Author Topic: What are your bubble indicators?  (Read 3675 times)

ctuser1

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What are your bubble indicators?
« on: August 10, 2020, 07:25:56 AM »
For me, any more than one of the following would flip the bubble trigger in my head:
1. My kids school-bus driver giving, or seriously asking for stock tips.
2. Ditto with the folks manning the shoe-shine stands in the Grand Central Station (that reminds me - I haven't been to GCT in 6 months now !!!).
3. The new-high/upgrade/new-high tango repeating at least 2 cycles. AAPL is close on this one indicator. It went up a lot recently (STILL does not seem overvalued compared to other tech stocks), and now the street is handing out new targets for this stock (I just saw a $600 one). If this cycle repeats once more, then that is a bubble indicator.
4. CNBC mentions non-cashflow indicators (e.g. "eyeballs") as frequently as earnings and other such balance sheet stuff.
5. People start to casually mention the 10X future. e.g. when bitcoin crossed $10k, you heard of the future where it will go to $100k. 

Anything else?


MustacheAndaHalf

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Re: What are your bubble indicators?
« Reply #1 on: August 10, 2020, 12:03:18 PM »
Do you mean a bubble that impacts the entire market?  I have an example that's more limited.

After Hertz declared bankruptcy, Robinhood investors bought heavily.  Hertz contemplated a stock offering - while in bankruptcy - until the SEC put a stop to it.  None of that makes any sense - almost all the time, holders of a bankrupt company's stock get nothing in bankruptcy.  It's very, very unlikely to be a good idea to invest after bankruptcy.

waltworks

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Re: What are your bubble indicators?
« Reply #2 on: August 10, 2020, 01:13:48 PM »
I personally don't think you ever really can recognize a bubble without the benefit of hindsight. But that's just me.

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bacchi

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Re: What are your bubble indicators?
« Reply #3 on: August 10, 2020, 04:47:29 PM »
Forex trading was big some years ago. The impending crash was obvious when a friend was interested in it and he mentioned that his barber was interested in it too. Yes, a stereotype come true.

On this board, the tell is when trading discussions pick up and when everyone is becoming a millionaire through a FAANG stock and not diversifying, even after they reach their FI number. We should worry when there's talk of tech stocks, like Tesla, never having a sane PE. In another thread, I mentioned the "Nifty Fifty" stocks from the 70s. Those were blue-chips that had high PEs that would guarantee (GUARANTEE!) you riches from the market. They did until they didn't.

A related tell is when there are more than the usual number of stock pickers who think they're the next Warren Buffet. Instead of accepting their luck, and acknowledging their high risk gambles, they think they can outplay the market through sheer intelligence. Been there, done that. But I'm sure they're smarter than me. :)

vand

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Re: What are your bubble indicators?
« Reply #4 on: August 11, 2020, 03:51:37 AM »
For me a key one is when we see talking heads on TV arguing that things that have been undeniably been bad for stocks if you study the course of history to actually be good for stocks.

This would mean:

- Arguments made that expensive current valuations reflecting a strong economy and therefore good for future stock returns. All the historical evidence suggests the opposite; that excessive valuations lead tend to lead to long periods of underperformance

- Inflation being good for stocks; arguments made that rising prices can be pushed on down the chain of production to the consumer, therefore real profits are protected. Again, all historical evidence strongly suggests that stocks get derated and perform poorly during periods of rising and moderate/high inflation

- Arguments made that it doesn't matter even if stocks perform poorly over the new few years; as growth with always eventually return to their long term trend. Sure, they might, but the you may end up waiting much longer than just "the next few years".

- Arguments that risk can be discounted. These generally revolve around New Paradigm thinking, and that the Fed will protect investors from anything truly bad.

- When you see stuff like financial analysts being invited onto Gardening shows to talk about the green virtues of owning a Tesla.

TBH I see a lot of this already on mainstream financial channels. The V recovery in the US markets have emboldened investors old and new into New Paradigm thinking, and could well have sown the seeds of an imminent parabolic move up.

JAYSLOL

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Re: What are your bubble indicators?
« Reply #5 on: August 11, 2020, 08:25:33 AM »
I may well look back at these last few months sometime in the future if we are indeed in a bubble that bursts and recall the following things I’ve noticed in the last few weeks.  I had a young coworker (in an unskilled, low pay position) mention he wants to get into day trading, I tried to talk him out of it.  An older couple my family knows (with no trading or investment experience that we know of) got sucked into a stock trading pyramid scheme thing and was trying to recruit more people into it.  Too soon to tell if these are normal, isolated cases or if there’s a greater force behind them

ChpBstrd

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Re: What are your bubble indicators?
« Reply #6 on: August 11, 2020, 10:28:41 AM »
I think culture has changed sufficiently that we can't just re-use some of the indicators of the past. For example, getting shoe shines at the train station is no longer a common enough thing to get multiple weekly observations. "What's on TV" has been replaced by millions of internet sites, videos, blogs, and media content almost everywhere has become more emotionally extreme and less rational. Also, themes from previous bubbles are no longer abandoned. Jim Cramer is still on cable TV and the internet advocating tech stocks. and there are still shows about how easy it is to flip houses for five and six-figure profits (I learned that remodeling a house generally involves walking around and talking while gesturing). The people we happen to know and encounter jump into and out of various media channels and social media groups, and so we are no longer sampling the wider culture with our handful of contacts and a handful of media companies like we were in the 90's.

