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Wall Street Banks Warn Downturn Is Coming (bloomberg.com)
332 points by champagnepapi on Aug 23, 2017 | hide | past | web | favorite | 385 comments



The pattern of boom/bust cycles over the past century is alarmingly consistent, especially for a field like economics that is famously unpredictable. Just look at the graph in Exhibit 7 of this article. It's almost perfectly periodic. According to investopedia [0], "there have been 11 business cycles from 1945 to 2009, with the average length of a cycle lasting about 69 months, or a little less than six years." By this logic, we're definitely "due" for a downturn very soon.

Does anyone who understands finance have any insight on why this pattern seems so predictable? Is it due to fundamental economic drivers, or is it merely correlated with major historical events (internet 2000s, globalization 1990s, deregulation 1980s, post-WW2 society 1950s, etc)?

If technological society does not continue to innovate at the pace of the last few decades, will boom/busts smooth out at a point of slower growth?

[0] http://www.investopedia.com/terms/b/businesscycle.asp


Anyone with a control systems background or even just audio experience will recognise what happens when you have an undamped feedback loop: it oscillates.

Technology can make the problem worse by reducing the time taken to economic changes, exaggerating the feedback loop. However there has been one big success of formal macroeconomic control modelling: inflation. Almost all the Western economies have a good system for controlling interest rates in order to maintain an inflation target.

I don't think anyone has really invalidated Keynes' work on business cycle theory, although it is recognised that it doesn't quite cope with a heavily financialised economy and there is huge political opposition to counter-cyclical fiscal policy.


> there is huge political opposition to counter-cyclical fiscal policy.

There is huge political opposition to raising taxes and cutting spending during expansions, yes. However there is huge political support for cutting taxes and increasing spending during contractions.


This is the real problem with fractional reserve systems. In theory they could be used to damp out the business cycle. In real democracies voters always want low taxes and high spending irrespective of the state of the economy.


> In real democracies voters always want low taxes

Would they have to always want that though? I mean, I believe a lot of things can be made more efficient by economies of scale, and in some cases avoiding perverse incentives of for-profit motives (the stories I keep reading about the worst of the American prisons come to mind). In other words: that some systems work best when handled by the government. So I have no trouble believing there are situations where paying more taxes gives me the best value for money in terms of increasing personal happiness, because they would be spent on improving those systems.

I'm not sure if there is any government out there currently that I trust that much, but it's sounds hypothetically possible to me.


>the stories I keep reading about the worst of the American prisons come to mind

That's a misconception. State run prisons are no better.

Regardless, it's not that people don't want government to provide services. They want government services and they want low taxes.


Not totally during the 2008 recession, there was support for cutting taxes, but not increasing spending. "Austerity"


Cutting taxes more or less automatically results in increased spending.


Not if the tax cut is used to pay down debt, or is "saved" by buying government issued securities. Neither of these result in more economic activity.

Sounds an awful lot like the post 2008 environment, no?


That's not really true. If you maintain the same level of spending but cut taxes, you're going to get money going into the economy. When those government issued securities are bought, for instance, there's someone on the other end of that transaction that now has money.

The real problem with the 2008 recession is monetary stimulus doesn't really work.


As long as you don't cut services along with those taxes.


The thing about Keynesian economics is that it isn't sustainable in the long term, because there is never a plan to pay off the debt accumulated during each recovery. In practice, keynesians talk about increasing spending during recessions but never speak of running equivalent surpluses during 'the good times.'


By itself this doesn't prove that it's unsustainable. In fact, there's plenty of evidence around us that it is sustainable, since it's quite rare for states to collapse due to debt (that wasn't caused by exceptional catastrophic circumstances like war/revolution/highly-corrupt mismanagement/etc). State debt doesn't EVER need to be repayed in full, interest on it just needs to stay sustainable. (Which isn't to say debt is without its costs, just that the fact that it doesn't get aggressively paid down during good times doesn't imply inevitable disaster.)


This doesn't prove that it's sustainable in principle, only that the time to inevitable collapse is greater than the ~80 years since it's been widely implemented.

In practice, ever-increasing debt absolutely requires ever-increasing growth in order to service it. We've so far been lucky, in that the period during which we've used this policy has coincided with the enormous productivity gains that came with the computer revolution. But rearranging our economy so that it's dependent on continual windfalls from external sources merely to stay afloat seems reckless at best.


If there was ever a point where our current run of innovation starting with the Industrial Revolution were to slow down or stop, then you are correct. However arguing that it's not proven to be sustainable because the fact that it hasn't collapsed in ~80 years only proves that its sustainable for 80 years is makes proving it sustainable impossible. Absent a better theory with better predictions Keynesianism is still the most successful economic theory. Moreover the scenario where innovation stops or slows down is a fairly unlikely scenario and if we're going to have a public policy debate I don't think it's wise to count on it.


Innovation in specific areas slows or stops all the time. The general run of technical progress in a specific area shows an S-curve, in which initial discoveries are made slowly, later progress accelerates as synergies are exploited and greater investment is made, and finally innovation decreases as low-hanging fruit is exhausted and the shape of available technology matches that of the problem domain. For an example of this, see aerospace; it took around sixty years to go from the field's inception to the moon landing and the Concorde, and in the fifty years since we've made mostly incremental progress over the technologies involved in both.

It seems that we're currently approaching the top of the S-curve for computation via integrated circuits; further increases going forward are likely to be incremental and margin-focused, as opposed to paradigm-shattering. Maintaining the 1950-2010 rate of productivity improvement will require new paradigm-shattering advances in some other field (machine learning? Internet of Things stuff?). It's possible that these are indeed forthcoming, and we can continue our absurd growth levels for another fifty years. It's also possible that we're nearing the edge of the problem space and we won't have any more easy order-of-magnitude productivity boosts. If the latter is true, then our economy will inevitably collapse with enormous collateral damage. As an economic system, this seems unstable at best.


This doesn't seem like a reasonable worry really. We will continue to innovate at a more rapid pace until we have real AI or there is a massive disaster(runaway global warming of 8-10 degrees or nuclear war are the most probable), I personally think it will be AI though because I suspect we might be looking at 20-30 years until that happens.

Once real AI comes I'm not really sure what will happen because it is unpredictable how the AI will be made, but if the past is any indication it will be made recklessly in a race between a bunch of companies. Idk how long our current world order will continue to exist and how much the AI works with us after that event. Hopefully the zoo it keeps us in will be nicer than the way we have treated animals, and hopefully that takes 20 years after the birth of real AI.

I wouldn't worry about innovation slowing down, I would worry about the end of meaningful human innovation that we are clearly headed towards.


"Innovation in a specific area slows or stops all the time" Yes, but the general pace of innovation in the entire economy including areas that are slowing down or starting up is pretty consistent. One thing I'd like to make clear is I'm not just talking about 1950-2010 growth rate, I'm talking Industrial Revolution (around 1800 depending on where you are) to now. Ever since society realized we could build machines fueled by energy to increase productivity we've been growing at roughly a 2% pace. Even if it isn't immediately clear where the new productivity gains will come from (although I'd argue there are plenty of promising areas) I think it's more likely than not going to continue.

some possible areas - AI, 3d printing, falling renewable energy prices, continued marginal gains from computers, quantum network communication, longer term - quantum computers, expansion of VR, driverless cars, etc. Point being there are a lot of promising areas on the horizon.


> In practice, ever-increasing debt absolutely requires ever-increasing growth in order to service it.

No, it only needs increasing growth of the rate of debt growth is accelerating; if it is merely constant debt growth (over the long term), constant (not “ever-increasing”) economic growth allows debt service costs to grow constantly and still have the otput not devoted todeny service grow constantly at the same rate.

> We've so far been lucky, in that the period during which we've used this policy has coincided with the enormous productivity gains that came with the computer revolution.

It's been practice (“policy” is a bit too strong) since Eisenhower. And economic growth was stronger earlier in that period than later. Too the extent that it's been sustainable, it's not due to some unusual economic magic of the “computer revolution”.

> But rearranging our economy so that it's dependent on continual windfalls from external sources merely to stay afloat seems reckless at best.

Even to the extent the computer revolution might be relevant, that's not an external source when discussion the economy. That is a thing that was produced within the economy, and government (deficit-financed) spending played an important role in it.


More so, having safe government debt is incredibly useful. Retirement and pension funds and other low-risk investment vehicles depend on them.


Technically, you don't need to pay off the debt in expansions; you increase spending by deficit spending during recessions, increasing the debt to GDP ratio, and then curtail surplus spending (even without paying down debt, you can even do this with some net deficit spending) in expansions, decreasing debt to GDP ratio mainly by GDP increase. (This still oversimplifies a bit; you really care about the debt service cost to GDP ratio, not the debt to GDP ratio, but the two tend to move in the same direction.)

People dependent on income from wage labor need to pay off debt for sustainability because the ability to do labor eventually declines or is lost.

Governments aren't individuals.


And in practice, Keynesian economies don't do the 'curtail surplus spending' part, so we end up where we are now with debt interest taking up a significant part of US spending, with signs of increasing significantly.


The US basically has (measured by direction of change of debt-to-GDP ratio) in periods of economic expansion even as debt grew in the post-WWII period, except under Nixon and later Republican Presidents and Obama (and even in Obama’s case after the first term debt expansion overlapping the Great Recession and immediate aftermath, the second term was basically flat.)

I'm not sure there is a good case that “Keynesianism” is the problem; the late anti-tax orthodoxy of the Republican Party, which has nothing to do with Keynesian fiscal policy, seems more to blame.


> running equivalent surpluses during 'the good times.'

This is because government debt isn't a zero-sum game.

Especially since our currency is no longer gold standard/backed (partly because of the Great Depression).


The end of the US dollar international convertibility to gold did not happen until August 15, 1971.

It is also exactly the year inflation took off like a rocket - see the "Cumulative Inflation" graph. And the standard of living for the middle class (at least in the US) began to stagnate (up to this day).

https://inflationdata.com/Inflation/Inflation/Cumulative_Inf...


Inflation also took off like a rocket in Switzerland in the early 1970's: https://tradingeconomics.com/switzerland/inflation-cpi

Switzerland was on the gold standard until 1999. Since abandoning the gold standard, inflation in Switzerland has been minimal.

Clearly abandoning the gold standard does not necessarily lead to inflation. You haven't even shown a correlation here, much less causation.


Lack of gold standard is not sufficient for inflation - you also need reckless monetary/fiscal government policies (abundant in the US, taking full advantage of the dollar being the reserve currency)

I was not trying to prove causation. There appears to be correlation, but obviously other factors (like government spending) are at play


The end of convertibility didn't occur in a vaccum though: it was a response to a whole bunch of exogenous causes, including oil price shocks.


Simply not true. A good contemporary example is the governor of California, Jerry Brown, who has been vigorously defending the accumulation of surplus in the name of fiscal rectitude for the last several years.


