senshan
4 days ago
As long as this debt does not make it into life insurance and pension funds, we are fine. The trouble is that private credit is taking control of some life insurance companies and off-loads this debt to these. When these fail, it will become everyone's problem.
> Risks to financial stability may also stem from entities with particularly high exposure to private credit markets, such as insurers influenced by private equity firms and certain groups of pension funds. The assets of private‐equity‐controlled insurers have grown significantly in recent years, with these entities owning significantly more exposure to less‐liquid investments than other insurers
https://www.imf.org/-/media/files/publications/gfsr/2024/apr...
https://www.imf.org/-/media/files/publications/gfsr/2024/apr...
skohan
4 days ago
Couldn't it be a problem given the concentration of the S&P in these companies?
At this point these companies make up a huge portion of 401k's for a huge chunk of Americans. How would it affect retirees if they dropped 40-50%, likely taking the market with them?
hualapais
4 days ago
I suggest looking into “EQL”, or better yet, just replicating its index by taking a position in the 11 XL* sector funds from SPDR, allocating equal weighting to each. One will end up with one’s equities equal weighted by sector and with plenty of large cap exposure, as opposed to the pronounced mid-cap tilt found in whole market equal-weight strategies.
Personally, I drop the financial sector entirely (Thomistic prohibitions on usury) which leaves an even 10 funds which is easy to allocate mentally and in practice. For example, assuming a 60/40 allocation where one is holding the lion’s share in equities and the remainder in bonds (I substitute with a combination of gold, crypto, cash, and Swiss Franc here), one would allocate as follows:
XLC 6% XLY 6% XLP 6% XLE 6% XLV 6% XLI 6% XLB 6% XLK 6% XLU 6% XLRE 6%
(Note that XLF is consciously not taken as a position here, decide if it’s right for you. The Mortgate REITs which would make XLRE problematic are in XLF per the sector selection rules)
The remaining 40% is bonded debt if you are fine with usury, or some sort of asset negatively or neutrally correlated to equities.
khriss
4 days ago
The problem is that this strategy is only feasible in a tax-advantaged account. Otherwise the drag of taxes during rebalancing dramatically lowers the returns.
derwiki
3 days ago
BrokerageLink should let you do this with your 401k
user
4 days ago
rocho
4 days ago
Why do you consider bonds usury?
hualapais
4 days ago
Because bonds involve interest. Per Summa Theologica:
> To take usury for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality which is contrary to justice.
https://www.newadvent.org/summa/3078.htm
…Aquinas expands the analysis but it is relatively straightforward: all interest is usury.
Personally, I find it helpful to imagine two hypothetical persons representing the entire economy, one the creditor who is lending and two the borrower who is taking on the loan. In this ultra simple closed model with a fixed quantity of money, the former is in effect asking for more units of money than actually exist in the whole system. When the loan comes due the borrower owes a sum that cannot be paid in full from the circulating medium itself. Settlement then requires either default, the creditor forgiving the excess, or the transfer of real goods and property to make up the difference. Scaled up, that same pressure (the continuous generation of monetary claims that exceed the existing stock of money) is what I suspect drives a good deal of the subtle and overt strain on families and communities that people so often complain of in the West and in modern growth-oriented capital societies.
This definition of usury differs from the modern loophole-definition: that interest bearing loans are only usury when the rates cross some nebulous abusive threshold. In the above Thomistic interpretation, all interest is socially problematic and disfavored. Judaism holds to a similar prohibition on interest when loans are made between Jews. Islam likewise prohibit usury even more broadly. Despite the injunction against usury in the Middle Ages Christendom and the enduring prohibitions of usury in other faiths, there are many modern Catholics and Protestants who will favor the modern interpretation over Thomas’ understanding; I’m just not one of them.
maroonblazer
4 days ago
>in effect asking for more units of money than actually exist in the whole system.
Depends on how you define the 'whole system'. If I borrow $100 and make $110, the latter didn't appear out of nowhere. The lender, too, could have turned that $100 into $110.
Why shouldn't they be compensated for that opportunity cost?
largbae
4 days ago
If I understand right, it is allowed to invest like a partnership, where you make $110 together out of your $100 and your partner's effort. But you must be exposed to the downside of failure just like your partner.
hualapais
4 days ago
The opportunity cost point is fair enough if one is thinking in terms of two concrete individuals. The illustration I offered was meant at a more abstract level, the two persons standing in for the creditor side and the debtor side of a closed economy taken as wholes. In that framing the issue is not whether a particular borrower can put the money to productive use (clearly he can), but that the system as a whole is being asked to generate more units of the circulating medium than currently exist within it. Even when real value is created, the monetary claim still exceeds the monetary stock. Settlement then requires continuous expansion of the money supply, continuous transfer of existing assets toward creditors, or periodic default. That structural pressure is what I was trying to get at.
I suspect the deeper difficulty is the “bond” in bonds themselves, the ongoing compulsion that interest introduces. Once interest is attached the debtor is under continuous obligation to produce additional claims simply to keep the accounts from breaking. Traditional writers on the Christian and Islamic sides generally preferred arrangements that avoided this continuous pressure. A pure discount (as with discounted Treasury bills and similar instruments) prices the time element once, up front: the creditor advances a smaller sum and later receives the larger face amount. The cost is paid at the beginning rather than levied as a recurring claim that must be met out of future circulation. In that sense the time value is acknowledged without the mechanism that forces the system to keep generating more monetary units than presently exist.
[edit:] Clarified the discount language.
hiAndrewQuinn
4 days ago
This still seems off to me. If I were a potential creditor in such a closed loop system, and I was told I absolutely could not charge interest due to these monetary supply constraints, I would either just stop lending entirely or I would demand something that isn't strictly denominated in money to make the risk I'm taking on, etc worth my capital outlay.
But then eventually, if the system were sufficiently complex, I'd probably tire of whatever complicated barter system we have already going on, and then it's likely some third party would step in offering something that's totally not money, dude, trust me, it's just like a handy clearinghouse of IOUs for people engaged in the trade of these non-monetary favors for favors...
Some people who hold or offer such IOUs might then take the bold step of calling them non-exclusive, as in I will mow the lawn of whoever happens to have my "one lawn mowed" voucher, I just happened to originally give it to this first guy, I have no idea what he did with it after that... Other people realize this "non exclusivity" deal actually makes the voucher strictly more valuable, you can do more things with it than you could otherwise... You see where I'm going with this. It's not passing my sniff test.
yeeeloit
4 days ago
Can you recommend a book to learn more about this concept?
ted_dunning
4 days ago
Buying a bond at a discount is no different than buying at face value and paying back with interest.
Any claims that there is any important difference is sophistry.
mattclarkdotnet
4 days ago
But, there is no fixed quantity of money in modern finance. It's created every someone or some business takes out a loan from a bank, and every time the government spends money. It's destroyed when the loans are repaid or taxes are paid.
sharts
4 days ago
Infinite money is worthless. modern finance is bunk and infinite currency chasing finite energy is all there is.
geye1234
3 days ago
Greetings, fellow Thomist. You are correct that usury is any amount of interest, and attempts to pretend otherwise are sophistical, but I suggest you may want to look again at corporate bonds and other non-recourse loans -- that is, loan where collateral is limited to specified asset(s). Look at Zippy Catholic's writing on the subject -- he was a finance dude, and a very rich self-made man. A non-recourse loan is more like taking an ownership share in something, and then renting it back. It's unfortunate that we use the same words (loan, interest, debt) for both full-recourse and non-recourse contracts, because they're entirely different things.
