The mother of all crashes is coming and it won’t be fun(medium.com)
medium.com
The mother of all crashes is coming and it won’t be fun
https://medium.com/predict/sorry-but-the-mother-of-all-crashes-is-coming-and-it-wont-be-fun-beaa2bc9f96a
196 comments
> The post author frequently compares flow variables (eg earnings, GDP) to stock variables (eg market cap). That’s not necessarily terrible, but the ratio is always sensitive to interest rates (because the stock variable discounts future values of the flow variable, and when rates are low the discounting has less of an effect).
This was an incredibly clear way to put it. I can't believe I haven't thought of it that way before! Thanks.
This was an incredibly clear way to put it. I can't believe I haven't thought of it that way before! Thanks.
> over that 10-20 year cycle the market is always net up
This is simply not true especially if you take inflation into account.
And even more so if you look outside the US (one of the top 1% of market performers over the last 100 years - hindsight bias).
For example Japan total return index had a 30 year drawdown post 1989 even in nominal terms. The US market from 1966-1992 total inflation adjusted return (26 years) was zero. http://www.simplestockinvesting.com/SP500-historical-real-to...
This is simply not true especially if you take inflation into account.
And even more so if you look outside the US (one of the top 1% of market performers over the last 100 years - hindsight bias).
For example Japan total return index had a 30 year drawdown post 1989 even in nominal terms. The US market from 1966-1992 total inflation adjusted return (26 years) was zero. http://www.simplestockinvesting.com/SP500-historical-real-to...
You may be right, but I don't think we should compare ourselves to Japan, or cite them as an example in discussions about economics. Japan's priorities are totally different to most countries. They prefer to work hard at preserving the status quo, than chasing growth and change. Japan has many businesses that are hundreds, even thousands of years old, and still selling the same stuff. Many of these businesses have the same goal; to survive the next 50 years with 2% growth p.a.
Japan is one of the older civilisations with a recorded history, but "thousands of years old" businesses is stretching it more than a little.
Japan (population 125 million) is third in the world in GDP, with China (population over 1 billion) and the US (population 330 million) ahead of it. More remarkably this is from a tectonically unstable, volcanic island chain with limited natural resources, which is in stark contrast to either the US or China. This is probably an underestimate as they have a considerable secondary investment/production effort going on across Asia.
Japan's priorities are the same as everybody else's, they're just rather good at disguising that.
Japan (population 125 million) is third in the world in GDP, with China (population over 1 billion) and the US (population 330 million) ahead of it. More remarkably this is from a tectonically unstable, volcanic island chain with limited natural resources, which is in stark contrast to either the US or China. This is probably an underestimate as they have a considerable secondary investment/production effort going on across Asia.
Japan's priorities are the same as everybody else's, they're just rather good at disguising that.
From the years living in Japan I think the previous poster is right on a cultural level.
I mean if you think about it, 6 of the top 10 oldest companies are Japanese [1]. That says something about the value of continuity and stability in Japan's mindset. I don't see that changing any time soon tbh. (And yes, some of them are a "thousand" year old, though of course not thousand"s")
[1] : https://en.m.wikipedia.org/wiki/List_of_oldest_companies
I mean if you think about it, 6 of the top 10 oldest companies are Japanese [1]. That says something about the value of continuity and stability in Japan's mindset. I don't see that changing any time soon tbh. (And yes, some of them are a "thousand" year old, though of course not thousand"s")
[1] : https://en.m.wikipedia.org/wiki/List_of_oldest_companies
Construction company founded 1443 years ago: https://en.wikipedia.org/wiki/Kong%C5%8D_Gumi
>The US market from 1966-1992 total inflation adjusted return (26 years) was zero.
This was during a period when high dividend stocks were in fashion. I'm willing to bet that during that period stocks probably beat almost every other form of investment with regards to profits.
This was during a period when high dividend stocks were in fashion. I'm willing to bet that during that period stocks probably beat almost every other form of investment with regards to profits.
> I'm willing to bet that during that period stocks probably beat almost every other form of investment with regards to profits.
This illustrate why makes me uneasy of current times, that blind faith in the stock market as the ultimate investment. From FIRE communities to r/wallstreetbets to regular retirement to professional fund manager, don't ask question and join the dance, it always was and always will be 6-8% per year, it's a law of nature.
This illustrate why makes me uneasy of current times, that blind faith in the stock market as the ultimate investment. From FIRE communities to r/wallstreetbets to regular retirement to professional fund manager, don't ask question and join the dance, it always was and always will be 6-8% per year, it's a law of nature.
You might want to look at interest rates during that period... especially after 1973.
You are replying with a fixed period that confirms your claim while comment OP was talking about total returns which you can be sure are not zero. If you are handpicking periods you can find a month in the last 2 years that was negative and make a claim that the stock market didn't go up but it did, > 100%.
Real Total return (inflation adjusted, dividends included) of SP500 has been negative in two decades. 1970s and 2000s.
The original claim is 10-20 years. That's a valid ballpark estimate. There can be lost decades, but when you get closer to 20 years, it has been all good.
ps. If you spread the entry into market into 5-10 years there has never been a decade of zero or negative returns (total, inflation adjusted).
The original claim is 10-20 years. That's a valid ballpark estimate. There can be lost decades, but when you get closer to 20 years, it has been all good.
ps. If you spread the entry into market into 5-10 years there has never been a decade of zero or negative returns (total, inflation adjusted).
While I mostly agree with and everything you say is factual, the danger always lurks where you are not looking.
As we know from the past, systemic risk grows somewhere without good statistics.
FINRA Margin Debt shows $940 Billon. There is an additional shadow margin of unknown size. Margin debt, shadow margin, taking loans against properties and buying stocks, ... the size of leverage may surprise us.
There may be even larger systemic risk in the corporate debt market. The liquidity of high-yield is questionable and rating agencies (again) seem to be again part of the problem in rating junk as BBB. Bond market is not as boring as it used to be.
FINRA Margin Debt shows $940 Billon. There is an additional shadow margin of unknown size. Margin debt, shadow margin, taking loans against properties and buying stocks, ... the size of leverage may surprise us.
There may be even larger systemic risk in the corporate debt market. The liquidity of high-yield is questionable and rating agencies (again) seem to be again part of the problem in rating junk as BBB. Bond market is not as boring as it used to be.
I do not mean to be critical, but when you take some view points together that converge on a specific crash with actual factual fundamentals of how it will happen and why it really does not matter that any of that group only predicted it once.
Your conflating it with one data point, as those differing viewpoints that predicted 2008 is in a group is than one data point as they all covered a different mechanism of a set of systems as it was not just one system that crashed but several.
We have the same problem in medicine, ritalin is based on one system solution of ADHD...however if you foloow a multiple system approach you can take Phenyanalinine and Darek chocolate, L-glutamine, etc and actually have a better solution of managing adhd without having to do drug holidays.
Crashes are convergence of several data points of crashes in multiple systems that converge together to produce abig crash.
Is the Log4j vun one tiny crash of one system or a crash of several?
Your conflating it with one data point, as those differing viewpoints that predicted 2008 is in a group is than one data point as they all covered a different mechanism of a set of systems as it was not just one system that crashed but several.
We have the same problem in medicine, ritalin is based on one system solution of ADHD...however if you foloow a multiple system approach you can take Phenyanalinine and Darek chocolate, L-glutamine, etc and actually have a better solution of managing adhd without having to do drug holidays.
Crashes are convergence of several data points of crashes in multiple systems that converge together to produce abig crash.
Is the Log4j vun one tiny crash of one system or a crash of several?
This. More people should realize that the accuracy = hits / shots, and Michael Burry keeps shooting out predictions on a regular basis now.
His "proven track record" would be less than 10%, I'd imagine.
His "proven track record" would be less than 10%, I'd imagine.
I wonder why is there no "market insurance" products/services...
Could be a simple monthly subscription which buys managed basket of options (call on VIX, puts on SP500, Nasdaq, etc)
Or should the average retail investor get into the Black Swan ETF (https://www.amplifyetfs.com/swan.html) or similar to protect against these events?
Could be a simple monthly subscription which buys managed basket of options (call on VIX, puts on SP500, Nasdaq, etc)
Or should the average retail investor get into the Black Swan ETF (https://www.amplifyetfs.com/swan.html) or similar to protect against these events?
Of course there are. You can just buy put options, and if the market goes down, you can exercise or sell them, which limits your downside risk.
Because you would expect to lose money on it? That is, you should expect that in the long run the insurance would cost a little more than the amount it pays out and it sounds like you’d want insurance against losing money in a crash so buying insurance is just losing that money early.
Obviously that’s only true in the long term. There were some times when buying insurance may have been a good idea (eg early 2020) but that’s easier to say in hindsight. If you’re managing savings for a pension then this kind of thing could make sense as you get old because you mightn’t live long enough for the costs to average out. But the normal way to deal with that is adjusting the balance between equities and bonds.
Obviously that’s only true in the long term. There were some times when buying insurance may have been a good idea (eg early 2020) but that’s easier to say in hindsight. If you’re managing savings for a pension then this kind of thing could make sense as you get old because you mightn’t live long enough for the costs to average out. But the normal way to deal with that is adjusting the balance between equities and bonds.
The Black Swan ETF already does it
It's 90% of treasure bonds and some small percent of options
On a bulish market, you loose some performance (insurance costs) for renewing the options
On a bearish market (crash) your bonds loose market value, but the options will go up N amount of times. which will give you overall positive performance.
If the market stagnates, you'll loose money as the options continue to be renewed while the bonds are stable.
And you don't need to allocate all your portfolio to this ETF, can simply combine it with everything else you have. ----
Anyway
I've done this before, I believed the market could become wild
I bought VIX options and got lucky with a 20x score
Obviously this is not that easy or accessible to retail investors (and it's gonna cost at least 100$ monthly)
But if one's to believe we're near the peak, and the crash could be coming any time soon (next couple of months), buying this kind of insurance would make sense (I think about it as Insurance as a Service, because I just want a simple monthly subscription for the work behind the scenes)
It's 90% of treasure bonds and some small percent of options
On a bulish market, you loose some performance (insurance costs) for renewing the options
On a bearish market (crash) your bonds loose market value, but the options will go up N amount of times. which will give you overall positive performance.
If the market stagnates, you'll loose money as the options continue to be renewed while the bonds are stable.
And you don't need to allocate all your portfolio to this ETF, can simply combine it with everything else you have. ----
Anyway
I've done this before, I believed the market could become wild
I bought VIX options and got lucky with a 20x score
Obviously this is not that easy or accessible to retail investors (and it's gonna cost at least 100$ monthly)
But if one's to believe we're near the peak, and the crash could be coming any time soon (next couple of months), buying this kind of insurance would make sense (I think about it as Insurance as a Service, because I just want a simple monthly subscription for the work behind the scenes)
Wow Vix options trades… that’s pretty bold that’s a super complex instrument with some odd rules.
i got the tip from zerohedge lol
in the end it's just another market traded instrument, and you can sell it before expiration for a possibly better price
in the end it's just another market traded instrument, and you can sell it before expiration for a possibly better price
People wanna get rich quickly. Dont want to buy products that underperform SPY because of edging and managing expenses
SPY can crash 50% or more just as likely, therefore why I suggest some sort of "insurance".
