It's interesting that they're comparing against the 10 year bond yield to basically prove what the market knew 4 years ago when Europe started flirting with negative interest rates - TINA - There Is No Alternative, you can't put your money in a CD, savings account, or bonds, and expect to get a decent yield / return on your money. So people put their money into the stocks of dividend aristocrats (companies that have increased and maintained dividends over long periods of time) to be "bond-proxies." This pushed up those prices a lot. But no matter where you are, it seems there's not much easy money, unless you're a private VC investor.
I think the real lesson here is everyone is getting squeezed out. I feel like the other shoe is going to drop some day, but who knows when. The weaker hands (poorer people) will inevitably fold first, increasing wealth inequality, as it usually does.
Famous last words, but: I wouldn't be entirely surprised if, in 10 years' time, we'll hear the same lamentations about the stock market as we do about housing. "The older generation climbed up there and pulled up the ladder". Only slim returns, and you can't expect to make much from it unless you happened to be invested before the great re-pricing hit.
I think what might change things (at least in the US) is the demographic shifts. Housing demand (and so, related, prices) is obviously related to the number of people and what they can pay. If anything, the lowering of the 10 year yield, which is used to determine mortgage rates, allows people to spend more for a house due to the low interest rate. If interest rates go up, then the prices should go down to keep steady with what people are able to pay for a monthly mortgage.
Same thing about all the retirees eventually dying off and liquidating or handing down all this money, stock, and housing (honestly, I feel the same about political leanings, but that seems fairly steady unfortunately). Seems like if history has shown us anything, while one person might be good with money, the same can't always be said for their children (3rd generation rule - by the 3rd generation, 90% of wealthy families lose it).
I never heard about the 3rd generation rule before. But searching it seems to lead only to anecdotal reports, hearsay and a Chinese saying / belief.
The current litterature seems to suggest that on the contrary wealth easily pass down generations. The recent book Capital in the 21 century by Piketti is one of the largest analysis of wealth distribution based on tax data in most western countries for the last century.
Two economists from the bank of Italy went even further and analysed tax data up to 1427 in Florence. They found that "The top earners among the current taxpayers were found to have already been at the top of the socioeconomic ladder six centuries ago."
So it seems that the data suggest that the third generation rule might only be a way for rich people to teach their kid to be careful with their wealth don't you think?
If you have more data I would gladly read about it.
There is a problem with passing down wealth. If you split the wealth among all children it will become insignificant by the third generation. This is generally why the first born son received the entire inheritance in the past.
> If interest rates go up, then the prices should go down to keep steady with what people are able to pay for a monthly mortgage.
... this is ignoring the 10000-unit gorilla that is appreciation of the underlying based on speculative investment and not based on actual supply/demand for housing itself ...
Having expensive housing should be a benefit in principle. It's easier to justify building large apartment blocks and thereby provide lots of housing. Unfortunately nobody is building large apartment blocks.
I wouldn't bet on some major wealth-transfer from the boomers to their kids. I think a lot of them subscribe to that whole "die broke" philosophy and are using things like reverse mortgages to live it up on their inflated home equity, hoping to die just as the bank owns their home.
I can't find the link now, but at least in Australia this doesnt appear to true. We have a reverse mortgage system here, and the take up is extremely low ( I think it was <10,000 for the whole country).
Particularly with house prices here being completely insane, parents very much want to leave houses to their children.
I've also read multiple articles around how to get, or encouraging, retirees to be comfortable actually spending their retirement savings, rather than the interest/earnings from those savings, given its so hard to get a living income that way.
I think the 'die broke' crowd will be limited to a very small sliver of any generation... those poor enough that they have a chance to actually spend all their money, but well off enough that their children own their own houses ( possibly debt free )
I honestly don't see how it would work out. The vast majority of boomers are not rich. They were doing fine because they lived in an era where job training was easily available but if they lost their job before retirement they end up just as poor as their kids. They might own a nice house but it's not always where you want to live. You sell it and then go somewhere where that money is probably only enough for the down payment.
That’s what happens when people believe that “the market” is some kind of weird hybrid of a cornucopia and a perpetual motion machine..
Hopefully we’ll remember that we actually have the remedy for this in the form of redistributive tax policies (as opposed to the current inefficient tax policies that drives wealth concentration and stagnation)
Well, if you want a redistributive tax policy then the biggest change would be to make sure dividend taxes are lower than capital gains taxes.
The problem with capital gains is that they can be driven by bubbles. During bubbles investors buy a stock because the stock went up instead of looking at how the company is performing. It's a self reinforcing feedback loop because foolish investors attract even more foolish investors. A lot of those foolish investors are retail investors who are often behind when it comes to information and they often just follow the news. Think of shoeshine boys giving stock tips. They are not only late to buy but also late to sell so they buy during the peak and sell after the crash.
The easy fix is to increase capital gains taxes because it significantly decreases the gains from bubbles. At the same time dividend taxes should be decreased because you cannot "fake" dividend payments. Paying out a dividend reduces the market cap of the stock by the total dividend payments because it is merely distributing its income to investors. Even if the company borrows money to pay dividends its balance sheet will show X million debt and thereby reduce the value of the company by the value of the total dividend payment. This is equivalent to not borrowing money in the first place.
It also encourages companies to actually invest into improving their income rather than playing stock market games with short sighted policies to boost their value. This is something central banks are currently struggling with because they hand out money like crazy but don't see anyone do anything with the money.
But with housing that argument only works because there is a scarcity to housing and a fixed entry point. People want to live near London/SF/NYC for work and maybe because they like cities but the minimum for a place there is like 5-10x salary (or worse...)
How would that apply to the stock market? I suppose BRK.A has never split and now AMZN is getting a little large if you can't buy fractional shares a la RobinHood so then I guess the only parallel would be if we saw some huge stepwise increase followed by a market wide plateau (but no drop). This would cement people's positions of the invested before/after pandemic I suppose
What I'm thinking is that monetary and fiscal policy will do whatever it takes to make the masses minimally happy.
