This is a long read, but it's worth it. The metric can be calculated in FRED[2], and as a predictor of future returns, it outperforms all of the most common stock market valuation metrics, including cyclically-adjusted price-earnings (CAPE) ratio[3]. (Basically, the average investor portfolio allocation to equities versus bonds and cash is inversely correlated with future returns over the long-term. This works better than pure valuation models because it accounts for supply and demand dynamics.)
I've never seen market valuation expressed as market cap as % of GDP. I'm not an economist, so I'll leave the detailed arguments to them. But it would be at least useful to explain why you think this is a meaningful metric as compared to those typically used to measure market valuation (e.g. P/E ratios etc.).
Your graph also ties your valuation metric to the 2000 peak and the 2008 peak. However, there were crashes in 1990 and 1987 as well. Should readers conclude that the 1987 peak level was also too high, and that therefore the last ~30 years have also been too high as well? (Abstaining from investing in the stock market at levels above the 1987 crash would have resulted in the loss of tremendous opportunity for wealth creation.)
There are a lot of opinions implicitly expressed in this site; it would be good to try to make those explicit.
For market overvaluation, it says: 9.1 / 10 "DEFCON 4"
DEFCON 5 is peacetime, DEFCON 1 is imminent nuclear war. For example, during the Cuban Missile Crisis, the US reached DEFCON 2. Should this say DEFCON 2 instead? Or is "above" normal readiness the intended meaning?
The metric used to calculate market overvaluation is interesting but it has little value for predicting a stock market crash.
Let's take he last 3 major US crashes:
1987: this crash was caused by automated trading systems which could run wild in the absence of any prevention regulations such as circuit breakers
2000: the collapse of the dotcom bubble
2008: start of the financial crisis caused mainly by opaque credit default swaps and packaged subprime loans
Of those 3, only the dotcom bubble seems to be a bit related to the market overvaluation metric. And even right before the dotcom bubble crash there were plenty of economic guru's who argued that classic overvaluation metrics were not valid anymore because we were now in a 'new economy'.
The other two crashes were caused by black swans; occurrences that nobody was aware of and that were only understood afterwards. Most likely the next crash will be a black swan as well.
No, the 2008 crash wasn't a black swan. It just came from the debt side, rather than the equity side. It was clear this was coming. In 2004, I wrote this, on my "downside.com": [1]
The next crash looks to be housing-related. Fannie Mae is in trouble. But not because of their accounting irregularities. The problem is more fundamental. They borrow short, lend long, and paper over the resulting interest rate risk with derivatives. In a credit crunch, the counterparties will be squeezed hard. The numbers are huge. And there's no public record of who those counterparties are.
Derivatives allow the creation of securities with a low probability of loss coupled with a very high but unlikely loss. When unlikely events are uncorrected (I meant uncorrelated), as with domestic fire insurance, this is a viable model. When unlikely events are correlated, as with interest rate risk, everything breaks at once. Remember "portfolio insurance"? Same problem.
Mortgage financing is so tied to public policy that predictions based on fundamentals are not possible. All we can do is to point out that huge stresses are accumulating in that sector. At some point, as interest rates increase, something will break in a big way. The result may look like the 1980s S&L debacle.
It took longer than I expected for that to kick in, but it happened.
"occurrences that nobody was aware of and that were only understood afterwards"
Umm, I'm no genius but I was managing my mother's money at the time of the 2008 crash. It was very obvious to me that there was going to be a crash, I pulled out of the market in late 2006 and didn't lose a dime in the crash.
I think the better statement is "The 2008 crash was obvious but many people were in denial".
Again, I'm not a financial wizard, I could just see the writing on the wall on that one, everyone was getting approved for houses they couldn't afford, you just knew that was not going to end well.
There's a proximate vs. root cause argument going on here. In 87 and '00, the stock market was absolutely overvalued relative to historical metrics like the ones linked (and in '08 the real estate market was). It is today too. Now, the proximate causes were not "overvalued" because ultimately something has to "happen" to push an unstable system into a correction.
