How This Ends
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1. We had zero percent interest rates. This causes the value of assets with cash flows out into the future (think speculative tech, Tesla) to accelerate.
2. We had massive herding in megacap tech. These valuations are high in part because for a decade you would not have beat the index without having these names in your portfolio.
3. These valuations blew up even further because of call squeezes during the 2020-2021 bull. Tesla even managed to get itself into the S&P.
5. Then in December, the megacaps we're squeezed further until the S&P 500 had a negative return relative to price!
A lot of this occured because people remained under the impression that bond yields would never normalize. Now that they have, there is a risk free alternative to stocks.
Now for the next complications: Ukraine + Russia, economic war with China, inflation, how the fed will respond, gas prices.
If inflation continues and the fed becomes aggressive with hiking, all assets are dead. Bonds will be wrecked, stocks will be wrecked, cash is wrecked, even gold (depending on how aggressively they hike) will be dead because it's actually a really good deal to buy bonds when they yield north of 10% (if we get there).
Say the fed decides not to hike as aggressively and inflation slows, then you'll be holding the S&P 500 likely for yield than growth. In the case of a recession or further inflation, that yield may be at risk depending on the sectors you're invested in.
In this context the correction in names like Target make perfect sense. The dividend was near zero at it's price before the cut. Same thing happened in a company like Newmont mining.
This sounds incredibly short-term-oriented and alarmist. Dead is a word to describe the end of something's existence.
Market turbulence is not a novel occurrence, nor are unsustainably inflated economies driven by cheap money and speculation.
The ramifications of reaching a point like that would be devastating, so yes, I think dead is not alarmist but appropriate.
The one time in history they have gone beyond 10% it took 2 years to go from 7.32% in Sep 1977 to reach 10% in October 1979, and then peak at 15% in 1981.
It's not impossible bonds will reach 10% again. But it seems unlikely, and it seems safe to think it would take 3+ years to get there.
https://www.macrotrends.net/2016/10-year-treasury-bond-rate-...
What are the realistic values here? I have no clue, but a good analysis should cover this.
The Fed doesn't care about the cost of servicing the debt. That's the US Treasury's job. By law, the Fed has the dual mandate to keep both inflation and unemployment low. That's it. Nothing to do with the cost of servicing the Government debt.
If the interest on the Government debt becomes too high, nobody will point the finger at the Fed. If however inflation is high (like now) or unemployment high, you can start hearing people accusing the Fed of gross negligence. In the extreme, the Chairman of the Fed may be sacked, then brought in front of various Congressional investigations, and may even find himself in contempt, or some other very unpleasant situation.
Bottom line: the Fed really cares about inflation, and doesn't give a damn about debt servicing.
Say demand quiets but the price of inelastic goods (gas and food) continues to skyrocket due to greater demand from developing nations who demand more resources to have a better standard of living. How will hiking to 10% fix anything?
Sure you'll kill demand, but you'll also kill financing supply which will only exacerbates the issue over the long run. We need more drilling, more refining, more farming now that Russia is out of the picture and the Saudis are playing games.
Hiking too far is actually a horrible policy choice, and Powell can make a cogent argument about it: he already has mentioned this in hearings. You can't address supply related constraints with higher rates. At some point, they might justify capping rates to finance the needed supply, and that argument smells like the yield curve control of the 1940s. I suspect this argument will become more palatable if we have high unemployment and high inflation. [0]
I have a feeling whatever policy rate they pick will aim to be slightly sub neutral (negative real rates) as they pray inflation resolves itself, while constantly pointing out they have no control over whether Brazil has a successful wheat harvest.
[0]: https://libertystreeteconomics.newyorkfed.org/2020/04/how-th...
Granted, the rates the fed sets (and expectations of future rates) are strongly correlated to treasury debt rates, but they aren't directly linked.
It sounds from your comment like there is _nothing_ that won't be devalued, even gold. Is real estate worthwhile?
(Note: I am in the EU not US.)
The counter argument to this is that the above approach absolutely requires an iron discipline. And without experience non-professionals are prone to making very costly mistakes (e.g., invest on feelings, double down inappropriately, etc.). So, a general audience advice is usually: do not invest money you need within 5-10 years and do not make rash decisions; it is better to ride this train down and then hopefully back up than jump randomly. And diversify (across countries, economies, asset classes, etc.).
Just my 2c; not an investment advice!
The problem with inflation is that you need to protect yourself before the fact, and at this point, it's difficult to read to what extend the fed will respond with rate hikes and how much inflation we get going forward.
In my personal view, it would be stupid to hike to 10% since that will also cut off the needed supply response: this will decapitate energy, farm, and housing expansion while at the same time decimating all forms of wealth. But there is a possibility depending on how trigger happy the fed becomes.
More likely than not, they raise rates, but it stays below the rate of inflation (3-5%), so anything that yields above that range is a good investment. Anything below would be protective.
As for stocks, I'm looking at individual companies that are cheap with high cash flow that have macro tailwinds, but I'm still waiting. There are always bull markets inside of bears, but you have to look for them. Mind you, bear markets have vicious rally from time to time which fool people into getting an all clear signal. A bear markets job is to bleed everyones money dry, which is why I'd recommend people stay away until no one is interested in stocks anymore.
You need complete despair.
devaluation of everything is a consequence of unsustainable economics and the fix is not to find a convenient hidey-hole for your money but to invest time, money and attention building a future sans witless speculation, profligate consumption, public and corporate unaccountability, and consumer monoculture
You’re not going to outplay market trends, and if you’re young/middle aged then it doesn’t matter any way.
