The next financial crisis?

[REWahoo]

Are we destined for "QE Eternity" similar to Japan?

Are we? Or will the asteroid get us first?

 

[karluk]

Are we? Or will the asteroid get us first?

I'm betting on an asteroid strike first, followed by the Sun going supernova to finish us off competely. It seems like a cleaner and less painful way to go than suffering through an endless parade of self-proclaimed experts promoting their own version of financial Armageddon.

 

[lhamo]

I just looked out the window. Good news. China is still here.

We have a ridiculous amount of our networth tied up in real estate here. I'm not terribly worried about the doom and gloom macro predictions. China has endured a lot of turmoil in the last 200 years and will come through its current issues. Even the pollution thing is getting some serious government attention/investment and one benefit of living in a totalitarian country is that when the government wants to do something they can do it quickly. If you compare the Chinese rollout of universal health insurance with the ACA debacle, it is stunning.

I'm actually most worried about the news that they will likely be putting an elevated commuter railway in near our house. That is probably more likely to affect our property values than macro factors.

 

[Options]

Perhaps if you read Bernstein's The Four Pillars of Investing", particularly the chapters on the history of investing and the business of investing, you might stop listening to noise. This is not worth the time it would take to read it.

 

[brewer12345]

Are we destined for "QE Eternity" similar to Japan?

You tell us. Seems telling to me that the FOMC chose to begin tapering QE and did so even before Uncle Ben left the building.

 

[34rlsa]

Are we? Or will the asteroid get us first?

Each one of us has an asteroid headed our way... some sooner than others.

I'm only asking questions based on the title of the thread... out of curiosity of what your thoughts might be regarding a potential future crisis. Not how it might effect invest philosophies.

There will be another financial crisis at some point in the future and there will be a recovery. But for some... if it takes as long for the recovery to occur as it is in Japan it might feel like being hit by an asteroid.

 

[HFWR]

Each one of us has an asteroid headed our way... some sooner than others.



I'm only asking questions based on the title of the thread... out of curiosity of what your thoughts might be regarding a potential future crisis. Not how it might effect invest philosophies.



There will be another financial crisis at some point in the future and there will be a recovery. But for some... if it takes as long for the recovery to occur as it is in Japan it might feel like being hit by an asteroid.

Oh, there will be a crisis. It may be something out of the blue; seems we're always fighting the last war...

Re: Japan, our country (and economy) is much more flexible and open than Japan's, so likely more able to adapt and continue growing and evolving.

 

[MichaelB]

Oh, there will be a crisis. It may be something out of the blue

Unless it happens at night, then it'll be out of the black.

 

[34rlsa]

Oh, there will be a crisis. It may be something out of the blue; seems we're always fighting the last war...

Re: Japan, our country (and economy) is much more flexible and open than Japan's, so likely more able to adapt and continue growing and evolving.

Thanks for your comments.

I was beginning to believe it was taboo to discuss any possible threat of... dare I say it again... financial crisis.

 

[karluk]

There will be another financial crisis at some point in the future and there will be a recovery. But for some... if it takes as long for the recovery to occur as it is in Japan it might feel like being hit by an asteroid.

I would never completely rule out a multi-decade stagnation in the U.S. such as Japan has just been through. If it happens, I expect to survive and even thrive, seeing as how I'm only about 40% invested in stocks right now.

But to me, the whole point of why Dan Taylor's blog entry is so intellectually dishonest is precisely because he juxtaposes unrelated crises in what seems to be a blatant scare tactic to get unsophisticated investors to sign on to his investment advisory services for a fee.

PEs in the U.S. are elevated right now, true. But prices in Japan prior to the bubble bursting in 1990 were astronomically higher. Since it didn't affect U.S. investors as much as 2008, it's easy to overlook just how much more overvalued Japanese assets were compared to anything that's ever happened in the U.S. Dan Taylor, as a professional investment advisor, should know this, but if he does he certainly isn't letting prospective clients in on the secret.

Here is Burton Malkiel's description of the Japanese land and stock bubbles. It dwarfs anything that's happening in any major economy right now:

By 1990, the total value of all Japanese property was estimated at nearly $20 trillion - equal to more than 20 percent of the entire world's wealth and about double the total value of the world's stock markets. America is twenty-five times bigger than Japan in terms of physical acreage, and yet Japan's property in 1990 was appraised to be worth five times as much as all American property. Theoretically, the Japanese could have bought all the property in America by selling off metropolitan Tokyo. Just selling the Imperial Palace and its grounds at their appraised value would have raised enough cash to buy all of California.

The stock market countered by rising like a helium balloon on a windless day. Stock prices increased 100 fold from 1955 to 1990. At their peak in December 1989, Japanese stocks had a total market value of about $4 trillion, almost 1.5 times the value of all U.S. equities and close to 45 percent of the world's equity market capitalization. Firm-foundation investors were aghast at such figures. They read with dismay that Japanese stocks sold at more than 60 times earnings, almost 5 times book value, and more than 200 times dividends.

