Wall Street Banks Warn Downturn Is Coming
bloomberg.com
bloomberg.com
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?
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 raising taxes and cutting spending during expansions, yes. However there is huge political support for cutting taxes and increasing spending during contractions.
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.
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.
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.
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).
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...
What would you consider an invalidation of the theory?
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.
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.
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.
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.
Congress doesn't want to spend money on infrastructure.
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.
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.
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.
You left out Marx.
I think there's very little Marxist economics left, in the technical sense.
Marx is pretty early.
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...
"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.
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
'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.
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)...
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.
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.
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.
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…
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...
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.
..at least relative to this topic, busines cycles.
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.
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.
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.
It's a fantastic video for explanation for how the economy actually works.
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).
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).
> 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.
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.
Does a similar video exist from the "Savings drive the economy" point of view?
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.
(And what is the vertical axis supposed to be labelled as? I don't even know what the chart is of.)
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."
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.
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.
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.
What's the causal relationship? You're suggesting the bubble causes fear, but what causes the bubble to pop?
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.
As I recall this has been experimentally verified but I can't remember enough to find a citation.
too much fear / too much greed
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.
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).
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?"
Som are clearly booming like the regular stocks are. But some are also built to resist inflation.
And it can be a self-fulfilling prophecy .. expect a bust, look for a bust, have a bust: declare you "knew" it was coming
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...
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.
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.
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.
Eg Australia and Israel barely noticed the Great Recession.
Give your central bank some credit!
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.
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.
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 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 ...
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
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.
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.
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.
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.
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.
https://www.economist.com/blogs/freeexchange/2013/10/economi...
Was tulipmania irrational? Tulipmania was not just crazy speculation
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 former are always right and the latter are always wrong.
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.
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.
They don't claim they're doing rocket science.
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.
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).
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.
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.
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.
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.
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.
In a gold rush, sell shovels.
That said, the majority of my capital is traded by me. It's all in the futures market, specifically US debt instruments.
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.
that isn't the only other alternative to betterment, etc. https://www.bogleheads.org/wiki/ https://investor.vanguard.com/mutual-funds/target-retirement...
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.
1. open a brokerage account with your bank, 2. buy vanguard index funds for the next 20 years, 3. retire.
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.
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.
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.)
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-...
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.
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.
This eases your fall in a market where different things are falling at different rates, theoretically.
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.
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.
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?
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.
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)
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?
It's just starting to dawn on me now how precarious a situation we're in. Going in, it's like "awesome job, a million+ house will be worth 1.2M+ next year, maybe 1.4+ after that." Seemed reasonable.
My cynical side is just waiting for the market to implode now, our loan to be upside-down, and layoffs to start. Everything was so good six months ago. House paid off, a rainy-decade reserve. And now reality is sinking in that we could be homeless jobless and bankrupt in a month. Hopefully not. Hopefully the economy has a couple more years in it. I'd probably not make the same decision again.
Now if you were locked into your home loan until you pay it off or die, then you probably have something to really be concerned about.
For example, they cite that valuation is starting to diverge from corporate earnings, which could indicate a coming correction (and therefore downturn).
The only really bit in this article was a shitty attempt at explaining the "economic cycle". Saying the "Downturn Is Coming" because we might be a peak was less helpful than explaining what the cycle is, what it means to be at this point and what that might mean to do about it. Saying the "Downturn Is Coming" to me says, "shit guys, sell all your securities right now". It is plain sensationalism.
To reiterate, I don't see much substance in this article and I expect a lot more from someone claiming the "Downturn Is Coming". If anyone can get their hands on a copy of Gloom Boom Doom [1] by Marc Faber and you see what quality analysis looks like of the current economic cycle. I believe his August edition goes into it but I don't have my copies to confirm.
[1] www.gloomboomdoom.com
https://assets.bwbx.io/images/users/iqjWHBFdfxIU/iRECXe3ViYP...
While there have been "cycles", the cycle doesn't have a precise duration. The expansion period could be a "few years" or over a decade. The "dip" isn't predictable either.
Someone who was ready to buy the dip in 2010 might had to cut his losses because the decline was really steep that he might have believed the "sky is falling" news.
See the 1960-1970 period. We might still have 1-5 years of more "bull running" before seeing any correction. Given that we have little data too, it is possible that it turns into a 7-10 year of more "bull running" just for the fun of stretching the limits a little.
