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nkurz

https://archive.is/cmMx5

It's a decent article. Here are their 5 reasons:

1. Bets on a “V-Shaped” Recovery

2. Market Leaders Keep Rising

3. Corporate-Earnings Expectations Remain High

4. Old Habits Die Hard

5. The Fed’s Backing

Personally, I'm betting we're still headed to a bloodbath, but slowly. This quarter's earnings are expected to be terrible, so this is already priced in. But the market is expecting a recovery soon after society starts opening up again. If (when) this strong recovery doesn't happen, the bottom falls out. If the reopening is combined with a second wave of epidemic and a renewed lockdown, something akin to financial panic ensues.

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Thanks for the summary. This is a question that had piqued my curiosity. Based on past bubbles, I cynically assumed it was mostly delusion ("market can stay irrational longer than you can stay solvent").

Paul Krugman provided his own answer a few days ago in a Twitter thread:

Two lessons here. First, the Fed saved the world economy from total disaster (again). Second, the stock rebound is not a sign that everything will soon be OK. It's not telling us that the economy is great, but rather that investment opportunities other than stocks are lousy.

https://twitter.com/paulkrugman/status/1256208478282158085

This echoes @magicsmoke's explanation at the top of this thread and helped change my mind a bit. Like you, I still expect a bloodbath eventually.

Among this article's explanation, #1-3 sound like folly to me. And I'm guessing 4 & 5 can only go so far when 1/3 of the economy is out of order. It feels like a massive (long and slow) hurricane has just made landfall and there's still too much rain and wind to see how much damage has actually been done yet. But investors seem to want to pretend when the storm clears, the economy will somehow still be standing there unscathed and everyone will be able to just head back to work.

There's still a real possibility that there might actually be a full recovery - what's closing is small businesses, not megacorporations. The rich seem to do just fine even now. Even if most individual restaurants close, some will open back up, and more chains will move back in.

In every scenario I can imagine, one thing seems inevitable - most people in this world are going to get poorer and suffer more. But I'm not convinced that the economy itself will sputter; we might just be ushering in a new economy that's far more unequal.

In that case, the stocks might never go down again and people who have held off from investing are never gonna get back in.

Megacaps don't just print money out of thin air. If you have a faltering middle class, who's gonna be there to spend money? Unless you institute some kind of universal basic income, I don't see people's buying power staying the same. Remember, 70% of the economy is driven by people buying shit.

I think we're going to see just how small the mom and pop sector of the economy is.

There was a survey that went out that said 80% of small businesses can't afford more than 3 months under the current economic climate. If that's true, does that mean we will see all small business evaporate before the end of 2020?

> Unless you institute some kind of universal basic income

More than 100% of pre-crisis income for the service industry is being financed through the expanded unemployment and small business grant programs.

> More than 100% of pre-crisis income for the service industry is being financed through the expanded unemployment and small business grant programs.

Do you have any sources for that claim?

Sounds like you’re in the minority, but I think you’re right. Mega caps are built on the foundation of a broad consumer base that has been eroded faster than at any other time in history. Even those who seem insulated will feel the effects when their mega cap customers begin cutting costs because of their exposure to the consumer markets.

Doesn't this depend on the company? Demand for agriculture, petroleum, and financial services (among many other things) are fairly inelastic. People are going to consume all of that stuff regardless of how financially well-off they are.

Demand for agriculture is inelastic, but I don't think the same of petroleum or financial services.

Without travel, demand for petroleum has dropped significantly, to the point it was below 0 for a short time.

Financial services can come to a screeching halt as well if people stop buying on credit or taking loans out on housing and cars. Maybe I'm being short-sighted in only considering the consumer aspect here.

What's the last 30%?

My guess is government and corporate spending.

GDP = Consumption + Investment + Government spending + Net exports [0]

The investment component is dependent on companies' expectations about consumption (or other companies' investment, or government spending) in the future, and obviously the net export component depends on consumption in other countries. So in that sense the ~70% [1] due to direct consumption understates the true importance of consumer spending to GDP.

[0] https://en.wikipedia.org/wiki/Gross_domestic_product#Compone...

[1] https://fred.stlouisfed.org/series/DPCERE1Q156NBEA

UBI doesn't produce goods, though. You still need companies (open and) employing people to make the goods that people buy. Both need to be present.

UBI doesn't stop people working. It just stops them starving if they don't/can't work. It allows them to re-skill without risking ending up on the street. It provides a safe path out of poverty traps.

