If you're curious about how retail confidence is holding up, here's a dashboard I'm building to track discussion on the notorious WallStreetBets subreddit: https://www.quiverquant.com/wallstreetbets/
FANGMAN has lost $1.4tn in mkt cap since beginning of Sep w/#Apple quietly down 22.6% from highs, #Netflix down 18.3%, #Nvidia 17.2%, #Facebook 17.1%, #Amazon down 16.8%, #Google 15.9%, #Microsoft down 14%.
https://twitter.com/Schuldensuehner/status/13072058719073361...
Things are highly volatile right now. Frothy stocks like Tesla are moving 20% in a day both ways, which is neither normal nor desirable, CAPE at 1929 levels, 5 largest companies (all tech) were > 20% of S&P, IPOs reaching 140x earnings on first day (snowflake), fraud like We Work and Nikola constantly coming to light, companies like Softbank (of We infamy) making huge speculative bets on options. All the signs are here for a remarkable speculative bubble in tech stocks.
All this in the face of the sharpest recession on record, with worse unemployment than the great recession of the 1930s. I'm not convinced US equities will continue to provide the remarkable returns seen this year (with no basis in the real economy). Tech companies like Amazon need other tech companies to spend on AWS and consumers to buy, companies like FB/Google need other companies to spend on ads, companies like Apple/Netflix need consumers with disposable income. Everything is connected.
Everyone expects the Fed to inject as many trillions of dollars as needed to the _stock market_ to keep stock prices up. The effects on the economy are more uncertain; but we know the Fed can, has, and said they will do "whatever it takes" to ensure an "orderly market"; which is just an euphemism for "stop stocks from crashing".
TINA. There is no alternative, and if you look at long term treasury rates (YCC has not happened _yet_), people are believing interest rates will be around the 1% mark for the _next 30 years_.
When the long term risk free rate goes from 2% to 1%; stocks become worth twice as much.
You'll be left with 5-100 megacaps, carrying less real revenue than when the debasement started. Consumers, SMBs, and employees will have had their dollars eroded.
<Speculation>
IMHO the method that the Fed uses to inject currency biases towards asset classes by controlling borrowing costs. In an industrial economy, this would typically result in direct investment into new equipment, and an agricultural economy the tilling of new land. However, growth in services or tech is rarely debt-financed as there are relatively low CapEx costs and high opex loads. Given the relative maturity of the industrial and agricultural sectors, there aren't many places in the economy that can productively absorb debt-backed financing.
What we end up with is relatively static asset classes absorbing massive debt-based financing and inflating overall asset prices. Unfortunately, several of these asset prices bleed over as costs to workers who need a home, a rent for their place of business, or an education to acquire skills.
While in a healthy economy, everyone's cost is someone else's income. As long as the Central bank is applying a QE strategy, your cost is a mortgage or a rent backed by a mortgage; the "income" side of the equation is just the central bank.
Asset holders benefit from holding assets that magically increase in price.
</Speculation>
Not necessarily.
Prices are dictated by supply/demand - and different goods have different amounts of supply/demand.
As so, it's theoretically possible to continually print money into existence, and use it all to buy Tesla stock, until there are no more shares of Tesla stock left for sale.
Under such a hypothetical scenario, INFLATION would only happen in Tesla's Stock price - as all this extra money spurred DEMAND for Tesla stock and wasn't accompanied by an increase in SUPPLY of Tesla stock. However, the price of shirts would remain the same - as none of this money changed the SUPPLY/DEMAND of shirts.
As so - inflation doesn't necessarily have to happen everywhere.
Note, this is mainly why CPI is a bad indicator of inflation - as it doesn't track the inflation that is happening around us - inflation in assets like stocks / real estate. This also explains why prices of real estate in certain cities are way pricier than others, and also why the stock market can be way overvalued when the economy is doing bad.
That's not what it was supposed to do. It also wasn't supposed to be policy forever but a carefully calculated (quantitative) intervention.
I'm not even sure it's working any more to boost stock prices.
I'm honestly baffled by so many people thinking that a contractionary stance would be better?
If the money injected by the fed is not making it to consumers, then we should expect that inflation measured via some kind of consumer price index would not move.
Consumers take out loans, that's a fact. Interest rates are lower, that's also a fact. Therefore, the money is making it to consumers.
If the Fed is able to expand the monetary supply without inflation, then that is a good thing (again) and the Fed should continue doing so until inflation does move.
>If the Fed is able to expand the monetary supply without inflation, then that is a good thing
Expanding the money supply alone does not seem like the right goal. Suppose the fed decided to expand the money supply by cutting a check to the top 1%. I wouldn't expect to see any inflation in the pricing of general consumer goods since that segment of the population just isn't competing for those goods.
