Look at a chart of the S&P 500 from 1920 to 2008 and you'll notice something rather curious: the stock market has gone parabolic ever since the financial crisis. What made this period so unique? Tremendously low interest rates coupled with quantitative easing dissuaded capital from financing the real economy and instead encouraged herding and levering up in the financial economy for returns.
At ever dip, it was an open secret the Fed would cut rates and ease again.
At least for now, that game is over. We've had moments in the past when the markets had a similar panic (see 2018), but this period is unique due to the inflationary backdrop. Since 2008 we've never seemed to be able to create significant economic growth or inflation greater. The COVID fiscal canon blew growth and inflation skyward. The fed can't just turn on the printers again or cut rates until we hit proper a proper recession.
I think you reference only considers the index adjusted for inflation, but without taking the dividends into account.
Optimists tend to consider the dividends too small to matter when buying stocks, but it turns out that over time, the dividends tend to be a large part of the inflation adjusted returns:
According to this article [0], the profit of investing just before the .com bust would be only 12.9% by mid 2017, which is about 0.7%pa, if adjusting for inflation but not dividends.
When taking dividends into account, that grows to 54.5%, or 2.54%, more than 3x more.
And this is more or less the worst case based on recent history.
People (and tool developers) forget that the purpose of a stock is to ultimately produce dividends. It is like buying a house for rental income and forgetting to include the rent.
When I retired I had to switch from a growth-stock mindset to an income-stock mindset. I have made the switch but none of the free tools makes that easy. The closest I came was TOS will do this calculation for stocks but not ETFs. Oh well. I now have all the calculations in google sheets.
I also now have a backtest that goes the the beginning of the Clinton administration to the end of the Trump administration. I added dividends to the backtest. I only went to the Clinton administration so that I could use ETFs to simplify the calculations. The backtest includes dividends - which I had to add manually.
>People (and tool developers) forget that the purpose of a stock is to ultimately produce dividends.
It would be more accurate to say that they distribute profits back to shareholders. Buying shares back is equivalent to dividends. What's questionable are attempts to borrow money to boost the stock price as those then generate a hype cycle which lets the company sell its shares back for a profit which is exactly backwards to how it should work.
Out of curiosity: How do you test your sheets? I feel like I can arrive at such a sheet over a few days of reading, but unsure how I'd test I'm doing the right things (since there isn't a tool or a combination of tools that can act as oracle)
I used ETFs (and not stocks) to simplify the test. I was mostly looking for correlations of different investments across different scenarios. I then looked at severe market downturns to see how the correlations changed.
As you can imagine - when there is a severe market drop, most investments are highly correlated to the S&P. The most negative correlation I could get was medium term bond ETFs. Short term bonds were still highly correlated and I am not sure why.
The dot com bust was particularly interesting because each segment dropped at different times. Telecom dropped first, then tech. It took about a year for the drop to hit mid cap. In comparison - the 2008 crash hit everything quickly.
Also - lately I have been using the backtesting tools in TOS. As I said earlier, this only works for stocks and not ETFs.
> dissuaded capital from financing the real economy and instead encouraged herding and levering up in the financial economy for returns.
i don't really agree with this - the money used to purchase financial products don't disappear, because for every product bought, there was a seller. This seller now has cash, which would be invested elsewhere.
The only concern is low interest rates, which makes the hurdle for any investment lower thus making it easy for malinvestments to occur; In hindsight is easy to make judgements on what is a malinvestment, but not so easy at the time.
> i don't really agree with this - the money used to purchase financial products don't disappear, because for every product bought, there was a seller. This seller now has cash, which would be invested elsewhere.
But just look at housing, which has exploded well beyond the rate of inflation since the Great Recession bottomed out, and especially in the past couple years.
Yes, if money is plowed into housing, the homeowner has more cash when they sell. But presumably they have to live somewhere, and with housing skyrocketing in basically any halfway desirable place, it means they're just going to spend that cash on another expensive house.
> if money is plowed into housing, the homeowner has more cash when they sell.
but it's not expensive _everywhere_. It's expensive in some of the most desirable places. And housing has some issues unrelated to the market - such as NIMBYs stopping new constructions.
>but it's not expensive _everywhere_. It's expensive in some of the most desirable places.
The fact that the median and average house prices have exploded signifies that the housing market is in a bubble. It's not relevant that house prices have not increased equally everywhere. Ultimately, after the bubble eventually bursts, it will leave a lot of people indebted to banks with their real ownings not matching the debt. This translates to a decrease in consumer consumption, meaning slower economic growth. Resources of the society will be more directed towards customers who have more wealth, meaning those who weren't part of the housing crash. Likely customers from abroad.
Obviously we're talking about percentages, but that's how economy works and that translates to very real changes in a many people's lives.
Notice you said disposable income rather than income, there is a huge difference.
But I think people recognize the housing bubble that popped in 2008 as a bubble. Saying we haven’t reached the peak of the last bubble doesn’t mean we aren’t in a bubble.
You mean artificially high interest rates. If interest rates fell negative then the money supply would shrink and there would be less unneeded money to speculatively buy houses with. Alas, we live in a world in which negative interest rates were banned and therefore the money supply and economy must constantly grow to raise interest rates above 0%.
I find it frustrating that people ignore basic market principles when it is inconvenient for them. Like, people get richer (everyone is saving incredible amounts of money), the population is no longer growing, there are fewer and fewer investment opportunities and yet for some reason, people think they have a god given right to high interest rates anyway, even when those are impossible to pay without inflation.
the inflation target was barely met (and according to arguments about service degradation) it was undershot, so no, the interest rate was not too low. (there's no non-artificial rate in a central bank managed economy)
> The fact that the median and average house prices have exploded signifies that the housing market is in a bubble.
It doesn't signify that. The US has long since switched over to a permanently low interest rate environment due to the extreme national debt that the Fed has to manage. Housing is going to stay artificially expensive on a longer-term basis accordingly. Housing only deflates on a sustained basis if interest rates go up a lot on a sustained basis, and that's not going to happen (we're coming up on 14 years into the forever low rates era).
We've been enjoying very high rates of consumer inflation and what has the Fed done? Zilch. Mostly all they've done is jabber, which is most of what they can do now: endlessly talk about how they plan to raise rates. Why? Because they can't do anything of consequence and they know it. It's a humiliating failure of their supposed mandate.
One of the many consequences of forever low rates is forever artificially inflated asset prices.
Real-estate values broadly are not a bubble, it's dollar debasement, which is why gold is going to become normal up toward $2,000 and oil is going to be normal at $65-$75+.
Mediocre economic growth will (presently is) ultimately take care of the elevated rates of inflation, rather than the Fed hiking rates by a lot. Later in the decade the Fed will be back to talking about how they'd like to spark higher rates of inflation, as typical annual real GDP growth sinks below 2%.
>It doesn't signify that. The US has long since switched over to a permanently low interest rate environment due to the extreme national debt that the Fed has to manage.
Strange, Germany did mild austerity over the 10s and the end result was even lower interest rates. The current debt to GDP is 59,8% which is perfectly "healthy". Lower interest rates mean less money is spent on interest and more money is spent on servicing the principal. The only conclusion you can derive in the EU is higher debt and more risk => higher interest rates. Yet everyone thinks we are bailing out Greece when in reality the ECB is bailing out wealthy Germans.
>One of the many consequences of forever low rates is forever artificially inflated asset prices.
You call it artificially inflated but lower interest rates don't make e.g. housing more expensive. Your monthly payment is still the same. Lower interest rates make it easier to build more housing which can reduce the monthly cost of housing over the long term.
the Fed has a dual mandate, there are still a lot of people who doesn't have a job due to the pandemic.
this inflation spike due to the combined effects of overspending on products in quarantine (partly fueled by unemployment checks, that should have been sent in monthly installments to discourage spending it on big items), and the energy market chaos thanks to the war in Europe. (and even though a small portion of the supply disappeared the price curve is steep, the new price point is much higher up as we see.)
should have the Fed done more about this? yes, definitely. but just as you observed, the low rates are here to stay on the long run. (mostly because aging population of the developed countries as pension funds buy bonds to get the fixed cashflow they need to pay the pensions.)
> but it's not expensive _everywhere_. It's expensive in some of the most desirable places.
I disagree with this. I think this was true for the mid 00s property bubble, but now prices are exploding not just in the usual suspects like SF, LA and NYC. Pretty much every place that's not a total shithole is experiencing huge home price appreciation.
I made a post on a different thread making this point, and I used Flint, Michigan as my example of "sure, prices in Flint are still low..." only to get a response from another commenter along the lines of "You'd be surprised - while bad areas of Flint are still depressed, many of the nearby areas have also seen huge runups in real estate values."
> i don't really agree with this - the money used to purchase financial products don't disappear, because for every product bought, there was a seller. This seller now has cash, which would be invested elsewhere.
And buying stocks is financing real projects, and you only get those returns if they manage to do something actually useful, this is helping to finance and promote economic activity, how is that taking money away from the "real" economy?
If someone buys stocks from a third party in the open market, are they financing real projects? It really feels like it’s all speculation since the value of my shares doesn’t actually entitle me to that portion of the company’s profits, unless I can sell back directly to the company.
The value of stocks is pinned to two events that you often don’t directly participate in but are absolutely connected to in a real way.
1. The IPO. While it’s true that only the people who buy at the IPO directly finance the company, if there wasn’t the promise of someone else in the future to sell the shares to, nobody would buy at the IPO. The existence of future second-hand buyers makes the direct funding at the IPO possible.
2. Dividends and buybacks. All stocks get their value from either the current existence or future promise of dividends and buybacks. While from time to time people get lost in “greater fool” trading, the reason a stock doesn’t go to zero is because there is either currently a dividend/buyback or people believe that eventually when the company matures, they will offer a dividend/buyback to shareholders and a future buyer will want to buy this shares for the cash returned by the company. (As a tangent, this is something most crypto investors don’t understand… cryto is almost exclusively “greater fool” trading with no basis in the promise of future real cash return)
Point 2 is false: shares of stock derive their value from the fact that they represent ownership in a company.
If the company is profitable or owns valuable assets beyond their liabilities, then the shares themselves are valuable.
Their value does not depend on current or future dividends, but on the company’s current assets and the market’s estimation of the value of the company’s future cash flows.
Your point about crypto still stands: there are no future cash flows to consider with crypto, only the current value of the asset, although the comparison is really apples to oranges.
If a company was somehow set up in a way that prevented it from transferring wealth back to the owners by any means (buyback, dividends, salaries, or even creative ways, such as buying assets owned by it's owners), it's stock "value" would be close to zero, regardless of how much it owned in terms of assets. (One could imagine a non-profit trust set up this way.)
In other words, the reason why a company's assets and expected future cash flow does set its valuation, is precisely the expectation that it will lead to dividends/buybacks at some point in the future.
> set up in a way that prevented it from transferring wealth back to the owners by any means
and i noticed you omitted the method of the owner selling the share (to a third party).
This is the primary way to transfer wealth generated from a company.
> expectation that it will lead to dividends/buybacks at some point in the future.
it doesn't need to be an expectation of such at all, as long as there is someone else in the market willing to purchase the share, at a price they and the owner deem acceptable.
You could have the opinion that the lack of any possible cashflow returns to the owner as a proxy for the share being valueless, but as long as everyone else disagrees with you, and continue to transact the share in the secondary market, it has value.
