I wrote something up a few months ago, predicting with 65% confidence that the S&P 500 will drop below 3029 before July 16, 2022. I’m not a professional investor, so take it with a grain of salt.
FCCC
Karma: 43
Anecdotes Can Be Strong Evidence and Bayes Theorem Proves It
Maybe someone should ask the people who were working on it what their main issues were.
If we were to see inflation going back to levels expected by the Fed (2-3% I suppose?) how would that change your forecast?
Great question. So my view is that there could be a few potential triggers for a sell-off cascade (via some combination of margin calls and panic selling), leading to a large drop. There’s also a few triggers for increasing interest rates, not just inflation: The Fed doesn’t have a monopoly on rates. When they buy fewer bonds, they shift the demand curve left, decreasing the price, leading to higher effective interest rates. I’m kind of baffled that they speak about “tapering” as if it’s possible to do so without increasing interest rates.
The particular problem with persistent inflation is that the Fed is less able to increase the cash supply in the event of a large crash. So while I think that inflation isn’t necessary for a 30 percent drop (I’d say it’s over half of my credence), I expect it to magnify the downside if it is higher than normal right before a crash.
Interestingly, the Fed itself was (and probably still is) concerned about the current high valuations.
When you wrote “The main thing I’m worried about is increased savings” did you mean what you described in the previous paragraph (e.g. zero-NPV assets investing and alike), or was it something else?
When I say zero-NPV assets, I mean anything that doesn’t pay out future cash flows to investors, like gold, silver, bitcoin, and NTFs. Certain stocks are being traded as if they were these assets too (AMC, GameStop). I think investment in these things is indicative of mania.
I’m worried that the Fed has flooded the market with so much cash that the new normal for the CAPE ratio and PS ratio are close to what they are now. If it is, then margin-debt-to-GDP isn’t the relevant ratio anymore, margin-debt-to-total-market-cap is, which is not at as high of a level as margin-to-GDP. Basically, supposing we have a smooth exponential curve for the S&P 500, I’m worried about a one-off discontinuity in the graph. I’m also worried about people investing more of their income and net worth, which would have the same effect.
Exactly, which is why I looked further into it:
When you have a government that identifies as Communist, that’s a threat that needs to be taken seriously. The evidence I’ve looked at this threat to evaluate this threat is anecdotal…
It’s a perfectly reasonable jumping off point to get into the specifics. I agree that if you have a more specific reference class, you should use it (I’ve made that point myself before, “holding your IQ test results in your hand and refusing to read it because ‘The average is 100, so I probably got 100’”).
Make sure you use data that reinvests dividends.
Were they trying to simulate a body and an environment? Seems to me that would make the problem much harder, as you’d be trying to simulate reality. (E.g. How does an organic body move through physical space based on neural activity? How does the environment’s effects on the body stimulate neural changes?)
In my defence, we didn’t do arithmetic in my mathematics degree.
A billion to 1 chance of a 99 percent drop, not a 30 percent drop.
Yeah, that’s exactly how I look at it: The benchmark is the index, not cash. So I would see it as a 30 percent gain. But I figure that either I need to recalibrate my odds, or I need to make a bet that maximises long-run growth based on my credences. I don’t think holding cash is optimal.
Well aware of the risks, but I’d kick myself if I were right and didn’t act. I’m buying puts so the limit is the initial investment. Can’t go bankrupt.
Good luck in any case!
Thanks, mate.
A counter point could be that due to cheap index ETFs and the prevalence of passive investing it is possible that in general a lot of metrics will have a higher base level.
I completely agree. I made that point in the post (“Note that there could be reasons why the CAPE and PS ratios might not return to their historical average, e.g. increased savings chasing investments, which are not perfectly elastic. There may be risk of persistent inflation, which stocks hedge against.”)
I’m not basing this off of any one indicator. When inflation rose, that made every indicator I was looking at go bearish. I have this position because of the combination of all of these things, plus some other things I didn’t write down (indications of mania, like investment in zero-NPV “assets”). Price to sales ratios, which don’t have the same problems as PE ratios, are about 50 percent higher than it’s ever been. Margin-to-debt was 3 percent, yes, and now it’s nearly 4 percent, which is 33 percent higher.
