Dow plunges 1000 points
cnbc.com
cnbc.com
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).
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. ...
Sure sucks to be a worker. When your salary rises your real gains will be inflated away.
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.
In other words, another way that workers can win is by becoming investors/owners.
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.
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. 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 will not be happening anytime soon.
That sound you hear in the distance is a recital of the Internationale.
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.
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.
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.
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 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.
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.
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.
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.
Edit: although apparently I'm remembering a slightly later era than I thought.
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.
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.
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.
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.
Ironically you could call this “owning the means of production”
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.
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.
Disclaimer: I don't know much about the arguments, to me it just looks like a typical linear graph.
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.
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.
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.
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?
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.
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.
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?
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.
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.
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.
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.
If someone thinks sending the gov't an extra $10,000 is money well spent, then they do it regardless if others do it.
It’s about the principal of the matter. If you disagree with the tax cut, don’t benefit from it. Take a stand.
> 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?
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.
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?
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.
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.
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.
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.
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?
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.
Workers today relying on those programs in retirement will find them reduced or eliminated.
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?
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.
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.
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.
Until then, the less you pay for your stock purchases, the better your long term gains will be.
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.
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.
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.
Why should it be that way?
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.
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.
"Long term" is longer than 20 years.
The 20th century was particularly good and I think the average return was closer to 6 than 3.
The assumptions should be documented there.
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.
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.
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.
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.
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.
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?
Exactly. The corn you eat needs to be grown today.
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".
It doesn't make any of it like a ponzi scheme.
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.
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.
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.
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.
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.
It doesn't change the fact that your second paragraph is true though - just a nitpick.
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.
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.
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.
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…
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.
Still, I worked for a fund that swing traded futures for better returns and less risk than holding the market during this period…
Volatility is not risk.
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.
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.
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.
VIX futures also reflect stock market volatility, and their prices are based on S&P option prices.
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.
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...
"When a forest grows too wild a purging fire is inevitable and natural"
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.
How exactly do you decide the end of it has been reached?
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.
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.
Otherwise, I've died young or the market hasn't grown much over my remaining ~40 years of life...
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.
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.
https://www.npr.org/sections/money/2017/01/04/508261371/epis...
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"
The sugar high from the tax cuts will buy a few quarters of time at best.
Edit: it's two quarters as pointed out below
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.
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.
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.
2) Cut in discretionary spending in order to pay for the tax cuts. This in turn then slows the economy down.
These 401k plans buy a mutual fund, which buys stocks. So indirectly, these people own the stock.
user furiously shorts the entire economy
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.
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. :)
Over decades this will return better returns at dramatically less stress than any other approach.
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.
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.
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 ;)
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.
this is why i just want to pay a guy like my accountant to narrow down the decision tree for me.
Commodities possibly I guess.
It's a hard one when the stock market has been the only game in town for about a decade.
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.
I'd go for farmland near clean water.
Cant go wrong there. Sad but true.
Plus some company or other in the Netherlands exporting polder technology.
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.
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 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.
I wonder how much the spread of information/social media plays a role in this. it does seem like most of these swings seem to be from retail investors.
In general, it's usefulness as an indicator of volatility has decreased lately.
Another explanation is that VIX is being actively dampened by the growing popularity of the 'short volatility' trade. E.g., the SVXY ETF among others. We're seeing today just how volatile volatility can be!
Now the reason for my post. Where should I go for non-sensational finance news?
1: https://www.investopedia.com/news/overstock-goes-all-bitcoin...
It'd certainly be possible to price such an index (replicating strategy of portfolio of strips of calls/puts of various cryptocurrencies) but it'd be impossible to hedge because transactions costs are too high. You could hedge with crypto-options, but AFAIK they don't exist yet.
I just sold my entire portfolio (apart from retirement funds) earlier this morning, as we want to buy a house later in the year and don't want to get trapped if the stock market completely crashes.
Far better to hold steady.
It does require a good exit strategy for whatever hedge you choose.
I was thinking of buying VIX on Friday, and am kicking myself for missing out now.
