
What to Worry About in This Surreal Bull Market - rbanffy
https://www.bloomberg.com/news/features/2017-11-28/what-to-worry-about-in-this-surreal-bull-market
======
aedron
A bubble in slow motion, someone called the present economic environment. I
think it's an apt description. Extreme "quantitative easing" (I refuse to take
fed speak seriously) has only taken effect very, very slowly. Why? Because all
it really was was recapitalizing banks which had enormous gaping holes on
their balance sheets after 2008. They have been able to fill the tanks now,
getting money hot off the presses for a song for a decade, and finally it has
started to trickle into "the real economy" and actually lead to commercial and
industrial growth.

Another dampening factor has been the regulations introduced after 2008 like
S̶a̶r̶b̶a̶n̶e̶s̶-̶O̶x̶l̶e̶y̶ Dodd-Frank, the moratorium on IPOs has definitely
helped to slow things down.

Now things are moving again, trouble is, history has shown time and time again
that monetary policy is a ketchup bottle, once it starts having effect it is
already too late to moderate it. That's why we have bubbles - suddenly there
is too much money slushing around chasing finite resources, markets become
crazy and regulators have to slam the brakes hard (in combination with banks
predictably finding ways to overleverage, legally or not). Which leads to my
prediction: Markets are still not crazy enough. Crazy, but not enough to look
like the part where it all blows up. So I am betting on at least six months
more of "growth" (i.e. inflation) before the inevitable crash.

~~~
benevol
> "growth" (i.e. inflation) before the inevitable crash

What you need to know is this: Financial crashes are an eternal cycle, they
will never go away. Unless there is _fundamental_ societal change.

Here's why: Financial crashes are _business_ to a couple of extremely
powerful/rich people. After every crash, assets are undervalued. Rich people
have the financial cushion to not be impacted in the slightest way by such
crashes. Which means they are in a position to purchase these undervalued
assets from poorer people. The rich-poor imbalance grows further, as these
undervalued assets regain their "real" value. That's the reason why these
crashes are _manufactured_. Which means a couple of powerful/rich people will
continually steer society in this direction, for example by removing laws that
were put in place as safeguards.

Edit: And no, this is not conspiracy, it's pure economics.

~~~
headmelted
Please don't take offence, but you've misunderstood the mechanics of how
wealth is accumulated.

The wealthiest people in the world are wealthy by virtue of the gains made on
the assets they already have. So, in a bull market, their assets grow while
someone without assets is left behind. The inverse is true, too - they'll
proportionally lose to the same degree in a crash - as while a poor person may
have no investments, the wealthy person's investments will crash in line with
the market. There won't be a financial cushion, at least not a significant
one.

Books have been written around timing markets and it's generally accepted that
it cannot be done reliably. To get out before a crash then buy cheap would
require you to predict three different moments accurately: when to get in,
when to get out, and then when to buy on the "cheap". Timing even one reliably
requires luck or clairvoyance.

"Rich people have the financial cushion to not be impacted in the slightest
way by such crashes". This is clearly false - wealthy people don't keep
mountains of cash lying around as they would miss out on the growth in bull
markets, and as a result their wealth would decrease relative to their peers.

Investors generally just become relatively poorer during a crash then make it
back and more during the next bull market, at least that's how it's worked
until now. There's an old quote I can't find the source of right now that sums
it up fairly aptly:

"Stocks go down _faster_ than they go up... but they go up _further_ than they
go down".

~~~
dsacco
I agree with the thrust of your comment, but to nitpick:

 _> Books have been written around timing markets and it's generally accepted
that it cannot be done reliably. To get out before a crash then buy cheap
would require you to predict three different moments accurately: when to get
in, when to get out, and then when to buy on the "cheap". Timing even one
reliably requires luck or clairvoyance._

This doesn’t strike me as true, unless you’re describing the subset of
academic economists who agree with EMH in some form. In particular, the first
sentence on its own appears to be evidently untrue; it’s clear that there are
many parties, including economists and financiers, who attempt to time the
market and generally forecast macroeconomic shifts.

~~~
headmelted
I completely agree that it's the role of many parties to _attempt_ to forecast
the market, but I'm skeptical of how many (even those whose job it is to do so
day-to-day) really believe that it can be done reliably.

CNBC is probably a good example of this. When you don't predict anything
specific, you can never be wrong.

