This is a long read, but it's worth it. The metric can be calculated in FRED, 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. (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.)
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.
TLDR: The correlation did go down a bit since publishing but still seems alright.
It took me a few seconds to figure out that you meant the patterns and not the people as the targets for disappearing.
If you can find any way to predict the future price of things, you can make money by performing arbitrage across time (instead of space, which is how people usually think of arbitrage). This (nominally) describes all types of model-informed time-based investment.
The thing with arbitrage is that there's a finite amount of money you can make. If there's a price difference on some cross-listed stock between HKEx and SZSE, you can make money by buying on the cheap one and selling on the pricier one. But, as a side effect of doing so, the price goes up on the cheap one and goes down on the pricier one. There is only a finite amount of stock you can exchange before the price difference approaches zero and you can't make money. The price information has been communicated, and the market has served its function.
The same is true for arbitrage across time. There's only so much money you can spend before the "prices" (more complicated than spacial price differences, because you have to worry about some more complex utility theory to find the expectation value of something in the future) equilibrate and market information has been propagated "through time".
This is why these things "have a habit of disappearing"; every single way of making money via models corresponds to a market inefficiency. Model-based traders are eliminating market inefficiencies and making a cut off the benefit, just like any other good business. The inefficiencies are just more abstract than usual.
So if a model is good, there's no way for it to persist. If it actually predicts something we didn't expect, that corresponds to some inneficiency in the market that some trader can eliminate in exchange for a nice fee.
Hah! Grammatically, "they" refers to the people (not the pattern).
IMHO, sometimes these details matter, as in:
"Let's eat grandma!" vs "Let's eat, grandma!"
"know your shit" vs "know you're shit"
> "Linguistically, an amphiboly is an ambiguity which results from ambiguous grammar, as opposed to one that results from the ambiguity of words or phrases—that is, Equivocation."
"Fixing" it would probably involve rephrasing to reverse the order of "people" and "pattern" in the sentence or
just put all the emphasis on the pattern:
"... these patterns, when discovered, have a habit of disappearing"
Strict correctness regarding subject:verb agreement can, like other grammatical constructs, lead to non-idiomatic, awkward phrasing. Formal "rules" about prepositions are the first related example I can think of. ("... of which I can think" is awful, right?). My point was just to laugh at the ambiguity. (shrug)
1. Why 10 years as the forward return period -- would be nice to see the situation for other return periods, even close to 10 years. Granted, it is a round number and doesn't appear to be cherry-picked, but still.
2. Why 1952 as the starting point -- presumably because the data from FRED starts there, but can this not be extended further back?
3. Why an implausibly linear relationship between the equity allocation percentage, which is bounded (0%-100%) vs. the returns, which is unbounded on either side, over such a large range of values? What is the mechanism to explain this? In other words, what is the proposed model that transmits allocation percentage into a return, even if the directionality of correlation is at least likely? What happens around 0% and 100% allocation -- do the extreme cases make sense?
I'd like to run my own data before I believe this.
There are also several companies that specialize in providing this exact cash/equity data research to financial firms to help them manage their trading strategies and offering more practical details in their data than FRED data offers. For example TrimTabs  (no affiliation) has been around since 1990 according to their website  trimtabs.com
Discredited the article to me..
Improvements of a market reduce its friction and make it more efficient: transaction costs disappear for instance. Cost and price aren't the same thing. The latter includes the former.
Price can be seen as formed by a supply-demand process. In this process investors and capital seekers are BOTH subject to the cost of an inefficient market. They're not two sides of a coin.
Maybe not so recommended.
Basically you say that the decrease in friction in a market drives the demand up: as markets grow efficient it become easier for buyers to enter. However I see that it become easier for seller to enter as well! So it is not necessarily a driver of demand..
This argument can be correct in an asymmetrical market like the ones for bonds, equities, real estate, commodities but it doesn't hold in FX markets for instance (perhaps the money market as well) or other derivative markets where there is not so much bias in being a buyer rather than a seller.
