How can Wall Street be so healthy when Main Street isn’t?

By holding interest rates so low, the Fed has created a double-bind: despite the systemic risks (which are very high) people who have investable cash have two options: the stock market or paying down debt.

The stock market is being "invested" in not because it is a good investment at this point (it isn't) but because there is no where else to go. If interest rates ever revert to anything normal, it will get crushed. In the meantime this means that large, multinational companies are flush and are able to destroy smaller, more local competition. This trend is aided by the lockdowns, as well as the fact that large companies have access to the extremely low interest rates, but smaller players do not. You will continue to pay usurious rates on credit cards and most small business loans, while Global Corp. can issue corporate debt as very low rates.

Paying down debt is the opposite of what the Fed wants: in our system debt is the true money supply, so when debt is extinguished the money supply contracts. You can see this clearly in 2008:

https://fred.stlouisfed.org/series/TCMDO

Steve Keen outlines our best hope, a modern debt jubilee, here:

http://www.profstevekeen.com/modern-debt-jubilee/

It's really not that complicated. Wall Street doesn't (generally) own businesses on Main Street. Main Street is skewed towards locally owned boutiques, cafes, shops, restaurants and so on. Those are getting killed but it doesn't matter to the S&P 500 because they're not listed there. To some extent it is good for the S&P 500 as the money shifts from those locally owned businesses to the mega corps in the S&P 500.

We've gone from ~4% unemployment to 10-15%. Which sounds bad. But if you flip it around, we've gone from 96% employment to 85-90%. The vast majority of people are still employed and the economy is mostly still humming along.

Where else are you gonna put your money? Stable governments are paying ~0 or negative interest.

I'm actually asking, right now I'm just paying off debt but would be curious what people think. If I didn't have the debt I'd probably buy equities (index fund, etc.) like everoyne else.

Federal Reserve balance sheet:

https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

The simplified version is that when the Fed wants to inject money/liquidity it buys assets (exchanging new "money" for the asset) in the open market. These operations are done within the financial system. The idea is that banks next loan the money to non-financial businesses which in turn stimulates economic activity. But that last part isn't happening, the injected liquidity is remaining within the financial system where it is being used to bid up the prices of existing financial assets rather than being used to create new ones.

Personal take: A subset of "Main Street" is unhealthy not the entire country. Most things are not closed anymore and the stock market is propped up by tech stocks that saw little slow down due to COVID.

It's weird situation because I'd be willing to bet that the people who own stocks are simply not the one that have been laid off.

The price of productive assets goes up as interest rates fall, this is a simple NPV calculation.

Interest rates are low, and have been low in the developed world for a while. The reason for this has nothing to do with central bank conspiracy theories. The neutral rate of interest is determined by productivity growth, profitability of available investments, and how much capital there is that can be invested in them. The best a central bank can do is 1. be good at detecting where this equilibrium is and reacting to it, and 2. move interest rates at the margins to smooth out the business cycle.

Think of it this way. If, in the aggregate, an average business would make a real return of 3% per year, then an interest rate above 3% would discourage all but the best business ideas from being pursued. Likewise a lower rate would encourage investment in worse ideas with lower profit margins. This is one way to think about the "neutral rate of interest." It is determined by exogenous facts about the real economy.

Now, we have fewer "profitable ideas" (and lower productivity growth correspondingly), and significantly more savings due to greying populations (people who are older/will live longer require more savings) and cultural tendencies (e.g. higher savings rates in China, Germany). So the neutral rate falls, and the result of that the price of capital goods rises.

Central banks' hands are effectively forced by this situation. If policy maintained an artificially high interest rate when the neutral rate is lower, economic contraction would ensue disadvantaging all parties.

Basically, you can think of the stock market (price) driven by two components: 1) an aggregate of all company profits in the stock market and 2) the cost of borrowing capital (discount rate).

1) Corporate Profits - From what I recall, corporate profits have been flat to down over recent quarters.

2) Discount Rate - The cost of borrowing capital has been falling as governments make access to capital easier for businesses. This has a huge effect on the valuation of the stock market compared to the impact of the profits. This is why the stock market continues to go up. The issue is that if you were to make access to capital harder, thus increasing the discount rate, companies in theory wouldn't be able to borrow as much, and therefore grow as much. Thus, the market would in theory go down, probably alot.

Just from a very theoretical level, low interest rates means the net present value (NPV) of companies, ie their stock prices, are weighted more heavily to future earnings and not just this year's earnings. So if the market is pricing in some return to normalcy, even if it's a year or two out, you wouldn't expect to see much of a hit. Assuming companies can get from here to there without going bankrupt, something the government has been very explicit about helping with by providing cheap/free funds.

Edit: Plus there's FAAMG driving the S&P500 up, who for obvious reasons are doing very well right now.

Easy Congress put on bandannas and robbed the tax payers of about $18,000 each.

Congress then turned around and gave taxpayers $1,200 each, of their own money, that total amount can be doubled that to account for the temporary unemployment benefits increase. The rest of the taxpayer money went to the FED so they will guarantee the prices of shit stock...the market can't lower because as many rich CEOs and investors cash out their shit stock the FED is there to buy at these artificial prices.

Its not healthy obviously, its just another in a long line of scams on taxpayers who paid for the golden parachutes and will be left holding the bag. There is about $4.2T the FED has to buy stock at artificial prices so it will be sometime before this bubble pops.