> and i noticed you omitted the method of the owner selling the share (to a third party).
This is not a method for the company to transfer wealth to the owner. This is a way for a third party to exchange wealth with the owner. It doesn't affect the value of the shares.
And for virtually any normal share in a company (that I know of) that either generates income or is expected to do so in the future, the share owners has the ability to extract that revenue directly through dividends, buybacks or even by liquidating the company and selling the assets directly.
This means that they discussion is hypothetical for all such companies.
If you could name one company that is being traded at a significant valuation that has been set up in a way that makes it impossible to extract value from it to its owners, I would be interested to know about it, as it might prove me wrong.
But if there is no mechanism for giving cash to the shareholder, ownership is essentially worthless (from a money perspective) except for the possibility of amassing enough ownership to take a controlling stake in the company. But even a controlling stake is just a hobby unless somehow that stake returns cash to you at some point.
I agree about assets though. Book value of assets does need to be added to the value of shares, though usually that’s the smallest part of a share’s valuation.
You can sell stock to another person. The sale price will be higher, ceteris paribus, because the company is more valuable. This is how you make money investing in companies that don’t pay dividends. Google retained earnings for a more in depth explanation.
Buying shares of stock in a company that doesn’t pay a dividend isn’t investing, it’s the textbook definition of speculation. You are buying something that you hope to sell at a higher price. Investing is when you put money into something, and it gives you more money back over a period of time. Buying and selling crypto is speculation.
> Buying shares of stock in a company that doesn’t pay a dividend isn’t investing, it’s the textbook definition of speculation.
Yeah but this reflects the fact that starting and growing a company in itself is a type of speculative activity. Any optimism about the future is a type of speculation.
If you have a proven profitable business model, that you see no way to scale, there's no reason to list the company in the first place.
The main reason to even list a company is to take it through a growth phase, and companies get taken off the stock exchange all the time when they don't see any forthcoming growth, because then it's only annoying for them to compromise with the power/ownership for no reason.
The stock market is an accelerator for companies, not a central bank that makes absolute valuations.
It's speculation on the future development of the company's performance, you aren't entitled to a share in the profit, but you often get one anyway in the form of dividends.
If you buy a stock on the open market you don't actually fund starting a real project, but you fund the continuing development and improvement of that project, it's driven by the fact that they have shareholders to answer to, and you are entitled to voting rights.
It has to have some amount of speculation, that's the driving force behind it, otherwise the whole thing would just stagnate and you have no incentive to improve a company and it will just get looted by its employees. In the big picture it just help collectively push for more efficient ways of working, and stop inefficient work.
It's not pure speculation in the sense that you are not betting on a random event like tomorrows weather in a zero sum game.
> i don't really agree with this - the money used to purchase financial products don't disappear, because for every product bought, there was a seller. This seller now has cash, which would be invested elsewhere.
Make no confusion, please. Quantitative easing was intended to give credit institutions greater ability to lend money to entrepreneurs, so as to boost real economy. When capitals are invested in financial products the entities closing their positions (e.g., selling stocks) and, in turn, getting the cash are not necessarily credit institutions (i.e., they are typically fund managers and private investors) – which is to say they pocket the money.
Couldn’t there be an issue if the buyer is paying with margin that’s backed by an overvalued asset? Maybe not for the seller, but eventually someone will be left holding the bag.
I've had this same thought, but everyone seems to be sitting in cash? No one wants to invest unless everyone else invests. Seems the emperor is suddenly naked.
> curve inverted and interest rates have begun to go up. Risk on?
Yes, we’re still seeing billions of dollars being deployed into start-ups [1], crypto and the like. We are less risk on than we were. But within America, there is no flight to safety. (Internationally, it’s more complicated.)
Yeah, they did, and within a month or two it was reinvested elsewhere. Whether it was pulling out of American Airlines in favor of more shares of Chevron, or doubling down on tech stocks. BRK doesn’t just sit on 150bn in cash for longer than they have to. Not saying they don’t sit on cash but they definitely don’t sit on it for a year or more.
I generally enjoy his evidence-based approach to investing and this video is particularly good at addressing common FUD about today's situation being unique compared to the past.
The GDP is itself exponential. A growth of +2% a year is an example of an exponential curve. Sure there are "limits to growth" (see Meadows et al.) but it's not clear whether those limits are reached yet.
Unless we find a way to 'produce' (the P in GDP) without increasing entropy by digging up stuff (oil, metals, whatever) and then releasing them into our ecosystem once we're done with them, those limits seem to be pretty close though.
That's not just me thinking that. That's the Club of Rome, in the 70's.
As long as the Sun shines on (and this is essenty “for ever”), there is an increasing accumulation of energy in the planet: that is where the possibility of exponential “growth” comes.
Your point is invalid because it would require an exponential growth of the sun power (the derivative of an exponential is an exponential). While the sun power is exponential around a billion years, it is a constant over a year. So you would reach at most a linear GDP growth.
Not so fast. Entropy is decreasing. There might be more energy, but useless energy. Energy low enough, spread out enough or with too little temperature differential that you can't do much or anything with it.
The Earth is getting solar energy sure. But it also emits energy. And a lot of what stays here is just useless heat.
The population isn't growing exponentially anymore and most productivity gains per capita are linear. It's only the big breakthroughs that made it exponential by getting rid of old professions and replacing them with new ones.
GDP rising exponentially is also clearly unsustainable.
We have IMO reached a paradigm shift in central bank policy after decades of low rates and low inflation. The recent past is not a good guide to the near future in markets.
The entirety of human history since prehistoric times to the present gives evidence contrary to your claim. Human societies have experienced exponential growth since forever, with only occasional brief temporary setbacks. Even the Black Death is a blip on the exponential curve of economic progress.
> The entirety of human history since prehistoric times
Extrapolating from the past doesn't always work. There are real limits.
Take the rate of energy consumption of human civilization for example, which is currently about 17 terawatt[1]. Thermodynamics tells us that after doing useful work, practically all of that energy ends up as waste heat. (A small fraction is stored, e.g. aluminium stores some energy. I assume this is negligible.)
The power received by the Earth from the sun is about 170,000 terawatt[2], a factor 10,000 more. So plenty of room for growth, right?
But now take a modest 2% yearly growth. This is a factor 1.02 each year. So 500 years of 2% growth would be a factor 1.02^500 = about 20,000.
Maybe we could actually do that with fusion power. But then we'd have two suns(!) worth of extra waste heat to deal with. This cannot work. Current concerns about global warming pale in comparison. Even if we found a way to radiate all that heat into space as infrared, e.g. by concentrating the heat into country sized radiator panels, 35 years of 2% growth would double the waste heat again.
A similar calculation can be done for the growth of anything physical. And even if you continue growth off Earth, you'll soon hit the limits of the solar system. Even the volume of an expanding sphere at light speed cannot keep up with an exponential function.
Technology can produce goods with greater intrinsic value for less energy and fewer materials. A modern CPU is vastly more capable that the supercomputers of the 90’s, but costs less to produce and consumes far less energy. More importantly it means the market for CPUs and their contribution to GDP has exploded.
There are ultimate physical limits to how much information can be processed with a fixed amount of energy, but we aren’t near those limits yet. I’d argue that if you factor in technological growth you could go for much longer than 500 years before running out of energy, even if you limit yourself to a type 1 civilisation.
That's not correct. At a scale of a century, economic growth has been a zero sum game https://ourworldindata.org/economic-growth. Only recent abundance in cheap energy sources has allowed a HUGE economic boost.
Past performance is not a predictor of future results. If we continue to grow GDP (~energy consumption) at about 1%/y, we’ll boil oceans in 400 years. That’s what exponential growth means.
With a long enough time horizon, the GP consideration ("If we continue to grow GDP (~energy consumption) at about 1%/y, we’ll boil oceans in 400 years.") will still come true even if expanding in space. A sphere expanding around earth at the speed of light grows quadratically in the outer boundary and cubically in volume, and will be overcome eventually by any exponent > 1.
I'm pretty convinced that increasing human activity so much to increase the background radiation to 373K is never going to happen, the point is more that any exponential energy growth eventually can't continue.
In a way though it's already happening, the GDP ~ energy consumption equivalence from the GP assumption does not hold (https://data.worldbank.org/indicator/EG.GDP.PUSE.KO.PP). We'll just keep inventing ways for the GDP number to keep growing exponentially in questionable ways for the system to keep going, until we can't anymore.
the dataset is interesting, thanks for linking to it. the relationship is for now linear, which I believe doesn't invalidate the point that you and I both make that exponential is not sustainable. the GDP-energy consumption decoupling must also become exponential, which I lack vision for how to achieve.
Hand-wavy predictions like this scare me - it suggests people don't understand space travel or the distances involved at all.
Sure, if you think of the Earth as a game of SimCity plus Kerbal Space Program, these discussions about exponential growth are interesting. However, they miss the part where the intervening 30-100 years become literal hell on Earth while space travel ramps up.
I started my career at NASA. I'm working on an asteroid mining startup. I'm well aware of the vastness of space :)
The GP said 400 years. That's the time since the age of exploration until now. That's a vast era of time, and exponential technology development goes both ways.
Exponential growth, indeed economic growth at all, started with the industrial revolution. For instance, many places in Eurasia had the same GDP in 500 that they had in 1400.
Nope. The industrial revolution was a phase change in how economies operated and how wealth was distributed, but if you chart back thousands of years you get the same exponential trends.
>Human societies have experienced exponential growth since forever, with only occasional brief temporary setbacks.
If that were true why haven't we conquered the galaxy yet? It would only take 3% growth per year for 2000 years (numbers from memory). Oh right, it didn't happen because exponential growth is a fairy tale. It's always been logistic growth with breakthroughs increasing the upper bound.
There is an saying: The stock market is not the economy. The US economy is still growing faster enough for corporations to fight off the effects of inflation. (People / workers are a different social and economic issue.) The Fed will continue to raise rates and wind down its balance sheet in an orderly manner. Eventually, after enough rate rises, inflation will slow, and the economy will reach a new equilibrium between growth, rates, and inflation. This is all a normal part of an economic cycle.
Inflation will already slow (oil stopped going up), GDP prints are coming in negative, rates are only now accelerating while economy is slowing down. How this doesn’t end in a recession is beyond me. Mortgage workers have been laid off already due to that. Real economy is next on a lag due to demand destruction.
jury is still out on q2, I expect sub-1% growth, so technically not a recession, but it hardly matters. it's going to be interesting for the next 4 quarters anyway.
> Look at a chart of the S&P 500 from 1920 to 2008 and you'll notice something rather curious: the stock market has gone parabolic
That's because you are using a linear graph instead of a logarithmic graph.
If you have $100 and it double you have $200, if you have $10,000 and it doubles you have $20,000. Both of those are the same chance, but if you use a linear graph it looks parabolic.
Do yourself a favor and NEVER use a linear graph of the stockmarket.
> That's because you are using a linear graph instead of a logarithmic graph.
The macrotrends.net graph linked by fny is logarithmic (by default, though there's a "Log Scale" checkbox to turn it off). It's also inflation-adjusted by default, which I think is a little unfair.
> The COVID fiscal canon blew growth and inflation skyward.
