What Will Burst the Next Bubble?

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GrandMasterBlaster
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What Will Burst the Next Bubble?

Post by GrandMasterBlaster » Mon May 15, 2017 8:40 pm

It seems there are daily posts here expressing fears of an imminent market crash. Many claim that valuations are too high to be sustainable and that a burst bubble is overdue. I, for one, will stay the course and continue my automated purchases regardless, but for those who seem jittery, I'd like some insight.

The vast majority of market crashes that I've read about have a direct cause: speculation, which is almost always associated with a new paradigm in trading, technological advances, and fading memories of the last crash. The names of the bubbles themselves are indicative of their root causes: Tulip Mania, South Sea Trading Co., Go-Go, Nifty-Fifty, Tech Boom, Housing Crash, etc.

For those predicting a sharp market correction in the near future, what do you suppose will be the cause? Is there a likely culprit, or is it simply P/E ratios that are out of whack with the underlying fundamentals? I'm interested to hear your thoughts.

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Hawaiishrimp
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Re: What Will Burst the Next Bubble?

Post by Hawaiishrimp » Mon May 15, 2017 8:46 pm

Let me take a wild guess... GREED & FEAR. :thumbsup

It's always GREED & FEAR. Seriously though, no one can accurately and consistently predict the next bubble burst time or date, so may as well spend our valuable time worrying something else.
I save and invest my money, so money can make money for me, so I don't have to make money eventually.

GrandMasterBlaster
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Re: What Will Burst the Next Bubble?

Post by GrandMasterBlaster » Mon May 15, 2017 8:49 pm

I understand that, and I'm not asking anyone to predict when. My point is that with all the posts I read asking, "Where should I park my cash?" and "Should I wait to invest," it seems like people would have a specific, underlying issue to point to other than the fact that the market has been bullish for a long time. I'm more or less just trying to get a glimpse into the psychology I'm seeing so often.

Edited to put a finer point on things: Is there a rational basis for concern based on current P/E ratios or some other factor(s), or are recent jitters just examples of irrationality working in both directions?

runner540
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Re: What Will Burst the Next Bubble?

Post by runner540 » Mon May 15, 2017 9:02 pm

GrandMasterBlaster wrote:I understand that, and I'm not asking anyone to predict when. My point is that with all the posts I read asking, "Where should I park my cash?" and "Should I wait to invest," it seems like people would have a specific, underlying issue to point to other than the fact that the market has been bullish for a long time. I'm more or less just trying to get a glimpse into the psychology I'm seeing so often.

Edited to put a finer point on things: Is there a rational basis for concern based on current P/E ratios or some other factor(s), or are recent jitters just examples of irrationality working in both directions?
I'll bite: consumers are highly leveraged (again), with low interest rates, gas prices, and "full" employment. Any shock to those things, and most consumers will stop eating out, etc. because they (not Bogleheads) have no margin for error, and that will ripple through. As to what would be a shock to gas prices, interest rates or employment, take your pick of geopolitical dynamics.

countofmc
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Re: What Will Burst the Next Bubble?

Post by countofmc » Mon May 15, 2017 9:19 pm

I'll spitball.

I'll tread carefully, but in the near-term seems like there could be some serious political risk. Feels like the market has run up quite a bit on the "hope" that certain things would be done by the new administration, but there are some recent things happening that's bringing into question whether those things can happen. I guess whatever really happens or doesn't happen would be secondary to what the market believes will happen.

And I keep hearing China is one huge bubble that could drag down the global economy, but it never seems to burst.

KlangFool
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Re: What Will Burst the Next Bubble?

Post by KlangFool » Mon May 15, 2017 9:28 pm

OP,

The market will not crash this year. It will crash next year. Of course, I will not put any money behind my prediction. My guess is as good/bad as anyone else.

KlangFool

NibbanaBanana
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Re: What Will Burst the Next Bubble?

Post by NibbanaBanana » Mon May 15, 2017 9:35 pm

As Vanguard says, high valuations do not, in themselves, lead to market drops. That the bull market has lasted so long isn't a reason either. See Gambler's fallacy https://www.bogleheads.org/wiki/Behavioral_pitfalls.

There are always plenty of things to worry about. That's why they pay you the big bucks. Seems like the major problems are always caused by greed, corruption and illegal behavior within the financial system and companies themselves. Managers acting in their own behave rather than the owners. Read John Bogle "Battle for the Soul of Capitalism" and stand up for your owners rights, vote your shares and tell your funds to vote theirs.

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nisiprius
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Re: What Will Burst the Next Bubble?

Post by nisiprius » Mon May 15, 2017 9:45 pm

It's not even worth thinking about.

I can predict with great confidence that a roulette wheel is not going to come up "red" forty times in a row. It is much harder to predict when it is finally going to come up black, 0, or 00. On each spin, there are twenty possible numbers that could break the streak. So, it is twenty time harder to say, not only when the streak will break, but which will be the specific number that breaks it. That's what you're asking for.

