Dejavu 2007?

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Farm_or
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Dejavu 2007?

Post by Farm_or » Fri Jan 20, 2017 8:18 am

Does anybody else see the similar circumstances to our economy prior to the 2008 crash?

Record high dow, home ownership, high real estate, consumer confidence and bad loans?

I listened to an analyst yesterday acknowledge the shaky mortgages (red flag!), but played it down due to MIP. But the insurance fund runs out at $29 billion? Worst case, another tax payer bailout?

This all sounds familiar, to me.

IlliniDave
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Re: Dejavu 2007?

Post by IlliniDave » Fri Jan 20, 2017 8:33 am

Not really. My house still isn't worth what it was worth in 2007. And I don't think the mortgage situation is as bad as it was then. They were truly handing them out like candy with the gov't fanning the flames.

That said, one can always, every single day, wake up and declare we're headed for a market crash/recession/whatever, and be correct. And there's always the same risks out there. People can lose jobs and default on mortgages, and there's usually localized bubble-like markets. Corporate profits can falter and bonds can start paying more, prompting a move away from stocks. It's sort of like a blues song. There's some underlying similarities in every chorus, but the real action happens in the unique playing over the top of it.

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Chad
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Re: Dejavu 2007?

Post by Chad » Fri Jan 20, 2017 8:49 am

No. Mortgages aren't anywhere near where they were in 2007. If Trump goes too far with rolling back certain laws this might change, but no way to know at this time. A lot of numbers suggest a housing shortage. Consumer debt is better, though it still looks strange to high savers and low risk people (most people on here). US stock values are high, but not absolute nose bleed territory.

This does not mean a pullback can't happen or isn't likely, but it will just be a normal run of the mill pullback. What it will not be is an economic crash like 2007-2008.

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Chad
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Re: Dejavu 2007?

Post by Chad » Fri Jan 20, 2017 8:56 am

One caveat...the odds of a black swan event are much higher going forward.

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Ego
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Re: Dejavu 2007?

Post by Ego » Fri Jan 20, 2017 9:14 am

Farm, I am not saying you are not correct.... but.... it is common for everyone to be on guard for the last crisis and completely miss the next one.

black_son_of_gray
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Re: Dejavu 2007?

Post by black_son_of_gray » Fri Jan 20, 2017 9:31 am

Chad wrote:This does not mean a pullback can't happen or isn't likely, but it will just be a normal run of the mill pullback. What it will not be is an economic crash like 2007-2008.
How big is a normal run of the mill pullback? Depending on your metric, getting back to normal market valuations (historically) could mean a %50 drop, no? Or are you thinking %10-20 corrections?

7Wannabe5
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Re: Dejavu 2007?

Post by 7Wannabe5 » Fri Jan 20, 2017 3:45 pm

it is common for everyone to be on guard for the last crisis and completely miss the next one.
Yup. BTW, 1958 was the peak year for reported happiness of average American.

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classical_Liberal
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Re: Dejavu 2007?

Post by classical_Liberal » Fri Jan 20, 2017 3:57 pm

black_son_of_gray wrote: How big is a normal run of the mill pullback? Depending on your metric, getting back to normal market valuations (historically) could mean a %50 drop, no? Or are you thinking %10-20 corrections?
A bit dated, but accurate.
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enigmaT120
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Re: Dejavu 2007?

Post by enigmaT120 » Fri Jan 20, 2017 11:18 pm

7Wannabe5 wrote:Yup. BTW, 1958 was the peak year for reported happiness of average American.
No wonder, when they had finally achieved this:

Imagetruckleft by Ed Miller, on Flickr

...and the '58 Corvette, the last Cameo pickup, and the first El Camino.

Not that I care about cars and stuff.

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Chad
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Re: Dejavu 2007?

Post by Chad » Mon Jan 23, 2017 6:55 am

black_son_of_gray wrote:
Chad wrote:This does not mean a pullback can't happen or isn't likely, but it will just be a normal run of the mill pullback. What it will not be is an economic crash like 2007-2008.
How big is a normal run of the mill pullback? Depending on your metric, getting back to normal market valuations (historically) could mean a %50 drop, no? Or are you thinking %10-20 corrections?
From an article about a pullback in 2014. http://www.valuewalk.com/2014/10/stock- ... back-2014/
The S&P 500 has now experienced 19 pullbacks during this 5.5-year-old bull market, during which the index has risen by 182% (cumulative return of 217% including dividends). The 1990s bull market included 13 pullbacks; there were 12 during the 2002 – 2007 bull market. At an average of three to four pullbacks per year, we are in-line with history [Figure 1]. We understand the nervousness out there, but what we have just experienced looks pretty normal at this point.
A normal run of the mill pullback is roughly 5-10%, with a 20% every now and then. By no means would a 50% drop put the US market at normal valuations, it would be amazingly cheap. The majority of people on this forum are doom and gloom, and are always expecting a crash. These crashes rarely happen. Though, as I mentioned previously, the odds of a black swan event are higher now with Trump in office, as he is unpredictable.

Augustus
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Re: Dejavu 2007?