More straightforward approach:

a) Did an index or market price for a thing double in the past 2-3 years? E.g. between 1995 and 2000, the Nasdaq rose about 400%. In 1998 the Nasdaq returned almost 40% and in 1999 it returned over 85%. Home prices in HCOL areas did something similar in the years prior to the 2008 housing bust. Between Jan. 2017 and now, the Nasdaq has more than doubled. Things rarely change in value this fast, so this implies a pricing error by the market, either early on or now. E.g. if a house that cost $200k today costs $400k next year, it was either priced too low today or there is a bubble next year. It didn't double in utility and the currency didn't lose half its value. Given the nature of bubbles as spikes above a long term trend line, it is safe to say the higher price is probably the error.

b) Are the "hot" sectors only "hot" due to government subsidies, such as the lack of a sales tax for online retailers that existed for many years, government-subsidized loans, low interest rates, discounted access to natural resources on public lands, or taxpayer support for new suburban/exurban road construction? Government policy has led to each of the last two bubbles, and arguably popped them too.

c) Does the object of market fascination have little or no utility to the buyers at the moment, but is suddenly being purchased for the expectation of future price gains? Tech stocks of the late 90's, precious metals, cryptocurrency, tulip bulbs, cash-flow negative real estate, bonds with sub-zero real yields, and various collectible memorabilia over the years come to mind.

These guidelines are enough to avoid all bubbles so far, but it is also possible for bubbles to bring down non-bubble markets when they popped. You might have steered clear of dot-com stocks in 2000 or housing in 2008, but if you held the indices you still got whacked. The presence of a bubble anywhere is a threat to markets everywhere, but bubbles are a constant fact of life nowadays, so you have to ask yourself if the size of the bubble is a threat. The sizes of the 1929 bubble, and 1999 tech bubble were apparent to all, but the true impacts of the housing bubble were somewhat ambiguous.

Today, I'm watching bonds. Most people do not realize how far and fast they can fall if it ever becomes necessary to raise interest rates. The market is certainly propped up by government actions. The size of this market is many times bigger than the tech bubble and the housing bubble combined. It's a potential financial apocalypse. Fortunately, I do not see inflation on the horizon or interest rates occurring in the near future. We are Japanified for the moment.

hodedofome

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Re: What are your bubble indicators?
« Reply #7 on: August 11, 2020, 11:31:49 AM »
George Soros on bubbles: “When I see a bubble forming, I rush in to buy, adding fuel to the fire,” he said in 2009. “That is not irrational.”
One such example is gold, which he described as the “ultimate asset bubble” in early 2010. Gold had soared 40 per cent the previous year and many commentators took his words to mean he believed the precious metal was set to fall.
However, Soros was actually buying gold, which was then trading at abouat $1,200, the reasoning being that buying into bubbles can be very profitable, if one gets out in time.
Soros did just that, selling most of his holdings in early 2011, some six months before the bubble burst after prices topped out above $1,900.

I highly recommend reading this post before thinking we are in a real bubble: https://joefahmy.com/2013/12/13/stories-1999 and https://joefahmy.com/2013/11/13/bubble/

Back in 2011 I couldn't drive a mile to the grocery store without seeing 1 or 2 people out on street corners holding huge signs with "we buy gold" on it. I couldn't read a local magazine with an ad by a mom in her 30s who had a new gold buying business she just started. I knew this was crazy, and sure enough it wasn't long after that the whole thing topped.

The stories of widows getting into the real estate game in 2006-2007 are nuts and tipped off more than a few people.

I don't consider the Robinhood traders of today to be equal to what was happening in the 90s. Robinhood has made it incredibly easy to open up an account and trade with just a few dollars. These people don't necessarily have a lot of money and while they can all pile onto a few stocks and move them for a little bit, they aren't doing this to the whole market IMO.

There are very good reasons for tech to be doing as well as it has, and for that to continue in the future. First off, technology has always been the growth industry of the future, it just got ahead of itself in the 90s. Along with that, while many parts of the world see very little or low growth, tech is growing like bonkers and taking over market share from traditional businesses. Secondly, a good chunk of tech companies (specifically software companies) have gross margins of 80%+ which would make a traditional business owner drool. When they stop growing so fast and focus on profitability, they will be much more profitable than any traditional company, making their higher valuation justified. Third - I work in the tech industry and see this firsthand - the move to the cloud starts off slow. Then it picks up steam as all new companies go straight to the cloud and skip the on-premise stuff altogether. Finally it's a full blown freight train and all traditional businesses with on-premise old school stuff decide they need to move to the cloud NOW. I noticed about 5 years ago it became incredibly difficult to sell our on-premise software to anyone, whereas the decades before that it was easy. But in the past year or two even old companies decided their on-premise stuff was a liability, and put a move to the cloud on their roadmap. Covid forced all those businesses to make the move to the cloud RIGHT NOW, and not wait another year or two like they were planning on. Any server, phone system, email Exchange server, or application running in house is seen as a serious liability to the business, and that stuff is being ripped out this year to make way for NetSuite, Intacct, RingCentral, Teams/Slack, Bill.com, AWS, Azure, DocuSign, Zoom, SalesForce, ZenDesk, ServiceNow, etc. There are very good reasons why these stocks are up 100% this year (as well as the past 5 years) - everyone is moving to them at the same time. So their revenues are growing 30-100%+ per year and not slowing down but even accelerating. If you want growth, tech is pretty much the only place you're going to find it, and they are growing at rates we've never seen a company that size grow before.