COVID is going on for two years now. What really changed is the Russia-Ukraine war, this goes with higher energy and higher food prices (most of the wheat and fertilizers come from that part of the world) that all that stuff trickles down, as they don't know how to fix the metrics now (i guess no one was prepared for such a turn of events...)
Most of the metrics for inflation are based on some technicalities (you can fix that, that's why we hadn't much of an inflation), but it can't cope with fundamentals like food and energy.
As we transition out of the emergency mode of Covid the bill will be coming due at some point. Governments spent a whole lot of money to not generate any real work in the economy for two years
Lol, very much in the contrary. Had the EU invested heavily in a proper Green New Deal (in ~2010-11 for example, around the time recovery was needed, instead of implementing austerity), we would have robust economic growth instead of a decade of stagnation, and near complete independence of Russian oil and gas, so much so that we could turn the taps off on 24/Feb and suffer only mild consequences.
> Had the EU invested heavily in a proper Green New Deal (in ~2010-11 for example
Meantime in the real world in 2021 EU made strategic decisions that guaranteed high food and energy prices for next couple of years and made Putin think that he has a window of when Eu is completely at his mercy. (Putin made a mistake short term. Long term he surely forced EU's hand to go for alternative sources of energy).
> I [...] feel like we no longer follow any kind of logic after 2008, we totally detached from reality.
What does it mean we have detached from reality? That valuations are not what they should be? What exactly should they be then? Who should be deciding these things?
And a bonus question: Why do you think the current valuations are what they are?
houses for sale getting 30+ bids 200k over asking, buyers waiving all contingencies including appraisal gaps and inspections
some houses going for $400k+ over asking
EV companies valued at billions of dollars with <$50,000 in total revenue
retail tripping over themselves to buy SPACs before the SPACs even announce what company is merging with them
there was no repurcussion to the 2008 crimes. have been ingested into the system, not a doomsayer but hope the most egregious speculators get bankrupted it won't happen - we are in full bizzarro clown world.
"Fake it till you make It" implies when you make it, stop faking it.
We apparently didn't "make it" enough so had to keep faking after 2008. Now, we apparently think we can live on fake forever but the universe will likely not oblige.
Look at the world. The massive amount of people coming online. The pressure on resources this causes. The diminishing low hanging fruit (oil, water, fertilizer etc). The democratization of knowledge around the globe leading to technical talent in places besides the West and their close acolytes. The broken nature of Western BigCos many of which are one step above Soviet factories at this point in terms of actual efficiency, worker buy in and productive honesty.
I don't know what happens from here, but do believe is we are at the cusp of a radical paradigm shift over the next decade. The next 100 years in the West don't look like the last 100 in which Western companies and their captive governments ran the globe unchallenged.
Maybe I'm a cynic and a pessimist but have zero desire to invest in indexes of ossified Western big company stocks at the moment. Their paper value (in my mind) generally doesn't support their true value and potential earnings going forward. Now, there are no doubt some winners in the bunch and when things settle they are worth picking through. The US still has a lot of potential but so much faking it backed up with regime change military/intelligence ops instead of encouraging productivity and innovation has to be sorted out first to give a stable platform for growth again. We have much further to fall in my opinion before stability is achieved, and I'm not tossing dice in expectation of a reward on that right now. And that includes things like the obscene housing ponzi. It has to wash out and return to a stable base.
Other people might feel differently and they might be right. I thought the same things in 2006 and people with more faith made a lot of money but eventually reality catches up, and perhaps this decade is that time. I'm not a person to bet it isn't.
> I hope this is true but I also feel like we no longer follow any kind of logic after 2008, we totally detached from reality.
You're not the only one, consider that the financial crisis was the per-cursur and the necessary backdrop for why Bitcoin was created; this system went from being an arcane, but seemingly reliable way to grow the economy up until 2008 when the house cards fell down and we realized most business models were all based on the 'greater fool theory.'
Monetizing everything and squeezing people for every nickle and dime for essentials became the norm: education, medicine, food, energy etc...
Honestly, this system only benefits a small fraction of the Human Population, but it ultimately relies on their continued exploitation. The great resignation has been a somewhat limited counter-banace but it's still not addressing the underlying fact that this system is so utterly broken and it cannot sustain itself without perpetual intervention from the Central Banks.
Their is nothing Capitalist about this system, it's feudalism with a very obvious plutocratic bend with it's aim to maintain itself via nepotism and corruption.
This isn't a criticism of Capitalism, though I have come to the conclusion that it is ultimately a flawed system that relies on perpetual and infinite growth models, and does an even poorer job at pricing-in externalities that have had and will continue to have even worse devastation: be it economical or environmental.
As an Anarcho-capitalist I agree it is the best of all the other worse system: I just think we have seen the limitations that even the freest markets can avail so long as the parallel system can destroy with impunity, but justify itself as the only thing that keeps the World from succumbing to utter chaos.
When in reality, we live in that chaos and have been in chaos for most of my entire existence (middle millennial) with only the thin veneer of order, what's remarkable is we haven't completely obliterated ourselves in that time--Russia is doing what most Nation-States have done since the advent of it's existance, and what the US did that made it the ire of Humanity in the last decade in the Middle East. They seek to consuldate and extract for thier own vested interests, often to the detriment of it's own populace as it really only seeks to maintain it's own order and enrich an already obscenely wealthy political class which curries favour from the business class.
Before, I used to watch Black Mirror or an Adam Curtis documentary solely for it's entertainment value, now I'm starting to see how prophetic much of what they focused on not just came into reality, but started to have more dire implications than was even portrayed.
In short, while those of us in the BTC community haven't the grounds to declare we have made a utopia by any stretch of the imagination, I'm just glad we have learned our lessons and realized the inevitable demise of the financial system is starting to become clearer to more and more.
Where this leads can be a horrible path, and we have had glimpses of it: the Russian invasion of Ukraine is over hubris and distorted views of the Soviet Union.
Just imagine what it will look like if we are fighting over water or food as we have for most of our Specie's existence?
People here benefited, or stand to benefit the most from this corrupt system: vesting is the only real way to make any real gains as it provides the bulk of most TC. Their inflated salaries at FAANG mean less when they hear the typical story about stocks getting IPO'd and even their first janitor team can afford to live in a mansion in Palo Alto and send his kids to Stanford.
But the truth is this model is utterly broken, just look at the environment and woke culture that the valley has become: homelessness, social inequality and worsening substance and mental health issues etc...
You'll just never get the HN crowds to go along with it because most are still just trying to 'get theirs' or have already 'gotten theirs' and are now too comfortable but keep telling themselves that rent-seeing is ok so long as it's them and they regard themselves as a 'disruptor.'
It's pathetic and a shame to see, to be honest. To see so many talented people waste their collective skills at a time when climate change, and shortages of everything are starting to be the norm: you'd think if they had any capacity to act in anything but their own self-interest and had a modicom of
self-perseverance they'd try to sepnd at least some time trying to address these problems.
What good is money if this is this the World we live has always been my core moral compass that doesn't seem to be shared or well received when I work in tech. There is just a lots of lip-service but almost no deeds to back this up, it's a really just a bad platitude. One of many, unfortunately.
As a person studying AI and ML: you'd think that for a class of people who go on about 'meritocracy' being the end-all to explain why they are exceptional and are where they are and where most are they it's just hiding behind the limited window they have where the tech oligarchs allow them to be well compensated: but be under no illusion, they will quickly dispel with them when it's AI solution is as palatable is it can be, even if it means delivering a more mediocre solution and experience.
>Tremendously low interest rates coupled with quantitative easing dissuaded capital from financing the real economy and instead encouraged herding and levering up in the financial economy for returns.
This is the standard response that people repeat year after year. They are not the full or even major factor. They are more like a result of changes in economy.
>instead encouraged herding and levering up in the financial economy for returns.
Real reason:
Capital intensity has deceased dramatically. Capital intensity is the amount of fixed or real capital present in relation to other factors of production (especially labour).
From what I've read, our current inflation is due to combo of inflated asset prices causing mortgages and rents to skyrocket along with corporate greed raising prices "because of inflation".
You should probably widen the pool of what you read. You're not wrong (well, corporate greed tends to be a bit of a bogeyman), but it's certainly reductive.
> Our current inflation is driven by supply chain issues (unrelated to COVID relief)
Well, specifically it's because everyone went home and switched from purchasing services to goods. So there are serious composition effects comparing 2019 to 2020 and you don't have to assume you're making less money because an inflation number said you are.
Working class wages have increased, and that is clearly because of Covid relief. Or other Covid-related policies like halting immigration.
(I should be clear, this is still supply-side, but related to Covid relief. "Stimulus" money spent unproductively by the government is also supply-side.)
Asset and good inflation aren't the same kind of thing because you won't die if you can't buy a stock, and you can buy any fraction of a stock not just one share these days. (Although the second one is a reason they've gotten more expensive.)
Homes are a special case, but it's entirely possible for the purchase price of homes to go up while rent doesn't.
I lived through the dot-com crash and got out safely after hearing something so ludicrous that I had to ask myself "How insane does this industry have to be for someone to think they can build a high growth internet company out of home cement delivery?" My memory may be playing tricks, but it was something like that.
After 2008 I became interested with crashes throughout history. There are so many fascinating little details that added up to one giant mess.
There’s a great scene where the CEO of a Goldman-style bank is recapping the last 100+ years of global financial collapses and he mentions, “we just can’t help ourselves.”
Will Emerson: Jesus, Seth. Listen, if you really wanna do this with your life you have to believe you're necessary and you are. People wanna live like this in their cars and big f-in' houses they can't even pay for, then you're necessary. The only reason that they all get to continue living like kings is cause we got our fingers on the scales in their favor. I take my hand off and then the whole world gets really f-in' fair really f-in' quickly and nobody actually wants that. They say they do but they don't. They want what we have to give them but they also wanna, you know, play innocent and pretend they have no idea where it came from. Well, thats more hypocrisy than I'm willing to swallow, so f em. F normal people. You know, the funny thing is, tomorrow if all of this goes t-s up they're gonna crucify us for being too reckless but if we're wrong, and everything gets back on track? Well then, the same people are gonna laugh till they p-ss their pants cause we're gonna all look like the biggest p-ssies God ever let through the door.
Which illustrates the real point: "what we have to give them" is debt. Can we grow debt from this point forward?
In the short term: I don't see what the problem is with growing debt at this point.
Oh and, btw, the FED will never repay its balance sheet. It's just not going to happen, ever, under any circumstances.
Which gets me to my, seemingly rather unique, position: this is not a financial crisis (at least not yet). There's problems yes, but there's also a lot of money to solve them. Which means they will get solved, quickly. And just because we're recovering from the mother of all supply crunches and the numbers are going down to readjust, we see a lot of models crying "recession". There is no real recession. There's a recession in money paid for things. There's no recession in physical goods being distributed, quite the opposite. People aren't suddenly vastly more indebted (like in 2008) than they can be.
