Anyone think 2016 will see a major market crash?

[Greoric]

If you always predict an economic crisis is on the horizon, you'd be right every decade or so.

Not of this magnitude, and not with the specificity of the problems I've been laying out. When this thing is in full swing, its going to be unmistakable what I was talking about.

 

[KILL KILL]

Its interesting because the guys depicted in that movie allegedly made that move from the advice they got from a speech Schiff gave to a bunch of real estate developers in '07.

Not calling you a liar, but I can't find any evidence to support this.

- Michael Burry (played by Christian Bale) started investing in sub prime in 2005.

- Greg Lippman (played by Ryan Gosling)

Back in the winter of early 2005, investment banks had a problem. Homeowners weren’t taking out enough subprime mortgages to satisfy the investors who gobbled them up as risky but lucrative mortgage-backed bonds. Over takeout Chinese with men from Goldman, Bear Stearns, Citi and JPMorgan, as the late journalist Mark Pittman wrote, Mr. Lippmann hosted the meeting that solved the problem.

They came up with a standardized credit default swap, which is more gorgeously simple than it sounds. There were only so many subprime securities in the world to invest in, but by buying and selling insurance on them, Wall Street could now bet infinitely. Trading soared. “It wasn’t that it was our idea to standardize it,” he said this week. “It just so happened that the thing happened at Deutsche Bank because we were willing to host and other banks weren’t.”

and even then, he didn't actually know it was going to crash.

“I didn’t actually envision the carnage that came,” he said. “I envisioned a mere ripple on the perfect utopia that had existed.”

- Steve Eisman (played by Steve Carell)
The author of The Big Short had this to say about him.

Steve Eisman started really digging deeper, once he was investing other people's money, into the current state of the financial system and slowly concluded that there was this madness that was going on, and the madness was the subprime mortgage lending business. He couldn't believe the total absence of credit analysis that was going on before handing people money. Because he didn't understand the fixed-income markets, he had never really dealt with them. He had to learn how these loans got repackaged as bonds, and they get shoved into things called CDOs, and then CDO squareds, and how they got run through these very complicated models and came out the other end as AAA securities.

Yahoo finance also added the below from the transcripts obtained FCIC interviews.

[QUOTEHe did a credit-default-swap (CDS) trade with Goldman Sachs in 2007, and was in contact with Greg Lippmann, a trader who also bet on the housing bust.[/QUOTE]


- Charles Ledley / Jmie Mai (played by John Magaro and Finn Wittrock)
From an interview of the author of The Big Short

"They thought that Wall Street underestimated the likelihood of really unlikely events," Lewis says. "So they would buy options to buy stocks at prices far, far away from where the stocks were currently trading. They did this with currencies, they did it with commodities. They scoured the world, essentially looking to make bets on extreme things happening."

Soon, Ledley and Mai stumbled into the subprime mortgage market and realized that they could bet against not only the loans but also the financial institutions themselves. "They're able to piece together a clear picture of what's going on in a matter of months," Lewis says.

Lewis says the two men — like Dr. Burry — were able to see the failures of the market before the rest of the world did because they viewed the world differently.

http://www.npr.org/templates/story/story.php?storyId=124690424

In the movie, Wittrock's character even says "a friend had told Charie about it, and I read about it in Grant's Interest Rate Observer."

 

[Greoric]

Lol exactly. Thats what makes me wonder. Negative interest rates. I'm an intj personality type, one of the strengths/weaknesses of that type is relying on intuition. I don't know enough yet to say why it's bad, but my intuition is saying negative interest rates is really bad lol. Paying other people for the privilege of using your money. Hmmm.... It's interesting to watch.

Well even if you don't have a full grasp over what's going on, you're in a much better position than almost everyone else that still has their head in the sand. I'll say that much.

 

[Greoric]

Not calling you a liar, but I can't find any evidence to support this.

- Michael Burry (played by Christian Bale) started investing in sub prime in 2005.

- Greg Lippman (played by Ryan Gosling)

and even then, he didn't actually know it was going to crash.

- Steve Eisman (played by Steve Carell)
The author of The Big Short had this to say about him.

Yahoo finance also added the below from the transcripts obtained FCIC interviews.

[QUOTEHe did a credit-default-swap (CDS) trade with Goldman Sachs in 2007, and was in contact with Greg Lippmann, a trader who also bet on the housing bust.

If I read that right, 2007 sounds to line up correctly? I don't know for sure though. Obviously more than one person had to know something was going on.