Earnings will matter for the new tech companies one day, but for now they don't. Investors want to see these companies hurry up and take over their market share completely as fast as possible to lock out any possible competitors. And that's what happens in software. Only a few players control the entire market. So all these companies are working to take market share, and this is the best strategy for them. One day they'll focus on profitability, and when they do they'll be insanely profitable. But for now, not investing every penny they make would be foolish.

Amazon and Netflix and Tesla are showing how well this strategy works and every other tech company is following their playbook.

On the consumer side, you have more people ordering online all the time instead of going into the store, which is benefiting Amazon, Etsy, Wayfair, Shopify at the expense of brick and mortar stores. So the Nasdaq will be going up while VTSAX will be going down as it holds all those companies who will eventually go out of business. You have consumers watching streaming services benefiting Netflix at the expense of CBS, Disney, Discovery. So the Nasdaq will benefit while VTSAX will suffer comparatively. You have consumers moving away from traditional banking to online banking/payments benefiting Square and Paypal at the expense of all the traditional banking companies.

There are very good reasons for tech to be performing so much better than the total stock market index.

There will be a bubble in these stocks, this type of disruption always results in one, but we're not there yet. We have a long way to go. And in the meantime I'm playing the long side until I see more signs of a real bubble. Maybe when I see an old, local, conservative financial advisor advertising his software portfolios for clients, or I hear old people talk about tech stocks, then I'll get worried.

My strategy at this time is when I start to see bubblicious behavior, I'll probably sell 25-50% of my tech stocks. The rest I'll use trailing stops to get me out in a unemotional way. That way I'll have captured most of the move upwards without participating in most of the move downwards. A trailing ATR stop like this is what I'll use https://www.semanticscholar.org/paper/Does-Trend-Following-Work-on-Stocks-Wilcox-Crittenden/1453464b12d66c43ba6d1b28b58baf4871f6b4bc

« Last Edit: August 11, 2020, 11:54:30 AM by hodedofome »

ChpBstrd

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Re: What are your bubble indicators?
« Reply #8 on: August 11, 2020, 12:27:28 PM »
If you want growth, tech is pretty much the only place you're going to find it, and they are growing at rates we've never seen a company that size grow before.

No doubt there are many great information companies.

The question is, how are their customers doing? E.g. if Best Buy goes bankrupt or Ford cuts back on marketing, how many information companies lose how many millions in sales? If 20 million people leave the upper middle class and join the working class, how many new $50k cars does Tesla not sell? If state and local governments cut back on information services due to falling tax revenue, what's the impact on Microsoft's growth? If unemployed consumers spend less, when does that show up in Google's ad referrals? If Facebook's ad clients are unable to generate sales, how long until Facebook must cut its ad prices? How many companies are going to pay huge amounts for cloud subscriptions while closing branch offices and laying off workers?

At some level, the non-information economy is the customer base for the information industry. Today the non-information economy is spending money on information services in a bid for survival. The bet is that this will continue through the recession, allowing the information companies to enjoy double-digit revenue growth while the rest of the economy shrinks by double-digits. It's a decent thesis - information outperformed most other sectors in 2008-09 - but it is far from assured.

The future could also look like the commodification of currently-precious cloud services, and intense pricing pressure on software companies as their customer base dwindles.

bigblock440

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Re: What are your bubble indicators?
« Reply #9 on: August 11, 2020, 12:55:03 PM »
For me, any more than one of the following would flip the bubble trigger in my head:
1. My kids school-bus driver giving, or seriously asking for stock tips.
2. Ditto with the folks manning the shoe-shine stands in the Grand Central Station (that reminds me - I haven't been to GCT in 6 months now !!!).
3. The new-high/upgrade/new-high tango repeating at least 2 cycles. AAPL is close on this one indicator. It went up a lot recently (STILL does not seem overvalued compared to other tech stocks), and now the street is handing out new targets for this stock (I just saw a $600 one). If this cycle repeats once more, then that is a bubble indicator.
4. CNBC mentions non-cashflow indicators (e.g. "eyeballs") as frequently as earnings and other such balance sheet stuff.
5. People start to casually mention the 10X future. e.g. when bitcoin crossed $10k, you heard of the future where it will go to $100k. 

Anything else?

Last year I had seriously considered being a bus driver after hearing an ad on the radio on my way home from yet another 12 hour day.  It sounded really appealing and I wished I was closer to a coast-FIRE number.  I still like that idea, maybe I can convince people we're in a bubble if I start rambling on about withdrawal strategies, SORR, and buying the index.

I don't really have anything on bubbles though, I though Tesla was a bubble years ago at $200.

PDXTabs

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« Last Edit: August 11, 2020, 02:22:06 PM by PDXTabs »

dividendman

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Re: What are your bubble indicators?
« Reply #11 on: August 11, 2020, 07:48:00 PM »
I'm not sure about indicators, but an anti-indicator is a lot of people talking about a bubble.

MustacheAndaHalf

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Re: What are your bubble indicators?
« Reply #12 on: August 11, 2020, 09:32:12 PM »
... "What's on TV" has been replaced by millions of internet sites, videos, blogs, and media content almost everywhere has become more emotionally extreme and less rational. Also, themes from previous bubbles are no longer abandoned. Jim Cramer is still on cable TV and the internet advocating tech stocks.
If Jim Cramer is one of your bubble indicators, you might take a closer look - he's advocating a barbell of tech stocks and Covid recovery stocks.
https://www.cnbc.com/2020/08/10/jim-cramer-everybody-hates-the-barbell-until-days-like-today.html

Today's tech stocks have profits, while the dot-com tech stocks had "eyeballs", or website visitors.  When you look at the big tech companies, each dominates a significant area of modern life.  Very profitable companies that are part of everyone's lives are very different from unprofitable companies that might have big profits at a vague future point.

hodedofome

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Re: What are your bubble indicators?
« Reply #13 on: August 12, 2020, 08:01:29 AM »
I'm not sure about indicators, but an anti-indicator is a lot of people talking about a bubble.

