All those statements made sense to me at the time. And I have no doubt that one of these days, someone will make a correct prediction. But who the hell know what and when.
Diversify, be reasonable and be prepared for it to happen someday. But freaking out with any new prediction of doom is not the winning strategy.
One interpretation is that asset owners as a class have complete control in our system and they will always be made whole no matter what happens.
This may require extracting additional rents from consumers, from workers, from renters, from debtors (including the government) but whatever changes have to be made to protect asset holders will be made regardless of the cost. An example of this in action was the collapse of SV Bank where the rules of our federal deposit insurance program were rewritten on the fly to protect the depositors. Imagine having an insurance policy, incurring an uncovered loss, and then compelling the insurance company to retroactively rewrite your policy to cover the loss!
This interpretation seems accurate to me. I think the big concern is what happens once the asset and passive wealth class have squeezed the working class dry. And the governments don't have enough wealth for a welfare state solution. What is the point of working hard and smart and trying to innovate as a young person without family wealth when you can't even achieve basic economic security.
Yea, after the pandemic I've stopped making any predictions about the stock market and bubbles.
It's clear we're living in an illusion, but I'm pretty sure there are enough people invested in that illusion that it won't stop until it is no longer physically possible to maintain. I'm increasing convinced that when whatever dream we're living in ends, it will end catastrophically, but I'm not even certain I'll live to see that happen.
It's less of an illusion but more that the reality is separating into two, one which we live and breathe as day-to-day working class/consumers and another that caters to the market makers of government & private sector.
> The global pandemic will tank the stock market - the market did crash and then Fed stepped in. Rates were cut and Fed
> War in Ukraine will tank the stock market - Market did go down by -30% between Jan-Oct 2022 and went nowhere for sometime after that.
> High interest rates will tank the stock market - Impact for this remains to be seen. Even during 2008 the high interest rates risk persisted for couple of years before the crash. So, I'd give it more time.
> Tariffs will tank the stock market - Did we not see a 20% drop before tariffs were put on hold for 90 days?
> IA will tank the stock market - I don't have much conviction on this one.
It is true that no one knows when a prolonged market crash like 2008 will happen. Maybe never. Government has figured out that Fed intervention can help the market stay afloat. So, maybe unless Fed doesn't step in for a long time these predictions will come true.
The flip side of this is that investment returns of a diversified portfolio (net of inflation) is slowly going down. The choices are to either concentrate or find alternative investing vehicles. That is one of reasons private equity is out looking for alternate income sources like buying up houses and hiking up the rents etc.
The way I see it, prices are too high. War is one thing, but it's abroad and the restrictions have been minimal. But interest rates went from <1% to 4.5% without valuations going down or profits going up. This means that investors are pricing companies as if though interests rates can be lowered. I don't think they can, because inflation in the US already quite high despite the 4.5% interest rates and with these tariffs upon that, it probably can't be lowered. For this reason I think companies should be priced using the 4.5% interest rate as a best guess, maybe 4% works, maybe 3.5%, but they're current priced as if though the interest rate is is <1%.
Tesla has a P/E ratio something like 26 times what other well-run automotive companies have. Boeing has a price like Airbus, despite no profits, etc.
Commercial real estate prices have gone down, and that's reasonable, but you've had both the interest rate increases and this WFH+hybrid remote thing becoming common, and since the interest rates have gone up from such a low level I think this is still overvalued, because 1% -> 2% should in theory mean halving the value if the rent is constant, and it went <1% to 4.5%.
I think it's a miracle that there hasn't been a crash. I wonder what weird things have been going on that have ensured that there hasn't been one yet. So I think your perspective is strange. The situation is absolutely crazy, and has been for years, but that doesn't make it not crazy.
> This means that investors are pricing companies as if though interests rates can be lowered. I don't think they can, because inflation in the US already quite high despite the 4.5% interest rates and with these tariffs upon that, it probably can't be lowered.
This is why Trump is replacing people doing the statistics with people who very publicly say that they will print what Trump wants. He really wants to cut rates, and I think he will eventually get his way.
From 2004 to 2009, the inflation rate was less than 4% each year. Gold was $443 an ounce in March 2005 and $975 an ounce in March 2008. Yes rich people had to put their money somewhere as banks and then corporate America started to collapse during the surprise crisis, they took them out of equities for banks offering subprime mortgages and put them into assets like precious metals and the like.
Also in 1999 MSFT was $57 a share. In 2009 it was $16 a share. It cracked $57 again in 2016. 17 years to go sideways.
Cisco never reached its 2000 peak again. Of course companies like Pets.com just went out of business.
