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Do you think Wall Street is in another bubble?


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#1 Abaco

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Posted 26 March 2010 - 02:58 PM

Do you think stocks are inflating in a bubble that's about to burst?
There's no way to rule innocent men. --(Dr. Ferris in Atlas Shrugged)

#2 rtg24

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Posted 26 March 2010 - 02:59 PM

Depends. Remember the dollar is also inflating.

In gold terms, definitely.

#3 Henrik Unné

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Posted 26 March 2010 - 06:39 PM

Depends. Remember the dollar is also inflating.

In gold terms, definitely.


The appreciation in stock prices is in my view a bubble, but given the expansion of the money supply, the stock market may just keep going up (in nominal terms, not in real terms) until the fiat money system collapses. It could end in a very ugly way.

#4 rtg24

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Posted 27 March 2010 - 09:32 AM

Read this: http://www.frontline...f/mwo032610.pdf

He knows what he's talking about.

Sucks for me, I'm in my early 20s...

#5 Joss Delage

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Posted 30 March 2010 - 07:08 PM

Sucks for me, I'm in my early 20s...


Pile up the debt - fixed rate, non-inflation adjustable. In short, mortgage or student, mostly.
"The greatest productive force is human selfishness."
Robert A. Heinlein

#6 Abaco

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Posted 01 April 2010 - 01:45 PM

Read this: http://www.frontline...f/mwo032610.pdf

He knows what he's talking about.

Sucks for me, I'm in my early 20s...

Most Greeks I know will tell you, "He who dies with the most debt, wins." Pretty fitting, I'd say.
There's no way to rule innocent men. --(Dr. Ferris in Atlas Shrugged)

#7 RayK

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Posted 01 April 2010 - 04:29 PM

Not to sound to simplistic, but as long as the government plays a part in this industry (along with others) there will always be a bubble(s) awaiting us in the future.

#8 rtg24

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Posted 01 April 2010 - 05:19 PM

Not to sound to simplistic, but as long as the government plays a part in this industry (along with others) there will always be a bubble(s) awaiting us in the future.

I believe inherent inefficiencies in the capital allocation process coupled with human nature mean there always be bubbles (e.g. was the Tulip Mania government-driven?). However, in a free market, they would die out much faster.

I heard today on French radio a - technically - right-wing politician arguing for doubling the number of people who should have access to zero-interest mortgages (taxpayer-backed). She said it was an outrage that 30% of the population couldn't afford a home. History is condemned to repeat itself.

But wait, of course not, it's the traders' fault, they created the crisis :D

#9 JohnRgt

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Posted 01 April 2010 - 05:28 PM

History is condemned to repeat itself.

If we don't learn the obvious lessons, we're "condemned" to repeat historic atrocities. But the repeat isn't the lock so many around us insist that it is.
Fear is the passion of slaves. -- Patrick Henry

#10 rtg24

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Posted 01 April 2010 - 05:34 PM

History is condemned to repeat itself.

If we don't learn the obvious lessons, we're "condemned" to repeat historic atrocities. But the repeat isn't the lock so many around us insist that it is.

Asia has learnt. Stratfor recently wrote a great piece on the game the Chinese leadership is playing. They seem to understand capitalism much better than we do.

The thing is - by a natural process of evolution, humanity eventually learns, if there are incentives to do so. You can see this by seeing how far ahead the US is from Europe in terms of quality of life and purchasing power (to the amateurs of French cuisine, British clothing, German cars and so on, this will seem like heresy).

And the same is true of companies, especially investment funds.

The thing is, there are two options. Either politicians are REALLY stupid. Like the Wesley Mouches of Atlas, they whine and don't understand why their mediocre "solutions" do not work. Or they know exactly what they are doing, in which case they are criminals. I believe we have a mix of both. Some are criminals, like the Spanish petitioning for money and attacking realistic investors, some are just misguided from sheer stupidity like the French (Sarkozy in particular) and some are honest and prudent, like Angela Merkel refusing Greece free money.

As for the US, I most probably do not need to comment :D

#11 rtg24

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Posted 01 April 2010 - 05:37 PM

History is condemned to repeat itself.

If we don't learn the obvious lessons, we're "condemned" to repeat historic atrocities. But the repeat isn't the lock so many around us insist that it is.