Whatever the side effects (growing wealth gap, rich making out like bandits), they don't care. As long as the masses have their minimal existence, Netflix, cheap food, etc.
Yeah it is pretty much spot on. If you are wealthy you want your assets to increase in value but what you 100% want to avoid is that the income of workers is increasing. The easiest way to achieve that is by... letting the central bank give the wealthy more money but not give the poor a single penny.
If an average worker makes $20/h and you own $100 million you want to grow to $200 million but if an average worker now makes $40/h you haven't gained anything. Worse, if inflation is greater on the consumer side (the money is flowing into assets first so this will never happen) you can actually end up with "only" a $200 million net worth but workers who demand $60/h. You are actually less wealthy than before despite the increase in net worth! Workers massively benefit from consumer inflation.
"even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment..."
Keynes: "Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some."
Keynes should have been more specific: Inflation selectively impoverishes the poor and, and enriches the politically connected, who are usually already wealthy.
Honestly the fundamental flaw is that the central bank only has one tool. It can add money to the economy but only on the supply side. In theory this is enough because companies don't exist in isolation, to operate they must always employ workers. The problem with this theory is that those workers don't have to be domestic workers. If you lend me USD to build an LCD factory I 100% won't build the factory in Wisconsin or anywhere in the US.
There are two options: Just wait (for decades) until salaries in China have caught up to western levels. Introduce an artificial stimulus for domestic work.
That artificial stimulus is not the responsibility of the central bank. The rest of the government has to do this.
I have to disagree with #1, if anything political entities gravitate towards the unquantifiable so that they can be seen to be acting without any real consequences attached to the outcomes.
political entities is not just people voted into office, it's also unelected high-level policy-setting bureaucrats like cabinet officials, chairpersons of the federal reserve, etc, who have the right higher education credentials that get them to the place where they are, so that the elected folks can claim "I know how how to hire the. best. people." so you must also consider educational trends in social sciences and social policy schools, like Princeton Wilson (is it called Wilson anymore?) or Ecole Sciences-Po.
Inflation most strongly acts on those who have no alternative, and only save in currency.
Broadly speaking, this means the financially unsophisticated.
It doesn't necessarily mean the poor, as (a) they have debt > savings, (b) modern inflation primarily accrues in assets rather than staples, & (c) competition for employees inflates base wages (if low unemployment).
Did you not even read the excerpt? It depresses the real value of labor wages. That is almost definitionally the poor.
Consider: You are spending 90% of your wages on day to day expenses and there is 2% targetted inflation. You have lost a whopping ~20% of your margin of survival (100%-90% == 10% -> 100% - 91.8% ~ 8%). If you are spending 20% of your wages on day to day expenses and there is 2% targetted inflation, you have lost closer to 2% of your margin of survival. It's much easier to find lifestyle changes or, more likely, shift your investment balances that will keep you prospering in the "wealthy" situation.
And, before you say "wages keep up". No they don't, otherwise the policy of using inflation to prop up employment doesn't work via the policy mechanism. Definitionally.
> they have debt > savings
You haven't been poor, have you? The wealthy are truly the consumers of low-interest debt. You can't do things like trade forex, place margin stock trades, place options, etc, so fluidly except in a low-interest rate, debt-fueled economy. These debts are awesome because the nominal payback is diluted by real loss in purchasing value. By contrast, the poor are consumers of high interest rate debt. Sometimes even in the annualized double digit regimes (sounds really bad, but this is usually short-term, on the order of weeks to months loans, so only slightly bad). These financial instruments are NOT substantially ameliorated by inflation. If you are in debt and poor, you are not waiting for hyperinflation to make it easier for you to pay off the repo man.
>Consider: You are spending 90% of your wages on day to day expenses and there is 2% targetted inflation. You have lost a whopping ~20% of your margin of survival (100%-90% == 10% -> 100% - 91.8% ~ 8%). If you are spending 20% of your wages on day to day expenses and there is 2% targetted inflation, you have lost closer to 2% of your margin of survival. It's much easier to find lifestyle changes or, more likely, shift your investment balances that will keep you prospering in the "wealthy" situation.
Where do you think does the price rise come from? From magic pixie dust? It has to come from somewhere and since every service and good is the product of human labor that means any cost increase must derive from the scarcity of labor and thus increased income for workers.
In the past 5 years the US was one of the few countries that actually hit its 2% target inflation rate and guess what? It was one of the fastest growing first world economies both in terms of GDP and income for workers. It did not suffer because of the targeted inflation, it flourished because of it. The worst effects of inflation happen way beyond 5% and no country on earth wants that type of inflation. 2% is the best compromise between stability and change and it will always stay that way.
>And, before you say "wages keep up". No they don't, otherwise the policy of using inflation to prop up employment doesn't work via the policy mechanism. Definitionally.
Wages actually can't not keep up because by definition inflation happens when demand exceeds supply. Demand for consumer goods is by definition demand for the productive output of a worker. Buying that consumer good is directly paying the wage of a worker. If worker salaries consistently lag behind consumer price inflation then a competitor can just hire the cheap labor and undercut the incumbents and thereby reduce unemployment caused by "insufficient greed". I want to clarify that when I am talking about consumer inflation I am talking about demand side inflation.
Increased wages kill relative wealth and therefore for the wealthy the best thing that could happen for them is low consumer inflation or even deflation. Inflation forces them to actually invest their wealth to keep up with inflation and that investment must employ workers or otherwise it would not catch up with inflation. With deflation they don't need to do anything. You will get poorer every year automatically.