I agree that charging interest on a full-recourse loan is a wicked and disgusting thing to do to one's fellow man, and I'd say it's in the same genus as slavery. Usury is to fraud what robbery is to larceny. It's also interesting that the markets where usury is most prevalent (housing, college fees) are the ones that have seen the most insane price increases.
jbs789
4 days ago
The borrower is buying time. I’m glad I can buy something that I value now, rather than wait. That is useful to me, and I’m happy to pay for it
lazide
4 days ago
Sounds like a religious aversion to all lending?
Usury usually means ruinously high interest rates, not all lending.
Unless you’re Muslim, generally.
michaelt
4 days ago
In many historical societies, religious prohibitions on usury meant the charging of interest of any kind.
Jump in a time machine to 1515 and ask Martin Luther, or to 1260 and ask Thomas Aquinas, they'd tell you it's sinful.
And in the present age, a fair number of Islamic folk consider interest against their religion's rules. So there's a Halal finance industry where, for example, you can get a "murabahah contract" where the bank buys a house, then sells the house to you at a higher price, while allowing you to pay them in monthly instalments.
LadyCailin
4 days ago
I love when religions have rule lawyers like this. It readily discredits the religion. As if their all powerful god can be fooled by fancy paperwork or legal loopholes.
marcus_holmes
4 days ago
The bit that isn't rules-lawyered away is that the risk is shared. For the deal to be compliant with the religious law, the lender must accept the same risk as the borrower, equally.
So I guess in this case if the house burns down and the insurance only pays 50% of the agreed value then the lender only receives 50% of their agreed repayment.
pastel8739
4 days ago
Isn’t there still risk for a lender in a typical interest-bearing loan? That the borrower will default?
marcus_holmes
4 days ago
Usually an interest-paying loan is backed by a guarantee, so the lender can pursue the borrower for repayment by claims on other assets.
bacchusracine
4 days ago
They’re not trying to fool God, they’re trying to fool you into going along with it. They don’t care what God thinks and may not even believe in Him at all, but unless they can convince you of the loophole they’re stuck with the rules themselves.
harry8
4 days ago
Do you love it when people use religion to create rules like this as though people can be fooled into thinking they /know/ the mind of god?
Exoristos
4 days ago
Older than any of those:
"Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest" (Deut 23.20 JPS Tanakh).
nickpeterson
4 days ago
the letter but not the spirit, like Amish workers using batteries
inigyou
4 days ago
It's concretely different. If the house becomes worthless, the "borrower" can walk away from the contract, owe nothing, and the bank keeps the house. The bank had better consider the value of the house, not just the ability of the "borrowed" to pay, when issuing this contract.
tyleo
4 days ago
It’s an interesting thought. The growth is so extreme that if the S&P 500 fell 50% today it would reach levels last seen in 2022. Given that the timespan is so short, I’m honestly not sure it would be as bad for 401ks as people expect unless all of your investment was concentrated in the last 4 years.
I suppose it’s worse if your calculation is, “I’ll retire when my 401k hits $X absolute value,” but I think most people just retire at a certain age instead with risk spread across decades.
Imustaskforhelp
4 days ago
During the dot-com crisis. Nasdaq fell around 78% from its peak and S&P by around 49% so it isn't unprecedented (ironically has both aspects of being both tech and are within the same time-era)
It created an actual recession albeit thankfully short one for the case of dotcom (sadly not for 2007) and a really recessionary environment which causes unemployment and just straight up fear and panic.
I do understand what you are talking about and overall in long term, perhaps things flatten out but atleast speaking financially so, its better to be on a smooth sailing road rather than insane ups and downs with retirement money if preferable.
> I think most people just retire at a certain age instead with risk spread across decades.
The issue in my opinion is with people near that certain age you mention and who retire in the time during boom just before bust. They would then get the 50% hit on their savings instantly with an recession/inflation/unemployment environment which in my opinion might be genuinely devastating.
(supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.)
Karrot_Kream
4 days ago
This kind of metric is always used to shock and awe in pop media when talking about the GFC, but it's not how actual investment works. In practice most investments are DCAed.
No person puts all of their retirement savings into QQQ or SPY at the peak and sell it off at the trough. Instead folks drip their savings into their weighted portfolio and withdraw money from their weighted portfolio as expenses accrue. Now obviously the GFC was a huge deal, but this sort of facile understanding of stock markets always leads to big misunderstandings. There's a reason Monte Carlo analyses of these events are used to model these scenarios.
(Though I imagine there were many people who tried to re-balance their portfolio into a less equity-heavy model abruptly during the GFC and based on equities performance at the time, it was probably the right move as long as taxes were taken into account.)
toomuchtodo
4 days ago
> (supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.)
What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will. Going 100% bonds is simply intolerable for the time window for most retirees, but an equity wipeout of this magnitude is equally intolerable.
otherjason
4 days ago
They are probably not going to be implemented using long put positions, but a product with a similar return profile to what you're looking for is a buffered ETF. Basically, over a defined period, you agree to a maximum possible downside in exchange for a capped upside. They are available in ETF form from a number of providers.
For example, you could have an S&P 500 fund that, over the next year, will have a maximum of 0% capital losses (it can't go down), you will only get the first, say, 5% of gains that the equity index makes. So if stocks go up 20% the next year, your return is capped at 5%, but if they crash 50%, you don't absorb any capital losses. In practice, the return cap is going to be just a bit above the corresponding Treasury bill for the same duration.
These can be constructed in various different ways and institutionally I'm sure there are more bespoke ways that are more efficient from a fees/returns and tax perspective, but one way to do this on your own without going the ETF route is:
- Pick an amount you'd like to invest. - Buy a Treasury bill for some duration. Treasury bills are discounted at the time of purchase and return the target amount when the bill matures. For instance, if you buy a $100k 1-year Treasury bill, it might cost $96.5k today. - Now you have $3.5k in your pocket and a guarantee that you'll get $100k in a year when the bill matures. Use that $3.5k now to purchase call options or vertical spreads on the S&P 500 index to capture the upside that you can. Your return is limited by the structure of that options trade and what its maximum payoff is.
If you're willing to accept more than 0% downside, then you can achieve a higher potential upside cap as well.
toomuchtodo
4 days ago
This is exactly what I was looking for, thank you for taking the time to reply!
Imustaskforhelp
4 days ago
> What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will. Going 100% bonds is simply intolerable for the time window for most retirees, but an equity wipeout of this magnitude is equally intolerable.
Investment companies have to remain profitable or at-worst neutral as such they would generally charge a decent bit of money for this type of setup. (If they end up having too big of losses then perhaps it could be similar to the the 2007 Banking/Investment companies crisis.)
Generally speaking I am not a financial advisor but you can take a look at international index funds/ETF's in general which have less exposure to AI in general.
and you can follow the age rule created by Mr Bogle where you have (age)% in bonds and (100-age)% in stocks, so at 70 you have 70% bonds, 30% stocks.