As others have said, we did see effects, but a quick recovery of many of these events or the full scale of damage still isn't known and quantified. We definitely are in a bubble, but like you suggest, diversify. Don't stop investing, just be smart. Market can remain irrational longer than you can remain solvent. Time in the market also beats timing the market. And lastly, it sorta isn't surprising that things quickly recover. Tons of people's retirement accounts are injecting money into the stock market regardless of what is going on. We will likely never see long term significant drops just due to the fact that we've devised a system of a non-stop garuntee stream of money into it.
Kind of a weird post given that the pandemic did tank the stock market (-35%), interest rates and the war in Ukraine did tank the stock market (-28%), and the tariff announcement did tank the stock market (-21% and we have yet to see the full fallout).
I don't think putting all your net worth in S&P would be considered diversified.
With an MSCI world, those companies would drop to ~22% exposure. Throw a bit of real estate, more exposure to your home country if you are not in the US some real estate, some bonds and you can make it drop to <10%.
It’s not hard to predict that events will happen. It’s hard to do so with more precision than the next guy.
Something I learned in H2 of 2021, when I nearly went broke betting on a correction. Wasn’t wrong, one did occur. Just failed to realize I couldn’t figure out exactly when.
All of your examples did tank the stock market. At least in the meaning a 20+% drop over a time period in the order of months of less.
They are however not examples of long depressions. Which I think is reasonable to expect we'll see less of, given that more and more regular people feel the need to put their money in the stock market. There is simply no alternative. And every time we reach new heights. This is also expected.
Will this go on forever? Probably not. But it won't look like the 1930s. The stock market is a crowd, not a science.
Therefore the dips were an aberration - they should not have happened. Recovery is a sign that the previous dip was an incorrect prediction by the market.
You present these as straw man exaggerations, but they were real things that happened.
> The global pandemic will tank the stock market
It actually did screw up the economies of a lot of countries and companies and it messed with stock markets as well. It increased debt worldwide, it increased unemployment that took years to recover.
> High interest rates will tank the stock market
There is a well established relationship between lower stock market returns when there is high interest rates.
> War in Ukraine will tank the stock market
It significantly hurt the Russian stock market, at least the sanctions did. But war tends to be a stimulus for the economy as long as it isn't too large of a war.
There was an article I saw this morning saying only the very top of the S&P 500 are the stocks showing substantive growth in recent years, companies below that have been relatively slow to show growth. Additionally, since the pandemic and Ukraine war started global cost of goods have been rapidly increasing, much faster than they should be. Now with AI, the market in the US is losing a lot of jobs - both entry level and above. The latest US job numbers were so terrible Trump fired someone to try and cover it up.
I'm not sure what else needs to happen to show the economy has been doing poorly for all but the richest segments. The return of a blatant and severe caste system and mass starvation?
The primary harm of a bubble is *not* a crash in equity values, it is the misallocation of capital. The worst outcome would be for the misallocation to continue due to the intervention of asset owners with the most to lose who are also in control of the state.
All of the events you listed have had significant economic effects and required massive intervention from the state to buoy asset prices. The longer this continues the more our economy becomes geared to producing "value" for this small, and shrinking, group of owners at the expense of everyone else.
I think there's an incorrect valuation by looking at where things are today. I mean Black Monday, the 2009 housing crash, DotCom Bubble, and others were times the market did tank yet we've since recovered.
So how are we measuring the accuracy of those predictions? From Jan to April the Trump admin was announcing tariffs. VOO's (S&P500) lowest price this year was on April 8th at $456.74 and on Feb 19th it was $563.67. We see similar patterns with covid and invasion of Ukraine. Do we consider a 25% reduction "tanking"?
I agree that with enough time that everything will work itself out. But I do not think that this means we should ignore or downplay damage done in the short term.
- The pandemic did in fact tank the market
- Wars never tank the market and they jack up the military industry so no one would have said that
- High interest rates did tank the market once last year already and in the past because it provides for risk free gains
- Tariffs did tank the market so Trump played the reversal games
- Will AI tank the market? It will if it creates unemployment.
Diversifying does not stop the tanking. It will reduce the risk related to poor choices all at once
To be fair, there's a subtle but important difference to:
- we're going into the next Great Depression (a once in a lifetime occurrence)
- a small subset of stocks (that happens to make up a huge portion of the entire equity market in the US) has extreme PE and PEG ratios and will pop (which happens every few years)
I think your point largely stands for both cases, but it's important to delineate them.
If you're preparing for a Great Depression - you're likely only going to be right by coincidence. If you're preparing for a stock bubble to pop, at the very least, you've got better odds.