Not all Keynesian fantasies go on forever. If we are not careful (which we aren't), then at a certain point, those interest payments become a runaway expense. See Puerto Rico. California is not exactly a model of fiscal excellence -- they're in big trouble with pension obligations, amongst other things.


Steve Keen suggests that automatic government spending increases in the form of unemployment benefits (and similar) have been a major economic buffer in many countries.


I heard about Keen's proposal of a debt jubilee (reducing private debt by random payments into bank accounts) and would be interested to hear criticism of it:

http://moneyweek.com/steve-keen-interview-debt-jubilee/


Naively, it would benefit those able to carry debt and maintain many bank accounts moving into the jubilee period.


Hmm, it definitely wouldn't be a deposit per bank account, that would be deeply unfair and biased to the extent it would be politically infeasible. The intention, realistic or otherwise, is for the cash sum to be awarded per citizen. Yes that may be via bank accounts for those that have them, but I imagine there would need to be other mechanisms in place for those that don't have an account.

Also the payments are fixed amount, not erasing of whatever debt you may have. A key aspect is that for those with debt the bank must use the cash towards paying off the debt first, whereas those with no debt will just get cash appear in their current account (or a cheque in the post, or whatever). Not saying it's practical, easy, or without ways of gaming the system, but those are the baseline intentions.


Ah, my reading of your summary doesn't seem to match the actual proposal much at all.

I read "random payments into bank accounts" as "payments into random bank accounts", which I think is one reasonable interpretation but clearly not the only one. I also took "reducing private debt by..." as being a requirement on the individual payments rather than simply a goal of the program.

With neither of those attributes, my analysis doesn't apply.


That's not quite how he proposes it though: in order to avoid unfairly disadvantaging creditors, he'd have them given a cash payment of their share of the net difference of their total debt from the per-capita infusion. E.g., if the person has $2000 in bonds to be called, $1000 in credit card debt, and the total jubilee per capita is $4500, they'd receive $5500 ($4500 - $1000 + $2000). (If I understand his position correctly.)


Yeah, the summary mislead me.


And it would penalize those without debt!


That's not correct. The proposal is a fixed amount per citizen, with the caveat that for those with debts the money must go towards paying off debts with priority.


The main problem appears to be how it would be implemented in practice. We already did the money 'printing' part, but QE as a means of getting that money into the economy has been pretty awful (IMO and by an number of accounts), but it was relatively straightforward and cheap to do because all of the necessary mechanisms where already in place. To allocate a fixed amount of cash to every citizen, and require that debt is paid off with priority, well that's not simple at all, it requires a central database of who owns what and that doesn't exist.


To add to pjc50's comment and to demystify the phenomenon a little...Figure 7 is just a plot of the deviations from a trend line of the GNP. I can't say for sure, but I would bet that this trend line is refit to the data at a regular frequency (probably yearly). Imho, it is useless by itself as a predictive tool....it needs to be combined with other signals to have any real value in signalling a change. It is one of those things that looks like magic in hindsight. To be fair, the article does cite other signals that indicate a downturn and I don't have any insights or desire to call bullshit on the prediction.


Shouldn't Figure 7 represent a first derivative of the GDP? In which case, no refit is necessary, but trends are still only clearly apparent in hindsight.


When I look at a two hundred year US inflation/deflation graph, it looks like taking us off the gold standard provided some form of damping.


Being on the gold standard means occasional depressions caused purely by the inability of the supply of gold to keep up with the expansion in the economy IIRC.


And while it may have not played out historically in the US, the opposite side of that coin, that is a glut of gold, is just as devastating to an economy.


Didn't happen to the US, but did to Spain.


Additionally, glut of new world silver also greatly damaged the economies of India and China, which heavily used silver currencies at the time.


The problem in economics is that it's very hard to invalidate a theory.

What would you consider an invalidation of the theory?


The easiest way to invalidate a theory is to see what predictions it makes, and to figure out where those predictions were wrong.

One recent example: the choice between austerity and stimulus, in the US and Europe, shortly after the 2008 downturn. Keynesian economic theory claimed that if your interest rate approached 0%, that you could no longer stimulate the economy via interest rates, but that the best way to improve the situation was for the government to create and spend money. And that doing so wouldn't cause sudden inflation.

Another theory said that fiscal austerity measures and the reduction of government debt would improve the situation. This theory also suggested that the US should experience strong inflation in the years immediately following 2008.

IIRC, the US government spent something like 1/3 to 1/2 the money that some Keynesian economists recommend spending on a stimulus. Other countries tried varying degrees of austerity. So to test the theory, you'd need to compare what happened in different countries.

Note that this particular "Keynesian" theory does not necessarily recommend heavy government spending when the Fed interest rate is above 0%. Basically, it's only about emergency measures when ordinary economic theories have failed.

For an easily-accessible version of this particular "Keynesian" theory, and why it's supposed to work, see this paper on the "Capital Hill Baby Sitting Co-op": http://www.eecs.harvard.edu/cs286r/courses/fall09/papers/coo... This is really more of parable than anything else, but it explains the logic.

Tl;dr: At the government's scale, money is a weird abstraction and you can't always pretend that it works like grain or cars or other simple economic goods. Or to put it another way, if the economy gets bad enough, then everybody wants to work more hours at the restaurant, but nobody wants to go out to eat—and therefore something has to give.

I'm not qualified to comment on whether this theory is actually true. But that's how you might test it, and an explanation of why it's supposed to be useful under certain circumstances.


This is what I was going to say, but I'll put it in stronger terms; The only way to invalidate a theory is to take it's prediction, and prove it false. This is called falsification.

Economics is a challenging area to have theories because it is really really hard to run experiments. As a result you have to use existing choices and try to identify what the theory predicts, then walk forward in time to see if that prediction was accurate or inaccurate. It is really hard to do because humans tend to want things to succeed and can unconsciously add or subtract data points that move them closer to 'prove' or 'disprove' depending on what they want. Eliminating that bias is very difficult.

On a related note, we're also due for an ice age based on historical cycles. However as systems change and the balances within them shift, it can be difficult to see which variables force the cycle and which merely enhance it. Easy to see an enhancer as a major force when it isn't.

So back to business cycles; there are four outlier economic events which I think can provide some insights into what may or may not happen in the next decade. These are (in chronological order) The dissolution of the USSR in the 80's, Japan's meltdown in the 90's, the misnamed "Mortgage crisis" of 2009, and the collapse of the Venezuelan economy in 2015. Each of these events share a common thread of state controls and markets being ripped apart by events. I don't think we have yet learned all we need to learn from them.


How does the Venezuelan crisis affect the World Economy, though? AFAIK they are neither well integrated into global trade and finance (Japan and US), nor do they have so many people as to cause a serious change in the labor market (USSR).


In both the USSR and Venezuela cases we've seen a complete separation of meaningful feedback and controls in the regulation arm and the market itself. In both cases multiple markets emerged that where nominally independent (black, grey, sanctioned, and unsanctioned) which created ways for capital to flow that had previously been impossible. In both cases there appears to be tremendous looting of GDP into the market accounts of a smaller wealthy elite. To the extent that the wealth of a nation empowers its governance, the rise of oligarchs creates a nominally stable power structure that is disassociated with GDP development. To me, this appears to structurally favor wealth creation for the oligarchs over GDP creation for the economy.

What I observe is that the rapid shift of materially significant (from a GDP perspective) wealth from the general market to a much smaller number of market 'maskers' on a sovereign state basis, has an attenuating effect on systemic controls and other market damping systems.

So looking at how business cycles happen in a system where more and more interacting economies are less market driven and more exploitation driven is, again in my non-professional opinion, might shed some light on how the cycles will evolve.


You could probably throw Zimbabwe, Yugoslavia, and Greece into that mix too. To a lesser extent Iceland, but in that case the "bad actors" were thrown into jail afterwards (which of course doesn't have effects reaching back into time)


Yugoslavia? You mean before the war and the break-up?


During the 80s, Yugoslavia was a us-allied communist nation that experienced hyperinflation due to economic mismanagement.


So 'yes'. Thanks for the clarification.


It depends what time scale you're looking at. If you consider the US government's reaction to the events of 2008 a success because the stock market is high right now and unemployment is low, that would be misleading if the effects take an even longer timeframe to show themselves.

The Austrian economists would argue that what happened in 2008 was a breakdown of the fiat monetary system and that the responses were just bandaids. In the longer-term view, when you look at shifts in power and rising and falling of empires, 2008 could be the first of many massive shocks to the economy.


>everybody wants to work more hours at the restaurant, but nobody wants to go out to eat—and therefore something has to give

Ideally the restaurant would lower wages until fewer people want to work there, and lower prices until people want to eat there. Decreasing the value of money feels like a dirty hack that benefits the richest at the expense of everyone else. Remember before we adopted these policies recessions used to be really short.


And as we saw, despite claims from worry warts like Ron Paul, and from gold advertisers playing pump 'n dump, there was no inflation in the US to speak of. Throughout The Great Recession government bond prices remained high - which allowed the US to continue borrowing & spending without being reigned in by financial markets.


There is an enormous amount of asset inflation, and future inflation is just "stored" there.


Exactly. The following phenomenon are all related:

- the record-breaking auction prices of art pieces (Picasso, etc) at Christie's & Sothebys

- the vast pools of money chasing late-stage tech startups driving up late-round valuations,

- the increase in student loans for college students driving up tuition prices outpacing "official" inflation metric

There's also "shrinkflation"[1] which is a form of inflation but does not count in CPI calculations. Also, many homeowners complained that their house insurance went up 20+ percent even though they don't live in a hurricane or flood zone.

The pundits saying there's no inflation seem to only look at the flawed CPI statistic. If the Fed's quantitative easing creates $4 trillion in new money, that has to show up somewhere in the economy. (Unless _everybody_ coordinates to hide all $4 trillion in a mattress to negate its effect.) If citizens are seeing a reduction in purchasing power in real terms, you have inflation happening.

[1] https://en.wikipedia.org/wiki/Shrinkflation


See also, the related phenomenon of a company introducing a new, notionally superior product line at a higher price than the original, then somewhat later discontinuing the original, while never reducing the price of the new one. This results in the cheapest available product becoming more expensive, without this appearing in inflation statistics.

I have the most exposure to this in the realm of medical products. A family member has Type I diabetes, and so must continually buy insulin and blood testing supplies as an everyday expense; several times, he has been forced to switch products (between varieties of insulin, from purely chemical test strips to ones with an electronic reader, &c.) by the discontinuance of the older product. The new one is always much more expensive, and never reduces in price to match the old; this has resulted in a significant increase in his expenses for these supplies, despite nothing ever occurring that would appear in inflation statistics.


>, the related phenomenon of a company introducing a new, notionally superior product line at a higher price than the original,

Yes, and airlines charging a new extra fees for baggage when they used to be included in the base airfare is another form of inflation. This "shrouded pricing" is used to hide price increases in various industries.


