Right now all three of those are true, to varying degrees. If you correctly called the top in 2007 and got out of the market, it wouldn't matter unless you got back in before 2012. As someone who lived through those years - at every point during that period, there was a loud chorus of voices saying that we were about to have a double-dip, prices didn't really correct far enough, and fair value indicated they should've gone back to where they were in 2002-2004.
Remember that if you're in cash, you've chosen to put your wealth in an asset class whose controlling authority's stated policy is to make it worth consistently less every year.
a) They were getting out before the top, they'd sell to some other poor fool when it was time
b) The world had changed completely and it was a new paradigm (it's different this time!)
It's wise to avoid cash in the long term, but it's unwise to avoid it completely, and certainly when you sense things are getting a little crazy, it is not at all unwise to shift some of your holdings to cash, though you'll be mocked for it by many, for whom risk is a distant prospect which happens to some other poor sucker.
IMHO, we're at Greenspan's "irrational exuberance" speech of 1996. If you pulled out of the NASDAQ in 1996, you never made it back. (The nadir of the dot-com bust had the NASDAQ at 1139 in Sept 2002; it was at 1133 in July 1996.) In the meantime you would've missed out on 4x gains in the NASDAQ itself, and up to 100x in certain specific assets.
My indicator for when we're near the top of the bubble and it's time to pull out is that folks like you will drop out of the discussion and start keeping their opinions to themselves. That's when it's time to sell; when you're ridiculed for it.
Perhaps you're right though, and this has a long way to run... I'm afraid I just can't bring myself to invest in things which are overvalued due to FOMO rather than actually making money or having a prospect of making money. Old-fashioned I know.
Re pulling out of NASDAQ, I'm not sure that's a good example. You never made it back implies you lost something. You might have had indifferent returns in other assets, but not a loss. If you invested in 1999 on the other hand, you made a loss till 2013, over 10 years later, after another bubble burst. To me it is more important to avoid risk of extreme loss than attempt to chase extreme gains.
The Shiller book on Irrational Exuberance is better than the Greenspan movie IMO ;)
So depending on what the central bank will do, cash might be good or not.
https://www.cnn.com/business/markets/commodities/
Crude oil, natural gas, silver, corn, wheat, lumber, all up 2-3x since the bottom in April. In many cases (i.e. everything not oil-related), this is not just recovery from a dip: prices are significantly higher than 2017-2020 levels.
That said, I don't buy the conventional Wall Street narrative that this means the Fed'll raise rates and we'll get a stock market crash. Or rather, I believe that'll happen, but it'll be too late and the currency will have devalued 10x or more by then. The Fed has pledged to keep rates low through 2023, and to allow inflation to overshoot the 2% target to make up for the last decade of ~1.5% inflation rates, and that any rate movements will be "well telegraphed" for a long period of time beforehand. They still have tens of millions of people out of work. I doubt they'll act until it shows up in headline CPIs for a year or two.
Once inflation rates really get going, it's hard to tamp them down. The Fed has a pretty fun (and quite educational) game where you get to play the Fed chair:
https://www.sffed-education.org/chairthefed/default
Try playing one of the inflationary scenarios (they're random, but just keep playing till you get one with a tight labor market rather than a housing crash or recession). If you don't raise rates early and often, you quickly get into a situation where inflation is 7-8% and you have to hike rates to 15% or more to tamp it down. Why? Because inflationary expectations are subtracted from the nominal interest rate to get to the real interest rate. If inflation is high, you have to hike nominal rates even higher to get real rates to go up at all, and you have to hike real rates pretty high to make a meaningful dent in the money supply.
Im curious why you think inflation in the US is going to go from <2%, not to 3, or 5, or 10%, but to 1000%?
The basic money equation from macro-econ 101 is MV = PQ: money supply * velocity of money = average price level * quantity of goods sold. Under normal conditions, V is assumed to be constant, and so you either increase the money supply to keep up with greater economic output (M ∝ Q) or if you increase it too fast, you get inflation (M ∝ P). This is "ordinary" inflation: it's predictable, controllable by the central bank, and follows roughly linear equations.
When people notice and then start to assume inflation, their behavior changes. If you know that your dollars are going to be worth 20% less next year, you have an incentive to get rid of your dollars as quickly as possible. You'll spend them as soon as you get them, because they'll quickly become worthless otherwise. This shows up as an increase in V, and it means that even holding the money supply constant, you still get inflation (V ∝ P). Moreover, because the cause of the increased price level was increased velocity of money, this feedback loop becomes self-reinforcing: the higher prices go, the quicker people want to get rid of their money and turn them into hard goods. At this point the central bank has lost control of the economy, and you have hyperinflation.