(Clairvoyance was not meant seriously, I should have made that clear!)

~~~
executive
[https://www.youtube.com/watch?v=V9EbPxTm5_s](https://www.youtube.com/watch?v=V9EbPxTm5_s)

------
mathgeek
The next market recession will happen the same as the previous ones: some
lucky people will predict it, most won't, and everyone will in hindsight
declare how obvious the signs were.

The best strategy is still to diversify your investments, keep enough
emergency assets to ride the wave, and not worry about it.

~~~
dominotw
>diversify your investments

Diversify into what though? Once market crashes, it takes everything down with
it.

~~~
the_gastropod
This is not necessarily true. To avoid volatility, invest across asset classes
with low correlation [1]. E.g., bonds will probably not tank when U.S.
equities do.

[1]
[https://www.investopedia.com/terms/c/coefficientofvariation....](https://www.investopedia.com/terms/c/coefficientofvariation.asp)

~~~
qznc
Bitcoin does not correlate with anything. Should people diversify into it?

~~~
the_gastropod
I said asset classes ;-) Bitcoin is not an asset in financial terms.

~~~
drewbug
But cash is?

~~~
soundwave106
I would call Bitcoin a "speculative asset" right now, actually. Compared to
major currencies, it is highly volatile.

Bitcoin also is, in some sense, similar to a fiat currency (Bitcoin has no
intrinsic value) without having the typical fiat currency backing (a
supporting government, complete with armies, laws and their enforcement
agencies, etc. sponsoring the currency). This adds a degree of risk to Bitcoin
most other currencies do not have.

Definitely I'd see it as an asset though.

~~~
qznc
Not being government backed does add risk? Bitcoin cannot declare bankrupty,
but governments can (ok, affecting bonds primarily). Also, governments can
abandon currencies and use different ones.

~~~
soundwave106
Governments can attempt to legislate away / restrict Bitcoin at any time, and
have muscle power to attempt to enforce this. The converse is not true. This
is the main reason I say that there is added risk.

You are correct that government backed currency is indeed absolutely not risk
free either in all cases; if confidence in the government is lost, the
"official" currency might end up as worthless, and alternatives may prosper
even despite heavy-handed government efforts in some cases. There is such a
thing as speculative fiat currency.

Having said that, even though forex is generally considered more risky than
other sorts of investments, the likelihood of the governments of the major
currency players executing the sort of serious humdingers to move their
currencies into the "speculative" category seems quite low to me. (Of course,
nothing in investing is guaranteed, but still...)

I'll also add that, from what I see, Bitcoin "governance" \-- the technical
code decisions ([https://www.economist.com/blogs/freeexchange/2017/09/not-
so-...](https://www.economist.com/blogs/freeexchange/2017/09/not-so-novel)) --
is somewhat in flux right now, eg the dramas over bitcoin blocksize limits.
This also adds risk.

------
truffle_pig
Shameless plug (but related):
[https://isthestockmarketgoingtocrash.com/](https://isthestockmarketgoingtocrash.com/)

Posted this here a while ago and people seemed to like it.

~~~
TheAdamAndChe
I wonder what makes them think the stock market is overvalued. Increasing
inequality combined with market saturation and the current difficulty to start
a competitive business means it makes perfect sense that stock prices are
historically high. Combine with the fact that passive index investing has
become the norm, and it seems like it will be a new normal.

~~~
mattmanser
It explains each of the indicators on the page. Click the "Market
Overvaluation" button (albeit with a pretty poor UI and terrible URL support
so I can't link it).

It's basically the value of US companies on the stock market divided by the
GDP, $27 trillion / $20 trillion = 135%.

Although it makes you wonder about if all that stashed money overseas is
having a significant impact on that.

~~~
schrodinger
Wouldn’t companies with a strong international presence (e.g. Apple)
contribute to that? It seems like increased globalization could explain that
high ratio rather than “overvaluation.”

~~~
dannyw
That would be counted in America's GDP.

The metric as designed is more flawed, because not all companies are public.

~~~
gok
Exports contribute to GDP but sales between foreign subsidiaries do not. So a
Toyota made in Toyota-owned Kentucky factory contributes to the US GDP. This
is in contrast to GNP; that US-made Toyota would count towards Japan's GNP.

------
Al-Khwarizmi
Honest question: is there any unavoidable reason why there cannot be a
permanent bull market? I mean, apart from empirical/historical observation
reasons (I don't find those very compelling, as some stuff in economics seems
to never happen until it happens).

