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Interpreting a market plunge

economist.com

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Re: Interpreting a market plunge

#141

Post by AnimalMuppet »

crdoconnor wrote: post #38
thisisit wrote: post #8

The bigger concern is on the interest rate hikes. Low rates were expected to help kickstart the economy and prices and wages to increase. What has happened instead is that all the cheap money has caused asset inflation. US companies now have record amount of debt. Too fast increase in interest rates will cause their debt obligations to balloon and lower profitability. Though this will take couple of quarters to fully…

>Low rates were expected to help kickstart the economy and prices and wages to increase. You're confusing the sales pitch used to justify low interest rates with what they were expected to do. They were expected to bail out insolvent banks and save them from the consequences of their collective bad decisions. Not raise wages. Not kickstart the economy. Fiscal stimulus is how you do that and they knew that. Had politi…

You know, I'm not sure that I consider unions to be the gold standard for economic advice for the country. For what's good for the unions, sure. For the country as a whole? Not so much.

Re: Interpreting a market plunge

#142

Post by corin_ »

TekMol wrote: post #77
tyingq wrote: post #72

Earlier quoted context omitted.

Guessing the bottom is hard. Spreading risk, like you have done, is a better idea. Maybe be more granular than "money market" and "stocks" though. There's bonds, annuities, real estate, foreign derivitives, and other vehicles too.

You seem to imply that I am looking for investment advice or that my approach of asset allocation might change. Neither is the case. I will simply continue to hold 50% in shares and 50% in money. My question is what is better for me. If stocks go up or if stocks go down.

If you don’t know what the effect on your 50/50 decision would be depending on how the stock market performs, why are you so set on that decision as to not want advice if it were offered? If you don’t know the effects, how do you know it wouldn’t be better to be 55/45, or 45/55?

Tyinguq gave you a good answer already, but to add to what s/he said: anything kept in cash will almost certainly earn less than inflation, meaning that with cash you’re losing, even if the numbers appear to go slightly up.

There are plenty of times when it’s worth taking this hit for the benefits of cash. Maybe you want the cash as an energy fund to cover ‘x’ months of living costs should you lose a job, maybe you’re planning a big purchase in the near future, maybe you think the stock market is about to crash and want to invest when it’s at or near its next major low point, maybe you’re about to retire and want some of your wealth extremely low risk, I’m sure there’s plenty of other reasons. (If you’re trying to time the market and buy more when it’s cheap, you might do much better than investing it now, or you might do much worse, but that’s a whole new topic).

Unless a specific reason, in the context of however big or small your wealth is, means that you specifically need exactly 50% in cash, you might consider investing more in something that can give better returns than cash. If you’re trying to hedge against a stock market crash but think historical patterns in the finance world will continue, maybe bonds are a good option. If you’re worried that there’ll be a wider downtown then you might consider precious metals or even cryptocurrency. And maybe cash should be a part of the hedge, but maybe not all.

Disclaimer: I’m an amateur not a professional adviser, and I’m not advising you to do anything other than to consider why you think 50/50 is the best choice and whether it actually is or not.

Re: Interpreting a market plunge

#144

Post by crdoconnor »

AnimalMuppet wrote: post #141
crdoconnor wrote: post #38

Earlier quoted context omitted.

>Low rates were expected to help kickstart the economy and prices and wages to increase. You're confusing the sales pitch used to justify low interest rates with what they were expected to do. They were expected to bail out insolvent banks and save them from the consequences of their collective bad decisions. Not raise wages. Not kickstart the economy. Fiscal stimulus is how you do that and they knew that. Had politi…

You know, I'm not sure that I consider unions to be the gold standard for economic advice for the country. For what's good for the unions, sure. For the country as a whole? Not so much.

>You know, I'm not sure that I consider unions to be the gold standard for economic advice for the country.

How about you tell me who you think is the gold standard for economic advice?

Re: Interpreting a market plunge

#145

Post by AnimalMuppet »

ChicagoBoy11 wrote: post #104
Apocryphon wrote: post #42

Here's a question - people often refer to the 2008 recession as a once in a lifetime event. On what basis do they make that statement- because mortgages can't possibly pop as massively twice? What's to prevent another industry (in recent years often rumored to be student loans) from doing the same? Who's to say not another sector is as rotten as real estate was?

Mostly on the basis that it is the only way they can justify to clients/viewers/etc to "not have seen it." One would very reasonably conclude that the failure of banks/regulators/analysts to see any of this would likely be a good sign that they prob. don't really know what they are talking about, and predicting the market is actually kinda impossible, and consequently the value they add to their clients is minimal/no…

I think it goes like this. The memory of a crisis fades over time - especially the emotional memory of how it felt to wonder if the world was ending. So the longer time since the last crisis, the less cautious people are.

