Post: #1

Introduction:
I have noticed in various threads that some Rooshv members are currently overly cautious/bearish on stock and property markets causing them too miss out on gains.

I believe that a crash in any developed economy stock or property market is likely still years away. Its not going to happen in 2017 or 2018. Hell, it probably won't happen until the middle of the next decade.

Firstly what do I mean by crash? There is no universally agreed definition of a crash so I am going to define it as being a 20% or greater price drop (in local currency) from peak to trough in the case of real estate and a 40% or greater price drop from peak to trough (in local currency) in the case of stocks. I could explain why I choose 20% and 40% but its a little bit of a moot point. I even believe that lesser pullbacks such as 25% for stocks and 10% for real estate are pretty unlikely in any of the developed markets in 2017 or 2018.

When I talk about real estate I mean the average of the whole country not one specific city and in the case of stocks I mean the "main" index of the country such as the All Ordinaries in Australia, The S&P500 in the U.S.A. and the Nikkei225 in Japan, etc.

Now that we have gotten all the definitions, etc out of the way let me talk a little bit about why I think this is the case despite the high valuations and huge debt piles:

Interest rates:
Interest rates are very low in every developed economy. Yes interest rates are rising in some developed economies but only very slowly and from a very low base. Imagine for example at the current rate of interest rate increases in the U.S.A. how long it will take there for Federal reserve rates to get to 4%? Historically a crash is very unlikely when FED rates are at 1 or 2%, and generally happens when interest rates are much higher. Also the gap in most of these countries between short term rates and long-term rates is pretty wide. Historically the gap is narrow or even inverted (i.e. inverted yield curve) when a recession is about to occur or is occurring. Its a similar story in other developed economies.

Corporate Profits:
In Europe, Australia, U.S.A., etc corporate profits are holding steady or rising and there is nothing to indicate this will reverse any time soon.

Lending standards:
In most developed economies lending standards are not yet at the level of looseness that typically proceeds a crash. Easy credit is almost always a pre-cursor to a crash.

For example in Australia in recent times the banks have tightened lending standards. Its difficult (still possible) to get a loan with less than a 20% down-payment (we call it a deposit in Australia). Also here we now have many tiers of interest rates. We have owner occupier principal and interest loans which have the lowest rate, then owner occupier interest only costs a bit more, then investor principal and interest costs a little more and then investor interest only costs even more. Income requirements are quite high/strict and low doc loans or loans with small down-payments are very expensive and difficult to obtain.

Lending standards are not super loose in any developed economy that I am aware of. Yes interest rates are low but the lending standards are somewhat tough. In addition to this banking capital requirements are typically much looser preceding a crash. The past few years the capital adequacy ratios (e.g. BASEL III, etc) of the banking system in most economies has been becoming more strict (which does also feed into lending standards talked about above) or at least not becoming looser. Its still unclear if the the removal of the Dodd Frank act in the U.S.A. will happen and even if it does it will take a long time and the effects will take years to flow into the system.

Skyscrapper Index:
There is a concept known as the "sky scraper index"
http://www.phillipjanderson.com/forecast...on-effect/

The theory being that the world's biggest/tallest buildings usually are completed around the time of or during a recession. The reason being that they take a number of years to build and they only get built when conditions are booming and investors are euphoric because you need euphoria and easy lending standards to finance their construction (because the economics are often questionable). By the time they are completed the boom has gone over the top and turned to recession. The next world's tallest building is scheduled for completion sometime in 2019 and will be in Saudi Arabia.

http://www.arabnews.com/node/1098066/saudi-arabia

Now I actually think this will cause a slowdown/recession but it will be "mid cycle" slowdown as opposed to the main crash. Think of the 1998 Asian crises or the bursting of the tech bubble in the U.S.A., etc rather than the GFC. Personally I think the major crash will likely be sometime in the middle of the next decade, but I can't say for sure and will have have to keep an eye on numerous indicators every year to have a sense of when it might happen.

There is a theory about an approximate 18 year real estate cycle in U.S.A. real estate prices (and we all know when the U.S.A. sneezes the rest of the world catches a cold). Although certain events such as world wars can disrupt the cycle. The theory being that real estate moves in a predictable, repeatable cycle and every major downturn is preceded by a collapse in real estate prices. You can read up on Phillip J. Anderson, Fred Folvary, Henry George, Fred Harrison, and Homer Hoyt to name a few if you are interested in learning more about this. Phil Anderson and Fred Harrison both predicted the GFC years in advance and unlike the broken clock doom and gloomers like Peter Schiff they accurately (in approximate terms) predicted the subsequent recovery.