Given the low interest rates, people are growingly investing in diversified
stocks to obtain profits in the long term. Index funds are growing, which
don't even try to speculate to outperform the average, but just go with the
flow. Taking that into account, could a slow and steady rise not just become a
system equilibrium and go on an on?

~~~
peatmoss
Economy is tied to real consumption of finite resources. As we mine, fish,
over harvest, burn, etc. our way out of some resources, we tend to find
substitutes or other efficiencies to begin again.

But... there is the question of whether our economic growth brings us closer
to the absolute carrying capacity of spaceship Earth.

So yeah, economic growth can’t continue forever without hitting some bio-
physical constraints. But then maybe we’ll take to the stars. Or maybe we’ll
crash hard and have exhausted the readily available and easily used resources,
and be unable to sustain a large technological society.

~~~
fnovd
>But... there is the question of whether our economic growth brings us closer
to the absolute carrying capacity of spaceship Earth.

Are we inching up on the absolute carrying capacity of Earth? Perhaps. But
what about the carrying capacity of the Sun?

We are barely capturing a _fraction_ of the energy the Sun sends our way.
Think about what we could do if our ability to harvest renewable energy in the
next two decades increased not tenfold or even a hundredfold, but a
_thousandfold_.

The smartphones in our pockets are almost unfathomably more powerful than
those of a few decades ago, yet we still power them by burning rocks we found
in the ground, eking out barely a day of usage before plugging them back into
the grid. There is so much about our digital world that is limited by energy
in ways we don't fully appreciate.

Imagine a miniaturized particle accelerator [1] that could actually turn lead
into gold [2]. Imagine this done at a scale powered by energy production
several orders of magnitude greater than what we have today. Obviously, this
is an implausible scenario, but the fact that it could even brush up against
the possible makes me wonder. How would such a system affect the value of
gold? Our perception of what gold is? How would such a system applied to any
resource, design, good, or service fundamentally change the way we interact
with our world?

The digital revolution we have seen is something to behold, but perhaps it is
only a stepping stone to something larger.

[1]
[https://spectrum.ieee.org/nanoclast/semiconductors/devices/n...](https://spectrum.ieee.org/nanoclast/semiconductors/devices/nanofabrication-
enables-acceleratoronachip-technology)

[2] [https://www.scientificamerican.com/article/fact-or-
fiction-l...](https://www.scientificamerican.com/article/fact-or-fiction-lead-
can-be-turned-into-gold/)

~~~
mac01021
The following blog post[1] should be required reading for everyone everywhere.
It talks about physical constraints on economic growth.

The main point he makes is that, regardless of how inexhaustable our sources
of energy are, increases in our rate of energy use are still necessarily
limited.

He notes:

1\. Economic growth is always accompanied by increase in energy consumption.

2\. Nearly all energy consumption (whether that be running current through
computer chips, burning fuel in combustion engines, or just metabolizing food)
has the effect of heating the surrounding land, air, or water.

3\. If humanity's rate of energy use increases 2.3% every year, then the
associated heat dissipation will be enough to cook us all within about 4
centuries.

4\. Economic growth without an increased rate of energy use is not obviously
impossible a priori, but it's definitely hard to imagine.

[1] [https://dothemath.ucsd.edu/2012/04/economist-meets-
physicist...](https://dothemath.ucsd.edu/2012/04/economist-meets-physicist/)

~~~
fnovd
Great blog post, but I had to take pause at this line:

>Economist: More than happy to keep our discussion grounded to Earth.

Of course we can't just keep ramping up terrestrial energy production ad
infinitum. All evidence points to us trying to leave spaceship Earth. The
entire discussion was grounded in a reality we are trying to move past.

------
ronnypostsstuff
What is the best thing to do with my savings? I am thinking about investing,
and read up on it. One thing I don't understand is where to put money to
minimize the impact of a recession. Government bonds? But then Graham says, I
think, bonds prices also rise in a bull market, and fall afterwards.

~~~
hackermailman
10% gov bonds and rest in Vanguard S&P 500 index funds, and just ride the
market average for next 30 years is Buffet's advice since it has the least
management fees
[https://news.ycombinator.com/item?id=14259538](https://news.ycombinator.com/item?id=14259538)

~~~
ThrustVectoring
The total stock market index fund (VTSAX) is a slightly better choice IMO, but
it really doesn't matter much either way.

------
cooervo
> “It’s surprising to see the number of bankruptcies in China is even lower
> than that in Netherlands or Belgium.”

