3.85 million more Americans filed for unemployment last week and the stock market barely moved. Its because your Fed is printing money to buy up assets and corporate junk bonds.
This is also the sign of the kind of plumbing that is baked into the US system - protect capital when things go belly up and allow labor to hit the reset button through unemployment and wage cuts. Flood the market with cheap credit and then eventually growth comes back. It’s a rehash of the financial crisis response because it’s the only sort of response the USA is configured for.
bingo. Stocks are forward looking - by 10 to 20 years, depending on the valuation model.
The idea that companies should be worth half of what they were last year because of a 18-month long pandemic is kind of idiotic, which is why the liquidations in mid-march were a great buying opportunity.
...the only exception being companies that might be forced into bankruptcy - such as retail, restaurants, travel, etc.
Tech (NASDAQ) has almost entirely recovered... which is reasonable.
I think a lot of commentators are angry that many shareholders are not experiencing the same pain they are, and therefor attribute it to some sort of social evil.
20 year forward looking? Maybe across the market and across broad indexes & ETFs, but there is no way you can tell me that they're looking that far ahead intelligently -- one only needs to look at 2008, or the huge volatility over the last couple months.
Oil futures, for example, are only going out about 2-5 years.
We knew there was going to be wicked unemployment down the line in Feb/March. Now it's here and no one is surprised -- and that was baked into the stock price, on top of Federal cash bailouts that make the unemployment numbers less relevant.
Oil futures go out to exactly the expiration date of the futures contract.
Equity shares go out as far as you like. What makes the later years worth less is the discount you put on future cash - according to the time-value money principle.
ie. future years are discounted proportionately dependent upon the expected inflation/discount rate.
As an investor, I am obviously baking in those events in my decision making. I am also assuming an all-in-with-all-the-bazooka-firing response - Fed printing money, Congress enacting stimuli, smart people coming up with vaccines etc - which will recover the asset prices (at least in nominal terms) within 2-3 years.
How many of those people are really “unemployed” though? (Not a rhetorical question.) Lots of people are furloughed so they can collect unemployment, and both they and their employers expect them to return to work when the shelter orders are lifted.
The Fed has a twin mandate (price stability, maximum employment) and two tools to satisfy it with: rate adjustments and liquidity injection (QE). That's just about it. They aren't allowed or configured to do much of anything else.
If those two tools stop working or produce distorted results, they can't switch tools. They have to keep banging the hammer or choose to do nothing.
What we are seeing here is a failure of Congress and the Presidency, not the Fed. The Fed is doing the only thing it can possibly do in this situation. It has no more tools.
Traditionally, the two tools were rate adjustments and setting the reserve ratio.
Traditionally, the RR was never touched. The last adjustment was in in 1992, when it was lowered from 12 to 10%.
Nowadays, QE has become an even more important tool than rate setting, which is mind boggling to me. I worked at the Fed when Greenspan passed the baton to Bernanke, and while I understood that Bernanke was an expert at what to do when rates approach zero, I'm still stunned by the rapid shift.
Completely agree. The Fed is one of the few institutions that has bipartisan support so its allowed to fulfil its mandate and the 'plumbing' so to speak works well when its trying to pump money into markets. But as we've seen getting money into people's pockets is more challenging in the USA as that bit of infrastructure wasn't seen as needing investment due to the way USA normally reacts to market shocks. (And by infrastructure I think of benefit systems running 50 year old bits of cobol, sending benefit payments via cheques, patchworks of state benefits instead of universal coverage etc.)
Nonsense. Money isn't getting into people's pockets because the political will isn't there. If it was an influential Bloc screaming for assistance, they would get it, and the details would be worked out later. Where there's a will there's a way, and where there's no will there are a bunch of phony excuses.
Agreed. I should have included political will as part of the infrastructure. I was highlighting how the Fed is geared in such a way that makes it very difficult for it to automatically deliver support to anything other than large institutions/finance etc given the patchy nature of US benefit systems. If political class deemed it necessary it would exist but they don’t so it doesn't.
If the people protesting the lockdowns instead protested to demand immediate, and sustained benefits, and supporting policy, until the lockdowns are lifted under we may see different results. Of course, for that to work the protests must end entirely if demands are met.
Instead we get more reality TV. I keep going to bed every night wondering when I'll wake up from bassackwards nightmare.
I feel like a lot of Americans won't ask for help because they fear it will mean that others who are not just like them might also get help, and that quite a bit of it boils down to latent (and even assumed and subconscious) racism.
I wouldn't have said this 10 years ago. 10 years ago I thought racism was dead except for a few crackpots and maybe a few rural areas. The seemingly out of nowhere explosion of it in otherwise more contemporary settings on the Internet prove this is wrong and it's still very much alive. I don't think it ever died. It just became something you don't talk about in polite settings or in mainstream media. All it took was a few Youtube blowhards and trolls to challenge the taboo and it was back with a vengeance.
Other than racism the rest is self-righteousness: "I'm responsible and hard working, so sure I could deserve help, but what about those people over there? If they're in trouble they must be lazy or stupid."