This is strongly related to 'unbundling'.


Another example: products get slightly smaller but remain he same price. Often packaging can hide the change.


Correct, but the pundits are also correct, because there are really two different economies in the US:

- the "Walmart" economy - no inflation there, regular Joe Schmoes have not had a real raise in years

- the "Hamptons" economy - lots of money sloshing around (thanks to the Fed), bankers, etc spending big on luxury real-estate, etc.


Inflation is measured more by price than income. The salaries being stagnant at Walmart and co don't really have much say in the CPI.


Don't discount real estate's potential to be a sink of excess capital virtually without limit.


I'm not so sure about that. Of course they're not making land any more, but as the price of real estate increases so do rents and economic dislocation, so every rise in the cost of real estate comes with a reduction in disposable income.


False. Shrinkflation is counted in CPI calculations.


Do you mean inflation in financial instruments and other investment vehicles?


Not the original commenter, but, a negative correlation between government investment and economic growth?


"...there is huge political opposition to counter-cyclical fiscal policy."

Congress doesn't want to spend money on infrastructure.


The only honest answer (IMO) is We don't know at this point.

Explaining business cycles has been a primary motivation for macroeconomics' existence as a field. There are many theories, but theories are hard to disprove in economics.

The two big, long-lived families of macroeconomic explanation are from the Keynsian and Austrian/liberal "schools."

Austrian economics has Hayek & Mises' nobel prize winning theories, and built on by monetarists like Milton Friedman. These theories revolve around credit/money supply. Too much money is available at too low a rate, causing bad investments. When these undertperform, a downturn occurs.

Keynsian explanations revolve around "aggregate demand." When people and businesses are worried, they borrow/spend less and save more. This leads to less stuff being made, the definition of economic contraction.

The Austrian explanations are a little more straightforward to understand in a simple form. Keynesian is s bit harder. I recommend starting from the "paradox of thrift" concept, if you're interested in Keynesian.


Milton Friedman wasn't Austrian, as far as I can tell: http://economistsview.typepad.com/economistsview/2006/01/mil... https://krugman.blogs.nytimes.com/2013/08/11/friedman-and-th... Usually people compare with Chicago school macroeconomics (freshwater/saltwater economics), Austrian is not really mainstream.


OP didn't claim Friedman was an Austrian, merely a monetarist.


He wasn't "building on" Austrian school either. I think you're being pedantic, that sentence seems relatively clear to me.


I meant Friedman as an example of monetarism, if that's the confusion.

I consider him closely related to Austrian economics, neoliberal economics... at least when it comes to business cycles.

A lot of "keynsians" are much more removed from keynes himslef than Friedman is from Hayek, Mises, Bastiat..

Obviously every individual is different and taxonomies are fuzzy. I'm not attached to my taxonomy, just trying to comment without lots of footnotes.


Friedman was pretty clearly opposed to Austrian views, so I don't really see where you're coming from.


How am I being pedantic? You mentioned that Friedman was not considered part of the "Austrian school" which is true but I pointed out that wasn't what was claimed.

I'm not arguing the nature of the facts, just pointing out the fact. Hopefully you can relax a bit, this is just a dialog and not a debate where I'm trying to score points against your claims.


> The two big, long-lived families of macroeconomic explanation are from the Keynsian, Austrian/liberal "schools".

You left out Marx.


I dunno if there's a Marxist interpretation of recessions. Iirc there's something somewhere about recessions leading to socialist revolutions, but I don't remember anything about why they happen. I don't think das capital has anything.

I think there's very little Marxist economics left, in the technical sense.

Marx is pretty early.


There's a great book called The Long Depression which offers a Marxian analysis of these boom bust cycles.

It basically boils down to Marx's Law of Profitability, where the rate of profitability tends to fall as investment in fixed capital increases:

https://en.m.wikipedia.org/wiki/Tendency_of_the_rate_of_prof...


Marx looks more monetarist than anything else.

"If the amount of paper notes in circulation were doubled the prices would double" and things like that. I really do wonder what those economists would think of modern economics.


Do you think the Marxian school is big?


> the Marxian school

Marxist.


> Marxist.

I'm indeed Marxist, how did you know? We recently commemorated the 40th anniversary of Groucho's death, by the way.

Or maybe you were correcting me? https://en.wikipedia.org/wiki/Marxian_economics


That's actually informative, thanks.


Both of those schools of thought are too ideological to really get to the heart of the matter. Additionally, I don't see this distinction made often enough, but bubbles and recessions are 'abnormal economics' - economic axioms still hold in abnormal situations but the situations are completely different. Trying to understand abnormal situations through ideological (i.e normative) lenses is challenging and bound to be incomplete.

'Freshwater' economics / econometrics and even complexity / system theorists have given us a lot of insights into bubble formation. Dealing with recessions is something that doesn't really have an expert consensus beyond 'avoiding obviously bad things'. Heck, go ask economists to reconcile recessions with the efficient market theory.

In terms of maturity, economics is where medicine was after people accepted Ignaz Semmelweis’ theory that doctors and surgeons should wash their hands. The consensus opinion is against things like leeching (a gold standard) and people more or less agree on the right things to optimize (low, stable inflation; lower unemployment; somewhat high reserve requirements for banks, etc.).

For anyone reading this, I recommend the book "Manias, Panics, and Crashes" it's not well organized but it's very interesting.

Bubbles have a few things in common, they're speculative in nature, they're hypergeometric, and they’re fueled by credit expansion. More or less – too much money chasing ideas that aren’t going to pay off.

I’ve been warning people about used car prices since 2015 (though I expected the prices to decline about 8 months before they did). That clearly fits the pattern – after the recession used car prices were high so banks felt it was a relatively secure loan to make, but then the volume of car credit products (loans and leases) went up and made car credit too cheap, people bought too many new cars and now those cars are starting to flood the market which is a problem because banks expected to get more money out of the cars.

There’s speculation (I think cars will be worth a lot when they’re off lease). There’s credit (here Mr. 610 FICO, you can get a new RAM). There’s hypergeometric growth (the U.S auto industry sales grew much faster than the economy – a weak case of hypergeometric growth).

And now there’s the bust. We haven’t seen panic selling yet, but we might soon.

In my opinion, the clearest sign that something’s wrong is in the bond market. Something like ¼ of the world’s government bonds have a negative interest rate. People put up money today in exchange for less money in the future, it doesn’t make sense. It’s a sign that something is seriously wrong in the world economy. Too much money chasing too few ideas. I have a heterodox view – many economists think that interest rates are too low, but I think they’re too high. The market is trying to burn off excess value that’s not being used well and world governments are trying to insolate rich people from those effects.

At the same time there’s a few trillion in negative interest rate bonds, it’s hard to raise capital to start a business. That’s messed up.

There is some hope. I think we could continue the expansion for a at least 4 more years if we overhauled the tax code, we slashed rentier’s regulations (zoning, occupational licensing, and a few more), and we opened our boarders to high performance immigrants – not drug slingers but Ph. Ds / Executives / etc.


> It’s a sign that something is seriously wrong in the world economy. Too much money chasing too few ideas. I have a heterodox view – many economists think that interest rates are too low, but I think they’re too high. The market is trying to burn off excess value that’s not being used well and world governments are trying to insolate rich people from those effects.

Could this be related to past 30 years of consolidations in the banking industry?

Smaller/specialized institutions invest differently than large ones. Anecdotally, they can be more willing to take on small high-risk investments in local businesses (R&D, small-scale disruption) or cyclical low-risk low-yield investments (small farms)...


I would bet so. Just as eco systems with ow biodiversity are prone to rapid instability](http://onlinelibrary.wiley.com/doi/10.1111/ele.12073/full).

Taleb makes a similar argument in Antifragile. I think his arguments lack in formality, but [England's Work](http://www.englandlab.com/uploads/7/8/0/3/7803054/2013jcpsre...) on the matter certainly support him.


Problem is interest rates are still very close to the 0 bounds. Even a few years ago interest rates could simply not go any/much lower. Since we had the same problem when interest rates could not go any lower, I don't think its interest rates themselves thats the problem. Instead the problem is a global excess of savings vs. demand resulting in a situation where interest rates decrease and there's more money then there are things to invest in.


"[..] bubbles and recessions are 'abnormal economics' [..]"

In my opinion, something that happen periodically and continually to a system can't be easily classified as 'abnormal'.

I think 'inherent' would be a better word.


Perhaps, but it is important to recognize bubbles (malinvestment) and contractions are distinct from investment and expansion.

I'm not convinced that recessions and contractions NEED to happen. I'd bet that they're more common in market based economies but I haven't seen anything that suggests they're critical to equilibriums as we know it.


>… about used car prices since 2015 (though I expected the prices to decline about 8 months before they did)… In my opinion, the clearest sign that something’s wrong is in the bond market. Something like ¼ of the world’s government bonds have a negative interest rate. People put up money today in exchange for less money in the future, it doesn’t make sense…

It's funny, I made two responses[0][1], two weeks ago along these lines surrounding the Tesla bond auction. IMO, most people don't want to hear it because they believe they are doing the best they can with whats available for them to allocate. Too much money chasing the same shit that's consistently providing less and less returns… best to sit quiet in the background and do what one must's in this environment despite it all…

Yeah, yeah, it will be so good for Tesla to sell its new expensive (how many people can afford a $35k+ out of pocket for something that will sit idle for most of its lifetime?), the future™, cars with 0% down to subprime on the mass market once it gets at scale™ to people who can barely afford monthly payments on their used old and busted gas guzzlers… for fucks sake, hedge funds pay for satellite time to time their shorts based on bloated auto inventory now, because people are just waiting to have their new electric cars… who knows, maybe there will be a new gov program, an EBT of sorts for autos, cash for clunkers was a good step in that direction lol

>The market is trying to burn off excess value that’s not being used well and world governments are trying to insolate rich people from those effects.

I think this is only going to exacerbate feedback loops that end up only weakening the governing systems because "god forbid" that any of the The Market™ burn off accidentally get allocated to those who end up besting those who are trying so hard to lock in less money 5-100 years from now on gov/corp bonds…

[0] https://news.ycombinator.com/item?id=14949201

[1] https://news.ycombinator.com/item?id=14949123


The Austrian school is tiny, obscure, and not taken seriously except on the internet.

While we're at it, original Keynesian theory has been considered disproven by the existence of stagflation, which the theory would consider impossible.

See instead:

https://en.wikipedia.org/wiki/Saltwater_and_freshwater_econo...

https://en.wikipedia.org/wiki/Mainstream_economics


> The two big, long-lived families of macroeconomic explanation are from the Keynsian and Austrian/liberal "schools."