Most people cannot play the stock market well, and even those who make it their day-job often don't end up playing it well. The reality is that the stock market is just too random to game reliably.
This is the first big downturn I've been prepared to invest in, so personally I'm going to buy more than usual. I see it as stocks being on sale.
Whether real estate is worthwhile depends on your local markets. In some parts of Europe it might be. If you need a place to live, and you think the prices are reasonable (e.g. it's a market that hasn't seen crazy prices due to QE and low rates) and you can afford it then I'd definitely consider keeping in mind that it's also a long term play, not a short term one. If it's purely investment property the calculation is different.
I’ve always put most of my money into ETFs, mainly S&P500. It has served me well so far.
Just be prepared to be down with your portfolio for some time.
RE is interesting because it's both an asset as well as something you can use. So if there's general inflation, it's got both upward pressure (because it's an alternative to rent from a consumer standpoint) and downward pressure (because bonds are an alternative to RE from an investment standpoint).
I like the comment: “I think one of the problems in this discussion is that the word ‘shortage’ doesn't have a clear meaning. If gas is $6 a gallon, should we say there is a shortage of gas? If I get stuck in traffic on the way to work, can I say there is a shortage of roads? If I have to park 4 blocks away from my apartment, is there a shortage of parking?”
And a one-sided view on why your home is not an investment: https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terri...
Low-rate mortgages certainly aren't helping, but they're "not helping" in the same way that hucking an armload of kindling into an already-raging house fire is "not helping".
I'm cautiously optimistic that societal unrest from this will eventually forcibly neuter local zoning controls but short of that we're just going to keep subsidizing demand and kicking the can down the road as if people don't need places to live.
Will it work idk but if there's one thing the state is scared of it's voting boomer homeowners.
How safe do you feel that a piece of paper saying that plot of land is yours will hold up when there's a raging mob threatening politicians to do something about homelessness/housing prices/AirBnB/Asset managers holding all the properties?
The political risk in the West is at Emerging Markets levels. We've seen G7 nations de-bank their citizens extra-judicially, seize assets and remove licenses, remove freedom of movement, create an entire second-class of citizenship, lock up people for committing no crimes. This is normal. No one is protesting. The media agrees as does Hollywood.
If I had anything beyond my one property in which I reside I'd actually be pretty scared. This stuff happens in Emerging Markets all the time: the government tells anyone with more than one property to pick one to keep. All foreign property owners have their property forfeit or taxed to the point where they are forced to sell.
These actions are not out of the realm of possibility in the West any more, especially with the current leaders. There will be no tears shed for the poor landlords and property owners who can only keep their principal residence.
Are you referring to things like "key workers" (I personally hate this idea)
The truth is under capitalism everyone cannot be a Capitalist. Please, I need you to think deeply about that last sentence. It’s not as simplistic as it sounds.
Until we treat housing as a cost and not an investment none of this will end.
It's not just a mob, it's a raging mob.
Granted that they're still younger and should be in a more risk-tolerant phase of life, but what I see in Millennials, and Gen Z especially, is a culture of growth-only, with no interest in boring old investments that are intended to earn and build value over long timescales. I think at least some of this has to do with the gamification of investing; in my Dad's time, a normal person couldn't just sit at a brokerage and watch a stock ticker all day. Free trading has intensified it by removing the barriers to full-time gambling. Remember that Millennials are a much larger generation and we're just still early in the period when they're growing wealth; I wonder if what we're seeing isn't the beginning of what it will take to change the culture... or if we'll continue to see endless bubbles because the steady-as-she-goes, long term investment mentality is just disappearing in the face of permanent FOMO. Sure, it's not glamorous, it won't make you a millionaire overnight, but that's really not what investing your savings should be about.
I just had a follow-up thought to my own post (too late to edit).
Maybe part of this culture is that many of the most aggressive young growth stock investors are not investing their savings. That is, what's been inflating these bubbles is inherited wealth being directed away from responsible investments and towards speculation. Contrary to what I'm saying, I do know a few people (not just Millennials) who have blown uncomfortably large portions of their actual earned income / work savings on bad crypto investments... but I still feel like people are more careful and conservative when they're investing money they actually worked to earn.
Or they were. Maybe the whole society tips over towards hype and FOMO when it's all we see online everyday.
Treasury bond yields are 3%, inflation is 8.5%, so in real terms you are guaranteed to lose 5.5% annually if you hold bonds.
Or basically instead of risk-free gain you are holding gain-free risk.
I think people who expect we're going to go back to pre-pandemic supply chains are vastly underestimating the difficulty of bringing a complex system like the economy up from a cold start. In my experience with complex systems that are much less complex than the economy (merely a few hundred million lines of code), it can't be done. You have to incrementally build a new system and then cut over parts of old system as their replacements start to function better than the old degraded experience.
This'll likely take a decade or two. Expect it to be a good decade for startups as changing relative prices make new business models viable against soaring existing prices. It's going to be very bad for consumers and for incumbents, though.
IMHO, we will not see a recession, we already are in a recession. What we will see a depression.
https://home.treasury.gov/policy-issues/financing-the-govern...
I'd say that yes, we have a much bigger problem on our hands than the relative yield of a treasury bond.