I've got a bit more hope in the median American than you I think. I don't expect racism to disappear entirely. It's an extension of a natural reaction to change or experience. It takes education, and good experiences to counter racism. Some people are just stupid, but even they aren't beyond help. Those who are should be imprisoned.
Anyways, if you care to know, I suspect that people etal have merely forgotten how much power to effect change we have when we unite towards a common goal. If every person claiming unemployment started protesting tomorrow for: [weekly stimulus money no delays no excuses, 100% free to consumer health care and treatment extended into single payer after covid19, and policies preventing repossession, evictions, foreclosures, and garnishment due to un/under-employment] then I would bet everything I own that you would see our politicians act with a swift decisiveness, to either effect a nationwide tianemin square or capitulate to the will of the people. I fully expect capitulation, but realize we have an absentee president.
It's not just the US, it's every major nation. Companies are massively overleveraged across the board. Not being overleveraged a competitive disadvantage. It's the new normal.
No, Countries in Europe are providing fiscally sourced replacement to wages/salaries. For example Denmark is paying 80% of an employees salary if the company does not lay them off. This is a drastically different intervention than what the US is doing.
That's because a ton of European countries already have unemployment so generous that it's essentially the same or better than what the US is doing without having to do any changes.
I am talking about what happened for the past decade, not just the response to the crisis right now. Europe is doing everything the US is doing - and more.
The Feds mandate is to maintain low unemployment. They keep the credit markets flowing to keep the unemployment from becoming 10x worse than it already is.
Depending how you calculate it, that's not necessarily true. Reported unemployment numbers are calculated as a percentage of people who are actively working or seeking work. It's possible for the denominator to increase for some reason (like more people needing to find work due to state and federal aid drying up).
Said another way, the current workforce is 25% unemployed. If that corresponds to 5m out of a potential workforce of 25m, but the workforce increased to 100m, unemployment could increase 10x to 50m, while only doubling as a percentage.
And I just looked it up and these numbers are totally detached from reality, but I've written too much to delete now, so I'm just going to publish it! (And besides, I think it's still useful to question what's behind statistics)
Part of the issue is that the Bureau of Labor Statistics reports six unemployment numbers, all with different standards for what constitutes 'unemployment.' All of these numbers are useful, but often people throw around different numbers without explaining which unemployment number they're actually talking about, which can result in seeing wildly different numbers.
Uh, if 7.5% of people have jobs, there will have been riots and civil disturbances for months, food shortages, utility failures, limited medical care, and so on as the employment rate plummets.
It’s not possible to have 7.5% employment without total chaos, might as well be 0% in your (impossible) example.
Hypothesis: the face-ripping rally in stocks and total disconnect from the real economy is the result of trading bots that have mistaken the flood of central bank liquidity as a demand spike.
The algos haven't yet been updated to reflect the fact that there's a man behind the curtain with an infinite supply of liquidity pumping, pumping as fast as he can.
And it's far from clear that the distinction matters anymore. Assets have become a kind of video game. When you strip stocks and bonds from their anchors to valuation (P/E multiple or inflation), you're left essentially with something very similar to gold and cryptocurrencies - assets that are difficult to value by any conventional means, but which become sensitive to central bank shenanigans. This could explain why all asset classes are now moving in unison.
* It incorporates expectations about the future into stock prices today.
* Economic news looks at what has already happened, often way after it has happened.
* Hence stock prices shift if economic news does not match what investors already expect ie. more positive news than investors expected means stocks go up, more negative news than investors expected means stocks go down.
I get the pandemic being priced in now, but surely that implies a pas point in time in the past when the pricing in happened? Ie at some point or over some period, somebody looks at the looming global pandemic and goes "fuck! Sell everything!"
You'd be surprised how unsophisticated most of these trading bots are, very doubtful enough trading volume happens over this sort of macro trend (less their impact on intraday trends) to cause this. Further if those strategies existed, they would have been already turned off -- most shops have strategy engines with easy switching various smaller strategies, there isn't a mega-algo.
Nevertheless, You are correct that some of the first principles they trade on are no longer valid.
> This could explain why all asset classes are now moving in unison
I think this happens just because of portfolio balancing. If stocks in a balanced portfolio do better than other asset types (e.g. government bonds, corporate bonds, gold, commodities, ...) then some stocks will be sold and more of the other assets will be bought. Vice versa if stocks do worse. This behavior increases correlation between all asset types.
Alternative hypothesis: bailouts are a temporary smoke screen for the pension and hedge funds, other financial institutions and the super rich to cash out, once they have liquidated their positions, the real crash happens.
Alternate hypothesis:
The next year to 18 months of earnings reductions due to covid is not enough to justify a 30% drop in net present value of the market at large.
The the companies were accurately priced prior to COVID then that would be the case. If companies were in an overvalued bubble before COVID then that would not be the case.
Another alternative also is investors fleeing from emerging markets. With Fed's backing the US stock market is a better bet than some others as compared with moving to cash, bonds, Gold, etc.