So again taking the example of dot com bubble, International Index funds fell from my understanding 30-40% and suppose that you had 30% stocks and 70% bonds.
So that would only have a 30% times 30 % which is 9% which perhaps might be more managable as compared to the previous 25%. There might be some other strategies as well which can help in diversification
Hope this helps!
matwood
4 days ago
Even someone close to retirement doesn't need to go 100% bonds. It's not like someone needs all their retirement money on day 1. The part that remains in equities will continue generating dividends that will get reinvested, and recover over time.
ligne
4 days ago
100% of anything is a bad idea if you're going to have to draw on them any time soon. Bonds are less volatile than equity, but they're still subject to drops in value.
matwood
4 days ago
Sure, but a mistake I often see is people thinking that people's entire retirement savings is needed on the first day of retirement. People can and should still be invested in equities even in retirement, it's just the percentage is less depending on age and burn rate.
mhh__
4 days ago
Indeed, we have just been through arguably the largest (nominal) drawdown in the history of fixed income.
barchar
4 days ago
It would cost an extreme amount. The only reason to do something like that would be to defer capital gains into retirement while protecting your position.
You can use a collar for this at somewhat reasonable cost. Not sure how rolling that would compare to just using it to defer until you can cheaply sell and buy some fixed income ladder. Probably badly.
Also, there’s no capital gains to defer if you use a retirement account, which will be a better place for fixed income anyway.
mhh__
4 days ago
The cost of insurance is carry e.g. when you buy an option you are paying for the convexity with time decay. It is quite expensive.
It is worth saying however that part of tail hedging is that the payoff is worth a lot more when everything else has tanked, so e.g. even if you (say) get 10% on your puts when the wider portfolio is still down 40% (made up numbers), you can deploy that capital at probably quite a high expected return.
Marsymars
4 days ago
> What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will.
I expect that would not be a cost-effective way of attaining the risk profile you'd be looking for.
I expect there won't be a more cost-effective way of managing your portfolio risk than by simply adjusting your split of broadly-diversified equities vs bonds.
intrasight
4 days ago
My homeowners insurance isn't "cost-effective" either but I still do it. I think the reason that investors don't is because they are greedy or irrational or both.
That was the message that I got from a financial podcast I listened to a couple weeks ago anyway.
Marsymars
4 days ago
I'd content that homeowners' insurance is quite cost-effective, because there isn't a cheaper alternative to hedge your risk.
I'm saying that for the cost of buying puts to hedge against equity downside in a retirement portfolio, for any given level of risk, you'd probably be better off just selling some of the equities and buying bonds instead.
e.g. try and find any equity-focused ETF with downside protection that generally outperforms a bog-standard stock/bond split total-market ETF for whatever measure of volatility/downside protection that you want.
kipchak
4 days ago
I think the risk for increasing your bond exposure as compensation would be if instead of a low growth/low inflation scenario (Bonds do well) there's a low growth+high inflation scenario (1940s, 1970s, 2022) and the negative correlation between stocks and bonds doesn't hold.
Marsymars
4 days ago
Yeah, but in the abstract that's just saying "if you time the market, you can beat it", and we know that generally, the only way people are able to time the market is with random luck.
And more specifically, it's not low growth/high inflation that kills bond portfolio returns, it's interest rates increasing that devalue bonds, i.e. the transition from low inflation to high inflation. So yeah, you can construct a portfolio that hedges against that... but I'd be surprised if you can do it without decreasing your risk-adjusted expected returns below a plain stock/bond index fund - whatever hedging method you use is either going to increase your interest-rate risk (bonds), or your inflation-rate risk (cash), or is going to limit your upside (buffer etfs), or is just going sap your upfront returns (protective puts).
kipchak
4 days ago
In that sense, isn't the 60/40 or Boglehead perspective also timing the market, in the sense that you are betting the regime of the past will continue into the near future?
To me the diversification hedge options (say GUNR) seem like they are helping you get closer to regime neutral. Or in other words you are giving up returns to cover more macro scenarios and betting less on what the future looks like.
Marsymars
4 days ago
In a macro sense, I agree with that, but it's very difficult to compete with Vanguard for the fees/overhead to hedge in more regime neutral ways.
It's effectively impossible to hedge against every possibility, including temporary drawdowns, while still having positive returns after inflation.
intrasight
a day ago
>the only way people are able to time the market is with random luck.
No. With insider information.
duzer65657
4 days ago
investors are irrational but actually tend to go the other way - too risk adverse. I'm not sure what a "greedy" investor is, TBH.
intrasight
a day ago
Yeah "greedy" is not really the right word. What I meant was not properly managing.
TacticalCoder
4 days ago
Take SPY at a strike of $738, per lot of 100 that's $73 800. Take 14 lots, give or take, to make a cool million.
SPY260821P00738000 (OCC symbol: PUT on SPY expiring the 21th of August 2026 at a strike of $738) is $12.20 as I type this, so $1220 per lot. So $16 800 to protect for a month. So $200 K per year.
A solid 20% yearly, unless my math is way off.
Now of course you can buy, instead of a PUT, a PUT debit spread, or you can buy further from the strike, or you can finance or partially finance your PUT or PUT debit spread with a CALL you'd sell (turning it into a covered strangle) etc. That's not the point of this exercise though. And anyway I doubt many retirees have the know-how to do that.
In any case it's well known that the costs to hedge are extremely high.
In 1929 those who had 10% gold for example "only" lost 25% overall: gold has value since thousands of years. My dumb thinking is that if gold has value since thousands of years, there's an extremely high probability that it'll keep value for the few decades I've got left at most.
FabHK
4 days ago
A more sensible strategy is probably to protect only against large down moves, so get OTM puts, and then longer maturities (like 1/2 year or so), then rotate them every quarter.
ATM options cost approximately 0.4 S sigma T^0.5 (do a Taylor expansion of the "N"s in the Black Scholes formula), so indeed, for current index vols of about 16% we are talking 0.4 * 16% * (1/12)^0.5 = 1.85% for a 1 month option, and 12 of them indeed cost 22% of your portfolio. Not a good idea.
However, if you hold the options only half the way to expiry, you lose only 1/4 of the time value. And if you buy OTM, you have convexity coming your way on the way down.
Lastly, index vols were very low (until yesterday, ha), as so many firms entered the dispersion trade: they wanted to go long dispersion (some firms do well with AI, some lose out), so short correlation, therefore long single stock vol and short index vol. Which means you could buy index vol (ie protection) quite cheap.
MattGrommes
4 days ago
One of the big issues with this is sequence of returns risk. If you retire and rely on your portfolio but the market dives for a year or two right after you leave the workforce, your total portfolio value is screwed because you were selling at a low point.
Terr_
4 days ago
Tangentially: I think a lot of people forget/underestimate the degree to which the industries behind their job are ones that they need to diversify away-from.
In other words, a programmer should invest a bit more away from software than average, a realtor should invest a bit more away from properties than average, a coal-miner should invest a bit more away from energy and mining, etc.
