
Show HN: Is the stock market going to crash? - truffle_pig
https://isthestockmarketgoingtocrash.com/
======
pdog
If you're looking for The Single Greatest Predictor of Future Stock Market
Returns[1], here it is: [http://www.philosophicaleconomics.com/2013/12/the-
single-gre...](http://www.philosophicaleconomics.com/2013/12/the-single-
greatest-predictor-of-future-stock-market-returns/)

This is a long read, but it's worth it. The metric can be calculated in
FRED[2], and as a predictor of future returns, it outperforms all of the most
common stock market valuation metrics, including cyclically-adjusted price-
earnings (CAPE) ratio[3]. (Basically, the average investor portfolio
allocation to equities versus bonds and cash is inversely correlated with
future returns over the long-term. This works better than pure valuation
models because it accounts for supply and demand dynamics.)

[1]: [http://www.philosophicaleconomics.com/2013/12/the-single-
gre...](http://www.philosophicaleconomics.com/2013/12/the-single-greatest-
predictor-of-future-stock-market-returns/)

[2]:
[http://research.stlouisfed.org/fred2/graph/?g=qis](http://research.stlouisfed.org/fred2/graph/?g=qis)

[3]: [http://www.multpl.com/shiller-pe/](http://www.multpl.com/shiller-pe/)

~~~
PDoyle
Wow, really interesting read. Thanks for the link.

Only trouble is that once people find patterns like this, they have a habit of
disappearing. Hopefully this one is based on solid enough fundamental market
forces that it persists after its publication. It was published in 2013 so we
won't know for sure until after 2023.

~~~
babaganoosh89
I actually made an automatically updating chart for this using FRED data:
[http://financial-charts.effingapp.com](http://financial-charts.effingapp.com)

TLDR: The correlation did go down a bit since publishing but still seems
alright.

~~~
cloudkj
Thanks for this. Can you also add a way to change the window for S&P returns
from 10 years to other time windows? It'd be interesting to see how the plot
changes with adjustments to the window.

~~~
babaganoosh89
I remember looking at other time windows, anything 5 years or below wasn't
great.

------
runako
I've never seen market valuation expressed as market cap as % of GDP. I'm not
an economist, so I'll leave the detailed arguments to them. But it would be at
least useful to explain why you think this is a meaningful metric as compared
to those typically used to measure market valuation (e.g. P/E ratios etc.).

Your graph also ties your valuation metric to the 2000 peak and the 2008 peak.
However, there were crashes in 1990 and 1987 as well. Should readers conclude
that the 1987 peak level was also too high, and that therefore the last ~30
years have also been too high as well? (Abstaining from investing in the stock
market at levels above the 1987 crash would have resulted in the loss of
tremendous opportunity for wealth creation.)

There are a lot of opinions implicitly expressed in this site; it would be
good to try to make those explicit.

~~~
JumpCrisscross
> _market valuation expressed as market cap as % of GDP_

This metric makes little sense for this use case. Consider two countries. They
are identical in every way except in Country A 90% of the companies are
publicly-traded while in Country B 10% are. Country A will have a market cap
to GDP 9x Country B's. Does that mean Country A is 9 times overvalued relative
to Country B?

The objection works in-country, too. Saudi Aramco is going public in New York
or London [1]. This will lift one of those market's aggregate capitalisation
by up to $1 trillion. Does this mean that market will _necessarily_ become
overpriced?

The answer to both question is of course not. Market cap to GDP tells you the
degree to which a country has developed public markets. Not anything
interesting about the levels in those markets.

[1] [https://www.bloomberg.com/view/articles/2017-04-05/aramco-
ip...](https://www.bloomberg.com/view/articles/2017-04-05/aramco-ipo-is-just-
the-first-step-for-saudi-arabia)

~~~
JimboOmega
So I've had a fundamental complaint about Market Cap to GDP at least since
2005, which I've never gotten a good answer to:

There's this expectation that the market returns 7-10%... a number much in
excess of the actual rate of GDP growth (over any significantly long period,
anyway)

That can't continue forever. Especially in aggregate across the world. At some
point the public market has captured substantially all the economic activity -
after that there's no way for it to grow in excess of GDP without things like
PE increasing (and again, that can't go FOREVER, regardless of what the "true"
PE should be).

This is assuming all numbers are inflation-adjusted "real" numbers, of course,
because the money supply CAN grow forever.

~~~
stvswn
I'll probably get some of this wrong, but I read up on these arguments back
when Piketty was in the news w/ his book:

Yes, it can go on forever -- the rates of retun in the stock market are based,
theoretically, on the changing expectations about the future and not based on
current income.

Thought experment: 100 of us live in small society producing widgets, we each
make a widget a day at the factory. GDP is 36500 widgets/day. We also spend
some time researching a way to make widgets faster. Yesterday we found a
breakthrough that made it 50% likely that in 5 years we'll each be making 10
widgets a day.

It would be reasonable for the valuation of our widget company to go up
something like 40% on that news, right? But GDP next year is stlil going to be
36500 widgets/day.

Since the stock market bakes in all optimistic expectations, then in the eras
it that it outpaces GDP it could be the case that there remains unrealized
optimism for the future.

If the question is "but where is the capital coming from that flows into the
stock market?" The answer is that it can be created via credit, or it could be
created via appreciation in assets not captured in the stock market (like
housing, the major one).