This is amazing, how can a country so big as China, have less bankruptcies
than a micro state as Belgium. Unbelievable.

~~~
andruby
You forgot the sentence before:

> “The­ government should allow zombie companies to default or go bankrupt,”

This probably means that in China, they just let the company "rot" in zombie
state instead of letting it go bankrupt.

In Belgium, a company needs to submit paperwork regularly, and if this doesn't
happen, afaik, the company can be declared bankrupt by the government.

Belgium has a large numbers of companies per capita. Our tax system nudges us
to create companies for employment and investments, because of the high
personal taxes. This skews the comparison.

------
CharlesDodgson
I like the idea of bitcoin, but I can't help but worry that the fact it's both
unregulated and has no intrinsic value, couple that with the general
volatility and it looks less appealing.It's tough to think of something as a
safe haven when it has such wild fluctuation.

If it had one of those things I'd be tempted to invest, but the fact it lacks
either makes me fearful of it.

I really liked this write-up on crypto-currencies, it's a nice way of thinking
about the taxonomy of money and where it sits.
[https://www.bis.org/publ/qtrpdf/r_qt1709f.htm](https://www.bis.org/publ/qtrpdf/r_qt1709f.htm)

------
AndrewDucker
I'd love to know how far away from the next crash people think we are.

And where they think is a safe place to put money when that happens.

~~~
KozmoNau7
It _will_ happen before 2020, the question is when exactly it will hit. My
money is on late 2018 or early 2019.

What to do before then? Don't have any money in US stocks. Diversify both
geographically and sector-wise, cash out, be ready to invest when stocks crash
through the floor, to ride the wave when they inevitably rise again. The real
trick is spotting who's going to rise again and who's going to be left behind.
Tech stocks are volatile by nature, invest in renewable energy and related
sectors. We're going to need solar and wind power in the future, and
batteries. Lots of batteries. Then, as we near battery saturation, there is
going to be big money in recycling all those depleted batteries.

~~~
matwood
> It will happen before 2020, the question is when exactly it will hit.

What will be the catalyst? Just because we haven't had a recession in awhile
is not enough. Corporate profits are up, consumer spending is up, and even
though everyone on here thinks the numbers are lies, wages are starting to go
up.

> My money is on late 2018 or early 2019.

So you have already either shorted the market or bought put options out in
2019?

~~~
KozmoNau7
Market overvaluation and public debt are sky-high, it's an unsustainable
situation, we either reign it in by controlled means (not gonna happen), or
it's going to crash.

I'm not a huge investor, but I am preparing by reducing the proportion of US
stocks in my portfolio.

~~~
pault
How is market overvaluation calculated? And is public debt an absolute measure
or is it relative to another indicator?

------
cm2187
One more on the list: the end of quantitative easing. I think QE has largely
pushed the markets up since 2009, and the withdrawal of liquidity from the
system (if it ever happens, but normally should start this year) combined with
increasing rates should at the very least create market volatility, if not
apply a downward pressure.

~~~
sdljfslkjfdsj
It's scary what QE did. Inflated the largest stock market bubble & bond market
bubble at the same time. While most portfolios are split across them for
diversity.

It's more likely they both get crushed unless of course bonds continue to do
what they've done in the past meaning nominal yields go to -3% & real yields
-5%. It's possible I guess.

------
artur_makly
Would BTC prices rise or fall after this hypothetical crash?

~~~
brndnmtthws
Nobody knows, but if I were to guess I think they'd rise. If you're someone
who loves Bitcoin (and it would make sense to think the people buying Bitcoin
love it), then it's likely you think of it as a safe haven.

I see Bitcoin (and ETH, and others to a lesser degree) as a safe haven. I
personally have been selling off stock and moving into BTC, ETH, and others
because I think the traditional stock and bond market is grossly overvalued
and lacks the utility, censorship resistance, and security of Bitcoin. Nearly
10 years of the Federal Reserve buying up whatever crap people are selling,
and building a $4 trillion balance sheet, means the current market prices
don't reflect what the market can support.

~~~
aquova
> If you're someone who loves Bitcoin (and it would make sense to think the
> people buying Bitcoin love it), then it's likely you think of it as a safe
> haven.

The problem with this statement is that many people getting into Bitcoin don't
understand the underlying concept behind it, nor do they really care. I've
spoken to several people who are treating BTC as a new stock investment, and
only care about the steadily increasing value and think they can make a quick
buck. If Bitcoin crashes (and I think it'll crash to some degree fairly soon)
it won't be the core BTC enthusiasts who will leave, it'll be these
opportunists getting frightened and leaving in droves.

