
Is a Crash Coming? Reasons to Be Cautious - andrewljohnson
http://online.wsj.com/article/SB10001424052748703723504575425723973560744.html#
======
Revisor
The crash is not coming, it's just returning. The original one was never over.
Its effects were just postponed by pouring money in it (aka bailouts and buy-
outs).

The real reasons - ultra high debt of all players, errors in the system, for-
profit players not controllable by the three political branches - were not
remedied, in fact they might have been even worsened (the debt increased
because of the bailouts).

~~~
cynicalkane
Why does this have 23 upvotes?

Nothing of any substance is stated here. Vague comments about "the players"
and "the debt"--what players? Whose debt? To what extent an opinion can be
extracted from this post, it's wrong. For example, I don't know who "the
players" he refers to are, but my guess is they are _supposed_ to be for
profit.

~~~
Revisor
As for the indebtedness, I was speaking about the key layers of the economy -
personal/household debt[1], corporate debt and public (government) debt[2].
We've grown accustomed to the debt as a regular part of our life, of how our
households, businesses and whole countries work. This is very dangerous.

Regarding the unaccountability of the for-profit players, mind you, I'm pro-
free-market as anyone here. But this piece of news[3] makes you rethink what
happens at the highest level of the market, how the largest enterprises become
uncontrollable institutions on their own.

[1] <http://www.federalreserve.gov/releases/housedebt/>

[2] <http://en.wikipedia.org/wiki/File:USDebt.png>

[3] <http://www.rollingstone.com/politics/news/12697/64796>

~~~
cynicalkane
That third source is the Rolling Stone article everyone has seen a thousand
times, wherein many perfectly ordinary market maneuvers are presented mixed in
with a few instances of meso-level shady-looking deals, spiced with
inflammatory rhetoric to make everything look bad. Then the whole parade of
anecdotes and claims is cast as a sinister, company-wide conspiracy to
deliberately profit off ruining the American economy, putting Goldman on the
same level as the mythical Illuminati. Of the sources you could have chose to
cite, that one isn't the best.

------
cynicalkane
This just in: an uniformed writer has ten reasons not to invest. In other
news, there's unrest in the Middle East.

Almost nobody in the world can predict stock trends profitably. You especially
cannot predict stock trends from articles in the paper. In general, people
smart enough to predict stock trends and understand the macro factors will be
working in stocks, not writing second-rate personal finance pieces for the
WSJ.

(Also, the article essentially begins with, "I don't make predictions... but
here are 10 reasons I predict a crash might happen". How silly.)

~~~
Confusion
_In general, people smart enough to predict stock trends and understand the
macro factors will be working in stocks, not writing second-rate personal
finance pieces for the WSJ._

In general, a reputable paper like the WSJ will hire people that are smart
enough to predict stock trend and understand the macro factors, people that
may be working in stocks, to write finance pieces.

You provide no arguments to support your assertion that the writer is
uninformed. The only argument is a single broad stroke that implies that
nobody with enough understanding of the subject writes for any newspaper,
which is easily refuted by all the articles written by exactly such people
over the years.

~~~
cynicalkane
_In general, a reputable paper like the WSJ will hire people that are smart
enough to predict stock trend and understand the macro factors_

This is not true at all and I don't know where this is coming from. The signal
to noise ratio in the mainstream media's personal finance pages is famously
low. The WSJ is known for its reporting, not its investment advice. And had
you bothered to look up the author on Wikipedia, you would have seen he
doesn't work in equities, and apparently never has.

Sure, the author might turn out to be a genius who identified all the factors
that will lead to the next big crash--if so, how come the genius reasoning is
not evident in the article? Assertions like the second item--'the Fed is
buying Treasuries, must mean they're nervous'--are presented in an
unconvincing way. I assumed it was self-evident that these claims were
unconvincing, but apparently it wasn't so.

So here's why that claim, among others, was uninformed: the Fed's stated
policy is actually to not change the size of their portfolio of securities
held outright. The treasury purchases are offsetting principal payments of
other debt. The neutrality of this policy does not suggest 'nervousness' at
all.
[http://www.newyorkfed.org/markets/opolicy/operating_policy_1...](http://www.newyorkfed.org/markets/opolicy/operating_policy_100810.html)

~~~
Confusion

      I assumed it was self-evident that these claims were unconvincing [..]
    

