Stocks Are Recovering While the Economy Collapses

That's a funny thing to say since you can't get 10x worse than it is--we're already at 25% unemployment. Maybe you can say 2x?

> it's every major nation

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 a good distinction to make - but it's also unclear.

Will people go back on cruises in the same amounts? Will they pack a small enclosed bar or nightclub this winter?

Will companies that automate more functions today, re-hire those workers when this is over?

Some portion of those jobs may never return. It's very very hard to tell how many.

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.)

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.

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.

Misery loves company.

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.

My tinfoil hat hypothesis is that the drop in equity prices will be used as an excuse for bailing out pension funds.

> 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.

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!"

Inflation is a giveaway to people who took money and were expected to return it. It hurts people who do real work for wages.

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 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.

[1]:https://mises.org/library/essay-economic-theory-0 (part 2, chapter 6)

This is a decent answer.

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.

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.

> 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.

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.

>You're basically saying that whatever the price is, the market is right.

Op said that the markets are priced based partly on expectations of the future, I don't see any claim that those expectations are necessarily correct.

In terms of the Fed's effect: Both the Fed's immediate actions as well as expectations of future Fed actions have an effect on prices.

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.

> 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.

Markets may well be, often are, irrational.

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.

There is little meaning in the market “being right”. There is no “right” price for anything.

But it looks like the economy has already crashed and there is not so much worse to go.

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.

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.

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.

The Fed doesn’t hand out money. PPP grants, etc are administered by different departments. The FED is strictly a lender in this scenario.

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?

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.

> by robbing taxpayers and giving the money to said companies

... as loans, which had to be paid back with interest (and were).

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.