The bubble becomes unstable, and then almost anything could burst it. If it's not one thing, it's another. And even if you knew what would burst it, if you could prevent it, it wouldn't stop the bubble from bursting. It would just mean some other thing would burst it a few seconds later.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Always passive
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Re: What Will Burst the Next Bubble?

Post by Always passive » Mon May 15, 2017 9:59 pm

Looking at the issue as a Bogleheads, the biggest concern is not worrying about when the bubble will burst, no one can predict that, but that as the market continues to rise, one may ignore his own policy on rebalancing, just too painful to sell when things seem to look so good, and pay a price later on.

GrandMasterBlaster
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Re: What Will Burst the Next Bubble?

Post by GrandMasterBlaster » Mon May 15, 2017 11:04 pm

Always Passive - that's a good point and worthy reminder to stay principled.

countofmc - that seems a likely unspoken undercurrent in such fears.

runner540 - that certainly seems plausible. Not yet confident that the recovery from '08 is on stable ground.

Thanks for humoring me. Several of the books I've read have made it a point to describe previous bubbles in detail sufficient to assume instructive intent with regards to avoiding getting caught in future bubbles, so I was wondering if there is something I'm missing currently. Then again, that's part of the reason that each of those books recommended broadly-diversified index funds.

venkman
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Re: What Will Burst the Next Bubble?

Post by venkman » Mon May 15, 2017 11:32 pm

Interest rates have been historically low for awhile now. I don't think investors are speculating so much as chasing yield wherever they can get it. If interest rates stay low, stocks will continue to be highly valued, and overall P/E could stay high indefinitely. If interest rates get back to levels where safe bonds can at least give some real return, then P/E will start to revert to the mean.

Although, one wild card is the business cycle. When the next recession hits and the market takes a downturn, how many people will decide that only earning 2% a year in bonds is still better than the 10%+ drop they just went through? That could make the downturn bigger and start a chain reaction, and we'll get to the historical P/E mean a lot faster than we would've otherwise.

GrandDesigns
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Re: What Will Burst the Next Bubble?

Post by GrandDesigns » Mon May 15, 2017 11:51 pm

venkman wrote:Interest rates have been historically low for awhile now. I don't think investors are speculating so much as chasing yield wherever they can get it. If interest rates stay low, stocks will continue to be highly valued, and overall P/E could stay high indefinitely. If interest rates get back to levels where safe bonds can at least give some real return, then P/E will start to revert to the mean.

Although, one wild card is the business cycle. When the next recession hits and the market takes a downturn, how many people will decide that only earning 2% a year in bonds is still better than the 10%+ drop they just went through? That could make the downturn bigger and start a chain reaction, and we'll get to the historical P/E mean a lot faster than we would've otherwise.
This is my theory. I think extraordinary low interest rates are driving people out of bonds and into stocks. I won't even predict a crash but I would not be surprised if P/E reverts to mean as interest rates rise. Even as a Boglehead I was almost tempted to go more into stocks to compensate for the low bond rates, but then I reminded myself: could I tolerate the risk of stocks? The answer was no, so I accept the low interest rates on bonds and move on.

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Re: What Will Burst the Next Bubble?

Post by Valuethinker » Tue May 16, 2017 3:12 am

GrandMasterBlaster wrote:It seems there are daily posts here expressing fears of an imminent market crash. Many claim that valuations are too high to be sustainable and that a burst bubble is overdue. I, for one, will stay the course and continue my automated purchases regardless, but for those who seem jittery, I'd like some insight.

The vast majority of market crashes that I've read about have a direct cause: speculation, which is almost always associated with a new paradigm in trading, technological advances, and fading memories of the last crash. The names of the bubbles themselves are indicative of their root causes: Tulip Mania, South Sea Trading Co., Go-Go, Nifty-Fifty, Tech Boom, Housing Crash, etc.

For those predicting a sharp market correction in the near future, what do you suppose will be the cause? Is there a likely culprit, or is it simply P/E ratios that are out of whack with the underlying fundamentals? I'm interested to hear your thoughts.
With each stock market crash, after the fact we "attribute" the crash to a particular event.

So Lehman Brothers, which to be honest is a pretty good guess-- financial markets were badly stressed pre Lehman, but the Lehman fallout hit the real economy (via the financial channel) very hard. Worldwide, it was something like the fastest fall in GDP (and definitely trade) since the early 1930s.

But the dot com bubble? No one can really say what caused it to pop.

The 1987 Crash? Portfolio insurance to be sure. But harder to find a more general cause.

My bet is the next market drop will come due to a geopolitical event, and by definition, we cannot actually see that one coming. Think the 1973 or 1979 Oil Crises.

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MrFlish
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Re: What Will Burst the Next Bubble?

