Hacker News Reader

Comment by Someone1234 | Hacker News Reader

It starts to when you ask yourself: Where else are people meant to store money? Since interest rates and bond rates were at historical lows. So you have people who are looking at 10% YOY returns on one hand and 0.2%/2% on the other and making the rational decision.

Does this make stocks overinflated? Yes. Is it going to suddenly pop? Unlikely, since the conditions that caused it won't suddenly change (e.g. certain bonds have ticked up 1%~ but taken months).

View on HN

> Where else are people meant to store money?

Money isn't stored in other assets. It's transferred from the buyer of an asset to the seller. It doesn't cease to exist simply because you traded it for stocks (or gold or anything else). Now the seller has to deal with the consequences of holding the money you previously held. A rational trader factors in the costs of money when they price assets, therefore one doesn't avoid those costs by trading money for other assets.

This is always what I think of when I think of cryptocurrencies.

You're not parking your money somewhere, you're giving it to someone else. Every time you buy BTC someone else is getting paid. Money goes in circles.

Two economists are sitting at a bar, one pulls out a checkbook and writes a check for $100,000,000 then hands it to the other economist. The second economist looks at the check, smiles, then hands it back.

The first economist calls the bartender over and orders a bottle of champagne. The bartender asks what the celebration is about, and the economist responds, "we just grew GDP by $200 million dollars."

Sure, fraudulent transactions exist. The difficulty is figuring out how much it matters.

Right, and so the seller then has to put that money back in the market in some other asset at marginally higher prices, lest they lose money to inflation holding it in cash (or fixed-denomination assets).

This is the natural consequence of negative real interest rates. With positive rates the infinite series representing the "discounted value of all future cash flows" converges to a single dollar value. With negative rates the series diverges: the "discounted value" of future cash flows is greater than their nominal value, simply because you're losing money with competing investments. The rational value of any investment that generates positive and predictable cash flows becomes infinite.

Right now the only thing holding a lid on equity valuations is the expectation that the Fed will eventually raise rates, and so cash flows from time periods > 2023 need to be discounted at positive rates. If that doesn't happen, or if they don't raise rates by more than the inflation rate at the time, things will go boom.

> Is it going to suddenly pop? Unlikely..

This is not financial advise, but an investor myself, I'm on the other end of the spectrum. "Is it going to suddenly pop? Certainly! We just don't know when, how much and for how long. It could be june 2021, it could be 10 years after the Great Sino-Russian war of 2038".

the markets can remain irrational longer than you can remain solvent.

That isn't sudden in the usual meaning. What is meant by the question "Are you going to suddenly die?"? If a safe falls on you death will be sudden but there isn't any reason to believe you will be around falling safes historically. You may have some hidden defect. Sure you will die eventually even if you were unaging, but what is usually meant is "Do you have any known fragility like say a weak heart, high risk of stroke, or a habit of using something volatile in dosage like speedballs or carfentanil? "

Something a lot worse will happen in 2038. I'll be keeping my system programming skills up to date for sure.

The saying is that "As Long as the Music Is Playing, You've Got to Get Up and Dance." You can't -not- invest because it doesn't make sense and the valuations are insane because you could miss the dance or the encore.

Not only this, but with the near zero interest rates and perceived impending hyperinflation, people are taking out massive margin loans to bet on assets. Archegos isn’t the only one, they just happened to get caught with a dumb position. When the interest rates kick up, we’ll likely see a dual effect here(stocks react, high rates mean it’s harder to service debt for speculators and actual companies) and a 2008-like scenario except our bad bet is on stocks instead of mortgages

We get articles on HN about once a week arguing that massive inflation is coming soon. I think all of these articles are misguided. With such low interest rates, the Fed can and will raise those rates to prevent inflation.

That interest rate rise will likely pop the bubble.

Prices are on the rise throughout the economy, so I'm starting to think the inflation has arrived.

Covid has disrupted many things in the economy. That alone means some prices will go up. But it might be temporary.

And the Fed is starting to walk back their prediction that an interest rate rise before 2023 is unlikely.

> Is it going to suddenly pop? Unlikely,

I disagree.

https://www.currentmarketvaluation.com/models/buffett-indica...

Unless you mean will it pop tomorrow, then yes that is unlikely. But the chances it pops “soon” seem quite likely. And it will be very ugly. I don’t know if we have ever seen a spring coiled this tight from money printing.

https://fred.stlouisfed.org/series/M1SL

but what is a 'pop'? maybe ordinary swings in both directions due to various minor panics and manias and profit-takings that average out to a decade of nominal gains but depressed real returns?

'Pop' can also take the form of increasing inflation, making people take bigger risks for returns, leading to a bigger pop that is not coming soon. People saying this market can't sustain need to think about the inverse: what needs to happen for this market cycle to last 5-10+ years?

"The market can stay irrational longer than you can stay solvent."

2003 and 2009 style drawbacks but much worse. The SP500 has had 12 years of straight bull market, it's like an earthquake fault line that hasn't slipped in a long long time.

You don't have to choose one thing. A portfolio of two assets that are sufficiently uncorrelated can provide substantial returns over either one alone. They don't even have to be cointegrated. One of them could even have net negative returns, and it still works.

A split between equity and bonds still seems prudent, I think.

10% return investing into a company doesn't even sound as crazy as 10% return on a savings account.

Reply on news.ycombinator.com