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Dow plunges 1000 points (cnbc.com)
330 points by coloneltcb 6 months ago | hide | past | web | favorite | 349 comments



To put things in perspective: https://en.wikipedia.org/wiki/List_of_largest_daily_changes_...

Saying "Biggest Point Drop in History" is a deliberate attention-grabber and incites more fear than it probably should. We should be more concerned with percentage changes and at -4.6% this doesn't even make the top 20 daily percentage drops, which cuts off at -6.98% for number 20 (see above link).


It looks like it might be in the top 100 though. Considering these are changes per day, and the chart covers around 100 years or 25,000 trading days, this puts it in the top 0.4% of largest percentage daily losses. So, it does appear to be a significant losing day if 99.6% of such days are smaller in magnitude.


It's also significant given the overall state of the market.

http://www.macrotrends.net/1319/dow-jones-100-year-historica...

http://www.multpl.com/inflation-adjusted-s-p-500

Even accounting for an overall growth trend (e.g. real GDP) the market is looking quite overbought and prepared for a major crash. Signs of weakness like this are significant. It certainly doesn't guarantee a crash, but it's newsworthy IMO. Especially in the context of a decade of QE and the fed raising rates.


Dow has more up days than down. So among down days this is closer to 1% than 0.4%.


But then you could compare a different day and say it's in the top 200. Or the top 300. At which point does "X falls within top Y" no longer means anything?


About 0.3% of days are my birthday.


Despite the downvotes, the point seems valid on its surface. We should expect a losing day this bad or worse more frequently than once per year, which doesn’t sound that scary.

On the other hand, I wouldn’t expect losing days to be evenly distributed (in the short to medium term at least) but rather clumped together.


well, happy birthday to you then!


But I think it clearly shows the standard of journalism we live with. This is a headline about numbers so we can easily debunk it by looking at the numbers, but almost every headline you read has been sensationalized in a similar fashion. This is the kind of reporting you expect from tabloids.


I dunno, I thought the BBC's coverage laid out some possible rationales without being too over-the-top. And while it isn't a tabloid, they aren't exactly a finance-focused paper:

http://www.bbc.com/news/business-42942921

>...It is the largest fall in percentage terms since August 2011, when markets dropped in the aftermath of "Black Monday" when Standard & Poor's downgraded its credit rating of the US.

>US investors are reacting to small but significant changes in the outlook for the American economy, and what that might mean for the cost of borrowing.

>The stock market sell-off accelerated on Friday when the US Labour Department released employment numbers which showed stronger growth in wages than was anticipated.

>If salaries rise, the expectation is that people will spend more and push inflation higher.

>To keep that under control, America's central bank will need to raise interest rates, which is what has spooked investors who were expecting the US Federal Reserve to increase rates only two or three times this year.

>They now predict there may be a few more interest rate rises on the horizon.

>Monday's sell-off was driven by firms moving to sell stocks to put more money into assets such as bonds which benefit from higher rates, says Erin Gibbs, portfolio manager for S&P Global Market Intelligence. ...


>If salaries rise, the expectation is that people will spend more and push inflation higher.

Sure sucks to be a worker. When your salary rises your real gains will be inflated away.


If salaries aren't coming out of investor profits, they have to come out of the cost of goods.

The only way workers can win is:

1. Productivity gains make goods easier to make.

2. A bigger share of investor profits get redistributed to workers, be it through taxes, pension fund investments, co-ops.

#2 will not be happening anytime soon.


And #1 has been happening for decades, yet wages have stagnated. So the conclusion is workers can't win?


1. Many of those productivity gains happen via outsourcing work to countries where wages are much lower.

2. Many consumer goods have become cheaper as a result. The biggest ones, though (Rent, education, healthcare) have not. Incidentally, none of them can benefit from 'productivity gains.' Well, healthcare can, but...


>2. A bigger share of investor profits get redistributed to workers, be it through taxes, pension fund investments, co-ops.

>#2 will not be happening anytime soon.

That sound you hear in the distance is a recital of the Internationale.


[Some] Workers can individually win by forcing themselves to spend less than they earn and investing the surplus.

In other words, another way that workers can win is by becoming investors/owners.


That's a great idea. Let's all quit our day jobs, and buy into the S&P 500.

At the end of the day, someone has to 'waste' money, in order for companies to earn money. A quarter saved is a quarter that doesn't end up on a revenue sheet.


> At the end of the day, someone has to 'waste' money, in order for companies to earn money

I also used to feel this way, but I no longer think its accurate. This is most obvious in digital business-consumer goods today. Imagine I make a game. And it cost me about $100 to make this game. And you really want this game and would pay $5 just to get to play it. But I'm nice and sell it to you for $1. You certainly haven't wasted any money. And the fact I then sell it to 10,000 other people also doesn't mean you've wasted any money, nor they. Yet I've somehow made an immense amount of profit.

Even in the more difficult scenario of business to business material goods trades, it doesn't hold true. Imagine I sell iron and you need iron to make your widgets. It costs me $4 to produce a single unit of iron, but that's largely because I have an extensively refined and stream lined operation, and am able to benefit from an immense economy of scale. I sell it to you for $10. Well it seems that you must be wasting money, but the reality is that even if you bought the iron mine yourself and started producing your own iron you'd end up spending far more than $10 to create the volume of iron you need. So even though I'm again making immense profit, you're also not 'wasting' money in buying my iron.

This is why even huge companies are not entirely vertically integrated or producing their own supplies in other words. It's because buying from somebody else, even when that person is profiting immensely from the exchange, is not going to be inherently more expensive than if you did it yourself. And this is even true for simple no-skill goods like semi-raw materials. Get into skilled products, like semiconductors, and this all becomes even more true.


#2 happens every time unemployment drops. Yes higher worker pay increases inflation, but it's far from 1:1.


but your equivalent spending power vs your neighbor will be higher! That's what mattes... right?


I think of money as a claim check on labor (and to a lesser extent, other resources).

If everyone's income rises by 5% (and most of most people's income is spent rather than saved), I would expect prices to rise by about 5% and find that entirely logical.


Except not everyone gets a salary. Higher worker pay means investors for example get a lower share of economic gains.


>If everyone's income rises by 5% (and most of most people's income is spent rather than saved), I would expect prices to rise by about 5% and find that entirely logical.

Generally everyone's income would be rising 5% either from inflation, which amounts to a transfer from creditors to debtors, or from growth, in which case the total basket of goods and services available has grown 5% and there's no need for prices to go up.


You always have a mix. There will be growth in some markets, and inflation in others.

Humans tend to eat always roughly the same amount of food (except if they can't afford it). So food prices generally inflate with wage increases. Growth leads to bigger televisions, safer cars, faster internet being available at roughly the same price.


>Humans tend to eat always roughly the same amount of food (except if they can't afford it). So food prices generally inflate with wage increases.

Quite the opposite. Over the long term, food prices have deflated, and the variety has dramatically increased of foods available at a given price and a given distance from the point of production.


>This is the kind of reporting you expect from tabloids.

Unfortunately this is the kind of reporting I've come to expect from everyone. I can't necessarily blame them - their job is getting more views than the other guy and "Dow Has Bad Day" doesn't attract as many viewers as "DOW HAS WORST DAY EVER". At the end of the day it wasn't a lie, it was just going with the more interesting stat without regard for whether or not it was the most informative for readers. I wish it wasn't so, but we can't expect better without changing the incentives.


You know, I get the sentiment of these sorts of posts. But it doesn't really seem to matter at which point in history you think is the golden age of journalism, they were still selling the news and that often meant sensationalist headlines on the front page fairly often to grab attention and pull readers in. This is not a new thing on any level.

You can quibble that news stories were "less" sensationalist in the past, but that's very debatable. It's not as if anyone in this thread from 2018 can rattle off the ten headlines from 1918 or pretty much any year they didn't live through. So I would take any appraisal's of today's news compared to the past without some hard data to back it up with a few grains of salt. I'm of the mind the more things change, the more they stay the same as far as this subject goes.


The only ones that matter are the ones that occur after roughly 1995. Most people weren't in mutual funds or stocks the way they are today. When the stock market dropped 50% in 2008/2009, so many people in retirement age were ruined because their retirement money was in the markets. A greater number of people's financial health is based on the stock market in 2018 than it ever did in the 1930s or 40s. In 1987, when the markets crashed 25%, it was interesting and scary, but if that happens today, millions of Americans need to push back their retirement by a dozen years. It's much more meaningful today because so many more people are affected by it.

One of the great feats of social engineering that Wall Street has done in the several decades is convincing regular people that they should have their money in the stock market. That lets them make billions of dollars "taking care of" their money without any personal risk themselves.


> When the stock market dropped 50% in 2008/2009, so many people in retirement age were ruined because their retirement money was in the markets.

Interesting perspective on why central bankers have seemed so complacent about high stock valuations.

