The mother of all crashes is coming and it won’t be fun

I’m a hedge fund manager. Not a big fund all things considered, just a few hundred million. But I think about stuff like this for a living. Here’s why you can safely ignore this article.<p>There is always someone predicting an upcoming market crash. People like Grantham (cited in the post) have been predicting a mega crash for most of the last decade. Market crashes occur every 10-20 years but the thing is, over that 10-20 year cycle the market is always net up, so if you sit out the cycle because of worries about an upcoming crash you could easily miss out on 5-10 years of great returns.<p>The post author frequently compares flow variables (eg earnings, GDP) to stock variables (eg market cap). That’s not necessarily terrible, but the ratio is always sensitive to interest rates (because the stock variable discounts future values of the flow variable, and when rates are low the discounting has less of an effect). Market cap&#x2F;earnings and market cap&#x2F;GDP are high now because interest rates are low (asp because growth expectations are high, but that’s not necessarily incorrect). Before the dot com crash US interest rates were 6%, compared to 0.25% now — of course that skews the statistics.<p>Michael Burry is cited as “someone with a proven track record of predicting market crashes” but in fact he predicted exactly one crash. Well, so did John Paulson, and the ensuing decade proved that it was just luck. Mark Cuban “predicted” the dot com crash. It doesn’t mean they are geniuses, it means they got lucky once.<p>Growth in margin debt is cited as a reason to worry. But margin debt has grown because assets have grown. The S&amp;P 500 has double since the lows of March 2020, so the fact that margin debt has doubled is not a cause for concern. As a percentage of assets, margin debt has been stable for the last decade.<p>This post is pointless fearmongering, nothing more. Of course, there will be a crash at some point. It could be in six months, a year, five years or ten years. This guy can’t predict it any better than anyone else can.

The sub title of the article is &quot;History ain&#x27;t changed&quot; and the article starts with &quot;In the late summer of 1929 [...]&quot; and I already knew that I shouldn&#x27;t have read any further.<p>Yes, there will be a crash, there always is, but it will play out differently than the ones before. History only rhymes, never repeats itself.<p>There have been calls for a big crash for decades now but no crash in this millennium was the big one.<p>&quot;The S&amp;P 500 fell 57% during the 2008 crisis, 49% in the dot-com bubble, and 34% during the COVID-19 crash. So if the most pessimistic predictions prove true, the next one would be the most dramatic crash since the Great Depression.&quot;<p>We already had big crashes in the last decades but we always came round (more or less). We are no longer on the gold standard, governments have plenty of experiences with crashes. I&#x27;m not convinced that we&#x27;ll be seeing a crippling crash again.

&gt; Technology stocks turn out to be the most overvalued, with Tesla, Apple, Alphabet, Amazon, Microsoft, and Facebook (now Meta) making up 25% of the index.<p>Jus because they make a big part of the index doesn&#x27;t automatically mean they&#x27;re overvalued. Apple, Alphabet, Amazon, Meta are huge, highly profitable, and with high growth. Their valuations make more or less sense. Tesla is certainly an outlier though, and highly overvalued.

Just so people remember history correctly:<p>1. The Roaring Twenties market peaked in August 1929 with a ~6100 Dow.<p>2. Market low in November 1929 at ~3800, a ~38% drop. The &quot;big crash&quot; was just ~4400 to ~3800.<p>3. Then it RECOVERED to ~4700 by March 1930, a ~24% gain.<p>4. It then dropped over a year to ~3000 by March 1931, a ~37% drop.<p>5. Then the real crash to ~900 in June 1932, a ~70% additional drop.<p>People had a LOT of time and a LOT of additional information about the economy to decide to get their funds out of the market.<p>I have finally drilled into my skull that I am unable to time the markets with reliability. So I hold across corrections. In 1930 I wouldn&#x27;t have done anything -- I wasn&#x27;t born yet.

Predicting crashes is easy. Since they occur pretty much regularly every 10 20 years. What is hard is finding out when they will occur and what triggers them.<p>Also there is no one out there who can predict crashes one after the other with accuracy, no matter how right they were in 2008.

I&#x27;m happy to embarrass my future self with a firm prediction. Nothing in the market will happen that will cause people&#x27;s quality of life to drop until WW3.<p>The reason I think that is if the pandemic didn&#x27;t manage it than nothing short of a global war will be enough to shake people&#x27;s belief in infinite growth (which is what keeps the market alive).