You’re on to an important point, but your statement is inaccurate. Firstly, it’s a fall in the rate of interest that is equivalent to a rise in the present value of a future cash flow. And vice versa. Notice this has nothing to do with “high” or “low” interest rates (whatever that means, exactly), but a change in the rate of interest. Secondly, this is not related to speculative stocks. All companies with an expected future income are affected by this, ie. almost all companies in existence.
Someone just starting their career benefits from cheap assets, high rates mean down payments will probably be cheaper, stock declines don’t matter if you don’t hold stocks. High inflation means their wages relative to debts such as student loans or first mortgages will increase.
Retirees with fixed incomes might get crushed. These folks were pushed into stocks and alternatives due to low interest, declining assets remove income and high inflation reduces the real value of the income.
There are a lot of people in between who will experience churn. However given the current demographics of the US, having two groups experiencing different versions of the economy will pose political as well as economic challenges.
This has more to due to impact of inflation and less so just a function of a dividend and rates.
New all time high
> Then in December, the megacaps we're squeezed further until the S&P 500 had a negative return relative to price!
What does this mean? What is negative return relative to price?
https://ycharts.com/indicators/sp_500_monthly_return
Yours is unweighted, but return of the S&P in Dec 2021 4.36% The dividend yield about 1.37% The price ~4600.
4.36/1.37 - 4600 indeed very less than zero.
The relationship means nothing to me.
I must be getting this all wrong.
Bear markets typically have several short covering rallies of large magnitude on the way down. Use these rallies to unwind your portfolio. Use the dips to buy hard assets and stocks with high yield that can withstand inflation (honestly everyone's margins are probably screwed). Make sure you leave some portion of your portfolio to hedge. Never overstay your welcome. Risk management is key.
> it's a huge danger once a populace learns it can vote itself money. Charles Munger [1]
(This follows him saying that "inflation is how democracies die" and is followed by several historical examples)
I know several committed voters of the previous administration and an almost universal complaint of the current administration is how their _personal_ wealth is being affected. We don't [yet] have a positive sum economy: in order for someone to win, someone has to lose. In the case of the previous administration, it's future generations.
[1]: https://youtu.be/GNTczyGLdhc 3:26
It pales in comparison to the $9 trillion in QE over the past decade given to the largest banks.
Second of all, QE isn't money given to the banks. When we have a deficit, the government sells bonds to banks. "Naturally" this would drive up interest rates for businesses because unlike the government, they can't issue an infinite number of IOUs and have to compete for a limited amount of liquidity. If interest rates rise too much, businesses will be forced to shut down, especially when people spend less money during a pandemic. Quantitative easing is a tool that allows the Fed to lower interest rates purchasing by these bonds back from the banks. The more debt the government issues, the more debt the Federal Reserve needs to purchase in order to lower interest rates. Basically, the root of the problem is that Congress is incapable of balancing a budget.
[1] https://www.cityam.com/almost-a-fifth-of-all-us-dollars-were...
Shrinking the money supply is an awful idea. If money supply shrinks is decreases investment, increasing unemployment. Commerce stops (because people assume there money will be worth more in the future so they reduce spending) which increases unemployment more.
There's a reasonable debate to be bad about tax rates for wealthy people. I don't think any economist on either side of politics thinks decreasing money supply is a good idea.
Institutions such as Fed are now completely detached from their mandate and instead under bureaucratic capture devoid of any meritocracy. There is a revolving door between Fed officials and Banks/capital management firms. Bernanke, Powell, Kashkari, Yellen, Brainard - these are poster children of corrupt kleptocracy with revolving door arrangements between Fed and firms like Citadel, Goldman, Pimco. At least Bernanke had economic background. Powell doesn’t even have so. And his messaging has been super confusing with very little forward guidance which constantly confuses the market. I am not sure what qualifications even they attach to these utterly detestable individuals working for Goldman, Citadel, Pimco, and Brooking when they hire them. Oh let me guess, they work for the same people that fund our executive and legislative branch officials.
there is a risk free alternative to stocks
The value of that money depends on how scarce it is.
The government constantly raises and lowers that scarcity at will.
Sometimes the government decides to double the supply in just a few years:
https://fred.stlouisfed.org/series/BOGMBASE
So it seems highly risky to me.
The inflation for two different assets traded in the same currency are equal, so there’s not much of a comparison to be made there.
No asset is risk free. Bonds are a relatively less risky asset.
>The government constantly raises and lowers that scarcity at will.
Nope. Notes, Bills, Bonds are auctioned.
> How is holding a bond risk free? It is a promise to give you a certain amount of money at a certain time in the future.
I Bonds. They are guaranteed not to lose purchasing power and not to have a negative return. Unless the U.S. government defaults on its debt obligations. That is as close to risk free as one is going to get :-)
E.g. if supply chains were restored and suddenly there was a lot more product to purchase that would cause prices to fall.
My HCOL region is seeing a big change in the RE market as Mortgage interest rates hit >5%
Really? 2.5% bonds in a 7% inflation environment is an attractive bargain?
This part didn’t compute:
> Bonds will be wrecked […] because it's actually a really good deal to buy bonds when they yield north of 10% (if we get there).
I'm pretty sure Russia disagrees, and it remains to be seen how China and other foreign holders of US treasuries will look at US (and other foreign) bonds in the future.
I'm sorry to be that person, but what sort of effect if any might that have on crypto markets?
and to cause a dam burst it's enough for a trickle of retail investors to start doing this. and .. bam. you saw the last few weeks. (as others notice that there's less and less chance of making money they also withdraw to minimize risk)
Why? Also, isn't it in contrast with:
> it's actually a really good deal to buy bonds when they yield north of 10% (if we get there).