But realistically the corrections were inbound regardless of the specifics about automated trading, the startup economy, or bank solvency.
Can someone with an actual economics degree explain to me whether it's a valid criticism of the "Market cap as % of GDP" metric that many US companies derive value from multinational labor and consumption, and if not, why not? Thanks in advance.
SB in economics here and current business school student (I know, I know: burn the future MBA at the stake!).
Indeed, it is a valid criticism. The market cap/GDP measure is mismatched, since market cap theoretically reflects investors' expectation of future cash flows globally while GDP is a measure for only one country. Also, GDP is problematic for a bunch of reasons, so even if all companies were only operating in the United States, GDP would still only be a crude measure of economic output.
It is valid criticism. The rule is a rule of thumb, so isn't like a law of physics. The amount of internationalization would be relatively similar over short periods of time, so is an OK measure cf 10-20 years ago, but yes has problems comparing over a century.
Other similar issues are the amount of private ownership of US companies (that aren't included in Total Market Cap), and also foreign ownership of US companies which is higher than it used to be (I think).
I wouldn't worry about student loan debt being a problem. It's very likely that they're going to get a bailout before a bubble bursts. Where on earth did I come up with this, you ask? Easy - I just paid my student loans off last week. It's only natural that everyone else will now get bailed out!
Seriously, though, this is a real problem and we need to do something. Even if it doesn't have a direct effect any time soon, it's going to have an indirect effect as our generation (I'm some kind of X-ennial, apparently, but let's just say everyone 20-40) continues to replace retiring boomers in the economy. If we're all saddled with non-dischargable debt, it's going to hurt the housing and consumer spending segments.
So something like 77.5%+ of that is already bailout guaranteed. Taxes (or more likely US debt) will rise to cover it, which will have its own long term negative effects, but barring a US default that market is very well covered.
It's also very, very challenging to discharge US student loan debt, much more than housing debt. How that really works in the end, especially if a large number of people go into default, hasn't really been tested, and it will be a political hot potato when it does.
A site like this seems dangerous at best. Nobody can predict the stock market. Nobody can predict when a stock market is more likely to crash. This site tries to indicate otherwise. Whatever causes the crash it probably won't be one of the indicators listed here.
Predicting the actions of human being is very difficult. The market "crashes" when 2 people throw in the towel. One of those groups is the aggregate of retail+institutional buyers. The other group is market makers. When neither group is willing to bid the price, then that price decreases. When neither group is willing over an extended period of time(say, an hour), we have a "market crash". It's a very hyperbolic way of saying no one is willing to buy, but others are still willing to sell. In that state, the price retreats as buy-side liquidity is consumed, and continues retreating until buy-side liquidity is equal to sell volume. Once buy-side liquidity is in excess of sell volume, then the price moves up.
tldr; "crash" is used to describe a very natural condition, caused entirely by the emotions of human beings.
The real problem with these sites is that it is super easy to overfit to historical data. Try enough indicators and enough parameters and you can fit historicals to the dot. Except, no one knows how the model performs on a go-forward basis. On Wall Street, these are often easy to debug -- you just run on live data, often with live trading to see if the signal is real. However, with economic data, the velocity of new data is too low to really test models on a go-forward basis...so you just have a theoretical model, likely overfit, that has little predictive value.
Good idea for a website, should be able to get you some nice revenue from intermittent visits. You probably want to focus on financial services for your ads.
I'm not going to say anything about your numbers and your models other than, without the ability to see how they looked at previous crashes, it's hard to see if the site is useful. To the innumerate masses and emotional investors the flickering numbers are persuasive enough. So they really don't matter.
