
Warning Signs That a Bubble Is About to Burst - samrohn
https://onezero.medium.com/warning-signs-that-a-bubble-is-about-to-burst-aa9801e65557
======
Moodles
I was expecting to see discussions of something like a yield curve in this
article, not the fashion sense of CEOs...

Market timing is pretty much impossible for most people. So many people said
we’re heading for a crash 3, 4, 5 years ago. They lost out on so many gains.
We might crash tomorrow, or we might crash in 5 years. Nobody knows for sure.
Market timing based on articles like this is a fool’s game.

I’d really love these people who constantly predict the crash to also predict
when the market will pick up, but of course they never do. They just keep
predicting a crash and eventually get lucky. And we only remember the correct
predictions. Why don’t they put their money where their mouth is and actually
show us all that they’re investing according to their predictions as well...

~~~
starbugs
In the current late stage of a cheap debt infused bull market it appears to be
more sane to predict a crash and hence discourage people form investing in it
altogether (or at least be extremely cautious) rather than speculating on
where exactly the market top will occur.

If you miss the timing of the crash all of these gains will have disappeared
anyway. Downturns often happen too fast for normal people to react to in time
to save their gains.

It's most likely time to buy again directly after a crash or significant
pullback has happened and valuations have come down to a more rational level.

No one can predict a market under the current circumstances (federal reserves
keeping rates artificially low, pumping new funny money into the market over a
period of 5-10 years).

~~~
scld
How is under-target inflation for a decade artificially low rates?

~~~
starbugs
Well, look at where the money has gone. It's now in the stock market and in
real estate. Inflation is there, it just didn't trickle down into the CPI
basket (yet).

------
nostrademons
TBH I don't see much of a bubble by these metrics. My indicators for "not in a
bubble" are:

1\. New grads are more interested in getting a job at a big company than in
getting a job at a hot startup.

2\. Fundraising requires revenue.

3\. There is a constant negative press cycle around the industry.

4\. People are moving out of Silicon Valley.

5\. CEOs from the last bubble are getting indicted.

All of these are present today. Meanwhile, out of the article's list, the only
bubble indicator I see is that Apple, Facebook, Google, and Amazon have all
built shiny new headquarters. Tech P/Es are incredibly _low_ compared to the
general market (Apple is at 14 vs. the market's 25 or so), and the market P/E
is not out of line with interest rates (P/E of 25 implies a real rate of
return of about 4%, vs. about 2% for Treasuries. Mark Zuckerburg and Larry
Page are too busy raising kids to either attend to their companies or be
celebrities, Tim Cook is busy running his company, and Jeff Bezos is busy
getting divorced. Haven't noticed any particular CEO fashion. People are
looking to grey-haired figures for leadership, not young people. Six-figure
tech salaries are just inflation: there's money ( _real_ money, not bubble-
money) in tech, and intense competition for employees, and so that filters
down to wages.

If anything, the real tech bubble burst in 2015 with the unraveling of
Theranos, Zenefits, and Uber, and we've been in tech recession since. 2015
also seemed to be peak Silicon Valley rent increases, and the last time you
could raise capital on just an idea. There was a mini-bubble in crypto in
2017, but that also popped, and the dominant zeitgeist today is complaints
about how shitty life is, how there's no growth anywhere, and how we're on the
precipice of a revolution, civil war, environmental catastrophe, dictatorship,
or all 4.

~~~
ummonk
Yup. There are plenty of signs for a general economic recession in the US, but
tech specifically doesn't seem overvalued in comparison, and we're in a state
of anything but irrational exuberance in terms of attitudes towards the tech
industry and unprofitable startups.

~~~
m0zg
>> There are plenty of signs for a general economic recession in the US

Out of curiosity, what "signs" are you referring to?

~~~
coldtea
Economists have warned the recent slowdown experienced by the U.S. economy
carries with it "the unmistakable whiff of a recession."

