Do the people who still want more tax cuts really think this can go on forever? It's really scary that deficits are going up while the market is booming. In the 90s at least the deficit went down during the bubble.
Defense spending is largely a jobs program. The only question is, if you're going to have a trillion dollar jobs program if the rate of return on investment isn't higher in e.g. infrastructure spending than defense.
If it's a jobs program then the money would be better spent in an FDR like manner - large infrastructure projects that support the economy, bridges, trains, internet etc.
That's questionable. Defense employs a lot of white collar workers in things like design and development of aircraft, weapons systems, satellites, SIGINT, etc. It's not clear that the same level of jobs would be there for an FDR-like program. Sure, the country's infrastructure would be better off and we would probably have more people employed per dollar, but I'm not sure the economy as a whole would be better off.
Presumably these white collar workers are valuable and employeeing them with confiscated money on a useless task is much worse for the economy than both the counterfactual in which the government does not bid for their labor and the one in which these resources are used to subsidize public goods such as basic science research and merit goods such as public infrastructure.
Again, I'm not convinced that's the case. You're implying that, for example, almost the entirety of the employees at Lockheed, Raytheon, Northrop, General Dynamics, etc. and a good chunk of the employees at companies like Boeing would somehow be redistributed into the broader economy at a similar compensation level. That's upwards of a million white collar workers. You can't magic all those people into the broader economy without serious impacts, and replacing the expenditure on their salaries with expenditure on things like basic research and public infrastructure does not equate to the same economic outcome. I'm pretty sure doing so would further stratify the economy by replacing solid middle class jobs with a few tech and research jobs and a lot of blue collar jobs.
They say it’s a lot easier to convince the public to spend cash on defense then bridges, because “the bridge next to my house is fine”.
Also, bridge-building does not produce GPS and Internet as byproduct. We wouldn’t have the means to have this conversation if defense money was spent on infrastructure improvement, and most likely we wouldn’t have our jobs either.
It's also a geopolitical strategy. Even if that spending is rarely ever actualized in an armed conflict, the threat to do so still exists from the perspective of other countries. It's debatable how effective that is, but it's disingenuous to say it's just done for jobs or making contractors rich.
You could probably read through the speeches of some historical dictators to find a good way to express the idea of "the real politics is what things fall apart in to when order breaks down." Sure, the national debt exists on one level higher than the stuff the defense spending is buying, but so is our trade with other countries and most of our livelihoods. If the civility of our relationship with, say, China breaks down to the point that it's obvious we won't pay our debts, a lot of other things will break down along with it - perhaps enough to qualify as a gigantic disaster.
The US will be able to keep foreign soldiers off its territory but you and I could be out on the streets with a whole lot less.
Invade to spend trillions more on that country? No thanks. Gone are the "to the winner go the spoils" days. Frankly, I think we're blamed for the deaths and mess in Iraq and maybe Libya (not invaded but...). Democracy is great, in theory, in reality they have seen their lives turned upside down.
It all depends on perspective. If you’re friends with a bunch of defense contractors, war could spell good times for you. Hanging out around DC gives me the impression there are quite a few defense contractors.
Extremely unlikely that we would unilaterally invade another country under President Trump. That Bush-era hawkish interventionist doctrine is pretty much dead. The diplomacy with North Korea is a good example of the new way. I'm quite certain that we would be fighting some kind of conflict with them if people like Paul Wolfowitz and Dick Cheney were in the White House today.
Say what you want about Trump and his policies but the America-focused policies of his administration aren't going to squander this economy by starting a new fraudulent and unnecessary war on the other side of the world.
> I'm quite certain that we would be fighting some kind of conflict with them if people like Paul Wolfowitz and Dick Cheney were in the White House today.
Did they discover oil since the last time Wolfowitz was in a position if influence. Because that was expressly cited as the reason Iraq was invaded and North Korea not then, by Wolfowitz.
GWBush-era foreign policy had the kind of focus on domestic economic interests that Trump pretends to have, the main difference is that it had some substantive coherence rather than focus only as a PR veneer over a group of incompetently managed competing interests seeking personal advantage. That's not to say the say the execution of Bush foreign policy wasn't grossly incompetent, but and it's formulation wasn't grossly immoral, to be sure.
Now, Venezuela might be a target of active intervention if the Bush team were still in charge.
If the US hadn't brokered a debt repayment deal by threatening naval force against Britain, Germany, and Italy's blockade in 1903, there would likely still be a European-controlled port in Venezuela.
Somehow it seems the anti tax people always stop at cutting taxes and never get to the cutting spending part. Looking at Reagan, Bush and now Trump they even increase spending substantially with the military.
In a democracy the electorate must be bribed with there own money. It is in practice nearly impossible to cut spending in any way that matters if you want to stay in office. I suspect there we are just stuck in an equilibrium in which this is what we spend.
Serious Q: if you expect the stock market to crash (but aren't sure enough to start shorting it) and think housing is also overvalued, what should you invest in?
This is the question that everybody is asking nowadays, which means there are no easy answers.