I think all it is the market is pricing in a relatively fast recovery, and looking 12 months ahead of today's crisis. Whether that's correct or not, time will tell. Also, I think recovery will be highly sector and company dependent.
> Also, I think recovery will be highly sector and company dependent.
If that’s your hypothesis it sounds like there is supporting evidence, as not all sectors have shared in the recent post crash recovery. Eg a lot of retail still trading near lows.
> The Fed has committed to lend or buy [up to] $8 trillion in financial assets
The M2 money supply[1] is currently $16T. If the Fed creates $8T in new money, does that mean that the M2 grows to $24T and therefore the purchasing power of U.S. dollars will be 2/3 of what it used to be? If your nest egg is mostly in cash right now, what should you do?
I'm a layman when it comes to economics, so take my opinion with a grain of salt. The way I think about it is, when the Fed "creates" like this, who actually gets it? Well, it's the person who holds the asset the Fed will buy. Those assets (like bonds) are held primarily by the wealthy. The wealthy already have enough money to do the things they want and most of the time it's about watching the number in the account go up.
What I mean is, it seems like there are two economies. The economy where the wealthy* buy things. Things like art, yachts, houses in coastal cities, stocks, bonds, fancy education, fine collectables, fancy cars, fancy clothes. And the economy where the normal people buy their normal things like TVs, cell phones, commercial air travel, food, normal clothes.
So when the wealthy* get money for their assets from the Fed, they aren't really buying the same things normal people are buying. So inflation so far has not crept into normal things. It has crept into wealthy* people things, a lot.
Of course there is bleed-over, like housing and education and medicine, where inflation is showing up because the wealthy* and the normal people compete for the same resources or similar types of resources.
So when you're talking about purchasing power, are you referring to living a normal life or a wealthy* life? If it's the former, the current CPI seems like not a big problem.
The other subtlety is that "money" as defined by you and I isn't just the money printed by the Fed, it also includes the liabilities of the banking system (primarily deposits, and in some cases financial paper etc).
So there's public money (Fed), and private money (banks etc). Part of the reason the Fed can print so much public sector money in a recession without it being inflationary is at the same time, private sector money supply is contracting.
When you see interest rates on corporate bonds, commercial paper, and the implicit rates of return on equities all spike, that's telling you that there's a (moderate) run on the private sector money system.
The Great Depression was really a combination of a private sector money contraction, along with tight policy (a reduction in public sector money).
The hope here is that we can balance those forces out, and specifically paper over the COVID hole with printed money.
So far, deflation seems like the primary concern not inflation. Negative oil prices etc..
Will that be the case further out, will we turn into Japan in 1995 with zero rates forever, or Germany in 1920 and totally trash the currency, well, that's the billion dollar question.
> So when the wealthy* get money for their assets from the Fed, they aren't really buying the same things normal people are buying. So inflation so far has not crept into normal things. It has crept into wealthy* people things, a lot.
They are not buying or rather spending more - that's the problem. The money stays within financial assets, rather than rich people buying a second and third yacht. If they did then more companies would build more yachts, creating additional jobs and eventually that wealth would trickle down. Now it just leads to higher asset prices.
> They are not buying or rather spending more - that's the problem
I think that you might be missing the point of the GP. They're not saying that trickle down will invigorate the economy. They're saying that QE is bread and circuses for the wealthy. Asset inflation is precisely the point. This does has some negative secondary effects (the GP mentioned housing, education, and medicine), but as long as consumer goods stay cheap there's essentially no downside to inflating the cost of Veblen goods.
No it's not. The mandate of the FED is (among others) to maximize employment. The FED hopes to achieve this by stabilizing asset prices, therefore stabilizing pensions and housing prices, which creates consumer confidence and incentivizes spending. However as we can see there are diminishing returns - consumers are not nearly spending as much as the FED balance sheet would make you believe.
The real problem I see with FED interventionism is that it lets fiscal policy off the hook. If you want to actually stimulate the economy you need a strong effort by the politicians, increase government debt and let the government massively invest in infrastructure, health, education or even create a universal basic income. However because deficits are already high, lots of politicians (and a sizeable part of the voters for that matter) are not willing to do that. Central banks around the world keep calling for more fiscal measures - but in reality politicians are mostly kicking the can down the road.
The commenter you are responding to is positing the hidden mandate of the Fed is to inflate asset prices on behalf of the already wealthy. So to say the feds stated mandate is contrary to that is to say nothing.
Yes, though this also affects many people who have retirement accounts and pensions. The difference is primarily between those who derive their income from capital (the financial economy) and those who derive it mostly from labor (the real economy).
I kind of agree, but again me ≠ economist. I've found value in looking at the median reitrement account value of Americans. I say median, because the wealthy* skew the mean and so it's not valuable.
So this tells us the average person who is retired or approaching retirement, has about $40,000 of retirement savings. If that went down to $20,000 (50% drop in total market) would that change their normal person lifestyle a lot? I would say no, because CPI is pretty low and prices are pretty low for things normal people buy. It shows the inflation in asset prices seem to be detached from reality.
