
Boom in Dodgy Wall Street Deals Points to Market Trouble Ahead - imjk
https://www.bloomberg.com/news/articles/2019-05-16/boom-in-dodgy-wall-street-deals-points-to-market-trouble-ahead
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chewz
> The timing of the IPOs only serves to further stoke the suspicions of those
> Wall Street observers who see a plot to transfer a private-market bubble
> into public hands.

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TAForObvReasons
In a world of ample private capital, there are only two real reasons to IPO:
providing an exit for investors and raising monies that can't be raised in
private. Neither reflect well on the future prospects of the company.

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brycesbeard
A third option - raising capital from a public market may be cheaper
holistically. Perhaps the private money is heavy into competition, and you’re
worries about onerous terms.

I’m sure we could think of other options if we tried really hard.

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johnwheeler
The 2009 fiscal stimulus gave us negative interest rates which fueled high
equity valuations. Add in 2016 US tax law, and that’s why we’re where we are
today.

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snarf21
Agreed. I'm curious how it is all going to break. Is it just the pension funds
that will be left holding the bag? How much of a bailout is going to be
required? It seems like companies are in a cycle of extracting all equity and
selling worse debt to make payments on the already created bad debt.

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jjoonathan
My bullshit theory: it'll break next year because bonus depreciation
effectively boosted this year by borrowing against the next {3,5,7,10}.

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onlyrealcuzzo
Can you ELI5? What's {3,5,7,10}?

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jjoonathan
When a company buys something (a capital expense) they are allowed to deduct
its loss in value from their income every year to reduce their taxes.
Calculating the exact value of things is hard to do without selling them, so
for tax purposes things typically lose some fraction of their initial value
every year. The number of years it takes the item to lose all of its value is
typically 3, 5, 7, or 10 -- or my sample is biased. I am not an accountant.

In any case, the new "bonus depreciation" rules let companies take all of the
depreciation in the first year. Effectively, they were able to shift their
deductions from tax year 2019, 2020, 2021... into tax year 2018. I am sure
many did/will. It's a nice trick to score a quick bump in profit, but it only
works once.

If the market is full of dumb models that inappropriately extrapolate this
bump into future years, the people investing money on the basis of those dumb
models will be disappointed.

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thoughtstheseus
For those that are not as familar with depreciation. You have to pay taxes on
profits, when you buy equipment/machines/buildings/etc. (called PP&E) that
last for many years the tax code forces you to recognize the expense for tax
purposes over the useful life of the asset. So you pay $100 for a new piece of
equipment that will last ten years, every year for ten years you get to
recognize $10 of expenses, so your taxable income is lowered by $10 each year.
The tax law let everyone expense the entire value in the first year, so it
encouraged purchases of PP&E as $1 dollar saved today is worth more then $1
saved ten years from now.

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jimbob45
If I've learned anything about the stock market, it's that no one knows what
it's going to do. The only good plan is to make sure that you're going to be
able to stay afloat if the market tanks tomorrow.

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bryanlarsen
Lots of people know what it's going to do. Nobody knows when it's going to do
it nor the magnitude, so the knowledge is basically useless.

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onlyrealcuzzo
That's functionally equivalent to not knowing what it's going to do.

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RickJWagner
I closely align with 'Boglehead' investing philosophy. This school of thinking
tries to minimize risk by emphasizing consistent investment over time,
avoiding attempts to time the market and pick stock 'winners'.

One of the best parts of Boglehead culture is a set of short, easily
remembered phrases that describe core principles. In this case, I think of the
phrase "Nobody knows Nothing!", which means there has never been anyone who
can consistently tell when the market is about to spike upward or downward.

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faissaloo
I concur, something definitely feels very off recently. The question is what
can we do to ensure our survival?

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neoflex
So... what term put option would be best?

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maxxxxx
I tried to play this game before 2000 and it's amazing how often market can
have an even steeper upturn before it finally crashes.

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pmart123
Susquehanna made a killing during the dotcom crash by selling near-dated
options and buying longer-dated options. Essentially, the majority of the
market was pricing the dotcom crash to be very similar to the 1987 crash.
Instead, it was closer to a slow bleed.