Post by MrFlish » Tue May 16, 2017 4:17 am

runner540 wrote:
GrandMasterBlaster wrote:I understand that, and I'm not asking anyone to predict when. My point is that with all the posts I read asking, "Where should I park my cash?" and "Should I wait to invest," it seems like people would have a specific, underlying issue to point to other than the fact that the market has been bullish for a long time. I'm more or less just trying to get a glimpse into the psychology I'm seeing so often.

Edited to put a finer point on things: Is there a rational basis for concern based on current P/E ratios or some other factor(s), or are recent jitters just examples of irrationality working in both directions?
I'll bite: consumers are highly leveraged (again), with low interest rates, gas prices, and "full" employment. Any shock to those things, and most consumers will stop eating out, etc. because they (not Bogleheads) have no margin for error, and that will ripple through. As to what would be a shock to gas prices, interest rates or employment, take your pick of geopolitical dynamics.
+1
That sums it up nicely....

NiceUnparticularMan
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Re: What Will Burst the Next Bubble?

Post by NiceUnparticularMan » Tue May 16, 2017 5:33 am

My sense is a good number of people afraid of investing now are basically doing a form of "technical analysis." Hence all the concern about stocks being near an all-time high and such. And asking such people for a real world theory as to why stocks would decline sharply is approaching them from a worldview they don't necessarily share.

That doesn't mean there are no real world scenarios in which stocks could decline sharply. But many of the people offering such scenarios, at least here, are probably not inclined to do any sort of market timing because of those scenarios, as they mostly recognize when and to what extent those scenarios will materialize is not knowable with the necessary precision for us to take profitable action.

In other words, the set of people who don't believe in "technical analysis," but do believe we can make actionable predictions about when real world scenarios are about to cause a stock decline, may be small to the point of vanishing.

carolinaman
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Re: What Will Burst the Next Bubble?

Post by carolinaman » Tue May 16, 2017 6:50 am

The US and world markets could wake up one day and decide the markets are overvalued (even though they were the day before as well) and start selling, driving the market down 20% or more. It could be an accumulation of different things. The cause of a bear market does not have to be one thing other than perhaps a recognition that the markets are overvalued.

The last 2 major market declines had clear causes: tech/dotcom bubble and the mortgage debacle. The next one may not be so clear. Some possible contributors to the next bear could be the current high P/E of US stocks, a realization that the promised change in Washington is not going to happen, especially the promised corporate and personal tax deductions, inflation/rising interest rates which could drive more investors to bonds, trade wars, and global strife.

My crystal ball does not see any obvious culprits right now but I did not see the mortgage meltdown coming either, so what do I know.

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Re: What Will Burst the Next Bubble?

Post by sschullo » Tue May 16, 2017 7:17 am

MrFlish wrote:
runner540 wrote:
GrandMasterBlaster wrote:I understand that, and I'm not asking anyone to predict when. My point is that with all the posts I read asking, "Where should I park my cash?" and "Should I wait to invest," it seems like people would have a specific, underlying issue to point to other than the fact that the market has been bullish for a long time. I'm more or less just trying to get a glimpse into the psychology I'm seeing so often.

Edited to put a finer point on things: Is there a rational basis for concern based on current P/E ratios or some other factor(s), or are recent jitters just examples of irrationality working in both directions?
I'll bite: consumers are highly leveraged (again), with low interest rates, gas prices, and "full" employment. Any shock to those things, and most consumers will stop eating out, etc. because they (not Bogleheads) have no margin for error, and that will ripple through. As to what would be a shock to gas prices, interest rates or employment, take your pick of geopolitical dynamics.
+1
That sums it up nicely....
The next crash will be caused by something very few people talk about. It almost always a surprise. I feel secure that whatever happens my portfolio is ready, and so are my fellow Vanguard investors, who are most likely stay put, "no matter what."
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Re: What Will Burst the Next Bubble?

Post by simplesimon » Tue May 16, 2017 7:32 am

Healthcare.

Much of the finger pointing has been at legislation but I haven't heard anybody I know question the cost of a doctor or a drug treatment. A serious examination and reduction in the price of healthcare will force the system to crater and reset. Hospitals, doctors, nurses, pharmaceutical companies, medical device manufacturers, and the banks that lend to all of the above. I left out insurance companies because they've been the ones getting beat up in the last few years in addition to the patient's wallet.

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Re: What Will Burst the Next Bubble?

Post by aristotelian » Tue May 16, 2017 8:06 am

I have seen some literature about student loan debt being a mini-bubble. The amount of debt is truly frightening, and I believe it is beginning to outstrip the benefits of college education. However, the proportion of the economy is much smaller than real estate in '08 and for the most part the interest rates are reasonable. The total amount is more than overall credit card debt, but only about 15% of all debt.