Although, I might say this argument can be available in a world were investors are in majority of the 'buy and hold' type. Which is the world we live in actually! So I can agree with him that new market opportunities and improvements in market efficiency can be an explanation for the flow of cash, and thus inflated prices... even bubble genesis! The venture capital markets or the crypto-currency ones are perfect examples.
To conclude you made me think twice about that and I kind of agree with him but I still don't think it is a universal argument.
If you are wondering which category you are in, if at any point during your "analysis" you find yourself looking for things with names like "evening star", "bullish engulfing", "head and shoulders", etc.... save yourself some time and money, and go buy that lottery ticket. Day trading is not for you.
If your technical analysis is looking at volume/price/depth-changes, then congratulations, you are on the right track. Next you have to overcome the largest and most devastating hurdle, which is your own psychology.
Reading that and applying it was a huge turning point for me in my trading.
There is no sane way to automate this, since everyone's description of "enough" volume delta is different. Perhaps I open positions at a CD imbalance of 15%, bank of america waits on 19%, and chase at 25%. My actions at 15% further the delta, causing bank of america's 19% threshold to fire, which in turn increases the delta to 25% causing chase's threshold to fire. Until every day trader "gets on the same page" so to speak, this will not be automated. And...if they ever do get on the same page, then it only takes 1 person with decent equity to take the other automated strategies to the cleaners.
tldr; This will be automated away when greed no longer exists, i.e. never.
Anything that can be completely automated will lead to an elimination of excess returns. Having a single parameter that differs between market participants is not enough to stabilize a long-term imbalance.
I'm guessing it is a self-fulfilling prophecy (everybody believes in it, so it becomes true), but perhaps there is a logical explanation that I'm totally missing.
Support and resistance areas form because market participants remember price levels, and they tend to react as a group when a stock returns to those prices. A simple example will make the concept easy to understand. Let's imagine that you and other investors bought a stock at its initial public offering price of $20. People who did not buy the stock at the offering price are interested in buying it at that level, and they buy the stock at $20 or perhaps above $20 as interest in the stock builds. Other buyers come in and the stock trades up to $22.
The stock may trade back and forth between $20 and $22, but let's imagine that at some point the stock slips down to $16. Some traders will hold on to the stock, hoping that its fortunes will reverse and it will trade back above $22. But if the stock remains depressed, owners of the stock who bought it in the $20 to $22 area will begin to think it would be nice just to break even. If the stock does trade back up, the desire to get out at break-even will become even stronger as the stock approaches the $20 to $22 area.
To put this price zone into perspective, the more sideways trading that occurs, the greater the supply of stock will be. There will be more people who want to "get even," and therefore there will be more resistance to the stock's advance.
Support and resistance are not precise concepts. When support develops during a decline at a price short of the exact level, it is usually because traders are anxious. They remember the prior resistance level at $22, but they start buying on the way down at $22.75 and $22.50 because they are anxious or even fearful they will not have the opportunity to buy again at $22.
On a few occasions, eager traders might push a market too quickly through a support level, and support might not develop until just beyond the support area. Whether support is found short of the expected level or just beyond the level will tell you how eager or fearful traders are.
We have seen that when support is broken on the downside, it then becomes resistance. The opposite is also true; resistance, once broken, becomes support. This reversal of roles is due to the memory of traders and investors who want to get out of their losing trades at break-even, and traders who want to increase winning positions by buying more stock at or near support.
The role reversal of support and resistance leads to the formation of trends, because in an uptrend, market pullbacks or reactions will tend to find support at the last resistance level. In a downtrend, reactions or rallies will tend to find resistance at the last support level.
All support and resistance levels are not equal. The strength of a support or resistance level depends on several factors, such as the number of times the level or area was tested, the volume of trades transacted there, how long ago the formation appeared, and whether it was a round number of a "big figure." Even knowing the type of security will help in determining the validity of the support or resistance area.
The more times a level or zone of prices is tested, the more important that level becomes. A level that is tested six times and holds tends to be more important that one that was tested only twice. The more times a support or resistance level is tested, the more traders will remember it and the more traders will be likely to be committed near it.