Agree with this. You need everyone on board that the good times will never end for a bubble to really be here.

Software, AI, biotech, clean energy are going to be drivers of the next bubble. It's going to feel like the world will never be the same and that'll get prices way out of line.

ChpBstrd

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Re: What are your bubble indicators?
« Reply #14 on: August 12, 2020, 10:33:19 AM »
I'm not sure about indicators, but an anti-indicator is a lot of people talking about a bubble.

But again, on the internet there are always a lot of people talking about any given outcome. How could we quantify an increase or decrease?

And if I recall correctly, there was a lot of consternation out for com stock valuations in 1999 too.

PDXTabs

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Re: What are your bubble indicators?
« Reply #15 on: August 12, 2020, 10:39:39 AM »
I'm not sure about indicators, but an anti-indicator is a lot of people talking about a bubble.
And if I recall correctly, there was a lot of consternation out for com stock valuations in 1999 too.

I'm pretty sure that the chairman of the Fed called it a bubble in 1996.

bacchi

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Re: What are your bubble indicators?
« Reply #16 on: August 14, 2020, 10:07:11 AM »

vand

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Re: What are your bubble indicators?
« Reply #17 on: August 14, 2020, 10:56:03 AM »
This thread is a bubble indicator: https://forum.mrmoneymustache.com/investor-alley/are-bear-markets-a-thing-of-the-past/

Sentiment has evidently reached what looks like a permanently high plateau.

Heckler

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Re: What are your bubble indicators?
« Reply #18 on: August 14, 2020, 10:46:35 PM »
I'm a mountain bike trailbuilder, leading small volunteer groups.

Last week, two parents and their four 8 to 10 year old boys came out to help.  I swear two hours of the boys (not the parents!) conversation was about the market cap of Apple, and who could buy Amazon.  No shit.

MustacheAndaHalf

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Re: What are your bubble indicators?
« Reply #19 on: August 16, 2020, 03:59:27 AM »
bacchi - Most people in that thread disagree with the author.  That author posted and left, so maybe they didn't their own thread, either.

I don't know how Congress will treat all the loans it's been making.  If those loans are not forgiven, most U.S. companies will be heavily in debt, and bankruptcy could be their way out.  In competitive industries like airlines, debt weighs on profit.  If one airline goes bankrupt and suddenly becomes the only one to have reduced debts, they will wind up with higher profits.  And that profit motive then motivates other airlines in the same situation to declare bankruptcy.  So if every airline is made to be heavily in debt, one bankruptcy could trigger a chain reaction.  Is that a bubble?  Hard to say, without knowing how Congress will treat the loans it's providing to businesses.

PDXTabs

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Re: What are your bubble indicators?
« Reply #20 on: August 16, 2020, 11:19:08 AM »
In competitive industries like airlines, debt weighs on profit.  If one airline goes bankrupt and suddenly becomes the only one to have reduced debts, they will wind up with higher profits.  And that profit motive then motivates other airlines in the same situation to declare bankruptcy.  So if every airline is made to be heavily in debt, one bankruptcy could trigger a chain reaction.  Is that a bubble?

Yup, but that story is 40 years old.

RogerOS

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Re: What are your bubble indicators?
« Reply #21 on: August 16, 2020, 12:06:01 PM »
bacchi - Most people in that thread disagree with the author.  That author posted and left, so maybe they didn't their own thread, either.

I was the OP.
1. I didn't post a/my opinion but rather a question, hence the question mark. I have put off investing my nest egg for years because I have thought the stock market to be overvalued for some time.
2. I didn't leave...

waltworks

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Re: What are your bubble indicators?
« Reply #22 on: August 16, 2020, 09:02:43 PM »
I'm a mountain bike trailbuilder, leading small volunteer groups.

Last week, two parents and their four 8 to 10 year old boys came out to help.  I swear two hours of the boys (not the parents!) conversation was about the market cap of Apple, and who could buy Amazon.  No shit.

I spent an entire hour long mountain bike ride with my 8 year old discussing what the "biggest" company in the world was, because that's what he wanted to talk about. I don't know that I'd use that as an indicator of a bubble, though. He also likes to talk about the biggest earthmover, truck, spaceship, continent, etc.

As an aside he is actually not a bad mini-ex operator, at 8! Now if I could just teach him some geometry for getting the radius right on turns...

-W

Travis

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Re: What are your bubble indicators?
« Reply #23 on: August 16, 2020, 10:20:07 PM »
I'm not sure about indicators, but an anti-indicator is a lot of people talking about a bubble.

But again, on the internet there are always a lot of people talking about any given outcome. How could we quantify an increase or decrease?

And if I recall correctly, there was a lot of consternation out for com stock valuations in 1999 too.

I would never take what anybody says about anything (especially on television) as an indicator.  There are people whose job is to talk about one subject regardless of context or evidence. I remember seeing guys on CNBC talking about the next bubble and recession before the last one was even over.  If you get enough people talking and talking often enough, one of them is going to end up right in hindsight just out of pure chance.