There was such a big problem with supply and demand that when we all collectively decided to take away to artificial roadblocks, which turned out to be the point some idiot Russian decides to use to ... and supply and demand had such a big and such a wide ranging adjustment to make that it took the the law of supply and demand ~12-18 months to adjust prices, of which some 6-8 months are still in the future. Now supplier prices are adjusting down, not for housing, not for finance, but for everything else, and everybody cries recession. Wrong. Supply just shot through the roof and demand is actually rising. The same refrain is seen everywhere. Prices for X ROCKETED up, and are coming back down rather quickly. Take your pick cars, flights, food, chips, ... There are confusing factors, such as with housing: people have been using SUBSIDISED money for housing and this is being wound down, people are getting kicked out of the housing they're in. So ... lots of complaints. But this is actually an indication, of course, of too much demand, not too little. Too much demand, too much people yelling here's money, now give me ... This shouldn't lead to a recession!
Of course my problem is ... I'm "fighting the FED". The FED disagrees with me. Of course. I'm fighting JUST the Fed at this point. I'm still on the side of the ECB, BOJ and PBOC ...
I kind of enjoyed watching it and at the same time I don't think it's a good movie. It's so overly dramatic, the conflict between the characters is super vague, and the most annoying thing is the language they use - a lot of the time the characters talk to each other with metaphors and generic cliches to the point where they aren't saying anything. But the thing is that everyone in the room works in finance, they have no reason to be super generic and non-technical (apart from making the movie more accessible).
I imagine that people who work in finance would like it even less than I did.
Big Short was a movie that other people loved but I just didn’t really like all that much. I don’t even know why. I think maybe the cameo scenes made it feel a little dumbed down?
I’d also watched Inside Job not long prior and really enjoyed it, but others found it too dry. Different strokes I guess.
Well it's not really about the numbers - the details of the collapse don't really matter. In the context of the last crash we know the global economy is brought down by financialised insanity and fraud. It's a morality play showing what's happening inside the first firm to realise the house of cards is about to collapse, and who are about to bring it down themselves by being the first out the door. The details aren't really the point.
Felt the opposite, he really exuded that cold-and-carefree-but-wise archetype I'd expect from a mid-2000s cocky hedge fund manager who got themselves into that position in the first place.
> After 2008 I became interested with crashes throughout history. There are so many fascinating little details that added up to one giant mess.
I would recommend looking into Jeremy Grantham. Not saying he's right about everything, but he really views himself as a "bubble historian" and he's got some great commentary on bubbles and crashes.
Interestingly, his experience during the dot com bubble and crash is pretty fascinating. He saw the bubble pretty clearly, but he got out early which caused his investors to withdraw something like half of his assets under management. He was eventually proven right of course, and his strategies did very well during the crash.
Which also points out why diversifying can be emotionally difficult. If you're well diversified you should expect to do worse than the market when it's booming, and better than the market when it's crashing (i.e less volatility). The problem with that for money managers is that it's very easy for clients to feel "Hey, the market is exploding, and I'm paying this person who is underperforming the market!", and then, when the market falls, even if the manager overperforms the market (but still has negative returns) "I'm paying this person but he's doing worse than if I just kept my assets in cash!"
I kinda loved some near ending scene of Big Short. The investor is talking with the fun manager and saying "Market is at all times low and you are buying". Kinda hammering home that they don't really know and are just following the general sentiment...
One of the big wake up calls I had during that time was a friend telling me about Webvan. At the time I was younger and not investing so the conservation was mostly around how great the food was, cheaper than up scale stores and they delivered. The echo that reflected much of the dot com era was as he mentioned "how do they make money doing this". The wild part is the wages they paid was higher than other delivery drivers, I worked in a warehouse at the time and frequently heard of seasoned UPS and FedEx drivers leaving to drive for the company.
Funny that webvan is always cited as an example of a startup that could never work, but really just an early example of do something that doesn't scale and just keep doing it until you somehow make money. But VCs weren't yet ready for the unicorn burn.
Juicero was the mirror product, then: An overpriced orange juice machine, with little packets that you can only buy on subscription, but can’t suspend while on holidays, with a QR code to prevent you from consuming after your holidays. It is also down if it can’t reach the Wifi. It showed that you can overcharge and make everything become a cloud subscription, because money was unlimited on the consumer side this time.
Surprisingly, it didn’t work outside of the Bay area. Some entrepreneurs have difficulty seeing the world’s situation beyond their local horizon.
While I can see luxury food delivery kind-of working (wealthy workers in the office ordering lunch, wealthy home workers ordering lunch, fitness nuts who want calories and good food without cooking), Juicero was just plain ridiculous.
Competition from local supermarket is too strong. I can get freshly squeezed juice from the store machine anytime I want for cheap.
Plus juice is kind of a crappy high sugar project that’s bad for you?
Relatedly, I have no idea how “Joe and The Juice” stores remain in business. They’re in super valuable real estate in cities across the country and as far as I can tell never have anyone in them.
Do they? How long have the same ones been around 5 or 10 years yet?
On other their products likely have such margin it might be possible with enough sales. The components aren't too expensive, there isn't massive number of labour and equipment isn't that big of investment either likely...
I keep hearing this, but I don‘t really think fresh orange juice, for instance, is as bad as sth like sunny delight or soda. I do not have a source though.
> Competition from local supermarket is too strong.
Honest question: Do startup millionaires still go shopping themselves? I imagine when you are between the area where you have a gardner for time-to-time tasks and don’t have “un majordome” yet to serve you at any time, there’s an entire higher-class-market-but-not-elites who would be interested in Juicero?
You, and everyone that responded to you, have no idea what Juicero was. It wasn’t orange juice at all, or any type of fruit juice. It was green juice. The founder made millions selling his chain of green juice stores on the east coast so he short had a history of success.
I have a friend that worked there so I even tried the product. I thought the idea was vastly overpriced, but it definitely had the chance of working. Lots of people are into green juice vs fruit juice and they were trying to create a new market.
> It wasn’t orange juice at all, or any type of fruit juice. It was green juice.
This is a distinction without a difference. It doesn't matter what the juice is called. It doesn't change the fact that it's idiotic to pay hundreds of dollars for a machine that just squeezes bags of fruits and vegetables, and needs an Internet connection to ensure you're locked in to only squeezing the company's pricy bags.
What it shows is people who criticize the company don’t actually know anything about it. If you’re going to criticize actually take the time to understand instead of throwing rocks thinking you’re so smart because you read a headline.
"Green juice" is fruits and vegetables, FYI. Look at their marketing material. The bags listed the ingredients on the front and they included things like apple and pineapple.
The problem wasn’t the real world part it was the internet. I was there at the time, it was clear there was some value in all the delivery services and so on the issue was that it was so painful and tedious to dial in with a modem and wait for photos to download and navigate the catalog on a 56k (or 128c or whatever) connection, often losing your cart and having to start over.
And that was for those of us that were literary in digital stuff and comfortable with the internet. A lot of people just hadn’t gotten around to using it much yet.
It just wasn’t time yet. And there wasn’t any massive network effect or lock-in to capture like there was with something like a social network.
- Cement is extremely perishable.
- Contruction projects need cement at very precise times.
- When that precise time will occur is hard to predict -- construction projects have a lot of delays.
- In a city there are a lot of construction projects at any given time.
So using software to coordinate cement mixing and delivery has a lot of potential to reduce waste -- or that is, it did back in the dot-com boom when CEMEX started working on that. If you heard about that back then, you were hearing about something with a lot of promise! From what I remember it worked out really well.
Sad to think that investing in the stock market, which I have only been able to financially over the last 5 years might have been much riskier than I might have previously thought. What I previously thought as "okay I just leave it in the stock market for a bit of time to recoup" is something I am now realizing would likely have to be 10+ years.
It's kind of funny because I was getting shaky about having money in the stock market back in December, and I held onto investing some of my money there. But I ultimately relented 4 months later to lose 10% within about two weeks (and after just index funds). Now it's much worse, and I guess I'll just leave it all there.
And in 15 years I'll be back to where I was when I originally invested it.
There is an inverse question: If you have a cash windfall you want to invest, all-at-once or split it up?
I have seen a similar analysis (but can’t find it right now). Even if you invest at the all time highs, so the market drops right after you buy, you still win with the all-at-once strategy.
The general lesson: Get your money into the market as soon as possible. Maybe more memorable: Time in the market beats timing the market.
Investing in the stock market has the general assumption that, a priori, stocks are more likely to rise than to fall at any given point in time. Under that assumption, the all-at-once strategy has the better expected outcome. Of course, you can be unlucky and end up buying the all-time-high just before a crash. You can avoid that risk by splitting up the investment, at the cost of lowering the overall expected value. So it’s more about how you feel
about that risk, and whether you feel avoiding it is worth having a somewhat lower expected return.
Peter Lynch had a pretty interesting talk where he said that on average the stock market has a sizable dip every few 2-3 years, meaning it's lower at the end of that year than it was at the beginning. Generally though, it goes up over time.
Right, up to now the maximum interval where the market didn’t go up to a new all-time-high is about 15 years, but so far it always ended up reaching a new all-time-high in the end.
No, Japanese can invest in other markets using international brokers. I don't know details on the fees and currency conversions. Investing in a foreign exchange is always at a slight disadvantage because of currency conversions and fees.
US stocks are traded on foreign exchanges. Even if you insist on buying on a US exchange, the currency conversion is not very expensive. If you're a buy and hold investor, it won't matter at all.
If you invested only in the Nikkei on the way up and on the way down, you still came out fine. The only person who didn’t is the person who put all of their savings in at the very top and never bought again.
Yea so buy land if you’re so paranoid about becoming Japan. It’s an island nation with a very unique history. Not a great counterpoint to current US and global economics.
The UK is at more or less the same price as it was in 2000. France same as 2008. Meanwhile SPY is up 2.75x in that period. The US seems to be the anomaly. Value doesn’t always go higher. Maybe the USA is special, maybe not.
The UK FTSE all share total return index, which accounts for reinvested dividends, is at 8430 today and was at 2870 in May 2000. That's an annualized return of exactly 5%/year
SPY is differently weighted than for example FTSE. Most indexes do not factor in dividends, if you look at the total return data where dividends are reinvested you will see there are gains in Europe, but less than the US.
Argentina's economy is a series of endless crises from the government choosing the worst possible ways to intervene in it at every opportunity. Like a reverse South Korea.
Buying land in Japan isn't a great idea (except to live on it). You have to pay a hefty annual tax on it. Land even with property on it is so often abandoned they have a word for it and many marketplaces where you can buy abandoned land from the tax office.
> What I previously thought as "okay I just leave it in the stock market for a bit of time to recoup" is something I am now realizing would likely have to be 10+ years.
I am wondering where you previously got your information?
At one point ten years was considered about the minimum time window for investing in stocks.
To give an example, an old rule of thumb was to have 100 minus your age percent of your retirement savings in stocks and the rest in less volatile investments such as bonds (so a 50 year old would be half and half between stocks and bonds).
My grandfather had $3M invested in the market in 2007. Lost $1M at the bottom in 2008, but didn't do anything other than rebalance. Now worth $8M.
Either you fret over every price move and likely buy/sell at the worst times, or you invest with a long-term vision and stop tracking the price moves everyday.
yes but in that case the Fed rode to the rescue and delivered the greatest bull market in US history. There's absolutely no way the next decade looks like the last so this is a poor comparison.
As far as rebalancing --- you may have noticed stocks and bonds falling in unison this year, so rebalancing is not much help.
But EU has had negative interest rates for years, and will collapse (break up the eu monetary union) before USA goes under. Dollar strength confirms capital is moving into USA.
