just the tip of the iceberg. Other areas of growth and profit that will likely outperform the auto business:

- Energy Storage and Distribution (including Solar Roofs)

- Full Self Driving, Robotaxis

- AI as a service

- Insurance

- Charging Network: Access Fees / Restaurants / Convenience Goods

Like I said, put your money where your mouth is if you're so sure the author is correct here.

> It's growth rate is 50%+ per year, by 2030 it should be selling 15-20 million vehicles per year.

I can't wait until 2040, when Tesla is selling 5 billion vehicles per year! </snark>

Really though, I don't think it is rational to believe that kind of growth rate is sustainable...

Tesla is severely supply constrained. Wait times in some areas is one year. They could easily sell 3-4 million this year if they had the supply, and this is before their $25k car which should be available by 2025.

> They could easily sell 3-4 million this year if they had the supply

Reminds me of a story.

A man walks into a shop and asks for a dozen eggs.

Shopkeeper: Sure thing. That will be $50.

Customer: (shocked) But, the shop on the other side of the road is selling them for a buck each.

Shopkeeper: So, why don't you go buy your eggs there...

Customer: Because they are all out of eggs today.

Shopkeeper: Once, i'm all out of eggs, then I too sell them for a buck each.

I don't see how this relates at all.

How would your assessment of Tesla's value change if you learned each of this items is not profitable for the foreseeable future?

For example it is certain that FSD is not happening any time soon. I am not even sure what AI as a service means or why Tesla would be competitive in this field. Insurance already has well established incumbents.

Not only that but Tesla is going from having very little competition in EVs to more or less every current manufacturer offering them in the next few years, in addition to new EV-only companies. Assuming their growth trajectory wont change as that unfolds is naive.

One word: Bitcoin

That is indeed one word. However it's a compound of two words, one of which is itself a contraction of two other words.

I'm still hopeful my gamble in plastics will pay off

Is this a comment on Bitcoin's environmental impact?

https://www.youtube.com/watch?v=eaCHH5D74Fs&t=25s

What a relief.

Hello environmental impact, my old friend.

Use trading algorithms: https://tradeq.xyz

You don't know when the bubble will burst, and emotion is usually the driving force.

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