If you have your job, you can weather a stock-downturn, and if investments are solid, you can weather a period of unemployment by liquidating some, but if both hit trouble simultaneously then that's much much worse.
mancerayder
4 days ago
That makes sense, and it probably should be said more. It's probably just because we invest in what we know. If you're a real estate broker, you have an interest in properties, you think about it all the time, so you'll buy your own properties, or invest perhaps in builder stocks. If you're in tech, well, I don't need to say it because that's most of us. If you work in the energy sector, I imagine you know a thing or two about transport and esoterica of speculative miners or drillers, etc.
Terr_
4 days ago
> It's probably just because we invest in what we know.
I'm mostly thinking of folks that will passively invest in a big broad index fund, and then assume they've reached the end in terms of balancing industry/sector risk.
parpfish
4 days ago
it's also why you shouldn't hold equity in your own company any longer than necessary (e.g., an apple employee shouldn't tie up the majority of their networth in apple stock).
Terr_
4 days ago
My go-to example is always Enron, and the impact on employees whose retirement funds were in their own too-awesome-to-fail employer.
Oh, sure, it's way worse because of the fraud-angle, but even if it had just been a more honest kind of mania, the arrangement was reckless and bad.
parpfish
3 days ago
stock options/rsus are a great example of some sort of cognitive bias (maybe it's the endowment effect?).
give somebody $1000 worth of shares in their company, and a lot of folks will hang on to them. but if you gave them $1000 cash to invest, they almost certainly would not choose to dump all of that money into their own company.
Terr_
3 days ago
Tax-law also makes is sticky: StockX -> Money -> StockY means a portion of is lost as capital-gains tax on the money step. StockY might be better... but is it something that will perform better-enough to be worth the switching costs? (At this point logarithms and spreadsheets start getting involved.)
In contrast, starting with Money and then choosing between StockX or StockY is an easier choice.
rwmj
4 days ago
Which is why you keep 3-5 years of spending money in cash (or a bond ladder if you want to be fancy).
duzer65657
4 days ago
most don't even have 3-5 years "spending money" (whatever that is) in total savings; if you're keeping that in cash you're getting 2-3% annually while the market has doubled.
LargeWu
4 days ago
Last week I was at the bank in my hometown, a small rural community. The teller took a phone call, and I overheard her say "You have $1.53 in your checking account, and $150 in savings".
Presumably this is their total net worth. I think this is way more common than people on this type of forum realize. Most will work until they literally can't anymore, then scrape by on social security until they die. I think it's important to keep that perspective.
HDBaseT
4 days ago
It is either that, or they have tons of debt. (Sometimes both!)
The average person is struggling in modern America.
alex43578
4 days ago
Because the average person also makes a litany of poor financial decisions. $100K student loan balances for an state school arts degree, forgoing health insurance but expecting to receive $200K in care for free, or buying that $80K F150 on a 12.5% loan and rolling in negative equity.
The US is second in the world for median equivalised household disposable income, second only to Luxembourg and 10%+ above Norway. For daily median per person income after taxes and transfers, we're only behind Norway, Switzerland, Luxembourg, Qatar, and the UAE. Outside of petrostates, microstates, and Switzerland, no country has richer "average" people.
The US certainly doesn't have the safety net of some of these other states, but these aren't holes you're being thrown into by society: they're pits you've deliberately jumped into in 99% of cases.
mancerayder
4 days ago
Your error here, or the missing piece if we're generous, is what people are spending money on. Health care is astronomically more expensive here. Schooling isn't free after high school. Day care isn't free. Hell, even property taxes are simply 'not a thing' in France or the UK, where the taxes and Council Tax, respectively, are a tiny fraction of what Americans pay in property taxes ---- which, of course, pay for the 'free public schools.'
Now, let's talk about insurance, that's also much higher. In states like California and Florida, home insurance is through the roof, in some states like NJ and NY, car insurance is through the roof. Both going up way above inflation (like the items in my first paragraph).
You might counter with energy costs are much higher in these European countries (and similar ones like Germany, Benelux, etc), and the purchasing power might be higher, but the wages are so so much lower.
That said, this trope of people misspending their money needs to consider this outrageous costs of things that many people around the world never need to think about. The shitty wages in France are overshadowed by so many essentials being available without a high cost or any cost in some cases.
alex43578
4 days ago
>Your error here, or the missing piece if we're generous, is what people are spending money on. Health care is astronomically more expensive here. Schooling isn't free after high school. Day care isn't free. Hell, even property taxes are simply 'not a thing' in France or the UK, where the taxes and Council Tax, respectively, are a tiny fraction of what Americans pay in property taxes ---- which, of course, pay for the 'free public schools.'
A US worker at the average wage keeps roughly 70 cents of every labor-cost dollar; a worker in Belgium, Germany, France, Austria, or Italy keeps closer to 47 cents, even before you add in the effect of VAT. Nobody in Europe is getting those services you mentioned for "free" - you're just making everyone else pay for them with taxing their labor. You almost connected the dots when it came to property taxes paying for public services, but missed that Europe assesses income taxes.
>Now, let's talk about insurance, that's also much higher. In states like California and Florida, home insurance is through the roof, in some states like NJ and NY, car insurance is through the roof. Both going up way above inflation (like the items in my first paragraph).
This is a bundle of issues. As a quick list, compare the size/value of an average property in California or Florida to a property in Europe, assuming they even own the property (remember, Europe's home ownership rate is lower than Florida's). Same goes for car ownership costs: American cars are larger, more expensive, driven more, and are more exposed to damages from uninsured motorists, because states like NY, NJ, and CA think it's racist to enforce uninsured (or even unlicensed) motorist laws. Just like health insurance, allowing free-riders on insurance systems is financially disastrous.
>You might counter with energy costs are much higher in these European countries (and similar ones like Germany, Benelux, etc), and the purchasing power might be higher, but the wages are so so much lower.
I'm not sure what you're trying to say here. Yes, Europeans can get a number of services paid for by their neighbor, but it doesn't make them "richer" by any reasonable measure. Quantifying standard of living is incredibly difficult, because even as this exchange shows, people will value different things differently. But broadly speaking, my original point still stands: Americans should not be struggling to live in America, absent poor personal decisions, particularly if you're willing to lower the standard of living to that of an average European (a smaller rented property, driving far fewer miles in a compact car, no air conditioning, etc, etc).
>That said, this trope of people misspending their money needs to consider this outrageous costs of things that many people around the world never need to think about. The shitty wages in France are overshadowed by so many essentials being available without a high cost or any cost in some cases.
What outrageous costs are those? Community college remains very affordable, and costs for 2 years at a state school can be managed, especially against the greater lifetime earning potential in America. Healthcare costs OOP is capped at $9,200 on an ACA plan, which can be nearly free for middle to lower income brackets, and that debt itself is basically unenforceable in most cases these days, assuming you truly don't have the assets to pay.
niemandhier
4 days ago
I took the liberty of computing my and my wife’s effective income tax burden:
24%
We are both German and in the 92nd percentile of the income distribution.
alex43578
3 days ago
I’m assuming you mean you’re in the top 8 percent of income distribution? Ie about 90,000 euros?
If so, by my rough math, you’re paying about 25% more in taxes than an equivalent American couple based on PPP. That American couple would have about $30K USD/26K Euro more in disposable income, would likely have good quality health insurance paid for by their job, be eligible for $3K to $4K in social security retirement income per month, and be able to individually contribute to tax free retirement accounts, tax free college funds for their children, etc.
mancerayder
3 days ago
That's incredibly misleading. For a high salary, this American couple you mentioned, are probably living in California or New York or New Jersey or another high tax state.