You even say that bonds would be a good deal
But if you actually buy that bond, and the rates keep going up, then new bonds will be an even better deal than the bond that you bought, and so to sell it you'd need to sell at a discount ("wrecked").
I feel like this misses a sense of scale. Sure, everyone loses, but some choices must be superior to others in a rising-rates environment.
Yep, I did well, and I loved to show people AMZN stock price graph, like “can you identify the dot-com crash here?”. But I believed in the company then. Big question is: should I believe in the AMZN now?
Personally, I’ve stopped using Amazon when they started to support censorship - I’ve grown up in a totalitarian country and things likes censorship are revolting to me. I never suffered after leaving Amazon using Walmart for goods delivery and B&N for books. So Amazon is not unique and irreplaceable anymore.
So, let’s ask people who continue to use Amazon - how the company is doing these days? Do you think it will go on growing?
Also, there were a lot of other companies that people believed in that didn't fare so well.
You are being very optimistic to assume your pick is the one to not only survive but thrive.
In 1998 Greenspan cut rates due to the Asian financial crisis and worries over Y2K which blew up the dot com bubble. Then they slashed rates down to nearly ZIRP and held them low which blew up the housing and finance bubbles that deflated in 2008.
None of this started in 2008.
What is different this time is the wage inflation and the unionization drives that we're seeing. The Fed is likely to hike rates much more aggressively in order to stop that from taking off.
When you talk about inflation, though, asset prices and commodities don't matter anywhere near as much as wage inflation. And wage inflation is high due to the low number of job seekers, likely a result of other factors like death and disability due to the pandemic removing workers from the workforce and boomers retiring. As a result the rate hikes are likely to be more severe and the downturn is likely to more severe.
I would be worried that this downturn looks more like a depression than a recession. Of course it may just unwind as before and as the economy pops they slash rates and do ZIRP and the rich people buy up even more of the economy and the cycle continues.
I think there's a good chance the average Millennial gets pretty decimated by the next downturn and crypto should get tested and there's a pretty good chance that the Ponzi all unwinds and goes to zero (which will destroy all the Millennials using crypto as a 401k). I'm still not sure that crypto has gone up enough so that a few billionaires couldn't rescue it and keep the game running though.
I still think we're going to see a relief rally short term though and that the downturn won't really take off until 2023/2024 when the yield curve inverts. We're not quite there yet.
We've also had prices being out of whack with fundamentals for decades, that is also nothing new. Also don't go predicting hyperinflation or raising long rates. That has been predicted for decades as well, and it never happens. The Fed raising rates is designed to cause a recession and disinflation. Long rates won't rise and long-term inflation will remain contained. We're not in the 70s and we're not going back to the 70s.
The thing to be MOST worried about is political. Since the 2008 crisis there's been a rise of people who just seem to want the system burn and where they won't bailout the system in the event of a financial crisis. That increases the chances that the economy could really lock up and institutions could fail. There are a lot more crazies in power.
At some point the cyclical game that we're in with engineered recessions, low rates, low risk premiums, cheap money, insane valuations, asset bubbles, etc has to break. I think its way too soon to call it as broken though. The commodities inflation that we're having right now is not that unprecedented (and a lot of it is ultimately transient and due to bullwhip effects) and the Fed is showing that they're going to take action to stop it. That means that we're likely to just have another recession then another long period of ZIRP and asset bubbles and crazy valuations continuing again.
>The Fed is likely to hike rates much more aggressively [...]
I agree, and they're about to start letting the balance sheet run off too, though at half the rate they accumulated.
My question for the wonks here: will it be difficult or expensive to hold rates above, even say, 5% for very long if needed? US national debt is over $30T. Assuming inflation persists and rates are raised to 5%, the approximate steady-state cost of servicing the debt is $1.5T/year, more than pre-pandemic US discretionary spending, and more than 33% of federal revenues. I asked a friend about this and they said not to worry, it takes a while for the national debt to roll over, but looking this up it seems most US debt is in instruments with a horizon of less than a few years.
also, I imagine Debt:GDP is not the most appropriate stat here but in the 1970s it was 30-35% and now we're over 120%. Some other countries are over 200%. And in a recession, by definition the denominator gets bigger. Or maybe the broader question is at what point does national debt matter?
I sort of feel the Fed is playing everyone's expectations, talking to cool things off and even name-dropping Volcker while hoping to keep interest rates more at 4% than his 20%. I'm not crying conspiracy or complaining -- if it works they could get their soft (now "soft-ish") landing.
isn't this a bit more complicated than that? for example in housing though the prices are propped up by the tech companies (and startups), which can pay all those high salaries thanks to their valuations and cashflows (which are fueled by cheap credit, eg. credit cards). but also low rates allowed people to get bigger mortgages. so in that sense the fundamentals (cashflows) are there, but things with limited supply blow the fuck up, whereas wages barely moved up in comparison, and PCE was slightly below 2% (which was the target).
> There are a lot more crazies in power.
very underappreciated risk.
> At some point the cyclical game that we're in with engineered recessions, low rates, low risk premiums, cheap money, insane valuations, asset bubbles, etc has to break.
yes, but also these valuations are so high because the expected cashflows are also high, because almost everything (not just tech) is global and the world got a LOT richer (eg China)
the risks are structural (politics, eg. wars, crazy tariffs, brexit), but the potential for solving them are too (easier migration [eg Japan], more trade harmonization [US-EU], education and healthcare reform [US])
Why? There's an easy way out of depressions / recessions.