Even if SPY would be better than any less diverse or hand picked options from retail under the same crash market conditions
Even if SPY would be better than any less diverse or hand picked options from retail under the same crash market conditions
You can buy "market insurance", but the cost is high.
More complex the product, higher the counterparty risk.
More complex the product, higher the counterparty risk.
>I wonder why is there no "market insurance" products/services...
Paper currency, FDIC insured bank accounts, CDs, TIPS, Treasuries, VCSH…
Biggest of all, having a network of people that can and will help you (such spouse, kids, grandkids, cousins friends, political allies, etc)
Paper currency, FDIC insured bank accounts, CDs, TIPS, Treasuries, VCSH…
Biggest of all, having a network of people that can and will help you (such spouse, kids, grandkids, cousins friends, political allies, etc)
Certainly,
my idea is that if you have a stock portfolio, you could get "insurance" on it
Big banks and investment funds certainty do it, one way or another
I'was simply thinking of a more accessible approach to retail investors
"insurance as a service", pay 50$ per month for protection against stock crashes
Technically, I'm guessing this would not be called "insurance" but a financial instrument or investment which buyers/investors would get benefits under certain conditions.
my idea is that if you have a stock portfolio, you could get "insurance" on it
Big banks and investment funds certainty do it, one way or another
I'was simply thinking of a more accessible approach to retail investors
"insurance as a service", pay 50$ per month for protection against stock crashes
Technically, I'm guessing this would not be called "insurance" but a financial instrument or investment which buyers/investors would get benefits under certain conditions.
> Big banks and investment funds certainty do it, one way or another
I do not know what you mean by this, but hedge funds hedging their positions is not “insurance”.
You cannot earn a return with no risk. If you want to de risk, the counter party is going to want commensurate payment to take on the risk plus a profit premium.
Just like you cannot profit off of auto insurance (unless you have inside knowledge of their premium pricing and can game it), you would not be able to profit off of “insuring” your investments, which would defeat the whole point of investing. At that point, just invest in less risky things, like bonds or cash.
Note that risk has a time component, so risk for an equity index fund for year 0 to 3 will be higher than a bond fund, but for years 20 to 30 it might be basically the same. So insuring yourself against risks for an investment in an equity index fund you do not need for 2+ decades is pointless.
I do not know what you mean by this, but hedge funds hedging their positions is not “insurance”.
You cannot earn a return with no risk. If you want to de risk, the counter party is going to want commensurate payment to take on the risk plus a profit premium.
Just like you cannot profit off of auto insurance (unless you have inside knowledge of their premium pricing and can game it), you would not be able to profit off of “insuring” your investments, which would defeat the whole point of investing. At that point, just invest in less risky things, like bonds or cash.
Note that risk has a time component, so risk for an equity index fund for year 0 to 3 will be higher than a bond fund, but for years 20 to 30 it might be basically the same. So insuring yourself against risks for an investment in an equity index fund you do not need for 2+ decades is pointless.
good point hedging != insurance
this goes to my last point
> Technically, I'm guessing this would not be called "insurance" but a financial instrument or investment which buyers/investors would get benefits under certain conditions.
I would not expect to have this insurance for long periods of time
But could be interesting when it feels like we hit the peak of the market
this goes to my last point
> Technically, I'm guessing this would not be called "insurance" but a financial instrument or investment which buyers/investors would get benefits under certain conditions.
I would not expect to have this insurance for long periods of time
But could be interesting when it feels like we hit the peak of the market
If you are not going to have the insurance for long, then just skip the middleman and buy a bond index fund or treasuries yourself. There is no need for this type of insurance product to exist…since it already exists for cheaper.
They wont' go up in value to make up for your losses in the stock market?
I am not sure which securities you are referring to with “they”.
You only have a loss when you sell a security. So if you are interested in needing to be able to sell securities in the next 3 years, then invest it in a security that will not lose value in the next 3 years, such as bonds or FDIC insured accounts or cash. If you are not selling in the next 3 or 5 or 10 years, then historically, equities do not lose money that far in the future. The further out into the future, the lower the probability of loss.
So you “insure” yourself by making appropriate investments for the appropriate time horizon.
You only have a loss when you sell a security. So if you are interested in needing to be able to sell securities in the next 3 years, then invest it in a security that will not lose value in the next 3 years, such as bonds or FDIC insured accounts or cash. If you are not selling in the next 3 or 5 or 10 years, then historically, equities do not lose money that far in the future. The further out into the future, the lower the probability of loss.
So you “insure” yourself by making appropriate investments for the appropriate time horizon.
with the "official" inflation at 7% that may not be an option
and I'd be interested to compare performance of both approaches (probably you're right, anything else is too difficult or expensive for retail investors and doesn't give extra return)
thank you for the exchange so far
and I'd be interested to compare performance of both approaches (probably you're right, anything else is too difficult or expensive for retail investors and doesn't give extra return)
thank you for the exchange so far
There is: annuities.
> ... if you sit out the cycle because of worries about an upcoming crash you could easily miss out on 5-10 years of great returns.
Returns? Or prices?
Unless you actually cash out you are still supporting the collective delusion. That is true even over booms and busts.
Returns? Or prices?
Unless you actually cash out you are still supporting the collective delusion. That is true even over booms and busts.
I think the point was if you are worried about a hypothetical 50% crash (or whatever number), sitting in cash investments with near zero return isn't necessarily the best strategy. You're much better positioned for a large loss if you are up hundreds of % first (the SP500 is up 300% or so in the past decade).
I know people that have been waiting for a crash for so long that it would take something like a 75% drop in markets to now vindicate their strategy of waiting on the sidelines.
I know people that have been waiting for a crash for so long that it would take something like a 75% drop in markets to now vindicate their strategy of waiting on the sidelines.
> You're much better positioned for a large loss if you are up hundreds of % first (the SP500 is up 300% or so in the past decade).
And to add to this, dollar cost averaging means if you drop from 300% gains to 200% gains (let's say the market drops 100% for a laugh), you're not only still up 200%, but as your (automated) investment strategy continues to buy stocks you're now buying them at a massive discount. When they climb again, you won't be up 300% again, you'll be up closer to 1,000% (a lot, anyway.)
And to add to this, dollar cost averaging means if you drop from 300% gains to 200% gains (let's say the market drops 100% for a laugh), you're not only still up 200%, but as your (automated) investment strategy continues to buy stocks you're now buying them at a massive discount. When they climb again, you won't be up 300% again, you'll be up closer to 1,000% (a lot, anyway.)
The key is not to predict a black swan, but to keep reasoning and awake, trying to figure out where the focus is needed.
I don't value the outcome (you call it luck), but the reasoning behind.
I don't value the outcome (you call it luck), but the reasoning behind.
Thanks for the interesting points, one quick question I don't quite get, you state interest rates are high now but then reference them being 0.25%?
Typo, I meant to say they are low now.
Ok, I've replaced "interest rates are high" with "interest rates are low" in your GP comment. I hope that's what you meant!
Ah, cheers
Thank you for your service. I will be staying the course as always. HODL.
articles like this almost always point to high asset prices as a reason for a coming crash. And also high inflation as a reason for coming deflation. Then throw in some cherry picked data to support their take.
BTW, Michael Burry seems completely unhinged and I can't help but wonder if he just had pure luck.
Any real reasons, like 2008 where people started to realize security products were built on fraud at a massive scale? I mean crypto is a ponzi scheme but when that implodes 1 to 100 years from now, that's not going to make a big denty in the economic
BTW, Michael Burry seems completely unhinged and I can't help but wonder if he just had pure luck.
Any real reasons, like 2008 where people started to realize security products were built on fraud at a massive scale? I mean crypto is a ponzi scheme but when that implodes 1 to 100 years from now, that's not going to make a big denty in the economic
> interest rates are high
Did you mean to say low, or are you talking about nominal rates?
Did you mean to say low, or are you talking about nominal rates?
I meant to say low.
I fixed it (see https://news.ycombinator.com/item?id=29617675). I hope that's ok.
The sub title of the article is "History ain't changed" and the article starts with "In the late summer of 1929 [...]" and I already knew that I shouldn't have read any further.
Yes, there will be a crash, there always is, but it will play out differently than the ones before. History only rhymes, never repeats itself.
There have been calls for a big crash for decades now but no crash in this millennium was the big one.
"The S&P 500 fell 57% during the 2008 crisis, 49% in the dot-com bubble, and 34% during the COVID-19 crash. So if the most pessimistic predictions prove true, the next one would be the most dramatic crash since the Great Depression."
We already had big crashes in the last decades but we always came round (more or less). We are no longer on the gold standard, governments have plenty of experiences with crashes. I'm not convinced that we'll be seeing a crippling crash again.
Yes, there will be a crash, there always is, but it will play out differently than the ones before. History only rhymes, never repeats itself.
There have been calls for a big crash for decades now but no crash in this millennium was the big one.
"The S&P 500 fell 57% during the 2008 crisis, 49% in the dot-com bubble, and 34% during the COVID-19 crash. So if the most pessimistic predictions prove true, the next one would be the most dramatic crash since the Great Depression."
We already had big crashes in the last decades but we always came round (more or less). We are no longer on the gold standard, governments have plenty of experiences with crashes. I'm not convinced that we'll be seeing a crippling crash again.
Market crashes, much like forest fires, used to return things to a baseline. Now that we know how to prevent crashes - and forest fires - we risk creating an unhealthy environment which keeps growing until the inevitable catastrophe, where the underlying forces are beyond our means to control.
To the psychology of "the market always go up" we've now collectively added - through our interconnected hivemind - "buying the dip", and on the opposite end we have inflation coming after those who are more conservative, pushing them into taking uncomfortable risks.
To the psychology of "the market always go up" we've now collectively added - through our interconnected hivemind - "buying the dip", and on the opposite end we have inflation coming after those who are more conservative, pushing them into taking uncomfortable risks.
>... Now that we know how to prevent crashes - and forest fires ...
So we shall read your comment as irony?
So we shall read your comment as irony?
The analogy here is that we knew enough about forest fires to stop them from happening in a way that later on causes much worse catastrophic wildfires. The recent Californian and Australian wildfires were both worsened by previously putting out any and all fires and not letting burn-off of risk (brush/fuel) happen at a manageable scale.
I don't know anything about the stock market, mind. But I get their analogy.
I don't know anything about the stock market, mind. But I get their analogy.
> We are no longer on the gold standard
This is a key thing. A Great Depression-level crash is basically impossible in any modern country with a decent credit rating and even vaguely competent financial management.
This is a key thing. A Great Depression-level crash is basically impossible in any modern country with a decent credit rating and even vaguely competent financial management.
People are also not allowed to trade stocks at such a massive leverage as they did in 1929 (which was the actual reason for crash - massive volume of leveraged trades and thus, margin calls and forced sales).
And investment banks are separated from banks holding people's deposits, so you can be sure your deposits aren't participating in stock trading - especially not leveraged trading. They massively did in 1929, however batshit crazy it may sound today.
Vaguely competent financial management is by no means assured. I suggest reading Tim Geithner's "Stress Test" to to see how hard he had to fight to get some basic things done.
