I’m a hedge fund manager. Not a big fund all things considered, just a few hundred million. But I think about stuff like this for a living. Here’s why you can safely ignore this article.
There is always someone predicting an upcoming market crash. People like Grantham (cited in the post) have been predicting a mega crash for most of the last decade. Market crashes occur every 10-20 years but the thing is, over that 10-20 year cycle the market is always net up, so if you sit out the cycle because of worries about an upcoming crash you could easily miss out on 5-10 years of great returns.
The post author frequently compares flow variables (eg earnings, GDP) to stock variables (eg market cap). That’s not necessarily terrible, but the ratio is always sensitive to interest rates (because the stock variable discounts future values of the flow variable, and when rates are low the discounting has less of an effect). Market cap/earnings and market cap/GDP are high now because interest rates are low (asp because growth expectations are high, but that’s not necessarily incorrect). Before the dot com crash US interest rates were 6%, compared to 0.25% now — of course that skews the statistics.
Michael Burry is cited as “someone with a proven track record of predicting market crashes” but in fact he predicted exactly one crash. Well, so did John Paulson, and the ensuing decade proved that it was just luck. Mark Cuban “predicted” the dot com crash. It doesn’t mean they are geniuses, it means they got lucky once.
Growth in margin debt is cited as a reason to worry. But margin debt has grown because assets have grown. The S&P 500 has double since the lows of March 2020, so the fact that margin debt has doubled is not a cause for concern. As a percentage of assets, margin debt has been stable for the last decade.
This post is pointless fearmongering, nothing more. Of course, there will be a crash at some point. It could be in six months, a year, five years or ten years. This guy can’t predict it any better than anyone else can.
> The post author frequently compares flow variables (eg earnings, GDP) to stock variables (eg market cap). That’s not necessarily terrible, but the ratio is always sensitive to interest rates (because the stock variable discounts future values of the flow variable, and when rates are low the discounting has less of an effect).
This was an incredibly clear way to put it. I can't believe I haven't thought of it that way before! Thanks.
While I mostly agree with and everything you say is factual, the danger always lurks where you are not looking.
As we know from the past, systemic risk grows somewhere without good statistics.
FINRA Margin Debt shows $940 Billon. There is an additional shadow margin of unknown size. Margin debt, shadow margin, taking loans against properties and buying stocks, ... the size of leverage may surprise us.
There may be even larger systemic risk in the corporate debt market. The liquidity of high-yield is questionable and rating agencies (again) seem to be again part of the problem in rating junk as BBB. Bond market is not as boring as it used to be.
I do not mean to be critical, but when you take some view points together that converge on a specific crash with actual factual fundamentals of how it will happen and why it really does not matter that any of that group only predicted it once.
Your conflating it with one data point, as those differing viewpoints that predicted 2008 is in a group is than one data point as they all covered a different mechanism of a set of systems as it was not just one system that crashed but several.
We have the same problem in medicine, ritalin is based on one system solution of ADHD...however if you foloow a multiple system approach you can take Phenyanalinine and Darek chocolate, L-glutamine, etc and actually have a better solution of managing adhd without having to do drug holidays.
Crashes are convergence of several data points of crashes in multiple systems that converge together to produce abig crash.
Is the Log4j vun one tiny crash of one system or a crash of several?
articles like this almost always point to high asset prices as a reason for a coming crash. And also high inflation as a reason for coming deflation. Then throw in some cherry picked data to support their take.
BTW, Michael Burry seems completely unhinged and I can't help but wonder if he just had pure luck.
Any real reasons, like 2008 where people started to realize security products were built on fraud at a massive scale? I mean crypto is a ponzi scheme but when that implodes 1 to 100 years from now, that's not going to make a big denty in the economic
The sub title of the article is "History ain't changed" and the article starts with "In the late summer of 1929 [...]" and I already knew that I shouldn't have read any further.
Yes, there will be a crash, there always is, but it will play out differently than the ones before. History only rhymes, never repeats itself.
There have been calls for a big crash for decades now but no crash in this millennium was the big one.