Problem with "long term investing" as I see it is that to realize the gains you must get out of the market at approximately the correct time. That is difficult psychologically because if you have been able to increase your worth by doing what you have been doing so far you are likely to keep on doing it. Then one day the next crash comes. All of a sudden having been a long term investor does not help so much any more.
You need to be a long-term investor for a limited term. But hard to know when that term is over.
So I think when markets go up you should seriously consider taking some money out and using it for leisure and travel and education investing in yourself. But taking money out and spending it is not usually considered prudent investing. Especially because taking money out means you must pay taxes on it. So you stay in the market and soon most of your long-term gains are wiped out, and you have to be a "long term investor" all over again.
You should clearly have a purpose for your investing goals and adjust your investing style based on risk.
So if your goal is retirement and you're 30, you can tolerate higher risk because if the market crashes, you've got 30 years to wait for it to recover. If you're 60 and retiring in a few years, your risk tolerance is low. And you can slowly adjust your portfolio in between.
This a very popular idea but I don't fully accept it. Goals and desires are not static. They are path dependent and adaptive. I want a funding scheme that's able to fund that.
I never said I "think [I am] entitled to returns just because [I] took a risk". There is no entitled, it's simply a trade-off.
It's a basic precept of investing. In a very simplified way - higher returns require higher risk of invested capital - why else would you invest in something higher risk unless the return justifies it? And likewise, people will accept lower returns if they know the risk is low.
Nobody is doing payday loans at prime because the risk isn't justified by the return.
When you start looking at portfolio allocation across multiple investments, it gets more complicated because you can actually achieve the same return at lower risk through diversification across classes of assets.
But to answer your original question - the only way to guarantee short-term and long-term positive returns (as you put it "if my goals change, I don't want to lose money") is to invest in low risk investments. Low risk investments mean low returns.
You said "This a very popular idea but I don't fully accept it. Goals and desires are not static. They are path dependent and adaptive. I want a funding scheme that's able to fund that."
Which I interpret as "I reject the idea of setting some financial goal decades into the future. I want a scheme that is flexible and can accommodate changes to how I want to use my money."
How is that different than "If my goals change, I don't want to lose money."?
The best sort of discussions are those where each is happy with the other's rewording of their position. I certainly do not reject setting financial goals decades into the future. I do not like ('like' and 'reject' aren't synonyms) investment discipline that are strictly fixated on some goal I had in the past. I would rather have an adaptive trade off of risk to return depending on where I am right now financially. Some goal I had ten years ago may not be as relevant in my current state. I wouldn't want to let go of a favorable opportunity by pulling out the money, just because a goal that I had set in the past has been met.
> How is that different than "If my goals change, I don't want to lose money."?
… and I don't see at all how they are equivalent. I might be willing accept the possibility of losing some money if there is a notable increase in the possibility of meeting my updated goal.
I doubt that we have any fundamental disagreement. You have a good day.
The core problem here is that nobody understood your original comment or the follow ups. It isn't clear what you are criticizing or what alternative you want.
The real baller move for someone worth 50M+ with rates as low as they have been, is take out loans against the 50M to live off of. Pay back the loans with rates less than the annualized market returns. Also limits/pushes out cap gain taxes.
you have to take risk to earn returns. Sometimes that risk actually eventuates, and you have to either keep going, or take the loss.
That's why you must know the time horizon for your investments - if you know you need the money "soon", you cannot actually invest in the stock market.
You have to take calculated risks to earn returns. FOMO at your own risk.
If you are 30 and don’t need the money you put in SPY until 70, don’t sweat it. You’ll be fine.
But let’s not pretend blindly taking risk is OK because some return is expected. Time horizon and some relative valuation context is important.
Buying into the stock or housing market at extreme historic levels of valuations like those in late 2021 and now GREATLY reduces your expected return over 5/10 years.
If you don’t have the (extremely) long view, expect to lose some sleep watching your net worth over the next couple years.
> But let’s not pretend blindly taking risk is OK because some return is expected.
Exactly. I have seen this idea float around that just because they have taken a risky position they will be able get better rewards. Risk may be necessary for above market rate returns, but it is not sufficient. A proportionate amount of those taking the risk will be cleaned off the amount that was risked. Why do you think its not going to be you ! Of course when you use time effectively or use other hedges one can reduce the exposure.
This is a large part of why I’m feeling so negative about this draw down. In the last 5ish years I paid off my student loans and started banking real cash. I put it in the market and now am down tremendously. Crap timing.
I was pissed because I didn't invest in my portfolio to buy a house during the pandemic and missed out on pandemic gains - but checking how much money my portfolio lost, I made more money to keep those in cash.
It was hard to predict that real estate would see pandemic gains. It's an asset that people need to leave their homes to inspect, and comes with face-to-face time with multiple parties. In a locked down society, there were plausible reasons to assume that the real estate market would be dampened.
Predictions are always hard. I bought my house during the last housing 'crash'. It was my first house so I didn't have one to sell, so it was easier. But, I was being told by friends and online that things could drop more, wait, etc... At the end of the day, I needed a place to live, I could afford it, and my job was reasonably secure.
Now people ask how I timed it perfectly and the fact is I didn't. I simply made personal financial decisions based on my situation at the time.
If interest rates continue to increase, the market is in for a very rough time.
COST is about 40 PE right now which implies 2.5% trailing yield. You can get 3.1% on a 10y treasury risk free right now.
Of course equities have growth potential, but also risk, typically the spread between risk free rate and equity yields is much higher.
Plenty of 30-40 PE companies at index level with close to 0 growth. Companies like NET still at 30x sales.
If inflation persists and the 10y runs to even 3.5-4%, could be looking at close to 50% downside. However there are signs that the consumer is likely to collapse within the next 6 months, which should lead to disinflation, but also likely an earnings recession
>> Plenty of 30-40 PE companies at index level with close to 0 growth. Companies like NET still at 30x sales.
This is the scariest thing to me that very few are discussing. Corporate debt is either toxic or nearing it based on the implications of your statement (which I believe to be accurate).
> You can get 3.1% on a 10y treasury risk free right now
I am a noob of how yields work and the math behind the 2.5% . I don’t buy treasury directly but through VUSTX and VUTY. I am actually DOWN, not up. At least that’s what my Schwab portal shows.
I have COST on the other hand, bought prepandemic. I am up at least 20%.
The math is a 100 PE implies a 1% yield. The company could distribute 1% of its value each year to the shareholders in perpetuity. Many started using FCF and PS ratios in recent years, but often this hides the actual profitability of the business. For example, FCF measures typically do not add back equity compensation.. which is obviously highly misleading for tech companies that issue a lot of stock
If a 100 PE company doubles earnings, they will yield 1%, then 2% etc. Of course if they don't pay dividends then this yield is "theoretical", but its the fundamental basis of how to price equities.
Coke (KO) which is a fairly stagnant company is at a 30 PE, while GOOG is at 20. It seems to me that most fund managers these days haven't lived in a time where valuation matters... everything is vastly mispriced for the most part. There are pockets of fair value though, but buying a broad index is a pretty bad idea right now, IMO.
In terms of bonds, they have a market value, but the yield is guaranteed (assuming the issuer doesn't default). If you buy a 1yr bond yielding 3%, and the issuer doesn't default, you will get a 3% return by the end of the next year. It doesn't work the same for bond funds, but this is how it works for individual bonds
Tip: Don't buy bond funds (mutual and ETFs). Buy the bonds directly, then hold to maturity. This will give you the yield-to-maturity that you are seeking.
The market value of a bond will decrease, but the yield at purchase is locked in. But bond funds are different because they are constantly rolling money into new bonds, rather than just buying and holding a given set of bonds.
That depends on whether you want to sell your bonds or hold on to them and enjoy the coupon payments. If its the latter the falling price of the bond is not relevant to you. You can still get hurt by inflation, default, changes in tax laws etc. If you have the spare cash, you could buy the older bond issues on the dips induced by rising interest rates. That's a pretty decent strategy because these old bonds are those that are going to mature sooner, lower the time left, less sensitive are their resale value to further interest rate hikes. This leaves you with the option of selling them without much financial harm in case you are in a situation that you have to.
On the other hand, real yield is barely 0% and both nominal and real yield curves are still positive and in fact steepening. E/P should be compared to the real yield.
They’ve lowered short-term interest rates to effectively 0 and kept them there for quite a number of years.
Federal and State governments have flooded the economy with stimulus.
There is so much money that has been injected into the economy that it is no wonder that every asset has gone up so much. It is no wonder we have such high inflation. The trick now will be to stop it before we have a wage-price spiral where employees demand higher wages to compensate for higher prices which leads to even higher prices.
Expect the Fed now to be raising interest rates, taking $47.5 billion out of the economy per month starting in June and then $95 billion per month starting in September.
I think what’s coming is going to look at lot more like the dotcom bust than it will 2008. So I think the article’s caution on buying dips this time around is warranted.
I honestly think that’s not the main reason we have inflation now. Since every country in the world is seeing similar inflation I would think it’s supply side and not something any central bank can fight.
I’ve always been Keynesian, but it faces the same problem as everything else, you need to be able to predict the future to do it well.
To put those numbers in perspective, the market cap of the entire S&P 500 is about $40 trillion.
I hear what you’re saying about supply-side inflation but you don’t think flooding the economy with so much unearned money might be driving up demand a bit?
A beach town near me, I paid $4,000 for a week to stay there two years ago. This year, an equivalent house is $15,000 per week. So now I’m driving six hours away to get a house for $10,000 per week.
When people make $20,000 per month in stock market/cryptocurrency gains, it starts driving up demand for everything dramatically.
They blamed inflation in the 1970's on supply side issues as well. Sure, the oil embargo contributed to price increases, but looking back, it was pretty clear it was fed monetary policy that drove most of it. And monetary policy by Volker that fixed it.
No different today. Massively expand the money supply and you (eventually) get inflation. Add in a few supply issues and you amplify the problem. But I agree with you that without the massive monetary expansion, the supply issues would be minor blips.
That’s the problem, in bad times you pour money into the market either directly or with interest rates. Then I’m good times the opposite is supposed to happen. But this time the good times never arrived and now we are trying to fix it in the middle of a war, pandemic and massive supply shock, including for energy. It’s too easy to get it wrong and make the problem bigger.
>> Then I’m good times the opposite is supposed to happen. But this time the good times never arrived and now we are trying to fix it in the middle of a war, pandemic and massive supply shock, including for energy. It’s too easy to get it wrong and make the problem bigger.
Good times happened recently, and they've happened in the past. But no POTUS ever wants rates to go up and money to be tightened under their watch, no matter what the situation is.
We're doomed to a bust/boom cycle, because it's all we can tolerate. We can't tolerate minor pain or minor corrections if they're preventative. We can only tolerate unavoidable catastrophe.
The situation we're in now is pretty close to what some people were warning about back in 2008 when the feds decided on their massive monetary expansion.
By the time inflation starts to heat up (it doesn't happen right away), there will be immense pressure to delay any monetary contraction for fear of dampening economic growth. Then Covid hit and the economy was goosed with another massive injection while everyone worried about a recession.
Then once inflation starts it's too damn late to put the genie back in the bottle so you just spend the next 5-10 years trying to get it under control while not entirely tanking the economy.