Because the rules around running a business in the COVID-19 environment have been set such that large companies can afford to comply with them but small business can’t without losing money. So all their employees, and eventually the business owners themselves, bear the brunt of that.

TINA -- There Is No Alternative [to Wall Street]

Plus economies of scale on top of COVID killing mom & pop shops means that only large scale players can survive as Main Street offerings, e.g. the Starbucks on every block, or large chain eateries.

Remember the stock market has always been a game, it's never mirrored reality.

I'd say that the institutions that own the majority of stocks, colluded and just decided to sit tight.

"Main Street is the now, Wall Street is the future" is the main point. Yes, things are bad now but it's not permanent.

1. Stock markets are forward looking. Prices reflect expectations about the company going far into the future, not just right now. So yeah, this year and next year are going to be bad, but we expect that five years from now things will be back to normal or better and prices reflect that.

2. Companies in the S&P 500 (which is what people often mean when they talk about Wall Street/the market/etc) are by definition are big and have easy access to the capital markets. Consequently, they are the best positioned to whether the storm and seize the opportunities as they come. When things start recovering companies with money/easy access to the bond market are going to be the ones who can open new locations and capitalize on pent up demand.

3. There are a bunch of big companies that have actually done well for the last six months. The obvious ones are companies like Amazon, Netflix and Zoom, but for instance Target and Walmart have benefited from being allowed to stay open because they sell essentials while also selling everything else so they were often the only option other than Amazon.

4. When people talk about the S&P 500 recovering unbelievably fast, they often mean vs. the lows in March. Those lows were not reflective of the reality of what was happening (definitionally: nobody knew the reality of what was happening, lack of testing, etc.), but there was some concern that the actual apocalypse might have occurred... and everyday as merely bad news poured in that actually restored confidence because the news was not apocalyptic. So, the prices rose.

5. There really are a bunch of bored people buying stocks on their phone because they can't bet on sports anymore [1]. It's not clear how big an effect this is, but there really does seem to be extra retail demand for stocks.

[1] https://www.bloomberg.com/news/audio/2020-07-09/inside-the-m...

Fed invents money. It has to go somewhere. It goes into stocks. Someday it stops and so do stocks. Your grandchildren eventually pay it off somehow.

From the New York Times this morning, about the irrational stock market:

"As irrational as it might seem, here’s the way investors rationalize the bullish stock market to themselves (we’ll only find out whether they are right or wrong in the future):

1. The stock market is forward-looking: Investors are betting on what the world and the economy look like in 12 to 18 months from now, not what they look like today, tomorrow or this fall.

2. The big get bigger: Much of the stock market’s success has been the result of a run-up in value for a few big technology companies — including Apple, Amazon and Microsoft — that make up a large share of the index. And retailers like Walmart and Home Depot are growing in part because small businesses have closed, allowing the bigger companies to take even more market share.

3. Betting on a vaccine: Given the daily headlines about the potential for a vaccine, investors want to be invested in the market when the news comes that there is a genuine vaccine, on the assumption that it will send stocks even higher.

4. The only game in town: With the Federal Reserve planning to print money for the foreseeable future, investors don’t want to be in cash or bonds, which are steadily losing value. So where else can they put their money? The stock market has become a default.

5. Help from Washington: As dysfunctional as Congress has proved to be, investors are betting that Republicans and Democrats will find a way to keep plying the economy with stimulus. (Anecdotal stories suggest some Americans have even taken their $600 unemployment checks and invested them in the stock market.)

Of course, all of these rationalizations don’t take into account the possibility of a terrible second or third coronavirus wave, a delay in the discovery of a vaccine, a constitutional crisis come the election in November, runaway inflation, the prospect of higher taxes to pay for the stimulus, a more significant trade war with China, or the dozens of other risks that seem to be bubbling just below — and in some cases on — the surface.

In the meantime, happy trading!"

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#4 I hadn’t thought of, and is a VERY troubling sign I think. Cash is devaluing because of inflation. Bonds are devaluing because of a loss of hope of future repayment (they are debt instruments).

Money printer goes brrrrr.

So many ways to approach that question. One might be, look at the shape of a graph of S&P 500 over the last 4 decades or so, vs the shape of wages adjusted for inflation.

At this point, assuming one can tell you much about the other requires justification.

The bull case is that by mid-1Q we have a vaccine and the crisis is over. Government fiscal and monetary keeps the economy on life support until that happens. If you value a business bottom up and you think 2021/2022 sort of revert back to 2019 then by now in 2020 you are basing your valuations on those numbers and decreasing the equity value where necessary for businesses that took on debt to get through 2020. The Fed has said it will keep rates low for longer and overshoot 2% which is an average target not a ceiling. If your money has to go somewhere (and it does) then fixed income duration at paltry yields looks like a bad bet if we get a tick up in inflation. In an inflationary environment stocks aren't great but they will preserve purchasing power better than bonds. Sure you can play with commodities and bitcoins but are you as say a middle-aged saver with a family going to put your entire liquid net worth into gold bullion and bitcoin (of course this being Hacker News I expect a good number of "of course" responses!)

For my two cents I was embarrassingly late the the bull party and couldn't believe the rally back so fast. There will of course be a jobs recovery from the lows as the virus threat ebbs but I suspect a decent number of the jobs lost are structural and employment won't quickly rebound to sub 5%. Gun to my head I'd say high single digit unemployment could linger a while which is pretty painful. If the Federal government remains deadlocked then state and municipal austerity will multiply the economic pain.