[https://www.newsweek.com/economic-recession-2019-us-
economy-...](https://www.newsweek.com/economic-recession-2019-us-economy-gdp-
trade-war-china-donald-trump-1437258)

"US recession risk rises as trade tensions with China remain unresolved"

[https://www.foxbusiness.com/economy/us-recession-risk-
rises-...](https://www.foxbusiness.com/economy/us-recession-risk-rises-with-
trade-tensions-uncertainty)

"Morgan Stanley says economy is on ‘recession watch’ as bond market flashes
warning"

[https://www.cnbc.com/2019/05/28/morgan-stanley-says-
economy-...](https://www.cnbc.com/2019/05/28/morgan-stanley-says-economy-on-
recession-watch-amid-bond-warning.html)

~~~
ccffph
People have been saying this since 2010.

------
shuckles
I'm aware of three indicators of bubbles:

1\. Pricing anomalies where the price of two assets that have fundamental
relation to each other violate that relation. For example, in the 1999 bubble,
3Com was a majority owner of Palm, but their market caps were inverted for
almost two months.

2\. Huge upward movements in price without any corresponding changes in
fundamentals. NASDAQ doubled in 2000 without commensurate good news in the
prospect of telecom and internet companies. Similar was Bitcoin's tenfolding,
or whatever, in 2018.

3\. Huge downward movements in price without fundamental news. Again, NASDAQ
decreased by 3/4 of its value in a year and a half even though there was only
a short recession, rates were low, and economic fundamentals like productivity
were growing fast. Part of the reason I listed downwards movements as separate
from upwards is that volatility in valuation is an important feature in and of
itself.

I'm curious if anyone has indicators to add to the list or is able to apply
these indicators to current events.

And as always, even if you have identified a bubble, trading profitably on
this is subject to the efficient market hypothesis.

~~~
danieltillett
The problem is not identifying bubbles, but knowing when they are going to
burst. We have a massive real estate bubble here in Australia, yet I have not
the slightest idea when it might burst.

~~~
shuckles
"And as always, even if you have identified a bubble, trading profitably on
this is subject to the efficient market hypothesis."

Timing is hard in the short run, certainly. However, if you believe you have
identified a true bubble, it seems wise to scrutinize long term commitments
requiring outsized returns from the underlying asset? Practically, this would
mean not tying your career to bubble technologies; not settling down into a
bubble-priced home-cum-retirement nest egg; etc.

~~~
danieltillett
Yes. I own a very overprice home, but I have avoided joining the masses and
becoming a part-time landlord (the great Australian dream it seems).

------
slimscsi
“Mediocrity + two years of tech experience = six figures. Kids who can code
and are two years out of school, who are mediocre, are making $100,000-plus in
the market. What’s worse is that they believe they’re worth it. If you can
code, yay for you. But you have no real hard skills or management ability.“

So, when this bubble breaks, companies will lay off the coders and have a
bunch of managers managing each other into profitability? Makes perfect sense.

Implying Management is a “hard skill” and coding isn’t Is disingenuous at
best.

~~~
braindouche
Have you ever been laid off? Because that's EXACTLY how it happens. The young,
new, and expensively specialized are dumped first. (It's less about hard and
soft skills than it is about generalist vs specialist, and business school
preaches that management science is a generalist practice.)

~~~
slimscsi
I have, and the companies then failed. Because without the developers, bugs
weren't getting fixed, and new features weren't getting developed. If they
trimmed from the middle, killing the layer of middle management first, they
may still have failed, but not as quickly. The middle managers cost more than
the developers, and by not maintaining the products they would not have shed
paying customers as quickly.

------
ng12
> Mediocrity + two years of tech experience = six figures. Kids who can code
> and are two years out of school, who are mediocre, are making $100,000-plus
> in the market

This has been true for almost a decade at this point.

~~~
onion2k
If you adjust for inflation it's been true for about 50 years in every part of
the software industry (especially games, fintech, insurtech, automation,
web..) among the top companies. Everywhere you look people have made a ton of
money whenever the state of the art gets to a point where you can apply
software tech to something that's not been done with software before. It's a
sort of ongoing 'goldrush' where developers move from one field to another as
tech gets to the point where computers are fast enough and clever enough for
an existing industry to realise there's enough value in optimization to make
it worth paying for.

The only thing that's changed recently is that now startups aren't waiting for
lumbering old incumbents of whatever industry it is to invite them in. Now
software companies are pushing the incumbents out because the data that old
industries use as a moat is open enough to not be a barrier any more.