Then there's no need to comment. Comments in places like these add value when
they contain information above and beyond what is already contained in the
article. If your assumption is correct, your comment simply states what
everyone already knows. If the assumption is incorrect, your comment doesn't
provide any argument to convince others that your claim is correct and the
article is wrong. In either case, your comment doesn't add anything. There's
no need to point out the blatantly obvious, unless to explain why it is
blatantly obvious to someone for whom it isn't blatantly obvious.

What threatens the signal-to-noise ratio of HN is that more and more people
start making unsubstantiated claims concerning articles. They may be right,
but I, as someone with only casual knowledge of a given subject, will never
know. People responding only to state their opinion, without supporting it
with possibly convincing arguments. I don't feel those kinds of comments are
worthwhile.

    
    
      And had you bothered to look up the author on Wikipedia
    

My point is that your argument was too broad and this individual author's
credentials are inconsequential. Even if reporting in personal finance is
awful in general, then after your comment, I still didn't know why this piece
in particular is awful.

~~~
startuprules
cynicalkane's biased; he programs for the Chicago Mercantile Exchange. Of
course he wants to persuade the lemmings to invest so that he still has a job.
Logical? yes. Immoral? probably.

~~~
cynicalkane
It's nice that you think the HN readership is a bunch of lemmings off whom I
intend to directly profit, but the CME is a futures exchange and has almost
nothing to do with personal investing.

------
prewett
I'm a little skeptical of claim #1. According to Reuters, the P/E of the S&P
500 is at 16.1 (see
[http://www.reuters.com/finance/stocks/financialHighlights?sy...](http://www.reuters.com/finance/stocks/financialHighlights?symbol=KO);
look in the "Valuation Ratios" section in the right-most column). If 16 is the
average, then the market is fairly priced.

The Schiller figure he references might include all publicly traded companies.
If so, it might suggest that less well-known companies (outside the 500 most
popular) are over-priced. But since the 500 most popular drive the market, you
can't conclude a crash from that.

Most large-cap companies I have been looking at are trading at 15 year lows
for the P/E, and at close to 15 year highs for dividend ratios. They still
might be over-priced in an absolute sense, but we haven't seen prices this
good in 15 years.

~~~
vomjom
The article doesn't make it very clear, but Shiller's number is based on the
average inflation-adjusted earnings of the previous 10 years.

See the Excel file here: <http://www.econ.yale.edu/~shiller/data.htm>

The stock market is still very highly priced compared to historical standards
(excluding the past 15 or so years).

See also the graphs on: <http://en.wikipedia.org/wiki/Robert_Shiller>

~~~
prewett
I downloaded his Excel sheet (which has more recent numbers than Wikipedia).
I'm not sure what he means by "real price" and "real earnings" (as opposed to
"reported earnings"?). But if I add a column for "real P/E", it puts us at
just under 20, which is on the historical high end. So, following the trend in
his data, I would expect the P/E to gradually decline to 15 or so, maybe even
down to 10. (Under 10, buy like mad.) However, his data show gradual rises and
then declines over a period of 20 - 40 years or so. These are punctuated with
sharp drops, but according to these data, I would expect the next correction
to drop us down to maybe 18 at most.