MustacheAndaHalf

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Re: What are your bubble indicators?
« Reply #24 on: August 16, 2020, 11:28:30 PM »
bacchi - Most people in that thread disagree with the author.  That author posted and left, so maybe they didn't their own thread, either.
I was the OP.
1. I didn't post a/my opinion but rather a question, hence the question mark. I have put off investing my nest egg for years because I have thought the stock market to be overvalued for some time.
2. I didn't leave...
Suggesting there will be no more bear markets is closer to trolling people than asking a question.  That's why one of the replies was someone waiting for the fireworks.

You ignored the thread for 5 days, and then posted 10 minutes before your reply here.  I'd call that leaving.

RogerOS

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Re: What are your bubble indicators?
« Reply #25 on: August 17, 2020, 09:26:38 AM »
You ignored the thread for 5 days, and then posted 10 minutes before your reply here.  I'd call that leaving.

Five days is nothing. It's a message board, not instant messaging. I have obligations in the real world that take precedence. Yesterday I had time on the weekend to make a few posts sequentially. I'll admit it was a provocative title, aimed at invoking substantive discussion though, not trolling. I'll stop with this off-topic discussion here.

On topic: I'd call P/E ratio's like Tesla (>850) bubble indicators.

FINate

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Re: What are your bubble indicators?
« Reply #26 on: August 17, 2020, 10:16:12 AM »
For me, any more than one of the following would flip the bubble trigger in my head:
1. My kids school-bus driver giving, or seriously asking for stock tips.
2. Ditto with the folks manning the shoe-shine stands in the Grand Central Station (that reminds me - I haven't been to GCT in 6 months now !!!).
[snip]
Anything else?

Similarly, when financially non-savvy friends and family believe a certain asset class is easy or "a sure bet" it gets my attention.

I believe there's a theoretical underpinning to support this. There are a fixed number of potential investors. In a growing asset, each new investor entering the market is very likely, on average, marginally less competent than the previous entrant. Thus the collective "wisdom" of the crowd cumulatively dilutes with each new investor, which can then result in things like pets.com.

Problem is, what to do about it? I'm fairly pessimistic, so I perceive bubbles forming years before they pop. But timing is everything. If I sat on the sidelines for 2-3 years at a time I'd miss out on huge gains, and each year it doesn't pop only adds to the stress as things could keep increasing much longer than anticipated (e.g. the run up after the Great Recession).

Therefore, none of this changes my investment strategy. Though I do occasionally try to talk sense into said friends and family, at least those willing to listen. Being FIRE lends some degree of credibility.

LWYRUP

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Re: What are your bubble indicators?
« Reply #27 on: August 17, 2020, 10:21:10 AM »
For me, any more than one of the following would flip the bubble trigger in my head:
1. My kids school-bus driver giving, or seriously asking for stock tips.
2. Ditto with the folks manning the shoe-shine stands in the Grand Central Station (that reminds me - I haven't been to GCT in 6 months now !!!).
[snip]
Anything else?

Similarly, when financially non-savvy friends and family believe a certain asset class is easy or "a sure bet" it gets my attention.

I believe there's a theoretical underpinning to support this. There are a fixed number of potential investors. In a growing asset, each new investor entering the market is very likely, on average, marginally less competent than the previous entrant. Thus the collective "wisdom" of the crowd cumulatively dilutes with each new investor, which can then result in things like pets.com.

Problem is, what to do about it? I'm fairly pessimistic, so I perceive bubbles forming years before they pop. But timing is everything. If I sat on the sidelines for 2-3 years at a time I'd miss out on huge gains, and each year it doesn't pop only adds to the stress as things could keep increasing much longer than anticipated (e.g. the run up after the Great Recession).

Therefore, none of this changes my investment strategy. Though I do occasionally try to talk sense into said friends and family, at least those willing to listen. Being FIRE lends some degree of credibility.

I am like you.  It has a lot of upsides, but also some downsides. Some people from my law school who graduated when I did skipped the firm path and went down to Florida and bought a ton of foreclosures in 2009-2011.  I think their company is worth $100 million plus.  My conservative approach (legal practice + VTSAX) has made me comfortable but I doubt I'm ever going to catch up to them!

I do expect they had some family money backing them on that.  My parents are comfortable, but I would not have wanted to put them up to cutting me big checks that I might potentially lose.  So off to the salt mines I went. 

bacchi

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Re: What are your bubble indicators?
« Reply #28 on: August 17, 2020, 10:52:34 AM »
I believe there's a theoretical underpinning to support this. There are a fixed number of potential investors. In a growing asset, each new investor entering the market is very likely, on average, marginally less competent than the previous entrant. Thus the collective "wisdom" of the crowd cumulatively dilutes with each new investor, which can then result in things like pets.com.

Good analysis! More investors means more money which means the spiral continues. The question is, then, what causes it to pop? If Tesla is still a viable company, when does reality set in? Maximum buyers have bet on it and the last group of buyers grow tired of waiting?

Quote
Problem is, what to do about it? I'm fairly pessimistic, so I perceive bubbles forming years before they pop. But timing is everything. If I sat on the sidelines for 2-3 years at a time I'd miss out on huge gains, and each year it doesn't pop only adds to the stress as things could keep increasing much longer than anticipated (e.g. the run up after the Great Recession).