Right, so the theory is that in good times you put on the brakes so there is something in the tank you can spend during bad times. Spending can take many forms, but the traditional ones are lower interest rates and tax cuts.
The issue is that we lowered taxes significantly in the middle of good times. It's like feeding ice cream to kids already on a sugar high.
There is no room to lower taxes anymore as we are already running a significant deficit, and there is a recession coming where we are going to need to juice the economy.
This is simplistic thinking in line with the “what if the government budget was a household budget” memes that float around.
> theory is that in good times you put on the brakes so there is something in the tank you can spend during bad times
The government is not a squirrel with acorns. It can spend during both good and bad times, as the past 30+ years have shown. The only backpressure is inflation. Nobody seems to actually care about debt, despite the hand wringing.
> There is no room to lower taxes anymore as we are already running a significant deficit, and there is a recession coming where we are going to need to juice the economy.
Yes there is, they just adjust the tax rates down further. There is no floor other than zero.
I’m not talking about rubbing the country like a household, still there are considerable reasons to do some accounting.
1. Even the most spend willing economists agree there is some limit to debt that is sustainable. It’s just way higher than what most are comfortable with.
2. There is also political/popular will. If this is not there it doesn’t matter what makes economical sense. In the U.S. we are firmly against that.
Tax-cuts to the rich meant they had more money to invest in stock-market. And the tax-cuts to the corporations meant they made more profits which made them a more attractive target for stock-investors. Both effects meant the stock-market went higher and higher. And so here we are stock market doesn't seem to be going up because there are no new tax-cuts to the rich.
There is inflation which is bad for the poor people. But people have work and are getting paid. That increases demand which causes inflation. Would it be better if people did not have money to buy anything, which would cause prices to go down?
If supply-side could flex then inflation would not happen, but it can not because of pandemic which is still closing up China and Russia whose oil is out of the market for many would be buyers, and Ukraine whose wheat is not reaching world markets.
Trying to blame Biden and Fed for the inflation is Monday-morning-quarter-backing. For anybody who blames them I would like to say: Are you seriously asking us to believe that if you had been elected president of USA, or of Fed, things would be so much better now?
I think, even without hindsight, that I could have done a better job for the economy than the previous president. Biden? Probably not, he has not done much yet. He also does not have large enough majorities to do anything as any tax increases will probably be blocked by the more conservative members of his party.
You could have done (a better job). But that is uncertain, and untestable. Nobody can prove you are wrong when you say so. But not a lot of people will believe you either. Or they say yeah maybe. As to the previous president, I believe you. :-)
Decades of deficit spending demonstrate the feds can print adequate amounts of fiat currency, and issue debt, to continue to bail out the banksters, bail out foreign cruise line owners, and attempt to police the world and police outer space. USA could drop the federal personal income tax and continue on with the charade.
Love your relatively simple (that’s a compliment - I’m sure you can go deeper) yet 100% accurate (IMO) take on this topic.
Just want to mention that we shouldn’t forget that the fed’s balance sheet ballooning started with the 2008 crisis. If I recall correctly, they had _just_ started to lightly unload all the things they gobbled up like fiends during that period before COVID smacked. Of course they hard turned 180 degrees and got on the throttle again, going in to stabilize the usual markets along with new additions people never would have anticipated they’d touch, ever.
I guess my point is this has been very very long running and is another data point that says (to me) it’s not just a supply side issue that’s driving what we’re seeing.
Every other country did what the Fed did for the same reason: We've experienced (and are still experiencing) a once a century global pandemic. The measures to limit pandemic deaths would have completely destroyed the economy had the governments and their associated banks not taken the measures they took to support people during this difficult time.
There is still considerable debate if those measures were actually effective. Did closing down entire industries, closing borders, making 20 year olds WFH etc really move the needle on Covid deaths in retrospect?
And even if it did, was it ethical, fair and is it a reasonable price to damage the economy and life prospects of hundreds of millions of young people who weren’t at statistical risk?
Its important because it means the current and future mess is down to bad science and politics and not an act of god.
The measures were certainly very effective under the metric of limiting deaths.
British Columbia and New Zealand have about the same population, both are rich jurisdictions. BC was relatively open (compared to other Canadian provinces) while NZ was more locked down. BC has dramatically more deaths than NZ.
And then if you compare BC, which was more locked down than various US states, BC had less deaths than them.
It seems pretty clear to me that the "lock downs" worked.
(putting "lockdowns" in scare quotes here because really the only thing BCians were prevented from doing was going to restaurants and bars. You could still go to the grocery store and home depot etc with a mask on)
If you have some other metric well I dunno, but I don't think there's any better metric than deaths avoided.
> There is still considerable debate if those measures were actually effective.
Not really. I agree with the thrust of your post but there is definitely no considerable debate being had on this topic, because Near-Zero COVID is the only acceptable policy, and saving lives at any cost along with it.
Not sure what you mean here. In the U.S. there has been considerable debate, vaccines are free, safe and available same day. Finally we have given up on almost all safety measures as long as the healthcare system can handle the load.
Can you be specific in the change you want or which debate isn’t allowed?
Thanks to you authoritarians deciding for us, we will never know for sure. Comparing countries with similar densities (like Sweden and Finland) and different COVID policies seems to point out to a resounding no.
Most likely we would have had a few more mostly elderly deaths, we won't have ruined the mental health of a generation and we won't have enriched big pharma even more.
Even with the pandemic going on it would have been better to suffer during the pandemic than cause a recession. The same people who were hit by lockdowns would be hit 10 times worse by a recession.
Employment numbers in my jurisdiction are back to normal and thanks to the sort of government intervention we're talking about very few companies went out of business. Where I live everything is pretty much "back to normal."
The government successfully shut down big parts of the economy, kept people alive, and avoided companies going out of business. They did it.
If there is any recession, and it remains to be seen if there will be, it won't be because of local factors, but rather because goings on in China and supply issues stemming from our over-reliance on their manufacturing.
This is a good point, but there is a counter-argument as well. America is currently divided into the rank-and-file class vs. the stockholder class. The governments' actions so far have been heavily benefitting the latter. Workers get a $1000 cheque, stockholders get a 20% net worth increase. Mom'n'pop shop closes due to lockdowns, Walmart eats up their niche due to being exempt.
Taking too much money out of the economy at this point would harm the interests of the stockholder class, so they would try to do as little of it as possible. Of course, that would only deepen the divide and push Gen Z into accepting more socialist demagoguery, but the short-term stock market dip might be somewhat less than in the dotcom times.
Workers (well, unemployed ones) got $2400 a month. "We just got a $2000 check" is a meme from people who weren't unemployed and are looking for more free money.
It feels like the vast majority of the comments are negative towards the stock market and essentially saying “we may not recover this time”. The thing is, we always think that. We always think this time is different. We always think this might be the end. When Covid struck? It was different because the world economy was shut. When 2008 happened? It was different. 2000? Different. 1987? Different.
Markets will eventually recover. It will not take you 4 decades to recover. Sure, it could take years. But buy good companies, dollar cost average, and realize your loss isn’t realized until you sell.
Also realize that the best time to buy stocks is always, but especially when people are flooding forums with negativity.
I feel like this comment is well addressed in the article, where it shows how long it would take to get back to even from various dip-buying scenarios. Some of the timelines are far longer than most people would be able to cope with.
Not really if they dollar cost average (DCA). The specific examples talk about how a new high hasn't been made in nearly 16 years, but the case is not the same with DCA.
> Buying the dip isn’t some secret strategy. Time is the secret strategy.
Ah yes, the good ol' "time in market beats timing the market".
Of course, that assumes that markets trend upwards in the (very) long term. Which... if past performance is any indicator of future performance [0], the past 100 years provide a fairly compelling narrative.
Yep. No one in the 1970s and early 1980s would believe that Japan would be in the position they're in now.
Sounds a lot like people examining only post-WW2 markets in the United States during a period of historic national expansion and growth and thinking they'll continue on average.
The next few decades have very different social and economic considerations of the past few decades, so...
Why though ? Their 70-80s boom was always going to be short lived, geographically they are resource poor as well.
The demographics of Japan weren’t a sudden change or surprise their population is always been heading in this direction , coupled with their strong anti immigration culture and barriers to entry. It was bound to happen sooner or later .
It is extremely unlikely any one company /market can keep ahead of every single tech /product evolution cycle and always be the best .
While it is hard to guess correctly when that will happen as it did in 90s , but it will always inevitable sooner or later .
——
The growth of U.S. economy post ww2 and importantly post Bretton woods have been phenomenal is very true, however were already a powerhouse , the preceding 300 hundred years have also been explosive growth catching one wave after after .
Largely thanks to immigration of some form or other .
Modern America has always been built on the backs and hard-work of immigration. First European settlers fleeing stagnant economies, actual slavery for a while, economic slavery? of poor driven by famine or lack of opportunity later like the Irish wave or Chinese etc, then those affected by various wars, and most recently top talent from most countries in the world .
It has always been exploitative even now it is , most immigrants legal or illegal are paid less than their peers for example
Illegal immigration is more well known on how they are paid less, even In legal work visas like say H1B changing companies is hard because out of work even for a week you to leave the country immediately, changing employers also affects the Permanent residency qualifications, so people on those visas move jobs less, on average get 10-20% less and have lesser negotiating power, companies know this and use those visas as cost saving technique.
Despite all the problems around immigration, U.S. still remains the country most open to immigration , few countries come close to the volume of immigration legal and illegal U.S. supports, and path to citizenship .
Japan is other end of the spectrum in terms of immigration, which for the economy is a big problem because of such aging population.
And before the peak it was the greatest asset bubble of all time! "A $100,000 investment in Japanese large cap stocks in 1970 would have turned into $5.7 million by 1989." [0]
Could this be the exception that proves the rule? I have never seen any example used for this argument except Japan. That makes it seem like the situations that generated that crash and continued loss are pretty unusual. At some point, it becomes difficult to make financial plans in order to mitigate a situation this rare.
For a huge portion of people, it is impossible to build wealth on a salary. Investing is basically mandatory unless you want to have a very low budget in retirement and live entirely off social security.
Japan and the US got into a trade war; it’s a special situation for them. Absent getting a bloody nose from an economic giant, they would have done well
> Absent getting a bloody nose from an economic giant, they would have done well
I don't know any economic historian with expertise in Japan who believes that.
Their bubble basically puts all other bubbles to shame. The land under the Imperial Palace really was worth more than all the real estate in California at the peak. Japan was destined to have an epic crash of equal proportions to the size of their bubble, any US actions notwithstanding.
The bubble reached evaluations virtually impossible to meet, true, but the US torpedoing the largest semiconductor and electronics company in the world certainly was a contributing factor.
If the measuring stick you use is getting shorter every year by design (monetary expansion/inflation) then you can be quite certain that the market will trend upwards for as long as you use that unit of measure.
S&P 500 growth has historically outpaced inflation by 6-7% annualized over the ~65 years of its existence. That cannot be explained solely due to central bank policy and/or inflation. Naive extrapolation would posit that keeping your money in this index would continue to stay far ahead of inflation given sufficiently long horizons [0].
If your goal is simply to keep up with inflation, then buy I bonds.
[0] The aphorism that comes to mind here is that "the markets can stay irrational longer than you can stay solvent".
I bonds are great right now. But you can only purchase $10,000 per year ($15,000 if you finagle your taxes right). I wish my IRA had an I bonds-like product I could invest in.
