I think that this is just the beginning. In my opinion, we're heading for a tech bust that's going to spread to the rest of the economy, and deflate additional bubbles (housing, for one). The government has been pushing cheap money for the better part of a decade in the name of creating the appearance of a 'recovery', but what they've really done is build a new house of cards. Make no mistake: the 'free' money that's been gushing into major institutions under the current administration is just as distortive and will be just as disastrous as the 'free' money that the last administration encouraged banks to put into the hands of sub-prime individuals.
Maintaining a near-zero interest rate creates artificial demand, and encourages investment of capital in inefficient enterprises. The thought process is "hey, I lose value with money in the bank. I'd be better off if I found something -- anything -- else to do with it!"
I think that once things take a turn, housing will also turn again, because in many areas the median house now costs enough that it's beyond the reach of the median person. That environment is unsustainable over a large time scale. Ultimately, we'll need a correction that sticks if we want to avoid repeating these events, and for that to happen we'd need a government willing to tolerate a politically unpalatable permanent reduction in asset prices.
(edit/note: I do find it odd that under a Democratic president, the major flows of borrowed cash (debt) have been directed to the big guys, while under a Republican president, they were directed to the little guys. Both were a terrible idea, but it seems backwards for what one would expect.)
I'll nail it down a little for you. I think it's going to be within two years, based purely on asset valuation : income ... which isn't a particularly sophisticated way to analyze it, but when people can't afford things anymore, they stop buying them, and that has predictable effects.
Shorting is very risky, since the downside risk is unlimited if you guess wrong. (Imagine shorting Microsoft based on the low quality of their code, sometime around MS-DOS 1.0.) It's better to buy businesses that will go up when the market goes down, or ones that are recession-proof in general, while avoiding cyclically sensitive businesses and, especially, any sectors that are about to have bubbles burst in them.
If the near future is the unicorn version of the dot-com bubble, its aftermath would be a good time for tech stocks you're interested in.
Options vs. shorting are just two different ways to risk all your capital on a bet... the "unlimited" downside of a short position has a practical limit--it's when your broker forces your account to cover with buys (the short squeeze) and you zero out.
No, I described the practical downside exposure of a short (or, the trader could put in a stop). It is no more "unlimited" than is the downside of buying a bunch of ultimately worthless options.
Agreed. I've done that in the past and done quite well, but when I got married I dumped all my non-retirement portfolio. 6% guaranteed return paying down student debt (plus getting rid of payments, which hadn't been something I'd dealt with before) beats playing games in the stock market for me. Plus, I like to make my bets while the market is already on the way down ... during the last recession I started buying on the way down (after prices had already dropped quite a way), and stopped when the market got back to where I'd started, which worked out quite well. I did most of this in my 401k and IRAs (to the limits allowed by the contribution rules), so I also scored tax benefits :). Biggest non-retirement bet was buying a house in early 2011, which also turned out to be a decent thing to have done in my market ... although I think that there is a significant possibility that the gains in value due to the market will be wiped out in the future.
wow.. didn't know such a site existed...will definitely point more people to the site when they keep making these types of predictions. That was such a fun read (looks like the site has been around for a long time)
If you strongly believe this, you could do something similar to what the guy did in 'The Big Short', short the relevant markets within your timeframe and you'll be recession proof.
In places like SV and Vancouver housing prices are not strongly connected to the economic reach of the median person.
China has a middle class as big as the entire US, and a huge number of millionaires in USD, and an unstable, opaque state-run economy, so huge numbers of rich Chinese are buying real estate abroad to protect their wealth and to give their kids a life in the US.
I would be happy to see a movement to keep Chinese money out of the U.S. housing market, at least in places like SV.
Why? If foreigners want to buy stuff, we call that exports. Just produce more of the stuff they want to buy. Ie build more apartments (= higher houses) in SV.
> because in many areas the median house now costs enough that it's beyond the reach of the median person. That environment is unsustainable over a large time scale.
"Too expensive" does not equal bubble. It has to be expensive because speculators are driving the price up, thinking they're all fooling each other. As soon as they get get scared that the other speculators might be thinking of selling the price suddenly collapses as they race to not be the last to divest.
If something is expensive because it's scarce, is actually being practically used, and there are no substitutes, then there is no way to make the price suddenly collapse other than flooding the market with new supply, and it would take many years to increase the supply of housing by a significant percent. If the price of housing drops a bit all of the homeowners aren't going to rush to sell their homes in a panic like you might see with a purely speculative asset.
In the 2008 crisis home prices dropped by like 10-15%. The housing market didn't collapse. It's not as if the "bubble burst" and housing was worthless after that.