People will always get bored and people will always want nicer things, so they'll always eventually be motivated to go and get work to improve their lot. UBI won't change that. In fact, it will facilitate it.

UBI doesn’t do that. Unless tied to something like land-value tax, UBI just raises rent cost. Of course it doesn’t happen immediately, but within a year or so UBI will be consumed by rent cost.

Shouldn't the free market take care of that? Rental costs in a given area are driven by supply of, and demand for, rental housing in the area.

Housing is generally supply blocked due to zoning/regulation/bureaucracy/etc. It's a severely dysfunctional market in most areas.

That's exactly why tax cuts to the rich don't make any sense to me. Give tax cuts to the middle and lower classes, they're the ones who go out and actually buy shit, which drives everything else, really.

They make perfect sense if your goal is to enrich the wealthy in the short term.

The rich people create the value so they deserve whatever they want.

I agree... Covid is actually making the world more “efficient”, in the sense people are only doing the things that really “matter”, but the problem is it’s a big shake-up and there are going to be a lot of losers to go along with the winners.

That’s why I think we REALLY need to take the opportunity to pass a real UBI. So everybody gets to enjoy the efficiency gains.

I agree with this take the most. Everyone with a decent amount of cash or a job that lets them work remote is a-ok right now. In fact, they're doing great: picking up all kinds of assets for cheap right now, stock, cars, land, you name it. People who have lost their jobs are selling all that, since they need the money. Notice who is losing and gaining value in this situation.

$megacorps arent dying, they're thriving. The economies of scale they have built are doing great right now, since all the smaller players are essentially stopped, and people still need their stuff.

I honestly believe that every recession, the economy gets a little more inequal.

The rich always do well. I am surprised we put up with billionaires and rich Senators saying we need to go back to work when they could easily pay us to stay home for a few months. Essential workers could operate on shifts to reduce transmission rates of the virus.

Even if there is a second wave, there will be a time after Corona eventually. There won't be any new players by then so the market shares will almost be unchanged.

Stock prices are discounted future profits for about 15 to 20 years. Those profits are still there when Corona is over. From that perspective, why should share prices fall by more than 5-10% for every year that Corona is locking down the economy?

*edit: If anything, the economy will prosper because Corona has forced every company into the 21th century by requiring remote work and digital workflows.

> why should share prices fall by more than 5-10% for every year that Corona is locking down the economy?

Risk adjustment.

1-Risk of death/bankruptcy for companies.

2-Risk of reduced consumer spending. This can happen because people are in financial shock, or because unemployment stays high. Perhaps some of these layoffs aren't "furloughs." Some of these businesses won't survive, like many restaurants. My expense is your revenue, but I won't spend if I don't feel "safe" physically and financially and if I don't have a job, well... On top of which, what if some part of society stops going out?

3-Risk of permanently slowed economic activity due to coronavirus spread in trading partners.

4-Risk that the vaccines don't work out and there is no "time after corona." Even if this risk is small, it is non-zero, and catastrophic.

Because someone has to buy products and services? With 40 mil unemployment numbers it will be hard to sell stuff when noone has power to buy.

Take my mother in law as example. Hard core shopoholic. Amazon and QVC packages coming in daily. Hair nails etc done weekly at salons. Now for two weeks silence. She lost her job and empty bank account hit her like reality check. Shes on her way to a friend - they will do each other hair and nails. And when I told her it will all go back to normal on January 1st, so many people died she tells me “i am not going out anyways for very long time”

How do you know there will be a time after Corona? In all likelihood, it is here to stay like influenza and rhinovirus and other respiratory illnesses. The only way we recover the economy is by gaining herd immunity such that 25-50k yearly die, not 200k. That comes with vaccine and with wide scale exposure, which I'd wager is by 2021 summer. But even then, old folks will still die by the thousands each year due to covid 19.

At the current death rate, we're on track to reach 200k dead by early July. And that's only the deaths that are being counted. There is a substantial increase in overall mortality beyond the year to year average, beyond the confirmed Covid deaths. Considering that this disease is causing pulmonary embolisms, strokes, heart attacks, and other manifestations of out of control clotting even in healthy young people, we may realistically have already hit 200k dead in June counting the people who have died suddenly at home without being tested.