Economics is purely about setting the right incentives. Once you have set up the right system human greed alone will drive the economy to do the right thing. Unfortunately people hate greed because it screwed them, so they hate it even more when it doesn't screw them because that ruins their sense of justice (greed is always evil).
I know plenty of smart people with extra cash who are fearful of investing. It is very, very common. Even if they are not completely afraid, they would rather pay a "financial advisor" several percentage points in wrap fees and expenses on poorly performing funds than learn about investing themselves.
Stupid question, why would the adviser not just take a well performing index, invest into a fraction of the companies based on his own judgement and then just capture a larger fee? There is still an active management component but the risk has been minimized by not straying too far from what regular ETFs are doing.
I worked with some financial advisors earlier in my career, and generally speaking they do not like to invest in individual stocks. Often the company they work for makes them push certain ETFs or mutual funds onto their clients. Often that company even has their own fund family.
A lot of people are exhausted by working 40+ hour jobs where they are treated badly allowing them mere sustenance because health and accommodation have become so unaffordable.
VC investments are hardly easy money for the limited partners. On average those investments underperform stock market indexes on a risk adjusted basis, especially outside the top tier firms who consistently get the best deal flow. Investments into VC funds are driven more by portfolio allocation policies that target uncorrelated returns.
> I think the real lesson here is everyone is getting squeezed out.
To me the lesson is if you have any idea how to create a good (> 5%) return on investment, then it's your time to shine! The world is awash in capital looking for a home, and it could be your project. I would propose the real issue is more of the berkshire hathaway problem, in that there are plenty of opportunities to make good returns, just few of them billion dollar sized (in terms of position size).
Consider something like putting solar on one's home. It can have an ROI of 10-30% (quick google), but organizing a multi-million dollar investment on others' homes is administratively tough. So the "little guy" (home owner in this case) can have an opportunity to place ~$50k at a high ROI...
Now, if you're talking about really poor (like hand to mouth) then their best investments are likely in education and skills training. A sort of intangible capital that (afaik) no market keeps track of.
I guess in general to me those summarize the Middle Class choice. Being middle class means
1. Trading marginal time for additional income/wealth. An example would be renovating your own home on after coming home from work, or being a single unit landlord and having to fix the toilet. You're trading netflix time for additional wealth generation
2. Locked in choices, choosing to own a home is a choice to accept whatever circumstances come in the next 10-25 yrs. You. lock in the the choice and the outcome (home ownership at a certain future date). Any returns beyond that are "luck" but smart middle class people make choices with high likelihood of good outcomes
This seems like an obvious result of demographic changes. Assets like a farm, as an example, become more valuable as the number of people that need to eat grow. If you need to feed fewer people your farms are less valuable.
I'm not a big fan of the TINA (There is no alternative), assertion. Sure, if you compare yields of stocks against bonds, they look relatively more attractive, but that's a strictly relative comparison. Even if bonds yield 0%, if you buy a stock that goes down 50%, as many did in the dotcom bubble, you've done much worse.
Can stocks continue their historical run up? Sure. But we're pretty clearly one catalyst away from a major correction. Will that catalyst arise in the next year? Impossible to say, but it will come eventually.
In an effort to save the economy, the Federal Reserve and Government have created a much bigger long-term problem. They've shown a willingness to prop up the stock market and removed all downside risk. Wealth inequality is ballooning to an all-time high due to large inflation of asset prices. Homes are less affordable than ever due to extraordinarily low interest rates.
And when the Fed attempted to raise rates (2018 dip) and stocks dipped a few percent, they backed off totally. Years of asset price growth is happening in a few months, which is basically a wealth transfer from the investors of tomorrow to the asset holders of today.
While government intervention has helped the real economy in the short-run, we're setting ourselves up for much bigger problems down the line.
The Fed did exactly what they needed to do. If the alternatives are a) housing prices go up, and then go down later as the Fed removes stimulus, or b) 30% unemployment, then the Fed should choose b. If asset prices crash later, that's not the Fed's problem. Their job is to prevent inflation and prevent unemployment. They've done that. The impact on the stock market is incidental.
Yes, the Fed is supposed to be concerned with inflation, but the CPI measure used to gauge inflation is not comprehensive enough. Inflation of assets, home prices, equities should be considered.
Their mandate is not comprehensive enough. They've created a huge societal risk by effectively propping up companies that took on excessive risk or were otherwise poorly managed. Yes, they blunted unemployment in the short run, but excessive risk taking is now being rewarded, which has longer run consequences.
It's natural and healthy for poorly run companies to fail in times of crises... it leads to strong companies surviving and more stability in the long run.
They've also positioned it such that it will be very difficult to raise interest rates in a reasonable timeframe. When the next crisis comes, there are fewer levers to pull.
Finally, it's pretty clear the Fed is watching the stock market closely, as they backed off on increasing rates after the market dipped in Dec 2018. Their actions show they aren't strictly abiding by their mandate (see also: they very recently changed their rules on what they consider unacceptably high inflation)
They clarified their rules -- before they just said "2%", but they switched to "an average of 2% over some period". It's not like they switched to an inflation target of 20%. Having inflation be below 2% for long periods of time is not something that ever came up before 2008, and the Fed is promising that they won't remove stimulus too soon.
I don't agree that companies failing in a recession is "natural". I guess COVID is natural, but a restaurant business that goes under because their customers are temporarily afraid of dying is not a result of being poorly run, but of bad luck. I also don't agree that there is too much risk taking -- rather I think there is too little. High interest rates on government debt rewards lazy investors who don't want to work to find good investments.
Covid did cause the market to crash. It was one of the fastest crashes in stock market history. However, the federal reserve and government acted in tandem to enact the swiftest and largest economic response to an event like this in history.
That's what drove the turnaround and led to the subsequent (and ongoing) bull market.