Yeah, this. Can't speak for the US but in the UK most of the middle class (at a guess around 50% of the population) has at least some* of their retirement savings in pension funds which rely on capital growth to fulfill their intended purpose.
*most of the rest being in house prices to which the same applies in part.
In other words the rich getting richer and the poor getting poorer (this time without starving). Sounds like a great mechanism for those who are wealthy.
People are absolutely starving. In my area, Team Rubicon and the National Guard, along with a coalition of non-profits, have mobilized to distribute thousands of meals per day to feed families who were hit by the triple-whammy of closed schools (many of which have food pantries on-site in low-income communities), newly-unemployed parents, and multi-month delays in unemployment payouts. The money that pays for all of this is a combo of state and federal disaster relief funds.
I suspect this is much more true than people have ever even considered before. The metaphor of "two economies" makes a whole lot of sense in a lot of ways.
The economies are not separate. The essence of what you described is what was laid out by Cantillon, in what is now known as the "Cantillon effect"[1]
> "If the increase of hard money comes from gold and silver mines within the state, the owner of these mines, the entrepreneurs and smelters, refiners, and all the other workers will increase their expenses in proportion to their profits. Their households will consume more meat, wine, or beer than before. They will become accustomed to wearing better clothes, having finer linens, and having more ornate houses and other desirable goods. Consequently, they will give employment to several artisans who did not have that much work before and who, for the same reason, will increase their expenditures. All this increased expenditures on meat, wine, wool etc., necessarily reduces the share of the other inhabitants in the state who did not participate at first in the wealth of those mines in question. The bargaining process of the market, with the demand for meat, wine, wool etc., being stronger than usual, will not fail to raise the prices. These high prices will encourage farmers to employ more land to produce the following year, and these same farmers will profit from the increased prices and will increase their expenditure on their families like the others. Those who will suffer from these higher prices and increased consumption will be, first of all, property owners, during the term of their leases, and then domestic servants and all the workmen or fixed wage earners who support their families on a salary. They must all diminish their expenditures in proportion to the new consumption..."
There is some time for these market effects to occur, so the purchasing power decrease of workers is not seen for some time after the new money is printed. The initial spenders of the new money have purchasing power at the value the money had at the time the new money was created. This is the fed, the government, banks, and financial markets. By the time it trickles down the economy, price rises begin to occur and the bottom earners have reduced purchasing power.
The idea of continuous money printing by the state, even during times of prosperity is Keynes's gift that keeps giving. The state and its elite benefit from increasing the money supply and low earners and savers pay the costs. The fed committing to printing trillions now is simply a way for them to enrich themselves with a convenient excuse which can deflect blame for any economic damage caused - the Coronavirus. This can be seen by comparing what is being printed, and what meagre percentage of it is actually going to the average American in their stimulus checks, versus what is going to banks, big business and others, paid for by future taxpayers. Daylight robbery, which will only further increase wealth inequality.
This Cantillon effects keeps getting mentioned even though it's well outside of mainstream economics. And its convoluted explanation is not accurate in modern financial markets. The reality is much simpler. The FED intervenes by buying financial assets which directly benefits people who hold these financial assets: Either by selling to the FED or through the increase in their price. Poor people without savings (and without financial assets) don't benefit. It's as simple as that.
> This Cantillon effects [...] is not accurate in modern financial markets
> The FED intervenes by buying financial assets which directly benefits people who hold these financial assets [...] Poor people without savings (and without financial assets) don't benefit
Would you mind expounding on this a little bit? From my perspective, you seem to be decrying the Cantillon effect in one sentence yet acknowledging its existence in the next.
Edit: To explain my confusion a bit more: In my (albeit limited) understanding, the Cantillon effect claims that monetary injections will spread unevenly across the economy. So, I read your comment as: "The claim that monetary injections will spread unevenly across the economy is not accurate. The reality is much simpler. The FED just injects money in a way that it spreads unevenly across the economy."
I think the explanation the Cantillon effect gives is wrong. The monetary injection spreads uneven not because the effects on purchasing power are delayed between different groups but because it mostly increases the value of financial assets. And rich people have a larger share of their wealth in financial assets. Most of the wealth in the lower income percentiles is probably in consumer goods (appliances, cars, etc) and very little in savings / financial assets.
I'm still having trouble grasping the distinction that you're trying to make. Is it just that there's a separation between purchasing power and asset value?
I forget which contrarian this stemmed from, but it was probably linked on HN previously.
There's a larger reason most central banks print money: most countries are debtor nations.
If you are a debtor nation, and you have the option to print at minimal consequence (say, because your currency is a world reserve currency), doing so is strictly better than all other options.
All other approaches open the very real possibility of an ugly spiral into depression (real) and default.
I believe the phrasing the author used was 'when faced with a choice between actual default (economy unable to support debt payments) and implicit default (currency inflation), almost every democratic government will choose the latter.'