~~~
JimboOmega
Your example anticipates a huge growth in productivity, which is a factor in
GDP; in that case, the stock market is a forward indicator of anticipated GDP.

Which, if so, still doesn't allow it to grow infinitely _out of proportion_ to
GDP, unless the time horizon keeps changing or the anticipation of the future
gets steadily farther away from reality.

So you mention _in the eras it that it outpaces GDP_... I've consistently had
the message drilled into me that in the long term (20+ year horizon), stocks
will return something like 7-10%, while of course, nobody would expect GDP
growth anything like that (outside of a rapidly industrializing environment
where productivity is rocketing upward, like China).

An era is not forever, so...

------
uiri
For market overvaluation, it says: 9.1 / 10 "DEFCON 4"

DEFCON 5 is peacetime, DEFCON 1 is imminent nuclear war. For example, during
the Cuban Missile Crisis, the US reached DEFCON 2. Should this say DEFCON 2
instead? Or is "above" normal readiness the intended meaning?

~~~
truffle_pig
Yeah was trying to communicate "moderate risk", but it's kinda tongue in
cheek.

~~~
laumars
We got the tongue in cheek point of the comment. However what is being
discussed is the ordering. Defcon 1 is more serious than Defcon 5. ie it
counts backwards from 5 to 1 as situations become more serious. So your
comment should be Defcon 2.

Pedantics aside, I did enjoy those little comments you put alongside the
threat level.

------
misja111
The metric used to calculate market overvaluation is interesting but it has
little value for predicting a stock market crash. Let's take he last 3 major
US crashes:

1987: this crash was caused by automated trading systems which could run wild
in the absence of any prevention regulations such as circuit breakers

2000: the collapse of the dotcom bubble

2008: start of the financial crisis caused mainly by opaque credit default
swaps and packaged subprime loans

Of those 3, only the dotcom bubble seems to be a bit related to the market
overvaluation metric. And even right before the dotcom bubble crash there were
plenty of economic guru's who argued that classic overvaluation metrics were
not valid anymore because we were now in a 'new economy'.

The other two crashes were caused by black swans; occurrences that nobody was
aware of and that were only understood afterwards. Most likely the next crash
will be a black swan as well.

~~~
luckydude
"occurrences that nobody was aware of and that were only understood
afterwards"

Umm, I'm no genius but I was managing my mother's money at the time of the
2008 crash. It was very obvious to me that there was going to be a crash, I
pulled out of the market in late 2006 and didn't lose a dime in the crash.

I think the better statement is "The 2008 crash was obvious but many people
were in denial".

Again, I'm not a financial wizard, I could just see the writing on the wall on
that one, everyone was getting approved for houses they couldn't afford, you
just knew that was not going to end well.

~~~
matt_wulfeck
Predicting a crash is easy but timing it with accuracy is extremely difficult.
In fact you were two years too early and lost out on a lot of potential
return.

There will always be a crash/correction. Easy. But when?

~~~
leongrado
Completely agree. Yeah luckydude I can say with 100% certainty that if you
took all of your money out right at this moment, you won't lose any money in
the next crash. Give me the nobel prize in economics guys.

~~~
empath75
unless the 'next crash' is runaway hyper inflation.

~~~
nycdatasci
Great point! Important to look at crash in real, not nominal, terms.

More:
[https://en.wikipedia.org/wiki/Money_illusion](https://en.wikipedia.org/wiki/Money_illusion)

------
lr4444lr
Can someone with an actual economics degree explain to me whether it's a valid
criticism of the "Market cap as % of GDP" metric that many US companies derive
value from multinational labor and consumption, and if not, why not? Thanks in
advance.

~~~
pinky1417
SB in economics here and current business school student (I know, I know: burn
the future MBA at the stake!).

Indeed, it is a valid criticism. The market cap/GDP measure is mismatched,
since market cap theoretically reflects investors' expectation of future cash
flows globally while GDP is a measure for only one country. Also, GDP is
problematic for a bunch of reasons, so even if all companies were only
operating in the United States, GDP would still only be a crude measure of
economic output.

~~~
zmk_
Plus, as you mentioned yourself mcap corresponds to the present value of all
future cashflows and GDP to one years output. The only way this would make
sense is you were comparing changes in GNP to changes in mcap.

------
mendeza
What about student loan debt, how does that factor into the economy or the
stock market being affected?

Right now student loan debt is at 1.4 trillion

source: [https://www.debt.org/students/](https://www.debt.org/students/)

~~~
SmellTheGlove
I wouldn't worry about student loan debt being a problem. It's very likely
that they're going to get a bailout before a bubble bursts. Where on earth did
I come up with this, you ask? Easy - I just paid my student loans off last
week. It's only natural that everyone else will now get bailed out!

