It's quite clear that the extraordinary actions of the major central banks over the past several years has inflated numerous bubbles. The question is not whether they exist, but how big they can get, how long they can last and how they will pop or deflate.
In other words, precisely timing a bubble's demise and accurately estimating the magnitude of a correction so as to benefit from the correction may be damn near impossible for most of us (markets can remain irrational for longer than men can remain solvent, and all that) but it's quite possible to recognize growing risk that a market isn't pricing in, and adjust your behavior accordingly so that you're less exposed to the risk.
As I said, precisely timing a bubble's demise and accurately estimating the magnitude of a correction so as to benefit from the correction may be damn near impossible for most of us. And even if you do time the market well and have a good sense of the size of a correction, you probably don't have access to the investment instruments that will allow you to reap the greatest rewards.
> I'm genuinely curious if you know anyone who has the ability to do this? If you know someone, I'm putting all of my stock in their company.
What do you mean?
Right now in the Bay Area, you have lots of folks in tech who refuse to recognize that today's hot market is in large part fueled by monetary policy. They assume that they have job security and will always be able to jump to another six-figure job with a phone call or two. As a result, many fail to save. And many spend a very large portion of what they make in unproductive ways because they believe their risk of loss of income is close to zero even though it is actually much, much higher. This[1] is a good example of the mentality that is particularly prevalent amongst younger engineers and entrepreneurs here.
You don't have to be a hedge fund manager to see the froth in the market today, and even if the fun could potentially carry on for years more, any individual in tech in the Bay Area can reduce his or her risk exposure by a) avoiding certain types of employers (even if they pay handsomely today) and/or b) taking the opportunity to save while compensation levels are so high.
I feel like we're talking about two different things here...
You stated:
> it's quite possible to recognize growing risk that a market isn't pricing in
How is this possible? What data, metrics, tools, do you have that shows an increase in risk other than a basic "intuition"? That's my point - if such a tool did exist to the common person (as you suggest, the techie in SV who isn't saving), financial institutions would be all over that. They aren't (but they claim to be)
The blog post you reference, is just one data point. Just because one person feels that way, doesn't mean the whole culture is that way.
> They assume that they have job security and will always be able to jump to another six-figure job with a phone call or two. As a result, many fail to save.
I'm not disagreeing with this sentiment, but we'd both be drawing fairly baseless conclusions. Counter-point - Are there not loads of people who survived the 90's .com boom and making a killing today in SV? (i.e. PG is one example) So why would savings matter then?
> How is this possible? What data, metrics, tools, do you have that shows an increase in risk other than a basic "intuition"? That's my point - if such a tool did exist to the common person (as you suggest, the techie in SV who isn't saving), financial institutions would be all over that. They aren't (but they claim to be).
The challenge is not finding data; the challenge is identifying which data is truly important and allowing yourself to make objective decisions based on the data.
I'll give you a simple example: I am currently short JC Penney through options. Before I took my positions, one of the things I noted was a divergence between what the equities market was saying about the company's prospects and what the credit market was saying about the company's prospects. The credit market was notably more pessimistic about the company's position at the time (obviously measured by the risk of JC Penney defaulting on its debt), and now you see the equities market catching up.
From what I can tell, a lot of folks in Silicon Valley don't even want to look at data. Startups with little to no revenue raising million-plus convertible notes with $5-15 million caps and sub-5% interest rates? And some of them have already raised capital? That's a data point that makes junk bonds yielding 7% look good by comparison.
Nonsense.
It's quite clear that the extraordinary actions of the major central banks over the past several years has inflated numerous bubbles. The question is not whether they exist, but how big they can get, how long they can last and how they will pop or deflate.
In other words, precisely timing a bubble's demise and accurately estimating the magnitude of a correction so as to benefit from the correction may be damn near impossible for most of us (markets can remain irrational for longer than men can remain solvent, and all that) but it's quite possible to recognize growing risk that a market isn't pricing in, and adjust your behavior accordingly so that you're less exposed to the risk.