I agree with this. Had friends of mine not bothered to explain things to me (via the Socratic method, asking annoying questions) I would probably still be a socialist thanks to my French upbringing.

#12 Abaco

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Posted 01 April 2010 - 05:39 PM

Not to sound to simplistic, but as long as the government plays a part in this industry (along with others) there will always be a bubble(s) awaiting us in the future.

I believe inherent inefficiencies in the capital allocation process coupled with human nature mean there always be bubbles (e.g. was the Tulip Mania government-driven?). However, in a free market, they would die out much faster.

I heard today on French radio a - technically - right-wing politician arguing for doubling the number of people who should have access to zero-interest mortgages (taxpayer-backed). She said it was an outrage that 30% of the population couldn't afford a home. History is condemned to repeat itself.

Wow. That makes me clench. Not everybody should own a home, obvously. On the bright side, your comment gives me thought. Maybe I could time the real estate market next time... :D (sarcasm)
There's no way to rule innocent men. --(Dr. Ferris in Atlas Shrugged)

#13 rtg24

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Posted 01 April 2010 - 05:57 PM

Wow. That makes me clench. Not everybody should own a home, obvously. On the bright side, your comment gives me thought. Maybe I could time the real estate market next time... :D (sarcasm)

Not such a bad idea. I believe there could be a real edge in understanding the mechanics of populist socialism (basically, Atlas), studying the timing and mechanisms by which they have happened in the past, and then studying the best ways to take advantage of them.

As far as I'm aware, no hedge fund is currently running this as an explicit strategy (possibly because of political repercussions when they do - remember Soros' short of the pound, or recent attacks on people like Hugh Hendry for shorting Greece/the EUR) although many global macro or other fundamentals-based funds do incorporate basic classical economics in their views :D

It is definitely something I will look into later in my life, when I have both the capital and the experience to do this.

By the way, it's not so much timing the real estate market as those of its players that are most exposed to fluctuations. For example, whilst Goldman's CDOs were of exceptional quality, Merrill, which was a late entrant and wanted to gain market share, produced some true abominations. A savvy person could have spotted that (a 22 year old Harvard undergrad did, read her paper here: http://www.hks.harva...CDOmeltdown.pdf ) and done a simple long/short trade (you need both sides to fund it). Similarly, if you believe there will be swings in gold, you can easily maximise your returns by trading silver instead, which fluctuates in a more amplified manner but according to similar fundamentals, without taking on risky leverage.

(please do not enter ANY of the above markets without a SOUND understanding of how they work. Usual disclaimer. :D)

#14 RayK

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Posted 01 April 2010 - 09:07 PM

Not to sound to simplistic, but as long as the government plays a part in this industry (along with others) there will always be a bubble(s) awaiting us in the future.

I believe inherent inefficiencies in the capital allocation process coupled with human nature mean there always be bubbles (e.g. was the Tulip Mania government-driven?). However, in a free market, they would die out much faster.

I would not call what you state as "bubbles", but instead flucuations which is perfectly fine and normal. In a free society there would be no long-term irrational increases or irrational decreses within business as there would be no one to force these things to happen. If the cost of homes goes up because of a lack of supply then capitalist builders would step into that market to make money while filling the demand and the overall house cost would soon return to a lower cost. In other words, government manipulation of any field always creates "bubbles," but in a free market all we would see is a change of cost and the supply or demand changes. The more statist a country becomes the more often we will see "bubbles" and the more capitalistic it becomes the less we will see of irrational actions that cause "bubbles." And if a country or economy were totally free we would not see any "bubbles."

#15 rtg24

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Posted 01 April 2010 - 09:34 PM

I would not call what you state as "bubbles", but instead flucuations which is perfectly fine and normal. In a free society there would be no long-term irrational increases or irrational decreses within business as there would be no one to force these things to happen. If the cost of homes goes up because of a lack of supply then capitalist builders would step into that market to make money while filling the demand and the overall house cost would soon return to a lower cost. In other words, government manipulation of any field always creates "bubbles," but in a free market all we would see is a change of cost and the supply or demand changes. The more statist a country becomes the more often we will see "bubbles" and the more capitalistic it becomes the less we will see of irrational actions that cause "bubbles." And if a country or economy were totally free we would not see any "bubbles."