Lack of Euphoria in Markets and the general population:
Typically preceding a major crash like 1987 or 2008, etc you see huge Euphoria/"animal spirits" (a Keynes expression). You see all the major media outlets writing a lot of extremely bullish articles about stock and property markets, along with central bankers, the BIS, the OECD, heads of major international banks and corporations making bullish statements.

What we have now is the opposite where we see way more cautious/bearish official pronouncements, articles and TV announcements. In Australia its hard to go a month without seeing news and official warnings about a property bubble from everyone from the RBA to the news outlets to economists, the Bank of International Settlements, officials from the OECD, etc

Contrast that to the types of comments we were getting in 2007:
http://www.theaustralian.com.au/archive/...fe88a94e46

"My own view is that Australian households are in very good shape," Mr Battellino said in a speech in Sydney yesterday.

"They are not in any way exposed or vulnerable - the structure of assets and liabilities is quite sound."

There would obviously be examples of people getting themselves into financial difficulty, he said. "But fundamentally, the household sector as a whole is in very good financial shape.

"We had an adjustment in the housing market over 2005 and 2006, but house prices are now rising again ... and there's no hint the share market is grossly overvalued."

That was what the reserve bank of Australia deputy governor said in December 2007. Go and read what the RBA has said over the past year or two. They speak much more cautiously. Its the same in the U.S.A. and other major economies. Everyone sounds very cautious.

Where are the magazine articles with a picture of a wall street bull on the cover? Where are the the taxi drivers giving you stock tips? Where are all the people at cocktail parties who never had an interest in the stock market suddenly talking about stocks? Where are all the people quitting their day jobs to day trade because its "so easy to make money trading"?

Also we have not seen any very rapid exponential rises (i.e. a blow off top/"melt up" of 40 or 50% in 18 months that often occurs right before a historic market crash.



Other Business and land/housing Indicators:
If you look at construction levels, its booming as are the share prices and profits of property developers.

If they were starting to pull back because financing was too expensive or business conditions were deteriorating or housing was too un-affordable for consumers to buy that would be a red flag.

It has not happened yet. Office vacancy rates are very low at the moment. Construction levels are generally rising. In the U.S.A. residential house prices actually peaked in early 2006 well before the GFC began. Land prices and the share prices of mortgage and construction companies will generally peak will before a major crash so keep an eye on it. Land price downturns are always the cause of the big crashes.

This article talks about the previous housing bubble in the U.S.A. https://en.wikipedia.org/wiki/United_Sta...ing_bubble

Also the amount of major infrastructure projects around the world going to kick into gear is going to be hugely positive for growth and for land prices. I am talking about stuff like the new silk road
http://www.abc.net.au/news/2017-05-14/ch...de/8522682

Conclusion:
A major crash appears to be years away so do not lose sleep over it and do not be unnecessarily cautious. That being said the future is never 100% certain and anything could happen. Also many stock and property markets are overvalued. If that sounds contradictory let me clarify:

Markets are not about to crash so be aggressively invested, but its always dumb to buy overvalued things regardless. So the solution is to aggressively buy things which are not overvalued such as a "small cap value" ETF for U.S. stocks or an emerging markets ETF or individual undervalued stocks, individual undervalued properties, etc.

p.s. I highly recommend the Phillip J. Anderson (he is an Australian economist) and his globally focused investment newsletter (I have no affiliation and receive nothing for recommending it)
http://www.phillipjanderson.com/

If anybody has any questions or a difference of opinion I would be glad to hear it.

Post: #2

I lack the base knowledge needed to really argue for or against this, but this is fascinating. Rep from me.

Post: #3

This is pure speculation. No one on earth can predict the future.

Post: #4

crdr it is just opinion/speculation. I just wanted to give the bears food for thought. I could easily be wrong. Also like I pointed out for every investment you make, the numbers still have to stack up and it still has to make sense, whether it's a bull market or bear market. Also somebody with a regular dollar cost averaging plan should still stick to their plan under all market conditions.

Post: #5

There are always opportunities even in the worst economic periods. The air conditioning and refrigeration industries went from near zero to very widespread during the great depression in the 1930's. There will be similar things in the current era.

Look into the confluence of Deep Learning AI, computer vision, self driving cars, drones, and robotics. These will revolutionize daily life in the next 5 years. Expect to see near daily news of breakthroughs in these fields.

There will be ups and downs in various places as these new technologies turn things upside down, but overall I expect substantial economic growth globally, as the current backwards countries become fully modernized. I agree that a large general crash is not close right now, but there will be local crashes as regional industries are disrupted. Just make sure to diversify you investments and career situations to protect against this.