What I don't get about the current climate is the combination of low oil prices and low interest rates. Both are at historical lows. Low oil prices have helped keep down the cost of living and enable consumer spending. Low interest rates have helped support the stock market by discouraging savings and investing in bonds. I could see a rapid change in one or the other (or perhaps both) causing some kind of event with ripple effects on the rest of the economy.

There is also the ever-present threat of war causing severe short-term disruption.

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Re: What Will Burst the Next Bubble?

Post by alfaspider » Tue May 16, 2017 8:21 am

aristotelian wrote:I have seen some literature about student loan debt being a mini-bubble. The amount of debt is truly frightening, and I believe it is beginning to outstrip the benefits of college education. However, the proportion of the economy is much smaller than real estate in '08 and for the most part the interest rates are reasonable. The total amount is more than overall credit card debt, but only about 15% of all debt.
A student loan debt bubble can't really "pop". Current law makes it almost impossible to discharge the debt, but income based repayment programs also make it so borrowers never have to default either. It will just linger on the books as a "toxic asset" mostly held by the government. Since the federal government is not subject to the financial accounting rules the private sector is, they can leave the outstanding obligations as an asset on the books indefinitely regardless of the likelihood of repayment. End result is just a drag chute on the economy- a silent limiter of growth over the next decades rather than a bubble that causes a sudden downturn.

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Re: What Will Burst the Next Bubble?

Post by rattlenap » Tue May 16, 2017 8:25 am

This is exactly why I do a simple 60/40 AA. So as to mitigate risk.

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Re: What Will Burst the Next Bubble?

Post by junior » Tue May 16, 2017 8:27 am

GrandMasterBlaster wrote:It seems there are daily posts here expressing fears of an imminent market crash.
As far as I can tell the market can go 15 to 20 years between major crashes. It's only been 8 since the last crash. So even though stocks are likely overvalued they can stay overvalued for a very long time.

When I'm in a very grim mood, I imagine a new Korean war could crash the market. A new Korean war is not likely to happen, but is concievable.

Da5id
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Re: What Will Burst the Next Bubble?

Post by Da5id » Tue May 16, 2017 8:38 am

GrandMasterBlaster wrote:It seems there are daily posts here expressing fears of an imminent market crash.
I'm with others that you can't know, and should adjust your asset allocation according to, as they say, your need/ability/willingness to take risk. For the next crash is always coming, we just don't know when.

That said, the daily posts about the "imminent" crash are counteracted by the daily "you should be 100% in stocks" posts. I worry more about the latter myself :)

ray333
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Re: What Will Burst the Next Bubble?

Post by ray333 » Tue May 16, 2017 8:51 am

the market has hit 2 new record highs since I was "afraid of a market peak", so whatever ... invest consistently, buy more during corrections, wait 20+ years, enjoy

anoop
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Re: What Will Burst the Next Bubble?

Post by anoop » Tue May 16, 2017 9:05 am

Usually bubbles burst because the fed pricks them by raising rates high. And the funny thing is that they (bubbles) are immune to the initial stages of rate increases and then topple over suddenly and violently at some point. This time around the fed is playing the game a little differently. They are raising rates very slowly. As you can tell, we are still in the stages where rate increases are having zero effect on the bubble. So it looks like they are trying to burst this one in slow motion, but we'll have to see how it goes...it's an experiment.

This bubble isn't as bad as the last one because the average American only has a car loan (or multiple) this time around (as opposed to one or more home loans) that they cannot afford. So the damage will be very contained. So stocks may drop, but the drop won't be as violent as before and the spillover to the rest of the economy will be mostly consolidation in autos and some small businesses going bellyup.

When will this happen? I think it will take at least another 3-5 rate increases. So whenever that happens...

msk
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Re: What Will Burst the Next Bubble?

Post by msk » Tue May 16, 2017 9:28 am

For the very nervous, just buy one year Puts on SPY and renew every year. They cost around 5% but even if SP500 goes sideways you still collect the dividends, hence the cost of the Puts is 3 to 4% p.a. And if the SP500 keeps going up into the stratosphere, well you are sitting pretty and cosy. If the SP500 does crash, you can feel very smug and you haven't lost much... Me? I have been 100% in stocks since the early 1980s. No regrets so far. Just sat through all the crashes and even bought Calls when things crashed badly. PS you do not need cash in bonds to buy Calls. It's called margin :shock:

Flynlow
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Re: What Will Burst the Next Bubble?

Post by Flynlow » Tue May 16, 2017 9:29 am

Interesting topic, and something that has been on my mind of late as well.

I wonder if it will be soon. I am only in my mid-30s, so the 2007 housing crash is the only one I have participated in thus far, but I am seeing the same initial indicators as back then:

-New car sales are dropping. I was working in the automotive industry in 2007, and remembered a record year for new cars (17 million?), followed by tapering off with no explanation. Then the big hit.