The New Yorker also has a vested interest in making people freak out about AI. If anyone with a prompt can churn out something that passes as a New Yorker essay, the monopoly on tone, cadence, and authority starts to crumble.
It's helping me find things, understand things and do things. I'm sure some of those startups will figure something out that makes sense. And eat the rest.
This was the story of Amazon in the .com bubble, but buying Amazon in 1999 was not a good deal. Even if you know who the winner is going to be, you can still lose.
I get this sinking feeling that this "bubble" may never burst on its own, since the political environment now is different from the 2000s. Inequality is much higher post-COVID, with the ultra-wealthy sucking up the assets of the middle class. Those assets are going into the stock market for AI companies with the objective of eventually replacing people so they never need to pay the working or middle class ever again. Even if the AI doesn't perform quite at the level of normal employees, there's very little competition in the market anyway.
I'd be happy for someone to tell me I'm wrong. Otherwise it will take something dire to break this cycle.
I saw a figure yesterday showing that current AI data center investment exceeds all consumer spending in terms of GDP. This is important, because consumer spending is normally 2/3rds of GDP. This means consumer spending isn't great, and data center investments probably can't sustain this pace forever. It's also not clear that there will be a return on these investments (one that flows to the specific companies seeing the investment.)
I think the figure wasn't that data center capex exceeded consumer spending, but that data center capex contributed more to GDP growth than consumer spending did. Still really really bad and indicative of a bubble, but an important difference.
TINFOIL HAT SAYS: Since you used the P-word, consider the 2008 election and the possibility that a similar bubble-bursting occurring at the appropriate time to maximize chances to flip Congress in 2026.
I've been trying to figure this out, like I think the 2008 bubble burst for a lot of reason but it was basically a ponzi scheme that ran out of new people to buy houses at constantly inflated rates.
Bernie Madoff got caught when 2008 happened and he didn't have enough money to pay back investors, if 2008 never happened he maybe keeps going.
For Elon Musk, and maybe why he bought Twitter, he has to stay popular enough that enough people believe his companies are the best investment available. If someone surpassed him, and Tesla didn't seem like the place where robots or self-driving might happen, then people would probably move away.
For AI, maybe something similar? People would have to start deciding that investing somewhere else is better than investing in AI and let the AI companies start to fail.
Presumably the cause of a bubble is just too many people thinking AI is the best place to invest their money? And the bubble will pop when they decide to invest somewhere else?
No matter how right the AI crowd is, elements of it are/will be a bubble.
No matter how right the bubble crowd is, the market becoming irrationally exuberant for a brief period of time does not invalidate the technology or the rapid change we'll see as a result of it.
Yeah, this is what all the bubbleists miss. We got FAANG++ out of the last bubble, and they literally rule the world with the tech that was promised during said bubble. Catsdotcom and dogsdotcom failing had 0 impact on the tech itself.
It's the same today. A lot of the hyperVCfunded startups will fail, without a doubt. But the tech giants will get their money from this tech, and it will be ubiquitous in ways we can't even imagine now.
I'm not sure that the dotcom bubble leaving behind the web means that AI (and by AI I mean LLMs) are going to be transformative in the same way the internet was. Just because it happened once doesn't necessarily mean it's going to happen again.
To be clear, I don't think LLMs are going to vanish, there's clearly some things they're good for, but there's also some really big differences between the AI bubble and the dotcom bubble. People are very skeptical and worried about AI, they (the general public) aren't really using it for anything more than search, there hasn't been any clear economic data indicating that it improves productivity in a meaningful way, and a killer app hasn't really emerged that isn't a free chatbot. Plus, the majority of the money is concentrated in the same 5 or 10 companies just passing it back and forth between each other before eventually handing it over to NVIDIA. Maybe I was just too young to pay attention to the dotcom bubble, but the vibe seems completely different.
Of course it's a bubble. It's only about 20% as useful as the claims driving the current irrational exuberance. All it can do is generate pictures and text, and we had those _coming out our eyeballs_ for at least a decade. Prior to generative AI, each of us already had more access to images and text with which to stimulate ourselves than we could consume in a lifetime.
When did we forget that discovering "truth" via symbol manipulation is a fraught proposition at best? It was in the 17th century that Leibniz proposed that encoding logical propositions into a propositional calculus would allow all intellectual disputes to be resolved mechanically.
"For it would suffice for them to take their pencils in their hands and to sit down at the abacus, and say to each other (and if they so wish also to a friend called to help): Let us calculate."
The original AI bro! Any day now...
I've been thinking lately that the real value of a piece of code is that there is at least one human alive somewhere supporting it. You remove that, and the value proposition gets extremely shaky. Folks are going to have to learn this first hand as their brain becomes full of echoes of LLM output, rather than the output being an echo of some brain process (you know, _actual_ intelligence).