From some cursory chart exploration on yahoo, it looks like large-caps might
not follow the market moves as much. Mar 2009 was about 50% of the S&P 500's
current level, but KO only differed by 30% and JNJ only varied by 10%. I'd say
solid dividend companies are not necessarily overpriced.

~~~
phjohnst
Real vs reported means that the real numbers have been adjusted for inflation
from some base year (and looking at the CPI from his data, the base year is
mid 1983). The problem with looking at such a huge data set (this goes back to
the late 19th century, is that the companies, industries and the world that we
live in shifts significantly over time. So the 'real' numbers are extremely
important, but I'd have to do some more research to find out how his CPI
calculations change from one era to another. This is important because (to the
best of my knowledge) there is nothing that says that the P/E ratio of a major
industrial company in the 30s (thinking like Rockefeller, etc.) is equivalent
to that of a big tech company now. So as industries change, investment
attitudes, etc. change, which will affect the overall P/E.

And as far as the market being expensive in relation to historics, again you
have to compare apples with apples. There are more people investing now than
50 years ago, and there are more big companies. Both of these facts will drive
up the price of the mainstream companies' shares.

------
gaika
Here's a more scientific way of predicting crashes:

<http://videolectures.net/risc08_sornette_fcrm/>

"Most attempts to explain market failures seek to pinpoint triggering
mechanisms that occur hours, days, or weeks before the collapse. Sornette
proposes a radically different view: the underlying cause can be sought months
and even years before the abrupt, catastrophic event in the build-up of
cooperative speculation, into an accelerating rise of the market price,
otherwise known as a "bubble." "

------
mark_l_watson
Sort of an OK article, but he misses the big point: the USA spends more money
on their war department than the rest of the world combined, and we don't get
any decent kind of return on that investment (although the defense industry
and the congress members who they bribe do).

Sorry to sound cynical, but when talking about the economy, people tend to
ignore the proverbial 800 pound gorilla in the room: 'defense' spending. This
should be the center of conversation about the economy.

~~~
GrandMasterBirt
And defense spending is where billions are lost on side-projects which if made
in the public sector, would lead to tons of innovation, but in the defense
sector only lead to innovations on killing, which never helps the economy.

~~~
nostrademons
Almost all of the innovations that the post-war prosperity was built on were
initially innovations in killing. Radar, sonar, microwave ovens, synthetic
rubber, jet engines, antibiotics, atomic power, plastics, employer-provided
health care, widespread automobile driving skills, rockets and space travel,
satellite communications, computers, the Internet, and GPS all came out either
WW2 or DARPA-funded research after the war.

I hate wasteful defense spending and the military-industrial complex as much
as anyone, but saying that innovations in killing never help the economy is
just patently false.

~~~
loewenskind
Do you have any evidence that shows that, given similar funds only _the
military_ could have provided these innovations?

EDIT: Ok, weapons sure, but most of the entries in that list aren't weapons.

~~~
nostrademons
The other commenters basically have it right. _Given_ similar funds, no, there
are lots of other organizations that could have provided these innovations
more effectively. And really, I'd love to see the government double down on
peaceful basic scientific research.

The problem is that these organizations will never be given similar funds.
People respond to fear; they don't respond to the Higgs Boson. The only way to
get billions invested basic science is to say that without it, we're at risk
of nuclear annihilation from the Russians/Iraqis/Afghans/Chinese.

~~~
loewenskind
> People respond to fear; they don't respond to the Higgs Boson.

Is there no hope that we can educate people to be more rational? To look past
the short term? And to stop seeing boogy men everywhere?

~~~
c1sc0
You got the answer right there in your sentence: _educate_ people. And then
make sure the center of power lies with _educated_ people. Only trouble is,
that's not how this things called democracy is supposed to work

------
dangrossman
I should really avoid reading pieces like this. Tempts me to pull out of the
market again even though I intended to hold my investments for decades anyway
-- I only buy big ol' corporations that pay good dividends.