Seriously, though, this is a real problem and we need to do something. Even if
it doesn't have a direct effect any time soon, it's going to have an indirect
effect as our generation (I'm some kind of X-ennial, apparently, but let's
just say everyone 20-40) continues to replace retiring boomers in the economy.
If we're all saddled with non-dischargable debt, it's going to hurt the
housing and consumer spending segments.

~~~
knewter
> Seriously, though, this is a real problem and we need to do something

the thing we have to do is not borrow money we can't repay. capitalism is a
distributed system. borrowing money you can't repay is a broken local
protocol. don't try to fix that with anything but fixing it locally.

~~~
thomascgalvin
This is at least partially true, but ignores the "reality on the ground." Even
many entry-level jobs require a college degree now, and forgoing a college
education makes you unhirable in many markets. Until that changes, "college
you can't afford" is pretty much a mandatory expense.

There are ways to minimize the cost -- basically two years at a community
college and two years at a state school -- but the days of being able to
afford college by working a part time job are long over. The reality is, if
you want to participate in today's job market, you probably must take on at
least some college debt.

~~~
fabatka
I think college degree is highly overrated, and higher education is very
inefficient overall. But it is like a prisoners' dilemma, where all of the to-
be-students would be better off if say 70% of them didn't go to college, but
no individual has the incentive to decide so.

They wouldn't need to pay the enormous tuition, and as the job market would
change (as far less people would have a college degree), the lack of degree
wouldn't hurt them.

~~~
notfromhere
College degrees are oversaturated, but there's no real alternative outside of
a few fields where education isn't as important as experience.

College degree nowadays is basically a pre-requisite for not getting your
resume thrown out at first glance.

------
pillowkusis
A site like this seems dangerous at best. Nobody can predict the stock market.
Nobody can predict when a stock market is more likely to crash. This site
tries to indicate otherwise. Whatever causes the crash it probably won't be
one of the indicators listed here.

~~~
choxi
I think the subtitle sets expectations pretty clearly:

> No one knows for sure, but there are indicators that can help us guess. We
> can chart these indicators to give us the illusion of foresight.

~~~
module0000
Holy shit, just seeing the "indicators that can help us guess" gives me
shivers. The person who utters that phrase is admitting to _guessing_ with
their money. Does anyone else find that as absurd as I find it? If I hire a
pro to enter/exit a position, if they are guessing(with or without the
assistance of indicators), I have made a _very bad decision to hire them_.

~~~
MarkMc
Perhaps you and I have different definitions of the a word 'guess'. To me, it
includes 'Making a logical estimate based on available evidemce'. Every
investment decision is a guess.

------
avip
I love the design and phrasing. This is just a well-done website.

It would be really interesting to see your collapse pyramid over time. How did
it look in 2000? 2008?

~~~
truffle_pig
This is a good idea. I'm going to implement it as a timeline I think.

~~~
solatic
Since the diamond is a 2D figure, then if you add time as a third dimension,
you'd get a diamond-shaped cylinder. Add a blue-red spectrum color code,
whereby blue is a time slice with a small surface area and red is a time slice
with a large surface area, and you'd be able to plot the dangerously large
Diamonds of Economic Failure over time in a way which clearly indicates when
the danger signs were worst.

------
daotoad
Good idea for a website, should be able to get you some nice revenue from
intermittent visits. You probably want to focus on financial services for your
ads.

I'm not going to say anything about your numbers and your models other than,
without the ability to see how they looked at previous crashes, it's hard to
see if the site is useful. To the innumerate masses and emotional investors
the flickering numbers are persuasive enough. So they really don't matter.

On the bad side, your UX is god-awful. Use an oldish, slightly crappy monitor
to look at it and you will discover that your background is indistinguishable
from the foreground. The top bar of the box completely disappears, too. Also,
a row of buttons is NOT a good tabbed interface--there is no indication that
clicking on "Market Volatility" is going to reload all the content below the
row of buttons. Maybe make actual tabs, at least make that stuff a distinct
box.

This could be a nice little side product to make you some extra money. Get
some GA on there, and slowly add features. I think a bit of interactivity and
the ability to customize the predictive models through some drag and drop
could actually make the page sticky and get people coming back.

------
benmarten
How is the heat matrix diagram calculated? It seems to be wrong. Public Debt
has a 3.7/10, while it looks like its around 8.5 in the heat diagram.

Looking at the individual ratings: \- Household Debt: 5.5 / 10 \- Market
Overvaluation: 9.1/10 \- Market Volatility: 0.3/10 \- Public Debt: 3.7/10 \-->
SUM = 18.6/40 or 46.5%

Also I noted: Drawing a linear trend line through the "Market Overvaluation"
diagram, does make it look a lot better though. One could argue that people
get used to certain levels, hence a growing trend over time.

Taking only these factors into account, it does not look like the market is
gonna crash soon. In my opinion it's likely going to be caused by another
factor not listed here ;)

~~~
wuliwong
I'm also confused by the public debt number. It is far higher now than in
2008.

~~~
kerkufle
Thanks Obama!

------
omg_ketchup
Site just displays a blank page. No error or anything.

I think that's a better statement than whatever the app actually does.