I've also heard commentaries that the wealth effect was one of the tactics used to drag the US out of the Great Recession.

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


One of the great feats of social engineering that Wall Street has done in the several decades is convincing regular people that they should have their money in the stock market.

Ironically you could call this “owning the means of production”


Too true! I sometimes wonder why the marxist/socialist types aren't pushing for some sort of government fund that owns a percentage of all listed stocks. That's essentially what they want, right? All the pieces are in place to easily and relatively painlessly do this. I mean I kind of like it as the basis for a basic income. The basic income can start small, but as the economy grows, even if that includes via robots and automation, the basic income will grow as well.


As an index bizarrely weighted by price per share and a somewhat arbitrary divisor, the DJIA isn't what you'd choose to report on in the first place if you cared about anything but sentiment.


It's also a small basket of 30 US companies. A lot of big, important companies across different industries, sure. But it's just another aspect to consider.


You're silly if you just look at one day point/percentage drops. I'm not saying we're in for another recession, but many of the other events in the table you linked are actually part of a cluster of big drops, spread over several days. There was a ~600pt drop last Friday. It'll be fun to see what the rest of the week is like!


Do you not agree that relative moves (%) are more useful in characterizing the significance of a selloff?


Percentages are important, but one day movements are not. I think GPs point went to this logic: comparing one-day moves is irrelevant once we have, say, weekly or annual data.

I think this movement is very interesting, but only because I expect more of the same and/or a distinct lack of recovery. If a 5% one-day move is really it then I don't care. I've never paid any special interest when the market rises by 5%. Markets go up and down.


Perhaps it would alter your perception to know that many large derivatives are valued using end-of-day prices, or even intraday prices (as is the case with one-touch options), and that the volume of trading is generally highest (and thus allows the most liquidity for hedging) at the opening and closing moments of the trading day.

Not to mention that the significance of a variance injection is usually a function of its timescale.

I want to point out that market mechanics are vastly different when individual daily moves are higher, even if weekly moves are identical. In other words, there is a path dependency. Stop orders get triggered as a result of price action. The price of option products tends to increase in high-volatility moments. Day traders and market makers have intraday losses that alter the way they trade, both psychologically and according to the rules of their firms. Price discovery becomes more difficult, which makes market access more expensive.

The fundamentals of companies may not change directly, but the cost of doing business changes for financial companies, and that can affect other companies on a larger timescale. For example, a media company that does stock buybacks via accelerated share repurchase agreements will have a fundamentally different deal profile if it expects volatility to be higher, because these agreements often include terms for cancellation if the stock dips beyond a particular price.

Highly volatile markets can also affect companies' ability to access money by borrowing from banks or selling financial assets. So, even on a longer-term horizon, higher daily volatility makes the financial regime inherently different, even if weekly volatility remains unchanged.

If you relegate big daily moves to the realm of "I don't care," you prevent yourself from perceiving some of those differences, and ultimately only harm yourself -- the rest of the market, by and large, understands that big daily moves have an impact on the market even if they are reversed shortly thereafter.


This.

You have to take a look at percentage market moves. The markets have been moving up for a long time. A 1000 point drop when the market is at 26,000 is not the same as a 1000 point drop when the market is at 16,000.


The Dow 10K (let alone 20K) still takes getting used to for me -- I remember figures around 4000 in my childhood. ... at which point a 1000-point drop would have been seen as much more significant.

Edit: although apparently I'm remembering a slightly later era than I thought.


Inflation finally is going up after years and we can get out of this stagnating economy. Wage growth up 3% in new January report and so we can finally expect interest rates to rise faster like they did in the past. Many investors, especially institutional ones have for years thought the stock market has been over priced but where else to park money because interest rates are too low?

Overall the 3% wage growth is huge for the economy especially because unemployment is so low. Other economic indicators also show a very healthy economy so when the next recession hits we'll have the tools to stop it. Inflation not rising has like stated baffled everyone so glad we are now dealing with what we know rather than wading into the unknown. The normal rules seem to apply again.

This is also why presidents shouldn't make their number one accomplishment the market because often times market crashes don't correlate with recessions or a poor economy. Trump did have a huge effect on the market, but not 10% which he thinks he did. That said the market is still higher than it was 5 weeks ago.

Risk averse savers will finally be rewarded. My biggest fear is the huge deficit, and the huge spending. I think the tax cut is great long term but could have been made significantly better, and could have scored under $100B deficit over 10 years under dynamic scoring (currently at 500B) if they decreased the top rate but still made it significantly higher than what it is today, and made the global min tax per individual countries but payable over time rather than all combined.


I wasn't a big fan of the tax cuts, even though I'll see the proceeds from them. Some think that the less you pay, the better, all the way to zero. In my view, taxes are like porridge, you don't want it too hot or too cold. The best amount is not too little or too much. I too worry about the deficit and think we need to tax the biggest gainers a bit more and provide safety nets for the economic losers so they can breath easy and participate in the economy a little more than just sustenance levels. As we've written and read about here in the past, it's expensive to to be poor (e.g. visiting the ER vs. early prevention, overdraft fees, etc). That may not be what you like to hear, but I also don't think we should tax the gainers too much either. There needs to be an incentive to to do well and I'd be against cutting into that too deeply.


I quite like your reasonable, balanced approach. I've always been curious about your last point though:

> There needs to be an incentive to to do well and I'd be against cutting into that too deeply.

I've never understood why any tax rate would be a disincentive to do well. Even if the tax rate was 90%, doing well is doing well. If I make more money, I get to keep more money, even if taxes are high.

If we have tax brackets, then yeah sure there could be an unlucky minority of people who just barely land in a higher bracket than someone just under the line, so they pay a higher percentage than someone else.

But if you're well above the threshold, the amount you keep is more the more money you make before taxes. Isn't the primary incentive at all times to make more money, regardless of taxes? Or is the idea of paying a higher percentage than someone else a strong enough motivator to actually keep people from trying? Or am I missing something?


As the tax rate increases, the value you get for increasing your income goes down proportionally.

I think if you take it to the limit, you can see the effect more clearly. As the tax rate approaches 100%, say 99%, then even if I make $100,000 before taxes, I'd only keep $1,000. If I push myself hard to earn $200,000, I'd get to keep $2,000. Yes it is still double, and I am doing better, but not much of interest changes in my life and I personally wouldn't say I'm doing well. I can barely afford to take that second vacation, or see much value for my efforts. My efforts are simply less rewarded, giving me less tangible reason to make the extra effort. I think this would kill off the incentive to create wealth in the economy.

Wealth is needed to take care of basic needs, so it would be self defeating if you were trying to take care of everyones needs and make sure they had a little spending money to participate in the economy.

Somewhat as an aside, I didn't consider what benefits I would receive for paying a 99% tax rate, presumably it would be all the basic needs plus some more, but this would start to feel like a planned economy where individuals, with their small discretionary funds, would't have as much input into what is created in the economy, rather it'd be a course political process which could be slow to meet the needs of the citizens, or fraught with other unforeseen difficulties.


Ah yes for the working class, I can see a 99% tax rate would very likely have this effect. I'm still wondering if we stayed in more realistic ranges, is a 40% tax rate, or even a very high 60% tax rate by US standards, a real disincentive to earning more money? I feel like it would take a pretty high tax rate before I stopped caring about my income. Does it actually have that effect in Norway, for example?

I realized I'm also mixing a few different thoughts in my head. I've heard the high taxes being an economic disincentive idea applied to the rich and to corporations and to investors, and I think my question applies more to them than to the middle class. You weren't talking about only the rich, I think I'm projecting a little bit.

Is the idea for businesses and investors that with higher taxes, in the aggregate there are always alternative places for the money, and so behavior changes statistically as tax rates increase? Maybe I'm interpreting "incentive" too literally.


> Ah yes for the working class, I can see a 99% tax rate would very likely have this effect. I'm still wondering if we stayed in more realistic ranges, is a 40% tax rate, or even a very high 60% tax rate by US standards, a real disincentive to earning more money?

For me, and for people like me, it would be. I work high-paying shit jobs precisely because they pay a lot. The amount of saving I'm able to do in these jobs is life-changing (i.e. FU money after 5-8 years). If most of that money went to taxes, there'd be little point in doing them and I might as well induldge in doing something more satisfying instead.


> If we have tax brackets, then yeah sure there could be an unlucky minority of people who just barely land in a higher bracket than someone just under the line, so they pay a higher percentage than someone else.

This statement makes me think you might be confused about tax brackets. This is a common misconception, so I'll explain how tax brackets work.

Tax brackets assign a percentage to tax up to a certain amount of income. Suppose you went over a bracket by $100, then only that $100 is going to taxed the highest amount. The entire income is not taxed the amount in the highest tax bracket. So, while the unlucky people are still taxed at a higher amount, it is for a very small amount of their income. Their after tax income will be still be more than somebody who earned less money and was just under a tax bracket.