 

[KILL KILL]

If I read that right, 2007 sounds to line up correctly? I don't know for sure though. Obviously more than one person had to know something was going on.

Well, besides Burry and Lippman, I guess the others started dealing with default swaps around 2007. That still doesn't support the very bold statement that they learned of the housing bubble from a speech Schiff gave to some real estate developers in 07. What's more likely, is that they did their due diligence and saw it coming for a while prior to investing.

 

[Octavian]

As usual excellent substantive post by you without the condescending attitude from the likes of JVS so thank you.

Cheers!

Down to business though, the relative attractiveness of US debt to the rest of the world is just a stay of execution; not a saving grace. We're more leveraged than anyone.

We're not all that differentiated in terms of leverage to the big European nations and half as leveraged as Japan. So actually, if you consider it from a balance sheet perspective, the US is not only running similar leverage but has a much more healthy economy... AND you're telling me you can clip 200+ bps over those other developed nations? The US also has incredible national wealth to draw from if revenue is indeed an actual issue (as long as the GOP doesn't get its wish to drown the Govt. in a bathtub). What you're actually telling me right now with prices is that a good bit of European debt and Japanese debt is actually more valuable right now than tsys - that's just nonsense. Frankly, there's still tremendous demand for tsys on the secondary market and zero evidence that the market is sick of them. Pensions, foundations, endowments, insurance companies...etc. all need allocation to highly rated, highly liquid sov. debt - the greenback is basically cash with yield that keeps up with inflation and it's traded as such.

I'm not saying that debt wouldn't reach an unreasonable level of yearly outlays... that would obviously squelch critical investment from public into private and in support of critical social systems that do indeed greatly aid the productivity and financial soundness of millions of Americans. But again - we're not talking about blowing up our debt, but gradually paying it down.

Keep in mind the average household debt now is better than it was preceding the '08 crisis, but its still very high by historical standards. Moreover, this isn't a household problem as much as its an institutional problem... which just ends up affecting us anyway.

Correct:


But there's actually a more nuanced way to look at it and yes - the above is a good trend and somewhat high by historical standard but this isn't about historical standard as much as it is about the direction and rate. Take for example this - part of what's happening is also that people are generally making more money while also deleveraging:



The first is a measure of total household debt to GDP but the immediate above is more indicative of how much more flexible households are comparatively.

Private outstanding debt to GDP has also been falling and looks a lot like Household debt to GDP even with lower interest rates. We definitely saw a debt binge by the frackers and they will no doubt get hammered and have been getting hammered by lower oil prices but oil will eventually go back up a little and lots of shale oil will come back online.

The trajectory of oil and commodities isn't weird though if you acknowledge that there wasn't any fundamental recovery to begin with. Those sectors were only the benefit of the loose monetary policy, and now they've popped. The rest of the sectors riding off of their growth will follow just like with the real estate misallocation leading up to the last crisis.

Disagree... there definitely was and has been a fundamental recovery. I'm sure you'll chalk that up to expansion of the Fed's balance sheet but again, there's no lack of demand for the USD or tsys and why wouldn't the Fed expand its balance sheet in a time of crisis when everyone is starving for tsys?

As Warren Buffet recently pointed out in his annual letter, the US economy is better than ever... it's robust, vibrant, more free than most, has highly favorable tax treatment for large corporations, is incredibly innovative, growing in real and nominal terms, has low unemployment and has come through a full on financial calamity all the while, household and private debt have been falling. Clearly, there's going to be a need to slow things down, quell a little inflation, let things flush out and then lower rates again:



Regarding oil though.. my reference was more of a historical one. Typically oil lags stocks and bonds in the cycle... however, more recent developments have complicated it. Oil is very much a financial asset, traded and speculated upon more than ever at this point. It's also highly affected by real physical developments around the world regarding drilling and extraction techniques. That fundamental change in the supply and demand balance has thrown things and they're trying to find a balance. One thing that's lesser known is that inflation adjusted oil back in the 80's and 90's isn't that much higher than current prices... if you lay oil against CPI ex-energy and food, it's clear that while adjusted, oil may be lower than historical mean but it's not nearly as dramatic as it appears. Sorry I don't have the figures in front of me but the inflation adjusted average back to 86' is something like $45 a barrel.

Those developments in oil can hurt our fracking industry but it's more of a disaster for EM nations who are losing their power as a result.... again, the US wins out because of its flexibility, diversification and vibrance - shale can turn right back on at $55-$60 a barrel and once against push oil lower. In the meantime, the US is continuing to increase energy independence and lowering private and household debt - count me in on that.