~~~
aembleton
You need to switch Javascript on.

~~~
duxup
Thus crashing my browser and answering the question at the same time.

------
indescions_2017
Correct answer, of course, is no one knows, because the future is opaque and
unpredictable. And indeed you have some very smart professionals going to cash
or directly betting on a 5-10% correction in the S&P500. And a set of equally
smart fund managers calling for a 2600 target by mid-2018.

What we can say with some certainty, based on options activity, is that if a
single day 3-4% drop in the S&P500 occurs it can trigger a massive unwind in
short volatility positions:

[https://www.reuters.com/article/us-usa-stocks-volatility-
idU...](https://www.reuters.com/article/us-usa-stocks-volatility-
idUSKBN1AJ328)

And with several political risk factors on the near term horizon, including
the possibility of a government shutdown in late September due to the failure
of Congress to extend the debt ceiling (yes, they are arguing over who is
going to pay to fund the border wall with Mexico). It certainly should
surprise no one if a coming tomorrow could be very different than the
extraordinarily low-volatility landscape we face today.

The Case For Long Volatility by Eric Peters

[https://www.linkedin.com/pulse/case-long-volatility-eric-
pet...](https://www.linkedin.com/pulse/case-long-volatility-eric-peters)

------
saimiam
I was (sort of) there when the 2000 tech crash happened and was in the thick
of it when the 2008 crash happened.

This thread and a few offline conversations made me reexamine what I believe
about the stock market and the nature of the 2000 and 2008 collapses. Of
course, I'm not an econ nor do I have data to back up anything I'm saying.

All manias, from tulips to tech IPOs to housing bubbles are born when the
common person joins the frenzy. On the flip side, the mania collapses when the
common person walks away or never shows up the party. For the tech IPO frenzy
of 2000, the common person never even showed up to use all those exotic new
ideas which were getting funded and going public. During the housing bubble,
the common person bought and sold houses which setup the flywheel. Eventually,
the common person walked away from the asset in question bringing down the
entire charade.

Today, the market is soaring. People are starting to wonder when gravity will
reassert itself but in my view, this time the difference is that the common
person cannot walk away. Unless adblocking and disdain for social media become
extremely mainstream, the common person is so busy amusing themselves to death
online that they are not going to leave the tech mania. Companies like FB and
Google have made the web sticky.

Does this mean the stock market will rise indefinitely? I don't know. I do
know that once there is a captive market comprising everyone online, no
company is going to stop advertising or figuring out ways to reach buyers
online.

We are in a new age where you just can't get away from the web. We are the
product but we also have no way of exiting the dragnet.

~~~
plaidfuji
This is probably the most insightful comment here. When your grandma is buying
some asset class, it's time to sell. I think the biggest complicating factor
here is the US government debt and the massive amount of it that the federal
reserve owns via its treasury bond buying program since 2008. Who's on the
hook for this debt? The common person, via the value of the US dollar. The
next crash will be precipitated by actions of the fed and creditors to the US
government, not stock market investors. Incidentally, in this environment,
cryptocurrencies could emerge as a safe haven.

------
qubex
Economist here. You should really keep in mind that the same GDP must go both
towards paying off the national debt and paying off household debt. Also you
should track commodities (at the very least, the ratio between put & call
options).

~~~
crdoconnor
Are you familiar with MMT?

~~~
qubex
If you mean _Mark To Market_ , yes. It you mean anything else (and I am
wracking my brains trying to come up with another relevant meaning for that
acronym), no.

~~~
RobertoG
I think he is talking about Modern Monetary Theory, where one of the
conclusions they arrive, after studying how modern economies work, is that
private sector debt grow when there is not enough government deficit.

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

Another of the conclusions is that the national debt, for countries with a
floating sovereign currency, is just a number without real meaning.

[https://www.nakedcapitalism.com/2014/08/taxation-
government-...](https://www.nakedcapitalism.com/2014/08/taxation-government-
spending-the-national-debt-and-mmt.html)

~~~
qubex
Ah. I'm dyslexic and ashamed and I'm going to put myself to bed and try to
forget this before the morning comes.

~~~
RobertoG
I don't think you are at fault. We abuse acronyms.

------
tveita
Normalizing household debt against the GDP makes the assumption that we are
comparing the debt with the ability to pay for it.

But according to graphs like this, even though the GDP has been rising, median
households have not been getting a corresponding increase in income:
[https://en.wikipedia.org/wiki/Household_income_in_the_United...](https://en.wikipedia.org/wiki/Household_income_in_the_United_States#/media/File:US_GDP_per_capita_vs_median_household_income.png)

So the income we are adjusting against is not necessarily going to the people
that are in debt!