But sure, if you can convince enough people that you've invented a real magic 8-ball, you might be able to convince enough of them to shake it for the rest of their lives. Me, I'm not convinced that the marginal value of "new" text and images is there.
Readit News
> War in Ukraine will tank the stock market
> High interest rates will tank the stock market
> Tariffs will tank the stock market
> IA will tank the stock market <- We are here
All those statements made sense to me at the time. And I have no doubt that one of these days, someone will make a correct prediction. But who the hell know what and when.
Diversify, be reasonable and be prepared for it to happen someday. But freaking out with any new prediction of doom is not the winning strategy.
This may require extracting additional rents from consumers, from workers, from renters, from debtors (including the government) but whatever changes have to be made to protect asset holders will be made regardless of the cost. An example of this in action was the collapse of SV Bank where the rules of our federal deposit insurance program were rewritten on the fly to protect the depositors. Imagine having an insurance policy, incurring an uncovered loss, and then compelling the insurance company to retroactively rewrite your policy to cover the loss!
It's clear we're living in an illusion, but I'm pretty sure there are enough people invested in that illusion that it won't stop until it is no longer physically possible to maintain. I'm increasing convinced that when whatever dream we're living in ends, it will end catastrophically, but I'm not even certain I'll live to see that happen.
> War in Ukraine will tank the stock market - Market did go down by -30% between Jan-Oct 2022 and went nowhere for sometime after that.
> High interest rates will tank the stock market - Impact for this remains to be seen. Even during 2008 the high interest rates risk persisted for couple of years before the crash. So, I'd give it more time.
> Tariffs will tank the stock market - Did we not see a 20% drop before tariffs were put on hold for 90 days?
> IA will tank the stock market - I don't have much conviction on this one.
It is true that no one knows when a prolonged market crash like 2008 will happen. Maybe never. Government has figured out that Fed intervention can help the market stay afloat. So, maybe unless Fed doesn't step in for a long time these predictions will come true.
The flip side of this is that investment returns of a diversified portfolio (net of inflation) is slowly going down. The choices are to either concentrate or find alternative investing vehicles. That is one of reasons private equity is out looking for alternate income sources like buying up houses and hiking up the rents etc.
I’m too young to remember the naysayers, just the hype.
Tesla has a P/E ratio something like 26 times what other well-run automotive companies have. Boeing has a price like Airbus, despite no profits, etc.
Commercial real estate prices have gone down, and that's reasonable, but you've had both the interest rate increases and this WFH+hybrid remote thing becoming common, and since the interest rates have gone up from such a low level I think this is still overvalued, because 1% -> 2% should in theory mean halving the value if the rent is constant, and it went <1% to 4.5%.
I think it's a miracle that there hasn't been a crash. I wonder what weird things have been going on that have ensured that there hasn't been one yet. So I think your perspective is strange. The situation is absolutely crazy, and has been for years, but that doesn't make it not crazy.
This is why Trump is replacing people doing the statistics with people who very publicly say that they will print what Trump wants. He really wants to cut rates, and I think he will eventually get his way.
Also in 1999 MSFT was $57 a share. In 2009 it was $16 a share. It cracked $57 again in 2016. 17 years to go sideways.
Cisco never reached its 2000 peak again. Of course companies like Pets.com just went out of business.
Indeed, but even with something like SPY, there’s quite the concentration in tech:
Now that’s intentional as it’s market cap weighted. But the investing world is in for a rude awakening if things start to pop.AMZN does tech stuff, but also retailing, grocery, logistics, media and more.
META and GOOG are advertising businesses.
BRK is a basically a holding company, its businesses are in a wide variety of markets, mostly non-tech (and it owns public equity too).
TSLA is a car manufacturer.
With an MSCI world, those companies would drop to ~22% exposure. Throw a bit of real estate, more exposure to your home country if you are not in the US some real estate, some bonds and you can make it drop to <10%.
All those events don't tank the stock market because they were based primarily on fear.
What will tank it are lies based on greed.
> Dot-com: overvalued companies with no revenue
> Mortgage: banks lying/lending about credit scores
> Covid: continuing online & EV trend, meme stocks, SPACs
> AI: continuing scaling laws, high ROI?
It’s not hard to predict that events will happen. It’s hard to do so with more precision than the next guy.
Something I learned in H2 of 2021, when I nearly went broke betting on a correction. Wasn’t wrong, one did occur. Just failed to realize I couldn’t figure out exactly when.