 

[Greoric]

Well, besides Burry and Lippman, I guess the others started dealing with default swaps around 2007. That still doesn't support the very bold statement that they learned of the housing bubble from a speech Schiff gave to some real estate developers in 07. What's more likely, is that they did their due diligence and saw it coming for a while prior to investing.

Very plausible.

 

[Jack V Savage]

There's no legitimate reason to think a crash will happen this year.

That's the thing. A downturn in the market can happen at any time. So if you just predict it all the time, eventually you'll be right, and you'll get a lot of attention. Bears make news; bulls make money.

 

[Octavian]

These low gas prices are an indication of what exactly with the oil companies?

Oil exploration and production is a highly capital intensive process and has to be done years in advance. A lot of capital was poured into that industry 5-10 years ago with the expectation that oil wouldn't go below $85 a barrel. The problem is that once you start drilling, even if you're underwater but able to roll loans down the river, you still produce oil because there's nothing else you can do. So even though there's a glut on the market now and there are troubled companies, they can't stop producing - they need revenue after all. Combine that with some unforeseen production developments in Libya and Iraq, a slight global demand slowdown, Iran coming online for the first time in decades and the Saudis continuing status quo and you get a glut. Oil is incredibly hard to predict in the longer term (2-3 years) and requires scenario forecasting and again, it's really expensive to undertake a new operation.

 

[Orgasmo]

Not of this magnitude, and not with the specificity of the problems I've been laying out. When this thing is in full swing, its going to be unmistakable what I was talking about.

On the contrary, we had major crisis every 8 to 9 years for the past several decades.

1990's: 1997 Asian financial crisis
2000's: Dot Com bubble and 2008 sub-prime crisis

We had bull market for the past 7 years, so it's near major correction time. The only thing in question is what triggers it. However, if I'm always predicting doom and gloom, it doesn't make me a genius when it actually happens. There is a reason Austrians aren't taken seriously in financial circles.

 

[Thunderflash500]

On the contrary, we had major crisis every 8 to 9 years for the past several decades.

1990's: 1997 Asian financial crisis
2000's: Dot Com bubble and 2008 sub-prime crisis

We had bull market for the past 7 years, so it's near major correction time. The only thing in question is what triggers it. However, if I'm always predicting doom and gloom, it doesn't make me a genius when it actually happens. There is a reason Austrians aren't taken seriously in financial circles.

All of those happened for different reasons, if someone where to point each of them out before they happened for the reasons they happened that would be impressive. Just saying there are cycles of bull and bear is not. But that's not what is being said. What you're saying is too obvious to mean anything. I think just saying well it's been 8 years, time for a correction, shows that you really don't grasp what is happening.

 

[Supereem]

Well they are trying to go further. That's why we're seeing the start of negative interest rates, i.e the EU, Japan, the Scandanavian countries. Central banks around the world are now trying to get savers to pay for someone else to use their money. It's literally an absurd time preference for money if ZIRP wasn't already bonkers enough.

Lol the big oil companies are not going under anytime soon.

 

[Octavian]

Well they are trying to go further. That's why we're seeing the start of negative interest rates, i.e the EU, Japan, the Scandanavian countries. Central banks around the world are now trying to get savers to pay for someone else to use their money. It's literally an absurd time preference for money if ZIRP wasn't already bonkers enough.

Negative interest rates and their adverse economic affects aside, I don't believe that actual depositors are paying banks to hold their money... so the rates aren't negative for people. They're negative for the banks who're now being charged to have a reserve balance at their central bank. What this actually does is squash their net interest margins and bleed them dry. I'm not really sure what the point is.

 

[Orgasmo]

All of those happened for different reasons, if someone where to point each of them out before they happened for the reasons they happened that would be impressive. Just saying there are cycles of bull and bear is not. But that's not what is being said. What you're saying is too obvious to mean anything. I think just saying well it's been 8 years, time for a correction, shows that you really don't grasp what is happening.

Oh yes big doom and gloom on the horizon, like it always is with the Austrian school.

 

[Gandhi]

Negative interest rates and their adverse economic affects aside, I don't believe that actual depositors are paying banks to hold their money... so the rates aren't negative for people. They're negative for the banks who're now being charged to have a reserve balance at their central bank. What this actually does is squash their net interest margins and bleed them dry. I'm not really sure what the point is.