NIRP and QE Infinity part III.
And for now, even crypto?
I think a lot of people calling for a great crash will be disappointed this time around.
What will happen to the housing market?
This will cause low supply -> high prices -> people who didn't buy are very screwed: they will face high prices together with high interest.
Leverage is much more expensive (from sub 3% mortgages, we already have 5%+ rates), which means buyers can afford less, plus significant withdrawal of “cash” buyers from the market who were really just borrowing against their (now much smaller) equity positions.
I wouldn’t want to be in a forced sale position anytime soon.
Mortgage payments set a ceiling on how high property prices can rise. However, people seem to be willing to spend more on mortgage payments than they probably should, so it’s likely that this ceiling hadn’t been reached yet.
The other factor is simple supply and demand. A large factor in 2008 was a large inventory of housing that came on the market. As far as I’m aware, there is no current corollary in the US now.
If you are living in SF, this is bad. If you are living in the middle of nowhere, this is good for you.
I'm betting more like three to five years.
I was talking to a friend (another old guy, like me, but really rich, unlike me).
We've both been through at least two recessions (big, nasty ones, with teeth and claws). We realized that there's an entire generation of folks; many running companies, that have never seen a real bear market.
It's likely they are having a shit hemorrhage, right now.
The company I used to work for, was (still is) an over 100-year-old Japanese company. They lasted through a devastating war, a depression, multiple recessions, and were still around. I'm hoping that they stay around. They've made some choices that could be disastrous (I think that sidelining my team was one ;), but not the same kind a lot of companies are making now. Lots of people are leveraged to the hilt. Bad place to be, when the economy starts tanking.
HODL is the word. Live cheaply, so you don't need to cash out in a trough. Don't rely on other people's money, keep debt way down, keep margins high, optimize processes, etc.
Old-fashioned stuff. It worked 100 years ago, and still works today.
Not everything old is bad.
If anything, this is a problem that is much less bad than it was in previous down markets.
"7% of CEOs were younger than 50 years old at the end of 2018, compared with about 16% at the end of 2009." [0]
"Data on S&P 500 companies measured over the last two decades by executive recruiter Spencer Stuart shows a small but steady increase in the age of the CEO." [1]
[0] https://www.wsj.com/articles/ceos-under-50-are-a-rare-find-i...
[1] https://www.bloomberg.com/news/articles/2021-11-30/twitter-s...
Do you have a source for small-to-mid sized businesses having a decreasing average age of CEOs?
[0] Compare the implied ranking based on revenue for https://en.wikipedia.org/wiki/List_of_largest_private_non-go... vs. https://companiesmarketcap.com/usa/largest-american-companie.... There are only 14 private companies with more revenue than Visa, the 100th-largest public co by revenue. Cargill, the largest US private co, wouldn't even break the top 20 when compared to publics.
This is true for every recession, so maybe rethink your friends logic.
Taking advantage of near zero interest cash to grow like crazy is one of those. If you don't, your competitors will. Kind of a game theory situation.
Sometimes, things don't work out for individual organisms. But in aggregate, the ones that through luck and/or foresight manage to make the in hindsight correct decisions emerge as winners.
But, to be fair, there's plenty that have.
Which is why we're so puzzled at their behavior.
If you want to be traditional a then a fighter, thief or wizard is fine too, but roll something.
This article points out a similarity between the early 80s and now. So I think it's appropriate to point out a major difference as well.
Consider this chart[1] which shows both the short term interest rate (Federal Funds rate) and long term interest rate (10-year Treasury yield) since 1962. Before rates started rising in the late 70s, the market was used to an interest rate between 5-10% (both long and short term), after which it rose to 15% (long term) and 20% (short term). Compare this with the current situation. Markets now have been used to 0% short term interest rates and 2-3% long term interest rates for over 10 years. The little blip you see to the far right of the chart is how much interest rates have risen so far (to 0.83% short term and 2.85% long term). If such a tiny blip (historically speaking) is the cause of the current correction, then it seems reasonable to expect that this is only a tiny part of a much greater correction that comes if interest rates get even close to the levels seen in the start 80s.
> live a normal peaceful life.
Being able to blindly live a normal peaceful life, if it really has even ever been possible for anyone, is the exception, not the rule.
Most time periods for most people are fraught with risk and conflict. It is the nature of being.
Ah! An optimist who believes humanity will exist 1,000 years from now!
Let's face it. The FRB cannot stop busts. The real reason for the FRB is so the federal government can inflate the currency.
I used to say what you just said, and then somebody replied to me that there is value in our time and life too, and sure they could be financially fine in 5-10-15 years but what if they had other plans in the short term? Now those life plans are disrupted. Eventually, will they be fine financially? Probably. Have they lost the one shot they had in their life to do something they really wanted? Without a doubt.
https://www.washingtonpost.com/politics/2022/05/22/biden-mon...
Supposedly, we're better at tracing now, if it really blows up we're better prepared than ever before.
Transmitted through sex.
We're safe as houses. :p
Covid came closest to impacting my life. But I got the Pfizer shot as early as I was legally able, same thing with a booster and pretty much have just gone about my life as usual for most of the pandemic while never getting Covid.