~~~
JumpCrisscross
Household debt to GDP tells you the state of the society. Household debt to
income tells you households' ability to repay. If Debt/GDP is fine but
Debt/Income is not, you're looking at (a) default (lenders eat dust), (b)
inflation (savers eat dust) _or_ (c) public assistance (non-borrowing
taxpayers eat dust). That's a political question. If Debt/GDP isn't fine,
option (c) flies off the table.

~~~
tveita
That sounds reasonable, but aren't all of those mitigations for _after_ the
shit hits the fan? None of options will prevent a crash unless you can
actually exercise them pre-crash.

~~~
JumpCrisscross
> _aren 't all of those mitigations for after the shit hits the fan?_

Not necessarily. Raising minimum wages or cutting certain taxes are examples
of pre-emptive steps political systems can take to increase households'
incomes. Making debt harder or easier to discharge, or raising or lowering
policy rates, can be similarly prophylactic.

------
where_do_i_live
Your volatility section seems to be a very poor indicator of a future crash in
the manner you are using it. Volatility is not a predictor, but instead a
descriptor. An analogy I think is the weather stick - Is this stick wet? Then
it is raining. It is a very poor item to use in your context.

Further, sustained periods of low volatility often are sometimes indicators of
complacency among investors and indicators of higher chances of bubbles.
Sustained periods of low volatility are at times indicative of higher future
risk of a market crash, not a low predictor. I think you need to re-evaluate
how you use volatility.

~~~
dnadler
Well, he's using the VIX, so it is technically market implied future
volatility. Whether it has predictive power is open to debate, but it is
_technically_ a forward-looking indicator.

------
Nursie
"NaN% more overvalued than just prior to the 2008 financial crisis,"

I think there might be a few coding errors still lurking in there.

~~~
TazeTSchnitzel
I got that in Firefox, whereas it works in Chrome. Poor cross-browser testing?

~~~
bkanber
Seems to be because all the market data hasn't loaded yet. If you look above
it should say "Loading data" under one of the categories in the text.

~~~
Nursie
Yeah, on a second visit, everything seems OK.

Didn't notice the loading indicator myself.

------
mxschumacher
American companies sell products & services outside of the United States.
Comparing American GDP with the aggregate value of the US stock-market is
deeply misleading, especially given a historical comparison: foreign markets
such as China have gained in relative importance over timeframe under
consideration.

When looking at debt, one should not just observe the nominal amount, but also
the interest rates, which have never been lower. Large companies can tap
public debt markets and borrow billions at 1.5% over a timeframe of ten years.
Risk is thus lower than the website suggests (at lower interest rates, a
company can carry more debt). Additionally, returns to equity will be higher
(the I in EBIT is smaller, so profits are bigger).

~~~
georgeecollins
The American GDP includes net exports, ie: goods that are bought in other
countries. So its not a crazy comparison. But it is not great ratio for long
historical comparisons because of the changing nature of economies and
markets.

------
timsayshey
Really cool idea. As someone that hasn't really investigated the market
indicators for collapse this is really eye opening. It really breaks things
down into plain english. Hope this goes to the top for some
rational/interesting conversation.

~~~
truffle_pig
Thanks for the kind words! I'm not an economist myself so I'm hoping others on
HN might be able to correct any inaccuracies.

~~~
nautilus12
Is this open source? Id like to see how/where you are pulling your data.

~~~
myth_drannon
The source is not minified.

------
anonu
As the site makes clear, nobody really ever knows if the market is going to
crash. On the market valuation side they claim the current market is
overvalued. But overvalued is a relative term... As you have to value versus
something, and that something is usually something historical.

The way I see it though is the markets are a big voting machine.. and they're
making predictions about the future and incorporating future expectations.
With the current US administration still pondering over tax plans and
infrastructure stimulus packages that are promised, market may be
underpriced???

~~~
smt88
> _The way I see it though is the markets are a big voting machine.. and they
> 're making predictions about the future and incorporating future
> expectations_

This is likely true because of "wisdom of crowds" (aka regression to mean of
randomly-sampled human estimates).

> _With the current US administration still pondering over tax plans and
> infrastructure stimulus packages that are promised, market may be
> underpriced???_

The president doesn't control taxes or spending, and he can't do anything
about infrastructure on his own. All he can do is use political capital to
push Congress in a certain direction. So far, he's been totally unable to do
that.

In terms of the national economy, the US is the same as it was under Obama --
House totally under Republican control, Senate mostly under Republican
control, Janet Yellen running the Fed, no major shocks.

There's little unity among Republican Congresspeople, and even less when you
include Democrats. Tax reform _may_ be a bipartisan issue, but it's likely
going to be limited to simplifying the tax code (lowering taxes while closing
corporate loopholes). If all the trickle-down dinosaurs believe that higher
corporate taxes will harm the economy (which it almost surely won't), then the
stock market should -- if anything -- go down.

This could mean that it's underpriced, but not for the reasons you seem to
suggest.

------
mathiasben
I feel as though the "stock market" following the 2008 crisis has become
further insulated from the larger economies fundamentals. wages can continue
to not keep up with inflation, savings rate continues it's downward slide,
household debt service payments consume an ever increasing slice of disposable
income, etc... all the while the type of dramatic dislocation event similar to
1929, 1987 are unlikely to occur. the market "circuit breakers" ensure any
crash is a slow moving trend and not a single calamitous event.