"The S&P 500 fell 57% during the 2008 crisis, 49% in the dot-com bubble, and 34% during the COVID-19 crash. So if the most pessimistic predictions prove true, the next one would be the most dramatic crash since the Great Depression."
We already had big crashes in the last decades but we always came round (more or less). We are no longer on the gold standard, governments have plenty of experiences with crashes. I'm not convinced that we'll be seeing a crippling crash again.
Market crashes, much like forest fires, used to return things to a baseline. Now that we know how to prevent crashes - and forest fires - we risk creating an unhealthy environment which keeps growing until the inevitable catastrophe, where the underlying forces are beyond our means to control.
To the psychology of "the market always go up" we've now collectively added - through our interconnected hivemind - "buying the dip", and on the opposite end we have inflation coming after those who are more conservative, pushing them into taking uncomfortable risks.
This is a key thing. A Great Depression-level crash is basically impossible in any modern country with a decent credit rating and even vaguely competent financial management.
The only thing I would say is that goverments have only so many levers they could pull and some of those are already to pulled close to their max capacity.
> Technology stocks turn out to be the most overvalued, with Tesla, Apple, Alphabet, Amazon, Microsoft, and Facebook (now Meta) making up 25% of the index.
Jus because they make a big part of the index doesn't automatically mean they're overvalued. Apple, Alphabet, Amazon, Meta are huge, highly profitable, and with high growth. Their valuations make more or less sense. Tesla is certainly an outlier though, and highly overvalued.
Correct. The issue is that, for index investors that want statistical robustness, having 25% of your funds in only 6 stocks increases your risk (specifically, your variance.) People who invest conservatively (e.g., are happy with returns of inflation + 5%) would prefer index funds that don't have that issue.
1. The Roaring Twenties market peaked in August 1929 with a ~6100 Dow.
2. Market low in November 1929 at ~3800, a ~38% drop. The "big crash" was just ~4400 to ~3800.
3. Then it RECOVERED to ~4700 by March 1930, a ~24% gain.
4. It then dropped over a year to ~3000 by March 1931, a ~37% drop.
5. Then the real crash to ~900 in June 1932, a ~70% additional drop.
People had a LOT of time and a LOT of additional information about the economy to decide to get their funds out of the market.
I have finally drilled into my skull that I am unable to time the markets with reliability. So I hold across corrections. In 1930 I wouldn't have done anything -- I wasn't born yet.
Agreed, macro predictions are very hard. Much easier to make predictions on individual assets (companies, commodities etc.) and hold long term.
Also, precisely because macro is hard, these analyses often feel superficial.
Inflation, especially if exogenous, can negatively impact the economy but at the same time cash-alternative assets become more attractive. What's the ultimate effect there?
And what about historically low interest rates? Don’t they warrant a shift in investment preferences towards stocks?
Wether a macro prediction turns out to be right or wrong it’s rare to read a deeper argument than “things are too high must go down”.
Ok, let's assume people were reasonable and liquidated their portfolios after November 1929. Now they have cash, great. I may be wrong but didn't the value of the dollar also crash?
It seems the safest option was to cash out and buy gold or land.
Predicting crashes is easy. Since they occur pretty much regularly every 10 20 years. What is hard is finding out when they will occur and what triggers them.
Also there is no one out there who can predict crashes one after the other with accuracy, no matter how right they were in 2008.
I'm happy to embarrass my future self with a firm prediction. Nothing in the market will happen that will cause people's quality of life to drop until WW3.
The reason I think that is if the pandemic didn't manage it than nothing short of a global war will be enough to shake people's belief in infinite growth (which is what keeps the market alive).
I mean, possibly, but what informational advantage does a random medium blogger have here?
It's statistically likely that there will be one eventually, they seem to be some sort of Poisson process, just as it is likely there will eventually be another earthquake that destroys the Bay Area again. That doesn't mean it can be predicted even to the nearest year.
People were predicting a crash several years before the 2008 mortgage crash, and even so house prices have rebounded since then.