Now redo the math.
I and most people in my peer group pay over 40 percent of income in taxes, and that's NOT including property taxes, which are much, much higher than in Europe. Some much more than that - like triple (city, state and federal).
State taxes were completely ignored from your math.
This message, and the message before it which I am at pains to rebut much of, contains a lot of misleading cherry-picking.
And you compared European universities to a two year county college degree? Healthcare costs were also greatly glossed over. I'm hoping someone else is triggered but if not I'll be forced to step in and correct this stuff.
alex43578
3 days ago
An average American makes $60K per person in 40 out of 50 states, so no: they clearly don't have to live in CA/NY/NJ. Furthermore, the German comment is from someone in the top 10% of income, so it gets even better for Americans once you're comparing the upper income brackets.
The US median household pays roughly 10–12% of income in federal taxes. A German median-wage single worker's net rate is somewhere in the high-20s to high-30s percent.
Germany will be 10 to 20% higher in total taxes: income, property, sales/VAT, etc; than an American at a comparable professional income. If you claim to be paying 40, you'd be paying 50%+ in Germany. $10 to 30K a year more gives you a lot of room to save for college, pay for medical expenses, etc: the "safety net" in Europe only helps you if you don't want to work or don't want to earn a significant income.
States feature low or 0 income tax, including desirable places to live like Florida and Texas. Yes, they'll have property taxes or others, but again: personal decisions. If you choose to live in CA, vote for CA policies, then you have to pay for CA's waste.
If you read my comment, you'll see I'm saying you can minimize college expenses by doing 2 years at CC, then transferring, yielding a total college spend of just a few thousand dollars (not the absurd $100K student debt loads people incessantly whine about online). Healthcare costs are simple: if you pay for ACA-aligned insurance, again, your costs are capped: $10K OOP max sucks, but if you made the decision to purchase insurance, you're not paying the $200K medical debt people claim online.
My central claim was and remains: America provides more opportunity to earn money, and people misrepresent the "downside risk" of America's approach to healthcare, college, and income by refusing to acknowledge that the worst outcomes are of people's own making. America gives you far more opportunity to excel, but also doesn't backstop your personal failures with your neighbor's work to the same extent (at the individual level, ignoring govt. bailouts of companies).
inigyou
4 days ago
Victim blaming. It always works, whether on HN or Reddit. And why, pray tell, is the system set up so that all the things you obviously should do are bad decisions?
alex43578
3 days ago
"The system" isn't setup to make self-destructive, clearly bad decisions. People just choose to make them, and at some point the system can't help them by carrot or stick.
Here's the easiest example: with ACA subsidies the average cost of an ACA plan is $50, with low income people qualifying for plans as low as $10 a month. This will cover basic preventative care like screenings, tests, and vaccines; and importantly caps your OOP maximum, preventing a financial disaster if you have a significant illness.
Despite all that, many people still aren't insured. They aren't insured despite it being massively subsidized for them by taxpayers. They aren't insured despite the government running advertisements throughout open enrollment.
At this point, if you have a complaint about a massive healthcare bill, my very first question is: did you have insurance?
The same ideas apply to college, housing, cars, and health/diet: "the system" gives you a massive range of options, but people consistently choose poorly, shortsightedly, and wastefully. People need to take personal responsibility for their decisions.
inigyou
3 days ago
If an option then system provides is self-destructive, maybe it should stop providing that option?
Some people don't even have $10 per month spare. Wealth inequality in the USA is extreme. But more importantly: they are busy and stressed. If it's so easy to get health insurance it should either be mandatory and automatic, or it should be a checkbox on your taxes or some other form.
When I paid my student loan it was a matter of just ticking a box on the employment tax declaration that I had a student loan. And then it was automatically taken from my paycheck. It wasn't about the money, but about the ease of use. If I had to send a monthly payment with a paper check I'd surely miss payments.
The phrase "personal responsibility" is a thought-ending cliche used when someone doesn't want to see the big picture. It's like if Microsoft changes Windows 12 to break Valve games and you blame the game because "developer responsibility" or "executable file responsibility" and ignore the bigger picture that Microsoft is trying to drive Valve out of business to move games off Steam and onto the Microsoft Store.
alex43578
3 days ago
The ACA is about a 10 to 20 minute process, once a year, on a website. The average american of working age, employed, watches 120 minutes of TV a day. If one day they only watch 100 minutes of TV, they could have health insurance. Again, how much more handholding do people need?
For loan payments, somehow generations managed to pay mortgages, property taxes, and more with nothing more than a checkbook they manually balanced and gasp paper, envelopes, and stamps. Again, even if you have to log into a website to manually trigger an ACH, put a recurring calendar event in your phone and include a link. I bet you could get that down to 3 minutes a month, assuming they don't have autowithdraw.
Your Windows/Valve example has Windows taking action to make things harder for people. All the examples you provided are things that are easier now than they ever were in the past.
Even your initial premise that these options are inherently self-destructive is wrong. If you're a trust-fund kid and want to study art history for $100K a year, great! We shouldn't take the option away from everyone just because some people rack up $200K of student debt. We shouldn't further bureaucratize and regulate the healthcare system just because some people are too busy (read: watching TV) or stressed (read: can't follow instructions written at a 4th grade level) to work through a few questions on a website.
cindyllm
3 days ago
[dead]
MattGrommes
4 days ago
When you're headed into retirement, one possibility is to shift to saving more in cash-like options instead of a 401k (or whatever). It's should just be part of your retirement plan to account for possibilities like this.
light_hue_1
4 days ago
And lose the tax advantages? That's crazy
Grombobulous
4 days ago
The comment parent to you said it poorly. The 401k is the container, you don’t move stuff out of it you change the investments inside of it.
smallmancontrov
4 days ago
The tax advantages of being forced to pay ordinary income rates on your distributions as compared to long term capital gains (which are low, capped, can be exercised before a tax hike, and avoided entirely if you just need collateral)?
Retric
4 days ago
401k reduces your taxable income when depositing money, this is more tax efficient than paying normal income taxes and then also paying capital gains.
401k lets you rebalance a portfolio with zero tax implications.
The downsides are generally high fees and a 10% penalty for early withdrawal which makes them surprisingly bad for young people. They tend to start in lower tax brackets, have fewer reserves when unemployed, and face fewer risks from an unbalanced portfolio.
Pay down debt then Roth IRA when young 401k after 40 is often better than defaulting to a 401k, but saving anything tends to be more important than such optimizations.
leetrout
4 days ago
I am alone in my peer group for doing something like this.
Cars, student debt, credit card debt all gone. (And I dread needing a new car). Covered downpayment on my house and cash for a nice shed that matches the house and a fence so my kid can play in the back yard with no issue.
Invested low 5 figures into myself taking a year off and now I am getting serious about the 401k at 41. And I am ok with that.
I never worked at a big tech company and I covered my mom's down payment and appliances and new carpet and part of her move for her to move close to me. Dad died when I was 11 so I am all she has and she was a public school teacher so she's on a small pension.