 

[HFWR]

Unless it happens at night, then it'll be out of the black.

It's better to burn out than it is to rust...

 

[34rlsa]

Thank you karluk.

I appreciate you taking the time to address my questions.

 

[clifp]

Great example Karluk that all bubbles are not created equal.

Even the 2008 market, wasn't nearly as over valued as as the 1999 market for anything related to tech.. I won't say it is easy to spot a bubble but it isn't impossible either. You just have to be willing to spend some time making comparison like Malkiel did.

Back in 1999, in Silicon Valley. A friend of mine was the VP of Engineering for 40 person startup focusing on Business two Business commerce (B2B). Now realize that Ebay and Amazon were only a fraction of their size today and business selling to each other over the net was in their infancy.

His company was going public, he nicely gave all of his poker buddies (mostly former work colleagues) a the opportunity to buy 100 shares at the IPO price. The company went public at $14 and promptly shot up to $50+. In trying to decide if I should sell or wait for a $100. I did some comparisons. I was selling my house at the time so I grabbed the Real Estate section of the paper. I looked at the average selling price of homes in Silicon Valley (about $150K) and multiplied by the total number sold almost 3,000 and determined that value of every house sold in the value in the last year was $400 million. I then looked at the total value of my friends 40 person company, with no revenues, much less profits in a crowded field and realized is was almost twice as much as all the Silicon Valley Real Estate. It was pretty easy to figure out immediately which was going to be worth more in the future 3,000 houses or a 40 person company. Anyway I sold (sadly my friend the VP had to wait a year before selling at which point his company stock was between $1 and $2)

Now there are plenty of metric which show the market is overvalued, and certainly there are some tech companies, and Tesla which are quite expense, but nothing like the excessive of 99/2000 with zero revenues and billion dollar market capitalization, or like the Japanese bubble.


Now I am not saying the market couldn't drop 30% tomorrow, it could and it may stay there for several year. What is very unlikely today is it for it to go down 75% like the NASDAQ did from 2000 to 2002 or the Japanese bear market..

So I complete agree with Karluk, if you going to compare today's market to past bubble, you need to present a somewhat fair comparison.

 

[ETFs_Rule]

There has always been uncertainty in the markets. Just stick to your stock / bond allocation ratio.

 

[target2019]

More reasonable than than the typical 1%/yr, but still way expensive, and how do returns compare to a low cost passive/index lazy portfolio after expenses?

Indeed. You'll never see his clients' returns plotted against index. The only way to find out is to hand over your A so that he can work his UM.

 

[Shawn]

Now there are plenty of metric which show the market is overvalued, and certainly there are some tech companies, and Tesla which are quite expense, but nothing like the excessive of 99/2000 with zero revenues and billion dollar market capitalization, or like the Japanese bubble.

Now I am not saying the market couldn't drop 30% tomorrow, it could and it may stay there for several year. What is very unlikely today is it for it to go down 75% like the NASDAQ did from 2000 to 2002 or the Japanese bear market..

So I complete agree with Karluk, if you going to compare today's market to past bubble, you need to present a somewhat fair comparison.

I agree that we are not likely to duplicate the 1990 Japan, 2000 tech, or 2008 credit bubbles. Rarely are economic and financial conditions identical. There are too many variables.

But this does not mean we are not currently in a bubble, perhaps even the "mother of all bubbles." If we are, it likely is unique to 2014. There could be other variables (debt, interest rates, downward employment trends, etc) that will combine with the lofty but admittedly unabsurd market valuations to create the "collapse of 2014." It could be that 15 years from now we will be wondering why people were too short-sighted to predict this pending doom. It was so obvious, we will say, just like it was with Japan, tech, and real estate. And in 2029, 15 years from now, there will be a different set of financial stresses on the economy. But people will argue, "It's not like it was in 1990 Japan, or 2000, or 2008 - or 2014 - so there is no need to worry. The specific conditions are different today. We are much wiser in 2029 than people were decades ago."

Of course, this does not mean we are facing disaster, or that the words of any given financial analyst should be followed. There always will be people predicting imminent doom. Even smart people with impressive credentials. And they are usually wrong. In fact, even their correct predictions may be due more to random chance than uncanny financial foresight. And yes, it could be that equities will rise 30% again in 2014, much to everyone's surprise.

As for me, I have no intention of hiding under a rock, at least at this time. However, I also do not wish to ignore or make excuses for economic and financial conditions that do not appear favorable. I said this in 1981, just before a two-decade market boom. I said this in 1999, just before a relatively long period of cumulatively stagnant, although variable, investment returns.

 

[HFWR]

Thanks for your comments.

I was beginning to believe it was taboo to discuss any possible threat of... dare I say it again... financial crisis.

Actually, what is "taboo", as it were, is the latest doomer-gloomer writing an article claiming things are gawd-awful, and will crash any minute. As the saying goes, they've predicted 15 out of the last 10 recessions.

