We haven’t even felt the main wave of bankruptcies and disruption yet.
Credit is locking up (try getting an unsecured loan) and people aren’t paying bills. 50% of New York tenants didn’t pay rent. Every seasonal business is dead. Life looks ok for IT people working in their underwear right now, but we are heading into a very challenging time with fundamental changes in consumer behavior.
The next big thing will be underwater mortgages.
So are you making the argument that mortgage-centric stocks are going to go to zero?
It should be no surprise that Tech/NASDAQ is doing well since both individuals and companies are investing more in tech during this crisis, while industrial/travel/etc are all still down substantially.
Maybe the banks will take a larger hit, but the overall market has already priced in what you are saying.
This is important because people overbuild SFH not understanding the expenses, and people ruin their financial lives buying mobile or fake-mobile homes to put on rented land, not understanding that the land is where all the value is.
And don’t forget, property taxes are based on their value as of Jan. 1 - huge, unpayable tax bills are coming this year, too.
They’re already deep in the red financially, but there is some relief for the property owner.
In 2008 we thought that the problem was contained to the subprime housing market, and once the Fed started supporting that market people breathed a sigh of relief and there was a rally and recovery from March-May. It wasn't until first Bear Stearns and then Lehman Brothers failed that people realized we were in a crisis. These were centuries-old, multi-hundred-billion-dollars institutions. The idea that they could cease to exist was unthinkable to anyone not actively looking at their balance sheet and doing the math, which is why there was such a panic when they did cease to exist.
what possible justification is there to be worried about their FDIC-insured bank accounts? even sticking that in as an off-hand comment is spreading FUD.
As a result:
> The Emergency Economic Stabilization Act of 2008 is signed on Oct. 3, 2008. This temporarily raises the basic limit of federal deposit insurance coverage from $100,000 to $250,000 per depositor.
The limit was subsequently permanently raised. So with a limit of $250,000 there’s less reason to worry about bank accounts today. But the important point remains, what causes panic is when things that everyone assumes to be safe turn out to no longer be so safe after all.
And who cares if rich people take a haircut in a recession?
But this isn't really a risk to the broader market, because the government has already made it plain that it's going to backstop the liquidity to prevent any liquidity crisis, from buying commercial debt, to even buying equity. ...so if the gov't is the lender of last resort, then your argument doesn't make sense because.
Lehman Brothers going under is something the Fed has said it will not let happen again. Particularly in this scenario where bad debt is due to a pure externality.
...not to mention that people's bank accounts are protected by FDIC, and equity/retirement accounts are protected by a similar program.
Not that it really matters, because the banks are all much better capitalized than they were in 2008.
The real danger here is the potential for snap-back inflation (in a stagflation scenario), which I'd argue actually makes equities MORE attractive, not less - since stocks are inherently inflation protected.
So it's not a useful comparison.
Governments and central banks will certainly attempt to prevent contagion by buying assets and handing out bailout cash.
Does that fix the problem and then we go back to normal? Does it result in Weimar-style hyperinflation? Does it cause negative rates on long-term bonds?
I can only think of two historical precedents for guidance on how this might play out. First, Japan's "Lost Decade" (which was really more like 25 years). And second, the 2008 financial collapse.
Not sure either of these are directly comparable to the current predicament, though.
Stocks tend to perform chaotically during major inflationary episodes. Over the long run corporate earnings are inflation-protected. The problem is that inflation hits unevenly, depending on where relative shortages are, and some businesses can raise prices much more than other businesses can. That can make some businesses non-competitive (= insolvent) during an episode of high inflation, while also pooling profits within a small number of survivors. You often see a big consolidation of winners, great companies of the next era born, and then a lot of bankruptcies. Mainstream investors are often not very good at predicting the winners, so you get panic and malaise in the short term.
Index investors don't care about that part.
To some extent, this is already happening: the S&P 500 is down about 15%, but stocks like Amazon, Zoom, and Beyond Meat are skyrocketing.
> then the index rebalance forces index fund investors to buy in
That's not really how it works for cap weighted whole market indices. They remain cap weighted as prices change, there's no need to "buy more" of a winning stock, you already had the stock, it won, now you have more of it (in USD terms).
I told a friend about it and he looked at me like I was crazy. "The system is melting down! What makes you think the stock market is ever going to recover?"
Six years later I sold that stock for a pretty massive profit.
The stock market will always recover because people are always going to want to make money. Yes, some businesses will fall by the wayside, and yes, we don't know when it will get better, but people like making money and that fundamental truth will always keep the economy moving forward after things like this.
The fed, however, is more interested in preventing deflation and/or complete economic collapse, than it is in rewarding prudent investers.
Maybe.