I do regard the arrival of major brands into NFTs and the purchase of crypto-themed sports teams and stadiums as a leading crash indicator, but a lot of people have lost money trying to predict crypto crashes.
These fear based articles have been coming out for years. It’s one of the easy ways to get clicks, I guess.
As a holder of Tesla stock, I do not want to make bad decisions. So I don’t want to shrug off the points being raised. There are no simple explanations. Nobody can predict the future. And whether I like a message or not says nothing about how valid it is.
So I tried to do my homework. I wrote it up here[1], if anyone is interested.
"“If the shoeshine boy is giving stock advice,” he thought, “then it’s time to get out of the market.”"
But what if the shoeshine boys say a crash is coming and it's time to get out of the market?
How does one even get out of the market? There seems to be a huge inflation issue going on, so simply exchanging stocks for money does not seem the way to go, either?
Evergrande defaulting and impeding omicron couldn't even dent the market. Much less a crash. Those predicting the crash are going to have to play a long long waiting game. Might as well ride the wave.
On the flip side, crypto has been off the peak for a week or two, and I've noticed the price of crypto has an effect on meme stocks (like AMD, Nvidia, Tesla).. I wonder if the end of student debt payment deferment will cause a lot of people to liquidate their investments and cause a big dip..
How would quantitative easing affect the next crash? It seems like a thing that distinguishes this time from all other ones. Governments have more control over the economy with QE: they can inject liquidity into markets and boost spending whenever this is needed, so economy seems less likely spin out of control during a crash.
Did we learn how to tame and limit the blast radius of crashes or am I misunderstanding QE?
QE doesn't boost spending directly. QE is about buying bonds, so that there's more money in circulation (and fewer bonds), in the hope that the resulting low interest rate environment will lead to more borrowing and consequently to higher levels of consumption and investment.
QE actually reduces the amount of money flowing in the economy, not increases it.
What it is is an exchange of assets that pay, say, 2.5% for once that pay federal funds rate. That's a net reduction in income for banks.
QE is just an assets swap attempting to reshape the longer term yield curve that hasn't been pulled down by setting rates near zero. It's got nothing to do with 'injecting money'.
For that you need to look at the fiscal flow data: spending less taxes.
That's right. A cash position seems very expensive with high inflation. A tricky time to be investing, as always. Damned if you participate, damned if you don't. Hot tips welcomed.
Possibly a Hinge of History fallacy caused by raised anxiety levels. I suppose this might apply to the majority of contemporary doom predictions from all sorts of subjects.
I've noticed that if I crumple up a piece of paper and shoot it across the room into a trash can, nine times out of 10 I'll miss, and people will chuckle and forget about it in 5 seconds. But one time out of 10 I'll make it, and people will be very impressed and tell me I should play for the local NBA team.
This psychological phenomenon also applies to prediction of stock market crashes.
Lots of experts have been predicting a crash for at least a few years now, but none of them are saying what's the catalyst. Right now there's a huge inflation, unimaginable valuations, lots of retail investors -- yet nothing has triggered a noticeable reaction.
After reading articles like this you always have to remember that the market can remain irrational longer than you can remain solvent.
This is what I wonder. In the dot com and 2008 recessions it was fairly obvious what was fueling speculation - websites and real estate. Now…I don’t see it. Crypto, but it feels like it’s not mainstream enough to send economy into tailspin. If bitcoin crashed tomorrow, the economy would probably shrug and say “yea that was expected”.
They were predicting a crash at the tail end of 2019, pre-COVID-19. None of them predicted what happened next although I bet some will claim March 2020 was what they foretold.
Even if you predict a crash, predicting the bottom is almost impossible. As an example, among many people who had sat on cash during the 2021 March, how many of them actually bought at the bottom?
For layman investor the best course of action is to invest and forget, ideally in a balanced or semi-balanced portfolio.
You don't need to predict the bottom. If you manage to sit out the first 20-30% drop you can probably go back in.
You can use something like https://recessionalert.com/ or a combination of your own signals to time the exit of the market. Of course, it will never be perfect and there will be times where you will get a false positive, but being right most of the time can still massively reduce risk.
