Comment by solatic

Comment by solatic 17 hours ago

US stock market index funds will crash when the US stock market crashes. That will require very large sums of capital to decide to move away from US capital markets. To give an idea of how much money would need to move - VTSAX alone is about $2.1 trillion, with hundreds of billions of dollars of shares of each Mag7 stock.

You basically need the world to decide that EMEA/JAP markets are collectively stronger than the US stock market, and to collectively move their capital outside the US to be deployed in EMEA/JAP. Moves away from Mag7 to US value stocks will be captured by the US stock market index funds; moves into commodities will be seen as opportunities to buy the dip before a market rebound. You can view attempts by US private equity to purchase real estate as attempts to hedge against overvaluation in US markets, but if the US has another Great Depression, those real estate purchases won't be able to fetch high rents or prices anyway.

In short, just follow the normal advice, which is not to put all your money into US domestic stocks, but to also purchase foreign stock market index funds, which help to hedge against the risk of the entire US stock market crashing. In the long run, US index funds are still a good investment - US courts still are quite powerful to settle contract disputes, the US does not have capital flight controls, and American business culture is still one of the hardest working, greediest forces on the planet - a Great Depression v2 would not change that.

YZF 17 hours ago

All assets are correlated. When the stock market inevitably crashes, and it will, we just don't know when, so will other world stock markets. And the cycle will repeat.

Capital is not going to "move away from US capital markets" because those markets tend to over-perform and will likely still over-perform. What companies are you investing in that are not nVidia, Google, Amazon, Meta, Apple, Open-AI, Anthropic etc. etc.?

It's really hard to predict market crashes. I think it makes sense to be more cautious but also that's what could have been said a year or 2 or 5 years ago, in which case you would have missed a lot of potential gains.

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state_less 17 hours ago

> US stock market index funds will crash when the US stock market crashes. That will require very large sums of capital to decide to move away from US capital markets. To give an idea of how much money would need to move - VTSAX alone is about $2.1 trillion, with hundreds of billions of dollars of shares of each Mag7 stock.

I'd like to make a technical note about markets because I see this mistake repeated in the comments. The money doesn't have to move out of the US markets to somewhere else for the stock market to crash. It only requires a destruction of confidence. For a hypothetical example, suppose the S&P 500 closes at 7000 on a Friday, and everyone loses confidence in the S&P 500 over the weekend (for whatever reason). The market can open on Monday 3500 with not a share traded before the open (no money was moved out of the market), and investor portfolio values are now cut in half. Since confidence is broken, nobody buys the dip, and the market closes Monday down to 3000.

It's an extreme example, but it's worth understanding the fundamental underpinnings. The markets are a confidence game. Sometimes we forget because we have good reason to be confident (e.g. in the S&P 500) and so it fades into the background that something like this could even happen, but it's not hard find these sorts of events in history.

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solatic 15 hours ago

You are correct, but only insofar as destroying paper value. If investors have a firesale because the market would prefer to realize whatever value might be rescued, even at a loss, but the proceeds of the sale stay inside the US, then that capital is more likely to be reinvested in the US once investor confidence returns. This is the underlying reason why most long-investors should continue to hold their positions despite short-term losses. The fact that NVDA has a $4.6T market cap, as a product of about 24 billion shares multiplied by about a $190/share price, does not mean that the market believes that all 24 billion shares could be sold for that $190/share price. That is a convenient fiction that falls apart when investor confidence bursts, but that does not in and of itself truly represent value destruction (Nvidia employees will still wake up the next day and go to work), at least not until second-order-effects kick in (e.g. Nvidia employees leave because their RSU packages are no longer competitive compensation). People who stay long in the stock market can wait for investor confidence to return, in which cash is reinjected into the stock market, and the losses in diversified portfolios are not realized. If the S&P 500 investor takes a 50% hit in a crash, decides to hold, then the S&P 500 rises by 140% in the next two years, then the investor who held will still realize a nice return.
The way in which that narrative does not happen is if the capital leaves entirely to be locked up in other investments; in the context of index funds which would anyway rebalance to rise with those other investments, if the capital leaves for other countries, to investments that are not covered by the index funds.

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YZF 17 hours ago

Correct. The price of the market is the price people are willing to pay. It is not directly related to the move of capital. That said prices are also a function of supply and demand, if there is no demand (e.g.) for US stocks then it is more likely price will go down. If everyone wants to sell US and buy Europe, e.g. because they think the European competitors to Apple, Google, Amazon, nVidia and such will outperform, then presumably the prices at which those companies trade will trend down.

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