Maybe that needs massive investment rather than monetary policy. Certainly QE has had many other impacts, but it hasn't led to a positive change in the measure that matters - consumer price inflation.
Nope, economic growth is not the goal. Inflation targeting and unemployment targeting is the goal.
I don't see how you can claim that the levers "aren't" working if you don't know what would have occurred without the Fed action.
I'm also not sure what you're hoping to accomplish here. Yes, quantifiable claims are better than subjective ones, but "no one knows what would have happened otherwise" is just an argument that justifies literally any action.
I'm saying having a model for what you're talking about and also having empirical research about what has happened with similar interventions on the aggregate is good.
Looking at a single intervention in response to a massive calamity and saying "well that didn't work because things were bad after!" is what I'm trying to critique.
Anyone who claims that the Fed is "out of ammo" is not worth arguing with.
Until it comes time to settle. Then they’ll have to either borrow more, by raising interest rates, or literally print money.
This is wrong. The Fed will keep doing QE to prop things up for as long as long as it takes. Do you read the FOMC meeting minutes or listen to Jerome Powell talk? There wouldn’t be massive inflows to equities without the Fed put (QE).
Facebook makes more profit than some stock markets as a whole (might be an exaggeration). Tech companies did well in the crisis, adapted better than others and were generally pretty good in making even more money.
I do agree: lots of people loose in this crisis. But we are probably in fact living in times of super inflation; the EU has for the first time ever taken debt; US and China race for debt.
All you can do (I feel): is watch and be taken for a ride. The gap between rich and poor will grow, so will the gap between “fast adapters” and “the good old industries”.
It may sound harsh: but the economy in the US probably doesn’t really care about those that lost the most and were the most vulnerable.
Hitchhikers Guide to the Galaxy may be the book we all should be reading (again) these days...
[0] https://vietreader.com/business/finance/16638-why-is-vietnam...
But.... It's the one asset class where normal people are allowed to leverage themselves heavily. And you can live in it.
In practice, by and large, you have to balance towards the former, which means your financial returns tend to be lower.
Which is... a good thing?
It was what, a little over 30% drawdown, that's a crash now? I've lived through 5 crashes then, hope to live through a few more.
> with worse unemployment than the great recession of the 1930s
Great Depression, not recession, and nope. During the Great Depression the unemployment rate hit 25% and was over 15% for most of a decade, here's the graph: https://en.wikipedia.org/wiki/Great_Depression#/media/File:U....
I did say started, not finished :)
Sorry Great Depression. We're in the first few months of this recession, which may well become a depression, and crucially is happening worldwide in almost every country and slowing trade at the same time. It's certainly been a much sharper shock than the Great Depression - the US has seen unemployment rise faster:
https://www.pewresearch.org/fact-tank/2020/06/11/unemploymen...
And there has been nothing like these levels in the US since the Great Depression.
https://www.cnbc.com/2020/05/19/unemployment-today-vs-the-gr...
Since it usually takes these things several years to play out, I'm not convinced that the high water mark for unemployment has been reached yet. There are also hints that the true rate in early 2020 was more like 20% (department of labour statistics). We'll know in a few years, but this is certainly the sharpest recession on record (due to the imposed nature of it), and the only comparable is the Great Depression.
The real estate crash hasn't rippled ... yet.
Lots of younger people have moved home. High cost-of-living rental areas are going to lose those renters permanently. Once those younger people swallow their pride and move home ... there really isn't anything pulling them back.
Commercial real estate is like Wile E. Coyote running in mid-air trying not to look down. The commercial real estate has lots of empty spaces with no real prospect of refilling them ... yet they're placing those on the books by tacking them onto the end of the financing at the same level as they were when they were rented. That works great ... until the cash flow can't support anything at which point it all collapses together.
Of course, this is all going to hang together like the traders before 2008: "They're is a crash coming. If I'm right, it's almost impossible for me to diversify enough to survive because the trashing is going to be so thorough. If I'm wrong, I look like an idiot and lose money. So, I'll close my eyes and toe the company line and see if I can cash out before the devastation."
I just left a remote oriented(Major infrastructure automation startup) to work for a company in a HCOL area. Just completed the 2200 mile trek back from “home” with the pets and the family on Monday.
Anecdotal but the prospect of raising my kid in the middle of nowhere back “home” was not appealing. If I lost my remote gig I would have to take a 50% pay cut to hopefully find a job at one of a few employers locally- or pray I could get another remote gig in a very competitive job market.