We all walk a different life and I know people that make my entire life savings in a year but I will eventually grow a retirement to get me through 10-15 years and then it will be what it will be. (Maybe a tank of helium and bag)
smallmancontrov
2 days ago
401k sure sounds good when you mention the "no taxes on money going in" and don't mention the "big taxes on money going out" part, doesn't it?
Retric
2 days ago
Avoiding X% tax on money going in and paying X% tax on money going out aounds balanced. But you avoid the highest marginal tax rate when putting money in and social security alone doesn’t push them into the highest tax bracket.
So most people get taxed at lower marginal rates in retirement when they take money out. Which makes deferring taxes a meaningful advantage. This is especially true if you intend to money to a state with lower tax rates in retirement, but a worse deal if you intend to do the reverse.
user
3 days ago
kmbfjr
4 days ago
Keep in mind post tax income sources are king when retiring before age 65 and looking for ACA subsidies.
rwmj
4 days ago
Sure, but we're not talking about people who have no savings. FIRE people have huge investment portfolios while being frugal with their spending, and understand the risk of keeping 5-10% of their total net worth in cash equivalents (not dissimilar to having insurance).
user
4 days ago
bell-cot
4 days ago
Look back at the grandparent comment. If someone doesn't have 3-5 years in total savings, then they had better not try to retire.
hdgvhicv
4 days ago
People return with less than 4 years expenses in retirement funds
Surely you need about 20 years?
budman1
3 days ago
Social Security, my friend. And there are still some pensions out there.
staticman2
4 days ago
3 to 5 years of cash or a bond ladder won't help in a 1970s stagflation scenario.
inigyou
4 days ago
At the extreme end of this, realise that absolutely nothing is safe.
Panzer04
4 days ago
3-5x is way too much if you're still working.
1x is plenty IMO.
bandrami
4 days ago
Which is why lifecycle funds move you into bonds gradually as you approach retirement age
zer00eyz
4 days ago
Inherited IRA's, if you aren't the spouse, have some pretty strict draw down rules.
As the boomers die off - if they have these accounts - their kids are quickly going to be forced to liquidate them over the course of 10 years. With some of them having to sell a chunk annually.
riffraff
4 days ago
NVidia makes up 7.5% of the SP500. If it lost 50%, it would be a 3% loss for the index. The concentration is bad, but it would not cause a drop of 50% retirement funds by itself. If you take an all world index, it's even less.
Still, if NVidia lost 50% of their market share, we would probably see a big collapse of the stock market.
EDIT: to note, the top ten companies in SP500 make up an unprecedented concentration but they're not "mostly AI".
rockskon
4 days ago
It is unlikely that a 50% drop in NVidia wouldn't be paired with a significant drop in the valuation of every other company heavily invested in AI.
burningChrome
4 days ago
Unless they too were somehow tied into Nvidia.
This is what caused the 08' crash. Everything was all tied together so as one massive bank failed it sent a cascading ripple effect through the entire industry which became a sort of black hole that took down many seemingly stable, profitable banks with it.
I can easily see the same happening with AI.
riffraff
4 days ago
Of course, but the top ten that make up >30% of the market don't just sell AI. If all of those lost 50% it would be a 15% drop in the index, painful but not jumping-off-building bad
rockskon
16 hours ago
What of most of the rest of the US economy thats keeps trying to shoehorn AI into their workflows and, more importantly, whose stock prices are buoyed by the prospect of theoretical AI-related productivity gains?
hnfong
4 days ago
> EDIT: to note, the top ten companies in SP500 make up an unprecedented concentration but they're not "mostly AI".
They're mostly either AI proper, or hardware manufacturers benefitting from AI boom, or provide cloud services to AI companies...
matwood
4 days ago
An AI collapse would represent a generational buying opportunity for companies like Meta, Google, and MS. It would be bumpy for a bit while things unwind, but eventually all this FCF they have been dumping into AI would start dropping to the bottom line instead. It's like when Meta stopped dumping money in Reality Labs, but on a much larger scale.
throwaway85825
4 days ago
For it to be a buying opportunity would require the mega corps to continue growing post bubble pop. This is questionable given how large they already are.
oblio
4 days ago
And a lot of their apparent growth post 2022 is AI, but most likely at subsidized, unsustainable prices. So demand that isn't real.
Plus apparently at least for Google, but from other news sources I've seen, at least Amazon and Oracle have basically mortgaged their future in other business units to fund AI, so it's likely many of these other business units will underperform (or already are).
So lots of new debt, unverifiable growth that could be shady, coupled with a slow down of their other businesses could be a really bad combo.
mhh__
4 days ago
A risk in this situation is that in names that are dominated by passive flows there is a pro-cyclical effect where because the name is valued in terms of the overall index but is also part of said index that you end up with a positive feedback loop - which will eventually be arrested by speculators.
kipchak
4 days ago
Regarding unprecedented concentration, wasn't the nifty fifty era comparable for the top 10, about 40%?
riffraff
4 days ago
I frankly don't know, the "unprecedented" is something I read in articles but haven't actually investigated.
kipchak
3 days ago
Looking at for example 1965, the top 10 of the S&P500 were, rounded, ATT 9%, GM 7%, Exxon (4%) IBM (4%) DuPont (3%) Texaco (3%) Sears (3%) GE 2%, Kodak 2%, Gulf 1%, for a total of 38%.
This is pretty close to current concentration, but the current top 10% is basically all technology except for Eli Lily at 1.5%, so in that sense it's arguably unprecedented.
There's a good chart here on page 5 of top 10 weights over time, and on 6 of how the 1965 top 10 fared to 2025.
https://corporate.vanguard.com/content/dam/corp/research/pdf...
conartist6
4 days ago
Idunno man. Am I the only one that remembers the day the first DeepSeek model came out?
It wasn't like, "Nvidia took a hit and everyone else was fine". It was more like, "One or two companies were fine, and ALL others took a hit"
bdangubic
4 days ago
how are they not “mostly AI”?
riffraff
4 days ago
Amazon, Microsoft, Meta, Alphabet sell a lot more things than AI. They were huge before and would still be huge after.
Do you think iphones and windows™ will stop selling once the ai bubble pops?
krashidov
4 days ago
"This tree only makes up 0.0001% of the forest. If it is lit on fire, the forest will be fine"
6510
4 days ago
I have this cheap B movie in my head with a primitive people living on an island. They compete in hunting, fishing, building boats, houses, cutting trees, growing crops etc they use sea shells as currency. Someone finds a spot with countless sea shells, 95% of the population spends their days digging up more and more. Almost everyone is insanely rich, everyone except from the dumb people still hunting, fishing, building boats, houses, cutting trees, growing crops etc
fsckboy
4 days ago
>How would it affect retirees if they dropped 40-50%, likely taking the market with them?
a drop of 40-50% in the S&P 500!? That didn't even happen in the market crash of 1929. It would lead to unemployment and breadlines for the majority of the population, and retirees would get in line like everybody else. Making income from your savings requires a productive economy; bonds are not the answer because bonds also stop getting paid, and even govt bonds would be erased by inflation.
it's just not a scenario that should be on your radar, the chance is tiny, and the result would be completely non-linear. if you tried to hedge yourself against that, not only would you fail (it's simply out of your control, like an earthquake or tornado), you also wouldn't make any income in good times, and most times are good and it's sensible to plan for that retirement.
kbcool
4 days ago
The S&P 500 has dropped over 40% multiple times including 1929. It did it in the 70s, 2000 and 2008/9.