~~~
rue
> _Tempts me to pull out of the market again [...]_

Which is how crashes happen in an imaginary economy.

~~~
mkramlich
That's what is so crazy about the stock market.

There's a strong self-fulfilling prophecy effect caused by mob decisions. If
enough people think the stock market will go up, there's a surge in demand to
buy stocks and so stock prices go up. If enough people think it will go down,
they sell, and prices go down. Funny that.

So the real money may be in being the minority better, especially if you had
some way of predicting what the masses will do next so you can take a position
that will be profitable for you once the masses start betting. Thus, there's
incentive to do a sort of front-running operation but on a huge scale. And to
do it you need a media operation of some sort, and possibly some propaganda
organs. Any guesses as to whether these theoretical entities already exist?

------
jsz0
I'm skeptical of the doom & gloom stories a few months before an important
election. The numbers don't look great but it could be a lot worse.

~~~
mkramlich
And with the economy, perception can become reality. If a player has a large
enough bullhorn they can spew forth Messages that, if enough people believe
them or act on them, can nudge economic reality in whatever direction they'd
like. The WSJ is one such bullhorn.

------
stretchwithme
Yeah, all they did was interrupt the correction, not stop it. And they're
using the same unsound policies that created the bubble, trading our longterm
economic health to get short term consumption-driven phony growth.

And its not just in the US:

    
    
      http://seekingalpha.com/article/219542-china-the-mother-of-all-bubbles?source=article_sb_popular

------
c1sc0
Wow, a top 10 list article the the WSJ. I totally expect the US market to go
down again for the simple reason that right now, the US looks like a failing
empire that can't pay its bills on all levels from consumers to government.

~~~
phjohnst
Indeed, but remember that there as long as the collectors don't come knocking,
whether or not you can pay at any one moment is irrelevant. In this case, it
would take China calling in its US loans to adversely affect the States'
ability to maintain, and even extend their levels of debt. For various reasons
(the least of which is not that the US is the largest importer of goods from
China) this isn't likely to happen. At worst China just moves away from
holding US Dollars and more reasonably distributes its holdings worldwide.
This will likely move the dollar lower, but is unlike to cause any long-term
distress.

~~~
eru
The US will always be able to pay debts in US$. At least as long as they can
live with inflation.

------
enjo
Here we are again, trying to talk ourselves into another crash. I really don't
understand the Journals (in particular) fascination with doomsday.

For every item on the list you can point to trends that are positive for the
exact same metric. Like (there are a lot of other examples):

<http://online.wsj.com/article/BT-CO-20100726-710938.html>

I agree that the economy is quite uncertain right now. However, waving the
flag of doom isn't really productive at this point. Particularly when you're
cherry picking data to arrive at what appears to be a foregone conclusion. I
don't know if it's a fascination with disaster or (I suspect) more politically
motivated.

Either way, it makes you no better than this guy:

[http://lamarhowell.files.wordpress.com/2009/01/the-end-is-
ne...](http://lamarhowell.files.wordpress.com/2009/01/the-end-is-near.jpg)

~~~
sbov
More than doomsday, they play to fears. Back in 2005 it was about DOW 30k and
how what a gem real estate was. The fear then was to being "priced out
forever". Buy now or lose out, because your puny income won't compare with how
much a 100 square foot shack costs in 10 years.

Now its about DOW 1k and losing everything you own.

~~~
matwood
I never understood how anyone could believe the priced out forever argument. A
friend tried to argue it to me, but could never explain if everyone is priced
out then who is left to buy? It just never made any sense to me even at the
high point of the bubble.

I was successful at keeping 2 of my friends from making horrible financial
decisions, but a third went ahead anyway. Now she's stuck owning a crappy
apartment with an upward adjusting mortgage.

------
artsrc
Crashes can always come. Efficient markets have already priced in all these
well known reasons for one.

This article makes the classic mistake of exaggerating the known risks.

Actually the crash is just as likely to be caused by something unknown. Maybe
the US market will crash because the introduction an old age pension in China
means they don't need to invest as much, and they just use the money buy Sushi
instead.

~~~
loewenskind
> Efficient markets have already priced in all these well known reasons for
> one.

Too bad there's no such thing as an efficient market [1].

[1] <http://arxiv.org/abs/1002.2284>

~~~
artsrc
Thanks for the link.