Now, this may actually be healthy for the long-term state of BTC, but I still
think it'll have to happen.

~~~
brndnmtthws
> The problem with this statement is that many people getting into Bitcoin
> don't understand the underlying concept behind it

A lot of the people proclaiming "Bubble! Stay away!" are in the same category.
Or I'd go as far as to say they don't really understand market dynamics, and
the fact that the value of anything is only the price someone else is willing
to pay for it. And then there's the people who spread anti-Bitcoin FUD because
they are either a) mad they missed out or b) threatened by what Bitcoin offers
(maybe they're a rent-seeking middleman who would be rendered obsolete).

~~~
kgwgk
Value and price are different things.

------
kylestlb
The PEOPLE VS COUNTRY graph is a little concerning. Household wealth rising
faster than USA GDP. Is there some normal, boring reason why this would
happen?

~~~
ac29
Yes, the assets they hold are overvalued -- at least if you beleive US
equities, housing, and other assets shouldnt grow in value faster than US GDP.

------
antouank
Do we consider a case where a "crash" doesn't happen? Say we might have a war
or some other global disaster at some point, but not an economic crash. Is
that so improbable?

~~~
rebuilder
Without defining a timescale, yes, it's very improbable. Feedback loops tend
to develop in the markets, where eventually asset prices rise because people
buy the assets since they've been rising for a long time. If nothing else
happens, that at least is sure to lead to a crash at some point.

Now, whether there's probably going to be a crash in the next 10 years is not
something I'd care to bet on, although the odds are far from 0. Overall, the
game is not predicting crashes as much as it is being prepared for them when
they do come.

~~~
antouank
I guess I meant that looking back in history, I'd say there's a good chance
that we'll start a world war, or upset the climate or something, and that will
"crash" economy, not economy itself.

~~~
sdljfslkjfdsj
Sanctions have always been a pretty good indicator of war when levied from one
sovereign to another. That indicator has probably gone from flashing yellow to
red recently.

------
anon1253
Here's something odd I noticed. The previous crisis obviously had a lot of
detrimental effects. However, it also made some people /very/ rich. Basically
if you invested smartly right after, you would have more than recovered the
losses by now. I think people are anticipating that, I know I certainly am.
Next crisis, hopefully sell before it happens and then buy for longs. I'm not
quite sure if that /anticipation/ was just as ingrained before. Maybe I've
just gotten older and notice it more, maybe it's a real thing. But whatever it
is, it's quite dangerous, because it's a catalyst: if people want it, it will
happen faster than before. Couple that with real externalities (geo-political
tensions, climate change, resource depletion, overpopulation) we might be in
for a dangerous disconnect between market movement and "looking out of the
window".

------
narrator
Relax. Until the yield curve goes negative, there's nothing to worry about.

~~~
ionwake
What is the yield curve?

~~~
narrator
[https://fred.stlouisfed.org/series/T10Y2Y](https://fred.stlouisfed.org/series/T10Y2Y)

------
uptown
We're approaching year-end when there's typically some inflows resulting from
401k and IRA investments. Does this cash sit on the sidelines waiting for the
crash, or does it go into the market?

~~~
Unkechaug
401k and investments from people who think their IRAs need to be contributed
during the calendar year (and have the ability to) will go in because even
with high prices, you only get to contribute a certain amount per year.

~~~
uptown
Right but it can go in as cash and not be immediately invested. I'm wondering
whether that might happen given the current state of the market.

------
sytelus
One of the good way to find out if there is a bubble is to simply plot a graph
of total earnings growth vs stock index. If these two are out of sync by huge
margins, it's a sell time.

~~~
mullen
Where can I plot that? There has to be a website that has all that data that I
can visualize.

------
r41nbowdash
log periodic models predicted the end of the s&p 500 bubble somewhere at 2015,
and it's still exceeding the exponential growth

(can't find a source, saw it somewhere)

------
dbrgn
Could a mod remove the tracking parameters from that URL?

------
marcoperaza
After basically 0% net growth in the market for over a year leading up to the
election, there has been a 25% boom beginning exactly on the day after Trump
won. That is no coincidence. The markets are anticipating Trump's promised
massive deregulatory push (already well underway), tax cuts, a more union-
hostile Justice Department and NLRB, and other business-friendly changes.

~~~
kgwgk
The funny thing is that most of those things have not happened yet and the
first market reaction on election night was that Trump’s victory was a very
bad thing.

~~~
marcoperaza
Markets price in expectations of future events. Yes, there was indeed a
panicked frenzy in the futures market. But by the next morning, the consensus
clearly emerged that the result was a positive thing for the stock market.

~~~
kgwgk
I agree, but people forecast the stock market to go up again in the next year
due to the tax reform but that was alredy the reason for most of the gains in
the last year... And it's not yet a sure thing.