When a large volume of trading occurs in a support or resistance area, that adds to its validity because a greater number of traders and investors will remember the level, so their commitment to the level will likely be greater.
The further back in time the support or resistance area was formed, the dimmer the memory, and the more likely that people have already acted on new information and may not respond in the same way again. They moved on by liquidating their positions. An area of support or resistance that was formed recently tends to attract a greater number of people who are still committed to the level. Thus, these nearby levels have more validity or potency.
When a support or resistance level forms at a round number or a big figure, such as $100 or $1,000 or DJIA 10,000, many more people will remember the level because it is easy to remember and obvious. In turn, the more people who remember and act at that level, the stronger the support or resistance will be.
I believe that corresponds quite accurately with the assessment we are currently at the early to mid stages of a secular bull market in equities analogous to the runs during the 1950s and 1980s. But as others have pointed out, it doesn't say anything about the possibility of a correction in the near term. Be careful out there!
You mean when everyone sold securities, moved to cash, and bought Treasuries, CDs and bank deposits?
If your money wasn't in the market, you might have been lucky with timing but statistically if you replay that scenario, you're losing out on gains by not just parking your money in the market in the long run.
Your salary, invest you savings in the market.
Given Bitcoin's "capitalisation" failed to hit even $10bn until well after the crisis , it's safe to say that more capital moved, in almost any single U.S. state, from stocks to corporate bonds, than from anything to Bitcoin. Being optimistic about the future of a technology is fine. Being delusional about its history is not.
Regarding Cyprus, wealthy Cypriots--by and large--bought German and Greek government bonds, not Bitcoin.
Bitcoin came into existence in January of 2009. What was it supposed to do? Start stealing its owners' money and go negative?
Also, everything rose in 2009. The S&P 500 was up 23%. Bonds were up, commodities were up...that's what happens after you scrape past a global financial meltdown. Sure, Bitcoin was up like five thousand percent, but that's the difference between a tens of millions and hundreds of billion in market capitalisation, things that are very volatile and things that are not, and venture versus mature.
Those who've hedged with crypto's as a trading vehicle are likely to win again during the next inevitable downturn.
Bitcoin may be an alternative to gold but it is not the same.
1) Gold has intrinsic value.
2) Gold is a tangible asset.
Now, I know that I've committed a straw man argument myself by using a contrived example. To that, I'll say that the only "value" one has by having gold in the real world is that other people will trade you for it. But this is exactly the opposite of intrinsic value. The value of gold being entirely fabricated by people's desire to hold it.
Gold's value comes from its (a) millennia-long history of stably holding value across cultures and technological domains and (b) its tangibility and physically-enforced scarcity. Its intrinsic value is a fraction of its market value, in part because the inflated price deters lots of uses.
a) crypto holders believe that the value will hold because as more individuals use it to store their net worth, the harder it will become to
manipulate. ie. a history of price growth/eventual stabilization will occur in time.
b) its algorithmically-enforced scarcity, which many people believe is as valid as physically-enforced scarcity. So long as hash-based cryptography always works.
There is one feature gold has over Bitcoin that cryptocurrencies cannot replicate: resilience across technological domains. Gold holds value without computers or electricity. Bitcoin does not. Gold, on the other hand, cannot travel at the speed of light. TL; DR each solves different systems of trade-offs.
That's recursive - you're basically saying that gold has value because it has historically being valuable. Which begs the question of why it has been valuable.
I'm not saying that this doesn't add some (most, in fact) value to gold. I'm just saying that this isn't a property that is enabled by anything specific to gold.
With money, you want five things: fungibility, durability, portability, cognizability and stability .
On fungibility, gold is an element. It can only be extracted, not produced in a conventional sense. In fact, before the 1669 discovery of phosphorous, humans had only purified, from oldest to newest, copper, lead, gold, silver, iron, carbon, tin, sulfur, mercury, zinc, arsenic and antimony .
Out of those, lead, gold, silver and mercury are chemically stable, though only gold and silver are also physically durable. Both are easy to recognize, though more metals are "silvery" in color than yellow.