It's also the same reasoning used by a Thanksgiving Turkey.
The farmer has always come in and given the turkey food, so logically he will continue to do so. And it is true. Until it isn't. But the cost of that one day when it isn't is very high for the turkey.
I don’t think that interpretation of the metaphor is intended. Just that something good can happen many times and be followed unexpectedly and suddenly by something bad.
And that's why i said the analogy is not illustrative of anything - because you dont know the future at all, and there's no precedent for that bad future. You don't prepare for such a future at the cost of the current time.
If you switched the turkey to a pet cat, would the analogy still make sense?
Given that global warming will cause the global economy to contract one way or another within the next 100 years (either we willingly contract to soften the blow, or keep going and producing more greenhouse gases until a massive crash), I really don't think this is the right time to think in these terms.
I believe the latest IPCC report on climate change expected outcome even for the worst scenario had a noticeable decrease in the rate of growth of the global economy - not a contraction, just slower growth. We do not seem to be on track for a global contraction of economy, not even in the face of climate change.
And economic growth is already (though not that recently) somewhat decoupled from growth in greenhouse gas emission, so any actions taken to reduce climate consequences do not have to be at the cost of stopping global growth, much less intentionally contracting global economy; and in fact the only actions likely to be taken in practice are those which don't stop economic growth - the general population, especially those in poorer countries (even those directly harmed by climate change) will not accept that cost.
> I believe the latest IPCC report on climate change expected outcome even for the worst scenario had a noticeable decrease in the rate of growth of the global economy - not a contraction, just slower growth. We do not seem to be on track for a global contraction of economy, not even in the face of climate change.
The reports do talk about economic contraction after the year 2050 if we don't reach the 2 C temperature goals. They also don't model the likely resource wars that will happen if large parts of Bangladesh, India, Pakistan, Mexico etc will become uninhabitable by the end of the century, due to rising temperatures and water levels.
> And economic growth is already (though not that recently) somewhat decoupled from growth in greenhouse gas emission, so any actions taken to reduce climate consequences do not have to be at the cost of stopping global growth, much less intentionally contracting global economy
The IPCC reports says that GHG emissions increase is mostly proportional to GDP increase throughout all regions, with a significant, though smaller, contribution from population increase. It's also notable that GHG emissions continue to increase - we are not anywhere near a plan for net 0, and nothing suggests so far that we are even likely to start reducing GHG emissions, globally or even in any particular region.
Why can't technological advancement stave off climate change damage? Why cant renewables replace fossil fuels, and continue human expansion? Why can't space exploration and settlement be where the future growth occurs?
> Why can't technological advancement stave off climate change damage?
What technology in particular could stop the oceans from rising and swallowing much of today's southern coastlines, and what technology in particular could reduce wet-bulb temperatures across most of the world's south below 50C, the point where healthy adult humans with access to infinite water will die of heat stroke?
> Why cant renewables replace fossil fuels, and continue human expansion?
Because renewables are not reliable, rely on rare metals, and can't replace the huge amount of energy produced by oil. Someone was making a calculation the other day that replacing the entire fleet of vehicles in the USA with electrical cars would require doubling the electricity production of the states. Do you really think that's possible in 50 years, while also replacing all gas and coal plants with renewables?
Also, there are huge areas of industry that use oil or natural gas for many reasons other than energy - plastics, synthesizing NH3 for fertilizer and other uses.
> Why can't space exploration and settlement be where the future growth occurs?
Because we are nowhere near having the technological advancement needed for space settlement that would do anything other than cost resources. Perhaps there is some small chance of having a research base on Mars or the Moon within the next 50 years, akin to the ISS, but ideas of "colonizing Mars" are beyond sci-fi at this point. We couldn't even colonize Antarctica with current technology.
Besides, there's nothing on Mars that we don't have much more easily accessible on Earth - no rare metals, no crop fields, no spices, no native workers we could import as slaves, no cotton or anything that could even conceivably resemble the existing reasons for colonization. And lest you think anything else, there is nothing we can conceivably do to the Earth that would make it anywhere near as inhospitable as Mars. Even the worse possible consequences of a Nuclear War would not leave Earth as radioactive, poisonous, cold, or otherwise inhospitable as Mars is today.
10 years ago, no one would predict that the cost of solar would drop by 80%-90%. There's still a lot of untapped potential in other forms of renewables too. The current bottleneck of batteries might be solved, i'm sure, in the near future.
There's a lot of pessimism among the media. I, for one, am hopeful.
We are far from the limits of thermodynamics. You'd have to wait till nearer to the heat death of the universe for that to have an effect on the economy.
Only for gasoline engines. And the efficiency limit isn't the limit of possible sources of energy for work. Future engines could be electric, and the power source could be fusion.
With electric vehicles, you reach the problem of fuel weight. There is simply no realistic battery chemistry that comes close to the specific energy of oil-based fuels (J/kg). Gasoline (oxidation) is at 46MJ/kg, while a Li-Ion battery has at best ~0.9MJ/kg or so. Even a Zn-Air battery has a theoretical maximum specific energy of ~5MJ/kg, an order of magnitude less than gasoline oxidation.
You need huge increases in engine efficiency to make up for the extra weight. This is the reason why there are no electric cargo transporters so far - you may not care so much if your personal car is heavier, but a truck or cargo ship definitely cares.
Edit: Perhaps a car-sized fusion power generator is possible in some far future technology, but we are enormously far from that. At a minimum, it would require achieving fusion with materials that don't generate neutrons as a by-product, as those are enormously radioactive, and very hard to shield (read: have to be bulky). Things like deuterium-deuterium fusion are far out of reach at the moment, requiring much higher temperatures than we can currently achieve.
fusion takes is to a straight line to exceeding capacity of the planet to radiate waste heat fast enough to keep it habitable. free energy is self destruction. still better than fossil fuels, though.
electric engines require batteries and batteries are super duper enviromentally expensive to make at scales needed right now, let alone the 10y forward predictions.
Global warming is extremely likely to lead to large areas that are well populated today becoming uninhabitable in the next 100 years - either through oceans rising or through extreme heat. This will likely lead to huge migrant crises - not hundreds of thousands, but tens of millions leaving places like Bangladesh. This in turn is very likely to lead to wars and other forms of extreme events. A world at war is very likely to stop growing economically, and we may not be able to require from a nuclear war the way we did after WW2.
> Ah yes, the good ol' "time in market beats timing the market".
In the context of this article, buying the dip is a form of timing the market.
Consider instead the effect of time in market via the standard 401k model: You buy $250 of QQQ at the opening price on the 5th trading day of every single month, and you start in April of 2000 - the first month after that QQQ high mentioned in the article.
By January of 2004, you have a positive total return (which sucks). Your total return stays at less than ~20% all the way until 2006 (which sucks). You would get hit hard again in 2008, but by mid-2009 you are back to being positive. You hit a 100% return in 2013 (that took a really long time!). The next doubling is 2017 and the next is in 2020. In November 2021,you are sitting at very close to a 600% total return, but as of right now it is back down to ~450%.
Your $250 per month totals ~$66k and has a present value of ~$360k. That really isn’t so bad for being the worst case scenario the author could find ;)
PS - this does not consider dividend reinvestment, but QQQ doesn’t pay much in the way of dividends.
Past 100 years also tell us that there will be world wars, empires will go bust and some nations/people will be uprooted and have to migrate. That's a lot of uncertainty to bear, of course, and history does not predict what happens in the future. It just tells us something will hit us and we probably won't see it coming (paraphrasing Dan Carlin).
> Ah yes, the good ol' "time in market beats timing the market"
> Of course, that assumes that markets trend upwards
Market will trend upward only with positive demographics... Next 100 years might be rather disapointing for passive investing and "time in the market" types.
Another thing to look at is the CAPE ratio. Even now, it's still above 30. We've gone from around a 37 to a 32. Mean/median is in the 16-17 range. DotCom crash in 1999 topped out at around 44.
The historic average for interest rates is considerably higher than it is right now.
Considering the amount of public debt outstanding - it's extremely unlikely we're returning to those levels of interest rates long-term (short-term I suppose anything can happen).
Interest rates have a huge effect on P/E. I wouldn't expect CAPE to match historic trends if interest rates don't.
US government can’t afford 4%. Rates will rise until something breaks, but 4% will be transitory if it gets there at all. My bet is things break sooner than that.
(1) People were deeply and extremely risk-averse coming out of the 2008 crisis. And now we are _starting_ to see the other end of that spectrum. However, we are still far from the heights/throes of the dot-com boom. Those were some insane times when nothing even mattered.
(2) But keep in mind, the main driver of global economy is still increasing standard of living and middle class. And that’s far from over. We are still roughly 50% into land grab.
(3) If current pace of inflation persists, then you want to be in equities chasing cash flow in enterprises with pricing power. What you don’t want is to stay in cash. It appears counterintuitive because of all the things we experienced in 2000 and 2008. A vast majority of investors still base investment decisions with those two crises in mind. It’s a significant handicap.
Sure but if it's all crashes it will have little effect on the economy. In fact, people expect it to crash and will sit through virtually any dump based on the volatile history.
If current pace of inflation persists, then you want to be in equities chasing cash flow in enterprises with pricing power. What you don’t want is to stay in cash.
And if inflation ebbs, you want the opposite.
Both outcomes are possible. So it's best to hold a well diversified portfolio and not try to time the market. Just rebalance once a year.
> Logically, it seems like Buy the Dip can’t lose. If you know when you are at a bottom, you can always buy at the cheapest price relative to the all-time highs in that period. However, if you actually run this strategy you will see that Buy the Dip underperforms DCA over 70% of the time.
> This is true despite the fact that you know exactly when the market will hit a bottom. Even God couldn’t beat dollar-cost averaging.
> Why is this true? Because buying the dip only works when you know that a severe decline is coming and you can time it perfectly. Since dips, especially big ones, haven’t happened too often in U.S. market history (i.e. 1930s, 1970s, 2000s), this strategy rarely beats DCA. And the times where it does beat DCA require impeccable timing. Missing the bottom by just 2 months lowers the chance of outperforming DCA from 30% to 3%.
The thing about trying to miss the worst days (get out before the dip, get in after), is that the 'best' (recovery) days are often not long after, and if you miss just a few of those your returns get hosed:
> If you missed just the 25 strongest days in the stock market since 1990, you might as well have been in five year treasury notes.
> This is actually a pattern, it turns out. The market’s worst days tend to be followed by its best days, according to research from J.P. Morgan Asset Management.
> If you sell when the markets hit the skids, you’ll likely miss the upside.
[…]
> According to J.P. Morgan’s analysis, the 10 best days over the past 20 years occurred after big declines amid the 2008 financial crisis or the 2020 pullback during the onset of the Covid-19 pandemic.
> This is true despite the fact that you know exactly when the market will hit a bottom. Even God couldn’t beat dollar-cost averaging.
I'm a bit unconvinced by the studies that say this, because I don't think the "buy the dip" strategy they're talking about is the same one that people are running.
The studies describe waiting for a low point in a given year (or even across multiple years!) then lumping in all your money then.
Whereas I think what people actually mean when they talk about buying the dip is shifting their dollar cost averaging buy-in by days, weeks, or at most a few months, while they wait for the market to get spooked.