-Homes are selling for more than list, usually with multiple bids, in only a few days. If you're not offering cash or guaranteed financing, and/or waiving contingencies, your bid may not be competitive. That's an absolutely absurd way to handle a $200k+ transaction. There aren't that many wealthy buyers out there to support that kind of market (outside of maybe NYC, when its happening in rural VA, there's a problem), but there are people who can fake that level of wealth for a short while by inadvisable borrowing.

-Collector cars. I'm a car guy, and love vehicles just for the sake of them. If I had infinite money, I'd have a Jay Leno style warehouse full of vehicles and retire happily to obscurity. The price of everything is up. I look at projects, half-completed restorations, etc, and can't believe the prices people are asking (and getting!). Maybe not the best indicator, but certainly speaks to the easy availability of money.

None of these things would worry me if there had been a large scale wage growth or other event nationwide that suggested to me people were spending money they actually had. Since that hasn't happened, I assume the money being spent is borrowed from someone else (bank, home equity, whatever). That is troubling to me.


My only intention is to do what I did in 2008: stay the course. I was, and am, 100% equities index x3 (small cap, mid cap, large cap, all us equities indices). The only action i took back then was doubling my 401k withholding, trying to max it out. Since it is now maxed, I'd likely do nothing. Maybe go shopping for a classic car or two.

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Re: What Will Burst the Next Bubble?

Post by minesweep » Tue May 16, 2017 9:33 am

sschullo wrote:
MrFlish wrote:
runner540 wrote:
GrandMasterBlaster wrote:I understand that, and I'm not asking anyone to predict when. My point is that with all the posts I read asking, "Where should I park my cash?" and "Should I wait to invest," it seems like people would have a specific, underlying issue to point to other than the fact that the market has been bullish for a long time. I'm more or less just trying to get a glimpse into the psychology I'm seeing so often.

Edited to put a finer point on things: Is there a rational basis for concern based on current P/E ratios or some other factor(s), or are recent jitters just examples of irrationality working in both directions?
I'll bite: consumers are highly leveraged (again), with low interest rates, gas prices, and "full" employment. Any shock to those things, and most consumers will stop eating out, etc. because they (not Bogleheads) have no margin for error, and that will ripple through. As to what would be a shock to gas prices, interest rates or employment, take your pick of geopolitical dynamics.
+1
That sums it up nicely....
The next crash will be caused by something very few people talk about. It almost always a surprise. I feel secure that whatever happens my portfolio is ready, and so are my fellow Vanguard investors, who are most likely stay put, "no matter what."
+1

There have been different opinions expressed here. One or more of them may be right. But no one really knows the "what" and "when". Stay the course!

Solo Prosperity
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Re: What Will Burst the Next Bubble?

Post by Solo Prosperity » Tue May 16, 2017 9:46 am

As always, this is just speculation and for fun. Nothing I say below has an impact on my portfolio, only my set rules do.

In my opinion, I do not think there are any major bubbles related to markets right now (Maybe Bitcoin). The combination of 2000 and 2008 over the last two decades has sent so many people "bubble" chasing. We have made it so that those who spot "bubbles" (The Big Short effect) are considered geniuses and so now everyone wants to be the one who calls the top. This is part of the reason I think this market still has some ways to go.

What I really think is that the next bubble/crash will NOT be market related. I think it will be government debt/tax related. Between Fed/State/Local Pensions, Student Debt, and Social Security Benefits, I think a day is coming (Maybe in the next decade) where as citizens, we will either lose out on benefits OR have to start paying a higher tax rate. That is what will cause the next major recession in my opinion. Just a guess though...

an_asker
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Re: What Will Burst the Next Bubble?

Post by an_asker » Tue May 16, 2017 9:53 am

Don't know if it will be tomorrow or ten years from now, but you can bet your last cent on one thing.

When it does happen, there will be tons of articles and books by folks who will claim to have predicted it and saying that only a blind investor would have missed the obvious signs of a market top.

It's happened before and sure enough it will happen again! :oops:

nscarbrough
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Re: What Will Burst the Next Bubble?

Post by nscarbrough » Tue May 16, 2017 10:04 am

I'm not sure how to attach an image so I'll just link it below. I know this has been posted on this forum before (Investor Equity Allocation vs 10 year SPX return). May offer some insight into return expectations going forward.

http://www.philosophicaleconomics.com/2 ... t-returns/

Image
[image inserted by admin LadyGeek]

anoop
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Re: What Will Burst the Next Bubble?