Better nature, better job market and higher pay were a deciding factor. Just saying there are plenty of things that might pull a young person like myself and my partner back other than “pride.”
And I would point out that it completely ignores reality to think that it doesn't.
For better or worse in the US, a single male living with his parents at age 25 or above will generally be regarded as a "failure". You can claim otherwise, but the dating pool disagrees with you strongly.
However, I will concede that your situation (under 30 with a child but still in a place like the Bay Area) was not really what I was thinking about. That's kind of a minority for most high tech/high-COL areas which are renowned for having a highly skewed male/female ratio.
https://www.pewresearch.org/fact-tank/2020/09/04/a-majority-...
https://www.pewresearch.org/fact-tank/2020/09/04/a-majority-...
Of course, it's likely that this impact isn't going to be uniform, so that doesn't mean individual neighborhoods (or even individual cities) have no cause for concern.
It appears like quite a few. I can see into a lot of different apartments from where I live in SF and many, many more are empty. This might also be due to AirBnBs.
The real estate rental prices have fallen, but they're still pretty sticky - I predict they are going to fall more.
No, not in a world with COVID. Equities should be going down, not up.
I mean, I think the stock are overvalued, but it's not hard to see how we ended up here. I thought about rebalancing out of stocks to avoid a drop, but I'm stymied by the question: rebalance to what?
Sure, a crappy bond now is crappy, but if everyone is right about QE to prop up the stock market, they'll be worth more compared to future crappier bonds.
The value of any investment is the present value of it's future cash flows. Anything beyond that is going to end badly.
Interest rates have been low for over ten years.
Interest rates were at de facto 0% in 2015 (and still close to it for 2016) while Apple had a sub 10 PE and Microsoft was around a 15-16 PE. Now they have multiples in the mid 30s despite slow growth. The S&P 500 PE is about 40-50% higher than in 2014-2015, with a worse economic situation.
The Eurozone and Japan have had negative real rates across many years in the past without the type of stock market valuations the US is seeing now. One doesn't guarantee the other.
It's obvious this all comes apart at some point. Interest rates at 0% won't prevent that. There's nothing that stops the market from going back to 2014-2015 style valuations. Companies like Snowflake aren't going to be worth $70 billion (~140 times sales) on the backside of this insanity.
Quick, someone dig up the remains of DrKoop.com and do an IPO. Maybe they can be reincarnated as a telemedicine EV maker that sells hydrogen powered big data machine learning HTML5 supercomputer cloudlets that drift downhill via gravity, producing perpetual energy. Or maybe they can just analyze logs and lose a lot of money for a cool $10 billion valuation.
What we have going on now is primarily mania, not low interest rates. The economy in 2015 was healthier than the economy is today, multiples were nowhere near this, and rates were on the floor for many years at that point. So how about we just reset valuations back to when interest rates were close to 0% in 2015, what will that do to the market? It'll crash it big time, that's what.
It's certainly possible that valuations will remain elevated due to forever low rates. That doesn't mean the mania part of it will sustain, that is likely to be temporary. The public market mania is now so far beyond what was previously going on in the private market, companies have collectively switched modes and are rushing for the exits (Snowflake's recent public valuation was six times the private valuation they were fetching in February). WeWork in hindsight should have waited a year to try to IPO, this market would bid them up.
You can't eat stocks.
If your cost of capital is lower, your return on investment is:
(A) Higher (B) Higher (C) Higher
Which one is it, A B or C?
So the Fed can force rates to nothing so companies can get more debt to pay down their existing debt, but the point where they are actually profitable gets further and further away. Meanwhile, they get more and more vulnerable to even the slightest increase in rates.
Everyone can close their eyes and keep driving faster off this cliff for a while, but best case is we become Japan with 100 year mortgages and a market that is flat for the next 30 years because it is half owned by the government.
The real problem is the companies that hit the wall first and go bankrupt suddenly, I think Dave and Busters just announced and October is whispered to be full of incoming bankruptcies. Confidence in stocks won't hold when companies keep randomly dropping 20% in a day.
TINA doesn't consider "not losing money" is a very reasonable alternative that people will eventually realize.
In an economy with 15-20% unemployment and entire industries on the brink of destruction ( airlines/travel ) this is not a given. If the 5-10 year revenue projections of air-travel are 1/5th of the pre-covid economy, then a small change to cost of capital won't allow you to continue investing as if nothing happened. The risk inherent to Google's bottom line from long-term structural unemployment and lower ad-revenue should outweigh even a 0% cost of capital.
So if interest rates go down, the present value of those future cash flows increases and share price increases.
Basically 10 years to break even with the current share price. Not very far out of line with historical PE ratios.