There is the possibility of a debt bomb once we run out of safe assets for QE. That rubber band will snap if you stretch it long enough, and it will snap hard.
Can you elaborate? I'd like to know why this is the case
The Great Depression was caused by the gold standard. The initial crash caused a panic, which caused a run on the banks. Banks did not have the cash on hand to return all deposits, and many failed. This was before the FDIC existed, so when banks failed anyone with outstanding deposits just lost their balance. The ripple effect of this disruption through the economy was dramatic, and caused a deflationary spiral.
- Many companies and individuals had lost their money and desperately needed cash to meet ongoing obligations.
- Many banks had failed, and were not available to make loans.
- Banks that hadn't failed were much more cautious about extending loans.
- Faith in banks had cratered, and people were far less likely to deposit their money in banks, leading to even the banks that wanted to make loans not having sufficient deposits with which to meet demands for loans.
- Without access to loans, many businesses failed, leading to mass unemployment, creating strong downward pressure on wages.
- Large numbers of people lost their jobs and couldn't find new ones. They spent down their savings and didn't deposit any new money in banks.
- etc.
With the value of the dollar rapidly increasing, there was no incentive for banks to loan out their deposits or for investors to risk making investments in a shaky economy. Better to sit on your cash if you had it. This vicious cycle was only eventually broken by the massive federal spending programs of the New Deal, and arguably not until the even more significant spending and hiring programs of WWII.
---
So why was the gold standard at the root of the Great Depression? It allowed what should have been limited to a stock market crisis to metastasize into a depression by toppling banks and crippling the availability of dollars. At that point in time very few people owned stocks, so the blast radius of a market crash should have been very limited. But huge swaths of the economy had exposure to banks, and so bank failures had far-reaching impacts. If the federal government had not been constrained by the artificial limitation of the gold standard, it would have been able to step in and provide a liquidity backstop to prevent banks from failing, preventing a financial panic and the knock-on effect of mass bank failure. This is also why something (exactly) like the Great Depression can't happen anymore, it's impossible in a world where the federal government (or its proxy, the Federal Reserve Bank) can extend loans to tide consumer banks over until panic subsides. A stock market crash will not cause consumer banks to fail, people to lose their deposits, lending to cease, and the economy to grind to a halt.
And we've seen this in action in the great financial crisis. A financial market crisis threatened the stability of banking in general, lending froze up in response to uncertainty about what banks might be insolvent, and the federal government and federal reserve stepped in with loans, bailouts, and forced consolidation of failing banks to mitigate economic disruption, with the result that the impact of the great financial crisis was far less than that of the great depression.
- Many companies and individuals had lost their money and desperately needed cash to meet ongoing obligations.
- Many banks had failed, and were not available to make loans.
- Banks that hadn't failed were much more cautious about extending loans.
- Faith in banks had cratered, and people were far less likely to deposit their money in banks, leading to even the banks that wanted to make loans not having sufficient deposits with which to meet demands for loans.
- Without access to loans, many businesses failed, leading to mass unemployment, creating strong downward pressure on wages.
- Large numbers of people lost their jobs and couldn't find new ones. They spent down their savings and didn't deposit any new money in banks.
- etc.
With the value of the dollar rapidly increasing, there was no incentive for banks to loan out their deposits or for investors to risk making investments in a shaky economy. Better to sit on your cash if you had it. This vicious cycle was only eventually broken by the massive federal spending programs of the New Deal, and arguably not until the even more significant spending and hiring programs of WWII.
---
So why was the gold standard at the root of the Great Depression? It allowed what should have been limited to a stock market crisis to metastasize into a depression by toppling banks and crippling the availability of dollars. At that point in time very few people owned stocks, so the blast radius of a market crash should have been very limited. But huge swaths of the economy had exposure to banks, and so bank failures had far-reaching impacts. If the federal government had not been constrained by the artificial limitation of the gold standard, it would have been able to step in and provide a liquidity backstop to prevent banks from failing, preventing a financial panic and the knock-on effect of mass bank failure. This is also why something (exactly) like the Great Depression can't happen anymore, it's impossible in a world where the federal government (or its proxy, the Federal Reserve Bank) can extend loans to tide consumer banks over until panic subsides. A stock market crash will not cause consumer banks to fail, people to lose their deposits, lending to cease, and the economy to grind to a halt.
And we've seen this in action in the great financial crisis. A financial market crisis threatened the stability of banking in general, lending froze up in response to uncertainty about what banks might be insolvent, and the federal government and federal reserve stepped in with loans, bailouts, and forced consolidation of failing banks to mitigate economic disruption, with the result that the impact of the great financial crisis was far less than that of the great depression.
Pretty sure economists are still debating what caused and ended the Great Depression. Some have ideological incentives to come to the conclusion that the gold standard was to blame and government spending is the answer to all problems.
The active debate surrounds the relative roles that the consumption/investment crisis and monetary supply crisis played in causing and persisting the Great Depression, i.e. which one played the greater role. One group would say that the gold standard was a primary cause, the other would say that it only worsened a situation that was already going to end very badly.
Meanwhile, the actual ideologists are the persistent minor branch of heterodox economists with an ideological incentive to resist any explanation that suggests that the cause was the gold standard or that the fix was government spending (and thus oppose both the consumption crisis and monetary supply crisis explanations), because they hold various libertarian-ish sorts of political views and would like to believe that high government spending and government control of the money supply are both uniformly bad. I get the impression from how your comment is worded that perhaps you endorse the heterodox position on this topic.
The intro to this wiki article has a decent summary of the various positions.
https://en.wikipedia.org/wiki/Causes_of_the_Great_Depression
Meanwhile, the actual ideologists are the persistent minor branch of heterodox economists with an ideological incentive to resist any explanation that suggests that the cause was the gold standard or that the fix was government spending (and thus oppose both the consumption crisis and monetary supply crisis explanations), because they hold various libertarian-ish sorts of political views and would like to believe that high government spending and government control of the money supply are both uniformly bad. I get the impression from how your comment is worded that perhaps you endorse the heterodox position on this topic.
The intro to this wiki article has a decent summary of the various positions.
https://en.wikipedia.org/wiki/Causes_of_the_Great_Depression
Interesting read, thanks, but so far I don't get the impression that the gold standard features as prominently in the explanations as you claim?
I don't know enough about the Great Depression to have a good opinion, but the discussion seems to rage on in present times, and there certainly are points of views that I consider unlikely to be correct. As an example, I don't think Krugman's babysitting circle is sufficient proof to bet the fate of nations on printing money.
Economics is also not my specialisation, I only find it interesting.
Science is also not a democracy - scientific truth is not decided by democratic vote, and there are many examples throughout history when the mainstream consensus was wrong. Therefore I admit I find statements like "only ideologists still peddle other theories" a bit odd. Not saying ideology does not affect things, I said so myself. It may be more likely that a theory is affected by ideology than not.
I don't know enough about the Great Depression to have a good opinion, but the discussion seems to rage on in present times, and there certainly are points of views that I consider unlikely to be correct. As an example, I don't think Krugman's babysitting circle is sufficient proof to bet the fate of nations on printing money.
Economics is also not my specialisation, I only find it interesting.
Science is also not a democracy - scientific truth is not decided by democratic vote, and there are many examples throughout history when the mainstream consensus was wrong. Therefore I admit I find statements like "only ideologists still peddle other theories" a bit odd. Not saying ideology does not affect things, I said so myself. It may be more likely that a theory is affected by ideology than not.
> Interesting read, thanks, but so far I don't get the impression that the gold standard features as prominently in the explanations as you claim?
To preface this, I think a combination of the two mainstream proposals (Keynesian, Monetarist) provide the best explanation, rather than an either/or approach.
* https://en.wikipedia.org/wiki/Causes_of_the_Great_Depression...
* https://en.wikipedia.org/wiki/Causes_of_the_Great_Depression...
The Keynesian and Monetarist explanations are slightly different, but both point fingers at insufficient money supply. But why was the money supply insufficient? Well, because of the gold standard. The federal government would trade dollars for gold at a fixed conversion rate, so the supply of dollars was fixed against the supply of gold that the treasury was holding. As demand for dollars grew faster than the treasury could expand its gold reserves, deflation happened. As banks started to fail the need to keep the money supply proportional to the gold reserves prevented the Federal Reserve from creating money to extend loans to failing banks, touching off waves of failures and economic crisis. And then with the economy stagnated due to demand shocks, business failures, and unemployment, the need to keep the money supply proportional to the gold reserves prevented the Federal Reserve from creating money to loan to the federal government to boost spending. Instead the federal government raised taxes to strengthen government finances, taking even more money out of the economy at a critical time, because it could not originate money without buying gold from somewhere, and nobody was selling, including other countries that themselves needed gold for their gold-backed currencies. (The money shortage was at this point basically global.)
It wasn't until FDR suspended redemption of dollars for gold and forced everyone with gold to turn it over to the treasury in exchange for dollars that the money supply could be meaningfully expanded (and then only in proportion to the amount of surrendered gold). Then, with the nation's stock of gold under the control of the treasury and redemptions of dollars for gold suspended, the federal government could go about meaningfully expanding the money supply, which it did by announcing that the value of gold had increased from $20/ounce to $35/ounce, which allowed the federal government to issue 70% more dollars, since the money supply was still actually restricted to the amount of gold held by the treasury. (Though if the government owns all the gold, and doesn't actually allow redemptions of dollars for gold, and gets to set the price of gold, you basically have a fiat currency with additional steps).
To preface this, I think a combination of the two mainstream proposals (Keynesian, Monetarist) provide the best explanation, rather than an either/or approach.
* https://en.wikipedia.org/wiki/Causes_of_the_Great_Depression...
* https://en.wikipedia.org/wiki/Causes_of_the_Great_Depression...
The Keynesian and Monetarist explanations are slightly different, but both point fingers at insufficient money supply. But why was the money supply insufficient? Well, because of the gold standard. The federal government would trade dollars for gold at a fixed conversion rate, so the supply of dollars was fixed against the supply of gold that the treasury was holding. As demand for dollars grew faster than the treasury could expand its gold reserves, deflation happened. As banks started to fail the need to keep the money supply proportional to the gold reserves prevented the Federal Reserve from creating money to extend loans to failing banks, touching off waves of failures and economic crisis. And then with the economy stagnated due to demand shocks, business failures, and unemployment, the need to keep the money supply proportional to the gold reserves prevented the Federal Reserve from creating money to loan to the federal government to boost spending. Instead the federal government raised taxes to strengthen government finances, taking even more money out of the economy at a critical time, because it could not originate money without buying gold from somewhere, and nobody was selling, including other countries that themselves needed gold for their gold-backed currencies. (The money shortage was at this point basically global.)
It wasn't until FDR suspended redemption of dollars for gold and forced everyone with gold to turn it over to the treasury in exchange for dollars that the money supply could be meaningfully expanded (and then only in proportion to the amount of surrendered gold). Then, with the nation's stock of gold under the control of the treasury and redemptions of dollars for gold suspended, the federal government could go about meaningfully expanding the money supply, which it did by announcing that the value of gold had increased from $20/ounce to $35/ounce, which allowed the federal government to issue 70% more dollars, since the money supply was still actually restricted to the amount of gold held by the treasury. (Though if the government owns all the gold, and doesn't actually allow redemptions of dollars for gold, and gets to set the price of gold, you basically have a fiat currency with additional steps).