You'll have to be real patient not to buy stocks/assets for the next 5-10 years. That "crash" day will happen once everyone is confident that "things are the way it is and bull is normal".
The question is not if stocks will pull back, its when. Bull markets can run for a long time even if they are over valued. The boom of the early 2000's and 2007 went way higher than average, and crashed hard.
This type of trading mentality is why the 90/90/90 statistic exists. People read this, believe it, and become sellers when they would have been buyers or non-participants. The only thing that matters is right now if you are trading. Yesterday is irrelevant, your [N]-period MA's, fib lines, gann fans, and other indicators are equally irrelevant. If you are on a commercial trading floor, ask the guy next to you "are we having a bull day/week/month/year or a bear one?". Either you get laughed at, or completely ignored. The people actually causing these numbers that people see visualized at charts aren't even looking at them! They likely aren't looking at charts at all! If that last statement seems too "oh no it can't really be that way, I see charts on MSNBC so they must be professional tools!" to you, then find a friend who works for a market-related institution, and ask them. You might be surprised at the answer.
Now the interesting part, is if you can get enough people to believe they are in a "downturn", then you influence them into becoming sellers opposed to buyers. This only turns "down" if enough institutional size believes selling is more immediately profitable than buying or non-participation. A good way to incite this belief is to publish it to major news sites. Like bloomberg(another word that will cause hilarity and snark if uttered on the trading floor).
Do you know why your financial-news network is a free channel? They want you to see it. Anything that can encourage you to participate means there is more amateur liquidity available. Institutions really like amateur liquidity. After consumption, your exit(at your loss and their gain) is assured, since your pain threshold is orders of magnitude lower than theirs.
One last bit about "patterns".... your brain is a pattern recognition machine. It's the reason you think you see "text" right now, instead of a purple giraffe. It's also the reason you see shapes in complete randomness: your brain wants to categorize things it sees, and we call that categorization a pattern. Patterns are death to a day trader: 100% financial death. Repeat that to yourself each morning before you walk into the pit, or you will walk out bankrupt.
https://tradingeconomics.com/united-states/interest-rate
Note: Click the Max button on that chart for perspective of where the rate is now relative to historical rates.
How was the QE performed? Basically printing piles of money and giving it to banks. What have the banks done? Double or triple the value of every equity market. Hardly any of the money ended up in the pockets of regular people buying groceries and petrol. Yet our measures of inflation come from consumer goods, not equity markets. Is it any wonder that our bullshit measures of inflation have barely budged.
I think the coming bust (whenever it occurs) will be the last boom/bust cycle in which this shit flies anymore. We now, finally, have universal, non-inflationary currency of a type which can compete with the unproven conjecture of Keynesian economists. People have been complaining that about economic theories being hard to prove, well here is a battle between the old dogma and a new challenger.
Every Keynesian I’ve heard from seems to think QE was, at best, the least bad option given the complete failure of those empowered to do so to adopt stimulatory fiscal policy, and that it in many ways demonstrated the weakness of monetary policy in isolation.
I've seen none cheering QE the way you describe.
https://twitter.com/zachaysan/status/895197582586261504
Forward P/E, yields, EPS, everything is just too frothy right now in the US. In my home country (Canada) it's difficult to see how the short term oil market will turn out, since it's such an inelastic market, but in the medium term oil is effectively over - especially for resource intensive extractions like the Alberta oil/tar sands.
The only major company that I'm still in on is Facebook, but that's only until regulators start coming down harder on them. Even so, Facebook has a huge amount of growth ahead of them.
I've been able to make around 18% YoY, even after the fact that half my portfolio is in bonds and low-risk consumer staples. I don't do anything too fancy. I sell before busts (like in late 2006) I put a little money into put options on the S&P500 (SPY) well out of the money for an extra boost if I've timed it right, I move things into actual cash and then I wait until people are panicking and then I buy back in.
Split exposure to 1/3 USD, 1/3 CAD, 1/3 Other (basically Bitcoin, startups, bit of precious metals, Asian / Euro stocks) when things are undervalued and move most things into cash when things are scary.