It's easier for people to lose invisible money (inflation) than visible money (depression / fiscal tightening / loan repayment).
Putting the money on the balance sheet by itself does not affect prices, only the expectation that it will be spent - along with the expectation that even more money will be created.
Now the question is, what will that money be spent on? It's not the stuff that's in the CPI, therefore the average consumer will not immediately lose purchasing power, at least for domestic goods.
This is why we have seen massive asset price inflation but very little inflation in terms of CPI. It's politically convenient, people don't really notice it unless they want to buy a house. If they have a stock portfolio, they're happy about the paper profits.
> If your nest egg is mostly in cash right now, what should you do?
The following is not financial advice:
If you're 100% cash, you should diversify. Asset prices are bound to stay inflated, the value of the dollar (and other currencies) in terms of assets is bound to go lower.
You should look at rising stock prices within an economic crisis as an indicator of cash losing value. Also consider that pretty much all governments are now creating money, so there's no safe-haven currency.
Could the market turn again, could you buy at a lower price yet? Absolutely. If that happens, are the governments going to create even more money to stop the slide? Most likely.
On a small, non-investment scale I'm now a little more inclined to spend for pleasure or acquiring skills (hopefully they're useful and might be an investment themselves). Normally I'm more of a compulsive capital saver, but right now who knows what will happen to value of money in the future.
The divorce of stock market and the economy on the ground is another thing with trajectory that's hard to predict. I expect later outcomes in the world to be "interesting" in some way. Recently I've read about 1929 and some say that initially stocks crashed while the economy was still mostly fine. It was a very prolonged process and on the way people had very little idea what's happening. From the perspective of early 1930s, any prices from late 1929 that briefly seemed "bottom" to contemporaries were still very much peak.
I wonder if older economies, like pre-Revolutionary Europe with aristocrats and peasants, could legit provide a better model of these parallel movements. Maybe not, since everyone was more anchored to grain.
This is the best economic answer to the question of why dollar doesn't had inflation like other currencies that increase supply. much better than the "the rich will only inflate art prices" that is currently on top of this one.
But also ignores the military power. Which plays a huge part on why the dollar is always so strong, regardless of how much is printed.
When Saddam decided to sell oil in euro, or Venezuela decided to accept gold, the US was ready to bring democracy and peace.
On a free market you can't shut down a bakery if they decide to buy flour from your competitor.
Lyn Alden did a fantastic in-depth explanation of this [1]. Monetary devaluation is a part of it, but inflation and deflation can work together at the same time in interesting ways.
Value is being destroyed by the lock-down. Nest eggs are drying up. There's a lot Congress could do to stem the bleeding from a flood to a trickle, but it's not doing it. I don't think there's much individuals can do to protect themselves; folks on Wall St. are looking for the same sorts of places to stash their wealth, with much bigger teams. If someone finds a safe place, the value goes up as people buy it up. That's the point of index funds.
In an ideal case, everything would lose value at about the same speed -- cash and stocks -- so a $100 index fund is still worth $100 (with obvious winners and losers within). That's inflation, but it distorts things less.
Inflation hurts people with savings, but helps people with debt. There's way too much debt in the system right now, which is causing structural harm as people can't keep up with payments (be that airplane leases, mortgages, student loans, or otherwise). A little inflation right now is healthy. If your nest egg is cash, and that's worth 2/3, that's still a lot better for you than if it doesn't inflate, but the US economy collapses. So I'd accept the inflation.
But there are smarter policies we could put in place if we hadn't elected politicians who were qualified, rather than ones who acted relateable. Next year doesn't look better: it's Biden v. Trump at the federal level, and likewise down the line. We needed a Warren or a Bloomberg -- someone who isn't dumb.
Inflation doesn't hurt people who do real work for wages. It helps people who have debt. It hurts people who have cash savings. It's neutral for people who live paycheck-to-paycheck.
But on the whole, that summary misses most of the explanation. Inflation has less to do with individuals than with the whole way business finance works, and the whole way that monetary policy works.
Stock markets are also priced according to _expectations_ about the future, rather than the events at this very moment. So if a recovery is expected, the market will reflect it sooner than the economy at large.
You're basically saying that whatever the price is, the market is right. How do you square that with the elephant in the room, the FED's market interventions? Does it have an effect on prices? If it does, then the prices are obviously not driven only by expectations. If not, where does the excess liquidity on the other side of the FED's treasuries and bond trades go?
But it's not crazy to expect the markets to rebound. People are becoming unemployed for a _transient_ reason of lockdown etc., economic recession is due to the pause button being pressed, and not a fundamental breakdown in economic activity.
Of course prolonged lockdown etc. could make things worse still. But the main pain we see is definitely expected to me short-medium term.
As for markets being irrational - actually, I think they are more often rational than not. They are mostly bashed for being irrational in hindsight, which, well, is not really fair. Also, it is just often rational, but with respect to different criteria than what is widely assumed.
The market seems to be pricing in the best case scenario here. They're saying that almost everything is back to normal by Q3.