Marginal return. If working an extra hour per day will give me $100 pre-tax, tax rate being 10% and 90% will largely determine whether I'd do the extra work, versus spending that hour with family etc. Everyone has different threshold for pay/fun ratios but overall society will be less productive as tax rates go up at least in the static sense (not considering tax money being put into productivity-increasing use).


If people make enough to retire every three years at a 0% tax rate, then most people will retire or switch to a less productive hobby job, because the marginal utility of more money approaches zero after three years.

Tax those same people 90%, and they’ll work for 30 years.

There is evidence of this phenomenon from the early days of the automobile: Craftsmen building cars by hand could and did retire after a few dozen cars, further inflating wages by constricting demand of labor. In contrast, Ford’s screw-turning factory workers worked for decades.

I don’t buy that lowering effective wages decreases the number of hours most people will be willing to work.


Individually, maybe. Let alone the ethical implication of 'tax them high enough so they don't retire early', artificially lowering the income of a trade would - to your point - constrict *supply of labor. And of course this would lower the total productivity of the industry and society.

And the Ford example, while interesting, doesn't have to do with taxes does it? It has to do with Ford lowering the barrier of entry for factory workers AND increasing productivity rate at the same time. I think we can all agree that that advancement was good for society as a whole?

Am I understanding you correctly? Or is there something I am missing?


Say you’re a freelancer and could do one more project but the marginal tax rate is going to be 90%, vs. being maybe ~50% on the previous project you did. So now you’d be doing the same work for 1/5th of the income. Wouldn’t you consider saying “screw this, I’m going on a vacation?”

xienze 6 months ago [flagged]

> I wasn't a big fan of the tax cuts, even though I'll see the proceeds from them. Some think that the less you pay, the better, all the way to zero.

So I take it you’ll be paying extra on your federal taxes next year and earmarking the difference for the federal debt or other things you find worthwhile?


That line of questioning frequently appears in these arguments. I find it disingenuous because if I did pay extra towards my federal taxes, I still (after rounding) have inherited the same amount of future obligation and I should expect, as taxes are invariably raised in the future, that I would be expected to pay towards that future obligation as well.

Arguing that we should all collectively pay more does not require one to individually contribute at that higher rate, nor does arguing that we (including the proponent) should collectively pay more ring near as hollow as arguing that those other people should pay more.


The other stupidity of that line is what difference will it make it I paid more tax voluntarily? Obviously bugger all. But should the middle/upper society all pay more it gives the govt significantly more resources to better society. Its a willingness for personal sacrifice for the greater good, not personal sacrifice for no good.

Can these people ever see tax as a value proposition? Wasted tax dollar are bad. But if you pay 5% more and get universal healthcare and get a liveable social security safety net that seems OK to me.

Further this attitude that its 'taking money I earnt' need to understand they are driving on roads that were built by generations ahead of them. Using sewers that their grandfathers laid, often on tax dollars. Benefiting from the political freedoms people literally fought and died for. Etc. If they want to claim the money earn is theirs the should go to someplace completely unoccupied and carve out an existence. See how much success they create truly on their own back. Maybe then they can understand we are all standing on the shoulders of those that came before us and that opportunity/system needs to be paid for and ideally continued to be improved upon.


>Arguing that we should all collectively pay more does not require one to individually contribute at that higher rate

It’s about sticking to your principals — if you disagree with the tax cut, the last thing you should do is benefit from it. Give the government the money you would’ve paid had there not been a tax cut. Doing otherwise gives you no right to complain about it.


Yes, it gives, because oneself decision to give back US$ 2k in a year to the government is peanuts, you don't impact anything, disagreeing on tax cuts in a societal level means more money is on the pot to be divided in projects that benefit the society.

You can't stand your ground on every issue that demands that a large part of society support it to work, that's not how it works. A lot of principles are only helpful if a larger part of society shares and act on them, individually they are useless.


It does not at all follow that because someone thinks that top marginal tax rates should be raised (amounting to hundreds of billions or trillions of dollars), they will unilaterally send a few thousand extra dollars beyond their statutory bill to the IRS with the expectation that that would accomplish anything.


It's not about accomplishing anything. It's about the principle of it.

If someone thinks sending the gov't an extra $10,000 is money well spent, then they do it regardless if others do it.


Taxes do accomplish something real. They are paying for grandma's healthcare, Johnny's schooling and Jim's GI benefits. Everyone needs to contribute their share or the kids don't get educated, grandma dies and Jim defects. In principle, my individual contribution is not going to maintain a large national program. So if I'm interested in saving a large national program, my individual contribution isn't going to do it. I'll need to adjust the tax policy of an entire nation. This is why my position is more complex than my own personal contribution. Hopefully you'll appreciate this.


Yes, because obviously me paying an extra $10,000 is the same as everyone paying an extra $10,000. Do you think we just hate money?? Is that where you are coming from?


Yes, but if you're ok paying an extra $10,000, why not just do it now?


Well if you and the millions of people whining about the tax cut paid extra...

It’s about the principal of the matter. If you disagree with the tax cut, don’t benefit from it. Take a stand.


> economic indicators also show a very healthy economy so when the next recession hits we'll have the tools to stop it.

Will the tools be there? You basically have monetary policy limited as interest rates are already low. And fiscal policy is limited as major tax cuts are already given and the debt/deficit mean increasing spend is difficult or come with potential negative consequences.

Am I missing something?

I'm more hopeful the govt uses this window to get itself in a position to manage the next downturn vs ride the good times and then not have the tools for the bad.


Trying to find a correlation between how the actual economy is doing and the current president is in my opinion a foolish endeavor. It takes way too long for a policy change to actually impact the economy and on top of that it's pretty much impossible to isolate the cause of the economic change. How the market reacts in the short term is even less relevant since it really only says how a certain group of people likes the change and isn't necessarily related at all to how the economy will nee impacted by the change.

Every time a president claims economic growth to be because of them they reveal themselves to either be a liar or a fool.


> Every time a president claims economic growth to be because of them they reveal themselves to either be a liar or a fool.

Every president claims credit if economy is doing well. Same for Obama, Bush and Clinton. All were claiming credit for their periods of solid economy. That's just what you do as politician, take credit for good things and try to blame somebody else for bad things. Part of the political profession.


True, but it's rare that a President claims on an almost daily basis that he alone is responsible for the current standing of the stock market specifically. Just last week he claimed had Clinton been elected, the market would have lost 50% of its value.


Yeah I mean Trump is obviously more extreme in bragging about everything good being because of him. But the other side also kept predicting that if Trump won the election stock market would crash immediately and recession would ensue, instead we got one of the craziest bull markets for over a year and a very robust economy (I mean let's see what happens next, this could be start of a bear market, but stocks are still up a LOT since his election).


Yes and I see them all as liars.


> Every time a president claims economic growth to be because of them they reveal themselves to either be a liar or a fool.

Is both possible?


The wage growth would be nice, except actual wage growth isn't anywhere near 3%. That's the nominal figure.

For production and non-managerial positions, which is nearly the entire economy, inflation adjusted annual wage growth is under 1%. We'll need to see 4% or 5% nominal wage growth, with inflation holding at 2% or lower, to generate meaningful wage gains at the median.


I haven't heard this side of the argument, do you have a source on that data?


Would this be it? https://fred.stlouisfed.org/series/AHETPI

Disclaimer: I don't know much about the arguments, to me it just looks like a typical linear graph.


"Many investors, especially institutional ones have for years thought the stock market has been over priced but where else to park money because interest rates are too low?"

What information are you basing this off of? I'm not doubting you, just curious as to where one could find that sort of sentiment of institutional investors?


Well, if your average pension fund planned 7% yearly returns back in 2005, then boom, zero rate interest policy arrived, with 2.5% coupon on 10 year treasury bill, they had to dig into more risky assets. corporate debt, more exposure to stocks.


Future generations will have to pay for the deficit in SS and Medicare shortfalls, so voters today don't care.


What happens if they don’t pay? Will the federal government go bankrupt? How much debt is too much and why?


> What happens if they don’t pay?

Workers today relying on those programs in retirement will find them reduced or eliminated.


Couldn’t you have said the same thing 20 years ago?


Didn't the top income tax rate decrease by something like 2.5%? Doesn't seem like a lot of room for it to have decreased but still be "significantly higher" than it ended up at.


The top rate before was 39.6% for over 480k, over 480k now hits the 35% and 37% mark and that is a HUGE difference.

Let's only consider how that effects the top 1% and a rough estimate. Currently that's around 1.73M filers with an average income of 1.4M a year. Under the new tax rules the average 1% will save $40,000 over 480k (will obviously save more under 480k but not counting that). That totals out to be $692B in tax cuts over 10 years or in other words basically 70% of the tax cut deficit based on standard scoring and 138% based on dynamic scoring (obv not exact). So this could have been a revenue neutral tax cut even after a massive tax cut to everyone, just a slightly less of a tax cut to the top 1%.

