Financial Armageddon!!

[WINZ]

September 2008 this thread started.

Are we having a crash, yet?

Be patient, it'll happen (when does it not..?), and I can guarantee that it'll be bigger than the last one.

[Bob Kane]

Be patient, it'll happen (when does it not..?), and I can guarantee that it'll be bigger than the last one.

I think we'll all die of old age before your 'biggest ever' crash happens.

[Nick G]

Oooooh a guarantee. That seals it!

[WINZ]

I think we'll all die of old age before your 'biggest ever' crash happens.

It's not my crash.. it's called a 'Minsky Moment' and unless you're 90+ or of ill health, then you can expect to see another one before you die.

[WINZ]

Oooooh a guarantee. That seals it!

Newton's Third Law of Physics ("that every action has an equal and opposite reaction") broadly applies to the world of finance/economics however one could argue that the level of 'equivalence' isn't constant.

I would argue that in the case of Central Bank intervention (i.e. quantitative easing) that there is a significant multiplier effect. i.e. Central Banks pump into $15 trillion of liquidity which leads to a significant upswing in global asset prices, and arguably a (larger potential) corresponding correction in asset prices.

This is simply due to the creation/destruction of wealth being asymmetrical in proportion due to the wiring of the human brain.

Daniel Kahnerman and Amos Tversky's loss aversion theory broadly proves that humans prefer avoiding losses to acquiring equivalent gains. I.e. you suffer more anguish when losing $10,000 than you receive joy from receiving $10,000. As such when the tide goes out on the economy, humans rapidly seek to minimise their losses which is why corrections happen significantly more quickly (and sharply) than their causative bubbles.

In terms of the "bubble of everything" this has been greatly magnified by central bank intervention (e.g. QE/low or negative interest rates) and therefore naturally we can expect and even greater/sharper correction.

Given the financial world is significantly more integrated than 200-01 and 2007-08, then again naturally we can expect more collateral damage.

Given the global median population in the west is also older than 07-08 (e.g baby boomers heading into retirement) then we can also expect that the next correction will have significantly more fallout. You only need to Google "pension crisis" to get a better understanding of the wider issues at play.

Good luck

[Bob Kane]

It's not my crash.. it's called a 'Minsky Moment' and unless you're 90+ or of ill health, then you can expect to see another one before you die.

It's your posting.
They're your words.
It's your crash claim.
Not the first time either.
Once again you don't give a time-frame or a magnitude of damage.
"One day something bad will happen..."
Gee, that will be useful in shaping my investment strategy.
Grow some balls and give some specific details.
Actually, I'm thinking you don't have a clue and just have a funny personality defect where you wallow in bad news and spread it around with some perverse pleasure.

[Bluekiwi]

It's your posting.
They're your words.
It's your crash claim.
Not the first time either.
Once again you don't give a time-frame or a magnitude of damage.
"One day something bad will happen..."
Gee, that will be useful in shaping my investment strategy.
Grow some balls and give some specific details.
Actually, I'm thinking you don't have a clue and just have a funny personality defect where you wallow in bad news and spread it around with some perverse pleasure.

WINZ's Armageddon is when the Thur dole payment stops ?

Surely Labour wont let that happen

[WINZ]

It's your posting.
They're your words.
It's your crash claim.
Not the first time either.
Once again you don't give a time-frame or a magnitude of damage.
"One day something bad will happen..."
Gee, that will be useful in shaping my investment strategy.
Grow some balls and give some specific details.
Actually, I'm thinking you don't have a clue and just have a funny personality defect where you wallow in bad news and spread it around with some perverse pleasure.

I’ve given a time-frame before, but we’re expecting from Q2 2018 onwards (likely late ‘18 - early ‘19) - you can hold me to that.

Damage - impossible to quantify but the GFC was approx $22 trillion in asset devaluations and direct economic damage (i.e lost output).

I would expect that the US stock marker will at least half (50-60%) which alone is probably $20 trillion. Add in real estate, bonds (currently $11 trillion are yielding negative returns globally), global assets etc and you have a large sum of money.