This is what I used to believe. But Jesse Livermore (the greatest trader in the 20th century), in particular, made me change my mind. He observed that the industrial man who had spent a lifetime carefully considering risk and return, being careful with every cent invested in his business, making his fortune out of his great sense of reason and rational decision making, would then approach the stock market much like a casino, buying what was hot, generally getting fleeced by professionals within hours. And coming back for more, expecting a free lunch with every trade, despite knowing from life experience that wealth always came from effort, not handouts. It certainly baffled him, since he built his stock market fortune on sticking to his rules and improving his system painstakingly. I definitely agree with James Montier etc. that there are herd spirits inside humans, and that they will never go away (and never have in the past).

One example of an unregulated bubble is the commodities (mainly oil but also non-precious metals) of 2008. Commodities are completely unregulated. "Insider" trading is not just legal, it is encouraged - for example, every oil producer has its own proprietary trading desk, whose role varies from providing a basic interaction between Exxon and the market, to taking on large prop risk much like the prop desks of investment banks. Those traders are directly linked to every well in every site ran by the companies - if a site goes off, they know first. However, banks fought back by buying and operating oil tankers at a loss/small profit, which enables them to have access to similar "insider" information before the market. Commodities investing is therefore extremely dangerous for the retail investor - exactly what edge are you hoping for?! - except in the case of very smart trading systems disconnected from the fundamentals of the commodity (see e.g. The Complete Turtle Trader by Michael Covel). It also means bubbles, when they happen, happen fast, brutally, and are over just as quickly. Observe the price of oil over 2007-2008-2009:
http://upload.wikime...pot_monthly.svg

Part of this was black box, trend following (they should be called trend enhancing) hedge funds. That bubble was up and over so quick it didn't hurt retail. However, it did have some negative consequences related to statism: it provided the justification for much of the cleantech/green investing that happened in the 5 years preceeding it, and then maximised the credibility of the idiots going on and on about how peak oil had happened and meant the end of the world. The one you will most have heard of is a certain annoying little man who tried to run for President a while back, failed, and decided to gain power the Toohey way instead. You must have heard of, if not seen his "film". I really hate this trend because nowadays very few are the investors that are not involved in some kind of alternative energy thing. Most of them are market timing a bubble cynically, but it gives the green credibility they really should not have.

That being said, I have not seen or studied enough data to draw conclusions about bubbles yet. It doesn't help that much of the economics profession is at the pay of the governments. And Keynesian when necessary.

(by the way, if you believe in peak oil, or that oil supply is necessarily restricted looking long term, plot the above price of oil in terms of gold oz, rather than USD. Amazing what story this tells. Any inflation-proof asset will do.)

#16 rtg24

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Posted 01 April 2010 - 10:04 PM

Here's a quote that I just read (Warren Buffett, Buffett Partnership Letter, 1959) showing some more of that trend:
"I think this summarizes the change in psychology dominating the stock market in 1958 at both the amateur and professional levels. During the past year, almost any reason has been seized upon to justify "investing" in the market. There are undoubtedly more mercurially-tempered people in teh stock market now than for a good many years and the duration of their stay will be limited to how long they think profits can be made quickly and effortlessly. While it is impossible to determine how long they will continue to add numbers to their ranks and thereby stimulate rising prices I believe it is valid to say that the longer their visit, the greater the reaction from it."

#17 Abaco

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Posted 01 April 2010 - 10:21 PM

That's interesting rtg24. I appreciate your input (including that of Livermore and Montier).

Last year, I goofed around with day trading. I found it to be educational, and realized that it should not be a casual hobby unless one enjoys being fleeced. I tested some theories and enjoyed it. If I paid attention I would have a good day. If I didn't, I wouldn't. I could just picture scores of profit takers, sitting anxiously staring at their computer screens all day long. "Made a dime! Sell!!!!"

I still like gold, as a long-term investment and portion of my portfolio. I like the physical gold, too. Other than watching my tgldx every day, I don't like a piece of paper that tells me I own gold :D
There's no way to rule innocent men. --(Dr. Ferris in Atlas Shrugged)

#18 rtg24

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Posted 01 April 2010 - 10:25 PM

Also in the specific case of the US and UK, please bear in mind the structure of the investment world. Who owns equities and bonds? Pension fund managers. Large asset managers. Insurance firms. Mutual funds.