I think this paper does help put bounds on the upper limits to creating
efficiency through some mechanisms. Using those bounds you can think about the
limits to which reasons for crashes are not reflected, based on size of the
time series of crashes.

I always think of efficient markets as an idea like a frictionless surface, an
invalid, simplifying model to make the mathematics tractable. So the question
would be is the market close enough to efficient that well understood crashes
are reasonably well reflected in it, most of the time: implying you should be
thinking about something else.

I guess I should not believe in efficient markets since I work for a large
active fund manager.

Our definition of "weakly efficient" is different that the paper you site. Our
definition is "close enough to efficient to make exploitation infeasible". And
I can't simultaneously believe in that, and believe in our products.

------
dennisgorelik
I totally lost any trust to the author of that article after I've read this: >
9\. We're looking at gridlock in Washington.

Gridlock in Washington is a good thing for economy. Government is not capable
to interfere with business and spends less -- the result -- boom in the
economy which we observed in ~1994-2000 ("Clinton with Republican Congress"
era).

~~~
leot
All the unemployed could, and probably should, be put to work
building/restoring public infrastructure. None are now because that would be
"socialism".

It is a fun/depressing exercise to imagine how you would improve the US if you
had 14.5 million (<http://www.bls.gov/news.release/empsit.t12.htm>) people to
order about.

~~~
leot
Well, I suppose that came out sounding a bit communist, and OT. Fwiw, the
point was that, if there's gridlock, then there's no hope of seeing any of the
needed job-and-value-creating investment in public infrastructure development.

------
ANH
I read this last week and promptly expunged it from my brain. Any "Ten
Reasons..." list should be automatically suspect.

------
varjag
Insightful piece. However I feel it is not correct to measure deflation by
housing prices, since they are never factored in inflation index firstplace.

~~~
mistermann
But the debt behind the houses will default, resulting in deflation. You're
talking about the CPI, which always only measured owner equivalent rent (so
they could hide the inflation).

~~~
varjag
But is there any widely used inflation index that takes house prices into
account? It is bound to show tremendous inflation, yet we never see that kind
of figures.

~~~
mistermann
Not that I know of.

The Shiller index was one of the best metrics for prices themselves but didn't
relate to relative inflation that I know of, the math would be easy enough.

------
ww520
Hmm, would this be a contrarian signal to invest?

~~~
hugh3
Only if this article represented the conventional wisdom, rather than a
pseudo-contrarian view in itself.

Actually it's a difficult time for contrarian investors, since I'm not sure
there _is_ a conventional wisdom. But if I had spare money I'd be sticking it
all into "socially irresponsible" companies: alcohol, gambling and oil.

~~~
artsrc
There is always some conventional wisdom, even if it is not a directional view
on the market as a whole.

Here is some conventional wisdom: "eBook readers will be cheap enough (<$99)
that most people (>50%) will own one in less than 36 months."

So the contrarian would buy shares in physical book manufacturers?

------
herval
If you're into contrary thinking, that's probably a great moment to BUY...

------
startuprules
Actually, the pink elephant in the room is the huge corporate debt - total
domestic debts at 7.2 Trillions.

"American companies are not in robust financial shape. Federal Reserve data
show that their debts have been rising, not falling. By some measures, they
are now more leveraged than at any time since the Great Depression.

Central bank and Commerce Department data reveal that gross domestic debts of
nonfinancial corporations now amount to 50% of GDP. That's a postwar record.
In 1945, it was just 20%. Even at the credit-bubble peaks in the late 1980s
and 2005-06, it was only around 45%."

[http://www.marketwatch.com/story/the-biggest-lie-about-us-
co...](http://www.marketwatch.com/story/the-biggest-lie-about-us-
companies-2010-08-03)

------
jrockway
This article is crap. He didn't even try to blame the oil spill.

------
sdh
WSJ ... DOOM TERROR CRASH ... "GOP a 62% chance of taking control"

hmmm, wha?!