There’s also the flow on effect of lost jobs/productivity, a big impact to western retirement savings, and potential concerns around US govt solvency.

Some are suggesting that the US will default (or at least be unable to finance their deficit via treasury demand from other sovereigns) however personally I think they will simply be forced to devalue their currency.

I’m not a nihilist, this is just my fair assessment of the market, if you can even call it that anymore.

I won’t enjoy the outcome.. do I position myself for it.. yes of course but who in their right mind would want to see their friends and family lose their jobs/savings etc.

Maybe you’re correct in that it is a personality defect. I can see the writing on the wall and I cant see any possible way out of our current trajectory than a very sharp correction, hence why I feel compelled to warn people.

It’s literally the calm before the storm. Volatility is at record lows (i.e below 10 on the vix index) for a record number of days whilst asset prices continue to melt up.
There hasn’t been a 3% correction in the US stock market (a healthy sign of a market) since the Trump election. Central banks have pumped in unprecedented amounts of liquidity and are now collectively in the process of withdrawing their monthly stimulus. Rates are rising. There are obvious bubbles everywhere.

It’s these sorts of things that make me concerned. Crashes don’t occur when everything is bleak or uneventful. They happen when everyone is far too optimistic and everyone in the market is making money (e.g 1929, 87’, 2007).

Food for thought.

[Davo36]

Good posts WINZ. I agree.

A little anecdote: I went for a walk around Newmarket in Auckland yesterday. There are at least 20 big development projects going on including: Apartment developments, new Westfield mall, 4 new university developments (student accommodation, medical school stuff, engineering school stuff...), a large office building (13,103sq m) and so on.

And then in the rest of Auckland you have a huge amount of building going on including: The new conference centre, the CRL and many other apartment buildings, office buildings and so on.

And so I'm thinking, with this much activity going on, how can things go bust?

But it's precisely at these times, when development is racing ahead that things can take a downturn. 1987 was like this. 1997 was like this. 2007 was like this too. And the developers all got caught.

We've got all time highs in all asset classes. Looks awfully bubbly to me.

[eri]

Maybe you’re correct in that it is a personality defect. I can see the writing on the wall and I cant see any possible way out of our current trajectory than a very sharp correction, hence why I feel compelled to warn people.

a few of us suffer the same "defect"

common enough to have a name

The Cassandra complex is a psychological phenomenon in which an individual's accurate prediction of a crisis is ignored or dismissed.

Corporate world[edit]
Foreseeing potential future directions for a corporation or company is sometimes called ‘visioning’.^[11]
Yet achieving a clear, shared vision in an organization is often difficult due to a lack of commitment to the new vision by some individuals in the organization, because it does not match reality as they see it.
Those who support the new vision are termed ‘Cassandras’ – able to see what is going to happen, but not believed.^[11]
Sometimes the name Cassandra is applied to those who can predict rises, falls, and particularly crashes on the global stock market, as happened with Warren Buffett, who repeatedly warned that the 1990s stock market surge was a bubble, attracting to him the title of 'Wall Street Cassandra'.^[12]
Andy Grove, in his book Only The Paranoid Survive, reminds the reader of the Helpful Cassandras that sense the winds of change before others and are critical to managing through Strategic Inflection Points.^[13]

[Perry]

Taking in David's comments, along with WINZ et al, if / when a big correction takes place, what is going to be the likely effect[s] on long-term, buy-and-hold PIs?

1) Residential PIs?

2) Commercial / Industrial PIs?

Further, what debt equity ratios will ensure PIs in (1) and (2) survive / weather the storm?

And for the cashed-up, how's the prospect of a 'haircut' looking for them?

I have wondered (and I know others who have a similar view) just how it is that a debt-driven house-of-cards economy stands up and how for long it can do so.

[WINZ]

Taking in David's comments, along with WINZ et al, if / when a big correction takes place, what is going to be the likely effect[s] on long-term, buy-and-hold PIs?

1) Residential PIs?

2) Commercial / Industrial PIs?

Further, what debt equity ratios will ensure PIs in (1) and (2) survive / weather the storm?

And for the cashed-up, how's the prospect of a 'haircut' looking for them?