Looking at data on a few dozen instances of hyperinflation, the threshold seems to be ~20% inflation annually. Below this, consumers write off inflation as annoying but don't change their behavior significantly. Above it, hyperinflation seems inevitable: there are very few instances of sustained inflation above 20%/year where the government has later managed to bring it down, and it usually ends with hyperinflation, a currency crisis, and the replacement of the currency (and usually government) with a new one.
We've observed price increases > 20% in a number of industries this year: commodities (listed above), housing, food, and labor is getting up there. It hasn't filtered down into CPI numbers because those are averages, and inflation is flat or even negative among some demographics. But prices in fundamental industries tend to bubble up eventually, and if the Fed is focused on bringing back the stagnant parts of the economy while other areas are raising prices at 50-100%/year, inflation will cross that threshold throughout the economy before they can react.
(Incidentally, historical incidents of hyperinflation usually happen in the transition between a command to a market economy, the two most common examples being when wartime gives way to peacetime, and when communism gives way to capitalism. The transition from a pandemic economy to a normal economy has many elements in common with that: there's a large shift in consumer demand while the economy has been optimizing for pandemic production for the last year.)
>(Incidentally, historical incidents of hyperinflation usually happen in the transition between a command to a market economy,
Most command economies simply didn't provide enough production capacity to meet the demand of all citizens.
>the two most common examples being when wartime gives way to peacetime, and when communism gives way to capitalism.
China had massive food shortages that were papered over by price controls. Just because someone fakes the numbers doesn't mean there was food for everyone. By introducing a free market you are merely revealing an existing collapse in production
The Weimar Republik is a classic example of a collapse in production capacity. Germany lost the war, winners destroy factories and there is a lack of working age men because they died in the war. People don't have fond memories of there being food everywhere and some speculating capitalist driving up prices because of greed. No, there were many days where they got three slices of bread per day and a hand sized lump of coal to heat their home.
>The transition from a pandemic economy to a normal economy has many elements in common with that: there's a large shift in consumer demand while the economy has been optimizing for pandemic production for the last year.)
How exactly is that going to result in a food shortage?
It's also interesting to plot all these commodities (as well as cryptocurrencies) in terms of the S&P 500, which is rapidly becoming the true store of value. I think you'll find that their price is relatively constant in those terms, and it's the dollar that's been falling.
An asset that isn't used as a medium of exchange does not have the characteristic of inflation. An asset can have an inflated price (in a currency) but the asset itself (in this case copper) cannot have inflation if its not used as a medium of exchange. The distinction is important.
a) "epistemic arrogance" -- you believe you're smarter and know more than everyone else;
b) "heads, you might win, tails, everyone loses anyway" -- so you might as well gamble on heads;
c) "f*ck it, load up!"
And there's also d):
d) "wait it out" -- if you're already rich and infinitely patient, like Mr. Buffett. Maybe find a hobby to occupy your brain -- e.g., play Bridge online.
No, more like you decide to be less greedy than everyone else. You choose to leave money on the table in favor of getting out early.
If you think things are overvalued, there are two ways for it to go:
- the value of equities crashes in nominal terms and consumer prices are stable
- the value of the dollar itself declines, so that the nominal values of equities stay the same but consumer prices inflate to make the real value of equities revert to the norm
It’s probably a mix of a and b, but outcomes that tilt more heavily towards the latter would hurt people holding cash more. And right now b is closer to official Fed policy, since it would prefer that to getting into a Japanese deflation trap.
We might as well consider VTI to be better than FDIC insured on a 5+ year timeframe. FDIC only protects nominal values. The Fed can protect real values.
I am guessing we will see cash devalue roughly 2x in the next five years. As a result, there's a scramble where to put money safely.
If the alternative -- cash -- loses half of its value once COVID19 financial measures start unwinding, all of a sudden, investments just need a 50% ROI to be profitable. If I dump a million dollars into a startup, and it sells for the equivalent of $500k in five years ($1M after inflation), I've come out neutral.
I wrote that badly, didn't I? Let me rephrase that more clearly: Let's say I expect 100% inflation over the next 5 years.
I can buy an investment which will lose 50% of its real value over that time. I come out neutral compared to holding cash.
In dollars: I buy today at a nominal value of $1 million, and sell at $1 million. Same as cash.
In value: I buy today at a real value of $1 million. I sell at a real value of $500k in 2020 dollars.
I can buy into investments whose real value is falling, and still come out ahead in inflationary times. Value-losing startups suddenly become okay investments since they lose less value than dollars.
