A whole lot of aphorisms in this commentary about falling knives and dead cats, but very little actual information.
If you're trying to time the bottom you may as well take your money to the blackjack table. The quants are probably going to make a bunch of money, but if you're just a regular person, you should probably just continue making your regularly scheduled 401k contributions and diversified investments. Historically speaking, all the movement is going to average out in the long run to modest gains.
Ah, but those quants are going to make a bunch of money...
There's a cottage industry forming around finding market distortions caused by bad algos. You'd think that there wouldn't be a bunch of bots running around making stupid decisions, but there are a lot of bots that haven't been updated in some time and were put in place according to some idealized rule-based model in some esoteric area of finance that one guy came up with.
It's kind of like asking yourself seriously how many computers out there are running outdated software. The less fundamentals matter, the more computers handle various activities that have a more or less direct impact on prices of marketable securities, the more this is a valid strategy. It's basically anomaly detection on very messy data.
If transaction costs keep coming down and data becomes cheaper (both of which seem likely), trading as an independent might become less ludicrous than it is. And to be clear, it is currently ludicrous. Transaction costs will eat up any potential gains on the retail side unless you're operating with very large amounts of money.
Someone really bit the dust this morning in ETF land. Lots of US ETFs were down 10,20,30% and were halted due to circuit breakers. There is some quant/market-making firm out there that is really paying for this today.
Could one make a bot to make money off crashes like these (like gp post suggested). It would seem circuit breakers would limit that possibility, and also, didn't they revert trades in the past during such flash crashes as well?
Yes - if you have better information than everyone else - or at least can extrapolate where the fair value of products are based on where other things are trading - then you would be able to make a bunch of money. On the other hand - many of these names kept flipping their circuit breakers on and off. So, not much volume may have traded at these "wrong" prices. I was expecting a lot of CEE (Clearly Erroneous Executions) to be raised this morning in all these ETFs - but I haven't seen it yet.
You'd think that there wouldn't be a bunch of bots running around making stupid decisions, but there are a lot of bots that haven't been updated in some time and were put in place according to some idealized rule-based model in some esoteric area of finance that one guy came up with.
There are other reasons why stupid decisions are being made by bots.
For example, response times matter. Often you have a tradeoff between making a bad decision quickly, or a good decision more slowly. It isn't clear that being smart is worthwhile...
Historically speaking, when has the Fed kept interest rates at ZERO for 7 years? After pumping QE full throttle at $80B/mo? The economy has been in continuous "recovery" mode since '08, but not much has actually recovered. The market is going to collapse my friend because, historically speaking, we are in dark, uncharted territory and have lost our way back.
Historically we've always been in dark, uncharted territory.
There are only two things you can guarantee about the market: First, it will fluctuate. Second, those fluctuations will be unwittingly used as a Rorschach test by everyone with a political axe to grind.
Actually, I think it's fair to point out that the sophistication of the financial markets, vis-a-vis fiat currency, drastically outstrips the capabilities of regulators and financial decision makers to comprehend and/or manage with any believable outcome.
It's less fair, though, to say, "Nobody knows with what will happen next, therefore X will happen next," as the grandparent did. Surrounding the argument from uncertainty with a few popular talking points doesn't make it any less fallacious.
I see the grandparent as pointing out Cause-and-Effect more than one of uncertainty, or simply dismissing volatility as media-fodder "political gamesmanship" as your response seemed to imply. I think there is a significant amount of visible actions and structures in global and US finance which indicate that yes, we have entered into conditions that refuse to abide by 'traditional thinking' on how to solve problems. Thus, I agree with the initial postulation that it is appropriate to be fearful of the conditions at present, built up over many years of other decisions, which may not be solvable by the same actors thus far.
We were also in uncharted territory when the stock market collapsed in 1929. The market had never crashed like that before.
The market had also never crashed like 2000 because the internet tech sector had never existed like that before.
The market had also never crashed like in 2008 because home loans had never been so lax in terms of lending such highly-leveraged loans to such low quality lenders.
Every new crash lies within dark, uncharted territory because no one can predict the future and a crash could only come about from a set of new circumstances we couldn't have predicted before (or else it wouldn't have crashed).