Since WWII started, I don't think it automatically followed that leaving the gold standard did the trick. War economics are bound to have had at least some impact.
Also isn't printing money equivalent to raising taxes?
Ultimately, isn't the issue how to distribute and produce goods, not spending in itself? It seems to me there needs to be some indication that spending even helps with the distribution.
I can imagine the economy needing a kickstart like a motor, but whether simply distributing money is sufficient to do that seems not obvious.
Also couldn't people still get into debt, no matter how high the monetary supply? Like if the government says "build this bridge for us, and we owe you 100000$", what does it matter if the 100000$ are backed in gold or not?
Also isn't printing money equivalent to raising taxes?
Ultimately, isn't the issue how to distribute and produce goods, not spending in itself? It seems to me there needs to be some indication that spending even helps with the distribution.
I can imagine the economy needing a kickstart like a motor, but whether simply distributing money is sufficient to do that seems not obvious.
Also couldn't people still get into debt, no matter how high the monetary supply? Like if the government says "build this bridge for us, and we owe you 100000$", what does it matter if the 100000$ are backed in gold or not?
> Since WWII started, I don't think it automatically followed that leaving the gold standard did the trick. War economics are bound to have had at least some impact.
Banking panics and deflation ceased in 1933/1934 with FDRs gold-confiscating shenanigans, and at that point things started to recover, which was well before WWII.
> Also isn't printing money equivalent to raising taxes?
No, because creating money expands the money supply and raising taxes does not.
> Ultimately, isn't the issue how to distribute and produce goods, not spending in itself?
The Keynesian approach says that government spending is necessary to restore the confidence of businesses that demand will be high, so that private investment will resume, businesses will hire, and unemployment will fall. Once velocity is restored to the cycle of businesses earning money and using it to pay wages, the government can step out of the picture as the workers with their wages will take up the demand slack. Per this argument, what goods are being created and distributed doesn’t actually necessarily matter, which is why even government spending on economically worthless things like war equipment (much of which was abandoned in Europe as not worth bringing back after the war) will still work.
> Also couldn't people still get into debt, no matter how high the monetary supply? Like if the government says "build this bridge for us, and we owe you 100000$", what does it matter if the 100000$ are backed in gold or not?
Not if the government won’t deficit spend, and doesn’t have an institution to borrow from that can loan money by creating it rather than borrowing it.
Banking panics and deflation ceased in 1933/1934 with FDRs gold-confiscating shenanigans, and at that point things started to recover, which was well before WWII.
> Also isn't printing money equivalent to raising taxes?
No, because creating money expands the money supply and raising taxes does not.
> Ultimately, isn't the issue how to distribute and produce goods, not spending in itself?
The Keynesian approach says that government spending is necessary to restore the confidence of businesses that demand will be high, so that private investment will resume, businesses will hire, and unemployment will fall. Once velocity is restored to the cycle of businesses earning money and using it to pay wages, the government can step out of the picture as the workers with their wages will take up the demand slack. Per this argument, what goods are being created and distributed doesn’t actually necessarily matter, which is why even government spending on economically worthless things like war equipment (much of which was abandoned in Europe as not worth bringing back after the war) will still work.
> Also couldn't people still get into debt, no matter how high the monetary supply? Like if the government says "build this bridge for us, and we owe you 100000$", what does it matter if the 100000$ are backed in gold or not?
Not if the government won’t deficit spend, and doesn’t have an institution to borrow from that can loan money by creating it rather than borrowing it.
"Banking panics and deflation ceased in 1933/1934 with FDRs gold-confiscating shenanigans, and at that point things started to recover, which was well before WWII."
Maybe all the bad banks had been consolidated by then, after years of Depression?
"No, because creating money expands the money supply and raising taxes does not."
But why would money supply matter - you can simply raise the value of the existing supply to the same effect? What does "money supply" mean, the number of coins?
"The Keynesian approach "
yeah but that is "just" the Keynesian approach. I know he is popular, but that doesn't make it automatically correct.
For starters, why does "economy" even depend on a government? It sounds like a special case where a meddling government is present.
"Per this argument, what goods are being created and distributed doesn’t actually necessarily matter, which is why even government spending on economically worthless things like war equipment (much of which was abandoned in Europe as not worth bringing back after the war) will still work."
You have to admit it does sound slightly crazy, though? Interesting point about the useless war equipment, but again it seems like that is not the only thing war does. Maybe it simply took millions of otherwise useless workers out of the picture by killing them, for example? There seem to be more aspects to war than useless spending. "Confidence" may have risen by winning the war, too, not just by government spending?
After all, if the government spends too much, then trust in the money is also being eroded.
"Not if the government won’t deficit spend"
But then you can't say it is the gold standard, but the unwillingness to deficit spend?
Maybe all the bad banks had been consolidated by then, after years of Depression?
"No, because creating money expands the money supply and raising taxes does not."
But why would money supply matter - you can simply raise the value of the existing supply to the same effect? What does "money supply" mean, the number of coins?
"The Keynesian approach "
yeah but that is "just" the Keynesian approach. I know he is popular, but that doesn't make it automatically correct.
For starters, why does "economy" even depend on a government? It sounds like a special case where a meddling government is present.
"Per this argument, what goods are being created and distributed doesn’t actually necessarily matter, which is why even government spending on economically worthless things like war equipment (much of which was abandoned in Europe as not worth bringing back after the war) will still work."
You have to admit it does sound slightly crazy, though? Interesting point about the useless war equipment, but again it seems like that is not the only thing war does. Maybe it simply took millions of otherwise useless workers out of the picture by killing them, for example? There seem to be more aspects to war than useless spending. "Confidence" may have risen by winning the war, too, not just by government spending?
After all, if the government spends too much, then trust in the money is also being eroded.
"Not if the government won’t deficit spend"
But then you can't say it is the gold standard, but the unwillingness to deficit spend?
> Maybe all the bad banks had been consolidated by then, after years of Depression?
Sure, maybe after 4 years of issues things just happened to naturally get better right when the federal government carried out a targeted intervention.
> But why would money supply matter - you can simply raise the value of the existing supply to the same effect?
This is called deflation, and tends to both cause and worsen economic contractions for reasons discussed previously.
If all financial obligations happened to somehow be pegged to inflation, then the actual money supply wouldn’t matter. But the purpose of a currency is denominating prices and debts, so it does matter.
> What does "money supply" mean, the number of coins?
Literally the number of dollars that exist. At that point in time this would have been the sum of all cash and all bank accounts balances.
> yeah but that is "just" the Keynesian approach. I know he is popular, but that doesn't make it automatically correct.
Profound insights today in the HN comments section.
> For starters, why does "economy" even depend on a government?
Perhaps look into Locke or Hobbes for some background here. Economic activity is for the most part predicated on some concept of property rights, which are a legal construct and thus predicated on the existence of a government and its monopoly on the use of force.
> You have to admit it does sound slightly crazy, though?
Does it? The argument isn’t that paying people to dig holes and fill them back in (or build warships and sink them in the ocean) creates economic value, only that it creates demand, which is self-evidently true.
Usually, demand from workers earning wages drives businesses to supply goods, so an economy generally sits at a supply/demand equilibrium. But a bunch of people who are unemployed and have no money do not contribute to demand. A negative demand shock can cause an economy to contract to a new lower equilibrium. A positive demand shock can drive it back to a higher equilibrium.
> But then you can't say it is the gold standard, but the unwillingness to deficit spend?
Deficit spending doesn’t expand the money supply if the government has to borrow to spend, it just draws money out of the private sector. Hence we’re back to the gold standard as the root of the problem.
Sure, maybe after 4 years of issues things just happened to naturally get better right when the federal government carried out a targeted intervention.
> But why would money supply matter - you can simply raise the value of the existing supply to the same effect?
This is called deflation, and tends to both cause and worsen economic contractions for reasons discussed previously.
If all financial obligations happened to somehow be pegged to inflation, then the actual money supply wouldn’t matter. But the purpose of a currency is denominating prices and debts, so it does matter.
> What does "money supply" mean, the number of coins?
Literally the number of dollars that exist. At that point in time this would have been the sum of all cash and all bank accounts balances.
> yeah but that is "just" the Keynesian approach. I know he is popular, but that doesn't make it automatically correct.
Profound insights today in the HN comments section.
> For starters, why does "economy" even depend on a government?
Perhaps look into Locke or Hobbes for some background here. Economic activity is for the most part predicated on some concept of property rights, which are a legal construct and thus predicated on the existence of a government and its monopoly on the use of force.
> You have to admit it does sound slightly crazy, though?
Does it? The argument isn’t that paying people to dig holes and fill them back in (or build warships and sink them in the ocean) creates economic value, only that it creates demand, which is self-evidently true.
Usually, demand from workers earning wages drives businesses to supply goods, so an economy generally sits at a supply/demand equilibrium. But a bunch of people who are unemployed and have no money do not contribute to demand. A negative demand shock can cause an economy to contract to a new lower equilibrium. A positive demand shock can drive it back to a higher equilibrium.
> But then you can't say it is the gold standard, but the unwillingness to deficit spend?
Deficit spending doesn’t expand the money supply if the government has to borrow to spend, it just draws money out of the private sector. Hence we’re back to the gold standard as the root of the problem.
It's more likely that the cause was that governments failed to respect the gold standard. There was way more money in the system than there was gold backing it. Like any centralized monetary system, it couldn't resist the temptation to create money from thin air.
The Fed started printing fiat money in 1914. This results in inflation. However, gold does not inflate, and the fiat money was, by law, exchangeable for gold at a fixed rate.
By 1929, people finally realized that they could double their money by cashing in their dollars for gold. Hence the runs on the banks, which only stopped when FDR repudiated the gold backing.
By 1929, people finally realized that they could double their money by cashing in their dollars for gold. Hence the runs on the banks, which only stopped when FDR repudiated the gold backing.
What you’re saying is flat out wrong, please don’t post things like this… you have a lot of HN karma so people wrongly assume you might have a source. You do not. You’re making up a revisionists rendition of events to fit your narrative. Using the word “fiat” screams “I don’t know economics, but I have the confidence to say I do.” You certainly aren’t telling people with physics backgrounds that they’re wrong or pushing tachyons down their throats.
HN, on both sides, left and right gets economics profoundly wrong as though it was being taught in the year 1850. Its a science, not a belief, you just have to like… you know, put effort into it and your intuition is probably wrong.
HN, on both sides, left and right gets economics profoundly wrong as though it was being taught in the year 1850. Its a science, not a belief, you just have to like… you know, put effort into it and your intuition is probably wrong.
Last time I checked, inflation from 1914 to 1929 had nearly halved the value of the dollar, but the exchange rate of dollars for gold was the same (by law).
You can check inflation 1914-1929 for yourself:
https://www.in2013dollars.com/us/inflation/1914?endYear=1929...
Dollars were exchangeable for gold at $20.67 from 1914-1927:
https://onlygold.com/gold-prices/historical-gold-prices/
Anyone can see this will cause a collapse of the banks. Why do you think FDR suspended gold exchanging? This sort of thing happens every time a country pegs their currency to a fixed exchange rate and then inflates it.