On the bad side, your UX is god-awful. Use an oldish, slightly crappy monitor to look at it and you will discover that your background is indistinguishable from the foreground. The top bar of the box completely disappears, too. Also, a row of buttons is NOT a good tabbed interface--there is no indication that clicking on "Market Volatility" is going to reload all the content below the row of buttons. Maybe make actual tabs, at least make that stuff a distinct box.
This could be a nice little side product to make you some extra money. Get some GA on there, and slowly add features. I think a bit of interactivity and the ability to customize the predictive models through some drag and drop could actually make the page sticky and get people coming back.
How is the heat matrix diagram calculated? It seems to be wrong. Public Debt has a 3.7/10, while it looks like its around 8.5 in the heat diagram.
Looking at the individual ratings:
- Household Debt: 5.5 / 10
- Market Overvaluation: 9.1/10
- Market Volatility: 0.3/10
- Public Debt: 3.7/10
--> SUM = 18.6/40 or 46.5%
Also I noted: Drawing a linear trend line through the "Market Overvaluation" diagram, does make it look a lot better though. One could argue that people get used to certain levels, hence a growing trend over time.
Taking only these factors into account, it does not look like the market is gonna crash soon. In my opinion it's likely going to be caused by another factor not listed here ;)
Mine took a while to load all the data. (I have a very fast internet connection). The site loaded, but the inside data took a while, like the graph, and the "Current Risk" numbers at the bottom.
Correct answer, of course, is no one knows, because the future is opaque and unpredictable. And indeed you have some very smart professionals going to cash or directly betting on a 5-10% correction in the S&P500. And a set of equally smart fund managers calling for a 2600 target by mid-2018.
What we can say with some certainty, based on options activity, is that if a single day 3-4% drop in the S&P500 occurs it can trigger a massive unwind in short volatility positions:
And with several political risk factors on the near term horizon, including the possibility of a government shutdown in late September due to the failure of Congress to extend the debt ceiling (yes, they are arguing over who is going to pay to fund the border wall with Mexico). It certainly should surprise no one if a coming tomorrow could be very different than the extraordinarily low-volatility landscape we face today.
I was (sort of) there when the 2000 tech crash happened and was in the thick of it when the 2008 crash happened.
This thread and a few offline conversations made me reexamine what I believe about the stock market and the nature of the 2000 and 2008 collapses. Of course, I'm not an econ nor do I have data to back up anything I'm saying.
All manias, from tulips to tech IPOs to housing bubbles are born when the common person joins the frenzy. On the flip side, the mania collapses when the common person walks away or never shows up the party. For the tech IPO frenzy of 2000, the common person never even showed up to use all those exotic new ideas which were getting funded and going public. During the housing bubble, the common person bought and sold houses which setup the flywheel. Eventually, the common person walked away from the asset in question bringing down the entire charade.
Today, the market is soaring. People are starting to wonder when gravity will reassert itself but in my view, this time the difference is that the common person cannot walk away. Unless adblocking and disdain for social media become extremely mainstream, the common person is so busy amusing themselves to death online that they are not going to leave the tech mania. Companies like FB and Google have made the web sticky.
Does this mean the stock market will rise indefinitely? I don't know. I do know that once there is a captive market comprising everyone online, no company is going to stop advertising or figuring out ways to reach buyers online.
We are in a new age where you just can't get away from the web. We are the product but we also have no way of exiting the dragnet.
Economist here. You should really keep in mind that the same GDP must go both towards paying off the national debt and paying off household debt. Also you should track commodities (at the very least, the ratio between put & call options).
Your volatility section seems to be a very poor indicator of a future crash in the manner you are using it. Volatility is not a predictor, but instead a descriptor. An analogy I think is the weather stick - Is this stick wet? Then it is raining. It is a very poor item to use in your context.
Further, sustained periods of low volatility often are sometimes indicators of complacency among investors and indicators of higher chances of bubbles. Sustained periods of low volatility are at times indicative of higher future risk of a market crash, not a low predictor. I think you need to re-evaluate how you use volatility.