Gold won due to stability, in large part because of a few flukes. For most of human history, growth was flat and gold mining was minimal. When we actually started growing, the major powers were using gold. The rate at which they added to global gold supplies happened to mirror their economic growth; this gave gold a few decades of price stability. That memory, together with the millennia of use, forged a cultural memory in the furnaces of the industrial revolution that remains, vividly, to this day .
> That's recursive
Cultural memories, like trust, are re-enforced by network effects. Your observation is correct. Gold got where it got, in part, due to luck and then just stuck.
Can that be replicated? Perhaps. I personally think our obsession with gold is silly. But engineering that properly means understanding why it happened in the first place. At least amongst Bitcoin enthusiasts, I come across the types of comments you see others making in this thread, as opposed to bona fide introspection and defenses.
Your last point brings up an interesting tangent, if gold wasn't treated as a store of value, what would its price be? Would it be similar to diamonds where synthetic ones are half the price? Are you aware of any sources that try to answer this question?
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.
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 . 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.
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.
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).
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...
If you list 5% of a $1 trillion company on a stock exchange, the aggregate market capitalisation goes up by $1 trillion. (Float goes up by $50bn.)
Market capitalisation is price per share times shares outstanding . Float is price per share times publicly-trading shares .
When only a small fraction of shares are on the market, it's quite easy to manipulate the price higher... buying pressure goes a relatively long way.
If you can get 1% of your shares to be worth $100k, it now appears as though you are a $10 million company. This makes you appear reputable.
Drive hype about your "valuable" company, and once the stock is sufficiently pumped, dump your shares for profit.
The case against: economic activity in the US has been concentrating in larger companies (less small companies being started for example) and there is more "financialization" in general. So you would expect the ratio of market cap / GDP to go up for those reasons as well.
Total stock market value has units $
GDP has units $/year
Thanks for the feedback
That this ratio doubled in 8 years is worrisome.
The thing is that an alternative analysis is to look at the linear regression since 1980 and it seems clear that a background upward tendency does seem to exist, so we can see 2009 as an adjustment to the 2008 crisis and 2017 as only slightly above the expected trend.
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?
Pedantics aside, I did enjoy those little comments you put alongside the threat level.
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.
The next crash looks to be housing-related. Fannie Mae is in trouble. But not because of their accounting irregularities. The problem is more fundamental. They borrow short, lend long, and paper over the resulting interest rate risk with derivatives. In a credit crunch, the counterparties will be squeezed hard. The numbers are huge. And there's no public record of who those counterparties are.
Derivatives allow the creation of securities with a low probability of loss coupled with a very high but unlikely loss. When unlikely events are uncorrected (I meant uncorrelated), as with domestic fire insurance, this is a viable model. When unlikely events are correlated, as with interest rate risk, everything breaks at once. Remember "portfolio insurance"? Same problem.
Mortgage financing is so tied to public policy that predictions based on fundamentals are not possible. All we can do is to point out that huge stresses are accumulating in that sector. At some point, as interest rates increase, something will break in a big way. The result may look like the 1980s S&L debacle.
It took longer than I expected for that to kick in, but it happened.
as such there are probably no such things as black swan events. I mean, until there is. Its more like Schrödinger's swan.
>The future is now in the hands of political forces. We can't predict that from fundamentals. So we have no further predictions at this time.
So diversifying ones portfolio based on ones portfolio exposure to "political risks"? Usually you see people trade on that in currency markets? If most of ones portfolio is dominated by a single currency (and hard to liquidate to another asset?) one will have the most exposure to the political risks in that particular locale?
Through all that neither the dollar nor the Euro moved all that much compared to other markets. Housing, oil, stocks, and gold all moved more.
To back up your point, the US federal government guarantees the vast majority of the student loan market: https://fred.stlouisfed.org/series/FGCCSAQ027S
I believe the total student debt market is estimated somewhere between $1.3-1.4 trillion these days, so at least 77.5% backed by US taxpayers. I don't know what TARP topped out at, but I doubt it was 75% of banking assets.