You can check inflation 1914-1929 for yourself:
https://www.in2013dollars.com/us/inflation/1914?endYear=1929...
Dollars were exchangeable for gold at $20.67 from 1914-1927:
https://onlygold.com/gold-prices/historical-gold-prices/
Anyone can see this will cause a collapse of the banks. Why do you think FDR suspended gold exchanging? This sort of thing happens every time a country pegs their currency to a fixed exchange rate and then inflates it.
Apparently gold itself suffered quite the inflation in that timeframe, from 8097 tonnes in 1913 to 16469 tonnes in 1930.
US reserves went from 2293 to 6358 tonnes.
https://www.swcs.com.au/goldreserves.htm#Table1
Scroll down to table 8, sum of the newly mined gold is ~8800 tonnes from 1915-1929.
US reserves went from 2293 to 6358 tonnes.
https://www.swcs.com.au/goldreserves.htm#Table1
Scroll down to table 8, sum of the newly mined gold is ~8800 tonnes from 1915-1929.
Good try! But inflation is not the same thing as an increase in the supply. Inflation is the excess of an increase in supply vs the value in the economy it represents. I.e. you have to discount the increase in supply by the growth in the GDP.
For more evidence, consider the gold bonds. The US government sold gold bonds and dollar bonds. The gold bonds offered a lower interest rate than the dollar bonds, because the buyers trusted the gold more than they trusted the fiat money.
The buyers were right. But the buyers were wrong about trusting the government. FDR repudiated the gold bond contracts, paying the holders off in inflated dollars. They basically stole the money from the bond holders.
This wouldn't have happened if gold had inflated along with the dollar.
For more evidence, consider the gold bonds. The US government sold gold bonds and dollar bonds. The gold bonds offered a lower interest rate than the dollar bonds, because the buyers trusted the gold more than they trusted the fiat money.
The buyers were right. But the buyers were wrong about trusting the government. FDR repudiated the gold bond contracts, paying the holders off in inflated dollars. They basically stole the money from the bond holders.
This wouldn't have happened if gold had inflated along with the dollar.
Sorry for the sloppy language. The question I have is, what is the value of gold relative to other commodities (preferably the same ones that are used to measure inflation of the dollar) in 1914 vs. in 1929. Unfortunately I don't have an idea where to get the data to answer this question.
I found that M2 in 1914 was 24.62, up to 66.61 in 1929. This is quite similar to the increase in gold reserves, not much of a surprise.
Second graph here:
https://www.longtermtrends.net/m2-money-supply-vs-inflation/
I found that M2 in 1914 was 24.62, up to 66.61 in 1929. This is quite similar to the increase in gold reserves, not much of a surprise.
Second graph here:
https://www.longtermtrends.net/m2-money-supply-vs-inflation/
There certainly are a lot of beliefs in economics. It is not as easy to run experiments on economical theories as it is in physics, so saying "it is a science" may give people the wrong impression. I agree it is a science in a way, but not really a hard science like physics or medicine.
Check out the history of pegged exchange rates, and what happens when the values of each side changes.
https://en.wikipedia.org/wiki/Gresham%27s_law
https://en.wikipedia.org/wiki/Gresham%27s_law
Not a very convincing reply. Are you claiming that the printing of money unbacked by gold in a gold standard system didn't matter at all?
Printing of money unbacked by gold in the gold standard system doesn't appear to have been significant, if it happened at all - the amount of gold reserves that the US treasury held and the money supply look like they grew proportionally during the period 1913-1929 [1, 2]. It would be nice to see user WalterBright's citation for this.
Meanwhile, if WalterBright's explanation is to be believed we'd expect it to have manifested as high inflation rates during the period 1913-1929, and spiking inflation during the 1929-1930 economic crisis as everyone realizes that the jig is up and their dollars aren't actually backed by gold and are worth less than expected.
Instead, that's not at all what happens [2]. The inflation rate is all over the place between 1913 and 1929, dramatically positive from 1916 to 1920, dramatically negative from 1921 to 1923, and then relatively stable until the Great Depression, including being slightly negative for the 4 years leading up to the Great Depression. Then the Great Depression hits and inflation becomes dramatically negative. The Great Depression starts in 1929, but FDR doesn't suspend the gold standard until 1933 in the interest of being able to expand the money supply and cause inflation. Inflation finally goes above 0% in late 1933, but even then doesn't spike dramatically - it spends a couple months in the 5% range before falling back and spending the next several years in the 2%-4% range.
So WalterBright's explanation just doesn't line up.
Credit to user the_why_of_y for pulling up sources in a different thread.
[1] https://www.swcs.com.au/goldreserves.htm#Table1
[2] https://www.longtermtrends.net/m2-money-supply-vs-inflation/
Meanwhile, if WalterBright's explanation is to be believed we'd expect it to have manifested as high inflation rates during the period 1913-1929, and spiking inflation during the 1929-1930 economic crisis as everyone realizes that the jig is up and their dollars aren't actually backed by gold and are worth less than expected.
Instead, that's not at all what happens [2]. The inflation rate is all over the place between 1913 and 1929, dramatically positive from 1916 to 1920, dramatically negative from 1921 to 1923, and then relatively stable until the Great Depression, including being slightly negative for the 4 years leading up to the Great Depression. Then the Great Depression hits and inflation becomes dramatically negative. The Great Depression starts in 1929, but FDR doesn't suspend the gold standard until 1933 in the interest of being able to expand the money supply and cause inflation. Inflation finally goes above 0% in late 1933, but even then doesn't spike dramatically - it spends a couple months in the 5% range before falling back and spending the next several years in the 2%-4% range.
So WalterBright's explanation just doesn't line up.
Credit to user the_why_of_y for pulling up sources in a different thread.
[1] https://www.swcs.com.au/goldreserves.htm#Table1
[2] https://www.longtermtrends.net/m2-money-supply-vs-inflation/
Net inflation from 1914-1929 nearly halved the value of the dollar w.r.t. the official exchange rate with gold. I cited this with references.
There's no way you can talk your way out of that.
Pegging a currency against something one has no control over, then inflating the heck out of the currency, always results in a crash. The banks continued to fail until FDR suspended convertibility to gold.
There's no way you can talk your way out of that.
Pegging a currency against something one has no control over, then inflating the heck out of the currency, always results in a crash. The banks continued to fail until FDR suspended convertibility to gold.
Print money, buy assets, raise price floor.
If printing money can resolve all problems, Zimbabwe must have become the strongest nation in the world.
Printing money really isn't that big a problem if you know how to take it back from the public(aka taxes).
In fact if you have a strong enough tax collection system, printing is actually good because it cleans up debt by inflating it, provides liquidity, and has other benefits.
You just need to pull it back from the public intelligently.
In fact if you have a strong enough tax collection system, printing is actually good because it cleans up debt by inflating it, provides liquidity, and has other benefits.
You just need to pull it back from the public intelligently.
DDC (dollar-denominated currency). That’s why. No such thing as a Zimbabwean denominated currency. That the rest of the world uses USD is the reason.
It solves some problems, not all.
They do have the best-performing stock market.
Governments are quite good at managing the financial system with the tools currently in use. But there is a chance that we will see change to those tools.
Like we previously abandoned the gold standard to get to the current system, there is a good chance, that we will need to abandon the current system to get to a post-current system to avoid a "depression-level crash".
What could be the cause for the need to abandon the current system? Well, this is where we go into the realm of prediction. But there are quite some technological tooling to outperform current economic and governmental structures. Those are currently in their infancy, but we will probably be forced to make some serious changes when they reach maturity.
Like we previously abandoned the gold standard to get to the current system, there is a good chance, that we will need to abandon the current system to get to a post-current system to avoid a "depression-level crash".
What could be the cause for the need to abandon the current system? Well, this is where we go into the realm of prediction. But there are quite some technological tooling to outperform current economic and governmental structures. Those are currently in their infancy, but we will probably be forced to make some serious changes when they reach maturity.
> with a decent credit rating
That's the thing... what happens next year when Biden in a lame-duck President and the GOP end up blocking the next debt ceiling raise? The US would then be unable to pay bond coupons which would trigger a default. This would cause America's credit rating to tank.
That's the thing... what happens next year when Biden in a lame-duck President and the GOP end up blocking the next debt ceiling raise? The US would then be unable to pay bond coupons which would trigger a default. This would cause America's credit rating to tank.
The only thing I would say is that goverments have only so many levers they could pull and some of those are already to pulled close to their max capacity.
> Technology stocks turn out to be the most overvalued, with Tesla, Apple, Alphabet, Amazon, Microsoft, and Facebook (now Meta) making up 25% of the index.
Jus because they make a big part of the index doesn't automatically mean they're overvalued. Apple, Alphabet, Amazon, Meta are huge, highly profitable, and with high growth. Their valuations make more or less sense. Tesla is certainly an outlier though, and highly overvalued.
Jus because they make a big part of the index doesn't automatically mean they're overvalued. Apple, Alphabet, Amazon, Meta are huge, highly profitable, and with high growth. Their valuations make more or less sense. Tesla is certainly an outlier though, and highly overvalued.
Correct. The issue is that, for index investors that want statistical robustness, having 25% of your funds in only 6 stocks increases your risk (specifically, your variance.) People who invest conservatively (e.g., are happy with returns of inflation + 5%) would prefer index funds that don't have that issue.
So it is statistically less robust and more volatile to invest disproportionately more in companies that earn more money?
What scale would you recommend using to decide proportionality of one’s investments? The arbitrary number of publicly listed companies? Divvy up between 500 or 3,000? An arbitrary blend of net income and number of publicly listed US companies?
My point is if 6 companies are each growing their profits for 10+years in amounts equal to or greater than profits of entire other industries, you might want to weight it a bit higher.
What scale would you recommend using to decide proportionality of one’s investments? The arbitrary number of publicly listed companies? Divvy up between 500 or 3,000? An arbitrary blend of net income and number of publicly listed US companies?
My point is if 6 companies are each growing their profits for 10+years in amounts equal to or greater than profits of entire other industries, you might want to weight it a bit higher.
> So it is statistically less robust and more volatile to invest disproportionately more in companies that earn more money?
From tone I'm assuming this is a rhetorical question, but I believe the answer is obviously yes?
Statistical variance is orthogonal to profit. You'd do even better by investing all your money in the single highest earning company, but you won't cause it's a huge risk.
I also believe that what scale to use to decide proportionality is not an open an shut case and is actually an important question for each investor.
Not an expert, corrections welcome.
From tone I'm assuming this is a rhetorical question, but I believe the answer is obviously yes?
Statistical variance is orthogonal to profit. You'd do even better by investing all your money in the single highest earning company, but you won't cause it's a huge risk.
I also believe that what scale to use to decide proportionality is not an open an shut case and is actually an important question for each investor.
Not an expert, corrections welcome.
> From tone I'm assuming this is a rhetorical question, but I believe the answer is obviously yes?
No, I meant to bring up how weird it sounds that investing more in businesses that earn more profit is volatile.
> Statistical variance is orthogonal to profit.
I do not know what this means.
> You'd do even better by investing all your money in the single highest earning company, but you won't cause it's a huge risk.