Exactly. This is why I don't follow the hypothesis that we're witnessing a crash due to unhealthy economic indicators/behaviors (debt ratios, QE, interest rates, etc). Of course those things matter, and they certainly suggest the economy is in bad shape (or at least on some pretty intense life support), but they don't seem to trigger crashes by themselves - the indicators and alarm signals have been painfully obvious for years now, and the market should have already taken them into consideration (at least to some degree).
As you say, we can't predict future crashes or the circumstances that trigger them, and I'm not entirely sure we've seen the trigger for a crash now. Perhaps we've set ourselves up for one, but it's doubtful that the indicators themselves will "pop the balloon".
In personal finance, you can use a variety of tricks to hide your bad finances for a while, but it's not usually your debt-to-income ratio (or any other technical indicator) that triggers bankruptcy; more often than not, people keep digging themselves deeper until the bank actually knocks on the door to repossess the house. Governments have historically shown that they can keep the game going far longer than any bank might allow (there are no real terms attached to their debt when they can literally print their own money).
We probably won't know the trigger this time (or any other time) until a collapse is already well underway, if it's indeed happening.
Maybe this doesn't matter, but how did you leave out the long history of market crashes prior to 1929 [1], and how did you leave out the S&L crisis [2]? That is some really selective reading of history.
> a crash could only come about from a set of new circumstances we couldn't have predicted before (or else it wouldn't have crashed)
This claim isn't actually correct. Economic history is full of crashes and recessions where nothing new happened.
The crash (or correction) of 2015 might be because of student loans & labor participation rates of recent graduates. The load is such that many of them could not grow into the consumer role to the degree that the economy needed of them in order to grow. And reducing growth/recovery even further, stagnant wages further hold back consumption.
2008 and 2015 are economic events which feel to me like they're based in inequality manifesting in different ways.
New graduates are a relatively small slice off the overall workforce and they have a long time to pay of their loans. I don't see any mechanism there which would cause a crash. We've seen quite clearly that over-subsidising their debt burden simply causes them to take on larger loans - it doesn't help.
The problem for those younger people entering the market is not that they don't consume - in fact, they consume readily - but that they can't afford property and don't receive adequate pensions or other benefits.
It's not that they don't consume, it's that that don't consume to the same degree of past demographics (they simply can't). That consumption would have worked its way through many hands (businesses & employees) causing a multiplier effect vs going to pay back a loan. So larger scales of student debt, aren't just larger numbers on the balance sheets, it pulls money out of the active economy.
If they can't afford to buy a property, a whole cascade of secondary 'new place' purchases don't happen.. it's a symptom of not enough circulating money at the center of society to sustain the economy.
The crash part comes when investors look at falling activity in China, and falling commodity prices as strong indicators that global demand is falling.
The difficult part of arguing economics is that it's a feedback loop - not even a clean loop but a messy cyclic network. One can point a myriad of direct relationships between elements of the network which are true, yet completely miss why the overall network is moving one way or another. It's not just political axe's being ground (and dismissing arguments as political is itself political), but schools of economic theory and social values. If we actually knew what to concentrate on as the root drivers of crashes - we wouldn't have crashes.
That's a ridiculous assertion. The trivialities may differ, but fundamentals are generally pretty close. Crashes happen when reality catches up to people's perceptions.
The phenomenon where lots of cheap capital causes junk companies to do dumb things fueled by debt isn't a new one.
On earth, a zero interest rate indicates a sick or at least stalled economy. The rate cannot be held at zero for much longer without risking a deeper debt via evermore unhealthy credit expansion, yet the consequences of raising it, even a little, will likely crush global markets as investors react etc. There is no question this economy is quite sick and has been breathing with aid of the Fed's iron lung so long that it probably can no longer sustain itself without resetting (hard).
Also of note: US worker demographics do not substantiate the narrative that a recovery is going on. Jobs added are typically in the service industry, and a large percentage of those are part-time situations. Also the only age group that has added jobs since 2008 is the 55 and up cohort, which only further punishes the under-employed youth with significant student loan / other debt burdens and stalls the general progression into higher classes. I have my suspicions that the 55 and up group simply can't retire (no savings) or refuses to retire (standard of living).
Basically what I see are indicators the collapse will come around by way of massive defaults on student load debt. This will be combined with Federal Government idiocy promising Baby Boomers that the benefits will aways be there for them as a pandering for votes. Everybody knows full well the lower tiers of society and the working population are forced to make do with unapologetically low wages which aren't condusive to a healthy tax system, but there's no end to people voting against self-interest because they're clouded ideologically.