When choosing investments I generally do:
1. Tech I understand (in the past Amazon, Tesla, Apple, Google, Shopify)
2. High dividends stocks (Apple, then a bunch of boring ones with no appreciable downside, since I don't like buying declining industries).
3. Short term commodity plays (since in the long run clever humans invent better mining techniques).
4. Strategies that anticipate the catchup effect. Last decade it was China this decade it will be India and Africa.
I'm not perfect (SQM and Etsy were two stocks I was quite confident in that didn't pay out for a number of reasons) but I'm confident and careful. I really think I would have been wealthier if I'd gone into finance instead of machine learning, since I seem to have a knack for it, but we'll see how the chips finally land in the future I guess.
Bubbles never happen where or for what reason people think they will, and for good reason- bubbles are formed by market participants, so in order for one to exist, people by definition can't believe a bubble exists or that the market is due for a selloff.
It's like multiple, concussive "Stock and awe" campaigns where the price has plummeted by $600 per coin. Everytime that happens, the subreddit for /r/bitcoin posts the national suicide hotline and the price rallies in 4 months.
Apparently the Linden dollar crashed not long before the 2008 financial crisis hit - A virtual bank in SL went bankrupt because of a virtual 'run on the banks'.
I think the same might happen with crypto-currencies but they'll bounce back.
People will lose their jobs and have to dip into their savings/investment to cover their day to day expenses. Those that have bitcoin will have to sell some to cover their cash expenses thereby flooding the market.
Print(Bitcoin will Crash!) Print(Bitcoin will boom!)This is why amateur investors do a lot of hand-wringing about market timing -- they think they can "time" the recessions. And of course you can in hindsight, but recessions are very difficult/impossible to see in real-time, even for experienced economists.
This is exactly why panic selling is such a bad idea. By the time you're panicking, it's too late. If you actually panic early enough to time the market, you're more likely to be freaking out over a fluctuation and lose out on more gains.
- The Great Depression (1930)
- The 1980s recession (1980)
- The Great Recession (2008)
A wealthy and prosperous middle class is thus essential to a stable economy. Without it, you get these boom-bust cycles and you condition people to "spend it while you got it" (aka the poverty mindset). This creates a feedback loop that the US had to work really hard to break out of in the early 20th century (the time between the Civil War and the first World War was extremely tumultuous economically because we were learning a lot of hard lessons about monetary policy).
We had some pretty bad economic downturns in the 50s, 60s and 70s as well. But they didn't reach recession level because the wealth gap wasn't as vast. My grandfather was a factory owner in the rust belt during that period and the richest man in his small town. He was wealthier than his employees, but not by a lot. But eventually he had to sell out to a large multinational because he simply couldn't match their prices in the market.
What I mean, is that they could have very easily first taken short positions, then made this announcement. Or kept the analysis for themselves. But they didn't. They just did the analysis and shared it for free as a public service, which is a class act all the way.
I wish more Wall Street Banks looked out for investors this way. Sometimes big investment banks forget that there are people behind these pieces of paper.
https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
I think this could have some nasty impact on stocks, particularly if combined with an interest rise.
Illustrative picture:
Typically before decent market corrections/crashes you do not hear on the "news" that it is coming. The point of the down move is to catch most market players off guard.
The fact that these "smart" guys are yelling "sell off" is coming tells me stay the course ... for now (where were they back in 2000 or 2008 warning general public??). But longer term i agree we will correct probably sooner than later. Market loves round numbers. 2000, 2500 ... 3000? who knows where and when it will stop this massive bull run.
Also, we generally get a recession every 7 to 10 years.
Do we really need wall street banks to tell me what is going to happen.
I still think we have 2 or 3 years of economic growth but sooner or later the hammer is gonna drop on us.
The growth of asset prices, the expansion of debt and the growth of FED balance sheet is quite interesting. And this isn't just the US - China, Europe, Japan, SK, etc are also interesting.
Not well versed in this subject, appreciate all advice:)
:) You are asking about timing the market. No one can do it, it is said. (I think it can be done, but it would be through illegal means, i.e. insider trading, which I believe happens all of the time since it's too easy to do and too hard to catch). Also, you don't have to invest in stocks. You can buy and hold on to bonds (AGG or ACWI).