It is a huge risk to invest in the single highest earning company, but that is not what an equity index fund tracking the sp500 or russel 3000 is doing.
What equity index funds are doing is investing money in the entire market, all of the options, at the proportion that everyone else as a collective is investing into them.
If there were a scenario where 99% of the equity index fund was invested in 1 company, then the entire investing world is basically saying the safest investment is only the 1 public company.
What I think you are actually referring to is the volatility of the accuracy of the investing world’s opinion as a whole, or efficient market hypothesis. Which is the basis of investing in index funds (that you know only as much or less than what the entire market knows). If you do not assume that, then index funds do not make sense.
No, I meant to bring up how weird it sounds that investing more in businesses that earn more profit is volatile.
> Statistical variance is orthogonal to profit.
I do not know what this means.
> You'd do even better by investing all your money in the single highest earning company, but you won't cause it's a huge risk.
It is a huge risk to invest in the single highest earning company, but that is not what an equity index fund tracking the sp500 or russel 3000 is doing.
What equity index funds are doing is investing money in the entire market, all of the options, at the proportion that everyone else as a collective is investing into them.
If there were a scenario where 99% of the equity index fund was invested in 1 company, then the entire investing world is basically saying the safest investment is only the 1 public company.
What I think you are actually referring to is the volatility of the accuracy of the investing world’s opinion as a whole, or efficient market hypothesis. Which is the basis of investing in index funds (that you know only as much or less than what the entire market knows). If you do not assume that, then index funds do not make sense.
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Just so people remember history correctly:
1. The Roaring Twenties market peaked in August 1929 with a ~6100 Dow.
2. Market low in November 1929 at ~3800, a ~38% drop. The "big crash" was just ~4400 to ~3800.
3. Then it RECOVERED to ~4700 by March 1930, a ~24% gain.
4. It then dropped over a year to ~3000 by March 1931, a ~37% drop.
5. Then the real crash to ~900 in June 1932, a ~70% additional drop.
People had a LOT of time and a LOT of additional information about the economy to decide to get their funds out of the market.
I have finally drilled into my skull that I am unable to time the markets with reliability. So I hold across corrections. In 1930 I wouldn't have done anything -- I wasn't born yet.
1. The Roaring Twenties market peaked in August 1929 with a ~6100 Dow.
2. Market low in November 1929 at ~3800, a ~38% drop. The "big crash" was just ~4400 to ~3800.
3. Then it RECOVERED to ~4700 by March 1930, a ~24% gain.
4. It then dropped over a year to ~3000 by March 1931, a ~37% drop.
5. Then the real crash to ~900 in June 1932, a ~70% additional drop.
People had a LOT of time and a LOT of additional information about the economy to decide to get their funds out of the market.
I have finally drilled into my skull that I am unable to time the markets with reliability. So I hold across corrections. In 1930 I wouldn't have done anything -- I wasn't born yet.
Agreed, macro predictions are very hard. Much easier to make predictions on individual assets (companies, commodities etc.) and hold long term.
Also, precisely because macro is hard, these analyses often feel superficial.
Inflation, especially if exogenous, can negatively impact the economy but at the same time cash-alternative assets become more attractive. What's the ultimate effect there?
And what about historically low interest rates? Don’t they warrant a shift in investment preferences towards stocks?
Wether a macro prediction turns out to be right or wrong it’s rare to read a deeper argument than “things are too high must go down”.
Also, precisely because macro is hard, these analyses often feel superficial.
Inflation, especially if exogenous, can negatively impact the economy but at the same time cash-alternative assets become more attractive. What's the ultimate effect there?
And what about historically low interest rates? Don’t they warrant a shift in investment preferences towards stocks?
Wether a macro prediction turns out to be right or wrong it’s rare to read a deeper argument than “things are too high must go down”.
Ok, let's assume people were reasonable and liquidated their portfolios after November 1929. Now they have cash, great. I may be wrong but didn't the value of the dollar also crash?
It seems the safest option was to cash out and buy gold or land.
It seems the safest option was to cash out and buy gold or land.
Don't forget to factor in capital gains taxes on selling. This is a strong behavioural influencer. Basically, unless you are very certain of a major downturn in your investment eg. 40%, it doesn't make sense to sell, ever!
Predicting crashes is easy. Since they occur pretty much regularly every 10 20 years. What is hard is finding out when they will occur and what triggers them.
Also there is no one out there who can predict crashes one after the other with accuracy, no matter how right they were in 2008.
Also there is no one out there who can predict crashes one after the other with accuracy, no matter how right they were in 2008.
I'm happy to embarrass my future self with a firm prediction. Nothing in the market will happen that will cause people's quality of life to drop until WW3.
The reason I think that is if the pandemic didn't manage it than nothing short of a global war will be enough to shake people's belief in infinite growth (which is what keeps the market alive).
The reason I think that is if the pandemic didn't manage it than nothing short of a global war will be enough to shake people's belief in infinite growth (which is what keeps the market alive).
"Nothing in the market" is right because climate catastrophe is an externality.
The pandemic caused the market to do well, due to the excess monetary and fiscal stimulus aimed at countering it.
Without the pandemic the market would be lower right now. Of course, the pendulum is about to swing the other way with both fiscal and monetary support ending.
Without the pandemic the market would be lower right now. Of course, the pendulum is about to swing the other way with both fiscal and monetary support ending.
I mean, possibly, but what informational advantage does a random medium blogger have here?
It's statistically likely that there will be one eventually, they seem to be some sort of Poisson process, just as it is likely there will eventually be another earthquake that destroys the Bay Area again. That doesn't mean it can be predicted even to the nearest year.
People were predicting a crash several years before the 2008 mortgage crash, and even so house prices have rebounded since then.
I do regard the arrival of major brands into NFTs and the purchase of crypto-themed sports teams and stadiums as a leading crash indicator, but a lot of people have lost money trying to predict crypto crashes.
It's statistically likely that there will be one eventually, they seem to be some sort of Poisson process, just as it is likely there will eventually be another earthquake that destroys the Bay Area again. That doesn't mean it can be predicted even to the nearest year.
People were predicting a crash several years before the 2008 mortgage crash, and even so house prices have rebounded since then.
I do regard the arrival of major brands into NFTs and the purchase of crypto-themed sports teams and stadiums as a leading crash indicator, but a lot of people have lost money trying to predict crypto crashes.
What says that a crypto crash will affect the regular economy as a whole, though?
I think he may mean that the exuberance going on right now in the crypto and nft markets may be seen as a "top signal" predicting a market crash soon (people moving into riskier and riskier assets usually precedes a crash).
Timing the top of markets is hard though - and while the music is playing you have to dance.
Oh, it most certainly would; it would wipe out billions of dollars of what many people consider part of their wealth. Joe Cryptomillionair spends more of his regular income because he feels rich because of the balance in his crypto wallet, and thus stimulates the economy. Wipe all that out and suddenly a lot of people who were spending a lot of money are scrambeling to pay their morgages, perhaps even having to sell other investments to do so.
Do we have any idea how many people have wealth in Bitcoin etc? I tend to assume if someone is driving a Tesla they bought a bitcoin for ten bucks back in the day, but that's just based on who I have talked to. Is there any good surveys?
well, coinbase claims to have 73M verified accounts [1], so, quite a few?
and anecdotally, yeah, seeing crypto go up has similar impact on me as seeing stocks go up: i feel more comfortable making larger purchases whenever my wealth goes up, doesn’t matter if crypto v.s. equity (if volatility impacts your comfort, then you just cash out your gains and soend those).
[1]: https://www.coinbase.com/about
and anecdotally, yeah, seeing crypto go up has similar impact on me as seeing stocks go up: i feel more comfortable making larger purchases whenever my wealth goes up, doesn’t matter if crypto v.s. equity (if volatility impacts your comfort, then you just cash out your gains and soend those).
[1]: https://www.coinbase.com/about
Yeah, but... There are only 21M BTC ever going to be mined, and at something like 20/40/60K (wild price fluctuations this year) all of those accounts cannot have "fuck you money" in them. It's probably a power law so most people holding BTC don't have even one coin.
So ... it just feels like a sizeable but still very small minority.
So ... it just feels like a sizeable but still very small minority.
i imagine most market holdings follow power laws. or is the stock market different in this way because of more widespread pensions/retirement accounts?
either way, a $2T crypto market (i don't know where GP got $3T from: CoinMarketCap.com lists 2.2T) is substantially smaller than a $50T stock market. Governments can and have just straight up injected that demand equivalent in value to that $2T figure into markets in the past, so if we have a crash localized to crypto, it's not as though govts have no recourse.
either way, a $2T crypto market (i don't know where GP got $3T from: CoinMarketCap.com lists 2.2T) is substantially smaller than a $50T stock market. Governments can and have just straight up injected that demand equivalent in value to that $2T figure into markets in the past, so if we have a crash localized to crypto, it's not as though govts have no recourse.
There have been a ton of them and it hasn't even come close.
It is this it previous metrics never decide next crash. If this was so take out shorts on major market players and get rich. Environment is highly uncertain and those who have introspections make best. Manipulators try to move markets way they want because they already made bets.
These fear based articles have been coming out for years. It’s one of the easy ways to get clicks, I guess.
As a holder of Tesla stock, I do not want to make bad decisions. So I don’t want to shrug off the points being raised. There are no simple explanations. Nobody can predict the future. And whether I like a message or not says nothing about how valid it is.
So I tried to do my homework. I wrote it up here[1], if anyone is interested.
[1] https://leobg.medium.com/should-you-sell-your-tsla-holdings-...
As a holder of Tesla stock, I do not want to make bad decisions. So I don’t want to shrug off the points being raised. There are no simple explanations. Nobody can predict the future. And whether I like a message or not says nothing about how valid it is.
So I tried to do my homework. I wrote it up here[1], if anyone is interested.
[1] https://leobg.medium.com/should-you-sell-your-tsla-holdings-...
"“If the shoeshine boy is giving stock advice,” he thought, “then it’s time to get out of the market.”"
But what if the shoeshine boys say a crash is coming and it's time to get out of the market?
How does one even get out of the market? There seems to be a huge inflation issue going on, so simply exchanging stocks for money does not seem the way to go, either?
But what if the shoeshine boys say a crash is coming and it's time to get out of the market?
How does one even get out of the market? There seems to be a huge inflation issue going on, so simply exchanging stocks for money does not seem the way to go, either?
Evergrande defaulting and impeding omicron couldn't even dent the market. Much less a crash. Those predicting the crash are going to have to play a long long waiting game. Might as well ride the wave.
On the flip side, crypto has been off the peak for a week or two, and I've noticed the price of crypto has an effect on meme stocks (like AMD, Nvidia, Tesla).. I wonder if the end of student debt payment deferment will cause a lot of people to liquidate their investments and cause a big dip..
It's less of a meme than you think. AMD and NVidia are integrated into crypto by the GPU mining and Tesla has lots of Bitcoin.
> meme stocks (like AMD, Nvidia, Tesla)
Uh. What is your definition of a meme stock?
Uh. What is your definition of a meme stock?
How would quantitative easing affect the next crash? It seems like a thing that distinguishes this time from all other ones. Governments have more control over the economy with QE: they can inject liquidity into markets and boost spending whenever this is needed, so economy seems less likely spin out of control during a crash.