Worst case 10 years, likely well less than that and coronavirus won’t matter to humans. You see we have what’s called an inate and an adaptive immune system. The inate immune system catches coronavirus and immediately illicits a response, the adaptive immune system catches infections that the inate immune knows about. The innate immune system dies off after you are 10 or 11 and your adaptive immune system catches 90% of foreign invaders over your life.

I’m giving some background because it means kids and children today have antibodies created by the innate system that fights off novel coronavirus. Which means their adaptive system will be able to remember and fight back against this virus. This means mutations, specifically this means weaker general strains in the future akin to the cold/flu.

Let me put it this way.. RSV is a nasty respiratory illness but we as a species survive quite well along side it even if it happens to kill a few babies and old people every year

Your descriptions of the human immune system and of viral evolution are both wildly inaccurate. I don’t intend to be snarky, but nearly every sentence is factually incorrect.

Even in the unlikely scenario where resistance/immunity/vaccines for corona never develop and it never goes away, there will come a point where people consider the death toll acceptable losses and the lockdowns will be lifted. E.g. the current attitude towards car accidents and influenza deaths. (And yes, I know corona is worse than either. Eventually, should corona truly become the 'new normal', that won't matter.)

A vaccine is a near certainty.

why?

Over an infinite period of time, sure.

It's helpful to use Spanish Flu as a proxy. It was almost completely overlooked by historians, mostly due to it coming on the heels of WWI, but look at what 1921 and beyond looked like. Back to normal. That's with the same social distancing and mask-wearing measures we see today. But no vaccine.

What's clear is society now seems to be willing to let COVID run its course (and kill discriminately) as long as we keep below hospital capacity. If we allow that to happen, then we'll reach herd immunity, regardless of vaccine availability, within a couple of years.

Let's just hope it doesn't mutate.

If you would like to keep an eye on mutations, some of them are tracked here [1]

[1] - https://nextstrain.org/ncov/global

From that perspective, the stock market should have no volatility in share prices whatsoever - it should fairly value each company based on their profits over the next 15 to 20 years, and since those profits don't change, neither should the share price.

Stocks are based on expectations of future profits, i.e. psychology. "In the long run, the stock market is a weighing machine. In the short run, it's a voting machine."

Few investors' psychology will let them look at a year of bad news and still think "Oh, it's going to get better in the future." After about 3 months you start doubting yourself and wondering if maybe you were wrong in the first place, and you've entered a brave new world where people randomly die and commerce or long-term plans are impossible. All of the economic data - corporate earnings, employment, share prices, etc. - will reflect the new normal, so there's no reason (other than your memory of what the '10s were like) to believe that share prices would always go up.

> stock market should have no volatility in share prices whatsoever - it should fairly value each company based on their profits over the next 15 to 20 years

Computing this depends on estimating/forecasting/extrapolating/guessing a lot of values. E.g. what kind of revenue growth the company will have. How the structure of company expenses may change. Parameters like a discount rate make a huge difference in the estimated value. In many cases the majority of the value for a discounted cash flow valuation of a stock comes from the tail term where you give up trying to unroll the contribution for each year and make a simpler approximation of what the company will be doing 20 years+ in the future.

The computed share value has a lot of sensitivity to adjusting some of these inputs, and in many cases it is not at all obvious what values parameters should be set to.

But that's the point. Parent poster is assuming that the future profits of a company won't change over the next 15-20 years because of coronavirus. Everyone in this subthread is pointing out that that's not a valid assumption. We've already seen the discount rate drop to zero in the last couple months. Will it stay there? Will we get hyperinflation? Will we get deflation as laid-off workers lose their spending power? Will the target market of many companies end up dead? Will companies go bankrupt through lack of cash flow? Are we going to see civil unrest or a breakdown of political authority?

Many of these are permanent consequences that will absolutely effect earnings 15-20 years in the future. The market seems to be pricing in an assumption that this will be a blip: we'll reopen, businesses will rehire, and 2021 will look much like 2019. I don't believe that's likely.

I think you're nitpicking on the parent comment forgetting to add "estimated" before "future profits."

Thats the theory. In practice stock prices wildly oscillate around expected value (which is a gradual curve up and to the right), with no apparent logic. As shiller points out in irrational exuberance, stock markets do not consistently reflect expected long term returns.

No one makes the claim that short term price changes are rational. They are bets made by humans - very flawed biased humans. ... but if you can be more rational than them, then you can make a lot of money in the long term.

... but I find that most people who complain about irrational markets lack the conviction to bet against it.