The COVID crash nearly hit those levels also
minimaltom
4 days ago
Even if theres a massive drawdown it will recover in the medium term (and in the short term is a great buying opportunity).
For the people who are close/early to retirement and can't do that, well, they need to manage sequence of returns risk.
Edit: I think some ppl might interpret this as me being bullish on the SP500. I'm not, I'm bullish on everything evens out and returns to the mean.
MikeNotThePope
4 days ago
I don’t think concentration risk is itself overly concerning. The nature of a market cap weighted index means it will always be heavy on whatever is currently trending. You’ll certainly be hurting if your plan is to retire at the top of the market with just enough, as the inevitable downturn will hammer your portfolio down into not enough. So invest until you have enough to handle volatility or a lost decade with a dip and slow recovery.
epolanski
4 days ago
There is no data showing that high concentration is bad in an index.
No correlation with future returns.
On the other hand the world is leveraged to insane levels not seen since world wars or global recessions.
At the same time yields are low while inflation is high.
There is definitely a high level of risk in the financial markets.
A risk nobody, especially politicians, want to look at, because it would unavoidably lead to some major pains, so procrastinating until it's unavoidable seems the way to go.
senshan
4 days ago
For those who stick to a meaningful asset allocation (e.g. 60/40, 80/20, etc), this does not pose significant problem -- they would not be buying much stock in the last 3 years. Instead, they would be buying mostly fixed-income. Probably mostly in 401k/IRA accounts.
mint5
4 days ago
But if their debt goes bad, isn’t that debt the very bonds that make up the other part of those asset allocations?
senshan
4 days ago
Typical total bond market fund like BND is ~70% in USG -- pretty solid:
https://investor.vanguard.com/investment-products/etfs/profi...
swarnie
4 days ago
I'm not familiar with 401k rules but presumably they get a choice of markets and products?
If one is over concentrated its easily avoided.
skohan
4 days ago
The problem some have pointed out is that these companies are such a huge portion of the market right now.
The sound advice for the past decades has been, just invest in a low-cost ETF tracking the S&P instead of picking stocks to minimize risk and invest in the market broadly.
So a huge number of people have done that, believing they're diversified, while tech makes up 40% of the index.
Yes you could sell your S&P and find things to invest in least likely to be impacted by a potential bubble, but your average 9-5'er with automated contributions to their 401k is probably not sophisticated enough to do that.
And that's assuming only these companies would be affected if there was a massive draw-down in tech/AI related stocks. We haven't really seen a situation like this before, so it's not easy to predict what effects there might be in the broader economy.
wonnage
4 days ago
It’s probably not even a good idea to try and defend against the bubble by switching up your stock allocation. After all the whole reason passive investing works is that active investment rarely beats the market and if you’ve just been in SPY the whole time it’s unlike you have any edge to gain by switching to an active strategy every time fear creeps up
izacus
4 days ago
All of that is only true if the market is sufficiently diversified and not manipulated for profit extraction.
Right now it's not clear that is true.
wonnage
4 days ago
It’s one thing to predict a crash, it’s another to actually make money off of it. If you’ve watched The Big Short even those who predicted the housing crisis correctly nearly lost their shirt before and after it happened because timing the crash is the hard part. There is a whole body of research showing that passive strategies outperform active after crashes
anthonypasq
4 days ago
no one that needs to rely on their investments for their actual retirement still has them in equities. theres a reason target date funds automatically adjust asset allocation as it nears its target date. you should be in majority bonds and cds well before your actual retirement date.
jandrewrogers
4 days ago
That is an overly conservative approach that sacrifices a lot of growth for not much more safety. It also exposes you to inflation risk, which is a significant concern these days.
Most people in actual retirement I know do something like keep ~2 years of cash in short-term treasuries and everything else in equities. That gives you a lot of buffer to time-shift equity drawdown, which is the main risk with equities, while retaining almost all of the benefit of equities. Simple and relatively robust.
anthonypasq
4 days ago
i dont think you want to ever be in a position where you arent making money and your net worth could drop 50% in a year. but hey, if you want the risk go for it i guess.
jandrewrogers
4 days ago
It literally doesn't matter if drops 50% in a year. That is a paper loss and you have years worth of cash you can spend while waiting for it to recover. If you panic-sell at the bottom of that market then that's on you. It isn't necessary in order to pay the bills.
What you propose takes on a huge amount of inflation risk. How are you hedging that risk? A guaranteed yield doesn't mean you aren't getting poorer. Obsessing over one type of risk and ignoring another isn't rational.
Reducing variance of net worth has a very high cost. Over-indexing on that singular property, particularly when most people can afford some variability, is a recipe for relative impoverishment.
anthonypasq
4 days ago
> That is a paper loss and you have years worth of cash you can spend while waiting for it to recover.
not if you're 80 dude...
reverius42
4 days ago
Retiring at 80 requires very different financial planning than retiring at 65.
loudmax
4 days ago
The employer selects a financial company to manage the 401k. When you switch jobs, you can roll the 401k from the previous employer into the new one, or into an IRA (Individual Retirement Account).
Usually the financial services company will offer several options: more aggressive/high risk, or less aggressive/lower risk. Most people will just go with whatever is the default option.
So much of the American S&P 500 is dominated by handful of companies that the risk is not that easy to avoid. If or when the AI bubble pops, it's going to take down a lot of the economy with it. You can direct your retirement savings into the lowest yield/lowest risk assets offered by the firm, but you'll forego whatever growth happens in the mean time.
Will the bubble pop next week? Next month? Next year? Who knows. Timing the market is incredibly difficult.
There's a famous quote, attributed (perhaps apocryphally) to John Maynard Keynes: "The market can remain irrational longer than you can remain solvent."
TitaRusell
4 days ago
The whole idea of a pension fund is that you don't need to time the system it is the system.
Like my country pension scheme. It went through ups and downs for a hundred years but has always come on top. All you need is a long horizon and a trillion dollars and you basically can't lose.
magicbook
4 days ago
Isn't that considered a likely case? I always assume that my sp500 holdings are worth roughly half of what they are (and base retirement and spending decisions on that number). and most financial advisors will tell you future returns of sp500 for 10 years out will barely keep pace with inflation, if that.
anthonypasq
4 days ago
retirees arent suppose to have their active retirement funds in stocks dude. Any financial advisor with a brain would not make such a ridiculous asset allocation error.
kipchak
4 days ago
Regardless of whether it's a good idea, it absolutely happens and as a result would impact retirees, both in individually managed accounts and target date funds. For example here 70+ are 45% equity.[1] TROW retirement 2020 funds are about 50% stock, for example, and only decrease to a floor of 30%.
https://workplace.vanguard.com/content/dam/inst/iig-transfor... (page 78)
noelsusman
4 days ago
Retirees relying on short term equity returns to cover expenses only have themselves to blame.
isoprophlex
4 days ago
There is ZERO chance the modern oligo-kleptocracy isn't going to socialize the losses onto the little guy
shimman
4 days ago
Yeah, hence all the talk about forcing "public" ownership. Becomes easier to justify a bailout when you create some legal fiction compelling the government to do so.
d5lt5
4 days ago
> As long as this debt does not make it into life insurance and pension funds, we are fine.