That's like saying there's two families of space research, Astronomy and Astrology. One of these things is mainstream and taken seriously, one is not. As the other guy said, it's Keynsian vs Chicago, Austrian isn't in the game, it's fringe stuff.


Sheesh! Taxonomy is dangerous on HN. Call it Chicago, if you like. I consider them part of the same family, chronospecies or something like that.

..at least relative to this topic, busines cycles.


Some explanations as per Ray Dalio https://www.youtube.com/watch?v=PHe0bXAIuk0


He says that interests rates can't be lowered when they are at 0%, but they technically could go negative... looks like Denmark has a negative interest rate, I wonder how it's working out for them. (https://en.wikipedia.org/wiki/List_of_countries_by_central_b...)


The argument against negative interest rates was that people could simply store cash in a vault and get a 0% return, rather than lend it for a negative return. In practice very slightly negative rates seem to work out because storing large amounts of cash in a vault is hard. However, it's probably still right to assume that if interest rates are meaningfully negative for a while everyone will switch to storing cash.


... hence the War on Cash.

They can also convert bank deposits into 'yellowstuff' and put that in a vault, or safe at home. However, the mining inflation rate in 'yellowstuff', plus fees for storage, come to a depreciation of about 1.5%. So if the WoC is successful, and NIRP policies demand less than about -1.5% interest rate, then there has to be a War on Yellowstuff too.


> I wonder how it's working out for them

Dane here. We're fine. It's not affecting consumers directly. The negative rates are locking at zero or close to zero. Government has talked about intervening if it would go negative, which I would tend to believe. I honestly don't know the exact consequences of what would happen in any case. I feel motivated to buy a new apartment because of the low rates, so I'm guessing it's working as it should. But that's all just anecdotal.


>I feel motivated to buy a new apartment because of the low rates, so I'm guessing it's working as it should. But that's all just anecdotal.

Would that be your first apartment? It seems to me that the programs of low interest rates are motivating the wrong people - people who already have significant assets and can borrow against them to buy another/several properties.


Thank you! I've been looking for this video for quite a while!

It's a fantastic video for explanation for how the economy actually works.


I just want to point out that what it explains relies upon the Keynesian or Saltwater School of Economics. The assumption being "Spending drives the economy", the Chicago, Austrian and other free market schools of economics believe that "Savings drive the economy".

Based on this distinction lies the distinction between the policy proposals advocated by Liberals and Conservatives, Democrats and Republicans. Irrespective of which of the above statements "Savings drive the economy" vs "Spending drives the economy" sounds right to you, it's important for people to understand that this distinction exists on a fundamental level in economics (and in today's political climate, even more important than holding an opinion on which two statements are right, it's important to understand that the difference exists).


The savings vs spending views were demonstrated beautifully in the 80s and 90s with the Asian crash: east Asian nations, as a whole, are savers, whereas western nations, as a whole, are spenders.

But due to international demand - especially on Japanese production) - in the 80s and early 90s, those nations didn't spend on infrastructural improvements (factories running at 95-100% capacity (sometimes bursting even higher), so when they inevitably had to spend on capital improvement (expansion, new tooling, etc), they had to take production lines offline, which led to production drops, which led to their economy crashing.

"Spend" and "save" (where "save" is a mix of capital investment and so-call "rainy day funds", and "spend" is consumerism) are far too often viewed as independent factors, when they rely on each other being in balance to keep the economy working well.

When an economy spends everything it has (or more - which happens with credit that is too easy to come by), and forgets to plan ahead, it crashes in predictable cycles.

When an economy saves "too much", it never grows (or crashes due to having too much capital investment and not enough demand).

The US' coming out of the Great Depression - largely due to WWII production - was a giant case study on this: factories, production lines, and employable people were massively under utilized, so when demand was created (by gearing up for war), all those people and production factors were "available" to be used. In other words, they had been "saved" (from the economy's point of view) for a decade instead of "spent" (again, from the economy's point of view).

This is part of why there is a "healthy unemployment" value that economists toss around ... generally in the range of 4-6%. Those "saved" resources (human capital, in this case) are available to be "spent" when needed.

If you run at an unemployment level (regardless of whether that "employment" is production capacity, personnel, funding, etc), that is too low OR too high, you run into boom-bust cycles.

That's what central banks try to regulate (albeit not very well, when viewed in the long term).


> This is part of why there is a "healthy unemployment" value that economists toss around ... generally in the range of 4-6%. Those "saved" resources (human capital, in this case) are available to be "spent" when needed.

> If you run at an unemployment level (regardless of whether that "employment" is production capacity, personnel, funding, etc), that is too low OR too high, you run into boom-bust cycles.

I don't think this is a good summary of the theory - it's recognised that reaching the limits of capacity causes inflation, but no mainstream economist would refer to unemployment as a form of saving. Labour is a "wasting" good; you either spend a day or waste a day, you can't save up time while unemployed and spend it later.

Economists prefer a minimum level of unemployment because it effectively prevents labour organisation being used to drive up wages.


>you either spend a day or waste a day, you can't save up time while unemployed and spend it later

Except human capital is, from the economy's point of view, like money in your bank account: if you have none to spare, you cannot absorb increases in demand (to personalize it, say you have $100 per month for gasoline - if the price doubles, you can buy half as much for the same money .. you have no cushion to absorb that change).

Just about every economist I've read over the last 20+ years (ranging from the 1700s to now) agrees there, more or less - regardless of the school they adhere to: if you're operating with no margin of error, you experience the booms and busts less well than if you have a margin.

Unemployment is a form of margin in this context. Say there's 100,000 employable people, but 5,000 of them are unemployed. When demand for labor spikes by anything less than 6%, there is an "instant" buffer to bring onboard while new employable labor is "spun-up" (via training, growing old enough to work, etc).

>Economists prefer a minimum level of unemployment because it effectively prevents labour organisation being used to drive up wages.

Pretty sure you have that backwards: the lower the unemployment, the more wages are likely to rise. If your unemployment is too high, wages will fall (or remain stagnant).


I think this argument ignores other large factors in both of those cycles, namely demographics. Japan went into a demographic spiral with an aging workforce and not enough labor capacity to replace them. Decreased demand, as well as the factors you discuss, made outsourcing more appealing. The opposite is true post WWII. There was heavy investment in production infrastructure due to the war, but we're also looking at one of the few times in human history where labor was more in demand than capital. Add to this the rapid advance in technology which allowed goods -- and labor -- to spread more widely, or to even eliminate human labor, and you have a complicated soup of problems.

I don't think either the Keynesians or the Austrians can really claim a victory in those examples because external factors played a large role.


Wouldn't a low unemployment level be good as that the workers are currently developing/using their skills? Wouldn't that be a positive net effect on society as that there are less individuals who need social services and causing crime due to boredom?


On society maybe, but lower unemployment creates competition for labour and that create more profits going to labour instead of capital.


It's "good" in that fewer societal services may be needed.

It's "bad" because there's no buffer to absorb increase in demand of production and service creation


Thank you for the clarification.

Does a similar video exist from the "Savings drive the economy" point of view?


I couldn't find a video that well done, but there are videos explaining this stuff. One of this is Austrian Business Cycle Theory where you can look it up.

https://www.youtube.com/watch?v=te-xwqKApAE

But as I said, everybody has an opinion on "savings vs spending" (just look at the responses to my original comment), and it's such a clear classification that at that end of the day you can divide every individual on one or the other side of this debate.

Savings vs Spending is actually more accurately defined under "Say's Law". Whether you believe Say's law to be true or not. Keep in mind, pro-spending side defines Say's law different than pro-savings side (it's like pro-choice vs pro-life).

The economic ideas which fall under "Savings drives the economic growth" are:

Free Market policies, deregulation, privatization, reduced govt spending, (most) Republican/Conservative economic policies, anti-war, lower taxation, global trade, anti-protectionism, "Work and jobs will always exist".

The economic ideas which fall under "Spending drives the economic growth" are:

Increased govt spending (includes war spending), regulated markets, nationalized industries, UBI, Welfare, "machines will do everything one day", higher taxation, (most) Democratic/Liberal economic policies, higher spending on education, universal healthcare, infrastructure spending.

Funniest part about economics is that if you try to look at "evidence" then you'd find both the side being able to present the same events as an evidence of their theory being right. New Deal is simultaneously an example of how govt spending got us out of recession and how it dragged the recession to 10+ years.


Google "Austrian business cycle theory" for lots of material on the idea that boom & bust is caused by over/under-investment as a result of monetary policy distorting the "price of money" by manipulating interest rates. I haven't looked too deeply into whether it's a useful or explanatory theory, but that is what they believe.


I'd lookup Hayek, who has a different take on it compared to Keynes


Hayek, Friedman and Keynes provide a good starting point for three main strains of modern economic thought.

While Friedman is often portrayed as a 'synthesis' or mid-point between the philosophies of Keynes or Hayek on a linear plot, I found him to be closer to Hayek philosophically.


Probably not because that never happened.


Where do you think the money for business investments and commercial loans comes from? And do you think that either of these has anything to do with economic growth?


They ALL comes from governmental mechanism and spending.


If savings are put into banks or investments, is there even a significant difference between saving and spending (for the whole economy)?


In my opinion "spending vs. savings" is not the best way to put it. It would be better phrased as "debt vs. savings", or maybe even "growth vs. stability". I don't think even an Austrian School economist would argue that spending doesn't drive an economy -- that's what an economy is -- but rather that spending driven by debt is problematic. The argument is that more debt in an economy creates inflation by definition and destabilizes the market. They will cite countries that have less debt (among businesses and individuals) tend to have more stable economies and higher exports. Of course, this is partially because they are selling to countries with higher debt, so I don't think it's as simple as either.

EDIT: Also important to point out that Austrian school economics are against manipulation of monetary policy. They argue that interest rates, credit and savings ought to be driven by market factors rather than the government. It's not so much "debt is bad", but rather "artificially driving up debt by manipulating monetary policy is bad".


It's more like investment vs. consumption.

Keynesians would say the government should employ policies to increase overall consumption in the economy (aggregate demand).

Austians would say government shouldn't do either, but rather allow the free market to find the correct balance between consumption and investment. They are particularly against monetary policy because it increases overall investment in an economy (aggregate supply). The problem is that artificially high rates of investment inevitably lead to businesses offering goods and services that cannot be sold profitably (malinvestment).

That's why Austrians believe that artificially low interest rates cause business cycles.


> If savings are put into banks or investments, is there even a significant difference between saving and spending (for the whole economy)?

There's a difference in the velocity of money in the domestic economy; it’s not fundamentally tied to savings vs. spending, but is correlated to it.


The idea that banks lend savings is wrong.

A bank is not constrained by savings to lean. When a bank lean money is creating that money as a liability for the borrower and a asset for itself.


This is a great presentation. I was going to link this.


