The other half of the story is low interest rates/high asset prices. A year ago federal funds rate was ~2%; today it's ~0%.
Yep! S&P 500 reaches pre-COVID level record high again recently all thanks to U.S. Fed's UNLIMITED Quantitative easing (QE) policy. The aftermath and the side effects[1] are going to be serious concerns now.
[1]: https://en.wikipedia.org/wiki/Quantitative_easing#Risks_and_...
So much of the US economic engine after WW2 up to 2000 was driven by the fact that people were having lots of kids, and the taxpayers back then were borrowing from future taxpayers. That works if you continue to have lots of kids, but now that that has slowed down, plus the increase in labor supply via women in workforce, and outsourcing to other up and coming countries, plus decrease in demand of labor due to automation, makes for a bleak future outlook for many (as opposed to a growth outlook in the decades after WW2).
This is ignoring climate change and its effects. Which can only be remediated with reduced consumption. Which would also cause a reduction in demand for labor.
I am quite tired of economic crashes, but I’ve failed to convince enough others to vote and advocate for changes. Those who do care about change are focused on matters other than economics, which I believe to be a mistake.
Even those with "some college" millennials are slightly worse off, but within 5%.
It's those with only a high school degree that have seen a significant hit.
[1]https://www.pewsocialtrends.org/essay/millennial-life-how-yo...
Unless you're an average citizen of the USA. I swear, I've never seen so many gleaming white and healthy sets of choppers as I have in the USA (particularly compared to, say the UK or Eastern Europe)
Very close to unlimited amount if it gets out of control. See e.g. Venezuela, Zimbabwe, or Russia in early 90s, among other countries.
> can’t work or earn money
They will be able to soon if they still can't. You can't keep the economy shut down forever. So it'll be shut down selectively until Nov 3 and opened completely shortly thereafter. /s
On a more serious note, having lived through hyperinflation myself, people who can work will have their salaries adjusted upward enough to keep them working (and therefore putting some semblance of food on the table), but not enough to keep up with inflation. At least that's how it worked in Russia in the 90s. In Russia, though, the situation was relieved somewhat by the availability of the almighty dollar. You could temporarily protect your rubles from hyperinflation by buying dollars, and then selling them for rubles when you need money. With dollar (and really, all currencies) collapsing, I'm not sure what people are going to do, worldwide. Seems to me that a global inflationary spiral could de-facto reduce everyone's debt obligations to each other. So whoever is owed debts of any kind would take a massive haircut. In the 90s that was the Russian Government. The beneficiaries were people now known as "oligarchs". They borrowed unimaginable amounts of money (with kickbacks to government officials of course), bought up the Soviet factories, mines, and oil production that didn't yet collapse, and then paid back with hyperinflated money, fractions of a kopeck on the ruble.
You could temporarily hold bonds, stock, etc. Many other equity classes out there with high liquidity, which can be converted to cash whenever you like.
Don't get me wrong, I think Venezuela-style hyperinflation is unlikely (unless we get a communist government or something in which case hyperinflation will be the least of our problems, and the economy would be fucked for a hundred years). But higher than normal inflation is very, very likely indeed, and you need to start thinking in terms of what that means for you. The old things like "buying bonds" might cease to work to increase, or even maintain wealth, irrespective of yield, if this gets even remotely out of control.
Inflation to a first approximation is wage rises. "Too much money chasing too few goods" is the traditional formulaion.
Western economies have split. For the majority wages are not rising. For the affluent minority incomes are rising sharply. So we see little inflation in the goods and services bought by poor people, but steep price rises in goods bought by rich people.
The latter are mainly collectibles: stocks and bonds, real estate, artworks, gold and jewels, cryptocurrencies, etc.
We won't see Zimbabwe-style hyperinflation unless there is massive redistribution.