In other words 70% of the tax plan deficit over the decade is coming from cuts from the top 1%. I would have preferred a different allocation that would have decreased their tax burdens but not by that much. Obviously this doesn't consider many smaller factors but it's a fairly accurate estimate.


Just kind of laughing at the idea of people making $1.4M having a tax "burden" like it's weighing them down.


> Under the new tax rules the average 1% will save $40,000 over 480k

It'd probably a lot lower.

You need to consider other code changes. For instance a filer in CA with W2 taxable income of $1.4M saves only $4,500 due to the loss of state income tax deduction offsetting the vast majority of beneficial rate changes.

ref: http://taxplancalculator.com/


Ugh. Just checked the link. I pay more. In CA so state tax deduction loss kills.


Yep, it's designed to punish blue states


> In other words 70% of the deficit over the decade is coming from cuts from the top 1%.

I believe it's far more accurate to say that 70% of the tax cut-related deficit is coming from tax cuts to the 1%. The impact on the overall deficit is far less than 70% from those cuts.


Thanks, edited. I can see how that was confusing


Your math is off by one magnitude. $40k * 1.73 million people = $69.2 billion. Unless I'm missing something?


It's 69.2B per year, 692B over 10 years. The tax cut deficit is stated over 10 years at 1.5T without the economic benifits and 1T over 10 years with benifits scored at standard and 500B with benifits scored with dynamic.


"$692B in tax cuts over 10 years" is what GP said


how can you simultaneously care about the deficit and support the tax cuts. Cognitive dissonance?


Um... by reducing spending.


The current admin has proposed a multi billion dollar wall (turns out we will pay for that after all), a trillion dollar infrastructure project, and increases in military spending. What is this "reduced spending" you're talking about?


This is where the opposing view will typically point at social programs, for starters. I suspect that no amount of feasible cuts to social programs would fully subsidize the spending that you mentioned and reduce the deficit but don't have the numbers.

To their point though, a person could reasonably support the tax cuts and seek to reduce the deficit on the premise that reduced spending would satisfy the latter over time. Whether or not the current administration is making a genuine attempt to do so is a separate argument and one that their comment did not mention.


> To their point though, a person could reasonably support the tax cuts and seek to reduce the deficit on the premise that reduced spending would satisfy the latter over time. Whether or not the current administration is making a genuine attempt to do so is a separate argument and one that their comment did not mention.

Right, that would be an argument, but not one that's on the table. The Republicans and the President justified the tax cuts not by saying they would subsequently reduce spending, but by saying the cuts would invigorate the economy so much, any reduction in revenue directly caused by the cuts would be offset by gains in GDP.


It seems pretty straightforward: they likely aren't in favor of those policies either.


Who is "they" exactly? The party that spent the past 8 years talking about how deficits and spending are going to destroy the country are currently running things... and looking to increase deficits and spending. Self labeled "fiscal conservatives" just voted for a $1.5T unfunded tax cut, banking on essentially fairy dust (trickle down economic voodoo) to save the budget.


There's more than just Democrat and Republican out there.


I was just talking about the commenter you replied to (gonational).


yes but there’s no plan to do that. so as it stands we’ve committed to less income with increased spending. (the wall, wars, infrastructure) sounds legit.


I hate to be nitpicking about good news, but the S&P 500 is down less than 7% from it's peak, that's hardly a crash. Especially after gaining 26% over the previous year. And, after increasing over 90% the last 5 years.

Obviously, either way a decline in the stock market indexes is good news for almost everyone. I'm hoping for a real crash as I need to save lots more money, not just for my retirement but also for my kids college.


Not a crash, but the gains of January have just been wiped out in the few days of February trading.


It is the nature of the stock market to make money slowly and take some of it back quickly.

It corrects, retrenches, and in time, exceeds its prior high.

Not trying to time the market is boring, and doesn’t sell clicks. But not trying to time the market is the only strategy guaranteed to win, unless an asteroid hits the planet, in which you don’t care about your USD anyway.


If you're a normal person, not a day-trader, the time horizon your investments should be on the order of years, not months. If you're a day-trader, then this is just one of the risks of that choice.


If you're a normal person, who had a decently sized/exposed market retirement account in 2007, it took you about a decade to get back to the same level, inflation adjusted.

That's a lot of risk for chasing inflation adjusted returns…

Not to mention, there are a couple short volitilty ETFs that will be terminated soon, hope some long term ETF buyers won't be exposed to them or any big names they are holding who were exposed, because we're not done yet…


If you're a normal person, who had a decently sized/exposed market retirement account in 2007, it took you about a decade to get back to the same level, inflation adjusted.

Jesus! What was this average person invested in? From the bottom of the market to back to the prior peak was 3 years for me. And I was so heavy in equities I lost 1/3 of my portfolio's value.

Where does this "decade" come from? The DJIA is nearly 90% higher than the peak pre-2008.

And I know you said inflation, but that has been 1-2% per year since then.


I had in mind the ^RUA, which only started to break out from the previous top after 5 years, nominally, so you're right, not a decade, but not good for someone trying to retire within that time frame (which doesn't seem like you were).

Still, I worked for a fund that swing traded futures for better returns and less risk than holding the market during this period…


If you're a normal person, the market crash in 2007 meant that you got almost a decade to buy additional shares of stock super cheap, and increase your eventual retirement portfolio substantially.

Volatility is not risk.


Yup. So what. This means nothing.


> Obviously, either way a decline in the stock market indexes is good news for almost everyone. I'm hoping for a real crash as I need to save lots more money, not just for my retirement but also for my kids college.

Could you elaborate?


Buffett had a good quote about it once that I can't find now, but essentially during most of your life you will be a net buyer of stocks. Only at the end, during your retirement, will you be a net seller and only then will you want high prices.

Until then, the less you pay for your stock purchases, the better your long term gains will be.


Another way of thinking about it is: on average, stock value over the long term (20+ years) is very likely to be in range of, say, 5%/year, plus or minus (actual number is not that important for our purpose here), after adjusting for inflation. If stocks have been on a recent runup, gaining, say, 50% or 100% over a period of a few years, then they are very likely to grow more slowly than average (i.e., revert to the mean) over the coming years. If you buy during period of inflated prices you will realize a lower than average return if you're holding over the long term.

Robert Shiller (Yale finance professor, of Case/Shiller housing index) likes to make the following analogy. Predicting the stock market is basically the opposite of predicting weather. With weather our short-term predictions can be fairly accurate, but our long term predictions are very poor. With the stock market it's the reverse, short-term predictions are worthless, but long term predictions are generally fairly accurate.


> on average, stock value over the long term (20+ years) is very likely to be in range of, say, 5%/year, plus or minus (actual number is not that important for our purpose here), after adjusting for inflation.

Why should it be that way?


The classic explanation is that the economy is growing and thus the overall "pie" being shared is growing even if individual pieces are not as predictable. But I think broader and broader participation in the market via government policies like 401(k) has to be part of the story, and also I worry how much we try to extrapolate from modern financial history which is barely more than a single human lifetime.


William Bernstein has argued pretty well that the growth of economies over the long term has held pretty stable over (surprisingly) the last several hundred years. See his book, "The Birth of Plenty": https://www.amazon.com/Birth-Plenty-Prosperity-Modern-Create...

The keys to economic growth he identifies are (1) property rights, (2) scientific rationalism, (3) capital markets, and (4) adequate transportation/communication. All of these appeared in sufficient form for prosperous growth several hundred years ago.

There is of course no guarantee of continued growth at same rate as last several hundred years. But given the conditions that have prevailed it has settled at a fairly stable rate as sort of a natural law.


He missed out (5) Abundant fossil fuels.


This is the real cause of economic growth. The Soviet Union and the People's Republic of China industrialized at only a slightly slower rate then the West, despite not having much in the way of property rights or capital markets.

Without two hundred years of unsustainable consumption of fossil fuels, property rights or capital markets wouldn't have given us a fraction of the economic growth that we got. Stock exchanges don't do much for you when 97% of your population are either subsistance peasants, or make hand-crafted tools used by subsistance peasants, and you have to spend 8 hours a day banging rocks together to stay warm and to scare away mountain lions.

#4 is also only possible because of #5.


In one sense your question is similar to many others: Why should the sky be blue? Why should gravity at the surface of the earth accelerate objects downward at 9.8 m/s2? Of course, the answer to question of economic growth is more changeable, dependent on societal arrangements that are more likely to change than physical conditions governed by natural laws for the other two questions. But given the economic society we have, 4% or so is the observed stable growth, worldwide.


Long term returns over the last century have been about 3%, after taxes, inflation, etc. If have to do some digging to find the chart.

"Long term" is longer than 20 years.


