Economist Mohamed El-Erian warns about the risk of 'zombie markets' | Hacker News Reader

Economist Mohamed El-Erian warns about the risk of 'zombie markets'

cnbc.com

38 pointshhs31 comments

Unprecedented levels of stimulus around the whole world. If that isn't the precursor for some airpockets/bubbles of mispricing to emerge.. I don't know what is.

I was reading Sapiens by Yuval Harari today and he had an explanation of easy credit that i liked. You are basically betting that enough innovation and progress happens to underpin the money you've "borrowed" from the future - when that doesn't happen...the bubble bursts. I wonder what sort of progress would smooth over the extraordinary credit injection we've seen in 2020.

I think in terms of the money supply, assets haven't gone up in excess of the increase in money. so not a bubble yet. too many people skeptical of it to be a bubble.

I don't see any big progress or innovations to get velocity into money so we are going to be stagnant for some time.

give it 10-20 years then baby boomers won't be around and we can proceed with a global project against climate change and for renewables, I think that will be it.

The only progress I can think of is the amount of people that might enter the global economy at a higher tier class. More lower middle class everywhere from India to China to America to Brazil, etc). That’s the only sure fire bet (as usual).

Globally, we’re going to need more Netflix watching, IPhone buying, startup working, Starbucks drinking sneaker-heads for this to all work out.

Giving money directly to businesses (especially hedge funds and banks) is a mistake which will have terrible consequences. If we need stimulus to stave off a debt deflation spirals we should give money directly to people. It could be structured as a modern debt jubilee, as suggested by Steve Keen, or as UBI, as suggested by many including Andrew Yang.

It is more of a mistake now than in the past. In the 1930s, yeah sending checks to everyone as a form of stimulus would have been highly complex and difficult. Banks were the only society wide economic linkages at the time. That is less true today. Today you can sends cash to a large portion of people with existing infrastructure and clearly you could get near 100% with a dedicated platform/process to do so.

The argument for giving money directly to businesses is that it makes the recovery easier. Many argue that we needed to give more money directly to businesses, that it was wrong to let unemployment get so high when we could just pay businesses to keep people on.

Giving money to businesses to keep people employed is a non-starter in the US as there is no political will to ensure those businesses don't just furlough employees anyway and pocket the bonus - will for both writing effective regulations and post-hoc enforcement against businesses that skirt them.

It also directly creates zombie companies if applied to industries that can't possibly bounce back, like travel etc.

IMO the appropriate business-saving economic response would have been to statutorily suspend all rent/mortgage/loan payments denominated in USD. That's the bulk of most small businesses' fixed burn rate. Needing to service the debt black hole is our primary source of inflexibility.

Of course given that we're still "debating" whether the pandemic is even real or not, figuring out what is appropriate is purely academic. Enjoy your token $1200 while the looters loot billions.

Businesses have no incentive to keep employees on. If you want businesses to keep employees on then you offer to do exactly what the UK did https://www.bbc.com/news/business-51982005

This is not at all what the USA is doing. The USA is making a terrible, terrible mistake. Trickle down economics once again, and trickle down doesn't work. At least not for the bottom 9/10 of society.

> I wonder what sort of progress would smooth over the extraordinary credit injection we've seen in 2020.

A successful Mars colony, obviously :) Gaining a second planet might possibly justify this level of credit.

>> I wonder what sort of progress would smooth over the extraordinary credit injection we've seen in 2020.

> A successful Mars colony, obviously :) Gaining a second planet might possibly justify this level of credit.

I'm not so sure. From the perspective of Earth economics, a Mars colony may be no different from a massive, useless boondoggle. The colony would obviously consume massive amounts of Earth resources, but what products and services would it provide Earth in return and is the production of those things on Mars economically justifiable?

One way to rephrase your question would be to take a look at the sum total of commodities markets, specifically the subset that includes natural resources (specifically precious metals) mineable on mars. How much of that market is bottlenecked by supply?

You can apply this approach to more complex commodities to theorize about the upper limits, but I think this is a good way to get started.

> specifically the subset that includes natural resources (specifically precious metals) mineable on mars. How much of that market is bottlenecked by supply?

IIRC, mining on Mars for export to Earth doesn't make much sense vs mining on an asteroid, since you're paying for transport through an extra gravity well.

Space porn.