American companies sell products & services outside of the United States. Comparing American GDP with the aggregate value of the US stock-market is deeply misleading, especially given a historical comparison: foreign markets such as China have gained in relative importance over timeframe under consideration.
When looking at debt, one should not just observe the nominal amount, but also the interest rates, which have never been lower. Large companies can tap public debt markets and borrow billions at 1.5% over a timeframe of ten years. Risk is thus lower than the website suggests (at lower interest rates, a company can carry more debt). Additionally, returns to equity will be higher (the I in EBIT is smaller, so profits are bigger).
The American GDP includes net exports, ie: goods that are bought in other countries. So its not a crazy comparison. But it is not great ratio for long historical comparisons because of the changing nature of economies and markets.
GDP is a correlated measurement. Trying to use correlated measurements as a leading or primary measurement is one of the many steps on the stairwell down to bankruptcy for a trader.
Really cool idea. As someone that hasn't really investigated the market indicators for collapse this is really eye opening. It really breaks things down into plain english. Hope this goes to the top for some rational/interesting conversation.
Don't put too much weight into his analysis. There are folks who spend their entire professional careers studying the economy and they haven't, on average, ever correctly predicted how the stock market will perform.
I don't want to knock on OP's analysis here, but it's important to remember the famous quote (maybe by Keynes?), "The market can remain irrational much longer than you will remain solvent"
As the site makes clear, nobody really ever knows if the market is going to crash. On the market valuation side they claim the current market is overvalued. But overvalued is a relative term... As you have to value versus something, and that something is usually something historical.
The way I see it though is the markets are a big voting machine.. and they're making predictions about the future and incorporating future expectations. With the current US administration still pondering over tax plans and infrastructure stimulus packages that are promised, market may be underpriced???
> The way I see it though is the markets are a big voting machine.. and they're making predictions about the future and incorporating future expectations
This is likely true because of "wisdom of crowds" (aka regression to mean of randomly-sampled human estimates).
> With the current US administration still pondering over tax plans and infrastructure stimulus packages that are promised, market may be underpriced???
The president doesn't control taxes or spending, and he can't do anything about infrastructure on his own. All he can do is use political capital to push Congress in a certain direction. So far, he's been totally unable to do that.
In terms of the national economy, the US is the same as it was under Obama -- House totally under Republican control, Senate mostly under Republican control, Janet Yellen running the Fed, no major shocks.
There's little unity among Republican Congresspeople, and even less when you include Democrats. Tax reform may be a bipartisan issue, but it's likely going to be limited to simplifying the tax code (lowering taxes while closing corporate loopholes). If all the trickle-down dinosaurs believe that higher corporate taxes will harm the economy (which it almost surely won't), then the stock market should -- if anything -- go down.
This could mean that it's underpriced, but not for the reasons you seem to suggest.
[+] [-] pdog|8 years ago|reply
This is a long read, but it's worth it. The metric can be calculated in FRED[2], and as a predictor of future returns, it outperforms all of the most common stock market valuation metrics, including cyclically-adjusted price-earnings (CAPE) ratio[3]. (Basically, the average investor portfolio allocation to equities versus bonds and cash is inversely correlated with future returns over the long-term. This works better than pure valuation models because it accounts for supply and demand dynamics.)
[1]: http://www.philosophicaleconomics.com/2013/12/the-single-gre...
[2]: http://research.stlouisfed.org/fred2/graph/?g=qis
[3]: http://www.multpl.com/shiller-pe/
[+] [-] runako|8 years ago|reply
Your graph also ties your valuation metric to the 2000 peak and the 2008 peak. However, there were crashes in 1990 and 1987 as well. Should readers conclude that the 1987 peak level was also too high, and that therefore the last ~30 years have also been too high as well? (Abstaining from investing in the stock market at levels above the 1987 crash would have resulted in the loss of tremendous opportunity for wealth creation.)