The business cycle may look perfectly cyclic to the point where it appears predictable, but a closer look at the data shows that it is not. Exhibit 7 is not a great way to show the data because the compressed x axis gives the optical illusion that the cycles occur within the same amount of time and that each cycle's shape is roughly the same. For example, the two right after 1980 look similar, but their shape does not match any other cycle (particularly the 2008 recession).

Likewise the three around 1960 to before 1980 all look different. The expansion after 1960 is unusually long and even though it dips at one point before 1970 does not go negative until after.

With that classification we already have 4 categories of recessions (3 between 1960 and 1980, and one for two recessions after 1980). The reason is prior to the 1980s recessions were generally driven by political events or changes in government policy exogenous to the private sector. According to this link: https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit... the 1961 is because of FR interest rate move, 1969- government tightens budget and interest rates go up 1973- Stagflation starting with OPEC tightening oil supply

You'll notice all of those are caused by events outside the control of the private sector or in other words the cause of someone's deliberate policy rather than an event of the system. Economic policy cannot predict these nor should it try to predict human behavior. Which brings up the point again that they are not predictable because I don't think anyone would say they can predict the behavior of an individual or a conglomerate like OPEC with great certainty.

That said post 1980 many of the recessions are caused by financial crisis that are endogenous to the private sector, so that is worth looking at. But the claim that the business cycle from 1945 to 2009 is predictable does not hold up.


I dunno. If you take a random walk and label the parts that go up as "growth" and the parts that go down as "recession" don't you get a similarly compelling 'narrative'? The picture looks far from periodic to me other than the basic generalization that "it goes up for some time until it stops going up at which point it goes down and also it doesn't get too far from 0."

(And what is the vertical axis supposed to be labelled as? I don't even know what the chart is of.)


Exhibit 3 looks somewhat like a random walk. Exhibit 7 doesn't. I assume the y-axis is gdp growth.


Not the pattern specifically, but something in the short-termism of human psychology seems to be at work: https://www.theatlantic.com/magazine/archive/2008/12/why-wal... .

Although it's always popular to blame some group ("bankers" "irresponsible borrowers..." you could devise the others, and "the government" is almost always seen by someone as at fault), it appears that the answer is often "in all of us."


I sometimes wonder if the best economic system is the one the people living under that system believe in the most.


Most of the unpredictability is for things on the margins.

Fundamentally cheap capital available for too long lets dumb behavior sustain itself longer.

People stop questioning absurd market conditions, particularly in real estate. When growth slows down at all, over leveraged enterprises miss growth target, the cash spigot turns off and bust follows.

In my area, it's blindingly obvious that real estate is fubar. Single family home prices have been stagnant, and there are dozens of medium density apartment and condo developments going up that are only sustainable because of tax abatements and foreign money laundering.


Ray Dalio gives the best explanation to why the business cycle exists [1]. I wish I could provide a TLDR that does the video justice, but there's just too much great insight in this video to condense it any further (it's only 30 minutes anyways). In my opinion, this should be required viewing for all financially literate adults.

[1] https://www.youtube.com/watch?v=PHe0bXAIuk0


It's mostly a feedback loop. The more stable the economy the more risk companies and people take on.

However, the actual graph looks a lot more random without coloring various parts of it or all the other lines. Notice how the time spent below -1.0 varies a lot.


> Does anyone who understands finance have any insight on why this pattern seems so predictable?

https://en.wikipedia.org/wiki/Karl_Marx


> Does anyone who understands finance have any insight on why this pattern seems so predictable?

I think the only thing that is predictable is that there is some sort of cyclical event - where neither the frequency nor the amplitude is known. The peak-to-trough or trough-to-peak magnitude is not predictable and neither is the timing - unless you have some crystal ball.

The doomsday-ers will always beat the drums of fear. People will ignore them until there's an actual downturn - then we'll all point to them and marvel at their genius. Being a bit cynical, but I've seen this play out twice before in my professional career.


It's driven by the human brain : Fear | Greed


Not sure why this was downvoted. It's quite true. As others have mentioned, when the economy grows, people get more comfortable with risk. When the bubble pops, people freak out. This behavior goes a long way in mangnifying the boom/bust cycle.


> When the bubble pops, people freak out.

What's the causal relationship? You're suggesting the bubble causes fear, but what causes the bubble to pop?


Things go up in a market because the fundamentals are good. That's not yet a bubble - it's based on the reality of the fundamentals. But a bunch of people see the market go up and decide to invest in it, not because the fundamentals look good, but because they want to make money and that market is going up. That makes the market go up more. So more people invest in it, because it's going up, and there's fear of missing out. Now it's starting to become a bubble, but it's not yet a dangerous one. If it breaks, people will lose money, but it won't destroy the economy.

The next step comes when people borrow money to invest in the market, because it's going up, and they can make more money that way. So now the market really starts to go up, because there's so much money pouring in. The fundamentals are completely out of view here - they're not even a distant reflection in the rear-view mirror. Everyone's making money, and nobody wants to get out, but everyone kind of has this nagging sense that the party's going to end sometime.

Eventually, the banks kind of wise up (way too late) and start limiting the amount of money they're going to lend for purposes of buying assets in this market. Then the price stops going up. Then everyone rushes for the exits, because they don't want to lose money, especially since most of the money is borrowed. But everybody can't be one of the first ones out the exit, and so a bunch of people lose money.

Borrowed money. Money they can't pay back.

Now the banks are in trouble, because they've made a bunch of loans that people can't pay back. That's how a bubble can hurt the larger economy.


The bubble doesn't cause fear, the popping of the bubble does. People overreact, sell all their investments, drive down the cost and everything overcorrects on the bottom as well.


It's not so much people overreacting as banks. Banks call in loans which forces the borrower to stop whatever economic activity they were engaging in.


Basically, people expect momentum. During a boom, people expect values to keep going up which serves to drive values up but eventually they'll get past what is reasonable. Once they start correcting downward, people expect them to keep going down which drives them further down until the opposite phenomena occurs and the cycle restarts.

As I recall this has been experimentally verified but I can't remember enough to find a citation.


I would love to read some "experimentally verified" economics, as it is something that economics seems to be lacking.


Experimental econ is a fairly large sub-field that is very useful for micro phenomena.

Unfortunately because even the micro phenomena are complex and difficult to quantify, you can't reliably use micro knowledge to mathematically predict macro phenomena the way you could in something like physics.

Since the economics that most non-economists really care about are all macro stuff, this tends to mean that people are not really aware of experimental econ. It's still useful in cases like this, though: You can't experimentally confirm the actual causes of boom and bust cycles, for instance, but you can show that certain conditions are sufficient for the emergence of boom and bust cycles.


>suggesting the bubble causes fear, but what causes the bubble to pop?

too much fear / too much greed


The last obvious one for me was in the UK, when the first bank needed bailed out.


At the end of all the complicated business cycle explanations above, yep this is pretty much it. I would add that we have allowed the elite to design the economic system we all live in, and they have spun some really strong incentives for greed in there. Fundamental to all is just the random chaos of history that's led us here. We haven't had a good system reset since we've gotten better info technology so I don't think anything will change until then


I'm going to be honest, economics and finance has never been my strong suit. But a long time ago I did study a lot of math and one of the more intriguing parts of mathematics was the theories by Paul Levy (alpha-stable distributions), Gaston Julia (patterns under iteration), and of course Benoit Mandelbrot (it's kind of hard to talk about one without talking about all three).

Mandelbrot is rather well known for the Mandelbrot Set. But interestingly he started his study down this path as he looked at markets and the apparent predicability in such a chaotic and unpredictable environment. He studied wool markets but extrapolated that out further to many financial markets and then economics as a whole. He would say that financial markets are anything but quite unpredictable, just that the models we use are rather wrong.

I would suggest checking out the book "The Misbehavior of Markets: A Fractal View of Financial Turbulence". It's quite good.


These cycles are not as consistent nor as predictable as your comment suggests. Your link and the bloomberg article both mention how cycles have been changing (e.g. lengthening on average recently) and how once important economic correlations of the past continue to break down toward being uncorrelated.

There are many reasons for a cycle, some we think we understand, some we clearly do not. Everyone agrees we cannot predict the future. By the way, books are written about cycles, people writes their thesis on this topic, it is difficult to summarize.

The short answer is we have a list of things that have caused cycles in the past. And we have a calculation how often and how likely a new cause is to be added to that list (tech bubble was not on the list in the 80s, now it is). From this list of known causes and calculating the odds a new cause will come along, economics try to predict cycle peaks and valleys as best they can. Their track record is atrocious and a joke at best. Despite what is reported in the press sometimes, economics are actually getting worse at analyzing cycles. Ray Dalio is mentioned in a few comments, Dalio does not have a good track record when it comes to macro economics though his hedge fund has performed well in some years (don't believe marketing BS).

No one knows how innovation will effect boom and busts. Research on this is heavily manipulated. One can find strong connections between innovation and cycles if you want to AND one can find almost no connection between innovation and cycles. So unfortunately the real answer to this one is "it depends", all else equal (ceteris paribus) if innovation in tech slows it is likely part of many things slowing down and hence the lengthening of cycles we have seen MAY continue (again ceteris paribus).

TL;DR pattern is not predictable nor consistent. Tech and innovation has little to no effect except in extreme cases, the pace of innovation should not have a major impact. Demographics and population factors show strong evidence for warranting a majority factor weight.

Lastly, analogy: have you heard of yo-yo dieting? How long do most dieters last on a diet before failing that diet? What is the common causes of failing a diet? How long after failing to diet do they try again? Why do some people succeed when dieting on the first try and never regain the weight, why some on the 5th try? why some never? The economy acts just a person trying to yo-yo diet but it's 300 million people making and losing money instead of fat (well also fat).


> It's almost perfectly periodic.

And yet the underlying cause of the busts has varied.

People bring up the "due for a bust" observation and they may be right. But I have to ask, "What is going to be the economic trigger this time?"


Nine out of those eleven recessions were triggered by the Fed raising interest rates for the purpose of controlling inflation.


interesting, i wonder how cryptocurrencies will react.

Som are clearly booming like the regular stocks are. But some are also built to resist inflation.


>People bring up the "due for a bust" observation and they may be right

And it can be a self-fulfilling prophecy .. expect a bust, look for a bust, have a bust: declare you "knew" it was coming


Generally credit (leverage) cycles. There's momentum in people borrowing more, until people are too levered, and then the same in the other direction. You can look up some of what Ray Dalio has to say on Youtube for more on this. (Not his organizational principles - his views on credit)

https://www.youtube.com/watch?v=PHe0bXAIuk0


When buying on leverage is actively encouraged to the masses, a crash usually follows. Before the 1929 crash, buying stock/equites on extreme margins became normal; Before the 2008 crash, buying real estate on extreme margins became normal; today we are seeing higher education being purchased on extreme margins. Now higher education is a different beast than the others, so it is hard to say how a economic event stemmed from student loans will manifest itself, but it is a real concern.