Post by anoop » Tue May 16, 2017 10:09 am

QuietProsperity wrote: What I really think is that the next bubble/crash will NOT be market related. I think it will be government debt/tax related. Between Fed/State/Local Pensions, Student Debt, and Social Security Benefits, I think a day is coming (Maybe in the next decade) where as citizens, we will either lose out on benefits OR have to start paying a higher tax rate. That is what will cause the next major recession in my opinion. Just a guess though...
This is a good one. I think we are slowly losing our benefits. Between hidden inflation (and benefits that don't track it well), raising the eligible age, and AMT (which more and more people will hit with inflation) we are already losing benefits and paying higher taxes. And with the deteriorating infrastructure, we are getting less for our taxes (which is effectively an increase in tax). So I would say what you're saying will happen is already happening right now in slow motion.

Solo Prosperity
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Re: What Will Burst the Next Bubble?

Post by Solo Prosperity » Tue May 16, 2017 10:51 am

anoop wrote:This is a good one. I think we are slowly losing our benefits. Between hidden inflation (and benefits that don't track it well), raising the eligible age, and AMT (which more and more people will hit with inflation) we are already losing benefits and paying higher taxes. And with the deteriorating infrastructure, we are getting less for our taxes (which is effectively an increase in tax). So I would say what you're saying will happen is already happening right now in slow motion.
Agreed. Just wonder when the tipping point will occur (And what will be the cause?). Maybe a State pension lowering its promised benefits? Who knows. All guesses.

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nisiprius
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Re: What Will Burst the Next Bubble?

Post by nisiprius » Tue May 16, 2017 10:54 am

Speaking of bubbles:
In 'The Wonderful One-Hoss Shay', Oliver Wendell Holmes wrote:First of November, ’Fifty-five!
This morning the parson takes a drive.
Now, small boys, get out of the way!
Here comes the wonderful one-hoss shay...
...First a shiver, and then a thrill,
Then something decidedly like a spill, —
And the parson was sitting upon a rock,
At half past nine by the meet’n-house clock, —
Just the hour of the Earthquake shock!
What do you think the parson found,
When he got up and stared around?
The poor old chaise in a heap or mound,
As if it had been to the mill and ground!
You see, of course, if you’re not a dunce,
How it went to pieces all at once, —
All at once, and nothing first, —
Just as bubbles do when they burst.
"All at once, and nothing first/Just as bubbles do when they burst."

Holmes was actually talking about theories, ideas, and doctrines--in this case, a theological argument so sound that it had no weak point--and how they mysteriously become outmoded and discredited without anyone pointing to any flaw in the logic. So it is particularly applicable to asset bubbles, which are the product of group psychology and belief systems. Confidence erodes, and there is no one thing that explains why it collapses at the particular moment it does.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

GrandMasterBlaster
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Re: What Will Burst the Next Bubble?

Post by GrandMasterBlaster » Tue May 16, 2017 11:08 am

Excellent discussion, plenty of food for thought, and still no reason not to "stay the course." Thanks, guys!

I think that student debt is an extremely likely culprit, but I agree that the laws surrounding the loans make it tough to see how it would pan out. I also see some very concerning trends in real estate (local to Western New York) that seem to have been echoed by others in their regions. The market here is insane right now, but I'll just go along for the ride and let my property value rise, comfortable with the low-percentage, low principal mortgage debt on our modest home.

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Re: What Will Burst the Next Bubble?

Post by Valuethinker » Tue May 16, 2017 11:12 am

aristotelian wrote:I have seen some literature about student loan debt being a mini-bubble. The amount of debt is truly frightening, and I believe it is beginning to outstrip the benefits of college education. However, the proportion of the economy is much smaller than real estate in '08 and for the most part the interest rates are reasonable. The total amount is more than overall credit card debt, but only about 15% of all debt.
Given the only way out of student loans in the USA, AFAIK, is death? there's no real "bubble" in the sense the lenders will never fully realize losses. The borrowers will keep paying (something) -- it hits their standard of living, but it takes default to actually cause a crisis (other than a political one).

Sub prime car finance is a growth area, and the term of the average lease in the US is something like longer than the average time new cars are kept. So there really is a bubble there, and the lenders will take real pain as used car values slump and they have to write down the loans.
What I don't get about the current climate is the combination of low oil prices and low interest rates. Both are at historical lows. Low oil prices have helped keep down the cost of living and enable consumer spending. Low interest rates have helped support the stock market by discouraging savings and investing in bonds. I could see a rapid change in one or the other (or perhaps both) causing some kind of event with ripple effects on the rest of the economy.

There is also the ever-present threat of war causing severe short-term disruption.
Yes oil is subject to geopolitical events. Persian Gulf gets disrupted, oil prices soar.

But, fundamentally, oil prices are low this time because US production is rising, having fallen every year since 1971. And that is because of technology change-- tight oil/ fracking. So the supply-demand picture has fundamentally changed in an unprecedented way.

The outlook is very much for oil prices somewhere between say $40 and $80/bl for essentially forever.

Dieter Helm's latest book is fascinating on all this.

btenny
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Re: What Will Burst the Next Bubble?