~~~
mathiasben
the stock market is so divorced from the actual economy that over half of
Americans don't participate in any way at all whether through direct purchase,
401k, mutual funds, etc.. most of the action on the stock markets is companies
rebuying their stock to generate earnings and hedge funds and the less than
half of Americans who have access to retirement planning.

~~~
vkou
What percentage of Americans have historically participated in ownership of
capital?

------
bluetwo
The volatility index, or VIX, has become a popular measurement to reference in
the context of predicting the market over the past couple years.

The problem is that it does not seem to have any real predictive power and I
have yet to see any shred of evidence that the VIX has been shown to have
predictive power over the future value of the stock market.

It is calculated from past price variance and is used in calculating the
theoretical price of options, but that is it.

Does anyone have any evidence the VIX has value?

~~~
hidenotslide
It is calculated from the (theoretical) implied volatility of listed S&P
options, so it is indeed forward looking (not past variance).

But it is riddled with microstructural issues and to my knowledge doesn't
really have any track record of predicting crashes. It will react to market
events contemporaneously though, so it is a decent measure of expected future
volatility.

Besides household debt, the rest of these indicators don't make much sense
either. Much better would be measures of the yield curve, inflation, and
corporate credit quality.

------
Kiro
I got a "Add Create React App Sample to your home screen" notification on my
phone.

~~~
rcpt
Same here - wonder how they did that.

~~~
longwave
<link rel="manifest"> in the header, see [https://developer.mozilla.org/en-
US/docs/Web/Manifest](https://developer.mozilla.org/en-US/docs/Web/Manifest)
for more.

------
csomar
Does it make sense to have "marketcap" / GDP if the Nasdaq/DowJones has non US
companies like Alibaba? Or is it taking these into account?

------
apsec112
I think you could estimate much more accurately with the prices of deeply out-
of-the-money put options. Those are effectively a betting market on whether
stocks will crash or not. We should expect option prices to take into account
every major factor (not just these four), because if they didn't, people would
get rich by trading on the "missing" info until prices corrected themselves.

~~~
TuringNYC
Agreed, these are good indicators because people are actually backing these
"predictions" with money...as opposed to theoretical models with no skin in
the game.

------
lordnacho
One could argue that the volatility scale should be the other way round; that
the diamond should be showing extreme values on everything other than
household debt, which is middling.

The market is normally calm on the way up, which is why you might think its
current upward movement will soon be interrupted by a volatile down-move.

------
brookside
A great read on how to capitalize on the upcoming crash! _The Sale of a
Lifetime: How the Great Bubble Burst of 2017-2019 Can Make You Rich_ [1]

Also good is the author's earlier book _The Great Crash Ahead_ [2] "outlining
why the next financial crash and crisis is inevitable, and just around the
corner— coming _between mid-2012 and early 2015_ "

Hmmm...

1\. [https://www.amazon.com/Sale-Lifetime-Great-
Bubble-2017-2019/...](https://www.amazon.com/Sale-Lifetime-Great-
Bubble-2017-2019/dp/0735217742/)

2\. [https://www.amazon.com/Great-Crash-Ahead-Strategies-
Turned/d...](https://www.amazon.com/Great-Crash-Ahead-Strategies-
Turned/dp/1451641559)

------
grandinj
The answer is of course: YES.

The more important question is when, and the answer to that is "who knows".

The market is a chaotic system, with severe non-linear responses. As such, it
can remain stable much longer than people think, and crash much harder than
anyone expects.

~~~
csours
I was expecting the site to just have YES at the top in big letters with some
explanation below. Things are certainly feeling bubbly lately.

------
cs702
I love the idea, the simple design, and the humble tone of the byline ("no one
knows for sure, but there are indicators that can help us guess. We can chart
these indicators to give us the illusion of foresight.").

However, I have two suggestions. First, the numeric rankings (such as "5.5 /
10") need context: why not say something like "10 is the highest value reached
in the historical record"?

Second, the explanations you give for chosing these indicators need a bit of
work, as evidenced by some of the comments and questions on this thread. Most
lay readers won't understand why the ratio of total stock market
capitalization to annual GDP is important.

~~~
truffle_pig
Good point, I think I will go into a bit more detail as to how the risk factor
is calculated.

Yeah seems like I might need to go into a bit more depth explaining the
rationale behind each indicator. I'm open to including different indicators
too.

------
TekMol
The page strives solely on it's nice graphics, and sensationalist wording.
There is little to no content of substance.

For example the page calculates "Market Overvaluation" as the US stock market
value divided by the yearly US GDP. Hilarious.

