Financial bubble prediction and discussion

[greggles]

All the discussion and debate recently about the Bitcoin and associated cryptocurrency bubble has got me thinking about financial bubbles generally. Here is a list of the ones I can think of over the last 20 years.

Dot-com bubble
2000s commodities bubble
United States housing bubble
China stock and property bubble
Australian property bubble
Cryptocurrency bubble

Many of those bubbles had further sub-bubbles, such as the uranium and rhodium bubbles of 2007-2008, which was part of the larger commodities boom and bust. Some of them are linked, such as the 2000s commodities bubble and the China stock and property bubble.

The one thing we can be sure about when it comes to financial bubbles is that they will keep happening. The aim is to get on board early and ride the roller-coaster up or start shorting at the top. Financial bubbles can be very profitable for those who have a good sense of timing. The key seems to be understanding human psychology, fear and greed and how that plays out in financial markets.

So please post your financial bubble predictions here and we can discuss them as they happen, or don't happen. Perhaps through discussion, analysis and common sense, we can profit from future bubbles.

They say there are only two things in life that are certain: death and taxes. I say you can add a third to that list: financial bubbles.

 

[explod]

Good thread greggles. The DOW I find interesting, particularly the volume.

Fundamentals, follow the trend, hysteria ?

 

[greggles]

Agree with you there explod. The dramatic rise of the DJIA seems unsustainable based on current economic data. The idea that the DOW is well into bubble territory is being widely reported in the media. Here are a few articles to illustrate the point:

http://money.cnn.com/2017/09/12/investing/bubble-stock-market-julian-robertson-fed/index.html
https://www.forbes.com/sites/invest...as-negative-divergences-persist/#1c6dd0581173
https://www.marketwatch.com/story/why-stocks-may-be-on-verge-of-a-melt-up-2017-10-04

The question is, what is likely to trigger the correction and how bad will it be? And what will be the effect of the correction on the Australian market?

 

[Smurf1976]

The question is, what is likely to trigger the correction

Put a frypan with some cooking oil on an electric (so no open flame) stove and turn the heat up to maximum.

In due course the oil will catch alight. Once it gets hot enough you could make it catch fire sooner by holding a lit match or some other flame near it but ultimately a point comes where it's so hot that it ignites of its own accord.

Now to bubbles, the same principle applies. If it reaches a high enough point then it'll fall over eventually simply due to running out of greater fools to buy the asset in question. A trigger, like the flame near the hot cooking oil, will make it happen sooner but it still happens eventually even without an obvious trigger as such.

If there's an trigger then that's really just coincidence. The crash happens anyway, all the trigger does is change the timing a bit.

how bad will it be?

Given the dominance of automated trading and index ETF's which have no discretion as to what stocks they buy or sell my personal expectation is that whenever the next crash does come, it'll happen real quick once the tipping point is reached.

what will be the effect of the correction on the Australian market?

Hard to know with any certainty but if the US tanks then we're not going up that's for sure.

Bubbles which I think exist at the moment:

US stocks.

Australian residential property.

Bitcoin. It's hard to put a fair value on it but when something's going up more than 10% in a day and it's being reported as mainstream news that's a pretty big warning sign.

Bonds although that one could take a very long time (decades) to play out in full.

In a less specific context I'll add US shale oil to the list. It's a valid industry certainly but one that's dependent on surplus capital looking for somewhere to go. Cut that off, and that will happen someday, and it's a very different picture. The US shale industry isn't going to disappear but it's not going to put the Saudi's or Russians out of business either no matter what the hype says.

 

[greggles]

Great post Smurf.

So what's the best way to short the Dow Jones from Australia? Does anyone out there short indexes on a regular basis?

 

[Smurf1976]

So what's the best way to short the Dow Jones from Australia?

BetaShares have an ETF traded on the ASX which shorts the (USA) S&P500 so that would be one way to do it.

BBUS if you want to trade it. Note that it's leveraged - the info is on their website but the leverage ranges from 2.0 to 2.75 :1 and it's also currency hedged.

https://www.betashares.com.au/fund/us-equities-strong-bear-fund/

They also have leveraged and unleveraged Australian short ETF's too.

Disclosure: I don't hold any of the above.

 

[CanOz]

Shorting any market that looks like this is suicide, even Jim Rogers wouldn't do it....Tops happen gradually, how many "A" tops do you see?

The second chart is the GFC period. One thing they do have in common is the increase in volatility asd the market increases in value, thats usually a first sign....still not the top though.

 

[Smurf1976]

Shorting any market that looks like this is suicide, even Jim Rogers wouldn't do it....Tops happen gradually

Agreed there.

Whilst I do think the US markets are over valued and that we're late in this bull cycle there's no way I'd be going short on a market that's still in a strong uptrend.

Among other things I'll look for:

Trouble in the bond markets. Flattening yield curve and so on.

A decent rise in the oil price. With one exception this has occurred prior to every recession since WW2 so it's fairly consistent. At the moment prices are up but not in a big way.

Deteriorating market breadth.

Price action in the stock market indices suggesting a top has formed.

It's plausible we might be there 6 months from now but we're not there yet.

 

[sptrawler]

Can someone, with more ability than me post up a chart of the dow vs the all ords, from 2005 to present?

 

[debtfree]

Hope this helps sptrawler.


Cheers ... Debtfree

 

[sptrawler]

Thanks for that debtfree, that's magic.

It would have been nice to use the All Ords as the scale, as it would have reflected our lack of growth more.

What it shows to me, is Australia's companies haven't gained value since the GFC.
Which in reality isn't correct, the resources sector since 2008, have increased production many times over.
The population of Australia has increased a lot since 2008, also it indicates there is an underlying lack of belief, that Australia's economy can grow.

If the All ORDS is a reflection of our net wealth, I think it is undervalued.

Time will tell, but personally I think the ALL ORDS has a way to go, before it needs a correction.
Those who think it needs a correction, I would ask, to what level and on what basis.

 

[debtfree]

The XAO View

 

[willy1111]

@debtfree Can it be done on the xaoa view to include dividends as they make up a large part of our index

 

[debtfree]

I hope this is what you're after willy1111
Quite a different view but thinking about it we have now not included dividends for the DJIA

 

[willy1111]

Thanks for that amazing difference when dividends added into All Ords.

Dividends don't play as big a part for the yanks as they do us.