B) the government owned the mortgage debt, given that they paid it.
- Find out who has exposure to student loans portfolios and what percent is non performing?
- Find out what other assets A) is holding that will have liquidation pressure if *-swan occurs?
- What extent is B) tied to A)?
- What pressures B) would face long term due to non performance of student loans that would influence A) and the larger market of assets under the jurisdiction of B)?
- How much could be made from theoretically capitalizing on the downside risks of A) vs other assets in the mean time?
Another thing is that no one is wildly pricing cars; the fact that lots of subprime people are buying cars does not drive up the price of cars for everyone else. Thus, if a whole bunch of subprime borrowers default, the rest of us aren't sitting there with a car that's actually worth a quarter of what we thought it would be worth.
We also don't keep an enormous share of our equity in cars the way that we do in housing.
Maybe you only meant your comment as snark, but if not it's important to understand the difference between simple risky investments and potential structural flaws in the finance system, like the ones we saw in the financial crisis.
This is a measure of whether people can make their mortgage payments. When that ratio gets too high, foreclosures rise.
The Economist has an interactive chart, but, annoyingly, they don't let you see the absolute ratio number, just its trend.
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.
The problem is, it could be years before there is a collapse, or it could be tomorrow. That's a lot of yield you might be losing out on. A near similar argument could be made in 2014. You probably could have doubled or tripled your money in that period.
And even if there is a correction, not all equities will decline significantly (some will stagnate, or just decline a few percentage points, some will still double), whereas others will lose 80% of their value.
All true. I think what makes sense then is not to get out of the market entirely, but depending on your risk tolerance, simply re-balance so that you own less stocks at a time like this, while holding more cash or alternative investments.
How does one go about actually purchasing them? It doesn't seem they're available through typical online brokers like Etrade or Scottrade.
There will always be a crash/correction. Easy. But when?
The problem is people aren't watching the tape. It's thought of "too hard"(by those who fail), which is another way of saying their net ability is inadequate for a career in trading.
The market has always told us what it is going to do, seconds before it happens. You have to be willing to watch those seconds though, and capable of interpreting the tape during them... 1 day candles? too late. 30m candles? too late. 1m candles? maybe, but overall too late. The timeframe you are looking for is "real time", which is present in time and sales(and nowhere else). Anything else is inadequate for consistent profitability, but there is no shortage of people failing to be the exception.
If it was obvious, more people would have pulled out.
To be frank, 4% is not good. For comparison, my Vanguard account, which is mainly low cost ETFs and index funds, has had a 11.8% average annual return over the past 5 years.
But realistically the corrections were inbound regardless of the specifics about automated trading, the startup economy, or bank solvency.
There's one coming "soon" now, too. Eventually.
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.
Other similar issues are the amount of private ownership of US companies (that aren't included in Total Market Cap), and also foreign ownership of US companies which is higher than it used to be (I think).
Right now student loan debt is at 1.4 trillion
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.
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.
What is broken with student loans is that the current scheme messes with almost every sensible market incentive out there: Colleges get more expensive for little to no reason, people can get into big loans for degrees that will never pay off, and the companies lending the money are, in practice, guaranteed repayment by the treasury, so ultimately the whole scheme leads to far higher prices than, say, college in Europe, but only provides better outcomes for some school+major combinations.
Let's not forget, the system leads to degrees that have low expected values to end up being unaffordable, while prices would go down if the system wasn't built with the silly guarantees that it has. Putting the blame on the borrower alone and ignoring the insane system design is just shortsighted.
If someone went to try to launch pets.com today, we'd not blame the founders alone for the VC's loss: They carry responsibility too for betting on a horse that had no chance of even finishing the race. A VC takes risks, but also expects losses. Anyone making loans should consider chances of delayed payments and of losing all the money completely.