I'm not sure a total reset is this time or this year but probably next summer it'll be the focus of all the Presidential candidates.
We will retire and the Fed will end up bailing out the IOUs on the SS trust fund.
This is not a problem so long as it's done once. All SS money ends up strengthening the metric formerly known as M3, so it'll work out just fine.
The problem is the closely-held belief that There Must Be Suffering or we're not being responsible adults. The economy has been liquidity constrained ( outside of bubbles ) since 1980, with the odd 24 or 12 month period off.
Look, even if the Baby Boomer cohort does retire and even if Social Security was funded properly, that leaves the stunning inflation of medical costs and significantly longer-than-forecasted life span of that population as yet one more entitlement economic choke-point that creates problems. There's also the closely held belief that "I paid into this system and I'm going to get everything I deserve!" which doesn't jibe with the decades of voting for people who mis-managed the finances. I don't forsee SS/entitlements "working out fine" barring drastic changes, such as collecting large swaths of destitute and poor Senior Citizens, busing them out to some reservation with centralized health care, and calling it a day.
The medical thing will resolve itself. The business model to handle it hasn't emerged yet. No manner of price jiggering is gonna add capacity to the medical system, so alternatives will be found.
Medicare will be a second-tier service. That's nearly inevitable. But nobody will do anything about this until they have to.
And frankly, longevity of Baby Boomers doesn't seem as likely to work out as it did for the WWII and Silent Generations.
I agree wholeheartedly about "mismanaged the finances" but this is the world we live in.
>The problem is the closely-held belief that There Must Be Suffering or we're not being responsible adults.
While this is quite true, there are underlying demographic factors to take into account. Namely, insofar as voting means anything at all, Generations X and Y together now outnumber the Baby Boomers among voting, working adults. This means that there is now an active, demographically-driven political conflict between the interest of incumbent creditors and the interest of an increasingly large majority of the voting, working adult public.
The real-nominal confusion again. Zero interest rates wouldn't indicate a stalled economy if deflation was at 4%. They would be a terrible thing if inflation was high. Neither is true right now, though.
Well I think there's some pretty clear correlation that numerous large companies have been using cheap credit in the bond market to buy back shares at a rapid pace (billions) and further inflate the status of the equities market. That's the cheap credit that isn't doing anything other than fleecing the non-investor class. It's simply financial engineering dependent on access to cheap credit, from what I understand.
Yes, buy backs has been a large contributor to indices heading upwards. A lot of these companies issue their own bonds at rates lower than even their dividends.
In the public bond market, how is lending fleecing the "non-investor class"?
How? Because the Federal Reserve enables the cheap credit pegged to a near-zero interest rate to institutions on Wall Street, who turn around and loan to large organizations through channels by which the Wall Street firms will receive compensation by way of financial transactions. If you add up all the pocketing that goes along before a single retail investor has a shot at a position, then you'll understand what I meant by the 'fleecing' comment. Well, that and go back to the first point that the Federal Reserve's ridiculously low interest rate for the past half-dozen years punishes Savers, who are not investors in the market directly (that's why they're called savers), and that's a very large population being taken advantage of by a sophisticated system.
> The equilibrium interest rate is somewhere close to zero
Really? Who are all these people who -- with their own money -- are willing to lend $100mm today for $100.05mm in a decade?
If there are people willing to lend OTHER PEOPLE's money for near-zero rates, that doesn't count. Because ostensibly all money has to be someone's money. And if it's not -- like say if it's the Fed's money -- then that's clearly some kind of forcing function that can totally disturb the natural equilibrium.
The only way that interest rates accurately reflect people's true time preference for money (which is what it's supposed to be, really) is if all money loaned is money owned by a real human being, somehow, somewhere, who has actual influence over what is being done with it. If there's money in the system that doesn't fit that criteria, you're screwing with the interest rate in a non-natural way and suggesting that this artifice is reflective of the aggregate time-preference for money is totally bonkers.
People ARE buying federal bonds at that rate, right? You can find a figure for the sales, look at the yield curve, and quantify exactly how many people are acting that way with their own money (or how much money, at least).
Looking at http://www.treasury.gov/resource-center/data-chart-center/in..., the yield for 10 years is actually more like 2%. Less than a year is very close to 0, so there are apparently a ton of people out there who will lend you money for 1 year at 0.33% interest.
