Ask HN: In what ways can the current financial market high end? I asked this in another thread about BTC, TSLA, GME etc. but it probably deserves its own thread. And it probably applies to the stock market in general. There is a lot of liquidity around right now and it has to go somewhere. What single event (or accumulated effect) can cause this to stop? What are the potential effects on the rest of the economy? What are the different scanarios that we can see play out? |
I'm not by any means a financial advisor so given that and that you are on an internet forum asking, not sitting in a financial advisor or economics professor's office. From research, some things to watch for a bear market forming:
- fed rates going up
- consumer price index going up
- general market indexes (dow, s&p, nasdaq) and trends of distribution (selling) where 4-5 days of distribution happen over like 4-6 weeks
- lots of liquidity
- industry segment leader starts lagging market, laggards move up in price
- more minor points: talking heads saying things like its good time to buy (in contrast to market direction), lots of retail interest, weird anomalies with some stocks (AMC, GME, etc.)
A lot of these things are happening. This doesn't mean a crash per se, example years: 76, 84, 87, 90, 94, 98, 2000, 2007. Go look where the market (nasdaq, s&p, dow) topped out in those years, see if there is data from other indicators.
There doesn't need to be some major event or major crash, could just be a downturn for 9-12 months. There probably are economic definitions for bear, recession and depression based on length of time.
If I charge $1 this year for lemonade, but next year I charge $1.10 and the same people still buy the same amount of lemonade, my business is now worth 10% a year later, without gaining new customers.
With quantitative easing as the main strategy of the Fed, we'll not see an end to financial market highs. Short term corrections in industries, sure, investors want to take profit and reallocate and provide returns.
If you are not invested in assets, as the value of fiat currency decreases due to inflation, you become poorer as a result.
Financial education is so lacking among the poor. Even if they had the money to invest, they wouldn't because they don't understand the system, and would rather save up some cash which devalues over time.
Illiteracy of the financial system and its inner workings is one of the main reasons people are not able to generate wealth and put their savings to use. Hell, a lot of people I know don't even take advantage of 401ks, because why invest in something where they think "I can't access the money til 30-40 years later" what's the point.
A number of indicators suggest that the market is overpriced. Some of that is "real" money being sucked into the market and away from other assets, but the market multiplies that money. When somebody pays $40 for a stock that was $39, every single owner now believes that they have a stock that has gone up by 2.5%. They can can use margin features to buy even more stock without bringing any of their own money, causing more inflation.
There are lots of ways that can end, but when they do, that liquidity vaporizes. The stock that was $40 is now $30. Where did the money go? Nowhere. It just vanished.
It can continue as long as people believe it will. It usually fails as a cascade effect: somebody somewhere chickens out, and then a few more get scared, and then it becomes an avalanche. Anything could be that first snowflake, though an end to the Fed treating the market as if it's in a crisis when it's at record highs seems like a good start. The punch bowl has been out for a long, long time -- because they keep imagining it's going to "trickle down" into consumers. It doesn't.
Interestingly enough (and the reason I logged into ycombinator today) there seems to have been some attempt by unidentified parties to artificially create a bearish movement for GME, I was surprised no one has created a thread about the fact that Yahoo finance (Wallace Witkowski) had published the stock has 'plummeted' at 11:55 AM EST march 10th when the actual price drop didn't occur until 12:20 PM EST. There's definitely some dangerous house-of-cards going on in the US stock exchange. I don't envy those living there if this all falls down the way people are anticipating it will.
I honestly don’t know, but our guy Michael Burry believes inflation is going to sky rocket (if you are looking for the next major event).
From my dumb observation, it seems like the market on it’s own decides to pause. Apple’s stock was having it being valued at 2 trillion. Okay, so where does it go from there? 3 trillion? Probably not, but that doesn’t mean it should crash to 1 trillion. Things will probably move sideways out of sheer common sense (even by irrational market standards).
No country commits major troop presence in war conflicts anymore. There’s not going to be any noticeable war (look at how ignored Myanmar, Syria, and Yemen are).
And there’s just 8 billion people that are being exposed to tech and new ways to consume (spend money), so I just don’t see it.
2.) Long-term economic growth, where valuations stagnate for a while and earnings eventually catch up, and then we get another burst of more sustainable growth. (See eg. AMZN)
3.) Replacement, where the inflated asset completely replaces an industry or set of industries, takes all the cash flows of those companies, and keeps on rising quickly because of that. (See eg. GOOG or FB).
4.) (Hyper)inflation, where the value of the dollar falls rapidly, the asset's cash flows increase in nominal terms (because its real value remains constant), and then the cash flows eventually justify the asset's price and the asset starts rising again as those cash flows keep increasing. (See eg. Venezuela's stock market.)
5.) War or political unrest, where the system that these assets are embedded in collapses entirely and it's open season on whatever's useful in the wreckage (See eg. fall of the Soviet Union, WW2).
For the assets you list: I'd bet on #3 for BTC and TSLA and #1 for GME, with a non-negligible chance of #4-5.
Higher interest rates will hurt the consumer economy and asset markets. We’ve been living in a bubble for a long time, and will need to inflate the currency to get through it.
That’s one of the reasons the previous administration’s “America First” bullshit was so dangerous... acting as the worlds source of money gives the US a strategic advantage, and squandering it can evaporate that advantage in a short period.
A wealth tax.