However, the market is much frothier now (in certain segments) than before covid hit. For example, Tesla's value has increased by 10x from the March lows. Tesla is being priced as if it will be a near monopoly on both car sales and the self driving market, which is pretty clearly not true. Even though it may take legacy automakers or Apple a few years to catch up.
There are less levers to pull than before. Interest rates are close to 0, congress has already passed trillions in new spending. Ability to counter a second dip will be more limited than before.
A catalyst would be something like accounting fraud being uncovered in one of the growth stock darlings (ala Enron), or perhaps Tesla simply reporting numbers far below expectations. Volkswagen EVs are outselling Tesla in Europe for example, so the bull thesis of a monopolistic market position is a bit weak. Another catalyst could be unexpectedly high inflation, which would indicate the Federal reserve may raise rates soon.
It's also entirely possible the market just trades close to flat for a few years until valuations level out into something more realistic.
Is it possible that we're in a "new normal" where stocks are just valued higher than historical norms in perpetuity? Maybe, but when things look this frothy, the "new normal" thesis generally doesn't pan out.
> Tesla is being priced as if it will be a near monopoly on both car sales and the self driving market, which is pretty clearly not true.
It's unlikely that Tesla will be a car sales or self driving monopoly... but their charging network is by far the best, and they allow other manufacturers to use them. I think this, in addition to the car sales, self driving, and massive speculation is what is causing the stock price to be where it is.
Well, it's pretty obvious. If the disease wins it wins. It will kill people and that's all there is to it.
Young people will argue that the victims were older people who had less lifespan left than them. It will also help with aging populations, retirement schemes and free up the housing market. Economically it might not be significant at all.
I personally don't like to see people dying, I would want them to live a little bit longer even if they are a burden to me.
My favorite line from the article is "There are simply no alternatives" as people build cash reserves and buy stores of value like gold and Bitcoin. People are hungry for an alternative, but yes I suppose if you only consider stocks and bonds this article has a point.
I want an alternative, high interest savings accounts and CD used to be a good safe place for some savings, now your losing value relative to inflation.
A mixed portfolio makes no sense. Nobody has a pension, everyones retirement is in the market, none of this seems good to me long term, all very fragile.
Either your in stocks or Bitcoin at this point or your at negative rates relative to inflation.
What you'd really want is a machine you can buy that provides you useful goods and services at almost-zero maintenance cost. The stock market is sort of a proxy for this wish: You have excess capital, and you want to invest it in something that yields a return. Maybe that's a machine producing goods you can sell, maybe it's a machine that produces food and gives medical aid to you, the owner. You don't want to operate such a machine (if it is available at all), so you outsource the responsibility for a percentage of your return.
It seems almost absurd that the world can end up in a state where it is impossible to invest capital in a way that provides any significant return at all. All is relative, but people still want to eat and get shelter from the rain.
The stock market is increasingly disconnected from investments in real-world improvements of productivity and even if they manage to invest there in some tiny measure, it's not delivered to most people in the economy. That's the highest risk item in this whole discussion.
I've had the sense that growth investments are almost completely closed to the public in the United States. This trend has been gradually solidifying ever since the dot-com bubble, and has reached its logical conclusion today. The only IPOs happen when companies reach 100-billion dollar valuations, and sometimes not even then. IPOs seem more likely for private companies that have lost their growth potential.
There's certainly some potential for growth and returns still available when companies reach this stage, but the lion's share is taken out already. The index funds are also often at the ass end of this phenomenon, buying in only at very high valuations. The most absurd example happening a week ago, with Tesla entering the S&P500 as the sixth biggest company.
I'd like the possibility of investing in a fund of unlisted companies. The growth sector that's not represented in the major indexes is far too big to ignore. I try to compensate by having a portion of my wealth in "small cap" companies, but there is still a very significant sector that's completely missing.
SPACs are interesting, but they manage to be so by injecting an additional layer of uncertainty to the investment. They may be in practical terms not so bad, but in investment terms it's very low-commitment in the stability direction of investments take under the SPAC as I understand it. If investors have no say, then the balancing role of investment attention and selection in the market is limited and still a fundamental disconnect.
>It seems almost absurd that the world can end up in a state where it is impossible to invest capital in a way that provides any significant return at all.
It's pretty obvious. You don't have to invest that money in the same country where that money was created in the first place. If you exchange USD for yuan and the Chinese exclusively buy US assets with their newly acquired USD then there is no reason for workers to produce anything in the US. The factory can be in China after all.
In theory you could build housing with that money and employ construction workers but that is crazy talk in the US.
There is no incentive to save, but alternatively, it also pushes interest rates on mortgages to near zero which increases the demand side by opening up home ownership to people that before couldn't afford it which pushes up prices.
The same occurs with stocks, with no returns in other asset classes everyone floods in to stocks and pushes the prices higher.
This is definitely the new normal going forward, because you can't increase interest rates without dramatically reducing purchasing power, which in turn leads to slow down across many areas of the market.
Maybe investment in real but non-liquid assets would make sense. If stocks are bogus valued then the real money would be "in-the-know" asset purchases. Personally I am trying to get what I see is under-valued unique rural property in a locale favored by an apparently changing climate.
Better act fast, the rural property markets are on fire. Where I grew up I can always remember hundreds of for sale signs as long as I lived here because there just weren't any jobs. Now, everything sold last fall. It's unprecedented.
My concern is when retirement comes, and it is time to start selling off stocks. If there are more retirees than employees buying stocks via their 401k, won't that cause a price crash?
Not really, because the process is very gradual. You don’t sell all your stocks the day you retire, you gradually wind down until you hit some reasonably conservative allocation in your 80s or so like 30% stock/70% bonds. This certainly can put some downward pressure on the stock market if the rate of this winding down is higher than the rate that young people are adding to their 401ks but it’s counterbalanced by many other forces.