Post: #6

Most of the people I talk to in the finance arena who are doom/gloom/bearish aren't holding any short instruments either (Buying puts/selling shorts/etc). They're just completely on the sideline.

If you're going to be a bear, shit, be a Grizzly.

Good analysis. In a roundabout way I have come to the same conclusions but do expect a 10% cooling off period, for a month or two, to come within the next few years. I think most bulls would actually welcome this reversion to the mean and give some breathing room for another upward run, or at least a good entry point for reformed bears.

I like small cap value, financial services, and international right now.

I got into biotech during election time and am up 23% since.

Thanks again for the analysis and insight.

Post: #7

Cruisen_Chubby you brought up a good point that I neglected to mention. There is way too much cash on the sidelines. Markets crash when nearly everybody is close to fully invested.

http://www.smh.com.au/business/markets/c...wg35q.html

The article above is about fund managers in Australia massively increasing their cash weightings in recent times.

Globally fund manager cash holdings are currently above the average of the past ten years as shown by the article below:

http://www.fundselectorasia.com/news/103...sh-january

Fund managers are just way too bearish for a crash to be able to happen they need to be a lot more bullish. Yes, in the second link its a little dated (from February) and also it says global equity weightings are at a 13 month high (money moved from bonds to cash and equities), but if we were due for an almighty crash then equities allocations would likely be at something like a 10 year high not a 13 month high or whatever it happens to be now.

Here is another article from May of this year discussing the same topic:
http://fat-pitch.blogspot.com.au/2017/05...ation.html

Interestingly bond allocations are pretty much at a ten year low. What if the bond markets surprise everybody and long-term bond yields start moving lower? That would give equities a shot in the arm.

Post: #8

Here is another good article about the skyscraper index:

http://www.ctbuh.org/LinkClick.aspx?file...uage=en-GB

Post: #9

I used to drive by signs (on the east coast) 10 years ago advertising affordable newly built townhomes from the $500s (that $500,000).
Generally on top of perfectly good farmland and complete with an HOA to ensure your grass isn't a 1/4 inch too tall.

I'm seeing the same signs, for the same shitty built townhomes and mcmansions on (what was) perfectly good farmland (and fracking opportunities!) here in the CO.

WTF does everyone who is moving here do I have no idea but they seem to be able to afford 1/2 million dollar realstate.

Seems like a crash in the making to me.

Post: #10

I'm predicting a housing market crash if interest rates start moving at all.

Some of these tech companies are going to crash as well, because you can't just run a non-profitable company aimlessly forever (Twitter)

Post: #11

Great post AS. I agree with all your points about the indicators you mention. Just want to point out that geopolitical risks have never been higher since end of the cold war. And that's a big issue

Post: #12

(07-16-2017 05:00 PM)Sonoma Wrote:  I'm predicting a housing market crash if interest rates start moving at all.

Some of these tech companies are going to crash as well, because you can't just run a non-profitable company aimlessly forever (Twitter)

Agree on Twitter, but I think that company is an outlier in terms of tech stocks. You'd be hard pressed to find a decent mutual fund that is heavy on Twitter, whereas FB, Alphabet (Google), and Apple are staples in most of the retail funds these days. FB ads, the rise of instagram hoe-ing, and e-commerce outpacing brick and morter... I don't see those going anywhere anytime soon. Overvalued? Maybe. Going to crash and disappear? I don't think so.

What makes you think a slight rise in interest rates would lead to a real estate crash? if anything, it's going to stabilize this housing run out. Most people (smart folk) are on a 15 or 30 year FIXED mortgage, thus an interest rate won't affect their payments. Only the suckers are on the ARM (adjustable or floating rate mortgages) and may lose their legs (heh).

Further, when interest rates go up, new mortgagees can only get approved for a fraction of the house they could've gotten before (given the same income/credit score). So if interest rates were 3% and you could've been approved for a 500k McMansion and now interest rates are 4%, you'll only get approved for 400k. These are rough figures and estimates, obviously, but the point is an increase in interest rates can keep the NINJAs from getting more house than they can afford, which lead to the last bubble by artificially pumping up prices. Not to mention the MBS fiasco and turning low income degenerates into essentially penny stocks for investors...smh.

Check out "REM" on morningstar and do a 10 year look back. You can see when real estate was really hot and where it is now. Definitely not looking like a bubble. Pretty sexy 9% yield though.