I mean, possibly, but what informational advantage does a random medium blogger have here?<p>It&#x27;s statistically likely that there will be one eventually, they seem to be some sort of Poisson process, just as it is likely there will eventually be another earthquake that destroys the Bay Area again. That doesn&#x27;t mean it can be predicted even to the nearest year.<p>People were predicting a crash several years before the 2008 mortgage crash, and even so house prices have rebounded since then.<p>I do regard the arrival of major brands into NFTs and the purchase of crypto-themed sports teams and stadiums as a leading crash indicator, but a lot of people have lost money trying to predict crypto crashes.

These fear based articles have been coming out for years. It’s one of the easy ways to get clicks, I guess.<p>As a holder of Tesla stock, I do not want to make bad decisions. So I don’t want to shrug off the points being raised. There are no simple explanations. Nobody can predict the future. And whether I like a message or not says nothing about how valid it is.<p>So I tried to do my homework. I wrote it up here[1], if anyone is interested.<p>[1] <a href="https:&#x2F;&#x2F;leobg.medium.com&#x2F;should-you-sell-your-tsla-holdings-to-hedge-against-a-possible-market-crash-d7f157014178" rel="nofollow">https:&#x2F;&#x2F;leobg.medium.com&#x2F;should-you-sell-your-tsla-holdings-...</a>

&quot;“If the shoeshine boy is giving stock advice,” he thought, “then it’s time to get out of the market.”&quot;<p>But what if the shoeshine boys say a crash is coming and it&#x27;s time to get out of the market?<p>How does one even get out of the market? There seems to be a huge inflation issue going on, so simply exchanging stocks for money does not seem the way to go, either?

Evergrande defaulting and impeding omicron couldn&#x27;t even dent the market. Much less a crash. Those predicting the crash are going to have to play a long long waiting game. Might as well ride the wave.

How would quantitative easing affect the next crash? It seems like a thing that distinguishes this time from all other ones. Governments have more control over the economy with QE: they can inject liquidity into markets and boost spending whenever this is needed, so economy seems less likely spin out of control during a crash.<p>Did we learn how to tame and limit the blast radius of crashes or am I misunderstanding QE?

Alternative explanation: We&#x27;re looking towards huge amounts of inflation. Stocks are the safest place to stash savings, so are currently at high P&#x2F;E.

Either the author really believes this, and so should load up on puts and shorts, or they are just blowing smoke.<p>I doubt they&#x27;re willing to bet the money.

Meanwhile, those who don’t participate in the game are eaten alive by inflation.

Possibly a Hinge of History fallacy caused by raised anxiety levels. I suppose this might apply to the majority of contemporary doom predictions from all sorts of subjects.

I&#x27;ve noticed that if I crumple up a piece of paper and shoot it across the room into a trash can, nine times out of 10 I&#x27;ll miss, and people will chuckle and forget about it in 5 seconds. But one time out of 10 I&#x27;ll make it, and people will be very impressed and tell me I should play for the local NBA team.<p>This psychological phenomenon also applies to prediction of stock market crashes.

Lots of experts have been predicting a crash for at least a few years now, but none of them are saying what&#x27;s the catalyst. Right now there&#x27;s a huge inflation, unimaginable valuations, lots of retail investors -- yet nothing has triggered a noticeable reaction.<p>After reading articles like this you always have to remember that the market can remain irrational longer than you can remain solvent.

Even if you predict a crash, predicting the bottom is almost impossible. As an example, among many people who had sat on cash during the 2021 March, how many of them actually bought at the bottom? For layman investor the best course of action is to invest and forget, ideally in a balanced or semi-balanced portfolio.

<a href="https:&#x2F;&#x2F;archive.md&#x2F;Zer4n" rel="nofollow">https:&#x2F;&#x2F;archive.md&#x2F;Zer4n</a>

&gt; Predicting the exact moment when a bubble will burst is never easy. Grantham, for example, predicted the 2000 crisis well in advance, but it took almost three years for it to happen.<p>You&#x27;ll always have the people standing on top of the soap box predicting the end of the world. They&#x27;re not wrong. The end of the world will come one day. Its just close to impossible to figure out when.<p>As the economist Keynes would say, “The stock market can remain irrational longer than you can remain solvent.&quot;<p>Also, considering 2 things: first, timing the market perfectly is near impossible. second, market moves from the bottom left to the top-right of the graph over a very long term. If you are a long term investor, the safest, smartest, best thing you can do is to do nothing.