Post by Augustus » Mon Jan 23, 2017 2:47 pm

In my opinion it's the Chinese driving the current bubble, and the Chinese have an astounding bubble going on over there both in business/lending and real estate.

Here are housing prices by city:
Image

You can see that places like SoCal are a bargain for many Chinese in Tier 1 cities, compared to buying in their own towns.
In Irvine, California, about 70-80% of buyers of new-builds are Chinese parents whose children attend, or plan to attend, nearby colleges, says Peggy Fong Chen, the CEO of ReMax Omega Irvine. Other college towns such as Los Angeles, Seattle, Boston and Dallas, see a similar trend.
http://www.economist.com/news/united-st ... ring-trade

This article is interesting as well: http://www.zerohedge.com/news/2016-01-1 ... nt-housing

They've got a bunch of issues on the business/lending side of things with bad loans and poorly performing businesses:
http://www.businessinsider.com/china-de ... ort-2016-9

Business in China is largely dependent on getting the blessings of government officials who can give you access to loans. It's similar to Japan's boom a few decades ago with a bunch of bad lending and bad debt, and also similar to Japan is the money flooding into the US markets because housing here is cheaper than it is over there.

The thing that leaves me wondering about China is that the government officials have most of the money, and the most to lose, and they are the ones who make the laws. Sooo... it's in their best interests NOT to have a market correction in the short term. In the long term however, something must give...

If they have a correction, I think it is very likely that we will also have a correction, especially in the markets that they've been pouring money into like SoCal real estate.

Hankaroundtheworld
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Re: Dejavu 2007?

Post by Hankaroundtheworld » Wed Jan 25, 2017 1:49 pm

Has anyone a good overview of the leading indicators, like (a) Shiller P/E - above 28, (b) VIX - seems okay, (c) world-wide Shipping acitivity, etc...
At least, we could try to calculate the risk-factor that a correction could happen soon (I discussed in 2016, but that turned out a reasonable year, strangely enough Trump helped with this ...)

Is there a trustful site or list of indicators that can predict a possible turn of events?

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bryan
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Re: Dejavu 2007?

Post by bryan » Thu Jan 26, 2017 3:24 pm

@Hankaroundtheworld, personally I think it's way too complex, dynamic of a system. I'll leave it to folks like at BlackRock or the Michael Burrys of the world. Best to use what you know that others might not notice or act on (e.g. local factors/indicators or specific niche trends or new facts, etc.) and make bets with the correct vehicles.

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Dragline
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Re: Dejavu 2007?

Post by Dragline » Thu Jan 26, 2017 3:50 pm

Let me know if you find one -- we'll all be rich!

You would have to have the kind of insight that the characters in "The Big Short" had, and then be lucky enough on timing. Or somehow sneak under the hood of Jim Simons' hedge fund algorithms.

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Chad
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Re: Dejavu 2007?

Post by Chad » Thu Jan 26, 2017 4:55 pm

Oh, if someone somehow finds out Simons' algorithms/system please let me know. That would be interesting.

Hankaroundtheworld
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Re: Dejavu 2007?

Post by Hankaroundtheworld » Fri Jan 27, 2017 9:31 am

Thanks for the humour :-) He, I am just trying to hold onto some levels of predication's / finding a magic formula is of course the holy grail, but not realistic. Just trying to catch what you'll are using as a reasonable indicator (or just ignoring if you believe that it does not make sense)

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Re: Dejavu 2007?

Post by jacob » Fri Jan 27, 2017 10:28 am

John Hussman has been working on this problem for years. See e.g. https://www.hussmanfunds.com/weeklyMarketComment.html

The problem with indicators is that the most important one (which often override all the other ones) is usually unique to a given market. For example, between 2009 and 2014, almost all of US market moves could be explained by the QE activities of the Fed. That's a pretty easy "indicator" if you happened to have included it in your quiver AND figured out how it was more important than anything else. If not, indicator-thinking just puts you self-consistently on the wrong side of the trade.

There are of course some classic indicators as well ... they generally rely on waiting for mean-reversion, that is, having the statistics re-assert itself. The problem with that is the this mean-assertion can happen in two ways. Either the market comes to the mean (this is what you want) or the mean comes to the market as the sampling window gets moved in which case you didn't profit/lost money ... because all profit needs the price to move in the direction of your prediction ... something that holds for everybody; even buy and holders.

banker22
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Re: Dejavu 2007?

Post by banker22 » Sat Jan 28, 2017 8:08 am

I like Doug Short's composite valuation model, which is updated every month:

https://www.advisorperspectives.com/dsh ... overvalued

His model suggests a c.45% correction is necessary to return to historic means.

Hankaroundtheworld
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Re: Dejavu 2007?

Post by Hankaroundtheworld » Mon Jan 30, 2017 1:19 pm

banker22 wrote:I like Doug Short's composite valuation model, which is updated every month:

https://www.advisorperspectives.com/dsh ... overvalued

His model suggests a c.45% correction is necessary to return to historic means.
Thanks, interesting indeed. And of course, this all should be read into context (basically the way I read @jacob comments) If the world continues the QE floods, everything can be different. At the moment, TINA effect is still ongoing.