Some indicators look iffy, some look good, plus there are the black-swan events we can't really predict. Many here have tired of the attention grabbing headlines, and choose to set an AA that they hope will provide some defense in case the SHTF. May or may not protect them/us, but short of buying a compound, and stocking up on MREs and ammo...

 

[haha]

As for me, I have no intention of hiding under a rock, at least at this time.

I am interested in your choice of color words here. You describe a situation that could very well be(or possibly is not be) one of a negative outlook It certainly would be hard to say that today has many of the characteristics of an important market bottom. Then you refer to hiding under a rock, thus attaching a pejorative interpretation to taking (possibly unnecessary, possibly portfolio saving) steps to minimize exposure. Certainly there are reasons to do nothing, as there are reasons to act. Why attach the pejorative to the action path?

If we do get a large down move, believe that there will be plenty of much less well timed and much less effective acting!

Ha

 

[HFWR]

If we do get a large down move, believe that there will be plenty of much less well timed and much less effective acting!

Ha

Indeed...

 

[ETFs_Rule]

A Powerful Force Poised to Propel Stocks Even Higher: The great rotation out of bonds and into stocks. A growing number of investors, both large and small, will be making this asset-allocation move in their portfolios, which collectively adds up to an enormous amount of buying power for the stock market. In 1981, the benchmark 10-year U.S. Treasury yielded a mind-boggling 14 percent. But the next 30 years witnessed steadily falling inflation expectations and with it a sharp decline of interest rates — to a low of just 1.4 percent in July 2012.

 

[Shawn]

I am interested in your choice of color words here. You describe a situation that could very well be(or possibly is not be) one of a negative outlook It certainly would be hard to say that today has many of the characteristics of an important market bottom. Then you refer to hiding under a rock, thus attaching a pejorative interpretation to taking (possibly unnecessary, possibly portfolio saving) steps to minimize exposure. Certainly there are reasons to do nothing, as there are reasons to act. Why attach the pejorative to the action path?

Good question. I do not have a good answer.

Like many people here, I consider myself to be a stay-the-course boglehead investor. Right or wrong, many people of our ilk have been "socialized" into making casual statements like, "since I cannot predict the future, I am not taking any action other than rebalance into my long-term asset allocation." And it is true. Such statements have a lot of justification. It is difficult, perhaps impossible, to time the market. On the other hand, there is ample evidence for prior bubbles. Yet people, including me, do not tend to act on these bubbles. In fact, many people tend to reenforce bubbles until it is too late. Few things are absolute.

So my pejorative is not meant as a pejorative. It is really an acknowledgement that I am conflicted. I am pondering what to do. So far I have not altered my moderately aggressive 70/30 asset allocation. As a good buy-and-hold investor I proudly - even smugly - claim that I have no intention of doing so. And so far this philosophy has paid off, at least in the last 5 years. It is good that I did not go all cash in January 2013.

But there is still a significant nagging feeling of financial unease. Admittedly, I felt the same way in 1980 and was wrong. Although there was a sharp recession, we did not fall off a cliff (I had no money to invest at that time). I felt this way in the late 1990's and was right, but prematurely right. I took no action. I did not feel this way in 2008 and was wrong. I did not take any action even in the middle of the crisis, except to rebalance and tax-loss harvest. I did not alter my asset allocation, nor did I buy ammo and MRE's even though the world was about to end. My inaction turned out to be a good thing.

However, I look at all of the problems out there today and think that maybe it is different this time. At a minimum, I feel it would be naive for me to discount these problems or simply wish them away. And if we are setting ourselves up for a big fall, I clearly acknowledge that I have no foresight to "get out just in the nick of time." So maybe I should rethink my entire approach. Perhaps it is better to be safe than sorry. I have not yet climbed under a rock, and probably never will. But maybe I should.

So my pejorative terminology is really an expression of ponder.

 

[haha]

Thanks for taking my question seriously and giving a thoughtful answer.

For my own part, I remember reading these discussion on ER.org near the 2008 blowup and feeling very uneasy, but doing little. (My own investments are solid, etc.) By managing during the crisis, I cam out OK, but I vowed to never walk into something like this again. I respect your thoughtful and non-sarcastic observations on a lot of topics here, so I was interested in your metaphor. Although you used it consciously, many people are not even aware that they are thinking metaphorically, and that metaphors do not map perfectly onto experience.

For myself, I have used relatively short-dated puts to create sort of a stop loss around a 25 -30% loss. This will cost me something, and thus be a drag if they do not turn out to be necessary or if necessary, effective. But basically I do not care, relative to the magnitude of other issues here.

Ha

 

[Chuckanut]

Are we? Or will the asteroid get us first?

Worse than the asteroid, the Andromeda Galaxy is hurtling towards us at 250,000 miles per hour! When Galaxies Collide! showing soon in a theater near you.

 

[HFWR]

When Galaxies Collide!

 

[NYEXPAT]

The "financial crisis" came early to "JCP", just loaded the wheelbarrow this morning!

Christmas came early this year!