Post by btenny » Tue May 16, 2017 11:14 am

I have no clue what will cause the next crash but there are lots of indicators that $$$ things are way out of hand. So I suggest we will see a crash late in the first year or the second year of our new Republican president. It has happened lots of time before and likely will happen again. But I am not changing anything, just staying at 40/60.

Good Luck.

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Re: What Will Burst the Next Bubble?

Post by fishmonger » Tue May 16, 2017 11:21 am

Flynlow wrote:Interesting topic, and something that has been on my mind of late as well.

-Homes are selling for more than list, usually with multiple bids, in only a few days. If you're not offering cash or guaranteed financing, and/or waiving contingencies, your bid may not be competitive. That's an absolutely absurd way to handle a $200k+ transaction. There aren't that many wealthy buyers out there to support that kind of market (outside of maybe NYC, when its happening in rural VA, there's a problem), but there are people who can fake that level of wealth for a short while by inadvisable borrowing.
I think this is largely confined to a select few cities on the coast and maybe a couple of other places popular with those that left the coasts (Asheville, Houston, etc). For the rest of us, i.e. the vast majority of the country, I don't see this happening at all.

I live in a stable, LCOL market in New England. We bought a house in December for less than the previous seller paid for it in 2003, in great condition in a great neighborhood. Obviously this is an anomaly, but plenty of LCOL markets are growing at 1-2% a year.

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Re: What Will Burst the Next Bubble?

Post by High Income Parent » Tue May 16, 2017 11:25 am

At this time I think a geopolitical event would be more likely to cause a crash than over speculation and those things are impossible to predict, at least for me. That's why I'll just keep buying according to my asset allocation and stay the course.
Children are not a distraction from more important work. They are the most important work. | | C. S. Lewis

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whodidntante
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Re: What Will Burst the Next Bubble?

Post by whodidntante » Tue May 16, 2017 11:34 am

When we get a credit contraction then economic activity will fall. The next credit contraction is currently scheduled for August of 2018.

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Ged
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Re: What Will Burst the Next Bubble?

Post by Ged » Tue May 16, 2017 11:40 am

sschullo wrote: The next crash will be caused by something very few people talk about. It almost always a surprise. I feel secure that whatever happens my portfolio is ready, and so are my fellow Vanguard investors, who are most likely stay put, "no matter what."
I don't think it's always a surprise. I was not at all surprised by the last two bubbles. Specifically I had no investments in the NASDAQ before the dot com bubble went and was out of the market completely in 2007. Plenty of people were talking about the unsustainable stresses in the economy at the time.

Right now I don't see specific signs of excess at the levels of either the past two debacles. So there is a good chance it will be a surprise to me this time. Right now I'm at the low end of my personal stock allocation range. But beyond that - nothing more targeted.

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El Greco
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Re: What Will Burst the Next Bubble?

Post by El Greco » Tue May 16, 2017 1:17 pm

To answer the OP's question: The bubble will burst in exactly 4.5 years due to The El Greco Paradox. In exactly 4.5 years, El Greco plans to retire. Though El Greco strives to do everything right, the paradox is that everything usually goes horribly wrong. So in 4.5 years, brace yourself for the worst sequence of returns in recorded financial history.

But seriously, nobody knows nothing. (Except me, of course, and NedSaid) :D

Theoretical
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Re: What Will Burst the Next Bubble?

Post by Theoretical » Tue May 16, 2017 1:28 pm

But, fundamentally, oil prices are low this time because US production is rising, having fallen every year since 1971. And that is because of technology change-- tight oil/ fracking. So the supply-demand picture has fundamentally changed in an unprecedented way.

The outlook is very much for oil prices somewhere between say $40 and $80/bl for essentially forever.

Dieter Helm's latest book is fascinating on all this.
Yep, especially since there have been multiple trillion barrel reserves identified within the US alone - something like 3 in the Mountain west and another 1 in Texas. This has major ramifications for global oil supplies and price shocks. The Middle East is still viable because it's got cheap production costs (including technologically), but OPEC can't twist the screws as hard as it it used to be able to do.

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Re: What Will Burst the Next Bubble?

Post by Valuethinker » Tue May 16, 2017 2:33 pm

Theoretical wrote:
But, fundamentally, oil prices are low this time because US production is rising, having fallen every year since 1971. And that is because of technology change-- tight oil/ fracking. So the supply-demand picture has fundamentally changed in an unprecedented way.

The outlook is very much for oil prices somewhere between say $40 and $80/bl for essentially forever.

Dieter Helm's latest book is fascinating on all this.
Yep, especially since there have been multiple trillion barrel reserves identified within the US alone - something like 3 in the Mountain west and another 1 in Texas. This has major ramifications for global oil supplies and price shocks. The Middle East is still viable because it's got cheap production costs (including technologically), but OPEC can't twist the screws as hard as it it used to be able to do.
We are on a page-- but read Dieter Helm if you are interested in the subject. An accomplished economist, he writes very clearly and in a non technical (but not simplistic) fashion.