~~~
njepa
I am not sure the situation is the same. Code used to be somewhat valuable,
like in for example a game engine. Today code is to some extent free, and
programming is a service. You don't sell software, you sell whatever investors
wants to see. If the economy takes a hit programming won't necessarily be very
valuable anymore.

~~~
shakezula
> If the economy takes a hit programming won't necessarily be very valuable
> anymore.

if the economy takes a hit, a lot of things won't be as valuable as they once
were. that's kinda the idea of a recession.

------
friedman23
A website idea that I've had for a while now but haven't gotten around to
implementing is a website to track predictions by people and whether they ever
come to pass. Fear mongering is very profitable and it is very damaging to
society. We should track every doom sayer's prediction so that when they
inevitably make another we can see their track record.

>Mediocrity + two years of tech experience = six figures. Kids who can code
and are two years out of school, who are mediocre, are making $100,000-plus in
the market. What’s worse is that they believe they’re worth it. If you can
code, yay for you. But you have no real hard skills or management ability. Not
recognizing that you’re overpaid means you won’t have the funds to avoid your
parents’ basement when shit gets real.

Frankly, this person doesn't seem to know what he is talking about. The most
profitable companies in the world are software businesses. Why? Because
software is a nearly infinite margin product. The marginal cost of software is
so inexpensive that the most profitable companies in the world give it away
for free.

Given that selling software is so profitable and is a skilled trade (limiting
the supply of developers) it is logical that the compensation of software
engineers is so high and it will remain high as long as logic and a technical
understanding of computers is required to develop software. Software's
penetration into the economy is only just starting.

------
karmakaze
All this post says is how things were the last time a tech bubble burst. It
doesn't give any reasons why the timing should be the same for the next one.

When people say we're in a bubble, what they're implying is that the bubble is
about to burst. Yes we're in a tech bubble, this is how life is now and I
don't see it changing. If/when it bursts, we'll start growing into another
one. No clear reason is given why the bubble we're in now can't keep growing
for a while longer. If anything the trade war is deflating the bubble. At some
point there will be an event or signal when the bubble pops if not
sufficiently deflated. The post doesn't mention anything to this effect in my
reading.

I think it's more interesting to consider the magnitude of the investors' and
CEOs' filter bubble. Maybe that's what the article is trying to get at, and
that makes some sense. That bubble is larger and more self-sustaining than any
earlier time. I think it's going to take a steady series of failed unicorns to
get that signal in.

------
baoha
I'm not sure how a professor at a pretty good school like NYU has a blunt tone
like this.

Beside personally criticizing people by their personal choice, which I found
baseless, there is zero information here. There are people with that life
style like that all the time, just because they happen to be tech CEO doesn't
mean it's a sign to a macro thing like bubble.

One thing I've been regreting the most after 10 year living in the valley is
that I shouldn't have listened to the 'tech bubble' propaganda back in 2016,
nor delayed buying my first house, which should have saved me ton of cash.

------
bellBivDinesh
Coders aren't safe because they don't have hard skills like _management
ability_.

~~~
C1sc0cat
Yes not sure what he's getting at - the MBA who went straight from a
Batchelors to a MBA are more of a concern.

------
Bombthecat
The bubble is always almost bursting... And the next recession is always just
around the corner...

If you predict often enough, one day you will be right...

------
shoo
Some other leading indicators of "formal" recessions [%]:

* as others mention, yield curve inversion. e.g: [https://financial-charts.effingapp.com/yield-curve](https://financial-charts.effingapp.com/yield-curve)

* unemployment rate climbing after hitting a local minima. e.g. [https://financial-charts.effingapp.com/usa-unemployment](https://financial-charts.effingapp.com/usa-unemployment)

Some other indicators that expected long-term stock market returns may be low:

* valuation ratios -- in terms of P/B, P/E, CA(P/E), etc, are high [+], compared to historical norms. e.g. [https://www.starcapital.de/en/research/stock-market-expectat...](https://www.starcapital.de/en/research/stock-market-expectations/)

* supply & demand factors, in terms of how much the average investor has allocated to the stock market [@]. e.g. [https://financial-charts.effingapp.com/](https://financial-charts.effingapp.com/)

[%] periods when recessions occur tend to be formally defined after the fact,
by economists looking backwards at historical data. this may not be
particularly helpful for anyone trying to time the market before a crash.
"Prediction is very difficult, especially about the future." \-- Bohr.

[+] some people may push back on this, saying "stocks are priced high relative
to what alternatives?" \-- if all alternative asset classes are also
"overpriced", then maybe that just means there's far too much cash floating
about, and not many good investment opportunities remaining. but if all asset
prices are "overpriced", then nothing is, cash is just devalued...