I'm reminded of A Canticle for Leibowitz: space colonies were built for nationalistic reasons, and none of the promised economic benefits to their founder nations ever materialized. The only good they did was act as a lifeboat for humanity after the people on Earth destroyed themselves in a second nuclear holocaust.

Why do you think Bezos and Musk want to be in control of the first colonies?!

They want the first seats outta here when we fuck up big!

“We’re not there yet, but we’re starting to get close.”

I'd say we're clearly already there yet. How can stock markets possibly be rallying with half the world economy closed? Of course it's due to government zombie money. There's already a disconnect between real value creation and valuation (even more than usual).

The extent of the closures was always overstated in popular accounts - you say "half", and people often talk as though it was even more, but the highest concrete estimate I've seen is 30%. And in most places the closures have ended.

No doubt, but even so, the markets are barely even down. How so?

I think "barely even down" is a good reflection of the likely impact to the companies that comprise market indexes. In almost all places economic activity has mostly resumed; fears that nobody would be willing to do anything until the virus was gone have largely been disconfirmed. There will certainly continue to be human and economic costs of the coronavirus, but the costs seem unlikely to affect the financial situations of most companies.

Sorry I don't agree.

Not only have whole sectors such as travel, entertainment, retail been directly affected (ie closed), it seems they will continue to be affected by the changes (investments/costs) they need to make to comply with the post-covid world.

The markets have remained levitated by govt. stimulus - the Cantillon effect.

Counterintuitively I can see a case for the rally because things are closed. People are spending less in addition to fed easing and face uncertainty on a personal level while knowing the marker will eventually recover. Better to keep your stock in Tesla than to buy a Tesla right now essentially. With little worth withdrawing their investments for there is less "sell pressure" which helps keep values up.

Ironically this implied an improvement in the general economy could crash values if a demand boom causes more volume of selling demand than buying demand.

Because the government is printing a ton of money, but those companies' value is not changing. That's one component of stock prices: a lot of companies simply have a static value (at best), like houses, but that still has them go up by inflation (the real inflation, closer to the tongue-in-cheek "big mac inflation" of ~3%, not the CPI of 0.7%)

All the money coming from the fed must be paid back, I believe. It seems like this will be difficult to repay. Usually with a loan a business would invest in capital or something similar and there is no value lost. Then there is the hope of return so they can pay off the loan. In this case, what return will people get on the money that comes in for the crisis? I think in this case it is covering lost value. That swill be tough to repay. Or is the fed anticipating losing money? Will this allow the losses to be put on the feds balance sheet rather than some other lender?

I expect the fed to get a bunch of bankruptcies preventing them from recouping a significant portion of their loans. The big conglomerates and main street businesses will pay their loans. But, the middle companies will liquidate assets into other shells or move lateral within their market while letting the debt bearing entity dissolve.

No it doesn't. The fed is the only source of dollars in existence, and it only ever loans out dollars. Therefore, if every dollar were to be paid back, how many dollars exist ?

Zero.

Since that is clearly not what people want, you're right about it never happening.

In a modern fiat money system paying back central bank loans changes the money supply. You might be confused because the US did at one point pay back all the government debt (which isn't the Fed's money, that's a separate thing), however looking a bit more closely you might notice that that did not take place in a fiat money system, but in the gold standard (for one thing the Fed didn't even exist when that happened).

Analysing yet a bit further you will quickly find out that, if you had the choice, you want to live during a time where the government debt increases, and the number economists vehemently deny is a wild guess on page 5 of every economy book out there (but really, it is a wild guess), is 2% per year, or at this point 330 billion per year.

The real US number is about 3.8% per year, and calculating it for many years might make you notice that it seems to follow big mac inflation. That's not a coincidence.

You know you're in serious zombie market territory when bankrupt companies are raising $1b on equity markets: https://www.marketwatch.com/story/hertz-seeks-bankruptcy-cou...

It's no worse than startups that went public during the dot com era. At least these bankrupt companies have some operating history and physical assets.

Dot-com paper companies that had no assets and no revenue also had no debts.

Here, we're talking about the vastly different proposition of raising equity in a company where debts outstrip assets.

I understand. If you don't like it, buy puts.

It's not going to stop a financial crisis since the system refuses to help regular people past this July in August you can easily anticipate serious problems for the banks that could easily overwhelm the entire system. Trump doesn't get that basically 80% of jobs are gone you cut off unemployment and 80% of loans go into default by August.

They'll just extend the unemployment benefits. Like I said before, it's an election year. If politicians know one thing, it's how to keep their jobs.

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