The rest of it going on - I just don’t even pay attention to it.
These last macro-events caught many people by surprised. This inflation cycle is also affecting most of the world (since import prices will factor in lots of goods).
What if the war in Europe doesn't end in this decade? The optimistic scenario is that Russia bites off some of Ukraine and we go back to a cold war, with everybody in Europe building up serious military power to keep Russian expansion at bay. There are worse outcomes.
What if global warming starts to produce mass starvation in many areas of the world? This is looking likely, and it's already started.
What if supply chain problems don't go away? It's become clear that the incentives of the free market no longer insure abundance across the board. Americans could once deride the USSR's "short-blanket economy", where stores were always out of something. Now that's the norm in America.
For the past half century, large scale trouble in the US has been mostly about the business cycle. But this time, the business cycle doesn't dominate the other problems.
Most of the current problems that we have are caused by the politicians directly, and not by covid/war/whatever, and sadly, they're the first that will have to go, if we want to return to somewhat normal future.
The current situations are caused by politicians but politicians from dozens of countries. Politicians chose to invade Ukraine. Politicians financed the making of vaccines which provided enough confidence for economies to open up again. Politicians chose China's zero covid policy. Politicians flooded the market with money which led to inflation but also prevented a collapse during covid and allowed the poorest among us to survive. Politicians do both good and cause harm. They also provide representation, without them your other options are dictatorships or anarchy.
"they're the first that will have to go, if we want to return to somewhat normal future." how are you suggesting they "go"?
This is a normal future, there is very little going on right now that has not happened a dozen times before, its just people doing people things.
If those companies start disappearing, or cutting back on ad budgets, FB/GOOG don’t have a business model anymore.
For example, if Cloudflare were to do mass layoffs, and potentially fail/go bankrupt, what would the ripple effects be on enterprises throughout the US?
But think about the chip shortage (automotive, consumer electronics) - raising interest rates does not "fix" supply and make prices lower. Think about oil & gas markets. Think about labor shortages.
When supply is broken, it's not only a monetary policy problem. Most of these things are "U-shaped" and not "V-shaped" - they will take longer to come back.
So, for instance, I think it's actually possible (not guaranteed) a substantial amount of housing will be built in the Bay Area in the next 10 years, which will decrease the willingness of people to pay $2M for a generic small house in a suburb.
This article is merely drawing similarities with past events and concludes:
> First, we need to see the economy slow down and inflation slow down. We need to see stocks bottom out and hang out there for a while. And we need to be patient. None of this is going to happen fast.
This seems reasonable. Wait and see based on variables that were important in the only comparable period in recent times.
If you do wish to do something to actively manage things, try giving Nassim Taleb books a read, or just read about his or Mark Spitznagel's investment strategy. They also keep 97% of their money in an index fund, but the other 3% are slowly wasted away buying far out-of-the-money PUT options on boring stocks that are very cheap to buy because they'll "never happen". And most of the time, they lose that money. But when COVID hits, or airplanes crash into famous buildings, or <insert next surprise here>, those little never-gonna-happen options pay for all the damage to the 97%.
Their core theory is that humanity systematically underestimates the probability of very rare events. So it's not about timing the market, it's about using this exploit in human psychology to reduce or eliminate your "risk of ruin" from very rare events.
I also weight his opinion higher than my favorite financial columnists because he’s the man in the arena, and focused on the part of the economy I care about — startups — while columnists have to think about housing prices and other stuff.
The best you can do is to build a market thesis that represents your views, try to find reasons that you are wrong to help harden / shape your views, and only then try to find others that believe the same way your thesis does to try to see how they predict.
Everyone has their own crystal ball, and everyone believes theirs is the right one. If you look at fintwit, you will see "the world is ending", "the worlds ended, we going up", and "lets wait and see". At least a few of them will get it right, to some extent or another. I dont think you can figure out at this time which is the right one.
So, best you can do is form your own thesis I think. I've formed mine. It helps me not panic when things are temporarily against me.
We have all seen those recently: "This is going to be worse that dot com", "This is nowhere near the bottom" and basically bold but unsupported predictions of that flavor.
This, however, seems like a reasonably balanced take. Tries to take cues from the historical events, which doesn't always work imo but still is _something_ to base your arguments on.
I just buy a little bit of monero, funnel money into 30+ year tax advantaged retirement savings, and work on my skills I guess
If you have a high paying job/lots of money, it doesn't matter. If you don't have a high paying job, it also doesn't matter.
Do you see why?
That leaves people people for whom it doesn't matter, but they choose to entertain themselves with horoscopes, ahem, I mean market predictions.
The takeaway here is that there are no unique circumstances at play. This is a market cycle just like any other.
History doesn't repeat but it rhymes becomes the mantra.
It was pretty spot on for the level of info it had on hand.
This feels similar.aybe I shouldn't buy that watch I've been wanting.
Like another comment said, recessions hit the ordinary folks last. But their stress is already evident. Employment numbers can turn on a dime. as can retail sales.
But real personal income is down.
https://fred.stlouisfed.org/series/RPI
We are in uncharted territory here and anyone not acting so is foolish.
The situation in 1940s, with massive post-war government debt and high inflation is a much better match to today's state than 1970s with low debt and high inflation.
In Sweden there’s a lot of political debate around this, and many are arguing that it would be better to let inflation eat the debt burden.
Good news everyone! By destroying our economy we have successfully reduced the real cost of the debt by 80%! Unfortunately, we now need to print massive piles of money to incentivize economic activity again!