A small proviso. It wasn't OPEC that set prices, it was Saudi Arabia-- the only OPEC producer willing to flex output massively (and to not cheat on production quotas). Given the costs of their burgeoning population, welfare state (I think the gasoline price is the lowest in the world, there, something like 30 cents per gallon, and politically impossible to raise it) and various expensive wars, they don't have the flexibility they used to have.

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Re: What Will Burst the Next Bubble?

Post by IMO » Wed May 17, 2017 12:19 am

Who knows?

But what's always interesting is many highly educated/experienced individuals/groups/organizations in the financial world seem to only do well in making hindsight analysis on what caused a bubble. Lots have their theories on the forum, why or why not something may be on the horizon, etc.

And ultimately, leads to the answer, Who Knows?

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Re: What Will Burst the Next Bubble?

Post by Noobvestor » Wed May 17, 2017 12:29 am

nscarbrough wrote:I'm not sure how to attach an image so I'll just link it below. I know this has been posted on this forum before (Investor Equity Allocation vs 10 year SPX return). May offer some insight into return expectations going forward.

http://www.philosophicaleconomics.com/2 ... t-returns/

Image
[image inserted by admin LadyGeek]
Took me a while to realize the axis is inverted for stock returns, which makes a lot more sense. Are there updated numbers somewhere? I'm willing to bet stock dominates more than usual right now, tho I'm basing it on anecdotal evidence (seeing lots of stock-heavy and US-within-stock-heavy ports).
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

soldano
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Re: What Will Burst the Next Bubble?

Post by soldano » Wed May 17, 2017 1:57 am

Flynlow wrote:Interesting topic, and something that has been on my mind of late as well.

I wonder if it will be soon. I am only in my mid-30s, so the 2007 housing crash is the only one I have participated in thus far, but I am seeing the same initial indicators as back then:

-Collector cars. I'm a car guy, and love vehicles just for the sake of them. If I had infinite money, I'd have a Jay Leno style warehouse full of vehicles and retire happily to obscurity. The price of everything is up. I look at projects, half-completed restorations, etc, and can't believe the prices people are asking (and getting!). Maybe not the best indicator, but certainly speaks to the easy availability of money.

My only intention is to do what I did in 2008: stay the course. I was, and am, 100% equities index x3 (small cap, mid cap, large cap, all us equities indices). The only action i took back then was doubling my 401k withholding, trying to max it out. Since it is now maxed, I'd likely do nothing. Maybe go shopping for a classic car or two.
i'm guessing you're the guy bidding me up on all the old 930's on http://www.bringatrailer.com then. . . :mrgreen:

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Re: What Will Burst the Next Bubble?

Post by TX_Man » Wed May 17, 2017 5:21 am

All the talk about cyber attacks and all the hacking that has been going on has me concerned. A hack on any financial institution in the U.S. will probably cause major issues. Although which bubble it will pop is certainly unknown.

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Re: What Will Burst the Next Bubble?

Post by aqan » Wed May 17, 2017 6:00 am

Market is teasing the people who are on the sidelines. When the maximum number of bystanders give up and jump into the market, the market will crash for no particular reason.

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Re: What Will Burst the Next Bubble?

Post by Valuethinker » Wed May 17, 2017 6:59 am

GrandMasterBlaster wrote:Excellent discussion, plenty of food for thought, and still no reason not to "stay the course." Thanks, guys!

I think that student debt is an extremely likely culprit, but I agree that the laws surrounding the loans make it tough to see how it would pan out. I also see some very concerning trends in real estate (local to Western New York) that seem to have been echoed by others in their regions. The market here is insane right now, but I'll just go along for the ride and let my property value rise, comfortable with the low-percentage, low principal mortgage debt on our modest home.
I think what is happening in US housing is the economy is finally strong enough and unemployment low enough for people say under 40 to buy a house.

Low interest rates mean large mortgages are "affordable" as long as employment holds up.

However housebuilders in many areas have not been building enough supply-- tighter credit and the recession drove many out of business and makes the survivors more cautious. In addition, NIMBY issues have restricted construction in many places (the whole SF Bay Area comes to mind). Also there have been investor buyers of even Single Family Homes, and that has increased demand for homes/ restricted supply. Construction is an industry suffering from labor shortages (and there may be materials shortages).

Thus there are these bubbles arising from local mismatches between supply & demand. True even if there are enough homes out there on a national level. Housing is always a local market-- your Apple share doesn't care whether you live in San Francisco or Fargo ND, but your home certainly does (in terms of affecting the market for homes in that area).

I also note it's about time for the Baby Boomers to start trading down. I think we will see a lot more of that, as home equity is a major asset for many Americans. Probably *the* major asset.

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