There are a lot of opinions implicitly expressed in this site; it would be good to try to make those explicit.
[+] [-] uiri|8 years ago|reply
DEFCON 5 is peacetime, DEFCON 1 is imminent nuclear war. For example, during the Cuban Missile Crisis, the US reached DEFCON 2. Should this say DEFCON 2 instead? Or is "above" normal readiness the intended meaning?
[+] [-] misja111|8 years ago|reply
1987: this crash was caused by automated trading systems which could run wild in the absence of any prevention regulations such as circuit breakers
2000: the collapse of the dotcom bubble
2008: start of the financial crisis caused mainly by opaque credit default swaps and packaged subprime loans
Of those 3, only the dotcom bubble seems to be a bit related to the market overvaluation metric. And even right before the dotcom bubble crash there were plenty of economic guru's who argued that classic overvaluation metrics were not valid anymore because we were now in a 'new economy'.
The other two crashes were caused by black swans; occurrences that nobody was aware of and that were only understood afterwards. Most likely the next crash will be a black swan as well.
[+] [-] Animats|8 years ago|reply
The next crash looks to be housing-related. Fannie Mae is in trouble. But not because of their accounting irregularities. The problem is more fundamental. They borrow short, lend long, and paper over the resulting interest rate risk with derivatives. In a credit crunch, the counterparties will be squeezed hard. The numbers are huge. And there's no public record of who those counterparties are.
Derivatives allow the creation of securities with a low probability of loss coupled with a very high but unlikely loss. When unlikely events are uncorrected (I meant uncorrelated), as with domestic fire insurance, this is a viable model. When unlikely events are correlated, as with interest rate risk, everything breaks at once. Remember "portfolio insurance"? Same problem.
Mortgage financing is so tied to public policy that predictions based on fundamentals are not possible. All we can do is to point out that huge stresses are accumulating in that sector. At some point, as interest rates increase, something will break in a big way. The result may look like the 1980s S&L debacle.
It took longer than I expected for that to kick in, but it happened.
[1] http://downside.com/news.html#comingmortgagecrunch
[+] [-] luckydude|8 years ago|reply
Umm, I'm no genius but I was managing my mother's money at the time of the 2008 crash. It was very obvious to me that there was going to be a crash, I pulled out of the market in late 2006 and didn't lose a dime in the crash.
I think the better statement is "The 2008 crash was obvious but many people were in denial".
Again, I'm not a financial wizard, I could just see the writing on the wall on that one, everyone was getting approved for houses they couldn't afford, you just knew that was not going to end well.
[+] [-] ajross|8 years ago|reply
But realistically the corrections were inbound regardless of the specifics about automated trading, the startup economy, or bank solvency.
There's one coming "soon" now, too. Eventually.
[+] [-] lr4444lr|8 years ago|reply
[+] [-] pinky1417|8 years ago|reply
Indeed, it is a valid criticism. The market cap/GDP measure is mismatched, since market cap theoretically reflects investors' expectation of future cash flows globally while GDP is a measure for only one country. Also, GDP is problematic for a bunch of reasons, so even if all companies were only operating in the United States, GDP would still only be a crude measure of economic output.
[+] [-] rb808|8 years ago|reply
Other similar issues are the amount of private ownership of US companies (that aren't included in Total Market Cap), and also foreign ownership of US companies which is higher than it used to be (I think).
[+] [-] mendeza|8 years ago|reply
Right now student loan debt is at 1.4 trillion
source: https://www.debt.org/students/
[+] [-] SmellTheGlove|8 years ago|reply
Seriously, though, this is a real problem and we need to do something. Even if it doesn't have a direct effect any time soon, it's going to have an indirect effect as our generation (I'm some kind of X-ennial, apparently, but let's just say everyone 20-40) continues to replace retiring boomers in the economy. If we're all saddled with non-dischargable debt, it's going to hurt the housing and consumer spending segments.