[1] https://sixfigureinvesting.com/2015/10/how-does-tvix-work/
I'm hoping for a much bigger sell-off so I can pick up some more below $150.
It's not like putting all of your money on Tesla, but it's still riskier than a mutual fund.
The value of BRK stock is the net present value of Berkshire's existing holdings, plus perhaps a small and diminishing premium for the convenience of holding stock at the moment of Buffett's future sale and acquisition choices. Because Berkshire is fairly hands-off in terms of managing their holdings, and because its investments have fairly low volatility, in the short-term the stock price should hold steady upon Buffett's exit.
Thus, if owning BRK made sense 10 years ago, then it makes sense to own it until the very last day that Buffett[1] controls the company, and even afterward to the extent the pipeline is filled with his choices.
But maybe I'm misunderstanding something about market dynamics related to how end games play out.
[1] Presuming that Buffett remains Buffet, in control of his faculties and in particular his prescience.
Because I have a good grasp of what it's actual intrinsic value is, I can wait to buy more until it's cheap which increases my long term returns. That's much harder to do with an index fund, indexes don't get as cheap as BRK gets, and tend to remain overpriced. For example, 15 PE used to be considered a fairly priced stock market, but for the last 20 years or so the market has mostly been much higher than that.
That's somewhat comical given that he's 87 years old. Life expectancy tables show an expectancy of 5 years. Probably should cut that back a fair bit given his taste for Coca Cola, See's Candies, and burgers....
All that said, given the nature of his business and the strength of those in succession behind him, hopefully Berkshire continues to do well.
So that's not much of a risk at all.
But in this instance, the single stock is a holding company that is already diversified across several industries. Anything that would negatively impact Berkshire Hathaway to a greater extent than the market as a whole is likely to be the product of intentional malice. As it is now, it's akin to an extremely actively managed mutual fund, in that they generally have at least one seat on the board--or at least VIP seats at the shareholder meeting--for anything they invest in.
A stock crash is not a recession. The stock market is not the economy. Stocks falling is not a recession.
1987 stock crash? No recession.
1980-82 recession? No stock crash.
1992 recession? Also no stock crash.
Instances that demonstrate that the latter is not true do not contradict the former.
Higher than Expected Inflation = Faster than expected Rising Interest Rates = Cuts in Growth Outlook = Stocks go Down
The volatility index has a very sudden spike at the end of the market
https://www.bloomberg.com/gadfly/articles/2018-02-05/stock-i...
Thought that happened in December, not February. A short year for traders this year, I guess.
(unintentional pun)
Edit: One of the more interesting and notable causes is that many fund managers and investment advisors will actually rebalance portfolios so that at years end it appears they were holding the biggest winner stocks/assets. Basically a marketing trick.
There’s a lot more room to go down.
2.x% GDP growth stacked against peak PE ratios like ~40 by Coca Cola (KO), with zero (or negative) growth for years.
Who are the crazy investors paying that? The US and global economy can't expand fast enough to pull down these multiples in a reasonable amount of time.
50 times earnings for PayPal, for astounding 15% style growth. And similar for Netflix, except at 200 times earnings. Or Activision up at 50x for similarly uninspiring growth. Could always buy Amazon on the moon at 150-200 times earnings, and wait a decade until their earnings catch up. There's always the exciting Microsoft, almost zero inflation adjusted growth for a decade ($17.6b in net income for 2008), in exchange I get to pay 30x earnings.
I guess there's always Walmart. I can pay 23-26 times earnings, for a company that has had falling earnings for years. Or 28-30 times for 3M, where I can get years of zero growth for that nice fat multiple.
And so on and so forth it goes, across the entire spectrum.
Investors were begging to get crushed up at Dow 26k. The recent surge into the market by retail investors is one of the more classic indicators that a bull run is done. They universally arrive late to the party.
You get zero credit for predicting a drop after it happened. And also little credit for "predicting" something based on any indicator with frequent false positives.
Saying "I knew it" because one of 50 indicators showed something the day before is no different than what's happening in non-reproducability of research. State claims and indicators before and shows a track record of prior claims. But please don't after the fact claim "you knew it", everyone is a "newb". It subtracts from the conversation.