Already happened: https://finance.yahoo.com/markets/stocks/articles/michael-bu...
baron816
4 days ago
Yes of course life insurance and pension funds are going to buy this debt. This is the highest quality debt that's out there. If you don't want life insurance and pension funds to buy debt from big tech companies because you believe it's too risky, then you believe that bonds are just too risky in general.
AnimalMuppet
4 days ago
OK, wait a minute. Elsewhere in this discussion, people are saying that only a few of these AI companies are going to survive. For stocks, that can still be a reasonable investment - low odds, but still a positive expectation value - but for bonds, it's terrible. You're paying me single-digit interest when there's only a 20% chance that you live long enough to give me my principle back? Get outta here. Literally nobody should be investing in such bonds.
FabHK
4 days ago
FWIW, a firm can go bankrupt and the stocks be worth zero with the bond holders being paid 100%. In fact, that's sort of the goal and "ideal" scenario (ideal given bankruptcy, of course, which in turn is not ideal).
In the real world, recovery rates for corporate bonds are between 30% to 70% or so, depending on the seniority of the debt and the collateral.
muellero
4 days ago
If big tech bonds are a terrible deal for investors at 8%, then Google or OpenAI is getting a screaming deal by raising debt at that rate. Saying nobody should be investing in these bonds is very similar to saying that big tech should raise more debt.
AnimalMuppet
4 days ago
Yes, they should, if they can. But on the other side, life insurance companies and pension funds should not be buying it.
muellero
4 days ago
Agree with you on that. I just wanted to point out that Big Tech debt being a bad purchase for things like pension funds means its a good deal for big tech. Everyone else in the thread seems very negative on big tech debt for some reason. You can't have it both ways.
hvb2
4 days ago
> buy debt from big tech companies because you believe it's too risky, then you believe that bonds are just too risky in general
Uh, no? Ignoring the rating, I think there are plenty of other bonds to be found that are less risky.
Dutch government bonds just to name one? The yield wont be the same but that's probably a good indicator?
derf_
4 days ago
> When these fail, it will become everyone's problem.
Debt is senior to equity. For private credit to start taking haircuts, the equity has to have already gone to zero. At that point, this will already have been everyone's problem for some time.
senshan
4 days ago
Are you suggesting that holding private credit assets is relatively risk free?
Equity is a risky asset, so equity being wiped out should not be a surprise to anyone, but life insurance and pension funds failures is indeed a public problem.
nickff
4 days ago
There's a wide spectrum of 'private credit', and it varies from low-risk to quite high risk, depending on the debtor. In the case of "AI Companies", their debt is low-risk, but many are creating special-purpose-entities which will build and own some or all of their newer datacenters. Those datacenter companies are issuing a great deal of somewhat risky debt; with the exact level of risk depending on the off-take agreement.
jcfrei
4 days ago
That's an overgeneralization and haircuts for debtors are common - even when a positive equity value remains.
mschuster91
4 days ago
> As long as this debt does not make it into life insurance and pension funds, we are fine. The trouble is that private credit is taking control of some life insurance companies and off-loads this debt to these. When these fail, it will become everyone's problem.
Three things:
1) at least SpaceX is already in pension funds "thanks" to NASDAQ and MSCI relaxing their rules. Everyone who invests in NASDAQ or in MSCI World has SpaceX exposure, and assuming the bonanza lasts for 11 more months, so will everyone who invests into S&P 500. In addition NVIDIA, Google, Microsoft, Oracle and Amazon all have been in pretty much every investor's / pension fund depots. No matter what, everyone is going to get fucked when the party crashes, and it will make 2007 look harmless by comparison.
2) The debt of the AI companies is bad enough, but there's all the downstream credit as well, chiefly construction companies and public utilities that are undertaking absurd amounts of buildout. When the party crashes and the demand stops, there will be a lot of construction companies and possibly even a few large utility companies that will be unable to service their debt (because no datacenter means no income) or have to hike rates even more than they already are.
3) All this debt and speculation unwinding will cause an economic downturn. Most of Europe already is in or near recession territory, and the US would be in a recession if it weren't for the wash trading and circular investments artificially propping up the GDP. But unfortunately, with the exception of infamously austere Germany, everyone else has already fired all the guns during 2007ff and Covid, and all the ZIRP money never got slowly deflated out of the market, which means this time there will be no government help possible, it will be a hard crash. No way out of that one.
aftbit
4 days ago
I disagree - high leverage inherently makes systems less stable.
senshan
4 days ago
You probably meant to say that practically, high leverage tends to leak into companies of public interest. For example, when high net worth individuals start trimming their private credit holdings, which eventually end up with insurers. That is why the regulators have to watch carefully that it does not happen.
aftbit
4 days ago
No, I meant that having a lot of debt puts you in a position to be more vulnerable to any kind of negative outcome. Intuitively, this seems to hold true across the spectrum from the personal level to the government level.
If a person has a lot of debt and no savings, and they lose their job, then they will find themselves in trouble a lot faster than someone who owns their home and car and has 6 months in a savings account.
If a company has a lot of debt, they might find themselves in trouble with credit rating agencies as soon as they have a bad quarter. Or they might have cashflow issues if rates increase. Both of these can lead to an accelerating negative feedback loop.
Governments (at least those with fiscal independence) have a unique set of tools to work around this situation, but they too can struggle with high debt loads acting as a drag on future prosperity.
Debt plays a critical societal role in allowing new production in advance of revenues, but it can also be a dangerous trap.
These AI and tech companies are priced as if they are still running a capital-light, 0-marginal-cost SaaS business. That's no longer what's happening. This economic engine makes up a substantial amount of both the value and the growth in the American stock market.
If there's a loss in confidence, high leverage will make things fall faster. This could be infectious. Not just the AI and tech companies, but the whole market might suffer.
guywithahat
4 days ago
You say this as though every company doesn't take on debt, and all debt isn't a risk. I'm sure you have some much riskier debt than ChatGPT already in your portfolio, and interest rates are adjusted by relative as judged by the market. I'm sure some debt will fail, but certainly all of it won't, and while anything could cause a market crash saying "when these fail" holds a lot of incorrect assumptions.
jgalt212
4 days ago
> As long as this debt does not make it into life insurance and pension funds, we are fine.
I think for small to even large numbers you are correct, but given how yuge this debt amount is a broad-based default will probably cause a contagion. I will not predict how far and wide.
duxup
4 days ago
It impacts investment or lack of it in other places. I had some visibility to a company trying to sell and was told that if it wasn’t AI there just wasn’t much money out there.
BrenBarn
4 days ago
We are definitely not fine. The mere fact that this amount of money is flowing to these operations is already a problem.
dzonga
4 days ago
bingo - if the firms holding the debt keep holding the debt & the debt doesn't get passed to other entities - the system will be fine.
if say meta owes 720Bn, they wouldn't have trouble paying that back in 10 years.
this doesn't take away the fact that 'a.i' right now is a bubble.