[+] [-] stvrbbns|8 years ago|reply
[+] [-] bb611|8 years ago|reply
So something like 77.5%+ of that is already bailout guaranteed. Taxes (or more likely US debt) will rise to cover it, which will have its own long term negative effects, but barring a US default that market is very well covered.
It's also very, very challenging to discharge US student loan debt, much more than housing debt. How that really works in the end, especially if a large number of people go into default, hasn't really been tested, and it will be a political hot potato when it does.
[+] [-] truffle_pig|8 years ago|reply
[+] [-] JKCalhoun|8 years ago|reply
[+] [-] pillowkusis|8 years ago|reply
[+] [-] choxi|8 years ago|reply
> No one knows for sure, but there are indicators that can help us guess. We can chart these indicators to give us the illusion of foresight.
[+] [-] module0000|8 years ago|reply
tldr; "crash" is used to describe a very natural condition, caused entirely by the emotions of human beings.
[+] [-] TuringNYC|8 years ago|reply
[+] [-] avip|8 years ago|reply
It would be really interesting to see your collapse pyramid over time. How did it look in 2000? 2008?
[+] [-] truffle_pig|8 years ago|reply
[+] [-] daotoad|8 years ago|reply
I'm not going to say anything about your numbers and your models other than, without the ability to see how they looked at previous crashes, it's hard to see if the site is useful. To the innumerate masses and emotional investors the flickering numbers are persuasive enough. So they really don't matter.
On the bad side, your UX is god-awful. Use an oldish, slightly crappy monitor to look at it and you will discover that your background is indistinguishable from the foreground. The top bar of the box completely disappears, too. Also, a row of buttons is NOT a good tabbed interface--there is no indication that clicking on "Market Volatility" is going to reload all the content below the row of buttons. Maybe make actual tabs, at least make that stuff a distinct box.
This could be a nice little side product to make you some extra money. Get some GA on there, and slowly add features. I think a bit of interactivity and the ability to customize the predictive models through some drag and drop could actually make the page sticky and get people coming back.
[+] [-] benmarten|8 years ago|reply
Looking at the individual ratings: - Household Debt: 5.5 / 10 - Market Overvaluation: 9.1/10 - Market Volatility: 0.3/10 - Public Debt: 3.7/10 --> SUM = 18.6/40 or 46.5%
Also I noted: Drawing a linear trend line through the "Market Overvaluation" diagram, does make it look a lot better though. One could argue that people get used to certain levels, hence a growing trend over time.
Taking only these factors into account, it does not look like the market is gonna crash soon. In my opinion it's likely going to be caused by another factor not listed here ;)
[+] [-] wuliwong|8 years ago|reply
[+] [-] truffle_pig|8 years ago|reply
[+] [-] omg_ketchup|8 years ago|reply
I think that's a better statement than whatever the app actually does.
[+] [-] aembleton|8 years ago|reply
[+] [-] joshuaheard|8 years ago|reply
[+] [-] gianrubio|8 years ago|reply
[+] [-] indescions_2017|8 years ago|reply
What we can say with some certainty, based on options activity, is that if a single day 3-4% drop in the S&P500 occurs it can trigger a massive unwind in short volatility positions:
https://www.reuters.com/article/us-usa-stocks-volatility-idU...
And with several political risk factors on the near term horizon, including the possibility of a government shutdown in late September due to the failure of Congress to extend the debt ceiling (yes, they are arguing over who is going to pay to fund the border wall with Mexico). It certainly should surprise no one if a coming tomorrow could be very different than the extraordinarily low-volatility landscape we face today.
The Case For Long Volatility by Eric Peters
https://www.linkedin.com/pulse/case-long-volatility-eric-pet...
[+] [-] saimiam|8 years ago|reply
This thread and a few offline conversations made me reexamine what I believe about the stock market and the nature of the 2000 and 2008 collapses. Of course, I'm not an econ nor do I have data to back up anything I'm saying.