Cool. I’d like to see that chart because there will need to be some interesting assumptions about taxes.

The 20th century was particularly good and I think the average return was closer to 6 than 3.


https://www.crestmontresearch.com/stock-matrix-options/

The assumptions should be documented there.


Thanks this is really helpful. 4% for the 20th century is definitely closer to 3 than 6.

However, the assumptions have only 80% in capital gains while this should be much higher for long term investors.

If you’re investing in a 401k then you add about 1-3% because you won’t be taxed each year and those gains are compounded.

And it’s assuming 1% admin fees from 2000+. This is way too high and is closer to .1% starting in the 80s with vanguard index funds.

So if you invest in tax deferred index funds you are looking at 5-6% after taxes and inflation.

But I like the way this matrix displays info and I want to find a version with assumptions for efficient 401k investors.


> they are very likely to grow more slowly than average (i.e., revert to the mean)

I mostly agree with you, but this is basically the gambler's fallacy.

If I'm flipping a coin every second for days, and I hit a run of 10 heads in a row, "reversion to the mean" just means that the next 10 flips are likely to be less extreme than the previous 10. It does not mean that I should expect "more tails than usual" for the next flips. We revert towards the mean, not past it.


No. The gambler's fallacy is when we ascribe dependency to independent events. Stock performance tomorrow is very much NOT independent of stock performance today, e.g. "market correction"


There is a pretty strong empirical support for the random walk hypothesis, the essence of which is that performance tomorrow is independent of performance today.


But shifts in the market aren't independent random events. You can definitely find examples of dramatic, real shifts in valuation but in the vast majority of cases business value is created over time. That rate of growth might be slightly faster or slightly slower, but you can be certain it's within reasonable bounds. So when speculation or scare drives the price higher or lower, you can be sure it will find its way back.


No, it's not like gambling.

Unlike in a casino, the returns and value of stocks are loosely coupled to the real economy.

If stock values grow quicker than the economy, then we should expect a correction, because of that loose coupling.

Of course, markets can stay irrational longer than we can stay solvent, so I wouldn't try to time it.


This is the definition of the gambler's fallacy. However, if you look at a chart of the stock market vs. a chart of a coin being flipped many times, they will look very different. While a coin being flipped will either asymptotically trend towards zero or a positive slope of .5 depending upon how it is charted, the stock market will have large peaks and valleys, meaning that after a period of high growth (overvaluation), the market will not continue to value these stocks at a steady growth of 10% per year. Instead, the market will correct the value of these stocks, which looks like a short term undervaluation and so we should expect "more tails than usual".


I recommend you look at the random walk hypothesis, the chart (not the average) of a coin flipped does not trend towards 0 and looks surprisingly similar to stock charts


It might appear that way but stock prices are actually tied to economic performance, not coin flips.


>> If stocks have been on a recent runup, gaining, say, 50% or 100% over a period of a few years, then they are very likely to grow more slowly than average (i.e., revert to the mean) over the coming years

This is incorrect. Prior performance of the market over the span of years has little to no predictive power on future performance of the market.

Your statement is like saying: Because I flipped a coin and got heads 10 times in a row, I'm more likely to get tails in the future.

While it's true you should expect the market to revert to the mean over the coming years, there's no evidence that it will grow 'more slowly than average' in the coming years to 'make up' for the hyper growth in past years. If you were a betting man (and a non-sophisticated investor), you should bet that the future years will grow at exactly the historical mean.

Edit: I did some analysis on historical S&P 500 pricing to validate my intuition.

On average, the monthly growth rate of the S&P in a month following a bear month is -0.39%

On average, the monthly growth rate of the S&P in a month following a bull month is 1.08%

You might argue that it takes longer than 1 month for the market correction to occur, so I've included the script and data set I used here for you to play around with: https://pastebin.com/F78pLUka. You can use any cadence, and will find the same relationship.

Empirically, you cannot time the market, which implies future growth rate is not affected by past growth rate.


Stock prices aren't the outcome of lotto balls or coin flips. In theory, over the long-run, the price of shares will represent an equilibrium of investors' opinions of the intrinsic value of a company (divided by the number of shares). The intrinsic value is commonly modeled as the net present value of future cash flows plus a discounted terminal enterprise value.

For the same inputs (sequence of future cash flows, enterprise value, and weighted average cost of capital [discount rate]), the long-run value will be the same. If the near-term share price value rises more quickly than the long-run intrinsic value model, it is entirely reasonable to assume future growth of share price will moderate, as it must in order to converge on the same long-run value.

I think it's not at all like your example with 10 coin flips in a row.


There's some truth to the 'random variable' theory.

I think we only value stocks the way described (intrinsic value model) because its a cultural myth to do so. We can also think of stock certificates as baseball cards - of value mostly to other collectors. Sure there's a 'book value' or 'dividend value' behind them, but that's irrelevant most of the time for most stocks.


Absolutely not true. Days of stock market movement aren't independent events, they're loosely coupled together and with the economy overall. Your comment is a good example of, "Knowing just enough to get into trouble."


It's actually your mentality that gets you in trouble because it leads to individuals trying to time the market when they can't.

My assertion is that you cannot time the market at all. As a result, I'd just invest passively and immediately.

For data that supports my assertion, please see the edit of my original comment.


Right now we have high prices. We're also in the boomer retirement period, of 2014-2023 or so. I wonder what it's going to take to cause boomers to get skittish and panic sell their portfolio. In 2008, they still had time. Now it's a bit different.


There's also apparently something interesting happening with the bond market. A fairly standard retirement strategy is to gradually move your investments into more stable bonds as your retirement date approaches. Except that because of boomer retirement, there's quite a lot of people doing this - mix in some quantitative easing, and suddenly a lot of money is chasing a limited pool of bonds, causing low yields and other interestingness: https://www.wsj.com/articles/decade-of-easy-cash-turns-bond-...

Fundamentally, I think there might be a deeper issue at play here. There's a common (and dubious) argument that Social Security is a ponzi scheme because the payments to retirees come from funds contributed by new investors. On some level, though, all of retirement is a little ponzi-like; ultimately you're always relying on the current working population to pay for your retirement, no matter what investments you put into your pension fund. What happens if that goes pop?


On some level, though, all of retirement is a little ponzi-like; ultimately you're always relying on the current working population to pay for your retirement, no matter what investments you put into your pension fund.

Well, no, not really. You're relying on the fact that you own some assets, which you can sell to someone else who wants to own those assets. That's very much not "ponzi-like".


You can't eat an asset. You can only eat what someone else produces, and then only if you can convince them to give you food in exchange for your asset.

This is counterintuitive, but globally saving is not possible, in a financial sense. IIRC from economic models it nets out to investment.

Which makes sense. Real world saving is amassing a grain store, or an oil stockpile in a strategic reserve, etc

And we can't do very much of that. Monetary savings depends on the ability to buy things of value from a later generation of producers.

A small country can use savings to buy from other countries. The larger the country, the less possible that is, as the large country becomes a significant portion of the world economy.

A simpler way of looking at it is: if the future generation started producing half as much, you wouldn't expect monetary savings to command the same worth in terms of real goods that they used to.


Yup. One area where this gets particularly interesting is healthcare - older people consume quite a lot of it, it's highly skilled and hasn't been particularly amenable to automation, it can't be stockpiled at all, and healthcare investment mostly seems to increase the amount people consume and the price of it.

Of course, generally you wouldn't exchange your assets directly for food or healthcare; more likely you'd have stocks and bonds and make money from some combination of selling on to non-retirees and taking some of the profits when they buy things from those companies, but it's ultimately what you're doing in the end.


You can definitely eat stuff bought with the earnings of assets.

Retirement is non-ponzi like because the assets appreciate in value due to increased predicted future earnings. This is totally different from paying out what others pay in.

Assets can appreciate in value and income even without new investment.


The earnings of the assets are generally like the assets: digital or paper currency, or their equivalents.

You can trade those for things, now. In saving for retirement, you're planning to trade the earnings from those assets for future things made by future workers.

Assuming the economy continues relatively normally, we'll be able to do that when we retire. (I don't think retirement is a ponzi scheme).

But, I do think it's worth considering things from that angle. For example, could everyone do FIRE (financial independence, early retirement)? No. At least, not unless in their efforts they created perpetually working robots to replace everyone who retired.

To put this in other terms, you could say I'm saying "if there aren't enough future workers, the future value of investments will decline, causing retirement shortfalls". Which, again, doesn't make retirement a ponzie scheme. I'm just providing another frame: money can be confusing. It doesn't work in the aggregate the way it does for an individual.


>You can definitely eat stuff bought with the earnings of assets.

Saving money is an illusion. The government can't just put your pension contributions into a savings account and withdraw it decades in the future. It must use the contributions of current workers to pay the pensions of current retirees.