Let's go back to your idea of protocols. Imagine we are making a requests over a network and expecting the network to not be lossy, and to never have long network partitions, or for other servers to go down. We can be angry at the network or the server on the other side, but in practice, what we do is understand that failures exist. Expecting everyone to pay you back all the time is like expecting a distributed database to be reliable all the time. I can scream at the network or the database vendor, but ultimately the joke is on me for expecting impossible things.
At same time, I was repeateadly promised by all 'adults' that I was very intelligent, and that getting into a college would ensure I would get a job, and it is why it was so important.
After lots of struggling I ended doing what people wanted, got in a college, and I had no way to pay for it, so I got into debt too. (and I hate debts, I used to never get into any debt at all).
Around time I graduated, the last crash happened, my country never really recovered from it...
I am 29 now, and I can't get unemployment benefits, because I was NEVER employed in first place, all work I list on my LinkedIn was by freelance-style contracts, I never found the promised jobs...
I did recently finished paying almost all my debts (I still have some, and my net worth is still negative).
But 'not borrowing money' wasn't really an option.
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.
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.
College degree nowadays is basically a pre-requisite for not getting your resume thrown out at first glance.
Everything has a mix of intrinsic and perceived value and this changes over time. The more a thing is composed of perceived value the more volatile it is. I'd say all stocks are composed of at least 50% perceived value.
Perceived value can often drag intrinsic value upwards so investing in things with high perceived value can still be lucrative. Analysis moves from fundamentals to psychohistory. (bad psychohistory) Probabky based on some combination of time to death of cultural momentum and half life of faith isotopes.
College degrees were a thing that quickly lost perceived value because it was based on rarity. (the only rarity that doesn't drive itself to commoditization is useless rarity like expensive wines and designer bags. 100% pure perceived value things not worth commoditixation)
At an individual level the high intrinsic value degrees do well but overall they haven't as most degrees in the US were supplementary for Masters of the Universe type. Education to fill the void in your life.
The post WW2 dominance faded though and the upper levels of Maslow's pyramid were no longer the issue. Basic survival and making a living was. Globalization also created huge pressure and competition for useful jobs.
What happened in the US was essentially a dearth of sinecure positions based on a secure moat that is now deteriorating. Those who are hit hardest by this desire a return to the past, in their eyes this is being "More American". They simply can't compete with a workforce with much stronger work ethics out of having much more experience with dealing with daily survival of a more extreme kind.
This is how the education system is failing. A country for abundance needs either output or the ability to extract rent via moats or force. The US also has a strong immigration culture that can "steal" output from other countries. Though at the cost of making "doing right by americans" a very loaded and confusing idea to parse.
Literally nobody takes student loans that they are capable of repaying. Why would you, unless you could get a 0% APR?
It'd be nice if young people - possessors of great foresight and fonts of wisdom, all - could predict whether they will be able to repay the very substantial loans they're likely to rack up in college. We are not living in a world, or an economy, where making such a prediction is easy or straightforward.
So. No. Not literally nobody.
It's just such a shockingly bad idea. We went from the topic of the average kid's inability to gauge the future value of their degree to the topic of the average kid's ability to predict the stock market well enough that using leverage to invest makes sense.
Probably one of the most incorrect sweeping generalizations I have ever seen.
I finished my BS in CS about 3 1/2 years ago with about $44,000 in student loan debt. I'm currently on track to pay them off within the next 3 years. It'd probably be only 1 or 2 years if I didn't buy a car.
Not really, you simply didn't read my comment and the comment I responded to very thoughtfully.
The point of my reply is twofold. First, the obvious: you wouldn't take that loan unless you needed the money for your education (or wanted to gamble on the stock market, apparently, as one poster mentioned, but let's put that aside). If you can pay for your education without it, with saved money or through scholarships or grants, you'll do it. If you can't pay for your education, you take the loan. In that sense it wasn't a deep point, it was basically a tautology to point out how vapid the grandparent's comment was: "the thing we have to do is not borrow money we can't repay," "borrowing money you can't repay is a broken local protocol." As if arranging student loan financing were in some way similar to extending credit to a successful business that needs a little extra cash on hand until the end of the month. Ridiculous.