Big drawdowns really hurt the geometric compounding of returns. A 50% loss requires a 100% gain to offset.
> Predicting the exact moment when a bubble will burst is never easy. Grantham, for example, predicted the 2000 crisis well in advance, but it took almost three years for it to happen.
You'll always have the people standing on top of the soap box predicting the end of the world. They're not wrong. The end of the world will come one day. Its just close to impossible to figure out when.
As the economist Keynes would say, “The stock market can remain irrational longer than you can remain solvent."
Also, considering 2 things: first, timing the market perfectly is near impossible. second, market moves from the bottom left to the top-right of the graph over a very long term. If you are a long term investor, the safest, smartest, best thing you can do is to do nothing.
[+] [-] avvt4avaw|4 years ago|reply
There is always someone predicting an upcoming market crash. People like Grantham (cited in the post) have been predicting a mega crash for most of the last decade. Market crashes occur every 10-20 years but the thing is, over that 10-20 year cycle the market is always net up, so if you sit out the cycle because of worries about an upcoming crash you could easily miss out on 5-10 years of great returns.
The post author frequently compares flow variables (eg earnings, GDP) to stock variables (eg market cap). That’s not necessarily terrible, but the ratio is always sensitive to interest rates (because the stock variable discounts future values of the flow variable, and when rates are low the discounting has less of an effect). Market cap/earnings and market cap/GDP are high now because interest rates are low (asp because growth expectations are high, but that’s not necessarily incorrect). Before the dot com crash US interest rates were 6%, compared to 0.25% now — of course that skews the statistics.
Michael Burry is cited as “someone with a proven track record of predicting market crashes” but in fact he predicted exactly one crash. Well, so did John Paulson, and the ensuing decade proved that it was just luck. Mark Cuban “predicted” the dot com crash. It doesn’t mean they are geniuses, it means they got lucky once.
Growth in margin debt is cited as a reason to worry. But margin debt has grown because assets have grown. The S&P 500 has double since the lows of March 2020, so the fact that margin debt has doubled is not a cause for concern. As a percentage of assets, margin debt has been stable for the last decade.
This post is pointless fearmongering, nothing more. Of course, there will be a crash at some point. It could be in six months, a year, five years or ten years. This guy can’t predict it any better than anyone else can.
[+] [-] kqr|4 years ago|reply
This was an incredibly clear way to put it. I can't believe I haven't thought of it that way before! Thanks.
[+] [-] wavegeek|4 years ago|reply
This is simply not true especially if you take inflation into account.
And even more so if you look outside the US (one of the top 1% of market performers over the last 100 years - hindsight bias).
For example Japan total return index had a 30 year drawdown post 1989 even in nominal terms. The US market from 1966-1992 total inflation adjusted return (26 years) was zero. http://www.simplestockinvesting.com/SP500-historical-real-to...
[+] [-] nabla9|4 years ago|reply
FINRA Margin Debt shows $940 Billon. There is an additional shadow margin of unknown size. Margin debt, shadow margin, taking loans against properties and buying stocks, ... the size of leverage may surprise us.
There may be even larger systemic risk in the corporate debt market. The liquidity of high-yield is questionable and rating agencies (again) seem to be again part of the problem in rating junk as BBB. Bond market is not as boring as it used to be.
[+] [-] fredgrott|4 years ago|reply
Your conflating it with one data point, as those differing viewpoints that predicted 2008 is in a group is than one data point as they all covered a different mechanism of a set of systems as it was not just one system that crashed but several.
We have the same problem in medicine, ritalin is based on one system solution of ADHD...however if you foloow a multiple system approach you can take Phenyanalinine and Darek chocolate, L-glutamine, etc and actually have a better solution of managing adhd without having to do drug holidays.
Crashes are convergence of several data points of crashes in multiple systems that converge together to produce abig crash.
Is the Log4j vun one tiny crash of one system or a crash of several?
[+] [-] arubania|4 years ago|reply
His "proven track record" would be less than 10%, I'd imagine.
