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Comment by brettproctor | Hacker News Reader

To me, I think the most critical thing to make note of is the extreme focus on what the fed and other central banks are going to do.

The fact that most people (rightly) assume that fed action is the most significant factor for the market should really give people pause.

Lastly, people should really consider what happens when fed action is no longer enough, and what happens then.

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Why would anyone believe in a bunch of bureaucrats in the first place is beyond me.

They showed tremendous incompetence in letting the crisis happen (laughable oversight, too low rates).

This whole meme "the FED will bail us out" has to die before it dies naturally of fatal failure. The real economy is the real economy, not a bunch of econ PhDs wondering why the Phillips curve is not working any more. But we all know it'll take a fatal failure to remove it from people's minds.

Seriously, just think about it - you're trusting a bunch of bureaucrats that know no better than to follow what the bond market thinks (https://www.cmegroup.com/trading/interest-rates/countdown-to...). The blind leading the visually impaired.

And yes, as of Friday (last closing) the bond market tells the FED very clearly to cut the fed funds twice, already on the next meeting (Mar 18, 2020). Since Dec 2018 when Jerome Powell was humiliated by the markets and also somewhat by the President he dares not to do anything else than what the markets tell him to do, so very good chance for 2 cuts.

(To be clear, I personally don't think the fed will be able to get themselves out of this one. I'm just stating most market participants think they can.)

I certainly agree w/ you that it will take a fatal failure to kill this meme, and I think that failure might be coming up.

>too low rates

Define "too low". The world is awash in capital, no one is going to borrow from you at 5%+. Or are you one of those "we should raise rates so we can lower them later" people?

>you're trusting a bunch of bureaucrats that know no better than to follow what the bond market

The Fed are confined to monetary mechanisms. The rest falls on politicians. But the powers-that-be seem to have decided that they will not allow us to have a deflationary bust again, so they are going to print money and deal with the inflationary consequences down the road.

> Define "too low". The world is awash in capital.

You defined it in the next sentence. Capital should be the judge of prospectuses - i.e. of ideas to implement in the real world. When there's too much capital there's no judge (i.e. it's not really capitalism any more).

All bubbles are a consequence of too much money and too much credit/faith in something.

If the Fed is already often failing to achieve their target inflation rate, wouldn't raising interest rates cause them to undershoot it even further and lower investment / set off a recession?

I think their point is that while it's arguable that rates are too low, congress needs to change fiscal policy for them to be able to raise rates, so it's unfair for the Fed to get all the blame here. They're using the policy tool they have to execute their mandate and the other (maybe better) policy tools are out of their hands.

Correct. These are fiscal policy problems, not monetary. The Fed is helpless with the tools they have while Congress needs to act.

> The world is awash in capital, no one is going to borrow from you at 5%+.

https://www.valuepenguin.com/mortgages/historical-mortgage-r...

> Continued hikes in the fed funds rate pushed 30-year fixed mortgage rates to an all-time high of 18.63% in 1981.

Exactly, Paul Volker is the last Fed president that actually implemented a policy (of killing inflation), rather than just respond to what the market tells him to do.

He is remembered as a hero. Ray Dalio did an interview with Volker not long before Volker passed away:

https://youtu.be/mMN17uBzCw4

It's not about abstract belief in a bunch of bureaucrats, it's about waiting on the very, very large flows of money that these bureaucrats might open or redirect. The investors' pockets don't care if the dollars in them were created by the real economy or the fed.

This is the type of groupthink that gets one in trouble. I'd rather base my decisions on real world business performance.

All short-term market fluctuations are more based on groupthink than on real world business performance. Even when there's a fundamental, strong, unavoidable real world business reason for the price to move significantly, the timing of that price movement will be determined mostly by the groupthink and not the real world business reasons (the classic "the market can stay irrational longer than you can stay solvent").