That very much depends on where you live. It wasn't that bad in the Bay Area because there wasn't a building boom, but in places that there was a boom the prices climbed very quickly and indeed collapsed even more quickly. Las Vegas, Phoenix, Miami and other markets were all hit very hard (60% or so).
Housing markets are kinda weird in a way - when hearing bad news about the economy, people don't immediately get on the phone with a real estate broker and yell to "Sell! Sell! Sell!"
For primary residences most are driven by loss aversion ("I'll sell it when it comes back to the price I paid for it, I don't want to lock in my losses, and this is still a decent place to live").
You're right that some markets experienced steeper declines than others, and the ones that descended quicker were highly leveraged through 0% down, or interest-only (or both) loans. Post-2008 lending scene has been much more restrictive, I can't imagine a lot of people being highly leveraged at the moment.
Like other comments have pointed out, some markets did see much bigger collapses in prices. The markets that did had seen huge price increases driven largely by speculation in 2002-2007.
In the early to mid 00's the idea of "flipping" real estate became popular. The idea was that you would agree to buy a property, and then sell it very quickly, often setting up a deal to sell it before you even fully closed on it yourself. There were a lot of more-or-less amateur investor types who flocked to markets with cheap real estate and strong population growth - e.g. Las Vegas and Phoenix - and started flipping houses. This was pure speculation completely divorced from underlying demand.
I don't think there is anything like that happening today - at least not nearly on as large a scale. So, while I would disagree with the idea that "the market didn't collapse" - it did in some locations - I certainly do agree that it's not likely to collapse in quite as dramatic a way any time soon.
The trouble is that widespread leverage means that asset price falls detonate the entire system unless capital is backfilled somehow. That was why state credit was so widely extended to banks in trouble: the risk that collapsing bank A is in debt to bank B, which then collapses in turn taking out banks C, D, E, the payments settlement system, and the ability of people to get money out of ATMs.
It's not so much that any one entity is "too big to fail", but all the big entities are too interlinked so they cannot fail separately.
I predict the bust will happen because the HN/Silicon Valley hivemind so obviously wants it to and so we'll all bet on each other's failure until it is realized.
It really seems like if we all agreed to keep the music playing, the music would continue playing. But once we decide it's going to stop, it has to.
No. The people at the top providing the money for this circus are the ones with the power to stop the music, and they're stopping it because the companies they funded aren't performing.
You actually can't just keep dumping money into companies that are doing nothing but burning it.
But, yes, for the record, I do want the bubble to burst, because the world has real problems and I just got a cold recruiting email from someone building a GIF keyboard. "Silicon Valley" is a spectacular, world historical squandering of brain power and it needs to stop.
>"Silicon Valley" is a spectacular, world historical squandering of brain power and it needs to stop.
Are you implying that there are less-frivolous actors offering competitive salaries and getting ignored, or that SV is inflating the price of programming labor? Because if the latter, and you're hoping for a correction of programming salaries down to lower-middle-class clerical work that humanitarians can afford, won't those with brain power just "squander" it in some other better-paying field?
What? Where are people going to get the money to pay higher/equivalent salaries if not funding?
The non-tech sector seems perfectly content to pay engineers 60k under constant threat of outsourcing. In the absence of Silicon Valley competing for talent they'll get away with less, not more.
Google/Facebook/Apple/Microsoft/etc have been and will continue competing for talent. 2005 to 2009 was hardly a time of "easy money", yet the big tech companies still had to resort to collusion to combat demand for engineers.
I can say this much -- I have exactly one friend who also works as a software engineer. The rest of my friends are activists, students, service industry workers and non-tech entrepreneurs who are getting absolutely crushed by the cost of living in the Bay Area. A massive, "catastrophic" crash in the tech industry would, on balance, be great for all of them.
> who are getting absolutely crushed by the cost of living in the Bay Area
Outside the bubble, New York has always been like this, and it's not because of the tech industry.
Like the Bay Area, New York appeals to a lot of people, and with the appeal comes competition for housing. The Bay Area is a desirable place to live -- the weather is always excellent, there's plenty of stuff to do (try finding a mountain to ride your bike up in New York City), etc. People pay it because they like it. I don't think it's because tech is there.
I've only lived in the Bay Area for 6 years and I've watched it change dramatically for the worse. My friends who have been here since the 90s talk about it in biblical, apocalyptic terms. It isn't "just like that". Something fundamental has changed.
How will a bust all of a sudden make sure that all that brain talent starts working on something worthwhile? A bust just means that instead of improving their skills while working on something useless, they will instead be looking for work which will be equally useless and they won't be improving their skills.
Say what you will of all the bullshit we fund, every one of those represent projects where talent can improve their skills, and many of these will eventually stop working at a bullshit startup and get recruited by one of the companies actually building something valuable.