I recall that a former fed board member sold his townhouse in DC expecting the housing crash. He was eventually right but he also had to rent for a few years.
« Last Edit: August 17, 2020, 12:16:16 PM by bacchi »

FINate

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Re: What are your bubble indicators?
« Reply #29 on: August 17, 2020, 11:09:07 AM »
For me, any more than one of the following would flip the bubble trigger in my head:
1. My kids school-bus driver giving, or seriously asking for stock tips.
2. Ditto with the folks manning the shoe-shine stands in the Grand Central Station (that reminds me - I haven't been to GCT in 6 months now !!!).
[snip]
Anything else?

Similarly, when financially non-savvy friends and family believe a certain asset class is easy or "a sure bet" it gets my attention.

I believe there's a theoretical underpinning to support this. There are a fixed number of potential investors. In a growing asset, each new investor entering the market is very likely, on average, marginally less competent than the previous entrant. Thus the collective "wisdom" of the crowd cumulatively dilutes with each new investor, which can then result in things like pets.com.

Problem is, what to do about it? I'm fairly pessimistic, so I perceive bubbles forming years before they pop. But timing is everything. If I sat on the sidelines for 2-3 years at a time I'd miss out on huge gains, and each year it doesn't pop only adds to the stress as things could keep increasing much longer than anticipated (e.g. the run up after the Great Recession).

Therefore, none of this changes my investment strategy. Though I do occasionally try to talk sense into said friends and family, at least those willing to listen. Being FIRE lends some degree of credibility.

I am like you.  It has a lot of upsides, but also some downsides. Some people from my law school who graduated when I did skipped the firm path and went down to Florida and bought a ton of foreclosures in 2009-2011.  I think their company is worth $100 million plus.  My conservative approach (legal practice + VTSAX) has made me comfortable but I doubt I'm ever going to catch up to them!

I do expect they had some family money backing them on that.  My parents are comfortable, but I would not have wanted to put them up to cutting me big checks that I might potentially lose.  So off to the salt mines I went.

In some ways I'm conservative. E.g. spending way less than we make, and keeping a large emergency fund. But in other ways I'm more aggressive, especially if I find a good value while running the numbers.

In March of 2009 panic was everywhere. At the time we had cash on the sidelines (international job assignment and uncertain expenditures) that became freed-up. I reasoned that either everything would continue to go to hell in a hand basket in which case money would be essentially useless or, things would recover and it was the buying opportunity of a lifetime based on the Shiller PE ratio and other valuations. So we took this cash along with whatever else we could pull together, and went all in in the total stock market. Which paid off rather sooner than we expected.

Then a few years later, while real estate was still languishing, I started analyzing cap rates (and other metrics) for rental properties in my area. Everyone at that time was very sour on real estate. Anyone else remember all the hipsters talking up the "rental economy" back then? But there were deals to be had. So we took the plunge on an investment property. Not only did it produce a great income stream for ~8 years, but we recently sold for about 75% more than we paid for it.

But I never got into buying distressed properties. I looked into it for a bit and decided it was somewhat of a specialized skill with a number of potential legal pitfalls. Having a law degree seems like the right tool to navigate that market.

IMO, the most important first rule of investing is to know yourself. So good for you being honest with yourself about what you're really willing to risk. Sounds like your friends are doing well, and good for them, but often everything is not as it seems.

FINate

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Re: What are your bubble indicators?
« Reply #30 on: August 17, 2020, 11:22:04 AM »
I believe there's a theoretical underpinning to support this. There are a fixed number of potential investors. In a growing asset, each new investor entering the market is very likely, on average, marginally less competent than the previous entrant. Thus the collective "wisdom" of the crowd cumulatively dilutes with each new investor, which can then result in things like pets.com.

Good analysis! More investors means more money which means the spiral continues. The question is, then, what causes it to pop? If Tesla is still a viable company, when does reality set in? Maximum buyers have bet on it and the last group of buyers grow tired of waiting?

I'm absolutely certain that I don't understand market psychology. But my guess is something like yours: when there are no more greater fools to sell to and savvy investors start cashing in.

Travis

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Re: What are your bubble indicators?
« Reply #31 on: August 17, 2020, 07:50:05 PM »
I believe there's a theoretical underpinning to support this. There are a fixed number of potential investors. In a growing asset, each new investor entering the market is very likely, on average, marginally less competent than the previous entrant. Thus the collective "wisdom" of the crowd cumulatively dilutes with each new investor, which can then result in things like pets.com.

Good analysis! More investors means more money which means the spiral continues. The question is, then, what causes it to pop? If Tesla is still a viable company, when does reality set in? Maximum buyers have bet on it and the last group of buyers grow tired of waiting?

I'm absolutely certain that I don't understand market psychology. But my guess is something like yours: when there are no more greater fools to sell to and savvy investors start cashing in.

That's how a speculation bubble pops, historically. When you've got a bunch of folks buying in simply because they think they can sell it to someone else for more with no logical connection to the value of the asset, eventually you'll run out of people willing to pay the rising price and the buyers that have been sitting on the stock waiting for that peak jump ship.

Back in the late 90s you had companies nobody had heard of having IPOs go up several hundred percent in the first week entirely on promises.  I think Buffet and a few others started to back out of the market when that happened, but most folks won't want to leave for fear of calling it early and missing out on a few more months of gains.  You have some legit tech companies that survived that purge, but even today adjusted for inflation they are not valued as highly as they were 20 years ago.

dividendman

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Re: What are your bubble indicators?
« Reply #32 on: August 17, 2020, 08:56:14 PM »
That's how a speculation bubble pops, historically. When you've got a bunch of folks buying in simply because they think they can sell it to someone else for more with no logical connection to the value of the asset, eventually you'll run out of people willing to pay the rising price and the buyers that have been sitting on the stock waiting for that peak jump ship.