I highly recommend JL Collins Stock Series blog posts and specifically this article on market events of the past 100 years: http://jlcollinsnh.com/2017/07/26/time-machine-and-the-futur...


Huge increases in student loans will certainly have effects on future borrowing - mortgages, car loans, business loans. What happens when fewer people are buying houses? Cars? Starting businesses?


The fact that the pattern exists doesn't make it "predictable".


Isn't that the very definition of something being predictable?

That there is a pattern which predicts a certain outcome?

For example a certain simplified weather pattern (e.g. "if it rains for three consecutive days 9/10 times it rains a fourth day") makes it possible to predict a certain weather ("it has rained the last three days so there will be rain tomorrow as well")

Obviously that is not a prediction with absolute certainty but nonetheless a prediction.


It's a semantic argument over the meaning of "pattern". Your example is mathematical, the meaning in the linked article is more along the lines of "statistical model".

I mean, to provide a counterexample: we have about as good a model for beta decay of H3 as we are ever going to get[1], but we still can't tell you when your geiger counter is going to click.

[1] Pause for some physiscist to jump in and tell me this is totally not true and there remain deep theoretical holes here.


Unless you have some unique definition of what a pattern is: yes, it does.


David Hume's Problem of Induction strikes again! But that's not how science works.


exhibit A: we are all connected through love and war

exhibit B: macro human behavior never changes, we pretty much all desire and react the same way.

exhibit C: history repeats because too few learn from other's mistakes.

exhibit D: it has never ever been a good idea to trust anything a bank says. they don't love you and are at war with you. they are counting on you to fall in love with the wrong girl, again.

exhibit E: 100 years of data is not enough.


Which country are you talking about? Different countries have different business cycles.

Eg Australia and Israel barely noticed the Great Recession.


We are going to notice it when people come to the realization that a 3 bedroom house isn't actually worth a million bucks. Also one of the big reasons Australia skipped a few downturns is we got lucky having a ton of iron ore in the ground. In addition to this when the GFC hit the government just poured money at regular people, (trickle Up! Economics). I got $900 bucks for nothing, with a clear signal from the government that I was to spend that money keeping things ticking over. We got lucky.


The iron ore made China pay Australia lots. But the iron ore wasn't preventing any downturn. Just the opposite: commonly countries that rely on commodity exports have crazy volatile economies, since global commodity prices are volatile.

Give your central bank some credit!


Not lucky, you guys just played your cards right. Other nations squandered their chance.


>Eg Australia and Israel barely noticed the Great Recession.

Do you know why? AFAIK India too did not get very affected by it, maybe because it has a large internal market with both domestic suppliers and consumers. Or I may be thinking of the Asian crisis in 1997-1999 or so - not sure. Had been to S.E. Asia at that time and they were just recovering from it, IIRC.


Our (Australian) government at the time provided significant consumer stimulus (most taxpayers got up to $950 to spend, people on welfare and/or with children got even more) and it also invested heavily in infrastructure and construction projects (http://www.smh.com.au/articles/2009/02/04/1233423265116.html). Like other countries, our central bank also dropped interest rates.

As a consequence we now, apparently, lay claim to the longest period of uninterrupted growth in modern history.

However, we've had uncharacteristicaly flat growth since, narrowly avoided recession a couple of times, and are battling low wage growth which, in combination with rising energy and property costs, is beginning to undermine consumer demand.

This has been unhelped by the end of a mining boom, related decrease in Chinese growth and demand for commodities, structural taxation challenges (income taxes were reduced during the boom, and we struggle to tax multinational companies), and a huge speculative property bubble (fuelled by lower interest rates, favourable taxation schemes, currency flight from foreign investors, and ultimately the self-reinforcing returns). I'm sure demographics are playing a role too.

Considering most of our pension schemes ("superannuation") are invested in either property, mining, or banking (itself dependent on property), there's huge uncertainty ahead.


Almost sounds like all that happened was pushing off the bust of the boom-bust cycle, instead of actually avoiding it


What do you mean by "the self-reinforcing returns"?


Presumably, the classic mechanism underlying speculative bubbles: investors buying because they expect to be able to sell to other investors at a higher price, later.


For Israel and Australia it's too do with competent central banks. See https://marketmonetarist.com/2012/11/19/the-export-price-nor... and https://marketmonetarist.com/2014/04/24/how-stan-fischer-pre...

And compare https://marketmonetarist.com/2015/07/14/the-euro-a-monetary-...

I don't know about India. They probably just printed enough money to avoid the Great Recession. (But had some other problems independent of the Great Recession.) Some Googling on the same blog revealed https://marketmonetarist.com/2013/07/17/too-easy-and-too-tig...


>I don't know about India. They probably just printed enough money to avoid the Great Recession.

I doubt they did only that, or even that. The RBI (Reserve Bank of India) and the Indian finance ministry have some well-educated and experienced economists (some even with Harvard / Oxford type backgrounds, or at least were earlier) (though I'm not saying they are perfect, no one is). Even without being a finance professional or economist myself (though I did take a year of Economics in 11/12th grade), I can tell that (mainly gut feel or educated guess, of course).

A sort of caveat or counter to what I said above, though (and what you said as well) is that (IMO) no economist fully knows what they are doing, partly because the field is so complex (dealing with economies of nations or the world, after all), and partly because economics is not a science like the physical sciences are (and hence not perfectly predictable, even if you have a supercomputer), not matter how hard proponents of that try to claim so. It's not called The Dismal Science for nothing ...


I should perhaps have expressed myself more academically:

The banking crisis might have caused a recession, but what turned that recession into The Great Recession in Europe and the US was too tight money: nominal GDP just fell off a cliff.

India was further away from the dreaded 'zero bound' on interest rates, and never had any problem generating enough nominal GDP. (India's problems are with the real part of the economy. So they are producing too much inflation.)

The Fed and ECB also have clever people. They still made mistakes--especially when evaluated with the benefit of hindsight.


Didn't really get some of that. I guess I need to brush up on my economics terms and concepts.


Either that or I mixed up some terms. Happy to try and explain more.


Please do:

>The banking crisis might have caused a recession, but what turned that recession into The Great Recession in Europe and the US was too tight money: nominal GDP just fell off a cliff.

Was going to ask what nominal GDP is, but googled it, it seems it is GDP without being adjusted for inflation. Okay.

By "too tight money" do you mean less money available for business investment, or higher interest rates for borrowing it, or something else?

>India was further away from the dreaded 'zero bound' on interest rates, and never had any problem generating enough nominal GDP. (India's problems are with the real part of the economy. So they are producing too much inflation.)

Okay, this second paragraph seems to indicate that nominal-GDP-wise, India was okay, but it was not okay after adjusting the GDP for inflation?


India's also a developing country vs a developed one

A rapidly developing country, no doubt - but not developed yet

The vast majority of Indians aren't involved in either the "real" economy enough (ie, the one governments measure), or are too poor for it to matter

Yes, India has come a long way, but it still has a long way to go - economically speaking


>The vast majority of Indians aren't involved in either the "real" economy enough (ie, the one governments measure), or are too poor for it to matter

Not too sure about that. Also will depend on what exactly you mean by it. If income tax payers, maybe yes. But if just people who earn money, there are other means than income tax to include them in calculations.

Anyway, it's a very complex issue.

>Yes, India has come a long way, but it still has a long way to go - economically speaking

True. And not just economically - in other ways too.


I thought that this was a nice explanation: http://www.economicprinciples.org/


The one thing to note is most of these boom and bust cycles were also engineered during Greenspan's time. It will be interesting to see what happens in the coming months and years


My pet theory is that there's a recession in the first term of any new president. Although, you'd have to give an allowance for Bush Sr. sharing one with the first term of Bill Clinton.

If a president could time a recession, it would make sense to ensure that it was over before the next election.

For a certain class of people, recessions aren't a problem, but a tool which allows you to write off your more speculative investments.


Is it possible in the Age of Big Data that we have enough indicators to slow things down before they bust?


Its pretty obvious, just look at alberta, they had a surplus for decades when oil prices were high, spent it all away plus even more, and now the rooster has come home. Every industry falls to this basic lack of fiscal discipline. Over-spend and over-leverage when times are good, thus inflating the bubble(s) even further and socialize the losses through bail-outs when the check comes due.


This is known as Elliot wave principle - https://en.m.wikipedia.org/wiki/Elliott_wave_principle#Found...


And it is complete horseshit. no evidence whatsoever, but a great way to sell newsletters to suckers. Pseudoscience.


Cycle is driven by printing money or increasing supply


This is a misunderstanding of Austrian Business Cycle Theory. Business cycles are driven by artificial fueling of interest rates (which is technically done by printing money, or increasing the money supply by other means).


A sidenote to ABC-like theories: entrepreneurs always end up with clusters of malinvestments, even without interest rate manipulation. Simply because humans always exaggerate.

The difference is that without e.g. interest rate manipulation, we'd probably have a lot of "rolling waves" of small recessions. These small recessions would be frequent but also limited in duration, scale and scope.

With suppression of interest rates, the malinvestment becomes bigger and broader. Meaning their unraveling is much more traumatic.

9 years into the latest boom, with ZIRP and NIRP and QE and mark to unicorn accounting and all the other oxycodon shots necessary to abort and forget the 2008 run on the system, we can only wonder what has been built up in terms of malinvestment and what the unraveling will be like. Not just in the world of finance and credit, but also in the real economy, where much of the recent competition and "disruption" is really based on venture capital backed companies not worrying about profitability for years on end.


Why would you call the parent post a misunderstanding? It was merely a reduction of the same thing you said.


> Does anyone who understands finance have any insight on why this pattern seems so predictable?

I would look to psychology in addition to economics. There are several well-known psychological factors that suggest there will always be a boom/bust cycle:

1. People copy other people. Fear and greed are infectious. People become envious when their neighbour or brother-in-law continue to make quick profits from investments.

2. People make irrational judgements when affected by emotions like fear and stress.

3. People tend to make overoptimistic judgements about future events and their own business acumen. Conversely people often deny reality and do not critically assess their past performance.

4. In judging the future, people place too great emphasis on recent experience and discount events which occurred before they were born.


Driven by government regulations which are too inelastic to respond to changes in the economy.

Easy example: governments, by definition, will spend more money year after year. Governments rarely 'scale back' their expenditures. When 1) taxes cannot be raised and 2) money cannot be raised through treasury bonds, then there is a crash.

Government is bound to follow the boom/bust cycle and brings the rest of the economy with it. Sectors of the economy that heavily rely on government spending like: health care, defence, banking, education, transportation, will crash and it will be sudden.


Boom/bust speculation cycles predate government regulation by centuries. Somewhere around here I have a tulip farm to sell you cheap...


The tulip mania occurred after Europe had been flooded with precious metals coming from the Americas and later currency debasement to finance war. Doesn't mean that activist central banking isn't the cause of today's financialization and serial bubbles.