> in many areas the median house now costs enough that it's beyond the reach of the median person
I don't see it. Maybe bubbly areas like SJ will correct a bit, but at the end of the day real estate is a supply/demand calculation. YoY% increases don't look like they did in the last bubble.
The more people who want to live somewhere -- whether renters or buyers -- the higher the prices go, until sales start dropping off. Real estate is like anything else: it's worth whatever you can convince someone to pay.
EDIT: I am specifically referring to the "Price to Income" chart in my comment below, not the one that shows up by default. Sorry for the confusion.
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Uncheck everything but the 'US' graph. Different data sources give different ratios, but they all show that it's still well above historical norms & headed up. Some data sources say that it's already approximately back to where it was in the peak (see a link further down, that chart is up-to-date), others like this one only show it ~1/2 way there (note tat this chart is two years out of date), but either way we're above what has been stable in the past.
Without numbers it's hard to tell, but it looks to me like the curve is even gentler than 99-03. It's almost always going to be going up and to the right until the population starts shrinking.
People are just stubborn and think that if they can't afford the type of house they want in the type of neighborhood they want in the city they want, then housing must be in a bubble and out of reach.
Assuming continuous inflation, the absolute price of housing will always increase. However, affordability decreases as the ratio of housing price : income increases. There is a limit above which a vast swath of the population can't afford houses, and somewhere just beneath that limit lies another at which the price of housing collapses. That's assuming that the effect of speculation never becomes large enough to outweigh a collapse of real demand.
>(edit/note: I do find it odd that under a Democratic president, the major flows of borrowed cash (debt) have been directed to the big guys, while under a Republican president, they were directed to the little guys. Both were a terrible idea, but it seems backwards for what one would expect.)
Both of them were chiefly monetary initiatives rather than fiscal. The Fed acts pretty much independently of who's President, which explains the "oddness".
Do you have data to support that a few unicorn valuations being corrected will spread to the rest of the economy, particularly housing and not just be largely limited to private markets and investors?
Yes and no. With regard to spreading, just prior observation that adjustments tend to spread. With regard to housing, the observation that the median home price : median income ratio is now above 5.2x, while at the last peak it was only at ~5x. The rate of growth is lower this time, but I don't think it matters because the ratio is still really bad.
During the last bust home prices went up not down. Because investment rotated from stocks to housing. Why won't that happen again, especially with ZIRP?
It's far more likely we're about to witness a significant new housing bubble courtesy of the Fed moving to negative interest rates. The tech bust is a joke compared to the size of the housing market, there's no "spreading" that can possibly go on from the tiny unicorn bubble to housing that is going to matter. Housing is $30 trillion, the unicorn bubble is the size of one Facebook (1% the size).
See: the results of Sweden's negative interest rate policy (ie a huge housing bubble).
"Ultimately, we'll need a correction that sticks if we want to avoid repeating these events, and for that to happen we'd need a government willing to tolerate a politically unpalatable permanent reduction in asset prices."
I was referring specifically to the cheap debt. Yes, the much of the spent money under Bush went to the Iraq war, and under Obama much of it went to 'stimulus', and both items hurt us all (through inefficient use of resources) while benefiting large enterprises.
Not really. The Iraq and Afghanistan wars together cost something on the order of $750 billion, which was less than one year of stimulus spending at the beginning of the current administration.
> Not really. The Iraq and Afghanistan wars together cost something on the order of $750 billion, which was less than one year of stimulus spending at the beginning of the current administration.
Ignore this person. They don't know what they are talking about.
The estimate cost of the Afghan + Iraq War is estimated to be $4-6 trillion when you account for long-term medical care and disability compensation for service members, veterans and families, military replenishment and social and economic costs.
Add another zero to that and you're closer to the real figure, which doesn't even include ongoing expenses like the ramping up of the domestic security apparatus and the surveillance industrial complex created in the wars' wake.
Maintaining a near-zero interest rate creates artificial demand, and encourages investment of capital in inefficient enterprises. The thought process is "hey, I lose value with money in the bank. I'd be better off if I found something -- anything -- else to do with it!"
I think that once things take a turn, housing will also turn again, because in many areas the median house now costs enough that it's beyond the reach of the median person. That environment is unsustainable over a large time scale. Ultimately, we'll need a correction that sticks if we want to avoid repeating these events, and for that to happen we'd need a government willing to tolerate a politically unpalatable permanent reduction in asset prices.
(edit/note: I do find it odd that under a Democratic president, the major flows of borrowed cash (debt) have been directed to the big guys, while under a Republican president, they were directed to the little guys. Both were a terrible idea, but it seems backwards for what one would expect.)