The main thing I’m worried about is increased savings. (Second is persistent inflation without a corresponding increase in interest rates, but the Fed would have to be insane to do that, even if they are “overly optimistic” about future inflation.) As I said, 65 percent chance, not a guarantee. I could be wrong for some reason.
So, my question is: in a counterfactual world in February 2017, if I were to argue based on above data that you should move from equity to bond/cash/short positions as I am expecting 30% drop in US stocks within 2 years, how would you know that it was still too early?
Good question, essentially you’re asking for backtesting. If it helps, I didn’t short the market back then. I’d have a much lower credence because those indicators that I’ve mentioned weren’t at record levels across the board. Except in exceptional circumstances, go long on the market.
I think an easiest way to short SP500 is via inverse ETFs: https://etfdb.com/etfs/inverse/equity/ These move in opposite direction compared to the particular index (times 1/2/3 depending on type).
I’m fairly sure that’s not the most efficient way to bet on this belief. The payoff is linear. So if I bet on the market going down 99 percent, I’d make 99 percent (or 3x that if the ETF is 3x leveraged), whereas the options bet payoff would probably be over a billion to 1.
Perfect, I’ve sent you a message.
The fact that North Korea someone publically declares themselves to be democratic in the name of their country. That tells you little about how it’s actually governed.
Actually, it tells you a lot. Countries with “democratic” in the name are probably far less democratic than nations without it. The point I was making was that calling yourself something conveys information, depending on what you call yourself. Calling oneself communist has a positive correlation with other countries who called themselves communists. Whether they behave according to the ill-conceived utopian ideology doesn’t really matter, what matters is that we can increase our credences that they will behave in certain ways. Clearly, this is dependent on subject: Calling oneself a good driver probably conveys very little information. So, you can’t dismiss it based off counterexamples in different areas. Otherwise, you could say that since people who claim to always tell the truth sometimes don’t tell the truth, someone who claims to sometimes lie might be lying about lying (which is a ridiculous conclusion).
To say that calling oneself communist contains no information at all seems extremely unlikely to me, just based on all the other countries that have done so, even if I didn’t know of the recent changes in China. I’ve become more confident in this view from listening to people who can read and speak fluent Chinese and who have lived there for over a decade, and who saw first-hand the rolling back of free market rules.
To change my mind about communism not providing any info, you’d have to show how you built your reference class to reach that conclusion.
I’m only interested in large trading platforms, rather than betting with individuals. But I guess if you’ve got a way to guarantee it, send me a private message.
The S&P 500 Will Drop Below 3029 Before July 16 (65 percent confidence)
Can you help me paint a specific mental picture of a driver being exploited by Uber?
I’ve had similar “exploitation” arguments with people:
“Commodification” and “dehumanization” don’t mean anything unless you can point to their concrete effects.
I think your way of handling it is much, much better than how I’ve handled it. It comes across as less adversarial while still making the other person do the work of explaining themselves better. I’ve found that small tricks like this can completely flip a conversation from dysfunctional to effective. I’ll have to remember to use your suggestion.
Damn. This formalism is similar to one I developed (except I did it much later) for determining when a goal is good or not. Did Eliezer come up with those four pieces himself or is this based on someone else’s work?
Agreed. The best prediction would have been to assign Biden 100% credence. A defence of their position might say that “Given the information 538 had at the time, the best possible prediction machine would have less certainty than Nate”, but this is too hard to prove, and it’s inconsistent with the fact that Nate is a calibrated forecaster who (as far as I know) consistently beats the market.
Sorry, I wrote this out in an hour, so it could have been a bit clearer. The data alone does not imply causality.
Data that supports hypothesis & causal hypothesis & no competing hypothesis ⇒ causality.
The causal hypothesis doesn’t need to be a detailed mechanistic hypothesis (it might just be “vinegar will remove the smell”). As long as nothing else could have caused it, then you know what the cause is, even if you’re unsure of the underlying mechanics.
So for an example where I have the same(ish) data but wouldn’t be highly confident of causality (because I have more than one hypothesis), let’s say I have a light headache, and someone gives me an unspecified pill for it. I take it, and five minutes later, my headache is gone. That is some evidence that the pill worked, but I’m not highly confident because of competing hypotheses: For example, the placebo effect, or maybe the headache would’ve gone away on its own.
Let me know if this makes sense, and I’ll update the post.