Ouroboros, meet tail.
Will be interesting to see if discretionary spend continues to meaningfully drop and whether we will actually start seeing price cuts/discounts eg deflation as retailers look to reduce inventory.
It's fascinating how much attention the Federal Reserve gets when it comes to the business cycle. It's not clear what's being referenced above, but the reference to the Fed funds rate chart below suggests it's "the Fed" and company.
It's possible, though, that the Fed is irrelevant.
Have a look at a different interest rate chart: the 30-year Treasury yield (10-year chart looks similar). This is the risk-free price of money that comes due in 30 years [zoom out by clicking "max"]. Given the three-decade duration, this is about as close as one can get to answering the question: what is the economy likely to look like if the Fed didn't matter? This market is giving a peek into the relative level of growth and inflation expectation in the distant future.
https://fred.stlouisfed.org/series/DGS30
The chart peaks around 1981 and from there it's a fully-loaded train barreling down the hill without a brake and only hitting the occasional bump along the way. Through recession (grey bands) and recoveries (after the grey bands), through manias (1999-2000, 2006-2007, 2020-?) this long-term rate sets lower highs and lower lows, year after year.
During all this time, the Fed is doing its thing, pumping up the idea that it controls "the money supply" and it alone can fight inflation or get the economy out of recession.
That is, until this year. Depending on how you look at it, the top of the long-term trend line may have been broken this year, or just barely touched. In other words, this chart sits at a possible inflection point marking either the beginning of a new regeime (much higher interest rates) or reversion to the status quo (much lower and likely negative interest rates).
The point of all of this is that if the Fed were indeed the center of the financial universe, is this the kind of chart you'd expect to see? What factor(s) in the real economy are capable of producing a chart like that, independent of the Fed? Finally, what happens when/if this chart crosses the x-axis, or breaks decisively above trend?
We have hit an inflection point where interest rates are being raised as a tool to fight generational highs in inflation. This is the usual tool the central banks use in such a scenario. The resulting slowdown in markets and economy is the usual result. How smooth the slow down is to prevent overheating is always the risk they take.
What is in question is how effective this will be if a lot of the inflation was simply pent up COVID demand, supply chain constraints (China shutdowns), car makers getting caught flat footed while transitioning to EVs but unable to secure battery&chip supplies, and war induced energy price spikes. Some of these things will be resolved by demand dropping due to interest rates rising, many will not. For some things this will cause double pain - cost of money is higher and energy prices remain high due to war.
So we are probably in for 6-24 months of pain, with 12-18 months being the 90% scenario. Another question is if the clock started ticking in November when tech peaked or January when the broader market peaked.
Another question is the amount Wall St vs Main St, is this just going to be a market drawdown or a wider economic recession. So far what we've seen is GDP/unemployment have not really reflected the same bearish picture (yet).
GFC was more of a broader economic collapse story versus DotCom collapse which was more sector & market specific..
So now would be a good time to hunker down, manage your personal&company burn rates, and maybe be an opportunistic buyer or investor if you see specific opportunities.
This has been puzzling me so far. Tech hiring is hot as ever even with a few notable companies doing hiring freezes to various degrees. Can't help but feel like the market has to cool at some point.
Russia isn’t purchasing goods, yet the west is giving them wealth for oil, natural gas, wheat, etc.
That’s effectively wealth leaving the system and entering there’s.
More over, the west is increasingly looking at China as a threat AND China has locked down a large amount of economic output.
This is just starting imo and it’s not likely to improve for the time being.
In the 70s and 80s the US had a large manufacturing base and purchasers around the globe.
Today the largest exporter is China and most nations have china as their largest import. China is supporting Russia and looks like their looking to leave the western financial system. This is on a downward spiral far different than the 70s and 80s and I don’t see it reversing until the market bottoms out at its new size (much smaller than previously).
Both energy and food are scarce, and at the same time monetary inflation is running record-high, caused by monetary stimulus. To me it looks like we're entering an era of unprecedented global stagflation.
I could be totally wrong, and in general I trust the error-correction capability of humans, so take this with a big grain of salt. However, if wrong political decisions and monetary policies are used, instead of relying mostly on free markets, it will very likely make the problem worse.
This is based mostly on intuition. It's just how I feel right now. I don't have the tools to predict something like this accurately.
we know the world is now much more interdependent, interconnected and moves at a faster pace, and that this can result in massive growth, but that we are also much more fragile to shocks.
does it also mean that post-shock 'new normals' or 'next normals' may be fundamentally different than the previous state - punctuated equilibrium type models?
What happens when they can't borrow money at near-zero any more, and need to borrow more money at 5-10%?
Everyone always said the debt was nothing to worry about. It's been repeated for a long time as our debt keeps rising, but it was most apparent with the recent spending bills and virtually no pushback on trillions in unfunded spending.
A year ago or even 6 months ago I would have said this was pretty insightful if you had called it while everything was still moving up
When the rates rise, it’s no longer worth doing these marginal businesses and so growth slows down. You’re not going to borrow at 5% to make 3%.
Although we've had gains from Q4 2019 to Q4 2021, I am not sure they are significantly higher than baseline in other periods. I would be skeptical of a productivity increase due to WFH simply because of the supply crunch that in many ways hindered the ability of people to output at maximum levels.
Maybe if we are talking some specific sectors.