Food doesn't last forever. If you buy food in your 40s the food is no longer edible in your 60s. If you don't buy food and instead choose to save your money the food is still going to rot away. You now have money but no food. As a retiree you are dependent on the current working generation to work for your food.


Actually the government could save into a savings or investment account, then withdraw later.

It doesn't change the fact that your second paragraph is true though - just a nitpick.


Those assets only produce income because of the current working population. This isn't strictly required of course, but it has been the case for a long time and is likely to remain mostly true for the foreseeable future.


This is some strange, broad descriptive logic that makes me think you just want to give credit to the working population for retirees. You could make similar claims about consumers or infrastructure being required for assets to make income, or any other facet of an economy.

It doesn't make any of it like a ponzi scheme.


Eh I don't think it's a ponzi scheme, I'm just defending that it does have an important property in common: new participants pay for old ones.


Can't wait for post-scarcity. We need something to replace money. Not bitcoin, more something like community asset management.


It is, in the limited sense, that you need to find somebody to sell it to. That must be the current working populations in the end. Exception is if you just save money on account without interest.


>ultimately you're always relying on the current working population to pay for your retirement, no matter what investments you put into your pension fund. What happens if that goes pop?

Exactly. The corn you eat needs to be grown today.


Most people close to retirement who have been fortunate to build savings rotate slowly into a more conservative portfolio, and retirement is decades long not a binary event.


I once heard it described as "the market is on sale right now".


But it hardly means "a decline in the stock market indexes is good news for almost everyone". It could be true in some kind of isolated system where a global decline in share prices doesn't negatively affect many other areas of our lives.


The dip is good timing for Canadians, whose RRSP contribution deadline is coming up March 1st. If you're going to make a big 2017 RRSP contribution and buy ETFs, now is a good time.


Buffett also went all in on Wells Fargo, so nobody's perfect.


Buffett first bought Wells Fargo in 1990 at a split adjusted price of roughly $2 per share. That doesn't include dividends, which are over $1 a share now.


You don't want to buy your groceries when they're not on sale.


because that would be stealing? :p

Seriously though, I think this is a bad analogy. I buy groceries when I need groceries, sales have little bearing on that. A car however, that is something that wait for a deal before I buy.


For groceries that don't keep, you are obliged to buy when you need them, although because humans are omnivores you _can_ choose to eat steak only when steak is cheap or eat raspberries only when raspberries are cheap and save quite a bit that way.

However most peoples' grocery shopping includes staples that have a relatively long shelf life if stored sensibly. Those who aren't dirt poor can and should purchase larger volumes of these products at lower prices if they know lower prices are not always available.

This is one of many ways that being poor is expensive, your financial status makes it impossible to invest up front on bulk items that would be cheaper over the medium term.


My car costs me about the same as my groceries over the same period of time; they are very comparable in price. As for sales - buying in season and buying in bulk saves huge amounts of money, a larger %age than I expect to get off a special deal on a car.


Closely controlling all of your grocery prices costs way more labor than closely controlling all of your car prices.

That said, I do adjust the amount I buy from groceries based on the current price. It's a cheap (in labor) way to save on them, but has lower gains than actively searching for deals.


There was a flash-crash that started around 3PM EST and recovered by 3:16


This probably spiked the VIX The fear index went up like crazy


Was 35 I think. They temporary halted inverse derivatives like SVXY.


I highly doubt the halt will be very temporary. SVXY and XIV are undergoing forced unwinds after-hours and will very likely be terminated. XIV in particular terminates at an 80% position loss, per its prospectus.


Actually the intraday indicative value, i.e. the value of the underlying VIX strategy has to go down by 80%, not the market price of the ETN.

Though right now I think we are close. The ticker is XIVIV. I just closed my bbg but I think we were pretty much there. I don't know if non standard trading hours matter though.

The trade was too crowded. Too many people shorting the VIX without looking at the risks. This ETN lost 80% of its value in a matter of days in 2011, and tanked 40% intraday in Aug 2015. It is too easy to forget the risks.


Yes, well, they just posted a CIV/NAV of $4.22, so that's probably the end :)

http://www.velocitysharesetns.com/xiv


Credit Suisse is not obligated too, but it's likely they will.


Even if it's all by the contract, one would suppose an issuer would think very hard before doing that. It could taint their brand, their other leveraged ETFs, or even bring down more regulations.


Barclays did that I think in 2011. Their ETN was badly designed, the termination event was based on an absolute $ price, not a % movement.


VIX rolled off ~75%. It's insane.


That's a tiny eternity by flash crash standards.


Totally agreed. The run over the last 5 years is massive. A modest drop is hardly going to clean out most "investors".

Most people won't benefit from the crash because they have no savings to buy the dip.

What we need is jobs that pay and land prices that are not gouging productivity increases.


Nikkei 225 Hit All-Time High of 38,957.00 on December 29th, 1989.


So are you making the case the US is going through a systemic change away from growth, and will start a multi-decade economic contraction?


Even during the darkest days of the "lost decade" in Japan their companies never gave up on manufacturing and innovating. There were struggles, failures, but also successes. In that time Sony managed to dominate televisions and, later on, game consoles.

The level of utter destruction the US economy will face if it continues to double down on hedge-fund style acquisition/mergering of every one plus dog is hard to fathom, but it will be considerable. The remaining manufacturers are being managed into the ground, everything they do is being out-sourced, "streamlined", and systematically destroyed.

I wouldn't be surprised if the handful of companies that still make things in the US, like Ford, Boeing, and General Electric, are bought up, "reorganized" and sold off piecemeal, squeezing some juicy shareholder value out of them before throwing out the husk.

You have to do more than "invest" in things in order to have a functional economy. Shares don't employ people, sales of product and services do, and if people can't afford those products or services because you laid them all off as a cost-saving measure then you're doomed.


Try building something without capital. It's really really hard.


I wouldn't build something unless there was demand for it and a profitable business model. If people can't pay for it then demand doesn't matter, you won't make money, so you shouldn't invest in the first place.

Capital alone doesn't do anything.

When you have demand and a profitable business model then capital can help you, but it's a tricky balance between too much capital and too little. If you raise too much money then the investors will be clamouring for returns you can't deliver on. If you raise too little you'll be starved for capital and stunt your growth.

The real problem is when it's all about capital, when you ignore everything else. If your only goal is to create more of it then you're going to have no qualms about driving businesses into the ground if you can make money doing it. That helps only a small group of people and causes a massive amount of trouble for others.


This.


Japan has a declining population (due to low immigration, suicides, low birth rates, etc) which in effect has a negative impact on economic growth.


[flagged]


Personal attacks will get you banned here. We've warned you about this several times before. I don't want to ban you, but you do need to clean up your act if you want to keep commenting here.

https://news.ycombinator.com/newsguidelines.html


Just wait.


I was just reading:

https://static1.squarespace.com/static/5581f17ee4b01f59c2b15...

tldr; * The Global Short Volatility trade now represents an estimated $2+ trillion in financial engineering strategies that simultaneously exert influence over, and are influenced by, stock market volatility

* Since 2009 Global Central Banks have pumped in $15 trillion in stimulus creating an imbalance in the investment demand for and supply of quality assets

* Last month Austria issued a 100-year bond with a coupon of only 2.1%(6) that will lose close to half its value if interest rates rise 1% or more.

* Amid this mania for investment, the stock market has begun self-cannibalizing... literally. Since 2009, US companies have spent a record $3.8 trillion on share buy-backs financed by historic levels of debt issuance.

* Every decline in markets is aggressively bought by the market itself, further lowing volatility.

* Volatility is now at multi-generational lows... Volatility is now the only undervalued asset class in the world. Equity and fixed income volatility are now at the lowest levels in financial history.


How is Volatility an asset, and how does one take advantage of this?


Banks sell derivatives indexed on vol, like vol swaps and var swaps.

VIX futures also reflect stock market volatility, and their prices are based on S&P option prices.



I will never understand what HN downvotes. This was a cool conribution. Weird paper, but substantial.


Cripes, it's plunged to levels only last seen 2 whole months ago.


I would not have worried too much of a Dow correction, but I feel like a trifecta of events are coming together that is a bit concerning. First, is the explosion of US government deficit which could potentially lead to austerity measures in the near future. Second is the threat of inflation and overheating. And third is the plunging savings rate of individuals. It almost appears that these three are moving to a confluence. Austerity + rise in interest rates + depleted savings could lead to a consumer spending crash in the near future.


Well, all of Europe has been suffering under austerity for something like 10 years now. My money is on that it will come to the US.


Plunging saving rates? Saving rates jumped after the last crash. They are far higher in the US than countries like Canada, for example.


US savings rate actually dropped to a 12 yr low recently https://www.marketwatch.com/story/why-the-savings-rate-falli...


Thanks for sharing that.

Considering the noise in that chart (savings rate drops from 11% to 5% in one month?!?), I would question whether it's really a trend and how accurate the data is.