Someone at Wall Street must have thought of that and pitched the securitisation already. Think about it - large companies agreeing up front to spend a minimum of X billion a year buying back their stock. And then WS banks parceling both sides of the risk and exposure to investors seeking anything with non-negligible yield.
Retirees generally only liquidate a portion of their funds. They start withdrawing something like 4% per year roughly half a decade ahead (to avoid withdrawing during a crash) of retirement. As others said they also shift away from risky investments.
also, book value, though it's usually much smaller than market cap. if a stock ever fell below its book value you could buy it out and liquidate its assets to make money, so the book value should be a price floor for the stock.
This is extremely uncommon these days, but back in the dark days of the 1980s buying stocks below book value was a common way that people like Warren Buffet made a lot of money.
The real question is why aren't they allowed to build more housing? I mean come on. All the profitable activities are basically banned. Building housing gets banned. Although I am in favor of environmental laws they basically ban certain profitable activities which now have to be done abroad.
To be honest all that excess of money should be invested into renewables. No country can have too much renewables because they are low maintenance. The excess energy can be used to create more profitable employment opportunities.
I'm in real estate (rental properties), an IRA spread across 5 growth funds, and maybe 10-20% bitcoin at this point. Edit: Exited my stock positions this year
I ran a public node as my wallet for years on both Ubuntu and Windows frankly, the same wallet.dat was used on my public node for years but that’s terrible opsec.
Do not recommend a novice doing this. Like someone below has mentioned there are numerous exchanges now that will gladly serve as your gateway into bitcoin.
Just remember though, if you not in control of the private keys securing your wallet, it isn’t your money.
Do not blindly believe cryptocurrency exchanges are not running a fractional reserve. Without a transaction I’d on the bitcoin network, it never happened.
FWIW I started in bitcoin trading for anything in a chat room on irc. The landscape has changed significantly since.
Depends somewhat where you live and what you plan to do with the Bitcoin (long term hold or actively trade).. but major exchanges in major countries are pretty trustworthy these days.
Kraken, Gemini, and Coinbase are all quite trustworthy, if any of those are available in your locale.
Buying and holding for 4+ years has produced amazing gains in Bitcoin since its inception. Trading often and fooling around with alt coins has caused many great losses and pain. Don't invest more than you can stomach losing or holding in the red for a few years.
Thank you for the info. I live in the US and plan to buy and hold (for diversification) with the money I can stomach to lose. I'll try out Coinbase because it's the one that is the most familiar to me. Happy holidays!
For reference to support parent: that tax implications of the bitcoin I owned and sold after 7 years of sitting on it was much simpler than the bitcoin I bought and sold over and over again trying to make money on both sides of an order book during high volatility.
I am a US citizen. I have fully complied with tax law as I understand it. To my knowledge, I’ve never been involved in any darknet marketplaces. I’ve seen an opportunity much sooner than my peers.
I have been waiting for the current price volatility since the last ATH spike in January 2019 since exiting a majority of my bitcoin positions. The block reward halving last summer combined with an ever increasing mining difficulty is a no brainer to me. Good luck
There’s 7000 shitcoin trading on an infinite number of shitcoin exchanges providing infinite liquidity; that’s what I see. What is there to stop bitcoin?
Coinbase is the easiest to buy. But, I suggest you try another option. Coinbase's whole goal is to make money (surprise!) by selling many "coins" easily. Swanbitcoin or kraken are my suggestions. DYR.
Gold has terrible historical returns compared to equities. If you bought gold 30 years ago and sold now, you'd have about a 5x return. You would have done significantly better if you bought stocks 30 years ago and sold them at the bottom of the market in March. If you sold now, you'd have done more than twice as well.
BTC might go up, might go down. But it's a risky asset and there's only so much money that can flow into a non-productive asset.
The last 30 years has had an expanding market. We're now facing a deeply contracting market. Equities will lose most of their value; gold will do the opposite.
Gold and bitcoin won't help you. When stock prices move down, correlations between stocks go up. If you look at the last couple downturns you can see that this correlation between assets and asset classes has increased. Stocks dropping leads to people selling their bitcoin and gold which causes those prices to drop. Falling prices make speculators get scared and sell to cut their losses which drives prices down further and the cycle continues. What you really want to find is an asset that is negatively correlated to the stock market while stocks are dropping.
Their negative correlation zig-zag is remarkable the past few decades. Some research postulates that in a decreasing interest rate environment (past 40 years), they’re negatively correlated, while in a rising rate environment they’re positively correlated, leading to the past 100 years minimal (almost 0) long term correlation.
For a long time timber (as in, owning a forest and letting people log it occasionally) has been one of the favorites of large endowments and hedge funds.
There aren't many examples. Volatility is the best one I'm aware of. However, if you're regularly buying volatility to hedge your stock exposure you're going to lose a lot of money that way.
I've been using a similar metric, price to bond market, as it is much better than being a "permabear" just because the PE Ratio you grew up with is totally busted and being ignored by the entire market.
"My 1980s technical analysis hasn't been relevant for 5 years and I just learned how to short sell muahahaha .... but I guess the market can remain irrational longer than I can remain solvent!"
I honestly think this is a natural progression for people studying stock trading on the internet.
But I really find the credit markets illuminate a lot, and I find a lot of traders and investors to ignore that. "Bonds are boring", so they think. They are a leading indicator in stock in a variety of ways. It all does circle back to macroeconomic trends and monetary policy, as they are intrinsically related. Yes, when people are trying to get higher yields there are few options. This isn't that controversial, the Central Banks say so themselves and increase the money supply to transform everyone into a finder to locate the remaining assets to buy. Every time you look at a bank and laugh at their advertised savings account interest rate, that is exactly what the Central Banks wanted you to do.
> But I really find the credit markets illuminate a lot, and I find a lot of traders and investors to ignore that. "Bonds are boring", so they think. They are a leading indicator in stock in a variety of ways.