This would be 4 really bad months (March-June) total. The reality is that the future is very uncertain at this point. The market drastically underestimated the virus in early February, and it appears the same phenomenon is happening now.
Covid 19 will eventually (a year or 2) go through the whole population and kill a lot of people, especially pensioners. Then it will be a background level killer like flu and cars. This is bad for many humans and people who love them but it's not bad for the economy.
> You're basically saying that whatever the price is, the market is right.
No, the efficient market hypothesis states that asset prices reflect all current available information. OP is not defending that hypothesis in their message, they’re just saying stock prices reflect expectations about the future, a much weaker assertion. Those expectations might turn out to be wrong, for various reasons, but they’re nevertheless what motivated people to invest in stocks rather than doing something else with their money.
Sure, individual evaluations of all currently available information can and do differ. The efficient market hypothesis is about the sum total of all those individual evaluations adding up to a rational evaluation as reflected in asset prices. Not everyone believes in the efficient market hypothesis, Warren Buffet being a famous example of someone who does not.
I dont think he is assuming the market is right or wrong. The market is expected be great for some tech companies, and very bad for travel related business. No moral judgements, only expectations of future performance
The market is wrong all the time. People make money by beating the market. It’s just not easy to predict who will beat the market ahead of time. Just like how it’s not easy to predict who will win the lottery. It’s a pretty safe bet that someone will, though, at least some of the time.
No, people are not making money beating the market. See long term bets about ETF vs managed money managers. If you beat the market today like "you bough when it was 20% down" then "sell now because i went back to what it was" you have to buy again to stay in the market or never sell. Otherwise market will go up and you will stay with "one time shot" that in 5 or 10 years will be worth nothing.
Time in the market makes money, so market is right.
You are basically saying the same thing. Behavioural economics, in particular, says that expectations are not always rational.
To be more precise, just because people expect that things will improve doesn't mean that they will. However expectations do drive behaviour, whether those expectations are rational or not.
> Stock markets are also priced according to _expectations_ about the future,
That does not mean they are the right expectations and market is correct. Market could be over optimistic in this situation or just right. I know you don't mean to suggest that. But I just wanted to point that out. I feel "priced in" is the stupidest answer to questions wondering "why is this happening". And I know you aren't saying this either.
There’s a lot of speculation, and I love it. Keeping an open mind is a necessity. Think of from the perspective of the funds managing billions of dollars: it’s not in their interest to be predictable. There’s nothing in the stock market that can be explained by a single headline. Misdirect, delay, prepare.
Coronavirus in February was already a red alert and we had a brief panic, but the stock market went back up. I promise you it wasn’t a return to normal, it was a strategic delay. It’s fun exercise to follow the timestamps, the down move started at exactly opex.
The move back up was more statistically sound than you’d think. The headlines saying expect a double bottom were basing that on history and ignoring the magnitude of the move. We were many many many standard deviations out of expectations. Put another way, the massive amount of short positions opened when closed out would put us roughly back at (starting price - 2 ln). A smooth drop would line up with expected move models and would have room to continue.
You have to be very careful drawing conclusions between current news and current stock prices. You also can’t explain it all by forward looking expectations. If you’re actively trading and don’t have a full model based on past, present and future these types of articles will ruin you.
In your entire description, not once do you actually mention the performance of the companies in the stock market. Which is kind of the point of the article.
I don't mean to challenge you, I don't believe in technical trading too. But I don't think its equivalent to astrology, which IMO is completely bogus.
Technical patterns work somewhat better than a coin toss in the short term. It is basically follow the trend. They might not be the most optimal, and might as well be self-fulfilling prophecies, but I don't think it can be compared with astrology.
Or in other terms "Money tanks while an unprecedented amount of it is printed".
When looking at a stock chart, don't forget it is not the value of the company you are looking at. It is the ratio of two values. Of the company and a currency.
Working your ass off for a buck, to pay for your rent and food, feels rather pointless, when the government just prints money out of thin air, and hands it to the rich, and those that don’t need or deserve the help.
Meanwhile, you’re taxed like crazy. Health insurance costs is a heavy burden on your earnings.
And any savings you have, will now be cut in half.
Depending on the interest rate, lended money wery well can be a gift to the borrower.
Imagine a company that borrows $1M vs a company that borrwos $1B and both pay an interest of 0%. The company that borrowed $1B has 1000x more firepower to build a big business. While the downside is the same for both companies: They could go bancrupt and pay back nothing.
Combine that with the fact that a big enough borrower will be "too big to fail" and will always be able to borrow more money to pay back the last round. In that case, the lended money is a gift independent of the interest rate.
In a way the Fed does hand out free money to the rich, because well-connected institutions that can borrow money from the Fed, do so at a lower interest rate than everyone else who can't.
They can then turn around and lend that money out to the rest of us at a higher interest rate, pocketing the difference.
No, not free money. The people that can’t loan from the FED are higher risk than the ones that can, so the bank is taking on default risk the FED wouldn’t have.