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TheOtherHobbes
The flip side of "The markets can stay irrational..." is "Someone will
probably get lucky anyway. But just because they did, doesn't mean you can
learn anything useful from them."

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AtHeartEngineer
I honestly don't know how we've been in a bull market this long. Trump's been
turning a lot of economic knobs and the market hasn't really responded
drastically like it has in the past. When it does crash, it's going to crash
hard. Just my opinion.

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AznHisoka
Why would it crash hard unless interest rates go up by a significant amount?
The financial industry is filled with tons of money that is looking for
returns - it's just not going not sit in a bank and let inflation rot its
value. If there's a downturn, it will be very temporary as Wall Street is so
anxious/trigger happy. They'll immediately get greedy and buy any dips.

Everyday, there is new money flowing into the system automatically, without
any conscious decision. It's coming from 401Ks, IRAs, etc. That money needs to
be put into action.

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roenxi
> Why would it crash hard unless interest rates go up by a significant amount?

The 2008-era crisis _in theory_ should have resulted in a whole heap of
financial managers taking their companies bankrupt/to a place of horrid
returns and being blacklisted from ever managing a lemonade stand. But they
were bailed out, so now they got promotions instead for record returns or
whatever it is they've been doing since. Since the finance industry has
substantial control over what everyone else does, that leaks out into the real
world.

So, the intuition is that the system is being corrupted and people with no
ability to make good decisions are being put in charge. At some point that
should boil over. You can fit math models to that and guess which metric will
blow out first.

I'm not sure how much I buy that argument; people have an incredible ability
to put up with suboptimal circumstances. But when you put idiots in charge
there is always a risk that they do something spectacularly stupid so my
personal guess is at some point the pensions crack and trigger something. It
is a spectator sport in a way. Maybe America is productive enough that they
can cope with a few bad eggs in the financial markets. Maybe the taxpayers can
shoulder all burdens!

 _POSTSCRIPT_

Just for fun, veering off topic.

[https://en.wikipedia.org/wiki/List_of_bank_mergers_in_the_Un...](https://en.wikipedia.org/wiki/List_of_bank_mergers_in_the_United_States)

My interpretation is that something went wrong with bank regulation in the
late 70s or early 80s. That is when the too-big-to-fail snowball started
rolling; since then the stresses in the system seem to have been building.
2008 was a nasty blow.

~~~
supergauntlet
>My interpretation is that something went wrong with bank regulation in the
late 70s or early 80s. That is when the too-big-to-fail snowball started
rolling; since then the stresses in the system seem to have been building.
2008 was a nasty blow.

Yes, it's called "Ronald Wilson Reagan" and was worsened when Glass Steagall
was repealed by Clinton in a remarkably short-sighted move. Another poster
already mentioned the Savings and Loan crisis that happened in the 90s that
took taxpayers for a ride to the tune of 130 billion dollars (around 250
billion dollars today). We should have learned from it but for some reason
(probably greed) we made the same mistakes again with Glass-Steagall and then
not even 10 years after repealing that we reaped our rewards: subprime
mortgages falling apart and taxpayers footing the bill while thousands were
foreclosed on. The same is happening with auto loans right now.

For some reason, if you are a white collar criminal, the rules don't apply to
you. No matter how much you fuck up and how much illegal shit you do, none of
it sticks. Look at Boeing. 346 people died, but I honestly bet the worst thing
that happens to any of the managers that OK'd that plane is they lose their
jobs; realistically they probably won't even lose that. Maybe not get a bonus.

The common thread here is not just with deregulation being seen as the magical
cure all that fixes all our problems (because as it turns out, sometimes we
have regulations for very good reasons!) but that there are simply no
consequences for doing bad things if you are stealing from or hurting the
average American taxpayer. The only difference between Bernie Madoff and the
bankers in 2008 that grifted us all is that Madoff made the mistake of trying
to steal from the rich.

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AnimalMuppet
What particular grounds do you have for blaming Reagan?