[+] [-] PaywallBuster|4 years ago|reply
Could be a simple monthly subscription which buys managed basket of options (call on VIX, puts on SP500, Nasdaq, etc)
Or should the average retail investor get into the Black Swan ETF (https://www.amplifyetfs.com/swan.html) or similar to protect against these events?
[+] [-] upofadown|4 years ago|reply
Returns? Or prices?
Unless you actually cash out you are still supporting the collective delusion. That is true even over booms and busts.
[+] [-] kimsant|4 years ago|reply
I don't value the outcome (you call it luck), but the reasoning behind.
[+] [-] 4monthsaway|4 years ago|reply
[+] [-] arielweisberg|4 years ago|reply
[+] [-] fnord77|4 years ago|reply
BTW, Michael Burry seems completely unhinged and I can't help but wonder if he just had pure luck.
Any real reasons, like 2008 where people started to realize security products were built on fraud at a massive scale? I mean crypto is a ponzi scheme but when that implodes 1 to 100 years from now, that's not going to make a big denty in the economic
[+] [-] 02020202|4 years ago|reply
[deleted]
[+] [-] newaccount2021|4 years ago|reply
[deleted]
[+] [-] arc-in-space|4 years ago|reply
Did you mean to say low, or are you talking about nominal rates?
[+] [-] bhaak|4 years ago|reply
Yes, there will be a crash, there always is, but it will play out differently than the ones before. History only rhymes, never repeats itself.
There have been calls for a big crash for decades now but no crash in this millennium was the big one.
"The S&P 500 fell 57% during the 2008 crisis, 49% in the dot-com bubble, and 34% during the COVID-19 crash. So if the most pessimistic predictions prove true, the next one would be the most dramatic crash since the Great Depression."
We already had big crashes in the last decades but we always came round (more or less). We are no longer on the gold standard, governments have plenty of experiences with crashes. I'm not convinced that we'll be seeing a crippling crash again.
[+] [-] flyinglizard|4 years ago|reply
To the psychology of "the market always go up" we've now collectively added - through our interconnected hivemind - "buying the dip", and on the opposite end we have inflation coming after those who are more conservative, pushing them into taking uncomfortable risks.
[+] [-] crooked-v|4 years ago|reply
This is a key thing. A Great Depression-level crash is basically impossible in any modern country with a decent credit rating and even vaguely competent financial management.
[+] [-] buzzwords|4 years ago|reply
[+] [-] sofixa|4 years ago|reply
Jus because they make a big part of the index doesn't automatically mean they're overvalued. Apple, Alphabet, Amazon, Meta are huge, highly profitable, and with high growth. Their valuations make more or less sense. Tesla is certainly an outlier though, and highly overvalued.
[+] [-] Blammar|4 years ago|reply
[+] [-] Blammar|4 years ago|reply
1. The Roaring Twenties market peaked in August 1929 with a ~6100 Dow.
2. Market low in November 1929 at ~3800, a ~38% drop. The "big crash" was just ~4400 to ~3800.
3. Then it RECOVERED to ~4700 by March 1930, a ~24% gain.
4. It then dropped over a year to ~3000 by March 1931, a ~37% drop.
5. Then the real crash to ~900 in June 1932, a ~70% additional drop.
People had a LOT of time and a LOT of additional information about the economy to decide to get their funds out of the market.
I have finally drilled into my skull that I am unable to time the markets with reliability. So I hold across corrections. In 1930 I wouldn't have done anything -- I wasn't born yet.
[+] [-] simo7|4 years ago|reply
Also, precisely because macro is hard, these analyses often feel superficial.
Inflation, especially if exogenous, can negatively impact the economy but at the same time cash-alternative assets become more attractive. What's the ultimate effect there?
And what about historically low interest rates? Don’t they warrant a shift in investment preferences towards stocks?
Wether a macro prediction turns out to be right or wrong it’s rare to read a deeper argument than “things are too high must go down”.
[+] [-] odiroot|4 years ago|reply
It seems the safest option was to cash out and buy gold or land.
