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Comment by ISL | Hacker News Reader

It is a bet on the continued support of the market by the Fed.

If you're interested in preserving purchasing power 15 years from now, would you rather hold dollars or things today?

As a value investor, all of my theses were blown out of the water by the unprecedented Fed intervention. It is an environment in which the fundamentals are uncertain. I'm standing pat and waiting for things to make sense before moving again.

The trailing (!) S&P P/E is greater than 20 right now. The Fed is supporting prices above their historical mean/median of 15. It makes zero sense, from a financial standpoint, unless the market is pricing in substantial inflation.

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>> It is a bet on the continued support of the market by the Fed.

Pretty much this. The Fed is backstopping losses. Betting against them post-2008 is a tough position to be in.

> The trailing (!) S&P P/E is greater than 20 right now. The Fed is supporting prices above their historical mean/median of 15. It makes zero sense, from a financial standpoint, unless the market is pricing in substantial inflation.

No, it's just pricing in low returns across all asset classes (to simplify, low interest rates) - assets are priced by excess returns not absolute.

There's nothing unreasonable about a P/E over historical norms if you think interest rates will continue to stay well below historical norms.

A fair point.

It is paradoxical that a sputtering economy can make equities worth more cheeseburgers, rather than fewer, but I see the logic. At some point, given the choice between a low-yielding equity and a cheeseburger, I'd rather have the cheeseburger.

Exactly. The thing people may also forget who have a long time horizon is that this is actually a bad thing. Returns are likely historically low going forward which is bad for your future retirement.

Thanks -- this is precisely why I post to HN. Other thoughtful perspectives are really valuable.

>> Returns are likely historically low going forward which is bad for your future retirement.

For sure. People are not factoring in the long-term interest rate here - they should look at the risk-free T-bill rates in the 1980s and how equities performed against them, and what we're looking at as well.

1. P/e does not mean much without context. Certainly not what the value of a company should be.

2. Fed helped and did what they are supposed to, which is good for everyone.

3. Market is forward looking and it should be, otherwise it would be dumb. In other words corona will pass, it is not the end of the world and if stocks went too deep, potential earnings from stocks within 5-10 years down the line would be huge, so anyone looking at that timeframe would be buying at discount.

High p/e does not mean things are overvalued. It means whoever buys into market estimates strong future potential. Now knowing that you can start to argue whether they are over or under estimating.

>> 2. Fed helped and did what they are supposed to, which is good for everyone.

Good for everyone. Much better for asset holders in a relative sense. Populism will continue to rise.

I felt like the biggest dolt that I didn't sell my stocks en masse a couple of weeks before the plunge, when it was already obvious C19 was going to be a big deal. I reasoned "The Fed will just inflate the currency to maintain stock prices anyway, so why would I want to go long on the dollar?"

Now a month later, my initial instincts don't seem so wrong anymore: My portfolio is doing fine... All I missed out on was a bunch of theoretical day trading gains.

(Too bad the things that really matter, like my friends that run local businesses, and everyone's mental health, haven't fared as well)

There was also biflation in the market, as many people have somewhat alluded to - tech stocks and specific sectors have exploded while others have collapsed. There has been a significant redistribution of alpha even if the total losses came in under what they expected.

"biflation" now there's a term I need to add to my vocabulary.

The canonical example are the wild changes to the CPI buckets:

https://howmuch.net/articles/price-changes-in-usa-in-past-20...

“Markets can stay irrational longer than you can stay solvent.” J.M. Keynes

It's studying for the test. It's too common to see a stock index as the stock market as the economy, buy they're all distinct things. Ideally an index _should_ represent that market, but when an economy becomes massively centrally planned by an overreaching fed, it's too easy to prop up those in the index to make the "economy" look strong. Ultimately, purchasing power, people's ability to save, liquidity of assets, etc were pretty bad before this recession. Those are the things we should actually care about - maximizing utility.

It's especially galling because the people pushing for these nigh-Stalinist levels of fed intervention and central planning (look how much support oddly favoured industries like manufacturing and coal get) are also posturing as champions of the Free Market. It's like we can't make any progress because nobody in charge is willing to argue in good faith.

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