~~~
vvdcect
How would you calculate Market overvaluation?

~~~
JumpCrisscross
> _How would you calculate Market overvaluation?_

The market is a conversation, not a calculation. There is no equation for its
"proper" valuation because there is no equation for an asset's "proper" price.
We have markets because these calculations, the economic calculation problem
[1], are hard.

Financial theory has a habit of magicking uncertainty into variables that look
like constants but aren't. With option theory, it's the volatility curve. With
CAPM [2], it's the risk-free rate curve and general market risk premia (also
beta). In the discounted cash flow model [3], it's the discount rate and
future payout curve.

These models sort of work a lot of the time, but not always and not as well as
we'd like them to. Unfortunately for the precision-minded, the bridge between
the quantitative models are people doing their people things.

Note that I'm not saying it's all voodoo. There _are_ models. But
understanding them takes appreciating their constraints, assumptions and
strengths.

[1]
[https://en.wikipedia.org/wiki/Economic_calculation_problem](https://en.wikipedia.org/wiki/Economic_calculation_problem)

[2]
[https://en.wikipedia.org/wiki/Capital_asset_pricing_model](https://en.wikipedia.org/wiki/Capital_asset_pricing_model)

[3]
[https://en.wikipedia.org/wiki/Discounted_cash_flow](https://en.wikipedia.org/wiki/Discounted_cash_flow)

------
mcguire
Is this a psychological experiment? All I get on Android Chrome is a white
screen.

------
lg
Could the fact that a lot of US companies book profits overseas and keep them
there for tax reasons foil your assumption about the meaning of a high US
market cap:domestic GDP ratio?

~~~
qubex
That is already implicit in the Efficient Market Hypothesis' valuation of the
total market capitalisation of stocks (that is part of the reason for which
the total value of the stock market exceeds GDP).

~~~
xphilter
Right, but this chart ignores that (as far as I can tell). If US listed
companies are going to eat more of the global GDP, then it wouldn't be crazy
that the value of the stocks will exceed GDP of the country in which it's
listed (i.e., the fact that the value does exceed GDP might not be a precursor
to a crash).

~~~
krit_dms
There's really no reason why GDP should equal market cap. Companies are
largely (especially now, since interest is so low) valued on future income,
rather than current income.

Look at Amazon and Netflix, both tradin at 200x earnings. This is beacuse
investors think they will earn a lot more in the future than they do now. Are
they overvalued? who knows.

~~~
qubex
Indeed, market valuation as a multiple of GDP is hitherto unknown to me.
However that's why I wrote _partially_ : foreign assets are factored into the
value investors attribute to the stock market as a whole. In retrospect I
shouldn't have argued from the standpoint of percentage of GDP.

------
Glyptodon
Question (as someone without domain knowledge): could someone explain what the
expected relationship between GDP and total stock market value is? GDP
represents non-publicly traded, and even non-private activity, while
presumably the stock market's valuation is at least somewhat driven by
expectations of future growth/profit, rather than current productivity. I
don't doubt that there's a relationship of some kind, but what is the simple
ratio actually showing?

------
aagha
This is sooo cool! Great job.

One thing that might be helpful is to have a separate (informational) page
that indicates what the diamond looked like at other period of economic
failure--in fact, what it looked like leading up to the period of
failure/crash would be really interesting.

I'm curious: How quickly can some of these variables changes? For example, it
seems the VIX is at it's low end--how quickly can it spike to say, 30? How
fast can the other vars change?

------
module0000
So, if the stock market is hypothetically predicted to crash in 10-25 days -
what are you going to do? Short it now? Short it later? Buy?

Just curious what HN readers think. For the giggles...I'm going short when the
tape says market sell orders exceed the rate of bid additions, and the
opposite for going long. I like long-term analysis as much as the next guy, I
just never, ever, ever, ever, ever make decisions based on it.

------
tome
Market Volatility section:

Current risk:

NaN / 10

"Calm waters"

(I'm using Edge)

~~~
lowboy
Ah, I was getting the same error in Chrome Canary and it just took a while to
load data. Came here to let the OP know about it and when I tabbed back it was
no longer NaN/10.

------
AJRF
"We can measure Market Overvaluation by looking how much the stock market
costs vs how much it is providing." Isn't this the opposite of what the stock
market is supposed to provide? I assumed valuations for the most part are
guided by what a companies outlook is for the future, not the present.

------
jostmey
"We can chart this to give us an illusion of foresight"

Got to respect the Author's humility in foretelling the future

------
coverband
Interesting analysis, but I'd not have included public debt as a risk factor.
If anything, increasing public debt provides upward support for the equity
market, regardless of whether the money goes to public investments, tax cuts
or bad government spending.

------
cm2187
Blank page for me. Don't know if it is there but a nice chart is size of the
Fed B/S vs S&P 500, since 2005. Suggests a large part of the valuation of
stock is generated by QE, which the Fed intends to start withdrawing this
year...

------
neilwilson
'Public Debt' is a private asset. Why is having more wealth a bad thing?

The idea that being 'in credit' with a sovereign government with its own
currency is a problem has been thoroughly debunked. Primarily by Japan.

Time to stop repeating the myth.

------
sigmar
>The VIX is generally consistantly low (10 - 15) until it isn't. To get a
sense of what a crisis would look like, we can compare to a few historical
values.