Discounting is also a harsh mistress. If your model expected a 10% discount rate but actually achieves -20%, say next year, then it would need to produce 51% just to get back to baseline on the year after that. Early missed returns do hurt disproportionately unless there is an easy way to get back on track.

This is assuming a (or near) 100% efficient market. Which it definitely is not.

Analysts use different methods to discount cash flows: https://www.investopedia.com/articles/professionals/072915/d...

Finding R (what to discount by) can be difficult to do: https://www.investopedia.com/articles/investing/021015/advan...

I don't work in IB or PE so take what I put with a grain of salt, just what I've learned.

Also, you know markets aren't near efficient when people invest in $ZOOM and not $ZM and when Elon tweets $TSLA stock is too high.

You can look at daily gainers and losers and watch them over the course of the week. They are extremely volatile.

If you're talking about the S&P500 it's a little easier to do. A little over 50% of the value of S&P 500 is the top 50 companies by weight. The top 100 equate to 70% and the top 250 equate to 90%.

There's a pretty good technical illustration of how the discount rate impacts stock prices here [0].

This does provide one plausible answer to the headline question from TFA: Corporations' expected future profits are lower than they were pre-COVID, but the valuation discount rate is lower because the expected future return for assets in general is lower, so the present value of corporations' expected future profits is the same-ish as it was pre-COVID.

[0] https://johnhcochrane.blogspot.com/2018/02/stock-gyrations.h...

> a second wave of epidemic

Judging by people's behavior, and the politicization of even common sense measures like mask wearing in the US, I think this is likely. I hope I'm wrong.

It's not just likely, I worry you won't even get out of the first wave. With everyone pulling in literally 50 different directions and and no leadership from the top this might just bounce between states like the proverbial hot potato.

I feel bad for you guys watching from the north here.

Just wait until we get closer to the election. Then it's going to get absolutely bonkers.

I was already worried about what might happen with this election, but the pandemic is likely to make things worse.

My wife and I have been discussing logistics to get somewhere safer in the event of different scenarios, but at the end... it's just difficult to predict what might happen and where.

If the U.S. collapses so does the whole world. Many regions in the globe (eg. Israel & the Middle East, Eastern Europe, the East Asian archipelago) are stable because of the threat of U.S. intervention if a large regional power decides they want to dominate the region. Take away that threat and you're going to get some very quick invasions as local powers seek to take advantage of the situation. Plus the U.S. dollar is the global reserve currency, so its collapse would send financial shockwaves through many developed countries.

Better to build local relationships where you are and focus on mutual aid & defense agreements with friendly local communities. The threat model here is a breakup of the U.S, not an invasion. The threat model to an individual is much less if you're in a community where the other individuals have your back, than if you're a minority or outcast in unfriendly territory.

There are just too many "unknown unknowns" for me to really do a good job of contemplating any of it. We might end up like Venezuela, Hungary or Russia, with some of the trappings of a democracy, but not the real thing. If he loses the election and there is violence, who knows how that goes, how much of it there is, and where...

Feels weird to write all this. I'm not much one for "wild" sounding theories, but all this feels like it's coming to a head, and things may change a lot.

I'd recommend reading US political history. Specifically in the 1850 - 1920 period.

The amount of batshit antics that passed for democracy gives a healthy perspective on current events.

The Union endures.

The US has certainly endured worse in the past and came through strongly. Neither the coronavirus nor Trump are anywhere close to an existential threat for this country.

You're probably correct, but past perfomance is no guarantee of future resuls, and, more importantly, while the country may have 'come through' events like the civil war, the death toll was ghastly. All things considered, being anywhere near its path was a really bad idea.

If you're Canadian and you think you have this beat, you're wrong.

https://www.endcoronavirus.org/countries

This is a naive way to interpret the situation -- it doesn't even account for testing rate or death rate.

What's naive is to complacently and condescendingly assume that Canada is handling this any better. It doesn't look that way from my province.

There was no condescending.

I'm out west where we got luckier and maybe also managed it better. But Canada had the advantage of strong leadership at this time and only ten provinces that are mostly on the same page.

I think the second dip is coming (the first being in March). With the flu season and covid19 resurgence and the market is going to realize those unemployment rate means a lot of people aren't going to buy stuff.

This is the alarm that keeps going off for me from getting too optimistic. If it's accurate that 78% of the U.S. was already living paycheck to paycheck [1] and many haven't made a dime in two months, it doesn't matter if there's pent up demand for things. There's just no money to buy them.