They are however not examples of long depressions. Which I think is reasonable to expect we'll see less of, given that more and more regular people feel the need to put their money in the stock market. There is simply no alternative. And every time we reach new heights. This is also expected.
Will this go on forever? Probably not. But it won't look like the 1930s. The stock market is a crowd, not a science.
> The global pandemic will tank the stock market
It actually did screw up the economies of a lot of countries and companies and it messed with stock markets as well. It increased debt worldwide, it increased unemployment that took years to recover.
> High interest rates will tank the stock market
There is a well established relationship between lower stock market returns when there is high interest rates.
> War in Ukraine will tank the stock market
It significantly hurt the Russian stock market, at least the sanctions did. But war tends to be a stimulus for the economy as long as it isn't too large of a war.
I'm not sure what else needs to happen to show the economy has been doing poorly for all but the richest segments. The return of a blatant and severe caste system and mass starvation?
All of the events you listed have had significant economic effects and required massive intervention from the state to buoy asset prices. The longer this continues the more our economy becomes geared to producing "value" for this small, and shrinking, group of owners at the expense of everyone else.
I think there's an incorrect valuation by looking at where things are today. I mean Black Monday, the 2009 housing crash, DotCom Bubble, and others were times the market did tank yet we've since recovered.
So how are we measuring the accuracy of those predictions? From Jan to April the Trump admin was announcing tariffs. VOO's (S&P500) lowest price this year was on April 8th at $456.74 and on Feb 19th it was $563.67. We see similar patterns with covid and invasion of Ukraine. Do we consider a 25% reduction "tanking"?
I agree that with enough time that everything will work itself out. But I do not think that this means we should ignore or downplay damage done in the short term.
Diversifying does not stop the tanking. It will reduce the risk related to poor choices all at once
- we're going into the next Great Depression (a once in a lifetime occurrence)
- a small subset of stocks (that happens to make up a huge portion of the entire equity market in the US) has extreme PE and PEG ratios and will pop (which happens every few years)
I think your point largely stands for both cases, but it's important to delineate them.
If you're preparing for a Great Depression - you're likely only going to be right by coincidence. If you're preparing for a stock bubble to pop, at the very least, you've got better odds.
Deleted Comment
I'd be happy for someone to tell me I'm wrong. Otherwise it will take something dire to break this cycle.
Bernie Madoff got caught when 2008 happened and he didn't have enough money to pay back investors, if 2008 never happened he maybe keeps going.
For Elon Musk, and maybe why he bought Twitter, he has to stay popular enough that enough people believe his companies are the best investment available. If someone surpassed him, and Tesla didn't seem like the place where robots or self-driving might happen, then people would probably move away.
For AI, maybe something similar? People would have to start deciding that investing somewhere else is better than investing in AI and let the AI companies start to fail.
Presumably the cause of a bubble is just too many people thinking AI is the best place to invest their money? And the bubble will pop when they decide to invest somewhere else?
No matter how right the bubble crowd is, the market becoming irrationally exuberant for a brief period of time does not invalidate the technology or the rapid change we'll see as a result of it.
It's the same today. A lot of the hyperVCfunded startups will fail, without a doubt. But the tech giants will get their money from this tech, and it will be ubiquitous in ways we can't even imagine now.
To be clear, I don't think LLMs are going to vanish, there's clearly some things they're good for, but there's also some really big differences between the AI bubble and the dotcom bubble. People are very skeptical and worried about AI, they (the general public) aren't really using it for anything more than search, there hasn't been any clear economic data indicating that it improves productivity in a meaningful way, and a killer app hasn't really emerged that isn't a free chatbot. Plus, the majority of the money is concentrated in the same 5 or 10 companies just passing it back and forth between each other before eventually handing it over to NVIDIA. Maybe I was just too young to pay attention to the dotcom bubble, but the vibe seems completely different.
When did we forget that discovering "truth" via symbol manipulation is a fraught proposition at best? It was in the 17th century that Leibniz proposed that encoding logical propositions into a propositional calculus would allow all intellectual disputes to be resolved mechanically.
"For it would suffice for them to take their pencils in their hands and to sit down at the abacus, and say to each other (and if they so wish also to a friend called to help): Let us calculate."
The original AI bro! Any day now...
I've been thinking lately that the real value of a piece of code is that there is at least one human alive somewhere supporting it. You remove that, and the value proposition gets extremely shaky. Folks are going to have to learn this first hand as their brain becomes full of echoes of LLM output, rather than the output being an echo of some brain process (you know, _actual_ intelligence).
But sure, if you can convince enough people that you've invented a real magic 8-ball, you might be able to convince enough of them to shake it for the rest of their lives. Me, I'm not convinced that the marginal value of "new" text and images is there.