But what if you have a person who has unlimited money and won't let the market fall by more than x%?

LWYRUP

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Re: What are your bubble indicators?
« Reply #33 on: August 17, 2020, 09:01:25 PM »
That's how a speculation bubble pops, historically. When you've got a bunch of folks buying in simply because they think they can sell it to someone else for more with no logical connection to the value of the asset, eventually you'll run out of people willing to pay the rising price and the buyers that have been sitting on the stock waiting for that peak jump ship.

But what if you have a person who has unlimited money and won't let the market fall by more than x%?

That is a fantastic question.

I assume the market stays up and then one day you look up and it costs $237 for a big mac.  But when that happens and how, I don't have the foggiest idea. 

ChpBstrd

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Re: What are your bubble indicators?
« Reply #34 on: August 18, 2020, 09:02:38 AM »
That's how a speculation bubble pops, historically. When you've got a bunch of folks buying in simply because they think they can sell it to someone else for more with no logical connection to the value of the asset, eventually you'll run out of people willing to pay the rising price and the buyers that have been sitting on the stock waiting for that peak jump ship.

But what if you have a person who has unlimited money and won't let the market fall by more than x%?

That is a fantastic question.

I assume the market stays up and then one day you look up and it costs $237 for a big mac.  But when that happens and how, I don't have the foggiest idea.

Eventually that “person” would end up owning the entire market cap and you’d have either feudalism/fascism or communism (not much difference between the two at a fundamental level). A simulation can be run using a monopoly board game.

ctuser1

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Re: What are your bubble indicators?
« Reply #35 on: August 18, 2020, 09:35:11 AM »
That's how a speculation bubble pops, historically. When you've got a bunch of folks buying in simply because they think they can sell it to someone else for more with no logical connection to the value of the asset, eventually you'll run out of people willing to pay the rising price and the buyers that have been sitting on the stock waiting for that peak jump ship.

But what if you have a person who has unlimited money and won't let the market fall by more than x%?

That is a fantastic question.

I assume the market stays up and then one day you look up and it costs $237 for a big mac.  But when that happens and how, I don't have the foggiest idea.

Asset inflation is unlikely to cause Big Mac inflation.

That would only happen if there is some sort of "trickle down effect" in play here, such that money from AAPL/TSLA owners eventually trickle down to the majority of Big Mac buyers.

In an ideal world populated by Homo Economicus, such trickle down would surely happen. In the real world, however, that does not seem to be the case.


ChpBstrd

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Steeze

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Re: What are your bubble indicators?
« Reply #37 on: August 18, 2020, 12:09:55 PM »
A group of my very broke and financially un-savvy friends have become options traders, does that count?

These guys don’t know what an IRA is and they are trading options!

clarkfan1979

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Re: What are your bubble indicators?
« Reply #38 on: August 18, 2020, 12:33:37 PM »
I kind of feel like a stock market bubble is currently a non-factor based on government intervention. If we have a large stock market decline in the 30% to 50% range, the government is going to intervene and pump the economy full of money until the stock market recovers.

Based on how the government is currently behaving, it seems unlikely to me that we would see a stock market decline that lasts for more than 18 months.

Am I missing anything?

ChpBstrd

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Re: What are your bubble indicators?
« Reply #39 on: August 19, 2020, 10:28:33 AM »
I kind of feel like a stock market bubble is currently a non-factor based on government intervention. If we have a large stock market decline in the 30% to 50% range, the government is going to intervene and pump the economy full of money until the stock market recovers.

Based on how the government is currently behaving, it seems unlikely to me that we would see a stock market decline that lasts for more than 18 months.

Am I missing anything?

If investors suddenly became unwilling to pay high PE ratios for stocks, the only way to prevent a multi-year decline like we saw in the early 2000’s would be for the government to buy some critical mass of market liquidity every day, propping up prices by creating a shortage of shares for everyone else. This process might eventually be ended by (a) a rise in interest rates due to the government’s borrowing or money printing, (b) effective nationalization of most productive industry, or (c) businesses responding to government incentives to over-leverage or continually dilute existing shares.

(C) is interesting because it reflects continuation of the trends we saw during the last decade of QE. An artificially low cost of capital creates the incentive to boost ROE by taking on more and more debt. However, firms eventually reach a tipping point where their valuation declines due to their riskiness more than it improves due to their financial leverage. This tipping point on the debt/EV spectrum is artificially shifted by either a perceived “fed put” or an artificially low cost of capital. I.e. if the market would lend to over indebted corporation X for 6% interest, but the government will lend to them for 4%, then corporation X is more likely to increase their debt because the government is there lending to them at artificially low rates. Consumers often take on odious debts because of low interest rates on cars or housing (another sector with subsidized debt) and this limits their ability to do other things. Similarly, a highly indebted corporation might be less willing to spend money on growth and innovation (example: Why is Ford not the leader in electric vehicles?). Clayton Christensen wrote a few things about how the optimal capital structure for boosting stock metrics is different than the optimal capital structure for growth and innovation.