It means the are incentived to go out and loan every last spare dollar and then some.

One thing I have noticed is some Austrians say that loose monetary policy never led to inflation because the banks never lent the dollars (velocity was not there). The reality is that the reason all the things like QE and negative rates are being tried is because the velocity is not there. Weird measures were used because the traditional tools where not there.

 

[RIPWarrior]

Everything is fine. More immigration please!

 

[WrestlinganJudo]

The top graph is the SSE shanghai stock exchange. China's market recently crashed nearly 50%. The government is manipulating the market to stop it from crashing harder, but the bubble burst. The market is trying to correct itself.

The second graph is the S&P 500. Look how much value has been added to the U.S. economy since 2008. Now, not only did we recover fast, apparently we've grown at an insane rate. I would ask why? What has been added to the economy that not only counteracted the market correction of 2008 but then added tremendous value on top of it?

I think we are due for a major crash soon. One larger than 2008. Or will the Fed keep printing money to keep the party going longer? I for sure believe the market wants to crash, with the fed, I'm not exactly sure how it will play out.

Don't confuse the price with reality. The market is considered irrational in the short term and be rational in the long term.

Things are trading at very high price multiples. That means some are expecting real growth the match the price but it does not always happen.

The market can be a good indicator in the long term but in the short term is can be more about perception and feeling.

It can grow into the price and if it does it was not overbid then the buyers were right. It earnings fail to grow into the price then the market will drop.

The market can create some self fulfilling prophecies but that is market psychology. If the psychology holds for long enough it will become undone. People will not look as hard at real earnings as create a system to exploit it which in turns tears down the pattern. You have to be able to guess what everyone is doing and then do something different but there are people thinking the same thing. This adds to short term market irrationality.

 

[Handsomebwonderfull]

Don't confuse the price with reality. The market is considered irrational in the short term be rational in the long term.

Things are trading at very high price multiples. That means some are expecting real growth the match the price but it does not always happen.

The market can be a good indicator in the long term but in the short term is can be more about perception and feeling.

It can grow into the price and if it does it was not overbid then the buyers were right. It earnings fail to grow into the price then the market will drop.

The market can create some self fulfilling prophecies but that is market psychology. If the psychology holds for long enough it will become undone. People will not look as hard at real earnings as create a system to exploit it which in turns tears down the pattern. You have to be able to guess what everyone is doing and then do something different but there are people thinking the same thing. This adds to short term market irrationality.

Pretty much. The stock market is short term perception long term reality. Short term you can gauge of certain things such as gas prices being low equals people have more money to buy. Presidential ratings mean confidence usually. Military strength is a confidence thing. Unemployment is a lagging indicator. Stock market crashes it goes up. So if it continues to go down the stock market will go up. If the USA economy is doing well compared to the rest of the world foreign countries dump money into our stock markets and bonds.

I actually cashed out my 401 k before the collapse then put it back in a year after. Everyone thought I was nuts when I took it out. It was pretty obvious it was going to collapse

 

[Thunderflash500]

Don't confuse the price with reality. The market is considered irrational in the short term and be rational in the long term.

Things are trading at very high price multiples. That means some are expecting real growth the match the price but it does not always happen.

The market can be a good indicator in the long term but in the short term is can be more about perception and feeling.

It can grow into the price and if it does it was not overbid then the buyers were right. It earnings fail to grow into the price then the market will drop.

The market can create some self fulfilling prophecies but that is market psychology. If the psychology holds for long enough it will become undone. People will not look as hard at real earnings as create a system to exploit it which in turns tears down the pattern. You have to be able to guess what everyone is doing and then do something different but there are people thinking the same thing. This adds to short term market irrationality.

I'm not confusing price with reality. That's what I'm saying, I think there will be a market correction between price and reality. I think the U.S. is in a better situation than some. We have a lot of strengths. But I wouldn't be surprised if we see a major correction.

 

[WrestlinganJudo]

I'm not confusing price with reality. That's what I'm saying, I think there will be a market correction between price and reality. I think the U.S. is in a better situation than some. We have a lot of strengths. But I wouldn't be surprised if we see a major correction.

Sometimes a correction has nothing to do with fundamentals. The market may be priced using an earnings discount model but it is currently higher than that. Then again earnings alone don't always mean everything since they are subject to change.

There could be a major correction since the price on many equities looks to be quite high but if earnings increase to justify the prices then there might not be a market correction.

We will have to just want and see if earnings will justify the price or not.