SPY closed at ~$145 in June 2000
SPY closed at ~$80 in October 2002
SPY closed at ~$145 in July 2007
SPY closed at ~$75 in March 2009
SPY closed at ~$145 in December 2012
Nothing but dividends for a decade or so unless you did some clever selling high and buying low.
It's been mostly up since 2012, but there is no guarantee it is up from here in 2030.
You have to do something with your savings. “Nothing but dividends” over 10 years still beats the heck out of holding cash over that period of time, for example.
Ah ha! The MUI is being skewed by IT workers expanding their new office wardrobes: https://en.m.wikipedia.org/wiki/Men%27s_underwear_index
Now it all makes sense!
Yep. Wife works for one of the big banks. They stopped taking applications for personal lines of credit this week. Stopped taking HELOC applications a couple of weeks ago.
Literally. POTUS could wake up tomorrow and say anything and do almost anything. That rolling of the dice problem with a very serious economic disaster makes it exponentially more dangerous in this phase.
We’re probably closer to a depression that we have been since 1929, and that depression didn’t bottom out until 1932.
Also my assumption is that folks in a public forum are middle class people with retirement funds and some home equity. Gambling with your retirement or the kids college savings is dumb. If you’re sitting on a few million liquid bucks or are very young, your situation is different.
And even in the great depression GDP rebounded within 10 years and had grown substantially by 20 years.
How are people who can't afford three morgage payments going to afford a triple payment at the end?
Though to be clear, there are some lenders that implementing it as "at the end of shelter-in-place", but they're in for a hard lesson.
There is also the corner case where the mortgage matures ~now, which is unfortunate, but that's not the case for most of them.
My understanding is that the traditional reading was that the mortgages would be extended for N months, so there is no balloon payment ever; just the loan lasting a bit longer than expected.
Supply and demand. If people are moving out of Manhattan (and they are), then demand went down and the house is less valuable. If people have lost their job and can't afford mortgage and sell their home and move into a rental apartment, supply for homes increased and the house is less valuable.
"Supply and demand" is a nice platitude and economic theory but it doesn't reflect reality.
In NYC at least, almost all restaurants, bars, and retail stores absolutely depend on very high volume.
That volume is simply not coming back.
The tourists are not coming back anytime soon.
And the office workers are not all coming back ever. Many will continue to work from home and many more will work only 2-3 days a week in the office rather than 5. And many of those will pack lunch or get lunch delivered rather than go out to restaurants.
And a lot of locals are going to be very reluctant to eat in crowded restaurants where tables are 3-4 feet apart and everyone is constantly bumping into each other.
I believe there are going to be a lot of vacant stores and shops in nyc once the immediate crisis is over.
And they’re taxed accordingly. Governments are going to be facing huge revenue shortfalls, too, and they’re going to be coming after already squeezed taxpayers to make up for it.
Two things are sure: (1) Things are gonna get weirder (2) Landlords aren't going to do as well.
https://www.propublica.org/article/whistleblower-wall-street...
To pull out just one of several frightening figures from that article, just one of the commercial backed securities they analyzed appeared to have over half its properties fudged to appear more profitable.
It's hard not to imagine some pretty frightening scenarios on how this might play out over the next 12-24 mos. The far-reaching unemployment this could cause (if/when lenders start calling these loans) has significant long term implications.
i don't see any issue here as long as everybody wears their rabbies ... err .. coronavirus vaccination and immunity certifying tags/armbands/bracelets. Those can even be automatically read upon entering businesses, offices, subway, etc.
The crisis in many respects is incorrectly blamed on the virus whereis it is mostly self-inflicted by lack of coherent response and is self-prolonged and made much more severe by the failure so far to launch any real counter-pandemic measures like for example massive testing and contact tracing.
Wrt. the stocks - the government has already made it pretty clear that they are propping those pure numbers up, real economy and people be damned, at least until the elections.
I keep hearing versions of this. Such dire finality. Do you actually believe that in 1 or 2 years time bars in Times Square won't be as busy as ever? If yes I think you are radically underestimating New Yorkers.
More effective treatments, a vaccine, herd immunity, better testing and tracing, or some combination thereof could make people feel safe in crowds again.
But I do think there will be a large shift toward more "work from home" for office workers with fewer open office cube farms and more contained offices for individuals/small teams, so I would expect the lunch and afterwork crowds in Manhattan to thin out. It's not going to be fun going out to happy hour when you might get sick with a dangerous virus that could kill your parents if you visit them that weekend.
And 1-2 years is more than enough time for all of those bars in Times Square to go out of business. Someone will open new ones when a vaccine comes out, of course, but that could be a long time.
And if the schools do not reopen in the fall in the city but they do in the suburbs, a lot of families will leave. I might :(. Remote schooling has been a disaster.