They're not loaning it to the Fed, they're borrowing it from the Fed and loaning it to the Treasury. By doing it this way everyone gets to pretend that the Fed isn't the entity buying government debt, and so it's not "monetizing the debt" and therefore -- somehow miraculously -- it isn't outright theft.
Ultimately though it's not as though banks are making the decision to loan to the Treasury at very low rates all by themselves. It was coordinated how the money flows would happen and it would do two things: allow the banks to repair their balance sheets through "free money" loans and also help the government out of a bind where there was nobody to buy their debt that they desperately needed in order to fund expansions of social services during the downturn.
Personally I think that it's pretty immoral to steal from savers to bail out borrowers, but that's because I'm a saver who's been locked out of the housing market by not having gotten in prior to prices going 2x, 3x, 5x or whatever. Ultimately I think the whole thing is going to end very badly, but of course I have no idea how long it'll take. It might take another 2-3 years, it might take another 20-30. No way to know how long the speculative mania will last.
As those bonds mature, the Fed is continually buying more to keep their balance relatively constant. Nothing is "over" until they manage to withdraw all that extra liquidity.
Exactly! It's happened in the past. Inflation starts to creep up, but the economy is still lagging. The Fed is then stuck between reining in inflation and potentially stunting future growth. Pull back too late and you end up with the Carter years: mediocre growth and an inflation in the teens.
This is my favorite part. This is how most keynesians react when confronted with the harsh realities of QE. This and "the consumers just aren't spending enough." Ofc it's never enough QE and never enough spending. Meanwhile that creaking sound....
Most Keynesians I've seen seem to think QE is a fairly weak tool, from a "complete control of policy" perspective, but that it remains, in certain circumstances, marginally better than the central bank doing nothing while the government also fails to execute fiscal stimulus when it is needed.
For now... QE 4 is coming, there is no doubt. It's the only tool in the chest. This time around though it won't be parked directly in the banks, but more likely it will be helicoptered directly to consumers, probably in the form of tax breaks, directly or indirectly. QE 4 will happen, but it still won't work of course because the economy sucks and people won't spend it, it will find its way back into the banks after all.
> QE 4 is coming, there is no doubt. It's the only tool in the chest.
Only if -- as you apparently do -- you redefine "QE" so broadly as to include not only every tool in the chest, but tools in completely different chests, as well.
> This time around though it won't be parked directly in the banks, but more likely it will be helicoptered directly to consumers, probably in the form of tax breaks, directly or indirectly.
QE is a kind of monetary policy, tax breaks are fiscal policy (and QE is specifically monetary stimulus by central bank purchase of financial assets from financial institutions.) These differ in kind (not degree) and authority -- the Federal Reserve can do monetary policy like QE, but not tax breaks; only Congress can do fiscal stimulus.
But if you're going to classify even tax breaks as QE4, then, sure, sooner or later there's going to be some tax breaks to somebody for something. Big enough to really classify as QE4? I doubt it.
If you're just a regular person, you shouldn't be trying to make millisecond-timing decisions. But you can absolutely say "thus-and-such appears to be systematically underpriced" and make a decision to transition some funds toward bargains.
I recognized there were bargains to be had in March of 2009. I didn't hit the exact bottom (March 6), but I got some pretty nice deals on March 12.
Right now, I wouldn't go out of my way to make excess contributions. The signal isn't strong enough. But sometimes it is.
The only way quants can make money is from active traders on the other side. It's impossible for quants to make money off buy and hold index investors. If everyone took your advice (and I do), there'd be no such thing as quants
The typical self-described "buy and hold investor" I know is actually a "buy and hold then panic and sell" investor. Take a look at r/investing to see what I'm talking about. I'm not criticizing them per se; it's unnerving to imagine half your life savings or retirement being gone in a flash.
Not necessarily, assuming there's still a whole lot of economic development, growth, and innovation left before we achieve stasis. I think we've got generations left to go before we shift into a new paradigm.
If you're trying to time the bottom you may as well take your money to the blackjack table. The quants are probably going to make a bunch of money, but if you're just a regular person, you should probably just continue making your regularly scheduled 401k contributions and diversified investments. Historically speaking, all the movement is going to average out in the long run to modest gains.