You hit the nail on the head. Bond behavior changes systematic incentives in a variety of first order and second order ways. It's inevitable that it gets somehow refactored back into stock behavior as a second order effect.
I guess the billion dollar word there is "somehow."
So, as the Central Banks in the major Western economies are prohibited from buying equity ownership, they generally do not buy stocks from companies^. They just buy bonds, mostly government bonds but when the utility of that diminishes they also buy corporate bonds.
Either way, Central Bank actions distort the entire credit market, allowing any existing bond holder to sell to the central bank at a profit. it allows corporate bond issuers to create and sell to the distorted market, or directly to the central bank in both the primary and secondary market, at a profit.
Note, when issuing bonds this is not called a profit, but let's be honest here, we are talking about writing on a sheet of paper that I will pay your $2,000,000,0000 back in 10 years at 0.75% a year. They frequently use new investor's money to pay back old investors. There is a word for that, but it dilutes my point. The accuracy of this reality doesn't change though.
These sheets of paper are exchanged for money that did not exist prior to the moment of that transaction.
The recipients buy stocks (and everything else). The corporate issuers buy back their own stock, give executives bonuses who make a diversified portfolio. The hedge fund issuers just amplify their own holdings with extremely cheap, non-margin callable leverage.
^Exceptions:
Swiss National Bank buys US stocks with newly created francs.
US Federal Reserve buys bond ETFs, in order to access the universe of bonds.
Outside of the West, the People's Bank of China buys stocks directly. Predictable collective ownership philosophy.
There is no reason that the Central Banks can't be given the authority to buy stocks. You are also leaving out the Bank of Japan which has bought over $400 billion [1] during their "Great Stagnation".
Correct, and in the US Congress can alter the mandate.
They have avoided it, specifically to avoid politicizing control of the money supply, and to keep private companies independent. It is part of the entire purpose of the Federal Reserve and its own independence.
The pandemic stimulus laws have been the most climatic changes to the Federal Reserve directly in the 100 years of its existence. The unshackling and new mandate has had predictable results, some parts of Congress are aiming to re-shackle it and create more safeguards against the legislatures accessing it, but now it is politicized.
The ability for the US to pay for anything is now completely tied to the market tolerance of more dollars on the market. The actual budget discussions have just been a sideshow to distract from this obvious source of funding.
Blame interest rates. Yields tracked Fed interest rates pretty tightly up until the GFC. This decade has been anomalous in this respect, with yields going up while interest rates fall, and so it seems that the market is on a correction-course.
We've also had nearly a decade where inflation is higher than the Fed rate. Making borrowing effectively more profitable than saving. And what are investors going to do with this borrowed cash? Well, probably buy assets that, at minimum, track inflation.
The Fed tried raising rates in 2018, but Yellen was replaced at the Federal Reserve with Jerome Powell, who quickly reversed course and put into place policies which are fueling an asset bubble. Now we are in this awful position where the economy needs higher interest rates, but whomever pulls the trigger on raising is going to tank the market, hard.
I think these days there is only one metric that really matters: the size of the Fed balance sheet. And it is going up [1]. As long as the Fed keeps printing, asset prices will go up, no matter the financial ratios.
In Germany official inflation was 1.5% in 2019 but the price of newly built houses and flats increased by 7-9%. This is missing completely in the official inflation numbers of the eurozone: https://www.faz.net/aktuell/finanzen/der-inflation-fehlen-di...
Well, yes. I use "consumer inflation" to describe inflation measured by the CPI which mostly involves goods and services and "asset inflation" to describe inflation measured on assets like stocks or real estate.
If prices for goods are low so are the wages of the workers that produce them. If there was a way for workers to get some of the central bank money they would spend it on consumer goods which drive up demand for consumer goods and those consumer goods have to be produced by workers which drives the incomes of those workers up.
So when I am talking about consumer inflation I am not just talking about the prices of services and goods but also the incomes of workers. These things are linked extremely tightly. High incomes drive up consumer inflation and consumer inflation drives up incomes. If you can get rich without involving workers you have found a recipe for growing wealth inequality precisely because you avoided consumer inflation.
So by definition low consumer inflation is associated with inequality. If there was consumer inflation but no asset inflation the relative wealth of asset owners would diminish and the relative wealth of people with income would increase.
High consumer inflation is generally associated with low unemployment because the scarcity of workers is driving up prices of consumer goods. Imagine a medieval country that is going into debt to start a war. They are buying up all the food for the soldiers and thereby drive up the prices. If everyone is already at full employment because e.g. they are doing subsistence farming and barely grow enough food for themselves + some taxes then what happens is that food becomes unaffordable for farmers and you are taking away all the food from the farmers and giving it to the soldiers. This obviously results in a famine because those farmers need that food to feed themselves and grow more food next year.
However, we are not a medieval country that has hit its maximum economic output. There is slack in the system. We have unemployment, especially youth unemployment in European countries. If you increase demand for workers you decrease unemployment despite introducing more money into the system. If you figure out how to print money and somehow do not create more demand for workers you end up keeping employment low. As long as unemployment is high you can keep printing more money endlessly. That's not an argument in favor of printing more money, it means that you should spend your money on the right things instead.
It means the divide between the rich and poor got even wider. The average person is poorer, can still buy basic staples, but is further than ever from being able to buy any assets and would need to work significantly more to build up the cash that would let them buy assets. It also means that the wealth of those whose wealth is primarily derived from assets has gone up signficantly more than those who have a mix of assets and earnings. Or to put it another way - the super rich are crowding out the rich from asset ownership. In essence making it difficult to build wealth.
It has to do with a mix of high market speculation, that the printing essentially replaced GDP and a few other things. I think this NPR podcast handles the topic well. https://www.npr.org/transcripts/821787090
I don’t know if you can do that. This is assuming an inflationary effect alone. But when there is too much cash around, when you have lots of buyers chasing a small number of assets, the price of these assets can increase in a completely irrational way.