These are all factors that could lead to asset misallocation and a long-term economic decline. But what would make non-government investors not be willing to pay high PE ratios in the short term? Classical economists have been waiting, Linus-like, for high inflation to appear in Japan for decades, and in the US for one decade. If the “fed put” was called into question or if QE was tapered off, that would do it. Also, if corporations started playing a game of “dilute the government, they’ll just come back for more” then regular investors might balk at joining the government in victimhood. Finally, if consumer demand declined, then it would be hard for regular investors to justify paying high PE’s. The pandemic will bankrupt a lot of Americans (20% of the infected end up hospitalized at great personal expense AND loss of wages). The other factor could be greater-fool theory among investors; if the fed is going to be buying overpriced assets in the future then there will be someone to buy your overpriced asset at that time, so why not just buy it?

WoodsRun

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Re: What are your bubble indicators?
« Reply #40 on: August 21, 2020, 06:57:39 AM »
I have seen ads on facebook trying to lure people into multi-family investing. I think multi-family investing can be great but it seems odd that someone took an ad out on facebook to lure people into such investments.

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ctuser1

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Re: What are your bubble indicators?
« Reply #42 on: August 22, 2020, 12:51:05 PM »
TSLA seems to be in a bubble to me. It definitely breached this rule I use:

"3. The new-high/upgrade/new-high tango repeating at least 2 cycles. "

At this point, the major driver for TSLA seems to be the greater fool theory. The pundits at CNBC and elsewhere have completely abandoned even attempting to justify the price via some intrinsic value mechanism.

AAPL is still not in a real bubble IMO. 37X PE is just on the edge of being justifiable if you have a very high (=double digit %) growth assumptions. I have a large (for me) position in AAPL that has now grown to become 40%+ of my total portfolio, and I am quite split when to diversify a little bit away from it.

aceyou

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Re: What are your bubble indicators?
« Reply #43 on: August 23, 2020, 05:06:55 PM »
I think it's best to not have a bubble indicator.   

v8rx7guy

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Re: What are your bubble indicators?
« Reply #44 on: August 23, 2020, 05:09:57 PM »
Used sports car prices... at least the ones I watch.  Through the roof right now, just like in 2007

ctuser1

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Re: What are your bubble indicators?
« Reply #45 on: August 24, 2020, 07:48:43 AM »
I think it's best to not have a bubble indicator.

Is it for the same reason as waltworks above: "I personally don't think you ever really can recognize a bubble without the benefit of hindsight."? Or do you have some other point of view?

Asking because I want to educate myself on all the possible ways to think about it.

I have to work hard to control my trigger finder itch to market time - bad habits from when I first started trading (and called it "investing"). Learning to think from as many angles as possible helps assuage that. I call it "intentional analysis paralysis".

ctuser1

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Re: What are your bubble indicators?
« Reply #46 on: August 24, 2020, 10:06:27 AM »

ChpBstrd

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Re: What are your bubble indicators?
« Reply #47 on: August 24, 2020, 10:52:19 AM »
I think it's best to not have a bubble indicator.

Is it for the same reason as waltworks above: "I personally don't think you ever really can recognize a bubble without the benefit of hindsight."? Or do you have some other point of view?

Asking because I want to educate myself on all the possible ways to think about it.

I have to work hard to control my trigger finder itch to market time - bad habits from when I first started trading (and called it "investing"). Learning to think from as many angles as possible helps assuage that. I call it "intentional analysis paralysis".

There were tons of people who go out before the Nasdaq bust in 1999-2000, and hoards of people who auctioned away their coastal properties to breathless, desperate trend chasers in 2006-2007. There comes a point where the rationale for a positive return is something like "all these dot com companies will each, individually, dominate the planet in 5 years" or "middle-class houses in this place will cost $10 million 10 years from now and middle class people will pay those prices."

So it is possible. The indicator is the lack of any reasonable rationale to support the case that an asset will outperform competing investments. E.g. treasuries outperformed most tech stocks such as Cisco, Microsoft, and Yahoo purchased in 2000 for the next 15 years.

To both catch a bubble's upside and also sell before the burst, one would have to take a trend-following approach to get in early on, and then switch to a rational/analytical approach which would lead one to bail out. Thus, there is a timing component - not so much in the trading but in the change of mentality. Additionally, that switch would have to occur at exactly the time the status quo mentality seemed to be working beautifully. Good luck with that game.

MustacheAndaHalf

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Re: What are your bubble indicators?
« Reply #48 on: August 24, 2020, 10:58:30 AM »
Investors bidding up the prices of bankrupt companies... might be a bubble indicator.
 Earlier in this thread I mentioned HTZ, which was driven up in price by Robinhood investors after the company went bankrupt.
https://www.forbes.com/advisor/investing/robinhood-bankrupt-hertz/
On to round 2...

One of the stocks I bought had an incredibly valuable recovery, which made it worth the bankruptcy risk.  Risk happens.  The company went bankrupt, and I braced for a total loss as the stock closed at 25% of it's prior value.  The next day, the price went up +56%... a day later, another jump in price.  So rather than getting a -100% loss, I've sold at a -47% loss.  Considering I expected bankruptcies to happen, and expected a total loss when they did, I consider it good luck that people are bidding up the stock of bankrupt companies.

vand

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Re: What are your bubble indicators?
« Reply #49 on: August 24, 2020, 11:49:48 AM »
IMO the US markets, led by Nasdaq stocks, are now clearly transitioning from a Fed-backed recovery into a full blown speculative asset bubble.

The telling characteristic is the lack of any significant corrections in Nasdaq that characterises a normal healthy bull market. When a market does 70% without pausing for breath that is bubble behaviour.