So if your decisions are of the type "what should I buy and hold in the long term" then definitely real world business performance is key as that will determine where that price will be in a couple years. But if you're not going to hold the same position for long and are trading on markets, well, groupthink is a very, very influential factor that determines the price you're going to get today or tomorrow.

Totally agree. And I do think short term trading gets people in trouble :). At least the vast majority of people. Not everyone is cut out to be a top notch speculator like Soros.

Yeah. Fed was able to intervene in 2008 because it was a financial crisis. This is a physical event that will affect the real economy. You can print all the money in the world, it won't make people go to the restaurant or buy a car.

Agreed. I've also appreciated the quote of "Last time I checked the fed can't print a vaccine"

The Fed also has substantially less wiggle room now. Interest rates are already very low, especially for boom times.

Last time they dropped it from 5.25% to 0, and still had to print ~$3.7T. With only 1.5% to cut and GDP 50% larger than it was back then, how much QE will they attempt this round?

In 2008+ when they “printed money” via “Quantitative Easing”, they would buy bonds off the market. This puts printed money in the hands of bond holders. Presumably bond holders are very rich. Presumably very rich people already have a good enough car and already frequent restaurants. Now if the Fed printed money and put it in the hands of the middle class, not just the hands of the upper class, I’d bet you new cars would be bought and restaurants would be dined.

What you're describing is called "helicopter money". It was just tried in Hong Kong, with unimpressive results.

https://www.zerohedge.com/economics/hong-kong-embraces-helic...

https://ftalphaville.ft.com/2020/02/26/1582705518000/Helicop...

The article is dated Feb 25, and mentions that the disbursement has yet to occur, so we don't have any data on the success of the measure, or do I have this wrong?

Australia had a similar thing during the gfc and they managed to dodge a recession.

> Presumably bond holders are very rich.

I'm not sure that's a safe assumption. These bonds could be held by pension funds etc...

If I am a blue-collar worker nearing retirement, and I find out my pension plan just imploded, it's definitely going to impact my spending negatively.

87% of Americans do not have pensions. [1]

The median savings for American families whose wage earners are between 56 and 61, is $17,000. [1]

34% of American adults have zero savings (retirement + non-retirement). [1]

Anecdotally, I had a Grandpa with a $60k/yr pension and he was definitely upper class.

[1] https://www.cnbc.com/2017/06/13/heres-how-many-americans-hav...

Those statistics are crazy. I'm not sure how the world still functions.

> 87% of Americans do not have pensions.

By “pensions” do you mean defined benefit plans only?

See above citation around where it says 13% of Americans have a pension. Feel free to counter with a separate citation.

If you follow the link in the (misleading, in my opinion) “Given that less than 13 percent of Americans have pensions” quote, it says that

“In 1980, more than 148,000 DB plans covered 30 million active workers (38% of the workforce), but by 2008 just over 48,000 DB plans covered 18.9 million American active workers (13% of the workforce). Over the same period, the number of DC plans increased from 340,850 to 669,156 with an increase in active workers covered from 14 million (14% of the workforce) in 1980 to more than 67 million (46% of the workforce) in 2008.”

“[...] restaurants would be dined.”

Kind of ignoring the root cause of this market sell-off.

Years ago in Canada, one province decided to mail $500 cheques to every adult in the province as an economic stimulus after they had an oil and gas surplus. Apparently it helped a lot

And it wasn’t just middle class, but lower too...

Australia did this in 2008, part of the reason we avoided a recession. Parts of China have started doing the same for coronavirus.

Alaska's been doing this since the 1980s.

https://en.wikipedia.org/wiki/Alaska_Permanent_Fund

I prefer Norway's approach of saving (to the tune of nearly $200k per citizen!) for a rainy day.

https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Nor...

I think you're misrepresenting QE. The Bonds the fed bought eventually expire, the money they used to buy the bonds gets repaid to the fed. It's not like they gave the value of the bonds to "very rich people" and said "here buy another yacht on us".