Apparently, you don’t understand how everything works, and how everything is tied together.
What the Fed is doing, and what they have done for the past 13 years, had significant ramifications across the board.
Like, have you noticed your rent increase? While your salary remained stagnant? This is the result of the Fed. They have distorted all markets for everyone. This is the hidden inflation for everyone, that the government refuses to acknowledge.
There is no hidden inflation. Inflation numbers are very public and housing is a problem independent of the rest of inflation. If the FED were devaluing the currency worse than actual inflation like you imply, it would show up in all kinds of core product prices (materials, energy, etc).
Well, while the FED is printing $, the ECB is printing €.
Who prints more is hard to say. One reason is the question, which definition of money we look at. Only central bank money? Or also private bank money? And there are many other forms of money.
Even if we only look at central bank money, it is tricky: Central bank money is not only created at the central bank. But also in private banks. For example in Germany, the central bank just announced they will back up 100% of loans that private banks give to businesses. So the private banks now can loan money without risk. Basically printing central bank money on their own.
If the currency were being devalued as you imply, it would be reflected in commodities markets, currency markets, etc. This is not the case.
The USD is quite strong because there is a significant deflationary pressure due to demand destruction so the printing is currently offset by the lack of economic activity.
Commodities: This depends on the commoditiy. Gold is up by a factor of 50 over the last 20 years. Coffee is not. The reason for the latter is that the printed money goes into the hands of already rich people. Those are not investing it into goods for their daily lifes. They buy gold, houses, shares etc.
Currency marktes: Which ones did you look at? Which currency has not been printed in vast quantities lately?
A shortage of gold/housing does not imply inflation. A huge chunk of gold’s gains came from before QE and gold isn’t really that interesting because it’s mostly a useless speculation vehicle.
> ...these moves by the Fed and governments are the equivalent of flooding a drought stricken area with water for a few days. It feels like a relief, but if there is no rain in the months after, it does little good.
That's a very insightful metaphor.
At this point, after 12 years of QE policies that were meant to maintain the status quo, it's clear that the global economy is failing. Those "floods" of liquidity don't have any connection with actual value. They're just there to maintain the illusion of growth. Without central banks propping up stock markets, the entire globe would have already been deep in a painful unprecedented contraction.
At some point all this will unravel. Just like actual floods where a huge quantity of water washes the landscape, removing topsoil and flowing to the sea, so will those ever-growing floods of make-believe money wash the economy, removing what little real value still exists, and disappear into nothingness.
Care to elaborate how an influx money should remove real value that exists? Isn't the relation between influx of money and real value a relatively loose one?
How? Central banks are essentially buying stock. The aid given to "normal" people is peanuts in comparison. This will further tip the balance between rich and poor, capital and labour. Lots of people lost their jobs, the value of labour is taking a nosedive.
But yes, your are of course right. Money has no intrinsic value.
Expectations have been all over the place. If you sold in February you saved a lot of paper losses in March. If you missed out on April you lost a lot of gains as expectations improved.
For now, I'm keeping 5-year money (college tuition starts in a little over a year) really conservative. Retirement is staying diversified mostly in stocks and I'll try not to obsess over it too much. A little bit of "fun" money may go into play if I feel like a gamble.
Oof. I blew my “fun” money in a couple weeks. My mistake was thinking the stock market tracked the economy and would fall on bad news. I was wrong, and learned I don’t know shit about the stock market. Buy and hold. Amen.
The markets seem to be priced with lots of 'hopium' and Federal Reserve dollars propping them up. Assets have been overvalued by a lot for quite sometime now.
Only 11-12 years ago the Federal government propped up many companies that were poorly run and would have died without assistance by robbing taxpayers and giving the money to said companies.
If you view ownership of said failing companies as a way to get on the Fed gravy train it makes sense. They're not even "overvalued" if that's how you look at them.
How many people who would have started new, competing companies went on to have their taxes fund the competition?
By pushing down interest rates via QE, the Fed has allowed so-called zombie companies to exist longer than they otherwise would have in an unmanipulated interest rate environment.
This isn't countrerintuitive. This isn't just about massive money printing and stimulus packages or some voodoo economics.
People rush to stocks because stocks are long term investments, and there are no other good investments.
After the peak of unemployment during the great recession, it took three years to get the U3 unemployment rate down from 10% and back below 8%. Three years. 2%.
We're somewhere around 23% right now. Call the peak 28%-30%. Assume a sharper bounce from the peak for various likely reasons. Can you imagine what things are going to look like in three years, if we're still near 14% unemployment? How about six years to get back to the worst of the great recession levels? It's going to take nearly a decade to get back to a normal job market. The market obviously isn't properly pricing based on the economic destruction and the fiscal consequences that will be entailed. The stock market is rolling around on the floor high on the Fed's supply while the house is on fire. How long can that last? I'm going to specifically watch for the inflection point of how fast the economy bounces back (or not), as that'll be an enormous confidence juncture for the market. It's pricing for the sharpest V shaped recovery imaginable, when the real recovery is more likely to look like a jagged, slowish, prodding swoosh; the difference between those two realities and how the present is being priced, is supplied by the Fed.