I have wondered (and I know others who have a similar view) just how it is that a debt-driven house-of-cards economy stands up and how for long it can do so.

Presuming there were a large correction then inevitably, the values of all property would likely come down (some more so than others). In the case of rentals etc, all things being equal then your yield % actually improves, so as long as you had sufficient equity in the property and it can service itself then obviously you can ride the dip.

It's hard to say what exactly would/could happen but a 20-30% correction certainly wouldn't be out of the question. I would actually be more worried about an even larger correction in Sydney/Melbourne as this could have flow on effects to credit availability/liquidity. Bottom line would be to have prudent equity levels and good income levels.

In terms of the debt 'house of cards' our whole system is reliant on debt as a function on re-allocating savings. If individuals can't borrow (for a cost), then other individuals can't generate a yield from saving. As such every loan represents a corresponding asset (savings) on the other side of the ledger, and therefore debt in itself is not a bad thing. In fact it allows individuals to expedite purchases in order to either earn a return and/or bring consumption forward and allocate the cost over a later period.

Where the system has broken down is that Central Banks responded (arguably incorrectly) to the GFC but printing/creating more debt to further leverage up the financial system.

If you read that actual Federal Reserve transcripts they outline the mechanics of the Fed's proposed "wealth effect", i.e. increase the money supply which increases asset vales, which in turn make people feel wealthier and encourage them to spend more, which in turn creates GDP growth (via consumption), promotes inflation and employment, thereby creating a virtuous economic/business cycle.

The problem with this theory is that their math was wrong. They increased the money supply hoping this would drive GDP growth, however this ultimately had the inverse effect of lowering the velocity of money (i.e. people's propensity to spend). As such individuals/companies hoarded wealth and/or leveraged up to invest. For individuals this was investments in property, bonds, stocks etc, and for companies this was generally to buy back their own stock (further enriching management via stock scheme incentives).

Now the Central Banks are in a bind because if they withdraw the stimulus to quickly they'll crash the economy, but the longer they stimulate the larger the bubble(s) and the larger the corresponding correction. The Fed is attempting to tighten, the ECB (who have been extremely loose) are planning to tighten, and the Bank of Japan still has their foot on the accelerator. When the aggregate flows of the big central banks is negative (i.e. net tightening) then you will see a tightening in liquidity which in theory should flow through (adversely) to asset prices.

A "house of cards" is an interesting analogy as if they add too many cards on the structure it'll crash under its own weight and if they remove them too quickly, then well you guessed it.. Jenga.

[Perry]

In terms of the debt 'house of cards' our whole system is reliant on debt as a function on re-allocating savings. If individuals can't borrow (for a cost), then other individuals can't generate a yield from saving. As such every loan represents a corresponding asset (savings) on the other side of the ledger, and therefore debt in itself is not a bad thing. In fact it allows individuals to expedite purchases in order to either earn a return and/or bring consumption forward and allocate the cost over a later period.

Given the fractional reserve and capital adequacy regimes, it's been vehemently argued on these forums that most loans are in-a-sense fictional. I.e. they do not represent a saver's deposit, but a theoretical book entry.

[Chris W]

An opinion piece which expands on WINZ's comments and observations in financial markets ...

https://www.bloomberg.com/view/articles/2018-01-16/please-remove-the-punchbowl-before-markets-get-any-crazier

Please Remove the Punchbowl Before Markets Get Any Crazier

There's a great big pile of evidence that financial markets have reached the speculative mania phase.



Everyone knows that when the shoeshine boy gives you stock tips, it is time to grab the canned goods and head for the hills. It happened to me in 2000 at the height of the dot-com bubble. A San Francisco cab driver gave me advice on trading options. I’m sure most people have had similar experiences in the current bull market. One of my subscribers says he was upbraided by a burlesque dancer (don’t ask) for not owning Bitcoin.
There is plenty of goofiness to go around. You may have heard that Kodak, after missing out on digital photography, is attempting to recover with a blockchain product and, of course, an ICO. A Hooters franchisee started its own cryptocurrency rewards program. Long Island Iced Tea became Long Blockchain and the stock soared five-fold in a day.