A recession seems pretty obvious.<p>And corresponding correction in 2022 if you think through the macro picture logically.<p>We injected 4T of fiscal stimulus over ~2 years, which is about to completely end over the next two months (though some programs already over).<p>A large amount of corporate earnings growth was due to distortions in consumer income, which fed into retail sales.<p>Personal Income: <a href="https:&#x2F;&#x2F;fred.stlouisfed.org&#x2F;series&#x2F;PI" rel="nofollow">https:&#x2F;&#x2F;fred.stlouisfed.org&#x2F;series&#x2F;PI</a><p>Retail sales have been about 20% elevated from a very smooth and consistent trend since the pandemic hit: <a href="https:&#x2F;&#x2F;fred.stlouisfed.org&#x2F;series&#x2F;RSXFS" rel="nofollow">https:&#x2F;&#x2F;fred.stlouisfed.org&#x2F;series&#x2F;RSXFS</a><p>(This chart alone is enough to understand the inflation situation, the quickness and magnitude of the increase is unreal)<p>So we inject 4T in stimulus at one pont in time, why would we extrapolate the impact of that in perpetuity? It seems pretty obvious a large portion of that money will end up in low velocity places and thus the higher goods sales won&#x27;t be maintained.<p>In the next two months, the child tax credit will expire, and student loan payments will resume. This amounts to close to 30B&#x2F;month in effective consumer income that will disappear essentially overnight.<p>There will certainly be a recession&#x2F;earnings recession next year due to these factors.<p>An alternative outcome is that the one time fiscal injection led to excess liquidity trading hands, thus we have persistently high inflation and new normal of earnings is maintained through deflated value of currency. But in this scenario the Fed must tighten much more aggressively, which leads to the same result.<p>There are many perma-bears out there that call doom without sufficiently specific reasoning, but in this case the macro picture looks very clear and easy to predict. The market doesn&#x27;t appear to be pricing it in, however.<p>If you disagree, what logical mechanism could explain an alternative outcome?

Everyone wants to talk about history as if it&#x27;s a good indicator of the future: but every moment in history happens only once.<p>If you expect to make the same returns in 2 years that a past stock market investor would get in 20, you probably should expect to survive as many market crashes as he did, just on a shorter time frame. There is no free lunch, you pay for high returns with high volatility.

People throw around “crash” but it’s never defined and I would argue has nothing definition.<p>A multi-year recession? S&amp;P dropping by 50%?

Everyone predicts crashes all the time; I&#x27;m guilty of this myself (I thought it would be 2019). Unless you have a narrow timespan, you will always be right of course. Currently it seems the market sentiment is pretty bearish though, so I guess it&#x27;s easier to sound credible when being negative.

The overwhelming sentiment from the opinions on this thread is that the author is wrong. Is that a sell signal?

Bear in mind that crashes and recessions aren&#x27;t the same thing. The stock market can go down without anyone losing their jobs, and vice versa.<p>We saw this with Covid, where GDP dropped but stocks stayed high. So if there is a stock crash it won&#x27;t necessarily be noticeable for the median person.

Is there any way to build an economic system without having periodic crashes?

I think everyone most everyone agrees with this. The market is cyclical.<p>The trick is predicting where the top and the bottom are. If you can do that with precision you are a wealthy man.

A lot of the speculative&#x2F;growth stocks took quite a hit recently, down 30% or more in the last few weeks, but that didn&#x27;t seem to affect the market as a whole that much.

Luckily, because my clients postpone my bills for months and try to settle for less I don’t have to worry about things like being “over invested” or “in a bubble.”

It’s interesting reading analysis on the stock market from someone who doesn’t know what money is nor how it works

Actually right now your average joe is calling an incoming crash. Not a single article out there is bullish.

crash usually come by way of forced selling. &quot;assets&quot; are no longer dependent on human factors like gdp. cloud and datacenter compute used is a better aggregate indicator then gdp. &quot;assets&quot; are growing exponentially and show no signs of slowing down.

Why is this on the front page??

Medium is like a normal news site, on steroids: almost all you can read there is fear-mongering and anxiety induction, and little else. Without that, people don&#x27;t click.<p>Seriously, people who actually decide on whether the crisis will happen (that is, starting with the guys like you and up the value chain), don&#x27;t make decisions based on that sort of bullshit, they read their news at Bloomberg&#x2F;AP&#x2F;Reuters terminals. So it can safely be ignored indeed.

I see too many fearless, and too less greedy. China is already there, delisting stocks from the US, empowering it&#x27;s currency and improving fast in intelectual property regulation and economics management. Maybe we won&#x27;t see crashes, but the big risk is a change of dynamics, a big stocks flat only sustained by inflation that sooner or later could trigger the ultimate shift of mindset, china beeing the right place to invest, yuan the world currency.