Did we learn how to tame and limit the blast radius of crashes or am I misunderstanding QE?
Did we learn how to tame and limit the blast radius of crashes or am I misunderstanding QE?
QE doesn't boost spending directly. QE is about buying bonds, so that there's more money in circulation (and fewer bonds), in the hope that the resulting low interest rate environment will lead to more borrowing and consequently to higher levels of consumption and investment.
Fed cant qe with inflation approaching 10%.
QE actually reduces the amount of money flowing in the economy, not increases it.
What it is is an exchange of assets that pay, say, 2.5% for once that pay federal funds rate. That's a net reduction in income for banks.
QE is just an assets swap attempting to reshape the longer term yield curve that hasn't been pulled down by setting rates near zero. It's got nothing to do with 'injecting money'.
For that you need to look at the fiscal flow data: spending less taxes.
What it is is an exchange of assets that pay, say, 2.5% for once that pay federal funds rate. That's a net reduction in income for banks.
QE is just an assets swap attempting to reshape the longer term yield curve that hasn't been pulled down by setting rates near zero. It's got nothing to do with 'injecting money'.
For that you need to look at the fiscal flow data: spending less taxes.
Alternative explanation: We're looking towards huge amounts of inflation. Stocks are the safest place to stash savings, so are currently at high P/E.
That's the thing, ain't it? If you exit the market for cash during an inflation period you will realize losses of x% per annum. So the question is: Is the current stock bubble driven by inflation expectations?
It doesn't matter. The question is whether we will continue to see high inflation.
Whatever the current perceived cause, if we do see massive inflation then it's not a bubble.
Whatever the current perceived cause, if we do see massive inflation then it's not a bubble.
Either the author really believes this, and so should load up on puts and shorts, or they are just blowing smoke.
I doubt they're willing to bet the money.
I doubt they're willing to bet the money.
The confidence people express in their predictions has an inverse correlation with their willingness to bet on those predictions.
You can’t just bet on a crash, you have to bet that your counterparties will survive the crash and pay you rather than defaulting. Anyone who followed Burry’s story, or the other big shorts, will remember that.
Any retail trader can buy a few puts on SPY for however far out they think a crash is coming
Meanwhile, those who don’t participate in the game are eaten alive by inflation.
That's right. A cash position seems very expensive with high inflation. A tricky time to be investing, as always. Damned if you participate, damned if you don't. Hot tips welcomed.
The conventional wisdom of "buy equities regardless of price" doesn't make much sense to me. I can temporarily convince myself it's the smart thing to do, but the thought of putting my money into stocks just makes me sick for some reason. I can't do it.
I've missed out on a great deal of money hoarding cash instead of stocks, but I have peace of mind. The cost of inflation is worth that to me. I have felt that a crash -- a real crash, i.e. a change in public opinion about the equity markets -- has been just around the corner since 2016. I'm much less worried about the prospect of a dollar crash, even with today's inflation.
This is not investment advice and is only my personal opinion.
I've missed out on a great deal of money hoarding cash instead of stocks, but I have peace of mind. The cost of inflation is worth that to me. I have felt that a crash -- a real crash, i.e. a change in public opinion about the equity markets -- has been just around the corner since 2016. I'm much less worried about the prospect of a dollar crash, even with today's inflation.
This is not investment advice and is only my personal opinion.
Keep in mind it's not a binary choice. You can exchange anywhere between 0 % and 100 % of your savings for some other asset class, like stocks. An extreme position in either direction is probably a mistake, but what about 20 %? 30 %?
The idea is not to get rich quick, nor is it to avoid any risk (because both are statistically impossible.)
The idea is to limit how much a crash of any type hurts, by having some savings also in other types of assets.
So for example, if your savings are $100 and you buy stocks for $30 of that, and the stock market crashes so you're down to $10 in stocks, now you only have $80 in savings. But you can use your cash savings to bootstrap your stock position back to 30 % again. If the market recovers, you get an outsize benefit from that.
(Similarly, if there should be some sort of dollar crash, you can probably use your stock market savings to bootstrap your dollar position again, putting you in a good position for recovery.)
The idea is not to get rich quick, nor is it to avoid any risk (because both are statistically impossible.)
The idea is to limit how much a crash of any type hurts, by having some savings also in other types of assets.
So for example, if your savings are $100 and you buy stocks for $30 of that, and the stock market crashes so you're down to $10 in stocks, now you only have $80 in savings. But you can use your cash savings to bootstrap your stock position back to 30 % again. If the market recovers, you get an outsize benefit from that.
(Similarly, if there should be some sort of dollar crash, you can probably use your stock market savings to bootstrap your dollar position again, putting you in a good position for recovery.)
Bravo. Peace of mind is an indirect cost of investment. I've met a brilliant head of engineering, that told me "I've sold all my stocks/coins so I can stop looking at my phone and reading articles, and I can really focus on what matters". Not having state bonds that allow people face inflation, has a HUge indirect cost: having offices full of nerds looking at stock/coin exchanges. How much human valuable time is now lost on that?
Real Estate - highly leveraged mortgage with a low, 30-year, fixed interest rate. Keep the payment low enough that you're sure you can afford to hold it. The 30 year mortgage rate is still pretty low, especially compared to current inflation. You win on the equity gain, you win on the inflation, and you win on taxes. (given recent trends, laws, and rates)
Edit: this is not investment advice; I am not qualified to give investment advice.
Edit: this is not investment advice; I am not qualified to give investment advice.
In a place where people will want to buy houses for the next 30 years, at an inflation-adjusted price which preserves the value of your investment,
and assumes you've already bought the house or can do so in the near future while mortgage rates remain low, while the struggle is that the cost to get into the market is rising at crazy multiples (30% yoy?)
and assuming enough economic stability that you can be sure to make the payment even if your job moves.
and assumes you've already bought the house or can do so in the near future while mortgage rates remain low, while the struggle is that the cost to get into the market is rising at crazy multiples (30% yoy?)
and assuming enough economic stability that you can be sure to make the payment even if your job moves.
People thought real estate was a can't lose investment back in the run up to 2008 as well. While real estate can be a good investment for many people, a lot of places are well into bubble territory (Canada, Australia, and China come to mind).
I have this exact problem myself. I'm saving quite a bit of money every month but at the same time it's worth less and less. I'm thinking of going to my bank and set up some kind of investment plan but I don't really trust banks, I mean, what's in it for them?
How do we stop this game?
First, don't commit to playing the game. A piece of advice I got (interestingly) from my dentist: "The only things worth putting money into are education and health." So, invest in your (spiritual) well-being and your capacity for relationships and love before anything else.
Possibly a Hinge of History fallacy caused by raised anxiety levels. I suppose this might apply to the majority of contemporary doom predictions from all sorts of subjects.
I've noticed that if I crumple up a piece of paper and shoot it across the room into a trash can, nine times out of 10 I'll miss, and people will chuckle and forget about it in 5 seconds. But one time out of 10 I'll make it, and people will be very impressed and tell me I should play for the local NBA team.
This psychological phenomenon also applies to prediction of stock market crashes.
This psychological phenomenon also applies to prediction of stock market crashes.
Lots of experts have been predicting a crash for at least a few years now, but none of them are saying what's the catalyst. Right now there's a huge inflation, unimaginable valuations, lots of retail investors -- yet nothing has triggered a noticeable reaction.
After reading articles like this you always have to remember that the market can remain irrational longer than you can remain solvent.
After reading articles like this you always have to remember that the market can remain irrational longer than you can remain solvent.
This is what I wonder. In the dot com and 2008 recessions it was fairly obvious what was fueling speculation - websites and real estate. Now…I don’t see it. Crypto, but it feels like it’s not mainstream enough to send economy into tailspin. If bitcoin crashed tomorrow, the economy would probably shrug and say “yea that was expected”.
To be fair, to most people it wasn't fairly obvious before it happened. So it seems like also the next time it will be obvious mainly in hindsight.
They were predicting a crash at the tail end of 2019, pre-COVID-19. None of them predicted what happened next although I bet some will claim March 2020 was what they foretold.
Even if you predict a crash, predicting the bottom is almost impossible. As an example, among many people who had sat on cash during the 2021 March, how many of them actually bought at the bottom?
For layman investor the best course of action is to invest and forget, ideally in a balanced or semi-balanced portfolio.
You don't need to predict the bottom. If you manage to sit out the first 20-30% drop you can probably go back in.
You can use something like https://recessionalert.com/ or a combination of your own signals to time the exit of the market. Of course, it will never be perfect and there will be times where you will get a false positive, but being right most of the time can still massively reduce risk.
Big drawdowns really hurt the geometric compounding of returns. A 50% loss requires a 100% gain to offset.
You can use something like https://recessionalert.com/ or a combination of your own signals to time the exit of the market. Of course, it will never be perfect and there will be times where you will get a false positive, but being right most of the time can still massively reduce risk.
Big drawdowns really hurt the geometric compounding of returns. A 50% loss requires a 100% gain to offset.
Do you have any evidence that your suggestion actually works for real people? All studies on this I've come across say that anyone using common wisdom will both exit and re-enter too late -- i.e. they tend to end up selling low and buying high, and even just holding would be an improvement.
(I'm saying "even just holding" because a constant-fraction rebalanced portfolio is a disciplined way of actually buying low and selling high, and not only in a bear market.
(I'm saying "even just holding" because a constant-fraction rebalanced portfolio is a disciplined way of actually buying low and selling high, and not only in a bear market.
The ERN blog had a few nice posts regarding market timing:
https://earlyretirementnow.com/2018/02/21/market-timing-and-...
https://earlyretirementnow.com/2018/04/25/market-timing-and-...
In the second one he simulates a momentum strategy which does pretty well, which can be used along with multiple other signals to increase confidence.
I was thinking of simulating using leverage after these kind of drops to try to increase returns even further.
https://earlyretirementnow.com/2018/02/21/market-timing-and-...
https://earlyretirementnow.com/2018/04/25/market-timing-and-...
In the second one he simulates a momentum strategy which does pretty well, which can be used along with multiple other signals to increase confidence.
I was thinking of simulating using leverage after these kind of drops to try to increase returns even further.
I was sitting on cash and bought in at the bottom. Although I do this every two weeks automatically. I must be a market expert!
> during the 2021 March
I think you meant 2020 March?
I think you meant 2020 March?
> Predicting the exact moment when a bubble will burst is never easy. Grantham, for example, predicted the 2000 crisis well in advance, but it took almost three years for it to happen.
You'll always have the people standing on top of the soap box predicting the end of the world. They're not wrong. The end of the world will come one day. Its just close to impossible to figure out when.
As the economist Keynes would say, “The stock market can remain irrational longer than you can remain solvent."
Also, considering 2 things: first, timing the market perfectly is near impossible. second, market moves from the bottom left to the top-right of the graph over a very long term. If you are a long term investor, the safest, smartest, best thing you can do is to do nothing.
You'll always have the people standing on top of the soap box predicting the end of the world. They're not wrong. The end of the world will come one day. Its just close to impossible to figure out when.
As the economist Keynes would say, “The stock market can remain irrational longer than you can remain solvent."