One of my pet peeves with economic data - some leading indicator plummets after being high for years. Mass panic in news headlines, only for it to return to normal the next month.


part of my biggest sell indication was a visit to the site zerohedge. They are a very bearish - gold centric site. I like to visit sites like these to balance out the generally optimistic news one sees elsewhere. Recently, I have noticed that the site has lost their commenters - they are all making fun of the site and how it cost them so much money, missing out on all these gains. I realized that completely aside from things like inflation upticking, the fed removing some QE, market being incredibly highly valued - that if one of the largest bear sites around had actually lost their crowd, that even that rank and file thought it was stupid to doubt that the DOW would only go up...it might be time to think about taking a step back. At least until post-Brexit next year.


The specter of rising interest rates in the US (driven by higher inflation expectations) appears to be a factor.[a]

Fast-growing companies that are investing aggressively today and whose profits lie far in the future, in particular, are exposed to rising interest rates, due to the higher duration of such companies' cash flows.

Duration, for those here who don't know, is a measure of the sensitivity of present value to interest rates.[b] Duration rises with the amount of time an investor must wait for cash flows, and vice versa.

For example, the present value of $100 of cash flow in 10 years, if the 10-year rate is 2%, is equal to $100/(1.02^10) = $82; if the 10-year rate rises, say, from 2% to 3%, the present value declines to $100/(1.03^10) = $74, or a -10% decline. However, if the $100 in cash flow is in 30 years, and the 30-year rate rises from 2% to 3%, the present value declines from $100/(1.02^30) = $55 to $100/(1.03^30) = $41, or a -25% decline.

In this example, an increase in duration from 10 to 30 years caused the sensitivity of present value to a 1% rise in interest rates to change from a -10% decline to a -25% decline. The longer an investor has to wait for cash flows, the greater the sensitivity of present value to changes in interest rates.

The same ruthless logic applies to companies. The present value of companies whose profitability is in a distant future declines much faster when interest rates rise than the present value of companies certain to generate cash flows in the near future.

Until recently, due to historically low interest rates and no prospects for inflation, the stock market has been rewarding high-investment companies that are sacrificing current profits for growth.

If interest rates continue to rise (along with expected inflation), I'd expect this abruptly to change -- in which case, strap on your seat belts!

[a] https://www.ft.com/content/af1f8e4a-0a23-11e8-8eb7-42f857ea9...

[b] https://www.investopedia.com/terms/d/duration.asp


A market is like a forest and a market crash is like a forest fire. In order for the market to grow and be healthy in the long term, a purge every now and then is necessary.


Last time round (2008) we deferred the purge, when you do that the next forest fire is potentially even bigger.


Are you paraphrasing Batman Begins? If not, that's an amusing coincidence.

"When a forest grows too wild a purging fire is inevitable and natural"


For most HN readers this means you should be buying more stock.


Right.

Better yet, wait for the end of this correction, then buy more stock.

Better still, sell any stock you own, and at the end of this correction, buy it all back and more at a cheaper price. Yeah, that’s the ticket!

Guys, all we need to do is find out when this correction is going to end. I feel like we can narrow it down to between one day and one year from now.


>> wait for the end of this correction

How exactly do you decide the end of it has been reached?


Whatever money I'd put in right now, I'd diversify the time component. Instead of buying 1x at once today, tomorrow, buy 0.2x every two/three days.


That's the million dollar question, and is the exact reason why this strategy (and no strategy) is a silver bullet.


People are out of their minds over a couple of minor red days and pullback to maybe one or two months ago. IMO it betrays a much deeper fragility in market confidence.

I'm pretty new to finance and haven't lived through a crash yet, but IMHO, the show is not over, not by a long shot. And the longer we go without a crash, the more extreme it's gonna be.


Just did a big fat sodl. Now I can't bear to look, pardon the pun.


I did. Yesterday. :(


The dollar has weakened over the past year, so knock off 1/4 point off any quarterly GDP numbers proposed, and knock 10 points off the 23% the 401(k) supposedly got in the past year, and consider any inflation comes with assymetric timing risk where wages always lag by a lot. And now in real terms the past year's stock increases look a lot more ordinary rather than remarkable. It's not like the stock market is going to ignore a weakening dollar, in particular when the Treasury Secretary publicly says it's a good thing as if it's an actual policy to have a weak dollar.

And working people have to feel the sting of inflation before they demand wage increases, they don't just automatically happen. Before that, interest rates going up might increase housing sales as people want to get "in" before the interest rates go up even more, and then housing will slowly taper off as inflation and interest rates take hold, and people get priced out of buying, since their wages will not keep up in the short term.

Inflation also helps pump up tax revenue, and monetize debts. So the numbers will look better, but in real terms they won't be better for a while until the markets fully correct for inflation and then things stabilize a bit.


"Fruits of capitalism available at a 3.5% discount to last month; limited time offer" would sell less ads, sadly.


Biggest by absolute value or by percent?


Absolute value. Not even close in percentage drops (see https://en.wikipedia.org/wiki/Black_Monday_(1987))


It's a great question, because point drops are not a very useful metric.


Yeah i expect this record to be shattered multiple times in my lifetime.


I hope [this point record] is shattered many times.

Otherwise, I've died young or the market hasn't grown much over my remaining ~40 years of life...


These days you can assume any number in a headline is as big as the editor could reasonably make it without violating too many technicalities.


absolute


What's with the 600 pt 3pm sell-off and recovery within 5 minutes? Algorithms? I thought massive swing effects are supposed to be under control now?


> are supposed to be under control now

Why would you think that? Massive swing effects are often caused or exacerbated by algorithms trading on momentum.

They do that because trading on momentum usually pays, and doing the hard work of fundamental value investing is difficult and also hard to scale.

Momentum trading is fine if only a few people are doing it, but if enough of the market transitions to having 'no opinion except following the crowd', then you get instability just like this. And many factors since 2010 have made flash crash-like events easier to cause, not harder.


Unlikely. Momentum works terribly for equities, doubt there are many people doing it.


Most are speculating a large asset manager getting hit with margin calls. The buy back was likely algos with limits getting hit.


> I thought massive swing effects are supposed to be under control now?

The optimal strategy during a crash is to sell everything as soon as possible and buy again at the bottom. Massive swings are endemic to the market.



Just by looking at the continuously negative % drop over the historical data, there's a pattern in 2008 (The Crash)

9/15/08 9/29/08 10/7/08 10/9/08 10/15/08 10/22/08 12/1/08 −4.42 −6.98 −5.11 −7.33 −7.87 −5.69 −7.70

8/4/11 8/8/11 8/10/11 −4.31 −5.55 −4.62

8/21/15 8/24/15 −3.12 −3.57

2/2/18 2/5/18 −2.54 −4.60

For 2018 to reach 2008 state, lets see if there are more significant (>-4%) drops in 2018 for us to start freaking out.

Again this by all means is not a financial model, it is something that I put together to tell myself "Keep Calm"


Market crashes don't necessarily have to result in economic pain. But when they did, both in 2008 and 1929, it was because the rise in stock prices was financed by debt. I'm worried that that might be the case today in the form of leveraged buybacks and the like, but I can't find any statistics on how much of the current asset bubble was debt financed. I suppose we'll know soon enough.


It's grim to see how unprepared websites are for sudden activity like this. I'm having a tough time logging in to my accounts.


On the bright side, at least sysadmins are first in line for a bank run.


Which provider? I have never had any issue with mine.


I do worry that this is the end of the current bull market and we'll be entered into a recession in the next half year or so.


Stock market corrections do not always lead to or cause a recession (or vice versa). Many Americans do not even own stocks, so something like today will be a passing news item barely noticed.

If you think a recession is coming, what will be the trigger(s)? Right now companies are making money, wages are finally growing, and jobless claims are near what some would say is full employment. The only real euphoria I see is in crypto, and I just don't see a problem there being able to spread economy wide like what happened in housing.


>If you think a recession is coming, what will be the trigger(s)?

Not in the immediate timeframe, but there are some potential breakers looming out there that have potential to hit in the next year or three.

The first is inflation, and the fact that we just pulled a massive tax cut. This will probably lead to stock buybacks, throwing gasoline onto the already booming economy. Usually it's best to save the cuts for busts, to stimulate growth. Now it's like throwing that third fuel pack into the train engine on Back to the Future III.

The second is the education bubble. The wealth gap is slowly but steadily growing for the current generation, and student loans are a strong cause. This is more insidious because you're turning out a generation with decreased buying power that they won't recover from without intervention. Depending on the method of the intervention, it could lead to debt disappearing which will cause another recession.

Lastly is the housing bubble. It busted in some areas but is still booming in others, thanks to no financial reform to prevent it from happening again. This alone won't be a large enough factor to trigger another recession, but could when combined with another smaller cause, like inflation. The fed has moved up the interest rate increase schedule because it's becoming obvious that we're looking at signals pointing to increases in inflation.