I don't do this at the moment. I had a "wait for the US president to say something stupid" strategy which seemed to work for a while, but of course I don't really have enough evidence to back that up.
But even if you're just modifying a DCA schedule slightly (buying a little early/more when things feel particularly cheap, or buying a little later/less when things feel expensive) -- doesn't the same problem exist: that those adjustments typically cause a worse outcome than if you didn't apply them?
Maybe some people have a better crystal ball than others, but if we just look at the average case where studies favor vanilla DCA, I have to imagine that the reasons (why DCA wins) will prevail regardless of the extent that they're applied. But if your skill is enough above average that it's helpful to deviate, go for it...
Index investing will work, if you live for a long time. The problems are, we do not live infinitely, and the average person does not have the stomach to see their investment going down for years, unless that investment is small enough to tolerate (in which case it is not enough to make a big difference, for most people).
What I think will work - not claiming that it will actually work - based on history:
Invest in companies that are generating a lot of cash and a lot of profits, have a moat/USP/technology advantage, and are at the forefront of where the world is headed in terms of trends, or at least are following a sustainable trend. Yes, you need to identify the company. Yes, you need to take decisions: INTC vs AMD (1980s), YHOO vs GOOGL (2000s). But it gives you a much better chance of seeing a profit in your lifetime than index investing. You can still index invest, but only an amount you can "set and forget". This gives you the best of both worlds.
Edit: (1) What I posted above is for long periods of no movement of stocks except downwards, as I believe we are going to see. (2) Index investing will work eventually and that is what I said above as well. The point is, the time period required for that. (3) I thought of posting this on my blog tomorrow, but it is past midnight here, and I wanted to see what HNers think. It is interesting to see the different opinions. Time may change some of your opinions (not about "index investing will not work" - that is not what I said above - but rather, about the protection offered by diversification, and what diversification actually means. Also, quoting this part again: "the average person does not have the stomach to see their investment going down for years, unless that investment is small enough to tolerate (in which case it is not enough to make a big difference, for most people)").
Your strategy sounds like "pick winning stocks"? A strategy which has been show to produce (on average) worse returns than index investing.
Index investing has produced a ~200% return in the past 15 years (from 2007 peak to now). Not sure what you mean by "a chance of seeing a profit in your lifetime".
There's a third strategy of "index minus bullshit stocks" where you would include both INTC and AMD stocks for risk hedging, but would leave out things with questionable sustainability like Uber and Netflix that otherwise made it into the index due to the speculative value.
More or less. Of course, I am advocating to leave out any company where it does not fit this criteria: " are generating a lot of cash and a lot of profits, have a moat/USP/technology advantage, and are at the forefront of where the world is headed in terms of trends, or at least are following a sustainable trend".
On other hand it also avoids Tesla when it inevitably crashes to same ballpark as other automotive companies... No I really believe it is nothing special and will eventually come down.
Kind of the opposite of diversification though. Houses burn down and neighborhoods change, sometimes for the worse. I knew someone that bought a house in 1972 for $70,000 and sold it in 2015 for about $70,000. Real estate is not all roses and candy.
All 20-30 years? Believe it or not, the history of investment spans more than the last 25 years. Also, there are some questions regarding the liquidity of ETFs during a major crash/selling session. It’s possible there could be a feedback loop of selling to deal with cashing out that results in price of the ETF going below net asset value.
Index investing has really only existed in common practice since the 1970s. You can simulate back further and do imaginary index investing, but we really only have 50 years of actual history with it. It's a very young experiment.
One thing that a lot of people are worried about is if the surge of people and money getting blindly pumped into broad basket index funds as if it was a savings account (because those have negative real yield) will itself distort the market in weird and unpredictable ways. It's entirely possible that it breaks the entire system and creates the mother of all crashes.
This, pretty much. Whenever a new trend comes up, be it Bitcoin or index investing (both of which are poles apart in terms of risk), passionate people will defend them passionately. Good on you all. I posted it hoping to see HNers' original or novel thoughts about this (along with the expected defending of index investing).
It's pretty tough to figure out if there's over-exposure in index investments, and tougher still to untangle the expected fallout of that problem, if it exists. Some people have talked about it, and have been shouted down of course.
I've done a decent amount of reading on the topic and think I'm barely knowledgeable about the surface of it. I guess that's how it always is, though.
People burying their heads in the sand and thinking that index investing has no hidden black swans are the ones to be most scared of, though.
While I appreciate many of the arguments being made - and there are countless similar situations (nifty 50 anyone) - that nasdaq is not the stock market it’s like 1/3rd of it… pop over to yahoo finance and look at the chart of the Russell 3000 Vs the nasdaq, this is why people recommend diversification…
I recommend reading the book “ Panic: The Story of Modern Financial Insanity” by
Michael Lewis. It’s a series of articles and expert opinions before and after modern market crashes that helps gaining perspective of expert opinions during the ups and downs of the market.
Does anyone have a solid understanding of how QE affects the economy? From what I've read, QE basically stays locked in the financial system as interbank cash. I think this can affect short term interest rates, and therefore affect lending(and money creation by the big banks), but otherwise that money doesn't really drive inflation, at least not directly.
Based on that assumption, the real driver of inflation is the $5.4T in stimulus combined with supply-side shortages.
It's looking to me like inflation is here to stay. On-shoring, demographics(aging boomers), the end of cheap energy and many materials, and other factors seem to be putting the US on a different course than we've been on for ~100 years.
It did spike up inflation when it was introduced and once inflation starts its effects tend to spiral.
Look, we're also coming from years of QE. We've been screwed for years, it's just a matter of understanding when the government won't be able to support this monster they created and let th market correct itself. Instead of a series of small economic crises we'll get a massive one.
Most of our economic crises are caused by governments interfering with the market.
Did it come and "go", though? A lot of that money was earmarked for local and state government programs, and at least from what I'm seeing, a lot of those projects haven't even taken place yet. Our local city hall, for example, is still trying to spend some of the money, which they will be reimbursed for after the projects are complete.
Exactly my thoughts, the author talks about S&P500 initially (which recovered "fairly" quick after the dotcom bubble burst) and then uses a different index to exemplify how the dotcom bubble took long time to recover.
While the peak-to-trough drop wasn't as bad as QQQ's, the S&P 500 still managed to fall something like 40% from its dot com peak in 2000 over two years, and didn't fully recover until 2007. (And of course 2008 sent it right back down again for another five-ish years).
I'd love to better understand how crashes start / propagate. A lot of the discussion seems to talk in slightly binary terms - "bear" vs "bull", "crash" as an on/off state, etc. But if we think inflation and reduced stimulus are going to cause a downturn in the stock market, I assume different sectors / types of companies will get impacted at different times? I'd love to see some theories/discussion of how that might play out. Timing dips might be super hard, but predicting how they play out, once they're underway, might be less difficult
I can't answer the part about what sets off a crash. AFAIK, it seems to vary slightly for each crash. They all share similar valuation problems though. If a company is worth $10 but it's trading for $50 then there's a risk that it will drift back to its intrinsic value in a bear market (aka mean reversion). When the most heavily traded companies are all overvalued then you see a situation where a large market can crash.
As investment firms realize that the investment isn't going through normal volatility, they'll sell off the shares and focus on other types of returns. The same goes for individuals but most will probably move after larger firms. A heavy sell off of a stock can cause the share price to drop. To some extent it probably happens in waves as negative events keep unfolding. That helps set the downward trajectory over the long-term.
Unfolding macroeconomic conditions like raising the federal interest rate will also have an effect like it does now in the current crash. That raises the interest rate for bank loans so consumer and commercial lending slows down. That typically ripples out with knock-on effects for the broader economy. There are other factors at play like inflation and supply chain logistics that have their own knock-on effects too.
There are trends in how to invest during a crash and bear market. Try looking for companies that are trading close to their intrinsic value that also offer a dividend. It's helpful to partition the companies by industry. Some industries are going to be fairly safe like healthcare, utilities, and defensive consumer products (e.g. toilet paper producers). Those companies are going to have steady business whether the market crashes or not.
On the other side of the coin, there are okay sectors and bad sectors. You can check the general valuations across the sector and what's going on across companies. For example, energy companies are hot right now because of oil demand. That's okay because it doesn't track the crash of the larger market. It's heavily dependent on oil value though, good luck predicting what happens to the price of oil over a year out.
A bad investment is something overvalued with bad future prospects. If you know people will be capital constrained and limiting big purchases, then cyclical industries like real estate might not be as good to invest in.
It might be helpful to think about companies in terms of size and market valuation too. A growth stock usually has higher price to book because it's invested in R&D for future growth. They may not be making that money right now but the price is higher because they should at some point if everything works. That hurts when mean regression happens and the market price snaps back to book value. Value companies make money now and have lower price to book. When they go through a bear market they'll be largely unaffected by mean regression and have an easier time getting consistent returns. They usually pay dividends which helps over time too.
I'm not sure if there's any consistent trend with how market cap size works in a crash or bear market. Check out some quarterly or annual economic outlook reports from major investment firms. They'll do the best at analyzing the current risk based on market cap if there is a trend.
Those bear market investment strategies should be put behind the caveat that long-term investing is a better way to go. The market ups and downs smooth out over time so trading based on fundamental analysis of a company usually works out much better than speculating on the current trends. With a long-term mindset you can be less stressed about news since you'll get less caught up with the short-term market conditions. Stay the course and all that.
Buy the dip is always trumped by "don't try to catch a falling knife." If you can't tell the difference (I am not professionally trained to) then it may not be worth the effort.
The problem is of course we don’t know how long bull or bear market will last.
If I was a betting man I would short everything I guess, but I’m not. I’m also sure there are others with way more knowledge on when it’s going to turn around.
But then surely it doesn't matter. To short everything you have to hope it gets worse, but not nuclear war worse. Like just so bad that you can earn a ton of money, but not so bad that the money is useless. Or so bad that the fed decides to intervene as well.
I predicted this bull-to-bear market transition to the day (it started on Sep 27 when the Fed announced rate hikes) and yeah, everything's the opposite.
Starting early is the best way of getting ahead to build wealth, investing remains a priority. The stock market has plenty of opportunities to earn a decent payout, with the right skills and proper understanding of how the market works. You can reach out to Norrel Smith on his email norrelsmith8 @ gmail .com
Can some of you share what are the ways to hedge against tumbling NASDAQ? The article is assuming we swing only a single bat. To me it seems spreading your investment into fixed dollar amount over a period of time is a sensible strategy.
Sorry, the standard of living for the night class has been declining for decades, and the rate of decline accelerating. Anyway, buy the dip works in the bull market and doesn't end up bear market, it's as simple as that.
No technique always works. Buying the dip is just that, a technique, not a promise. This is a single example at a specific (long-term) time-frame with many other factors involved.
At ever dip, it was an open secret the Fed would cut rates and ease again.
At least for now, that game is over. We've had moments in the past when the markets had a similar panic (see 2018), but this period is unique due to the inflationary backdrop. Since 2008 we've never seemed to be able to create significant economic growth or inflation greater. The COVID fiscal canon blew growth and inflation skyward. The fed can't just turn on the printers again or cut rates until we hit proper a proper recession.
That's when you buy the dip.
[0]: https://www.macrotrends.net/2324/sp-500-historical-chart-dat...