[1] https://www.cnbc.com/2019/01/09/shutdown-highlights-that-4-i...

This often mis-repeated paycheck to paycheck statistic needs to die.

Do you even read your sources fully?

> 51 percent of those making less than $50,000 usually or always live paycheck to paycheck to make ends meet

This is from the lowest income bracket in the 2017 survey.

It tells us 0 about how many are in the "usually" category.

It tells us 0 on does this account for investments or not.

What's the alternative statistic?

My $0.02, we're going to see bifurcation that the market hasn't fully priced in. Not a good time to be in broad ETFs.

Highly likely: Coronavirus is going to be circulating until the end of 2021 (based on transmissibility & vaccine timeline). We'll have better therapeutics to blunt the symptoms.

But steps required to (intermittently) re-suppress transmission (NYC is ~20% exposed? So at minimum 1-2 more spike repeats) are going to continue to harm the economy over that period.

There is no version of social distancing or lockdown that permits normal brick and mortar economic activity (and therefore normal employment levels).

And there is nothing shy of those that dent infection spread once it gets going in an urban center.

50/50: Government stimulus cannot replace normal market demand over that period (i.e. "V-shaped recovery").

Firms and industries that can adapt (curbside pickup, work from home, pivot to online delivery) and are deemed essential do fine by cannibalizing their peers.

Eventually, the demand destruction will hit the markets. You can't sell product to people who are unemployed and have no disposable income.

Consequently, adaptive companies are going to survive & maybe thrive. Everyone else looks pretty economically grim under likely scenarios.

One interesting possibility is that the people most likely to get infected (different from most vulnerable if infected) are going to get infected this first round.

What that potentially means is that they will act as effectively a fire-break for the broader population.

Basically a burning of the highest throughput avenues for mass spread.

If true, that would mean we get lots of localized outbreaks, but the probability of that spreading back out into an uncontrolled pandemic is much lower.

Very insightful, hadn't considered that!

I'm not sure how effective this 'firebreak' will be in practice but it will certainly slow the spread to some degree.

There are recent research papers supporting that theory, and lowering the threshold for herd immunity much lower to 30-40%

If that is the case then places like NYC are probably pretty close.

Any links?

https://arxiv.org/abs/2005.03085 - The disease-induced herd immunity level for Covid-19 is substantially lower than the classical herd immunity level

https://www.medrxiv.org/content/10.1101/2020.04.27.20081893v... - Individual variation in susceptibility or exposure to SARS-CoV-2 lowers the herd immunity threshold

This effect will be amplified if the initial vaccinations are given (as they should be) to the potential superspreaders, like healthcare workers and essential manual laborers.

If the Fed starts buying stocks, much like how the Bank of Japan has been doing for doing 7 years, asset prices could remain high.

One nearly certain continuation is cheap (low interest) debt. Cheap debt allows for further stock repurchases by corporations, and the cycle continues.

Can you define what this bifurcation in ETFs look like? I can’t grasp how this situation will crumble the ETF market- aren’t ETFs in theory safer than stocks?

Happy to be corrected, but I believe it would be more accurate to say that ETFs are less volatile than stocks.

They accomplish this by bundling together like stocks, such that each's individual volatility balances out others.

This essentially allows you to buy "oil stocks" or "retail stocks" or "all large-cap US companies."

However, what goes into those buckets are any companies that meet the criteria. Hence why ETF fees are lower than actively managed mutual funds.

The downside is that you own all the companies in that bucket. If half of those companies can coronavirus-adapt and the other half cannot, is that the bucket you want to be holding?

No. I want to hold the "will survive in the future" bucket. Can you sell me that ETF?

Great comment. Coming out of this will take until vaccine (1-2 years) unless this turns out to be less severe than we think and people will just ignore it.

Recovery will be highly company specific and overall reduced consumer spending will hurt even those companies who can operate under social distancing.

>no version of social distancing or lockdown that permits normal brick and mortar economic activity

I happen to agree, which is why I struggle to explain the last few week's stock price gains for companies that can hardly adapt e.g. DRI, SIX. Sit-down restaurants and theme parks.

Well, what else to do with your money?

It is called asset price inflation. Most assets will devalue at some point but, in the broader range, won't go to zero.

This is not clear for FIAT money.

Yep, this rally seems like an extended Bull Trap. Surprised slow bleed hasn't started yet. Falling knives may likely happen on vaccine bad news and subsequent waves with further bleed outs.

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