This is moronic reasoning. Just because stocks are "cheap" relative to bonds right now does not make stocks an "attractive" investment. As Buffet says, never confuse price with value.
For the people that haven't noticed, a global pandemic and lockdowns killed 40% of small businesses this year, forced many large businesses to take on new debts that will blunt future profits, and forced the government into unprecedented deficits. Stocks are "cheap" because risk went up.
Howard Mark's latest memo has much to say about low interest rates and market returns. He also compares today's tech stocks to the Nifty fifty stocks of the late 60s, which went on to have poor returns after becoming overpriced in the way tech stocks are now.
Right, but if I'm trying to buy a return, what are my options? Stocks, bonds, some kinds of real estate, and maybe annuities. But annuities basically track with bonds. For the segment that is trying to buy a return, and doesn't want the hassle of managing rental property, stocks and bonds are pretty much the only games there are.
So, at least for them, the question is: How much does it take to buy a given return? The question isn't the only one in investing, but it's also not an insane way of looking at the market...
I want to buy a bicycle but bicycles cost $10k right now because of a parts shortage. But what if I want a bike, and also car would be $20k, so actually bicycles are pretty cheap!
At the end of the day though, when the short term situation resolves itself, that bike is still worth $500 and it wasn't cheap.
I think the fallacy here is that you don't HAVE to buy returns. You could choose to just eat the inflation or pick an alternative asset class.
that is actually very good point. In the case of the pension fund I guess you do just pick the relatively cheapest option regardless of what you feel is the broader situation.
On the other hand that is insanity and has the potential of turning into a humanitarian crisis IMO but I guess we'll see how that plays out.
Right, like imagine a majority of all American pensions busting out at once because they all roughly bought SPY and QQQ and then we have some major bubble burst that takes more than a few years to resolve itself and those indices are down 40% for 5 years. If 3% returns is not fully covered, -30% returns would have to be an existential crisis.
I would imagine many retired government workers would end out on the streets or instead they will print an ungodly amount of money to paper over and shift it into a different problem.
The idea would be to invest into bicycle companies to make money off the shortage which encourages more companies to make bicycles effectively solving the shortage.
I completely agree the current irrational exuberance in stock markets is caused by the artificially depressed yields on bonds - it is yet another unintended consequence of QE.
You haven't mentioned risk though - this is a very risky game and the more mispriced assets get the riskier it is.
The article is written with filler words to buff up a simple idea: stock market is now more attractive than ever compared to bond market (I am not expect in financial jargons, so could be wrong), because the interest rate is so low.
This idea sounds self evident, and everyone is already doing that.
Forbes asks me to subscribe, after reading this, I have to reconsider this at least in 1 year where my memory of this low info density article faded away...
Has anyone considered investing in emerging markets overseas?
The markets over there should be more akin to the "golden age" in the west. I looked a bit into it. In general you need higher risk tolerance and I was disappointed to find that stocks often under performed compared to US tech stocks. But maybe still a wiser investment in the long run.
You can just invest in big corporations on the stock market. In emerging countries big companies are often there just through corruption, cronyism etc. so they are not a good deal.
The Russian stock market is considered the most undervalued in the world (CAPE ratio), but the political risk is just too high. The dividend yields alone are nuts.
In other, other words, dollars are worth much less than companies. Companies are worth a little less than they were last year, but dollars are worth a lot less. The price of a share isn't the value of a share in absolute terms, it's the exchange rate between dollars and the company. Low interest rates is the Fed saying "get rid of your dollars," and high asset prices are the market saying "yes, sir."
I'm struggling to see what this new measure is actually telling us that's useful. We know bond yeilds are super low, whcih is putting pressure on people to move into more risky investments like the S&P. This measure seems to simply show that pressure. What it says nothing about is whether those investments are good. What it seems to show is that there's enormous pressure on the stock market to go up. At some point though, those companies have to actually make money. We know they're not going to be making hugely higher earnings - we're a long way into a good economy, there's no real reason to think everything is going to get massively better. The only alternative is that inflation sky rockets and that's how earnings go up.
So what happens if inflation goes up? Well for inflation to have any meaningful effect it would have to blast past the fed's targets and the fed would need to massively increase bond yields. Which would remove the pressure on stocks, causing stock prices to drop.
What I'm not so sure about is what happens if inflation really does stay flat. If inflation stays flat, then everyone is just holding a load of stock with really bad yeild. Does that also cause a crash when people realise they're holding bad investments and those bonds don't look so bad because there isn't inflation?
The old 'if we keep analysing the data we can draw any conclusion we like from it'. I'm reminded of the classic book 'how to lie with statistics' and the perils of staring at graphs to determine stuff like this.
We're one financial scandal away from a crash, one pandemic resolving drug away from a bull market.
This seems like turning the argument upside down. The stock market is not cheap, but it is expensive because bond yields are low. That does not contradict that stocks are overpriced but simply explains why.
The big question is if this situation of overpriced stocks will increase, how long it will endure and how will it end?
Suppose that I create a valuation measure by taking the yield on my bond, and “correcting it by for interest rates” by subtracting out bond yields. Now, that seems ridiculous, but it’s very close to what’s going on when people try to “adjust” stock market valuations for the level of interest rates and use phrases like “fairly valued” and “attractive.” When both assets are at extreme valuations, this comparison, at best, says only that the dismal expected return on one asset is expected to exceed the really dismal expected return on the other asset.
> On the other hand, it’s quite alarming to see how much investors are banking on central bank intervention. You don’t want to hear them even murmuring about the slightest chance of backing down.
This is the real question; how does the Fed stop holding down the accelerator, and when they do, how many years of flat returns do we end up with?
The fact that Shiller had to come up with a new metric to rationalize exuberance should be worrying.