Both due to COVID19 and government debt generally, I think we're heading for high inflation.... People are looking for assets to put money into. Real values can go going down, while nominal (dollar) values can be going up.
https://en.wikipedia.org/wiki/Real_versus_nominal_value_(eco...
Selling at $2 million would mean I didn't lose value, but I'm not sure people are finding alternative investments which won't lose value; it's why people are grabbing bitcoin, and stocks are hot.
No but society has basically locked us all into it. I made a previous comment on why devaluing the currency causes a worldwide game theory of economic actors protecting their purchasing power to counteract it: https://news.ycombinator.com/item?id=15728480
Can we reconfigure society? It doesn't seem like it. Some critics today think that Bitcoin's limit of 21 million to support its philosophy against inflation is wrong.
Hey, maybe it isn't society that wants inflation but it's the US Govt and/or The Fed Reserve forcing it on us. Well, surveys say the majority of Americans want $2000 stimulus checks so that money has to come from somewhere. It's easier for politicians to print new money rather than sell Yellowstone Park to China for a few trillion dollars.
I'm not saying I'm against government regulation. I certainly am not. At all. I'd like to see some way to control inflation and the monetary system for good. But I'm against it getting too out of control in the first place. That's in my own interests. Maybe I'm wrong on that. I don't mind inflation. When it's controlled I want it to decrease, because, as I've said in other posts, more economic growth creates less government interference and I think that's what we want for Bitcoin. But I don't want anything that gets too out of control to stop the currency from appreciating. When it's artificially forced onto the market I'd like to see it to decline and be replaced with something, maybe a currency with a higher cap or something.
It's all up to us, the Bitcoin community. You choose to participate in the process or you don't.
printing money out of thin air, vs borrowing money (via gov't bonds) are different things. I believe the US borrowed this money for the stimulus cheques.
Borrowed from taxpayers. The instrument is an AOT tax deduction/rebate for the 2021 tax year. "We know you are going to pay your taxes, you can have some of it back right now".
So anyway, you have this massive influx of savings flowing into the system, buying up investable assets to save for retirement, and thus bidding up prices. They call this the "global savings glut." There are OLG (overlapping generation) models that show how this behavior works in a simplified setting; you can easily get over-saving, dynamic inefficiency, and "rational bubbles" as an outcome in an OLG model with different demographic curves.
which is how new jobs are created - from this mechanism of investment (and acceptable returns from it). The problem is whether these jobs produce value in the future, at a greater rate than the returns being expected by the owners. If the excess returns are all captured by the owners, society wouldn't have progressed forward. But if these jobs brought more value than just the ROI, then it's a good outcome.
https://www.investopedia.com/ask/answers/072815/what-margina...
The net effect is that consumption (and associated demand) is suppressed at the lower to middle end of the income scale, where individuals' income isn't enough to sustain their needs + wants. When these individuals spend, the demand for labor + raw materials per $ spent is high, because they are often buying consumables or durables (food, washing machines, etc).
At the high end of the income/wealth distribution, there are few needs that aren't met or exceeded, so their wealth ends up chasing assets and investments that induce far less demand for labor per $ invested. A the extreme end of this are private equity funds (billions managed by a small number of people).
In this case, the imbalance has existed for years and is getting more pronounced. My thoughts here are based on that dynamic. If this changes, then I'd likely change the advice.
It's not entirely unlike mortgage rates, tbh; when you refi matters, due to the rates being variable. When you raise also matters, but sometimes raising is the important part, and the terms are the terms.
How can money which can't be spent hold value?
Think about it. The fed gives a bank money, the bank gives money to you so you can build a house and then the city denies you the construction permit. You decide to just buy an existing house instead.
It also may take a longer time frame for the improved productivity to manifest than it does for the economic metrics to reflect it. Meaning that one thing to watch out for is that the capital abundance may recede before the investments are able to return the productivity - and that would be tragic because there are an abundance of neglected investment areas which we as a society and an economy can realize benefits. To the extent that our capital investment allocation paths don't match societal needs is the real challenge with this bubble.
Like - if you think there's too much capital compared to X - couldn't capital just be worth less or X be worth more?
You can see it in rising angel valuations, rising early-stage VC valuations, rising later-stage VC valuations, rising growth-equity valuations, rising leveraged buyout valuations, rising stock market valuations, rising cryptocurrency prices, rising home prices, etc. Feeding frenzies and bidding wars for high quality assets have become more and more common. Asset prices keep going up and up and up...
The multi-trillion-dollar question:
Is this sustainable?