The Economist disagrees with you:

https://www.economist.com/blogs/freeexchange/2013/10/economi...

Was tulipmania irrational? Tulipmania was not just crazy speculation


The point was that it wasn't caused by government regulation. And it was a quip, anyway, pointing out that even late renaissance "investors" in a completely new market would see a boom/bust cycle.


Please read the article, it explicitly states that the Dutch tulip boom/bust was caused by government regulation.

> Earl Thompson, formerly of UCLA, takes a different approach. He reckons that the market for tulips was an efficient response to changing financial regulation—in particular, the anticipated government conversion of futures contracts into options contracts. This ruse was dreamt up by government officials, who themselves were keen to make a quick buck from the tulip trade.

> In plain English, investors who had bought the right to buy tulips in the future were no longer obliged to buy them. If the market price was not high enough for investors’ liking, they could pay a small fine and cancel the contract. The balance between risk and reward in the tulip market was skewed massively in investors’ favour. The inevitable result was a huge increase in tulip options prices. (The price of options collapsed when the government saw sense and cancelled the contracts.)


Of course The Economist thinks markets are perfect and government regulation is to blame for everything. Spreading that idea is why the magazine exists. If the article was promoting a different theory then it would never have been published in The Economist.


I'm not following, nowhere in that article does it say there was no boom/bust of tulips.


The article states 1) it was a boom/bust and 2) the boom/bust was caused by government regulation.

It states that Tulipmania was a rational response to anticipated government regulation that would let investors cancel their futures contracts for only a small fee.


Only an economist could look at the tulip 'incident' and not see a speculative bubble


The nice thing is that if you predict enough downturns you'll eventually be right.

The cliché goes, "Economists have predicted nine of the last seven recessions," but I think the numerator is actually higher.

This article: https://www.theatlantic.com/magazine/archive/2008/12/why-wal... was published in 2008 but is still underrated.


The antithesis of predicting that the eventual downturn will happen is "it's different this time" claiming that the cycle has been broken and there is only upturns to come.

The former are always right and the latter are always wrong.


While that's true as far as it goes, be careful not to draw unwarranted conclusions. There are always downturns, but the next one could start tomorrow, or in 2025, or in 3025. It will hit some point lower than the point at which the downturn starts, but that point could be higher, lower, or even equal to where the market is today.


until now


invest everything in bitcoin


"invest"


Are you talking about Wired's Long Boom prediction?


If the banks truly believe a downturn is coming, they should get their customers out of the market. Doing so would guarantee a downturn.


What I'm most excited to see in the event of a market downturn is how well Betterment and Wealthfront hang onto their clients.

I'm guessing that the average client of those firms hasn't really lived with a significant stock market investment during a bear market. Will these clients keep their money invested in a larger percentage than the typical ETF investor?

If so then I think that's a huge bullish signal for these new types of wealth management firms.

If not, then those companies are going to have to go out and raise money in a downturn.

If you can hold peoples money during a downturn, then I view that as a very positive investment signal, there has to be something more than the dollar, bitcoin, hedge funds, and gold that people can turn to in a downturn.


I've got friends in the Canadian version, WealthSimple. They've got some pretty good writers that put out articles related to money and saving and what-have-you and wrote this one a little while back: https://www.wealthsimple.com/en-ca/magazine/data-downturn

They really seem to want to help educate their customers. Of course, they want to do this because the more educated they are on the matter, the less likely they'll pull their money out.


Laughable. If the customers were better educated they wouldn't put their money in WealthSimple.


I don't see why you say that. I'm quite happy as a customer. I pay a low fee (by Canadian standards) to have my money automatically balanced between ETFs. I could do it myself, but A: I might make mistakes, and B: I have to pay attention to it.

They don't claim they're doing rocket science.


I'm unfamiliar with what a low fee by Canadian standards is. Maybe in Canada it's a good deal. My comments were US-centric. Sorry, I should have realize that it should be compared to other Canadian options.


Maybe others think differently but I see those two companies as a way to set it & forget it invest. I can afford to invest $X every month. I'm going to put it in a robo-ETF company & not think twice about it. That means not paying attention to the market at all & playing the long term.

The only thing I might do, which contradicts what you suggest, is try to increase my input each month during a bear market if I can afford it.


> I'm going to put it in a robo-ETF company & not think twice about it. That means not paying attention to the market at all & playing the long term.

Maybe I'm missing something about how ETFs work, but AFAIK the Japanese stock market is way bellow where it was in the late '80s - early '90s, so that anyone who would have invested in related ETFs back then (had those ETFs existed, of course) would have lost lots of money in this 20-years span. If the same thing were to happen to either the European or the US stock market (i.e. a long period of stagnation) then putting money in a "a robo-ETF company" will be a losing bet (and it is a bet, make no mistake about that).


You're making the assumption that someone just put all their money into the market at once. People use dollar cost averaging and add money to the market every week or month. So if you put all your money in at the top, yes you;d not be doing so well. But more likely you put money in before, during and after that event and today you'd be well up when you consider dividends and appreciation.

Also, you'd want to diversify outside of a single market, like Japan stocks. You'd want to be diversified across bonds, stocks, real estate, currencies, precious metals, commodities, etc. This is so easy and inexpensive to do today for the average person.

Dollar cost averaging across a broad spectrum of investment instruments over a long period of time is better than holding cash.


> You'd want to be diversified across bonds, stocks, real estate, currencies, precious metals, commodities, etc. This is so easy and inexpensive to do today for the average person.

I mostly agree with you, my question was addressing the "invest in ETFs and forget about it" part that OP was talking about (the "robo-ETF company"). What you're proposing sounds more like active investing, which of course will be one of the few viable options once a global crisis re-emerges.


The 2 robo-ETF companies mentioned basically have you set a risk tolerance level & then invest in a diverse selection of ETFs on your behalf. The company's job is to keep your investment balanced based off the risk tolerance level you suggested. So a risk tolerance level of 5 might mean your investment should have 30% of it in bonds. If your portfolio ever moves to 31% bonds it will re-adjust by selling some of your bonds ETF. Hence my comment about "invest in ETFs and forget about it".

I believe the above mentioned companies also offer non-ETF investments for customers with over 100K. In this case instead of putting your money into an ETF, they basically buy the individual stocks that the ETF would have been tracking.


Dollar-cost-averaging and diversifying your portfolio are orthogonal to active/passive investing. (Though arguably DCA is a bit more on the passive side, as it avoids trying to time the market.)


DCA and diversification are more-or-less the bread-and-butter of routine buy-ins to ETFs, MFs, etc

You rely on the fund to be diversified within its target sectors, and you diversify by picking multiple different funds across different sectors.


Exactaly right. And in part of the DCA strategy as you described I also DCA into a cash fund (liquidity fund) that can be used at a time I judge opportune. That is if there's a housing crash, I'll have a hard asset I can use to jump into that opportunity. Of if there's a market correction or crash, I'd be able to use a portion of that cash to buy low.

It's not quite timing the market because the portion going into cash is scaled accordingly to how much is going into other types of funds and also has the benefit of being used if there's an emergency that requires a decent amount of liquidity.

Having it all in liquidity would be a poor choice. Cash should only be a part of the overall strategy.


Buy something that is globally diversified. If the global economy is on a 20 year downturn you probably have more serious problems than your investments.


I think it is still possible to have a 20 year "downturn" and the world doesn't deteriorate. Essentially a complete reversal of what caused growth in many different industries. I'll just go through a couple of industries.

Banking - Governments around the world decide to break up big banks. This allows for the return of small local co-ops that aren't listed on the stock market. Now the market is super competitive and so the big banks stock go into decline (the hypothetical value of the co-ops increase but you can't capitalize on that).

Mining - Recycling gets so advanced we no longer need to mine stuff. Mining industry is no a shadow of its former self. New industry isn't as valuable as before as the barrier to entry into recycling is much lower.

Healthcare - US government decides to take over the industry because a cultural shift. Industry collapses.

Now, we live in a world with no Wall St, environmentally stable, and everyone has access to healthcare. But the people who went into ETF's essentially have no money. Obviously, this world would require much reform (more taxes), but one that I don't think is entirely unobtainable.


> Buy something that is globally diversified.

That's the thing, can ETFs do that? I.e., can they make active investment decisions (like, how do you diversify globally)? By the current definition I think the answer is "no", but it's interesting how things will evolve, though.


What? Why can't ETFs do that? Buy some combination of MSCI World and something for "emerging markets" and you're halfway there.


> Buy some combination of MSCI World and something for "emerging markets" and you're halfway there.

During the last crisis (2007-2011) the stock indexes fell almost in unison around the world (including MSCI World). Had you "diversified" into it in February 2008 (just as Bear Sterns was imploding) you wouldn't have made your money back until 2013-2014 (I took the data from here: http://www.stockq.org/index_en/MS001.php). Correlation can hit you pretty damn hard. But there were active investors who made lots of money during that same time-frame.

Later edit: Plus, switching from a ETF focused on US stocks to one focused on MSCI World (let's say) looks like active investing to me, i.e. you have to take an action based on what you think the future will bring (in this case you think MSCI World will be more stable than US stocks). I was responding more to the OP when he was saying about how he/she would like to put his/her money in an ETF and forget about it.


And most of those stock indexes recovered within 1-2 years. If you didn't panic sell your paper loses would have gone away pretty quickly. Not to mention almost no one's cost basis would be the peak price from 2007, most people would have an average cost basis of lower than that do to periodic investments from previous years.

If your doing a long-term buy & hold strategy, you really don't need to worry about temporary dips in your portfolio. That's why the ETF-and-forget-it long-term strategy is nice. If you're investing and you don't have a long time horizon or you're scared of a dip in your portfolio, you don't belong in the stock market anyway (stick to bonds and other conservative investments).


>Had you "diversified" into it in February 2008 (just as Bear Sterns was imploding) you wouldn't have made your money back until 2013-2014

That's paper losses - unless you panic sold

If you kept investing throughout that time, you'd be substantially further ahead than otherwise


Other thing: Their entire revenue stream is based on percent fees from current assets. During market downturns, total assets drop, which means their revenue drops. Not only are more of their customers likely to withdraw funds during a downturn, but the companies themselves have never existed during a downturn.


The hope is that the fund you are invested in reverses their long positions to short positions, and those assets keep on increasing. I wouldn't trust any money manager that wasn't ready to change their position to match the immediate market at the first sign it was profitable to do so. You don't want a "wait and see" money manager, you want a shark.


The problem is that good ones who are actually good charge such high fees that it eats up all the difference they make, and also end up being bad after a while anyway. Bad ones do the same thing but lose more, faster.

In a gold rush, sell shovels.


What kind of funds do you invest in? Most people invest in long-only funds.