These guys are rated against the curve. If they fall below a certain point, they're fired/divested from. It's all about being average (hence the fallacy of relative returns - "Sir, you appear to have lost 40% of your net worth in 4 months, but it's ok, the market on average lost 45%. I've taken the liberty of paying my 0.5% management fee cash, but we decided to be generous and waive 50% of the profit fee, so we'll only take 5% on the 5% of outperformance."). The only way to ensure you perform like the rest is to buy what the rest owns, to act like the rest. So in a way the industry is structured to behave like a herd of sheep.

#19 RayK

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Posted 01 April 2010 - 10:41 PM

Rtg24,

Your example still only explains flucuations within a market which sometimes happens when people bid up the price for the stocks/commodities of which they expect to make a profit from. In other words the spikes you mention are a normal part of a capitalistic society as the bidder/investor is looking to purchase ownership and hence part of future profits. When someone purchases a stock they are purchasing part ownership of a company or commodity of which they expect to make profits on. Now if the stock purchaser is of such little intellect that he fails to look at the cost and the possible return of investment and instead spends foolishly then he gets what he deserves. But the more that government intervenes for the idiotic invester, or what ever reason they give, the worse and more often the bubbles will become. Capitalism demands the best from everyone, to include the stock market investor. And in a rational society the professional that looks to "fleece" his clients should and would also get what he deserves, going out of business or jail time for being a fraud. The more the government regulates an industry the more they will run off the good people within that industry and hence irrational or immoral people will be left behind to create the mess we see today.

#20 rtg24

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Posted 01 April 2010 - 11:28 PM

Rtg24,

Your example still only explains flucuations within a market which sometimes happens when people bid up the price for the stocks/commodities of which they expect to make a profit from. In other words the spikes you mention are a normal part of a capitalistic society as the bidder/investor is looking to purchase ownership and hence part of future profits. When someone purchases a stock they are purchasing part ownership of a company or commodity of which they expect to make profits on. Now if the stock purchaser is of such little intellect that he fails to look at the cost and the possible return of investment and instead spends foolishly then he gets what he deserves. But the more that government intervenes for the idiotic invester, or what ever reason they give, the worse and more often the bubbles will become. Capitalism demands the best from everyone, to include the stock market investor. And in a rational society the professional that looks to "fleece" his clients should and would also get what he deserves, going out of business or jail time for being a fraud. The more the government regulates an industry the more they will run off the good people within that industry and hence irrational or immoral people will be left behind to create the mess we see today.


Ray,

I define bubbles as being when an asset class or particular assets are hopelessly overvalued, with a large proportion of market assets flowing straight in for no reason other than emotions. It's usually accompanied by sayings such as "this time is different" or "the new paradigm" or "the new economy", coupled with long explanations of why, really, stocks with no earnings forecast for 3 years are worth hundreds of millions, or why something which traded at $20 a barrel just a few years ago is suddenly worth $148 a barrel (or even the $70-80 range currently used). A year-long or longer overvaluation by several multiples of a long term average or trend is no fluctuation in my book... especially when the above qualitative indicators keep ringing!

As for fleecing. I was not referring to professional investors taking the industrialist's money and wasting it in bad investments. I was referring specifically to the forces of competition. As an analogy, imagine if somebody, noticing that you as CEO and founder of Progressive Exercise, were driving around in a rather nice Mercedes, decided to start their own exercise programme, but without any prior knowledge. The man reads a couple of books, perhaps one written by Schwarzenegger, buys some equipment, and advertises himself as a direct competitor to you, going for the same clients with bespoke requirements that form your clientele. Three months later, he is out of business, because what you are selling is a lifetime of expertise and the understanding and knowledge from thousands of sources, whereas he is asking a high price for something anybody could read in the same book he did (that being said, my understanding of the gym industry implies to me that many people simply do not care enough to see the difference :D ). As you rightly say, investing is not just a field where professionalism is required, it is also one of the most competitive, most difficult fields in which to be successful in the long term because it is so highly competitive. I am not going to be able to pick up a violin and play it tomorrow, even if I already play two classical instruments to near-professional level. Similarly, whilst the industrialist understands business well, he is not able to invest successfully in many cases without going through extensive efforts to understand the process and establish his edge, just as he did with his business. A value for a value...




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