"The time had come, as in all periods of speculation, when men sought not to be persuaded of the reality of things but to find excuses for escaping into the new world of fantasy."
I am not following, they are quite different as far as I can tell. I am not sure either has a deep meaning, but P/E gives a better clue to the earnings per invested dollar you would expect when purchasing. I have never found much use for EPS, because outstanding shares between companies vary so much, and change with stock buybacks and such.
Best advice my dad ever gave was: The middle class is disappearing. In the future there will be only rich and poor. Your job is to end up on the correct side of that line.
He then peaced out of my life but that part stuck.
As a parent with a kid, this inevitable bifurcation into "dirt poor" and "ultra rich" is obvious, and on every parent's mind these days. This is making school life for kids punishingly competitive. It's a-few-winners-take-all, with most of the winners already pre-determined by being born rich. Every middle class parent is taking extreme steps to get their kid a chance of being one of those winners.
When I was a kid, there was college+professional job out there for the A and B students, and there were jobs at the factory or mill out there waiting for the C and D students. Now, it's success for the A++ students with the "right" extra-curriculars (and for the too-rich-to-fail kids), and unemployment/meth/prison for the remaining A, B, C, and D students.
I'm seeing this, but the irony is that this is a losing strategy for many parents. I know a ton of people who internalized this lesson, got a Ph.D, and have been stuck in post-doc limbo for a decade. Or they went to law school and washed out when they realized they hated it (at least one of whom is now dead from what I think was suicide), or became a dentist and had their practice eviscerated by COVID.
Meanwhile I did basically no homework between the ages of 11-24, graduated 2 years late from college after flunking a couple courses, spent all my "free" (= homework/class) time reading and fiddling around with computers, and ended up in one of those hot jobs. My parents freaked about me ever having a job or living on my own - my mom sent me a graduation card that said "Some call it graduation. We call it a miracle." I matched her final salary (after 35 years in the workforce) in my first year out of college.
IMHO, the best skills you can teach your kid these days are: 1) supply & demand 2) compound interest 3) how to read what's "hot" and what people really care about 4) how to form a mental model of what's in someone's head and trade with them so they get what they want and you get what you want 5) statistics and 6) whatever labor-saving technologies of the day can make things more efficient and throw people out of work. That was software when I was a kid; it's probably things like deep neural nets and robotics now, and may be biotech/nanotech/material science by the time kids today get into the workforce. Lots of middle-class parents fight the last war and prepare their kids for the world they entered as 20/30-somethings. They need to stop stressing over economic realities now (which will be totally different by the time our kids enter the working world) and teach general principles for being able to look around you and make sense of the world, then trust the kid to be able to do that on their own.
Completely off topic, but: Do you have a blog or a twitter feed? I've been reading your comments on HN for a while, and you often have insights and observations that I find valuable.
Not yet, but I've been thinking of starting blogging. Wanted to get a little more established in my team at work first (I just started a new job 6 months ago), plus take care of some family stuff. Thanks for your interest!
How do you know they would be better if they didn't get a Ph.D and stuck in postdoc? It is not like that's the worst they can have. The alternative of failure may be another million possible way of failure.
I would phrase it a little differently. There is labor and capital. And the way things are going is that most of the returns are going to capital, not labor. Save and invest as much as you can, because I don’t see this changing.
There’s another dimension that I find increasingly useful to look at.
Capital is infinitely scalable. One person can put $1 to work, or one person can $100 billion dollars to work.
Labor has a hard limit somewhere around 60-80 hours per week. One person cannot sustainably put more labor “to work” without capital. Labor is essentially time.
So you have time and money. But not all hours you spend are the same. You can spend an hour fixing your car, or painting your house. The net effect of that hour is to provide a bit of value for perhaps up to a dozen people.
Or you could spend an hour creating something that provides a bit of value many times into the future for thousands, millions, or billions of people.
One is not inherently better than the other, but one is inherently more economically valuable than the other.
So the lesson is if you are time rich but capital poor, and you want to get capital rich, you need to spend your time on things that provide a bit of value for an arbitrarily large number of people. In other words, one-to-many not one-to-one.
There’s an upper limit to how much money your labor can make working 1-to-1 or even 1-to-N where n is small. There’s no limit to how much money your labor can make when N is large.
How does that jive with the incredible salaries of elite professionals, like computer scientists, lawyers, doctors, CEO's, when compared with the rest of the population? I think the importance of the labor vs capital divide is being exaggerated by the very elites who are making out as bandits from their labor. It is one way to assuage a guilty conscience I suppose.
> How does that jive with the incredible salaries of elite professionals, like computer scientists, lawyers, doctors, CEO's, when compared with the rest of the population?
It is important to turn that high income into assets. Living on cashflow is a losing bet long-term.
I have felt the same thing for some time. With the rise of automation I expect this separation to get even worse. You, can't help but think that now might be the last chance to get on the right side, lest you get left behind in "digital serfdom".
No. At the global level most ordinary people are decent and just want to make a living - from my anecdotal experience of the few places I've been. The rich and those who want to get rich are different (some of the rich are decent but not most of them)
I like this advice, because it's not dictating what "correct side" is, and it doesn't define "rich" as in "wealthy", so you can take this advice a little bit how you want to take it.
If your take away from "the world seems to be becoming less and less livable for most" is "I need to get on the side of the abusers as fast as I can", you might want to take a hard look at the person you have become.
There is no wrong side of the line. A manichean dichotomy between winners and losers is an unproductive way to look at the world. You can both be successful while trying to carry everybody up. Life is not a zero sum game.
The end game of rising inequality is not a few living good lives while most suffer. It is chaos and instability.
I think the real lesson here is everyone is getting squeezed out. I feel like the other shoe is going to drop some day, but who knows when. The weaker hands (poorer people) will inevitably fold first, increasing wealth inequality, as it usually does.