Yes, the original bonds expired, but the Fed has actually resumed buying short-term treasury bonds since Sept 2019. This has offset long-term maturities (e.g., 10Y) rolling off and actually has resulted a net expansion in their balance sheet: https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

From what I've been reading, it's looking like the most obvious immediate impact is a supply-side crunch, not demand-side.

Things are not getting made/made at normal rates, and that's starting to ripple up through supply chains.

Can't buy the car stuck on an assembly line because the widget plant for some key piece is only fulfilling 1/3rd of orders.

https://www.nytimes.com/2020/02/29/upshot/coronavirus-recess...

And for that, you're still right that there's no financial intervention to fix it.

Exactly. I had to buy a new washer and dryer today, and any brands from that side of the world are weeks away from delivery right now.

My hypothesis has been a supply crunch simultaneous with a demand crunch. We are seeing substantially altered consumer behavior in China. If they are drastic, these events can make lasting changes in people’s willingness to spend money.

If you spend months inside, avoiding gatherings, worrying about your health and that of loved ones, not going to restaurants, postponing discretionary purchases do you immediately snap back to pre crisis levels once it’s over?

What’s the economic activity in locked down areas of Italy right now?

What is the possibility that US escapes unscathed given clown car response at the federal level?

There will be substantial demand side effects as well. People that live in times of uncertainty stay liquid as much as they can. So if they can put off some major purchase that is more likely to happen now than before.

Printing money is just as vital. A financial crisis is when suddenly money isn't accessible, so the economy needs more to keep up with normal demand. A non-financial crisis in the "real" world needs corresponding action in the real world, which means we need to borrow from the future - people need to be assured they will be paid back for what they are doing now. So more money is needed to correspond to the increased activity. It's not the same, but similar.

If you had any sort of disruption in your personal life, you didn't have income coming in or whatever, wouldn't a large loan be really helpful if you didn't have enough savings? It doesn't matter if it's a "real" problem, or just some senseless legal thing.

I think the fed realizes that they can only do so much in a situation like this. Adjusting interest rates is a very crude lever, and it won't really have much of an impact on something like a sudden unemployment spike due to supply chain disruptions and quarantine impacts (at least not in the short term). My main concern is that the White House might put pressure on the Fed to take action, possibly forcing a misstep. It's possible we see a big spike in inflation due to supply constraints, and it feels like monetary stimulus could actually make the situation worse. Or, if the concerns regarding unsustainable debt levels prove true, we could dive head first into a recession, possibly pushing us into a deflationary spiral. At that point, fiscal stimulus would probably be the only real option, but the current administration seems like they would not be capable of getting that one right (more tax cuts would likely be one of the least effective forms of stimulus, and the 'tax reform' bill has left us with a lot less ammo on that front).

I guess what I am getting at, is that I am not really concerned about the Fed. I am way more concerned about the government bungling their response. They cut taxes and pressured the fed to lower interest rates when the economy was doing fine against very vocal warnings that it would be much harder to deal with a future recession. And now that we are faced with a potential recession trigger, I am not very confident they will get this one right.

What the fed do will matter little this time, I think. This crisis have been managed very badly by most Western countries, and the markets have started to price that in. I think we're 1/4-1/6 of the way down before this bottoms out. Sold all my stocks at the end of January.

> 1/4-1/6

We're down ~10%. A 60% drop sounds extreme for how much long-term impact this could have.

i don't know.

We're going to have serious supply chain issues for the foreseeable future. A few months with decreased production is going to set things back pretty significantly. And with the possibility of 6-18 months of delays and decreased production, i can see it taking 5-7 years to fully recover from.

Somewhat counter-intuitively, but didn't Double Line (or some other firm) produce an article that the lower interest rates are, the less affect there is in lowering the rate?

One would assume that a cut from 1% to 0.5% would mean a 50% change in Interest Payments. While a 8% to a 7.5% cut would mean only a ~6% change.

In practice, it's much more complicated than that.

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