Can the US Government spend an extra $8 trillion beyond what they already have to pad everything through the next three years? They can, I don't know if they will. I suspect after this very brief period of barely bipartisan voting to support the population and economy, Congress will rip at eachother like we've rarely seen before. The partisan walls will go back up before this year is out. Each stimulus measure will separate the parties a bit more than the last. There will be wild political brawling between those who have survived this mostly intact and don't want to keep spending at the highly elevated rates, and those who want to keep providing full stimulus-level benefits to the very large number of unemployed persons for many years. The cost will be something beyond extreme to handle a situation with unemployment ranging between 10%-30% for a mere three years (how about if we spend six years elevated beyond the great recession peak unemployment rate?). Sympathy will dwindle rapidly in large segments of the population and people will begin to argue primarily from their personal bias and economic condition, seeking to guard their own survival against economic disaster.
The stock market is perfectly representing, well, something. Any attempts to explain it require loads of mental gymnastics because it's a layer of abstraction over so many layers of abstraction that I fear we've collectively lost sight of human welfare and real human advancement. I can assure you that the stock market doesn't represent that.
The stock market is perfectly accurately representing the fact that every world leader and everyone filling their pockets have so much wealth invested in the assumption of the stock market increasing that no-matter the reality, every government in the world will print money and do everything in their power to keep the stocks valuable even while the companies they represent stakes in go bankrupt.
I'm a layman but my understanding is that this is in fact the issue stated in the article, there is nowhere else to invest, real economy is stopped, so currently everyone from individual to institutions and corporations put their money into stocks, thus the price increase.
Healthcare not so much, most non emergency procedures have been cancelled.
I don't know about the US, but over here a lot of staff has temporarily been laid off, and hospitals are struggling financially.
It's all over the US news that the healthcare system is having this exact same problem - because of all the procedures being cancelled, hospitals are in a terrible financial state and staff are being furloughed, laid off, and having their pay cut all over the place. What's interesting is that Americans seem to think that this is the result of some unique failure in how healthcare is structured over there.
Amazon reported yesterday they expect to spend their entire previously forecasted Q2 profit of $4 billion on COVID related expenses. I wouldn’t call that a fantastic outcome.
Article's argument boils down to the claim that outright inflation would buoy the prices of airlines, hotels, and retailers, and since that isn't happening, therefore QE isn't causing inflation.
Ongoing wealth inequality is producing a divergence in where currency is distributed in the economy, and thus producing an uneven effect on pricing. Where desirable investments exist, excess capital is flooding in to capture limited supply and causing inflation in the prices of those investments. Without a return to high employment, injections into capital markets cannot and will not reach Main Street and restore demand. Where demand is primarily driven by Main Street and is relatively elastic, we are beginning to see deflation, e.g. in the CPI which saw 0.4% deflation in March alone.
Arguing that the dollar, as a single fiat currency, has a single value is slowly becoming an outdated concept. The dollar is increasingly valued by Main Street and decreasingly valued by Wall Street. Ordinarily, this would be bridged by arbitrage - by Wall Street purchasing deflated investments and by Main Street selling inflating assets. But Wall Street can't capitalize on the low price of airline and retail stocks until governments permit those businesses to fully return to the market (whether they go bankrupt or not before that happens still being an open question, in spite of the Fed's injections), and Wall Street is failing to capitalize on other deflated opportunities, most spectacularly the failure to seize the opportunity posed by the collapsing price of oil due to a lack of storage. Meanwhile, Main Street has no appreciating assets to sell - the most common of which used to be real estate, but the failure of housing policy to encourage affordable mortgages and home-ownership has caused more and more of Main Street to rent their housing instead.
So there's real deflation that's being masked by an assets bubble. What will burst the bubble? If the Fed is committed to infinite QE, then eventually, political intervention. Look for the following:
* Intervention in housing: price-controls in rent and mortgages, as they become increasingly inaffordable for a Main Street with no income.
* Intervention in medical care: expansion of Medicare and Medicaid, as the demand for healthcare grows among the unemployed who have lost access to employer-provided health insurance.
* Intervention in additional markets that cater mostly to Main Street demand - food, clothing, energy.
Already we see Trump intervening in meat production to force meat suppliers to stay open. Why does the government have to force meat suppliers to stay open, unless they're no longer profitable because of production cuts (i.e. unavailability of labor) for reasons outside of their control?
The Caracas Stock Exchange, denominated in bolivars, has been doing exceptionally well, some 220% YTD ROI. Anybody in the audience running to purchase bolivars?
https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
This is also the sign of the kind of plumbing that is baked into the US system - protect capital when things go belly up and allow labor to hit the reset button through unemployment and wage cuts. Flood the market with cheap credit and then eventually growth comes back. It’s a rehash of the financial crisis response because it’s the only sort of response the USA is configured for.