I recall hearing about a subprime auto loan bubble too.


Many Americans have a 401k.

These 401k plans buy a mutual fund, which buys stocks. So indirectly, these people own the stock.


1) Increase in interest rates.

2) Cut in discretionary spending in order to pay for the tax cuts. This in turn then slows the economy down.


Recessions are technically at the minimum 9 months, three quarters of negative growth

Edit: it's two quarters as pointed out below


Recessions in the US are almost universally defined as being at least two consecutive quarters of economic contraction / negative GDP.

https://www.investopedia.com/terms/r/recession.asp


Recessions in the US are defined by NBER, and while they usually include two consecutive quarters of GDP contraction, that is not always the case, and it certainly is not the definition (as GDP is not the only factor considered.)

Notably, the 2001 recession did not include two consecutive quarters of GDP contraction, and while the 2007-2009 did include more than two consecutive quarters of GDP decline, they weren't at the beginning of the recession.

http://www.nber.org/cycles/recessions_faq.html


Yes you are right.


I said enter into. You only find out when the recession started 6 months after it has begun. So what I said is completely feasible.


There is no way we enter a recession this year unless something comes out of left field. Interviews with hundreds of economists and they think this is the least likely year to have a recession in history. Gdp is not going to drop due to the tax cuts. The cuts might cause problems in a few years but you have to realize marker doesn't correlate with the economy. In fact it's dropping because the economy is picking up steam causing interest rates to rise.


> Interviews with hundreds of economists and they think this is the least likely year to have a recession in history...

user furiously shorts the entire economy


lol. seriously. When has there ever been a recession that all economists predicted the months before it happened?


>There is no way we enter a recession this year unless something comes out of left field.

This is more likely because Trump won the presidency. It's why I'm staying cash until Mueller is done unless we see a few more pints of blood on Wall Street in the next few weeks.


Your worry is valid, however even bull markets have pullbacks. We haven't seen a real one in a while so naturally this is going to be bigger.


Investor sentiment from what I've seen has been that the tax cuts pushed the next recession to around 12 months from now. So I doubt this is that crash.


It's practically guaranteed, unless the Fed rapidly adjusts back to being accomodating by slashing rates.

The sugar high from the tax cuts will buy a few quarters of time at best.


Let's say you're a smart investor, and you think a big crash is coming. Right now everything you have is in stocks.

What do you move it to to hedge your risk?\\

Edit: To clarify, I don't have everything in stocks. I'm just looking for good advice on how to further diversify. I'm aware that timing the market is a fool's errand. :)


Smart investors should have an asset allocation that reflects their risk tolerance.

If your allocation is based on your tolerance for risk, you won't need to change it when the market crashes or booms -- such an allocation is based on the risk characteristics of the assets over the long term, not their current performance.

The time to change such an allocation is when your risk tolerance changes, e.g. as you get closer to retirement you will probably start to prioritize preservation of wealth over growth.


I mean, if you read Random Walk on Wall Street, you'd think that a smart investor wouldn't try to time the market.

I don't have the stat in front of me, but it's often repeated that all of the biggest gains in the market over the past several decades have occurred on just a handful of days. If you missed those days, you missed those gains.

That is to say that if you try and outsmart the market, the odds are pretty stacked against you that you'll not buy back in at the right time (or you could be wrong about the timing of the correction in the first place.)

This isn't investment advice – usual disclaimer, etc. But, I'd definitely skim through Random Walk if you have a chance.


A smart investor will always have a set of numbers in mind - say 60% stocks and 40% bonds - and every 6 months will rebalance the portfolio to that.

Over decades this will return better returns at dramatically less stress than any other approach.


I'm sure there's some dimensions it's not optimal on, but Vanguard LifeStrategy is a single low fee fund that does this for you. IIRC they have 20/40/60/80/100% equity options.


Here’s my own anecdote ...

After hearing so many people say positive things about Vanguard for so long, I set up an account there. They had pretty much all my disposable cash, in a Roth IRA, for about two years. Rather than begin the predictable uptick in wealth I expected, my results, having about $25K parked there, was that I lost about 300 bucks. I sent several messages asking what I could do about it, their responses were gobbledygook that I did not understand, so I took all my money back out. Praying that I don’t wind up with a huge tax burden this year, due to this mistake.

Here’s my message: regardless of the hype, Vanguard is not for unsophisticated investors. I am looking for an actual human being who can help me invest, now.


What did you invest in? If a 1.2% swing (over how long of a period?) spooked you then you probably want a heavy bond to equity fund/balance.


see, those are the exact sort of questions, and answers, that you are prepared to provide. and you're probably pretty good at it! i am not. that's why vanguard didn't work for me.

i am going to pay an actual human being to give me a list of options, with all the pros and cons spelled out, so i can make limited decisions that wind up with my pile of money growing, instead of shrinking. if that's too much to ask, i'll just keep my money under a mattress, thanks.


> see, those are the exact sort of questions, and answers, that you are prepared to provide. and you're probably pretty good at it!

Thank you, but it really has been a recent thing for me. It's only in the past year that I actually worked out what this all means, passive versus active investments, pensions etc.

> i am going to pay an actual human being to give me a list of options

I totally understand that but do me a favour. Before you pay anyone or start down that route, watch this playlist - https://www.youtube.com/watch?v=_chiIIxMGl0&list=PLXy71rkGuC...

It was accidentally stumbling across that which led to me getting my stuff together. At the very least it should give you a grounding in what to read up so as not to be blindsighted by any financial advice you may get in the future from a professional.

> instead of shrinking. if that's too much to ask, i'll just keep my money under a mattress, thanks.

Inflation is always eating away at your money there, no matter how thick your mattress is ;)


> Inflation is always eating away at your money there, no matter how thick your mattress is ;)

while that's true, if i'd kept my money under a mattress for the last two years, i'd have 300 bucks more than i have now. and with a lot less hassle.

so, here's another story. i hate paperwork. hate, hate, hate. i hate it enough that i pay a guy to do my taxes. i send him the forms as they trickle in, sign what he tells me to sign. he answers my dumb questions about my mortgage and my car loan and other financial stuff, when i ask them. i give him a check for like 200 bucks a year, and i consider it money well spent.

i've been working with this guy for over ten years now. he's proven himself to be absolutely trustworthy. i tried to give him even more money to manage my portfolio, but he is not interested in having that job, so he turned me down.

is it really impossible to find somebody like him, to be my money manager? while i hate paperwork, i am a really good judge of character. i dispensed with half a dozen shysters before i landed on my current guy. i could do the same thing with financial planners.


also, for the record, i started watching the videos. i heard that guy tell the same story, twice, about the woman who is far better prepared to invest (or not invest) in microsoft than i am, because she's steeped in it, day in, day out. um, duh? i am well aware that i am not going to do as well as that woman is, or i wouldn't be watching introductory videos on investing.

this is why i just want to pay a guy like my accountant to narrow down the decision tree for me.


If you think a big crash is coming, you basically want to avoid high-volatility assets, right? So IIUC, you'd just want to move into lower-volatility assets: bonds, money-market funds, or TIPS if you want inflation protection.


A broad market ETF.

Over time, it's nearly impossible to beat a diversified index fund with any other strategy.

Market timing is bad for your money and your sanity.


It's really not that hard to beat a broad market ETF... for example, the SP500 could easily outperform a total market index.


I did a quick check and compared VOO (SP500) versus VTI (total market) and they have an equivalent performance over the past five years (within 0.20% gain), VOO didn't exist ten years ago and missed the last big crash. Both hold the same top ten holdings with the slight less weighting for VTI that one would expect. This may be harder than you think.


For instance: SPY


Depends on what the hypothetical smart investor thinks will trigger the big crash, and how long they predict it to last.

I'd go for farmland near clean water.


If your time horizon is long enough, Bogle would suggest that you don't try to time the market. Buffet obviously held some amount of cash so he could deploy it during extraordinary opportunities (such as the 2008/2009 crash).


Bonds traditionally. Commodities if you know anything about them. Gold/bitcoin if intrinsic value is too 20th century.


I heard about this ICO that involves the blood of young models and smart contracts.

Cant go wrong there. Sad but true.


Non coastal real estate. You know, stuff that will still be land after the seas rise.

Plus some company or other in the Netherlands exporting polder technology.


lol might as well get some canned food, bottled water and a shotgun while you're at it.


Don't be ridiculous.

I don't eat canned goods. Said land can be chosen to have a secured fresh water source. And in the post apocalypse, when you can't count on getting bullets, a bow is a better choice than a shot gun. Bonus points: it takes skill to shoot a bow, so most people can't take your bow and turn it against it.

Duh.


You can always buy puts against your holdings.


Canned goods and shotgun shells?

Commodities possibly I guess.

It's a hard one when the stock market has been the only game in town for about a decade.

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