Eventually, the situation became clear to some people at the top but by that point it was too late to prevent a catastrophic economic crash, so when they heard about COVID19, they pressured politicians to respond aggressively with lockdowns; that way the virus could serve as a convenient scapegoat for the crash and as a justification for massive fiscal stimulus to allow the elites to quickly cash out of their investments... The elites knew that after 2008, their reputations couldn't take another beating. They couldn't let themselves take the blame again.
The unfortunate reality is that the COVID19 fiscal stimulus didn't solve any problem at all for the average person; it was purely a money-printing scheme to allow the elites to cash out by appropriating the wealth of regular citizens via the dilution of the value of their employment contracts and fiat-denominated savings.
The inflation we are experiencing now is a direct result of the elites' appropriation of public funds from the money printers.
Now we are facing some significant problems; after a decade of living in a parallel monetary universe in which irrationality, recklessness and negligence is rewarded, we have collectively lost our common sense. Our ideas about business, success, startups, finance, the economy, politics, everything is all wrong. For 10+ years, we trained ourselves to function in a totally dysfunctional environment and learned all kinds of lessons which only make sense in the context of that dysfunction.
As we head into a more contractionary monetary environment, we have to unlearn everything and re-evaluate all business relationships; we have to disregard people's past financial track records (since they are meaningless in the context of a functioning system). In fact, it seems unlikely that someone who is particularly successful in the context of a dysfunctional system would also be successful in the context of a functional system... It's a totally different skillset.
For me, cryptocurrencies and Web 3.0 are the culmination and perfect distillation of this whole era. Interested to see how they weather this storm. I heard a commercial the other day which stated along the lines "have you ever wished you could invest your retirement account in crypto? Well now you can!" That's when I knew the shark has officially been jumped.
If the value of fiat-denomiated savings is being diluted, then how exactly are elites cashing out?
What did the elites cash out to?
The more subjective aspects of the economy are hard to map - are people motivated enough to work? Do they feel invested enough in the future to work? Have they been burnt out by the yoyo cycle of work/lockdowns? Was their industry severely damaged and they pivoted to other careers?
Like there’s a massive pilot shortage. I have friends who are pilots. They were already planning on retiring by 40 (pilots get paid very handsomely here) and starting a business. They just shifted their plans forward by 5 years instead of sitting at home and doing nothing. That’s two skilled captains the airlines will have to find replacements for.
I really don’t think anyone really sat down and thought through these issues when the lockdowns were announced. You can’t expect people to go from 100 to 0 and back to 100 over two years. People are not resources that can be put to use or discarded whenever you want.
People clearly thought very hard about this. Different parts of the world came to different conclusions about it. Nobody thought that the lockdowns wouldn't cause immense amounts of economical and societal damage.
The calculation was whether they would have a worse impact than letting huge numbers of people die. And huge numbers of people died anyway!
I'd like to learn more about the economic impact of over a million deaths (in the USA). I would expect that to affect communities and industries in very complicated ways as well.
You can also look at it the other way round:
The lockdown forced companies to establish home office, something that was overdue for up to 20 years.
This can enhance the economy much more in the long run than it harmed during the last two years. Maybe the productivity gains are big enough that they outweigh the amount of artificially generated money. Then there shouldn't be much of an inflation.
As for the shortage in general: economies have to adapt. Maybe that means more robotic flown aircraft. Or train travel increases. Or people stay at home and do more virtual visits.
When you said “0 to 100 back to 0” I think that applies more to existing business models rather than how workers perceive / enjoy / want to their jobs.
https://www.barrons.com/news/biden-warns-of-potentially-cons...
> I really don’t think anyone really sat down and thought through these issues when the lockdowns were announced. You can’t expect people to go from 100 to 0 and back to 100 over two years. People are not resources that can be put to use or discarded whenever you want.
Didnt the paycheck protection program work towards this? We made a system to avoid unemployment strife and later inefficiency of rehiring everyone once it was over, by funding payrolls.
Reasonable enough to wonder, but not without the corollary question: how much damage would have been to the economy without lockdowns? Yes, there were no doubt many side effects of the lockdowns that were not anticipated. But we lost at least 1M people in the USA (significantly more if you use excess death data). Lockdowns may have prevented that from being anywhere from 2-5 times higher. If we had lost 3M people, we get close to 1% of the total population of the USA, and the impact of that on the economy seems potentially enormous.
US is mainly a services driven economy, which means people can work from anywhere. Offices and adjacent sectors will suffer irreparable damage, but the gain in productivity in other sectors will more than compensate for it. I think we will come out with a stronger and more efficient economy after this recession.
You might consider sitting down and thinking about who is making these decisions and what their backgrounds are before you pronounce that they didn't take something into account. On what basis are you making that accusation? Do you have any idea what other things went into that decision?
Perhaps they made the wrong choice. But they weren't guessing. And I don't have a lot of respect for your guess about it if you don't even know that much.
After reading this, I am comforted. Anyone predicting any particular outcome is not someone worth listening to.
Air-chair economists pontificating on what will happen to our economy over the next 12-24 months like they know with certainty what they’re talking about.
I thought this article was arguably the most rational outlook I’ve seen. It’s insane to me that a small fraction of companies have had a couple routine layoffs, the market slightly dips as it always does cyclically, and people are already running around saying the sky is falling.
but then (and in the very next sentence no less):
> I don’t know if we have hit bottom
Then I am going to invest everything. Down payment on a rental property And the rest 50% crypto / 50% S&P 500 index funds.