I am afraid to keep too much Cash at the Bank account, because now there is a higher chance that Governments will top this off if a Bank crisis appears again ... on the other hand, I want to wait till the overvalued market is correcting ..

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Seppia
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Re: Dejavu 2007?

Post by Seppia » Mon Jan 30, 2017 5:53 pm

jacob wrote:John Hussman has been working on this problem for years. See e.g. https://www.hussmanfunds.com/weeklyMarketComment.html
Thanks for the link, I've read a ton of these articles in the last days and they are excellent.

I think a good counter for the current very high valuations is (especially for Americans) to diversify internationally.
European and EM markets are not nearly as overvalued as the USA.
Yes the EU has gone negative on rates but stock markets refuse to skyrocket because of weak earnings and political uncertainty here. Shiller Cape is still below 17, dividends are well above 3% and P/B is reasonable.
Couple this with a very strong dollar and a weak euro and it's a good time to be American :)

Now obviously since all markets are correlated, in the event of a big USA crash, European stocks will drop as well in the short term.

I think though that there is also risk in being completely out of the market..
two years ago USA markets were already very very high. They're higher today

so it is in my opinion best to look at current valuations with a probabilistic approach i.e."in the next 10-15 years I'm more likely than not to have Decent returns investing in European stocks", "in the next 10-15 years I'm more likely to have bad returns investing in American stocks", "In the next 10-15 years I'm more likely to do better being in Europeans stocks rather than American ones", etc.

Felipe
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Re: Dejavu 2007?

Post by Felipe » Mon Jan 30, 2017 8:18 pm

I agree about international diversification. I'm curious, why do you focus on European as opposed to International or Emerging?

European has a higher P/E (25.30) & P/B (1.8) with a lower Earnings Growth (3%) than International (21.2 ,1.6 & 6.9%) or Emerging (18.5, 1.6, & 9.2%).

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Seppia
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Re: Dejavu 2007?

Post by Seppia » Tue Jan 31, 2017 2:19 am

I do because I live in Italy, and I am not opposed to a bit of home bias.
I also have emerging, but it's a smaller allocation

Hankaroundtheworld
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Re: Dejavu 2007?

Post by Hankaroundtheworld » Tue Feb 14, 2017 2:05 am

As of now (Shiller P/E 10 at 29) I went more into Cash. I was already 20% in cash in 2016, now moved it to 50% (waiting mode for correction). May be a big mistake, future will tell. Of course, if you look at the sentiment in the market, everyone is in the 2nd Trump rush because of promised Tax cuts, and in Europe, the Economy is growing above expectations (everyone forgets Greece, upcoming elections in France, etc.. for the moment). So, the market wants to go higher and more people are stepping in. I am not convinced, the fundamental problems are still there, so it looks like this stock-market rally is more like a relief-rally and that reality will catch up later this year. Anyway, these are just my opinions.

The problem with this move is that getting back into the stock-market (when everything seems to go up), becomes an extra hurdle (as you have to buy into higher levels than you sold).

Anyone else got chicken ( or clever :-) who knows), and went into a bigger Cash position?

halfmoon
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Re: Dejavu 2007?

Post by halfmoon » Tue Feb 14, 2017 9:51 am

Hankaroundtheworld wrote:Anyone else got chicken ( or clever who knows), and went into a bigger Cash position?
We cashed in about 10% of our stocks in December, choosing specific holdings that we felt had become overvalued. Some of that is sitting in retirement accounts waiting to be reinvested, but the major chunk went to pay down our rental mortgage. I'm very happy we did this, regardless of what happens next, and regardless of the tax-deductible nature of rental interest. I just can't stand debt.

In our case, because we invest primarily in value/dividend-paying individual stocks, it helps to keep evaluating whether the stocks are in line with our goals. Because I have no crystal ball (and a lot less analytical skill/interest than many here), I don't try to predict macro trends. Same goes for reinvesting: I watch for short-term drops in stocks I like. For example, we just bought some more GM when it temporarily dropped after the earnings reports.

*Caveat: we're older and out of the major accumulation stage (though accumulation seems to happen). When we were younger, we invested in aggressive-growth funds and just rode out the market ups and downs. It helped that we had no TV or internet. ;)

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distracted_at_work
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Re: Dejavu 2007?

Post by distracted_at_work » Tue Feb 14, 2017 11:11 am

I haven't moved into cash and I don't think I will. I agree there are warning signs (the P/E numbers set off big alarm bells). What I have done is:

-Move out of Canadian REITS. I expect interest rates have no where to go but up. I expect a housing crash a-la 2008 if Canada (or China, hello Van + Toronto) has a another huge pull back causing unemployment. Who knows when. Too many of my friends/acquaintances post pictures of newly bought homes where I know they stretched to the limit...

-Bought / buying 4% + utility-esk dividend paying companies and turn on the drip's. This should keep me brave in the face of a major crash.

-Haven't touched my U.S or ex. N.A Developed Int indexes and I won't.

-Not going to touch pure growth stocks for a while.

Important context that I'm fully in accumulation phase with a job that speeds up in times of recession. My inner masochist almost wants to see a crash to experience how I would feel/react.

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