All manias, from tulips to tech IPOs to housing bubbles are born when the common person joins the frenzy. On the flip side, the mania collapses when the common person walks away or never shows up the party. For the tech IPO frenzy of 2000, the common person never even showed up to use all those exotic new ideas which were getting funded and going public. During the housing bubble, the common person bought and sold houses which setup the flywheel. Eventually, the common person walked away from the asset in question bringing down the entire charade.
Today, the market is soaring. People are starting to wonder when gravity will reassert itself but in my view, this time the difference is that the common person cannot walk away. Unless adblocking and disdain for social media become extremely mainstream, the common person is so busy amusing themselves to death online that they are not going to leave the tech mania. Companies like FB and Google have made the web sticky.
Does this mean the stock market will rise indefinitely? I don't know. I do know that once there is a captive market comprising everyone online, no company is going to stop advertising or figuring out ways to reach buyers online.
We are in a new age where you just can't get away from the web. We are the product but we also have no way of exiting the dragnet.
[+] [-] qubex|8 years ago|reply
[+] [-] crdoconnor|8 years ago|reply
[+] [-] tveita|8 years ago|reply
But according to graphs like this, even though the GDP has been rising, median households have not been getting a corresponding increase in income: https://en.wikipedia.org/wiki/Household_income_in_the_United...
So the income we are adjusting against is not necessarily going to the people that are in debt!
[+] [-] where_do_i_live|8 years ago|reply
Further, sustained periods of low volatility often are sometimes indicators of complacency among investors and indicators of higher chances of bubbles. Sustained periods of low volatility are at times indicative of higher future risk of a market crash, not a low predictor. I think you need to re-evaluate how you use volatility.
[+] [-] Nursie|8 years ago|reply
I think there might be a few coding errors still lurking in there.
[+] [-] mxschumacher|8 years ago|reply
When looking at debt, one should not just observe the nominal amount, but also the interest rates, which have never been lower. Large companies can tap public debt markets and borrow billions at 1.5% over a timeframe of ten years. Risk is thus lower than the website suggests (at lower interest rates, a company can carry more debt). Additionally, returns to equity will be higher (the I in EBIT is smaller, so profits are bigger).
[+] [-] georgeecollins|8 years ago|reply
[+] [-] module0000|8 years ago|reply
[+] [-] timsayshey|8 years ago|reply
[+] [-] hellogoodbyeeee|8 years ago|reply
I don't want to knock on OP's analysis here, but it's important to remember the famous quote (maybe by Keynes?), "The market can remain irrational much longer than you will remain solvent"
[+] [-] truffle_pig|8 years ago|reply
[+] [-] anonu|8 years ago|reply
The way I see it though is the markets are a big voting machine.. and they're making predictions about the future and incorporating future expectations. With the current US administration still pondering over tax plans and infrastructure stimulus packages that are promised, market may be underpriced???
[+] [-] smt88|8 years ago|reply
This is likely true because of "wisdom of crowds" (aka regression to mean of randomly-sampled human estimates).
> With the current US administration still pondering over tax plans and infrastructure stimulus packages that are promised, market may be underpriced???
The president doesn't control taxes or spending, and he can't do anything about infrastructure on his own. All he can do is use political capital to push Congress in a certain direction. So far, he's been totally unable to do that.
In terms of the national economy, the US is the same as it was under Obama -- House totally under Republican control, Senate mostly under Republican control, Janet Yellen running the Fed, no major shocks.
There's little unity among Republican Congresspeople, and even less when you include Democrats. Tax reform may be a bipartisan issue, but it's likely going to be limited to simplifying the tax code (lowering taxes while closing corporate loopholes). If all the trickle-down dinosaurs believe that higher corporate taxes will harm the economy (which it almost surely won't), then the stock market should -- if anything -- go down.
This could mean that it's underpriced, but not for the reasons you seem to suggest.