The only answer I heard that is non-trivial is "skills". Not very satisfying, I know. But investing in skills that the future me might use, regardless of what the market does, is probably worthwhile.
That is a good strategy, as long as you can find people to pay for those skills in the future. So you'd have to pick the right area. The general strategy I follow is to invest in things that produce more things (skills being one of them). For example, if you invest in something like gold, it doesn't produce anything -- your only hope is that someone down the road will buy it from you for more than you paid for it. For company stocks, I like to pick ones that have a regular history of paying dividends (even if their value isn't going up that much), instead of non-dividend stocks that only increase in value. Another example: you can buy real estate, and rent it out. While technically not producing more stuff, it still gives you income outside of normal appreciation. The trap is that you need to be able to rent it out for more than what taxes, maintenance, and potentially interest costs you.
Just because others haven't brought it up, you can buy options. Unlike shorting, purchasing an option (or spread) has limited risk. Unlike shorting, options have much higher leverage, so the potential for profit is much higher.
SPY, the largest S&P 500 ETF right now is at $287.51. For $2335 today, you can buy the right to sell 100 shares of SPY for $285 in December 2020. That means that if the price in December 2020 (or any date in between) is less than $261.65 ($285 minus the cost of the option itself), you can exercise your option and make $100 for every $1 the price falls below $261.65. If say, the price falls to $230, you make $3100, or 32% on your investment.
If you're fairly sure the price will say above $200, you can simultaneously sell the option to sell at $200 on the same date for $505 and discount your total trade to $1835. This would become what's called a put "spread". If you purchased this spread and the price fell to $230, you'd make ($285 - $18.35 - $230) * 100 = $3665, for a 100% return. However if the price fell to $150, you'd only make ($285 - $18.35 - $200) * 100 = $6665 rather than ($285 - $18.35 - $150) * 100 = $11665, as you'd have to pay the person who bought the $200 option from you the difference.
If the price goes up, all you lose is the cost of your option, which is unlike shorting, where you lose $1 for every dollar above your sell price the stock moves.
If you buy an option (or spread) with a closer expiry, you'll pay a lot less but of course have a lot less time to be right. You can also sell an option much closer to your own, for example a $245 option for $1200, in which case you'd pay $1335 for your $285 option.
Bond returns have a low correlation with stocks. Short term and international bonds are sometimes negatively correlated.
Commodities have a low but positive correlation with stocks.
Some observers suggest that commodities boom before recessions.
The Goldman Sachs Commodity ETF (symbol GSC) is an easy way to invest in a diverse set commodities. Many other funds are targeted (eg, oil or gold).
iShares Core U.S. Aggregate Bond ETF (symbol AGG) is the largest bond ETF. There are many others.
You can always stuff cash in your mattress.
As others suggest, you can also short the market. Shorting housing for a small investor is not super easy.
Diversified long term buy and hold investing in stocks regardless of current conditions has historically been a great bet.
If you're super conservative, there are high interest savings, checking, and money market accounts, just requires a little homework to find the right one (and meet requirements if it's a checking account). I'm currently getting 2.26% in a money market account.
No idea where the parent poster is getting 2.26% but best guess is Customers Bank [1] that comes with a 25K minimum. However, you can get 1.8% on a normal savings account at Ally [2].
The account I have is not accepting new accountholders.
I said "homework" because you might have different needs than me - you may want to do a few debit card purchases a month for a higher interest rate in a rewards checking account vs set it and forgot it in a money market account.
You might have different accounts based on where you live. There's also different accounts that might make more sense if you have less money vs more money with caps, limits, etc.
What happens if there is a real systemic crash?
As I understand it the FDIC reserves will fail but the FED will start "printing" money for them so you'll eventually ('as soon as possible') will get your up to $250.000 back, but at that point, what would that still be worth?
2.26%? Why not just get an index fund and have reasonable stop losses? 2.26% is essentially putting money under the mattress. Hedge with some muni bonds. On $100k 2.6% is $2,600 per year before tax. Hardly worth it.
It depends on timing. Suppose the market were to crash 8% on Monday, then another 9% on Tuesday, then another 5% through the end of the week for a total peak to trough drop of 20%.
That’s a big correction in historical terms, but it only sets the market back to summer of 2017. We could easily have been having this conversation in the summer of 2017.
That said, if you have decent conviction you probably want cash and close case substitutes (e.g. short term high quality debt) so you can take advantage of any big drop as a buying opportunity.
I'd suggest that the number you should be concerned about isn't a stock market index, but inflation. Inflation drives everything else. Inflation is also complex and hard to measure.
Some will tell you to invest in "bonds," but be careful. What they usually mean is "treasuries."
During recessions, interest rates usually fall. But the yield on your treasury remains constant. As a result, your treasury increases in value if you decide to sell. Or you can hold and enjoy a higher-than-market interest rate. This effect is amplified the longer the maturity of the treasury. For example, a 30 year bond will increase in value much more steeply than a 5-year bond given the same relative drop in rates. This effect plays a role in "yield curve inversion."