The only fund I trust to manage any of my assets currently is FSI(futures strategies inc). It's a private fund that accepts outsiders if a member introduces them and they meet capital requirements. They are very quick at reversing their position, sometimes dozens of times per day. Fees are a flat 2% of managed capital, taken quarterly. I've been with them for the better part of a year, and so far(knock on wood?) there have been 0 losing weeks since I joined.

That said, the majority of my capital is traded by me. It's all in the futures market, specifically US debt instruments.


"Better part of a year" is not a very long track record.


2% quarterly? How is that ever going to be the market long term?


I assume that's 2% annual (i.e. 0.5% per quarter). And a fund changing its exposure dozens of times per day is not in the business of beating the market.


Good for you. Anyway the discussion here is about investing, not trading.


I'm about to open an account on one of those services. I'm 47 and am terrified that I'm not saving enough for retirement and am hoping that the service can give me some peace of mind or at least help me with a plan.


I'm a big fan of them. Some people hate on them for the 0.25% fee but I think for a lot of people it's well worth it (and better than paying more for an in person advisor that provides zero value).

They will set you up with a solid investment plan and rebalance for you, just don't get caught up in their tax-loss harvesting hype. Their value is in giving you the peace of mind that you seek, the tax loss harvesting benefit is overstated imo.


> (and better than paying more for an in person advisor that provides zero value)

that isn't the only other alternative to betterment, etc. https://www.bogleheads.org/wiki/ https://investor.vanguard.com/mutual-funds/target-retirement...


Yeah that's a fine option too to just put in a target fund and forget about it. It's debatable how much more value you get from a roboadvisor wrt rebalancing + diversification + tax loss harvesting.


I don't think Wealthfront etc. have any advantage w.r.t. diversification or rebalancing. Vanguard's target retirement funds seem to have target allocations (which change gradually as the retirement date approaches), and rebalance to stay in sync with those. E.g., VTTSX seems to maintain ~90% stocks and ~10% bonds, with ~60% of the stocks being domestic, and ~70% of the bonds being domestic.

They do have an advantage in tax loss harvesting, but the maximum annual savings is basically $3000 * (current marginal bracket for ordinary income - LTCG rate in retirement), which is about $600 for the typical investor. If you have more than 250k in Wealthfront, their annualized fee will be greater than $600.


The roboadvisors invest in market segments not included in the target retirment funds (like natural resources and REITS). If you were to do that on your own using various vanguard vehicles you'd then have to worry about rebalancing.


Well you still get exposure to companies in those segments, such as Monsanto and Equity Residential. If you just want "normal" positions in those companies (i.e. weighted by market cap), then Vanguard funds like VTSMX (a component of their retirement funds) are perfect.


Heres a plan for you,

1. open a brokerage account with your bank, 2. buy vanguard index funds for the next 20 years, 3. retire.


That's roughly my plan.

The details are what get me. I need to buy index funds and usually you are advised to save as much as you can. I want the advice that shows me how little I can save. My kids are only going to be kids once and I'm not going to forgo taking them to Disney or work stupid hours so that I can live like a king when I'm old. My goal is to live as well as I can today while still being certain that I'm not going to be a burden on anybody when I'm 80.

Paying an expert for advice appeals to me just because I have no confidence that I'm not taking something important into account.


Go with Wealthfront or Betterment. Wealthfront is cheaper I believe if you don't have over 100K invested.

All you have to do is set up a bank account to automatically put money into your account every so often. That's easy to do on their platforms. They'll keep it balanced among several ETFs based on how risky you're feeling. You won't have to pay any fees to purchase or sell the ETFs like some places charge. They do a great job of making sure you understand where you're at & what you're likely to retire with. They also post plenty of information to help you understand your investment.


The actual math for how much you need to save is, roughly:

25 times your annual expenses.

At your age, with a US assumption, you have the benefit of Social Security almost certainly providing you a good portion of income at Age 67 (any time between 62 and 70 is reasonable, and taking SS at age 62 is best unless you are very likely to live past 84.)

Ignoring SS, if you invest 25 times your annual expenses into a 60%/40% stocks/bonds split, your expenses will be roughly 4% of your investments, so you withdraw 4% each year. Your investment growth (including dividends) may or may not exceed your expenses, but, overall, you should make it 30 years without running out of money. [0]

What you need to do is determine your expenses (including Disney trips), and make sure you don't exceed that budget once you stop having income. (Of course, you can and should adjust if things go better or worse than expected when you're retired.)

[0] https://en.wikipedia.org/wiki/Trinity_study


If you want an idea, try to figure out the cost of annuity for the amount you want to retire with. That is probably a good target for how much you should save.


> Paying an expert for advice appeals to me just because I have no confidence that I'm not taking something important into account.

I've got good news and bad news for you.

The good news is that you're not as clueless as you think.

The bad news is that person you're paying to give you advice? They also don't have a clue, but it's their job to make you feel like they do.

Anecdotal evidence: 12 years of investing with Edward Jones in various mutual funds (2005-2017), and I would have made waaaay more money if I'd just bought ETFs to begin with.

Sure, a financial advisor is comforting to talk to, but the fees they charge are murder on your long-term return, and in the end they're just paid to spend all day reading strategy papers which at best will give them the same return as a cat picking stocks. [0]

[0] http://www.businessinsider.com/cat-beats-professional-stock-...


All available evidence points to x% of financial advisors being no better at picking investments than those they are advising, and the remaining (small) fraction capturing all the additional value they provide, and then some, via their fees.

So either your advisor is good, and you pay them more than they are worth, or your advisor is bad, and you still pay them more than they are worth. You cannot create more (dollar-denominated) value for yourself by engaging a financial advisor.

You aren't missing anything. You need extraordinary skills, contacts, or crimes to beat the market, and if you had what it took, you'd already be in the financial industry. So just buy the index funds and hold them in a non-margin account, year after year, until you can live for a year on 3% of your accumulated principal. That's all the investments advising you and everyone else in the 99% will ever need.


So, say I had $1 million in my retirement account at age 67 (I have maybe 1/2 that today). I could use $30k of that each year on top of my social security benefits, correct?

Seems like I will want about twice that. Maybe $2 million saved so I can have $60k / year and I don't think that's going to happen. Shit.


The prevailing advice for a long time was 4%, but bond yields have been so low for so long, that people have been questioning whether 4% is truly safe any more.

If you're retiring at 67, 4% is probably safe. $1.5M would be an acceptable target for you at that age.


Thanks for taking the time to write all this.

I'm going to dig into this some more (I really dread it) but I'm guessing I need to save another $500k or so over the next twenty years. Not impossible but not painless either.

I'm glad I started college savings accounts for my kids when they were born. They should each have $75-100k in them by the time they need it. Not enough, but it's a start.


Do yourself a favor and think carefully about the compounding effect of the fees before using one of these services.


I'm actually really surprised that Betterment used what was essentially scare-tactics to keep the money in the account.

They showed what our effective short term gains capital tax amount would be as a way to sway you from withdrawing. Negating the fact that they are showing you what your tax amount would be at the highest federal and state tax margin.

Nice to know max tax bill is $500 lower but it gave me quite a pause. I guess it's effective.


Should the electronic brain managing these funds do something smart in the event of a down turn? It would be nice if these funds made more rational choices than humans.


Generally robo-investors do the same thing all the time: The portfolio expects to have these holdings at these target percentages of the portfolio. If one holding is low and another is high (by more than some specific margin) sell a bit of the high one to buy a bit of the low on.

This eases your fall in a market where different things are falling at different rates, theoretically.


The rational thing is to buy more cheap stocks during a downturn. The is called "rebalancing".


>> The rational thing is to buy more cheap stocks during a downturn

Are you sure? If the price is decreasing, you see buying as profitable? When the price is decreasing, I see profitability as selling. The path of least resistance is the one your money needs to travel.


It would be ideal to sell the moment before prices start falling, and buy the moment before prices start rising again.

But since predicting the future is difficult, and fluctuations make meaningful "rising" and "falling" only obvious in hindsight, you might as well sell when prices are unusually high and buy when prices are unusually low. Which probably means that you will be buying when prices are still falling.



> The path of least resistance is the one your money needs to travel.

what is that even supposed to mean?

if the price is dropping, the market is full of shares for sale. it is somehow easier to sell your shares when there is an excess for sale?


This needs another reply, I didn't answer your question about what the "path of least resistance" meant.

So if you are prices are rapidly climbing, the path of least resistance is up. If you buy, there are currently many other people buying, and that supports your long position. There isn't an abundance of people selling(otherwise the price would 1) stop or 2) fall), so the path of least resistance is not down.

There is something in new(and some old) traders mind, that causes them to sell into a rally, and buy into a crash. They think "this is the top/bottom! yea baby!". The probability of them being correct is very low, since being "correct" means you are accurately predicting the actions of thousands or more individual traders with no evidence. I say "no evidence" because if the everyone is buying, there is no evidence that selling is occurring beyond the short limit orders that buyers are consuming.

I'd guess you know the term "pullback". A pullback occurs when many people(or few people with large size) have the thought that "This is the top/bottom!" at the same time. When the pullback stops and the trend resumes, that's all of those people being wrong at the same time.


It's not easier to sell, it's easier for the price to move down..since as you said, the market is full of shares for sale.

You don't buy into the sell off unless you have an incredibly high pain threshold with your equity(ie you are an institution or a market maker, and chances are, you aren't if you are reading this)


> buy into the sell off

I've been doing this with crypto lately.. Man it is brutal. But I'm not leveraged, so my only pain threshold is "can i sleep at night?"

I'm such a contrarian, i f*ing hate going with the herd. So what can i do?


As a great trader(John Grady) once said, the trick is to run with the herd....and to stop right before they head off the cliff.

But in all seriousness, going with the herd is the low-risk move. Depending on your trading platform for the cryptocurrencies you are trading, you might have access to cumulative delta information. That's the best way I know of to accurately gauge what the "herd" is doing. Once you see the price is reacting to match the delta(ie, if delta shows buying, and you wait until the price begins to react upwards), this is the moment to join the herd with low risk. The price reacting upwards means that sell-side liquidity has either been consumed, or has been pulled in response to the buying. These are when you can expect those quick bursts up in price, and that closes your scalp trade for a quick profit with minimal risk.


I could see a lot of users of the companies adjusting their risk either up or down depending on how they want to play the market.


"Playing the market" is the antithesis of what these firms claim to offer. They keep you on track for asset allocation and maybe the occasional tax loss harvesting. Nothing that couldn't be tracked via a simple spreadsheet and 15min in a brokerage account on whatever time scale people want to rebalance or tlh


I just rolled a 401k over into Wealthfront a month ago and I realized it's pretty pointless since the cost of buying the ETFs and rebalancing is much less than their fee, so it may look like a panic to them if and when I do it.

Then again, I've also (to my discredit) sold on the downs before. But (besides hindsight) how do you distinguish a secular decline from a temporary panic?


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