This is the type of stuff we saw in 1999, when stocks would skyrocket after companies added “dot-com” to their names. But there are even bigger, more sinister distortions today. A huge run-up in the price of Ripple, the cryptocurrency that is supposed to facilitate financial transfers, left one of its founders sitting on a fortune that made him one of the richest five people in the world.


My definition of a bubble is when people make money out of all proportion to their intelligence or work ethic, and it seems to apply here.
Of course, no discussion of cryptocurrencies could be complete without Dogecoin, the token that was launched as a joke but has attained a $2 billion valuation. That’s only slightly less silly than the virtual cats, the “Cryptokitties” that people are buying with Ethereum to the tune of hundreds of thousands of dollars.


Of course, there’s plenty of speculation to go around in the stock market, where the Intercontinental Exchange listed futures on FANG stocks, because we apparently need more leverage on Facebook, Amazon.com, Netflix and Google-parent Alphabet Inc. than Regulation T margins allows on individual shares. The exchange-traded fund world is a bit like ice skating, where everyone was satisfied with triple-leveraged ETFs for years, but now quadruple-leveraged ETFs have appeared on the scene. Speaking of ETFs, the industry is meeting surging demand for marijuana stocks by offering a junior marijuana growers ETF, in case you needed a little more volatility than “large-cap” marijuana stocks provide.


While we’re on volatility, you may have heard about the Home Depot logistics manager who turned his side job shorting the VIX into running a $100-million-plus hedge fund. That strategy, of course, depends on volatility staying low, which anyone above the age of 30 will tell you is probably not sustainable.


There is the time that Tony Robbins and Pitbull headlined a real estate conference in Toronto, the time that a painting went for $450 million, the time that a wristwatch went for $17 million, the time that SoftBank invested $300 million in a dog-walking app, the time that bonds of a corporate borrower rated BBB traded at a negative yield in Europe, the craft beer bubble, the Instagram “influencer” bubble, and Tiffany’s “Everyday Objects” campaign, with a ball of yarn selling for $9,000.


Some people don’t like to trade by anecdote, and you could certainly dismiss one or two of these anecdotes in isolation, but taken together, there is a great big pile of evidence that financial markets have reached the speculative mania phase. It is a frenzy. In 2009, people were so scarred that they refused to dip a toe back into a market that was clearly going higher. Now, people turn up their nose at anything less than a 50,000 percent return, which seems to be easily obtained by buying the latest alt-coin.


The Federal Reserve’s response to all of this has been to engage in a ridiculous discussion about inflation targeting. Policy makers are still concerned about the rate of inflation being too low and are seemingly oblivious to the signs of excess speculation all around them. There was a time when back-to-back speculative bubbles had so damaged the economy and investor psyche that the thought of allowing a third one to form would have been unconscionable -- and yet, here we are.


Leave the inflation target aside for a moment, and the insanity of trying to create more inflation. The Fed’s unwritten mandate is to take away the punchbowl when the party gets out of hand. Is there really a risk of plunging the U.S. into a Japan-style deflationary depression by having positive real interest rates? I don’t think there is. The economy needs higher rates, but not because of any threat of faster inflation. The economy needs rate hikes to curb speculative excess. Boost rates 200 basis points and all this crazy stuff goes away. People might even keep cash in a bank account.

[Bob Kane]

I’ve given a time-frame before, but we’re expecting from Q2 2018 onwards (likely late ‘18 - early ‘19) - you can hold me to that.

Damage - impossible to quantify but the GFC was approx $22 trillion in asset devaluations and direct economic damage (i.e lost output).

I would expect that the US stock marker will at least half (50-60%) which alone is probably $20 trillion. Add in real estate, bonds (currently $11 trillion are yielding negative returns globally), global assets etc and you have a large sum of money.

Good man.
A date: mid 2019 at latest
Magnitude: US stock market at least half what it is now (Dow Jones: 16 Jan 2018 = 25,792)
My interpretation of this: you are claiming the Dow Jones will drop below 13,000 before June 2019.
Is this right?

Perry, can you set this up on that trusty diary of your please?