You might see your holdings value go way down. People sell then. It's normal psychology. It is so tough to see the dollar value of assets go down and sit on it. But if it's the best investment, you don't sell. Hold. The best investment has a holding period of forever. It will go back up--eventually. If it is a good investment and it does not go back up, money will not be very useful anyway (i.e. asteroid hits, etc.) This is why common advice is to only put money into stocks that you will not need for at least five years or more.
Some people have said that some of the biggest gains in the stock market are just before it drops. You do not want to miss out on these, since that is often where the 9.5% return on stocks comes from.
This is free advice and I am not licensed to advise. Oh, and good on you to start saving now. That's _your_ money that you worked for. Keep it yours. Get out a spreadsheet and run the numbers assuming different % returns and _consistent_ savings over time. You might see you can become a millionaire.
1. Pick individual investments, based on extensive research, and monitor their performance closely. Move money between investments in response to market changes. Put a lot of effort into predicting upcoming changes and investing accordingly.
This can work OK, if you put in a lot of effort and keep it up. It means essentially turning investment into a second full time job. (And you are competing with people who do investment as their first full time job, and have much bigger budgets for research and much better technology that you do).
2. Take the long, broad view. This is based on the assumption that over the next few decades the economy is going to grow. There will be ups and downs, but 30 or 40 years from now when you may want to start leaving the working world and live off you investments there will have been considerable net growth compared to now.
With this approach you put money in things like index mutual funds tied to broad indexes that tend to follow the economy as a whole or major sectors of the economy.
Almost everyone should be going with #2, starting as early as they can afford it, and steadily investing more over the years. Do this starting from graduation, and but 5% of your paycheck every month into investments in this order:
A. Any investment program sponsored by your employer where they make matching contributions. That's free money! If that doesn't use up the 5%, then...
B. An IRA. (I'll leave it to others to pontificate on the Roth vs. Conventional question). If that doesn't use up the 5%, then...
C. Broad index mutual funds. (Others can go into more detail on which mutual funds).
Take that 5% off the top, investing it as soon as you get paid. That way you get used to living on 95% pay and you stop noticing the 5%.
Can this fail? Yes, but since you are betting on the economy as a whole with approach #2 such failure over a long enough time (35+ years) would mean the economy has developed such serious problems that you probably were screwed no matter you did.
If you wait, then you may wait several years for the recession to happen, several years during the recession and then several years because you're not sure if the market is recovering or if it'll drop back down again. So at the end of the day there's a good chance you'd be worse off than if you invested right away.
Pretty decent article. TL,DR if you're saving for retirement then ignore the markets and don't try to time things. The markets over time (IRA is for retirement) will always increase significantly.
If you wait, what will mostly likely happen is you'll jump in after 80% of the recovery happens.
Far better to invest now, hold steady through the downturn and be in the market when it goes back up.
It seems that the business or boom bust cycles is a relatively new phenomenon and it might just be related to the way the federal reserve handles the money.
Anyone feel free to correct or add info here as im not an authority on historical economics in the united states, but i have always found that the instillation of the federal reserve to be an 'epoch' of sorts for the US economically.
Sure, it's just totally untrue, this wikipedia article will help:
https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit...
Downturns do favour anti-establishment candidates, so I'd pay attention to the Bernie wing in the next few years.
The only real fault you can find with Trump so far is how he's constantly claiming positive news from Wall Street and economic indicators as his successes. Since he started with almost full employment, he's almost assured to end his first term with a net growth in unemployment. Establishing the idea of being measured by those numbers is almost comically bad strategy.
But I guess he and his sycophants will just go back to claiming that the statistics are manipulated.
That sounds a little like 'the utter idiocy of thinking a sous chef understands particle physics better than a janitor': I see no reason why either profession would have an edge over the other. Frankly, neither is real business: real estate is easily as much about using public means to earn private profit as it is about working in an actual market, and of course politics is not a free-market business at all.
And whilst I didn't say the janitor knows _more_ about economics, I think to fully complete your picture you should assume the janitor gets a lot of reading done and has read a single introductory macroecon text book in the last twenty years.
Sometimes the best thing to do with a heavy bag, is set it down. Trying to convince everyone around you that the contents of said bag are more valuable than they are, just ends up annoying people.
Directly related to the article? No. But it has merit because cryptocurrency didn't truly exist during the last major downturn and it will be interesting to see how people value it during such a scenario.