Also, considering 2 things: first, timing the market perfectly is near impossible. second, market moves from the bottom left to the top-right of the graph over a very long term. If you are a long term investor, the safest, smartest, best thing you can do is to do nothing.
A recession seems pretty obvious.
And corresponding correction in 2022 if you think through the macro picture logically.
We injected 4T of fiscal stimulus over ~2 years, which is about to completely end over the next two months (though some programs already over).
A large amount of corporate earnings growth was due to distortions in consumer income, which fed into retail sales.
Personal Income: https://fred.stlouisfed.org/series/PI
Retail sales have been about 20% elevated from a very smooth and consistent trend since the pandemic hit: https://fred.stlouisfed.org/series/RSXFS
(This chart alone is enough to understand the inflation situation, the quickness and magnitude of the increase is unreal)
So we inject 4T in stimulus at one pont in time, why would we extrapolate the impact of that in perpetuity? It seems pretty obvious a large portion of that money will end up in low velocity places and thus the higher goods sales won't be maintained.
In the next two months, the child tax credit will expire, and student loan payments will resume. This amounts to close to 30B/month in effective consumer income that will disappear essentially overnight.
There will certainly be a recession/earnings recession next year due to these factors.
An alternative outcome is that the one time fiscal injection led to excess liquidity trading hands, thus we have persistently high inflation and new normal of earnings is maintained through deflated value of currency. But in this scenario the Fed must tighten much more aggressively, which leads to the same result.
There are many perma-bears out there that call doom without sufficiently specific reasoning, but in this case the macro picture looks very clear and easy to predict. The market doesn't appear to be pricing it in, however.
If you disagree, what logical mechanism could explain an alternative outcome?
And corresponding correction in 2022 if you think through the macro picture logically.
We injected 4T of fiscal stimulus over ~2 years, which is about to completely end over the next two months (though some programs already over).
A large amount of corporate earnings growth was due to distortions in consumer income, which fed into retail sales.
Personal Income: https://fred.stlouisfed.org/series/PI
Retail sales have been about 20% elevated from a very smooth and consistent trend since the pandemic hit: https://fred.stlouisfed.org/series/RSXFS
(This chart alone is enough to understand the inflation situation, the quickness and magnitude of the increase is unreal)
So we inject 4T in stimulus at one pont in time, why would we extrapolate the impact of that in perpetuity? It seems pretty obvious a large portion of that money will end up in low velocity places and thus the higher goods sales won't be maintained.
In the next two months, the child tax credit will expire, and student loan payments will resume. This amounts to close to 30B/month in effective consumer income that will disappear essentially overnight.
There will certainly be a recession/earnings recession next year due to these factors.
An alternative outcome is that the one time fiscal injection led to excess liquidity trading hands, thus we have persistently high inflation and new normal of earnings is maintained through deflated value of currency. But in this scenario the Fed must tighten much more aggressively, which leads to the same result.
There are many perma-bears out there that call doom without sufficiently specific reasoning, but in this case the macro picture looks very clear and easy to predict. The market doesn't appear to be pricing it in, however.
If you disagree, what logical mechanism could explain an alternative outcome?
Everyone wants to talk about history as if it's a good indicator of the future: but every moment in history happens only once.
If you expect to make the same returns in 2 years that a past stock market investor would get in 20, you probably should expect to survive as many market crashes as he did, just on a shorter time frame. There is no free lunch, you pay for high returns with high volatility.
If you expect to make the same returns in 2 years that a past stock market investor would get in 20, you probably should expect to survive as many market crashes as he did, just on a shorter time frame. There is no free lunch, you pay for high returns with high volatility.
People throw around “crash” but it’s never defined and I would argue has nothing definition.
A multi-year recession? S&P dropping by 50%?
A multi-year recession? S&P dropping by 50%?
Some brave souls will compare to prior crashes by naming the years. But tying themselves to such also exposes them to ridicule if they get is spectacularly wrong. Financial "experts" only have their reputations to keep them employed so they need to be able to insulate themselves from any narrative.
Everyone predicts crashes all the time; I'm guilty of this myself (I thought it would be 2019). Unless you have a narrow timespan, you will always be right of course. Currently it seems the market sentiment is pretty bearish though, so I guess it's easier to sound credible when being negative.
The scattergun approach will see everybody be right some of the time. It's those experts who say they predicted X but X is irrelevant if we can't compare to Y, where Y is the number of times they've made such claims.
The overwhelming sentiment from the opinions on this thread is that the author is wrong. Is that a sell signal?
Sure, if you think the US government has lost its ability to prop/pump up the prices again, in contrast to the last 20 times.
If I remember Warren Buffet's teachings correctly, that would certainly qualify
Bear in mind that crashes and recessions aren't the same thing. The stock market can go down without anyone losing their jobs, and vice versa.
We saw this with Covid, where GDP dropped but stocks stayed high. So if there is a stock crash it won't necessarily be noticeable for the median person.
We saw this with Covid, where GDP dropped but stocks stayed high. So if there is a stock crash it won't necessarily be noticeable for the median person.
Is there any way to build an economic system without having periodic crashes?
Why would that be a good thing?
The environment is a chaotic dynamic system. There are massive non-linearities, phase shifts, etc, and yes, massive damping feedback loops as well. Don't forget the 2nd order, 3rd order, and 4th order effects.
You could build an economic system which did not have periodic crashes, it just would have to be very limited in scope (by keeping it in a highly controlled and isolated environment) and would thus only have one crash, when the containing vehicle breaks apart.
A one-off is not periodic.
The environment is a chaotic dynamic system. There are massive non-linearities, phase shifts, etc, and yes, massive damping feedback loops as well. Don't forget the 2nd order, 3rd order, and 4th order effects.
You could build an economic system which did not have periodic crashes, it just would have to be very limited in scope (by keeping it in a highly controlled and isolated environment) and would thus only have one crash, when the containing vehicle breaks apart.
A one-off is not periodic.
Humans have experimented with very diverse types of economic systems the last tens of thousands of years, and in all cases we have evidence of, there are recurring periods that could reasonably be called crashes.
Some of the fundamentals make that hard to avoid, I suppose: natural events and people's tendency to self-reinforce behaviour within their groups.
Some of the fundamentals make that hard to avoid, I suppose: natural events and people's tendency to self-reinforce behaviour within their groups.
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Possibly, but it probably won't have many periodic peaks either, and very flat or zero growth.
A lot of people seem to like getting rich even it means some of them wind up poor /shrug
A lot of people seem to like getting rich even it means some of them wind up poor /shrug
"A lot of people seem to like getting rich even it means some of them wind up poor /shrug"
wouldn't be that bad, but replace "some of them" with most of them.
wouldn't be that bad, but replace "some of them" with most of them.
Not if it's run on market principles.
I wonder if they were actually run on market principles would crashes be so bad or big? Or more of corrections of certain sectors.
I don't think so. The problem is that there's always going to be some amount of speculation in a market. And, it's really speculation that drives prices up beyond what they really "should" be, which eventually leads to the correction. If the speculation goes on too long, and drives prices up too high, then you have a "crash." And, absent regulation to the contrary, there's nothing preventing the market from rising too high, too fast (i.e. the market can remain irrational for arbitrary lengths of time, to paraphrase Keynes). OTOH, there doesn't seem too be a sensible way to determine what constitutes speculation, for purposes of constructing a regulation that prevents it.
Whoops. I meant "I do think so" in the first sentence.
I think everyone most everyone agrees with this. The market is cyclical.
The trick is predicting where the top and the bottom are. If you can do that with precision you are a wealthy man.
The trick is predicting where the top and the bottom are. If you can do that with precision you are a wealthy man.
A lot of the speculative/growth stocks took quite a hit recently, down 30% or more in the last few weeks, but that didn't seem to affect the market as a whole that much.
Luckily, because my clients postpone my bills for months and try to settle for less I don’t have to worry about things like being “over invested” or “in a bubble.”
It’s interesting reading analysis on the stock market from someone who doesn’t know what money is nor how it works
Actually right now your average joe is calling an incoming crash. Not a single article out there is bullish.
crash usually come by way of forced selling. "assets" are no longer dependent on human factors like gdp. cloud and datacenter compute used is a better aggregate indicator then gdp. "assets" are growing exponentially and show no signs of slowing down.
Why is this on the front page??
Because people are worried. There have been too many bad omens recently.
There always is and there always will be.
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Medium is like a normal news site, on steroids: almost all you can read there is fear-mongering and anxiety induction, and little else. Without that, people don't click.
Seriously, people who actually decide on whether the crisis will happen (that is, starting with the guys like you and up the value chain), don't make decisions based on that sort of bullshit, they read their news at Bloomberg/AP/Reuters terminals. So it can safely be ignored indeed.
Seriously, people who actually decide on whether the crisis will happen (that is, starting with the guys like you and up the value chain), don't make decisions based on that sort of bullshit, they read their news at Bloomberg/AP/Reuters terminals. So it can safely be ignored indeed.
Fear mongering and anxiety induction are all the rage with the Corona virus and it's variants.
Always goto another source of information and be critical all the time, that helps a lot as you point out.
Always goto another source of information and be critical all the time, that helps a lot as you point out.
UCSF does a Covid Grand Rounds of latest research/science https://www.youtube.com/watch?v=IGspuLnRBB4
I see too many fearless, and too less greedy.
China is already there, delisting stocks from the US, empowering it's currency and improving fast in intelectual property regulation and economics management.
Maybe we won't see crashes, but the big risk is a change of dynamics, a big stocks flat only sustained by inflation that sooner or later could trigger the ultimate shift of mindset, china beeing the right place to invest, yuan the world currency.
I think so too. Increasing money supply for too long devalues that currency, even if its a global currency like usd. In its face a more stable currency will start looking more appealing for trade. This dynamics may take several years to play out though.
There is always someone predicting an upcoming market crash. People like Grantham (cited in the post) have been predicting a mega crash for most of the last decade. Market crashes occur every 10-20 years but the thing is, over that 10-20 year cycle the market is always net up, so if you sit out the cycle because of worries about an upcoming crash you could easily miss out on 5-10 years of great returns.
The post author frequently compares flow variables (eg earnings, GDP) to stock variables (eg market cap). That’s not necessarily terrible, but the ratio is always sensitive to interest rates (because the stock variable discounts future values of the flow variable, and when rates are low the discounting has less of an effect). Market cap/earnings and market cap/GDP are high now because interest rates are low (asp because growth expectations are high, but that’s not necessarily incorrect). Before the dot com crash US interest rates were 6%, compared to 0.25% now — of course that skews the statistics.
Michael Burry is cited as “someone with a proven track record of predicting market crashes” but in fact he predicted exactly one crash. Well, so did John Paulson, and the ensuing decade proved that it was just luck. Mark Cuban “predicted” the dot com crash. It doesn’t mean they are geniuses, it means they got lucky once.
Growth in margin debt is cited as a reason to worry. But margin debt has grown because assets have grown. The S&P 500 has double since the lows of March 2020, so the fact that margin debt has doubled is not a cause for concern. As a percentage of assets, margin debt has been stable for the last decade.
This post is pointless fearmongering, nothing more. Of course, there will be a crash at some point. It could be in six months, a year, five years or ten years. This guy can’t predict it any better than anyone else can.