Treasuries are generally considered the least risky bet, but they aren't without risk. It wasn't too long ago that US debt was downgraded by S&P during a nasty debt ceiling brawl. (Ironically, treasury bond prices shot up in response, but that's another topic altogether.) The debt hawks have been quiet, but that can change given the current political volatility in Washington.
Corporate bonds should be considered a different animal, with a large spread in risk. The worse off the company, the worse its bonds will generally perform. Or you may end up with a total loss in extreme cases. Buying corporate bonds requires the same skill and attention to detail as buying stocks, but potentially more so. Your return is tied to the company's path through the recession. Not for the casual investor.
Municipals are also different. Cities can't print their way out of recessions like the US federal government can. Ditto states. When the economy goes south, so does the tax base and tax revenue. The risk of default increases even as the advantage of a relatively high yield also increases.
Gold's performance in recent recessions has been so-so at best. It skyrocketed in the late 70s recession, but that one was coupled to high inflation.
Cash has the advantage of being highly-liquid. But you can still lose money holding cash due to the inexorable march of inflation.
Bitcoin is currently untested in a US recession. However, its performance in financial meltdowns around the world in the last 5 years has been lackluster at best.
It depends on what is your risk profile and time horizon.
Safest bet and something which doesn't require any expertise - hold cash.
The other extreme is to buy LEAPS [1]. They are a cheap alternative to protecting your downside.
Now obviously both these two things are not full proof and have their ifs and buts.
Cash will lose value due to inflation. But at a slower rate than losing in a crash.
LEAPS are mostly 2-3 years out so if the crash doesn't happen you will lose your premium. But again a small price paid to save your downside.
There is one thing to stay away from is Bitcoin or cryptocurrency.
Gold has gone down in last 5 years. So, it still maintaining a slight negative correlation to stock bull market runs.
On the other hand, the supposed gold like bitcoin has gained lot of it's value in the last bull run. So, I am not convinced that there is an argument that bitcoin will hold when we start going into a crash.
Indeed. I read somewhere in the Wall Street Journal this week that the Millenial generation is the most debt-laden generation ever. I don't know if that cuts across all economic strata of their generation or if it includes the average younger HN reader but your suggestion is a solid one and will leave you on much firmer ground if things go south in the future.
Incidentally, if there is a crash, how is the Fed going to respond, since interest rates are practically as low as they can go? Will we see negative interest rates and asset purchases of equities and perhaps even real estate?
The Fed has been raising rates and is expected to raise rates in each of the next two quarters. They hope they can raise rates high enough, fast enough to give them leverage for when there is a crash. Of course they don’t want to raise rates too fast else the rate raising will be the cause of the next crash.
It's more accurate to say that bonds are uncorrelated with the stock market. You can verify this yourself by plotting a broad bond ETF like BND against the S&P 500 or DJIA. You won't get a magic bump in bonds when the market goes into a recession, you just won't lose a bunch of money, either.
I thought my peers who were buying houses in 2009-2010 were "buying at the bottom." And I was a bit envious, honestly. Turns out, prices dropped for 2-3 more years after that and the bottom was Q1-2012. Some of my 2009 friends ended up selling their houses for less than they bought them for.
Of course, this illustrates perfectly why your house isn't an investment - your life circumstances determine when you buy and when you sell, not the market.
Unless you have a lot of money you really should buy a house with the intent of living there for a long time and you should be able to afford your mortgage long term. The housing market is even less predictable than the stock market.
This is really hard to do btw .. all you are saving for is the down payment. I think housing in Toronto is overvalued big time and have not invested. That thesis seems to be materializing but it will likely take some years to play out. The issue is that the high end of the market has fallen more than the low end - the low end has even got up. So saving cash was a bit pointless. Unless I save enough to buy the whole house in case (impossible), I will end up having to get financing at a higher interest rate. I did the math and it is frankly worse to buy a low end house in Toronto today than it was when the bubble was in full swing (mainly because interest rates are higher now).
Lesson learned ... next time, get in on the start of the bubble.
There is a significant increase in overall productivity in last few years. Expectations of continuing growth are pushing market higher. Better automation of many processes, faster unlimited access to any information, connectivity. The first iphone was released 11 years ago, Android 10 years ago. A lot of disruptive innovations since then.
But many of those innovations have the potential to reduce large numbers of jobs, like taxi and truck drivers. When people aren’t earning money, they can’t spend money, and it’s the movement of money through the economy that makes it function. I don’t think productivity gains will offset that loss.
While my 401(k) is thankful, I'm wondering how much longer this can go on. Obviously the stock market got a big boost due to the tax cuts which lead to companies repatriating a bunch of overseas profits, but what happens next year when there's a lot less money to bring back?
...As the following chart from Statista shows, the current bull market is now ‘older’ than the previous record holder, the 1990’s bull market and Dot-com Bubble.
The boom is just capitalism's way of setting up the next bust. Too few people seem to understand this.
The current bull market and tight labor market were amplified by the largest outpouring of easy money by the world's central banks in history.