An increase in interest rates may also lead to an inflow of capital (from equities/money markets) into bonds to chase the higher yield. Bonds aren't in a great place right now and retirees are having a hard time finding safe/somewhat safe fixed income.

Am I the only one that think an increase in interest rates would be a net benefit to what we have going on right now? It'd be a nice pump of the breaks to give the market (all of the markets) a breather.

(07-16-2017 05:04 PM)FPT Wrote:  Great post AS. I agree with all your points about the indicators you mention. Just want to point out that geopolitical risks have never been higher since end of the cold war. And that's a big issue

^ True on the geopolitical risks, but when was the last time we were without Geo-turmoil going on.

Cold war, vietnam, desert storm, 9/11, afghanistan, ISIS, etc.

I'm personally on the other side of the fence and believe that AustraliaSucks has similar thinking to being bullish on international/emerging markets. The internet (arguably the greatest invention of our time) is bringing people/countries/economies together. it's as easy to sell to someone over in Europe as it is to sell to someone a few blocks away. Point, click, buy, ship. I'm excited about some of the buying opportunities this will present.

Post: #13

Saying a crash is years away is as vague and meaningless as saying a crash is soon. Exactly how long does OP think we are safe from a housing crash? Also which markets? Most of rvf don't live in Australia and housing markets are different from city to city.

Post: #14

(07-16-2017 07:39 PM)[email protected] Wrote:  Saying a crash is years away is as vague and meaningless as saying a crash is soon. Exactly how long does OP think we are safe from a housing crash? Also which markets? Most of rvf don't live in Australia and housing markets are different from city to city.

Analysts have predicted 47 of the last 3 recessions

Post: #15

(07-16-2017 07:07 PM)Cruisen_Chubby Wrote:  ^ True on the geopolitical risks, but when was the last time we were without Geo-turmoil going on.

Cold war, vietnam, desert storm, 9/11, afghanistan, ISIS, etc.

I'm personally on the other side of the fence and believe that AustraliaSucks has similar thinking to being bullish on international/emerging markets. The internet (arguably the greatest invention of our time) is bringing people/countries/economies together. it's as easy to sell to someone over in Europe as it is to sell to someone a few blocks away. Point, click, buy, ship. I'm excited about some of the buying opportunities this will present.

Exactly - take a look at Shopify (SHOP), who have developed a cloud-based commerce platform for small and medium-sized businesses. Their stock price is up from $32 to $92 in the last year.

The biggest risks are things that aren’t in the news, or discussed on forums like these, as people aren’t preparing for them because they’re not in the news.

There is the old saying everyone should understand - “Markets climb a wall of worry.

Post: #16

(07-16-2017 08:52 PM)BB1 Wrote:  There is the old saying everyone should understand - “Markets climb a wall of worry.

What does that mean?

Post: #17

It means that despite investors constantly worrying about uncertainty and thinking that at any minute now a crash can happen a bull market still keeps going up.

Some people even allow their political beliefs get in the way of making money, they complain about the fed, the government, the weather, the war across the globe and think that tomorrow is the day the next big crash will happen, so they stay out of the market completely for years and years and never make any money, then they become bitter and complain that the fed, the government, the weather the war across the globe made them lose money.

Peter lynch said: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Post: #18

burneremail you clearly did not read my opening post in detail. I said a crash would not happen in the current decade and is likely to happen in the middle of next decade (i.e. sometime between 2023 and 2027). By the way remember when you said the stock market was dangerously overvalued and primed for a crash kept pushing crptos? Meanwhile cryptos already experienced a crash since you said that, with Ethereum dropping more than 50% peak to trough in recent times.

Also I clearly said that I my analysis was applicable to all developed markets e.g. Australia, the U.S.A., Germany, U.K. etc. And when I said housing is not going to crash I clearly said the average of the housing market on a national basis, obivously there will be variations from city to city.

You actually need to read before you post!!

Post: #19

I hope the next crash will be in 5 years or more. That will give me enough time to build substantial cash assets and invest them into index funds shortly after the crash bottoms out the market.

Post: #20

Suits that being said in my opening post I did point out there is a chance of a mid cycle slowdown in 2019 (or early 2020). 2019 is when the world's tallest building is set for completion in Saudi Arabia. The mid cycle slowdown will likely be a correction e.g. up to 10% pullback in the national property market average and up to 25% pull back in stock prices. In my opinion, the big crash won't come until the middle of the next decade. So you may have a good opportunity to invest in 2019 or 2020.

Post: #21

I'm just some crazy old coot who lives in the woods, but I've always wondered if some of the folks talking about a market crash actually realise how far down the rabbit hole that little concept has the potential to go.