Wage rises are always sub-inflation during hyperinflation. Goods, by the way, and especially complex goods with long supply chains, will also become scarce in all this as inflation makes it difficult to maintain stock necessary to manufacture or distribute goods. That is, that widget you bought today might cost more than you're charging for it when you need to replenish the stock. So you raise the price accordingly, using your best guess as to how much money you will need to still turn at least some profit. And _everyone_ throughout the entire supply chain does the same thing.
You haven't lived through a hyperinflation and I have. So you'd be wise to listen right about now, and if you're wealthy, you'd be wise to also read up on hyperinflation.
It's not the kind of "managed" inflation you're used to. It is, by definition, out of control completely, and very hard to get out of.
With the current state of the economy, I'm not expecting anything better after a bust.
As someone who has another couple decades until retirement, a drop in asset prices would be great for me personally (though I'm sure it would be painful for many Baby Boomers).
For better or worse I wasn't very liquid when the stock market indexes tanked in March. Another lessons learned: invest in bonds at least a bit, not only to reduce volatility, but also because you'll have some 'dry powder' available to be able to rebalance when you equities take a hit.
Though total returns on bonds isn't too bad:
> The Nasdaq 100 ETF (QQQ) is up an astonishing 25.5% this year during a pandemic and that’s including a 29% peak-to-trough drawdown. But the long-term treasury ETF (TLT) is up 27.3%.
* https://awealthofcommonsense.com/2020/08/why-would-anyone-ow...
Edit - It seems like adjusting for whatever the fed funds rate is might provide a more accurate comparison.
> PE Ratio (TTM) 984.55
We could stand to do better about wealth inequality...
Expect more angry people electing even angrier people into important posts. There is some incredible short-termism in all this policy.
The people that applies to may be largely rich in any given instance in practice but this bit of pedantry is important as "rich" are not homogenous in their interests.
I question the validity of this hypothesis, at least in so far that it has a predominant or even major effect:
* https://www.youtube.com/watch?v=K3lP3BhvnSo&t=8m50s
The video cites an US Fed paper on the subject (see Section 3):
* https://www.federalreserve.gov/PUBS/ifdp/2014/1101/ifdp1101....
It's mostly "policy shocks" / surprises that cause changes in bond rates, which may have knock-on effects to other asset classes.
Indexes have gone up and up and hit all-time highs regularly over the decades on their own: there's no need to throw QE magic pixie dust as a cause.
Further, in the past, a much smaller percentage of the population probably had equity ownership: as pensions have given way to private retirement funds (401(k) in the US), and so you have people buying the S&P 500 in their Vanguard accounts.
On the flip side, you have a large population cohort (Baby Boomers) entering retirement age, and they want safer asset classes so are going after bonds, driving down yields. With yields getting lower, anyone who wants returns is stuck with equities.
So you have one group of people bidding up equities for growth towards retirement, and another group bidding down bonds for safety in retirement.
The announcement of the most recent round of QE is one of the "policy shocks" of the kind referred to by the 2014 Fed paper. Prior to the announcement, Apple, S&P 500, and bond funds were at 1-year lows. This month they are at all time highs.
It's just more in favor now than it was a year ago in investor sentiment
A better question would be whether the expected value of all future cash flows has doubled. Evidently, a lot of people seem to think so. (Whether these people are rational is whole another question)
It's rather than all other investments are worse, not that this one is real.
If there is a finite limit of "investable assets", then the relationship between those assets prices is not necessarily driven solely by sentiment in favor of Apple.
It could be that almost all other assets have seen their expected future cash flows fall while Apple's has slightly risen.
It could be that people's decision is not driven by future cash flows, but some other metric or feeling.
Have Tesla's expected future cash flows increased by 8.6X in the past 12 months? It's stock has gone from $220/share to $1,900/share.
That said said, if Apple bought them for accelerating their self-driving car development, the historical profit margins are irrelevant. The the valuation would still be all about the future opportunities and future cash flows. This relative to other opportunities in the market, as other commenters rightly point out.
In real dollars, or nominal dollars?
A relatively small increase in earnings might also cause outsize increase in valuation, if that increase was not expected or if it signals to the market the company is strong regardless of tumultuous market situation.