You can think of this as a system with gain. As time passes, people are willing to take more risks, which corresponds to the gain going up. That's fine... until the gain exceeds unity. Then there's a catastrophe. Then everyone gets very averse to risk, so the gain goes way down. But as time passes, it creeps up again...

It's reasonable to call 2008 a "once in a lifetime" event, because there hasn't been anything like it since the Great Depression. This gives some idea of the time constants involved. (One of the virtues of our regulatory regime is that they have managed to increase the time constants. Before the Great Depression, we used to have events like this every decade or two.)

Re: Interpreting a market plunge

#146

Post by AnimalMuppet »

crdoconnor wrote: post #144
AnimalMuppet wrote: post #141

Earlier quoted context omitted.

You know, I'm not sure that I consider unions to be the gold standard for economic advice for the country. For what's good for the unions, sure. For the country as a whole? Not so much.

>You know, I'm not sure that I consider unions to be the gold standard for economic advice for the country. How about you tell me who you think is the gold standard for economic advice?

How about economists?

I know, they make mistakes. So do physicists. But if I need physics advice, I don't go to plumbers.

Re: Interpreting a market plunge

#147

Post by viraptor »

bryanlarsen wrote: post #115
viraptor wrote: post #99

Earlier quoted context omitted.

That's not really how the market is balanced. If there's a million sellers at 12.34 and 1 buyer at 12.33, nothing changes and the price didn't move.

The word "seller" and "buyer" implies there is actually selling and buying happening. In your scenario there are no sales, so no actual sellers and no actual buyers. We can argue over whose dramatic oversimplification is worse, but do you disagree with the basic point that a small number of people can dramatically move a large market?

I'd go with "it takes a lot of money (relative to normal volume) to move the market, but it doesn't matter if it's one rich investor, or millions of tiny ones with the same idea".

Re: Interpreting a market plunge

#148

Post by crdoconnor »

AnimalMuppet wrote: post #146
crdoconnor wrote: post #144

Earlier quoted context omitted.

>You know, I'm not sure that I consider unions to be the gold standard for economic advice for the country. How about you tell me who you think is the gold standard for economic advice?

How about economists ? I know, they make mistakes. So do physicists. But if I need physics advice, I don't go to plumbers.

Yes, I meant which economists specifically?

Economists are rational economic agents similar to the people that they study. They make mistakes, but more importantly - like us - they also respond to incentives.

There's an interesting set of incentives in economics departments that the physics department simply doesn't have.

I might go to a physicist to fix my boiler if all the plumbers in my area were shysters.

Re: Interpreting a market plunge

#149

Post by dragonwriter »

crdoconnor wrote: post #148
AnimalMuppet wrote: post #146

Earlier quoted context omitted.

How about economists ? I know, they make mistakes. So do physicists. But if I need physics advice, I don't go to plumbers.

Yes, I meant which economists specifically? Economists are rational economic agents similar to the people that they study. They make mistakes, but more importantly - like us - they also respond to incentives. There's an interesting set of incentives in economics departments that the physics department simply doesn't have. I might go to a physicist to fix my boiler if all the plumbers in my area were shysters.

> Economists are rational economic agents similar to the people that they study.

Neither economists nor the people they study are rational economic agents, as the economists that use empiricism rather than trying to bash the observations to fit neat preconceived theoretical frameworks would probably recognize.

Re: Interpreting a market plunge

#150

Post by AnimalMuppet »

crdoconnor wrote: post #148
AnimalMuppet wrote: post #146

Earlier quoted context omitted.

How about economists ? I know, they make mistakes. So do physicists. But if I need physics advice, I don't go to plumbers.

Yes, I meant which economists specifically? Economists are rational economic agents similar to the people that they study. They make mistakes, but more importantly - like us - they also respond to incentives. There's an interesting set of incentives in economics departments that the physics department simply doesn't have. I might go to a physicist to fix my boiler if all the plumbers in my area were shysters.

Well, if you put it that way, I'd distrust a lot of economists. Big bank economists, stock broker economists, union economists, any lobbying group economists... have I missed any?

Oddly, I more or less trust the Congressional Budget Office. I kind of trust the Fed. (They have their own lens, which you can call bias, but they have more and better data than anyone else, and they are a lot more aware of second- and third-order effects than almost anyone else.)

I read your original comment as saying that we should have gone to the unions as our sole source of economic advice. I think that's a terrible idea. If you meant that we should listen to them as well as others, sure, I actually agree with that.

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