Are they going to be sitting on a pile of expertly chosen stock and bond options laughing at how filthy rich they'll be in ten years while the world burns around them and the pangs of starvation set in?

In '33 most of the population lived rurally and survived largely impoverished by a mix of hardscrabble agricultural work and self sufficiency. In the cities (where the minority of the population lived at the time) it was only a strong, culturally homogeneous sense of civil order that kept the block-long soup lines from turning into riots and total anarchy.

I'm not saying AS is foolish. Obviously he's anything but. What I'm saying is I'm personally more interested to know on what premise he believes that there will still be the structures in place to honour the paper trails and the digital ones and zeroes of the old order when the next big one comes (if indeed it does).

That's the direction my curiosity leads in any case.

Post: #22

(07-17-2017 12:15 AM)Australia Sucks Wrote:  Suits that being said in my opening post I did point out there is a chance of a mid cycle slowdown in 2019 (or early 2020). 2019 is when the world's tallest building is set for completion in Saudi Arabia. The mid cycle slowdown will likely be a correction e.g. up to 10% pullback in the national property market average and up to 25% pull back in stock prices. In my opinion, the big crash won't come until the middle of the next decade. So you may have a good opportunity to invest in 2019 or 2020.

How long would it take for the stock market indexes to recover to pre-crash levels after a BIG crash?

Post: #23

Also let me counter some arguments that are typically used by bears:

Bear argument Number 1:
"Stock markets are very overvalued when looking at metrics like Schiller P.E. and Tobin's Q and hence are primed for a mean reverting crash".

Rebuttal: Yes markets are currently overvalued and will eventually mean revert, just like I will eventually die of old age. History tells us that markets can remain overvalued for many years and can become even more overvalued before crashing. Also the process of mean reversion can occur through a combination of rising earnings and flat or slowly rising stock prices. For example if earnings rise at 8% per annum and stock prices rise at 4% per annum the p.e. ratio will gradually fall. For what its worth I don't think the stock market returns over the next 5-10 years will be anywhere near as strong as the last 5-10 years but I don't think the stock markets will crash either.

Bear Argument Number 2:
"Debt levels are unsustainably high and will cause a depression"

Rebuttal:
Debt levels are very high by historical standards, but due to a combination of economic growth, low interest rates, rising land values (which represent a large part of the collateral underwriting the debts) and accommodating bond markets, debt levels look set to continue rising for years to come. Look at what underpins the debts. In the case of household debt its household income and land values. Land values are rising, household income is generally rising and unemployment is falling. Corporate debts are underpinned by corporate profits which are at record levels (at least in the U.S.) and still rising (in most developed economies). As for government debts a lot of countries still have huge amounts of government owned infrastructure that they can privatize to fund the building of new infrastructure. It can and will happen. Expect a wave of privatizations at some point.

Bear Argument Number 3:
"Interest rates are rising"

Rebuttal:
Interest rates are rising but very slowly and from a very low base. FED rates going from 0% to 2% etc based on history typically is not enough to cause a recession because rates are still low. For example FED rates going from 3% to 5% might cause a recession but we are still years away from that scenario.

Post: #24

Suits I really do not have an answer to your question because every recovery is different and its too hard to tell. A while ago I did read an article somewhere talking about all the different recoveries and analyzing the average time it takes to recover. I will try and dig it up for you.

In the U.S. for the last crash the stock market peaked in late 2007 and hit a low in early 2009. It again hit a record high in 2013. By historical standards that was a very quick recovery, with the average time from memory being something more like 7 or 8 years (not 100% sure, will have to dig it up for you).

Sometimes it can decades for the market to hit a pre-crash high, with Japan (Nikkei225) still being below its 1989 high.

Post: #25

Leonard I get where you are coming from. The scenario you are painting of a civilization collapse of some sorts is always a possibility which cannot be ruled out.

You can't completely hedge the risk but using part of your portfolio you can partially hedge that risk by doing things like owning physical gold and silver, some physical cash (in case the banks shut down) and having some rural land somewhere.

These are the types of actions I recommend people take as an insurance/hedge to what you are saying, while they keep most of there money invested in things which create wealth like stocks and real estate, etc.

Also if you have some idea of when the crash is coming you can reduce your exposures to stocks, small business and property investments, etc that are overvalued and increase your cash weightings so you are ready to take advantage of crash induced bargains (assuming society does not collapse of course).

Also I think its important to keep a physical copy backup of things like the title deed to properties you own, etc in case the electronic systems have problems.