[+] [-] ekianjo|4 years ago|reply
Also there is no one out there who can predict crashes one after the other with accuracy, no matter how right they were in 2008.
[+] [-] Paul_S|4 years ago|reply
The reason I think that is if the pandemic didn't manage it than nothing short of a global war will be enough to shake people's belief in infinite growth (which is what keeps the market alive).
[+] [-] pjc50|4 years ago|reply
It's statistically likely that there will be one eventually, they seem to be some sort of Poisson process, just as it is likely there will eventually be another earthquake that destroys the Bay Area again. That doesn't mean it can be predicted even to the nearest year.
People were predicting a crash several years before the 2008 mortgage crash, and even so house prices have rebounded since then.
I do regard the arrival of major brands into NFTs and the purchase of crypto-themed sports teams and stadiums as a leading crash indicator, but a lot of people have lost money trying to predict crypto crashes.
[+] [-] leobg|4 years ago|reply
As a holder of Tesla stock, I do not want to make bad decisions. So I don’t want to shrug off the points being raised. There are no simple explanations. Nobody can predict the future. And whether I like a message or not says nothing about how valid it is.
So I tried to do my homework. I wrote it up here[1], if anyone is interested.
[1] https://leobg.medium.com/should-you-sell-your-tsla-holdings-...
[+] [-] kkjjkgjjgg|4 years ago|reply
But what if the shoeshine boys say a crash is coming and it's time to get out of the market?
How does one even get out of the market? There seems to be a huge inflation issue going on, so simply exchanging stocks for money does not seem the way to go, either?
[+] [-] frontman1988|4 years ago|reply
[+] [-] bellyfullofbac|4 years ago|reply
[+] [-] romankolpak|4 years ago|reply
Did we learn how to tame and limit the blast radius of crashes or am I misunderstanding QE?
[+] [-] lottin|4 years ago|reply
[+] [-] adflux|4 years ago|reply
[+] [-] neilwilson|4 years ago|reply
What it is is an exchange of assets that pay, say, 2.5% for once that pay federal funds rate. That's a net reduction in income for banks.
QE is just an assets swap attempting to reshape the longer term yield curve that hasn't been pulled down by setting rates near zero. It's got nothing to do with 'injecting money'.
For that you need to look at the fiscal flow data: spending less taxes.
[+] [-] blip54321|4 years ago|reply
[+] [-] bern4444|4 years ago|reply
I doubt they're willing to bet the money.
[+] [-] flyinglizard|4 years ago|reply
[+] [-] farmin|4 years ago|reply
[+] [-] thinkingemote|4 years ago|reply
[+] [-] edmcnulty101|4 years ago|reply
This psychological phenomenon also applies to prediction of stock market crashes.
[+] [-] StrLght|4 years ago|reply
After reading articles like this you always have to remember that the market can remain irrational longer than you can remain solvent.
[+] [-] xivzgrev|4 years ago|reply
[+] [-] sys_64738|4 years ago|reply
[+] [-] mercy_dude|4 years ago|reply
[+] [-] mikevm|4 years ago|reply
You can use something like https://recessionalert.com/ or a combination of your own signals to time the exit of the market. Of course, it will never be perfect and there will be times where you will get a false positive, but being right most of the time can still massively reduce risk.
Big drawdowns really hurt the geometric compounding of returns. A 50% loss requires a 100% gain to offset.
[+] [-] sys_64738|4 years ago|reply
[+] [-] baal80spam|4 years ago|reply
I think you meant 2020 March?
[+] [-] actually_a_dog|4 years ago|reply
[+] [-] anonu|4 years ago|reply
You'll always have the people standing on top of the soap box predicting the end of the world. They're not wrong. The end of the world will come one day. Its just close to impossible to figure out when.
As the economist Keynes would say, “The stock market can remain irrational longer than you can remain solvent."
Also, considering 2 things: first, timing the market perfectly is near impossible. second, market moves from the bottom left to the top-right of the graph over a very long term. If you are a long term investor, the safest, smartest, best thing you can do is to do nothing.