[@] n.b. the blog post that this indicator is based on is intended as somewhat
of a joke, as an example of how it is possible to construct rather arbitrary
and misleading indicators that look good --- but it's an interesting read:
[http://www.philosophicaleconomics.com/2013/12/the-single-
gre...](http://www.philosophicaleconomics.com/2013/12/the-single-greatest-
predictor-of-future-stock-market-returns/)

~~~
topmonk
The unemployment rate that everyone uses (U.3) actually only counts people who
have looked for work in the last 4 weeks since the BLS survey is taken. After
that, they fall into (U.6), which is for people who have looked for work in
the past year, and after that, they disappear from the stats all together.

Because of this, counterintuitively, the official (U.3) employment rate can go
up during a prolonged recession. This happened in 2008 - 2009 when people
stopped looking for work.

An estimate of the actual employment rate, including long term discouraged
workers, is here: [http://www.shadowstats.com/alternate_data/unemployment-
chart...](http://www.shadowstats.com/alternate_data/unemployment-charts)

If you don't trust that site, here is the Civilian labor force participation
rate, which indicates the percentage of the working population is actually
engaged in the labor force:

[https://www.bls.gov/charts/employment-situation/civilian-
lab...](https://www.bls.gov/charts/employment-situation/civilian-labor-force-
participation-rate.htm)

------
acchow
I like the behavioral signs pointed out in this article - of both people and
organizations. The signs of a bubble are becoming much more pronounced than 3
or 4 years ago. Add to that the temporary yield curve inversion a few months
ago, and again this week. Along with negative 10-year yields in Germany
today...

I took a large hedge against a recession in my portfolio today because I think
this one can be severe given the amount of QE.

------
chvid
This sort of prediction: "Things are going really well therefore they must be
about to turn really bad." Has a certain emotional appeal but they are not a
reliable indication of when a recession is about to occur.

------
bencollier49
The long hangover from 2008 has put the cycle out of whack, but I always
remember a quote from - I thought it was someone like Soros - saying that the
number cranes on the skyline was an indicator of an impending crash.
Apparently there is something called the Skyscraper Index which makes largely
the same point.

There are a lot of cranes in Manchester and London at the moment.

~~~
rgblambda
The Irish Times do something similar with the view from their Dublin Office.
Only difference being they use it as a measure of economic growth.

~~~
bencollier49
I suppose it must be a trailing indicator of economic growth.

------
bubblewrap
seem to remember reading that by now, internet companies have created more
value than was destroyed in the dot com crash.

Maybe people are just speculating wildly because they stakes are high - maybe
that's not even wrong behavior?

Also interested in the "giant penises" description of high building. Isn't it
simply space efficient to build high rather than flat? At least if space is
restricted, like on Manhattan Island, it makes sense. Maybe not so much if you
are located in a desert with unlimited space in all directions.

Also, there is a signalling aspect to marketing. Being able to afford
expensive marketing (including huge building, expensive ads) proves that you
have at least some kind of success so that you were able to come up with the
money.

------
j7ake
Talk is cheap. How much is he putting his own money on the line to support
this bearish position?

------
justaaron
Can we please have a moratorium on Medium articles? They are now a paywalled
site and even content providers are invited to pay to view their bloated blog
pages. The site itself offers nothing in addition to the content we freely
provided them.

------
lapinot
> Warning Signs That a Bubble Is About to Burst

Multiplication of people writing frantic click bait articles about how bad the
current state is.

------
davesque
So there's a bubble because some f __*boy didn 't get to buy himself a jet?
Bad way to start an article.

------
roymurdock
Author isn't saying anything new or insightful

Until he can say when and how the debt collection chain will break down and
spiral out of control, what types of non performing loans will spark a
recession, and how he's going to hedge and make money off that recession, not
interested

Just product placement for his new book

------
userulluipeste
_" too inexperienced to be running companies that hundreds or thousands of
families depend on for their livelihood"_

Did the author just implied that one would start or/and run a company out of
some moral responsibility for others' families livelihood?

------
shoo
sing along:
[https://www.youtube.com/watch?v=I6IQ_FOCE6I](https://www.youtube.com/watch?v=I6IQ_FOCE6I)

------
irjustin
This is probably the weakest "why you should listen to me for timing the
market" post that I've seen in a while.

Markets crash based on fundamentals. The specific examples - Meyer, Holmes -
are not indicative of market crashes let a lone direct signals or full on
causes of them even when a few are grouped together.

Remember the time when people said Trump would kill the market? Dow 22k? I'm
not saying it won't eventually happen with the next correction, but if I
listened to those guys then, I would've missed ~10%. We don 't know if that
correction will be 5, 10, 50%.

Dave Ramsey - Don't time the market. Buy Indicies.