Second, and on to the more important point that I made in the second paragraph: if we assume the grandparent really means "will not be able to repay after several years of college" the problem with this whole line of thinking becomes obvious. The average student embarking on college has no idea whether they'll graduate successfully. They have no idea whether they'll be able to find a job in their field and they certainly have no idea how much they will be paid. In short, they have no idea whether they'll be able to repay that loan. In terms of policy, saying they should not take a student loan which they will be unable to repay is not an answer to anything since at best they're making an educated guess. In a situation like that, where people are guessing, the expected outcome is that a lot of people will guess incorrectly.
I like this and would love to see more commentary on it. Taking one step back, the system is broken because we removed the primary safeguard: Bankruptcy. If we could declare bankruptcy to discharge loans, it puts the burdens on banks to only make loans they evaluate as having a reasonable rate of repayment on. We've removed that check. In turn, we have a completely predictable outcome. So, as far as I know the only alternative is to provide another, equally robust counter (like your suggestions, or just "free" tuition) to balance.
Save. Don't spend it. Save it. Invest it wisely.
Paying my shit off gave me an incredible sense of freedom, even though I still have a wife and kid and household to maintain, the usual job pressure, etc. I thought about it, and the sense of relief was from knowing that I was free of debt service, so the best thing I can tell you is to save your money and not make a single interest payment more than you need to.
The incentive has to come from somewhere else, but most solutions involve making it a lot harder for poor people to go to college. It's a tough problem.
Replace X with home ownership, car ownership, renovation, Chili's, Applebee's, and whatever else services the traditional nuclear family.
Our economy is built off of the boomer generation and their behaviors. They enjoyed stable, living-wage jobs, affordable housing, dirt cheap education, etc.
Now we have an emerging gig economy, ridiculous tuition costs (and the expectation of a degree to do more or less anything), cheap credit to prop up the housing market (did we learn nothing in 2008?).
IMHO, it hasn't hurt housing enough, and politically, that's going to stay as long as possible. A lot of boomers also have a large portion of their net worth tied up in their home, and letting that bubble burst will just swap economically disadvantaged millenials for economically disadvantaged boomers. Even setting aside the fact baby boomers also run our political institutions, for a variety of reasons, it's still better to have young people who can't buy anything because they still at least can work, versus a bunch of displaced retirees who also can't work any more. It's a really shitty situation. I try not to blame an entire generation too much because it's more complex than that, but I'm in my mid-30s and feel like I got really lucky. The generation right behind me really had the ladder pulled up before they could get to it.
So something like 77.5%+ of that is already bailout guaranteed. Taxes (or more likely US debt) will rise to cover it, which will have its own long term negative effects, but barring a US default that market is very well covered.
It's also very, very challenging to discharge US student loan debt, much more than housing debt. How that really works in the end, especially if a large number of people go into default, hasn't really been tested, and it will be a political hot potato when it does.
> 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.
this is the dangerous part. No, they can't, even though it seems like they could. If they could, they would be used by people to make money and deflate the bubble that would have caused the crash in the first place. That's the theory, anyway
tldr; "crash" is used to describe a very natural condition, caused entirely by the emotions of human beings.
It would be really interesting to see your collapse pyramid over time. How did it look in 2000? 2008?
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.
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 ;)
I think that's a better statement than whatever the app actually does.
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:
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
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.
Another of the conclusions is that the national debt, for countries with a floating sovereign currency, is just a number without real meaning.
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...
So the income we are adjusting against is not necessarily going to the people that are in debt!
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.
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.
I think there might be a few coding errors still lurking in there.
Didn't notice the loading indicator myself.
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).
I don't want to knock on OP's analysis here, but it's important to remember the famous quote (maybe by Keynes?), "The market can remain irrational much longer than you will remain solvent"
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???
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.
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?
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.
There are ETFs and other vehicles that buy VIX futures, and either go long or short, which people can buy and sell. Like TVIX, XIV, etc.
There's some worry that a quick spike in VIX futures from such a low level at the wrong time could cause a catastrophic unwinding of these instruments.
But I'm not an expert in these things.