What's the point of using a metric that can turn on a dime in a predictive
model?

~~~
cbanek
People use a low VIX to represent complacency, which is typically present
before a market crash, along with the famous irrational exuberance.

Once it goes up, it means there's volatility in the future coming, because the
VIX is based on S&P 500 options.

------
socrates1998
Low Volatility might actually be an indicator that the stock market is going
to blow up, rather than stay calm.

Volatility tends to cluster, and periods with really low volatility are often
an indicator that there is a big movement coming.

------
kmfrk
If nothing else, I like how this might stir some interesting discussions about
the state of the economy.

One thing I'd like is a link to the cited data to make it a little more
serious and conducive to debates.

------
forbiddenlake
Says "Stock market is closed" at 10:45AM EDT. Is it really?

------
neom
Distribution of household debt is to significant to look at the health of the
economy in this way, especially so when you look at how the GDP is generated
and who is generating it.

------
unknown_apostle
Cute site :-) Btw we have the added issue that the volatility of volatility
appears to be rising. Meaning periods of apparent big calm turn into big price
swings more rapidly.

------
peternicky
Why does this site report "the stock market is closed"?

------
artursapek
A high VIX would indicate that the market is crash-ing.

~~~
jaaames
Only indicates it's moving, doesn't necessarily mean crashing.

~~~
artursapek
VIX rising means market is moving, but strictly downwards, right?

------
tambourine_man
Site's broken on mobile:

[http://imgur.com/BD6gzVZ](http://imgur.com/BD6gzVZ)

------
franciskim
Lowest volatility ever in 27 or so years according to VIX apparently, which is
actually a warning sign.

------
odammit
Nah, Trump says it's fine. Don't worry about it. It's the best. May see a dip
in 2020.

------
malynda
Another pedantic remark: Next to the clock, you should include a timezone.
Very interesting!

------
wuliwong
I like the idea. I think it could benefit from some transparency into the
calculations.

------
rrggrr
Household debt should be measured against household income and not against
GDP.

------
movedx
Can you please open source this under an MIT or some license you agree with?

------
yosito
I fully expected this to be a page with the single word "Yes."

------
JVIDEL
This is actually a pretty useful site

Don't get to say that a lot around here

------
myth_drannon
You can setup webpack to minify/uglify your source files.

------
iliveinseattle
market cap as a percent of gdp is a very bad indicator. In today's world a
very large and increasing percentage of revenues is derived from outside the
U.S.

------
nnd
What library did you use for the counting animation?

------
mathiasben
market overvaluation section could do to include the yield spread on bonds as
this is sometimes quoted as a volatility risk indicator.

------
woah
Diagram doesn't work on safari with Adblock

------
kurtisc
>Is the *US stock market going to crash?

------
petters
> Create React App Sample

Shows up on Chrome mobile.

------
Sujan
Yes.

~~~
Sujan
(Sooner or later...)

------
hathym
The real question is when?

------
ringaroundthetx
So VIX doesn't give an indication of much. The VIX formula has changed so many
times, and the human behavior around the assets that VIX tracks has changed to
reflect those changes and the new products those changes are based on.

Different people gamble in weekly S&P500 options than gambled in monthly
S&P500 options. Different people gamble in the 5 consequetive week at any
given moment weekly options, than gambled in the single week at a time weekly
options.

The options market itself has had ebbs and flow in interest.

And the self fulfilling prophecy of keeping the market propped up when
everyone buys PUT options expecting it to crash has disillusioned a lot of
people from participating at all. People know what the central banks are up
to, why pretend to have confidence in any of it. The Swiss bank is printing
money to buy US stocks for free. Everyone's creating money through new bond
issuances to buy things for free.

This all contributes to a lower VIX.

------
yuhong
Yea, the US economy is based on constantly growing debt basically, which can't
last forever. My favorite is the ad bubble now, and ads are basically designed
to increase consumption. It is probably worth mentioning China too:
[http://www.zerohedge.com/news/2017-08-06/chinas-minsky-
momen...](http://www.zerohedge.com/news/2017-08-06/chinas-minsky-moment-
imminent)

------
19890903
Oh dang ! That household debt sure is scary. Where's the real time data
sourced from?

> U.S economic risk as of ...

With the click of a button, may be also allow a view of where it was at a
point in history...? i.e. U.S economic risk as of [insert point in history]

Great work so far. Simple and usable.

~~~
matt-attack
But while the household debt is huge, isn't it naturally balanced by the
equally massive collateral the banks have in the houses themselves? I mean,
sure Joe America has a $500k mortgage, but the bank has first position on
Joe's house which is worth $675k.

~~~
tveita
> first position on Joe's house which is worth $675k

Only in a healthy housing market. In an economic downturn where a lot of
people are defaulting, the bank will not be able to sell the house for
anywhere near that price.

------
davidreiss
Only the elite know. It's so funny how people think that recessions,
depressions, stock market crashes, etc are some "natural" event.

A stock market crash happens when the elite decide there should be a market
crash. When they pull money out of the market.

~~~
shostack
That's a bold claim. Source?

