Comment by MuffinFlavored | Hacker News Reader

Comment by MuffinFlavored | Hacker News Reader

Inflation cooling: good for everybody. Families, businesses, etc. Does the Fed deserve credit for handling the situation "correctly" despite lots of potential criticisms both ways? Probably.

Stock market reaction to inflation cooling: a little out of touch with reality at this point, and unfortunately only continuing to go in that direction.

Slightly related:

> The concentration risk in the S&P 500 is currently higher than it was at the peak of the dot com bubble in 2000, with the top five stocks representing 23% of total market capitalisation. The combined market cap of Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN) and Nvidia (NVDA) now sits at $9.5trn, equivalent to 23% of the S&P 500's market cap. At the 2000 peak, the Microsoft, Cisco (CSCO), General Electric (GE), Walmart (WMT) and Intel (INTC) reached a combined market cap of $2.3trn, which represented 19% of the S&P 500 market cap.

> The average price to sales ratio of the big 5 today is 6.8x, even higher than the 6.2x seen at the 2000 peak.

> While earnings multiples are less extreme, with the big 5 trading at a collective PE ratio of 40x versus almost 60x for the big 5 in 2000. However, relative to the overall market the overvaluation is similar, with the big 5 today trading at a 100% premium to the S&P 500 as was the case in 2000.

https://seekingalpha.com/article/4616549-spy-concentration-r...

Don't get me wrong, I'm not a SeekingAlpha article type of person and I'm sorry for the link/slightly off-topic-ness but, man... those stats are so interesting to me. Not from a "oh my God, doomsday is here, bubble 2.0" but...

How many Americans have a 401k/IRA with Nasdaq/S&P500/Dow Jones exposure where the top 5 stocks are trading at 6.8x sales and 40x P/E? That's like... unsustainable and scary, right?

> Does the Fed deserve credit for handling the situation "correctly" despite lots of potential criticisms both ways? Probably.

Fed causes massive problem, and then eventually stops it from getting worse... Hooray?

Inflation is still twice the target rate at 4%.

Every dollar has lost about 18% of it's buying power since 2020. If you haven't received an 18% salary increase in that time, the Fed printed you into a pay cut.

More like the federal government causes massive problem and Fed comes to the rescue

Both were the problem. The Federal Reserve buying up 1.5 trillion dollars of mortgages around 2020, for example, surely contribute to housing cost inflation.

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

It was eye-opening to watch how the news reported the two prongs of stimulus.

Garden-hose of money aimed at poor people? Wailing, gnashing of teeth, pearl clutching, hand wringing.

Fire-hose of money aimed at rich people? Complete silence. On the few occasions it was reported, it was dropped like a boring but inevitable fact without any accompanying inflation rhetoric, despite the much larger dollar amounts.

That's because "Fire-hose of money aimed at rich people?" (I assume you mean QE with that) does not cause CPI inflation which is the main problem.

Firefighting tends to be a good career strategy. Everyone remembers the heroic rescue, few point fingers.

I think it's unfair to pin this on the Fed.

Most of the inflation appeared to come from a mix of massive fiscal stimulus and supply chains that got blown up by the pandemic, so large increases in demand coupled with decreased capacity to supply, driving up pricing for capacity.

Arguably increases in some asset prices could be attributed to QE, but the story doesn't really hold water for CPI ex-housing.

As an aside, I don't even think this course of events was a mistake. It was much better to have some inflation from huge stimulus but avert economic disaster, and then deal with the inflation through the relief valve of higher interest rates. There is no relief valve for total demand destruction.

While I agree that fiscal stimulus, which drove excess demand and thus shortages was the primary culprit in inflation, the Fed deserves more blame due to having the ability to unilaterally make the decision to intervene, yet choosing not to.

The bar for getting something passed in congress is much higher. Powell was also publicly requesting congress to pass a second (or was it third?) massive stimulus after the economy was already on a strong path to recovery. Since then he's declined to comment on fiscal policy, even when it was clear that fiscal policy was driving inflation.

https://rooseveltinstitute.org/2021/02/25/fed-chair-powell-m...

Some of the volatility can be blamed on the Fed; It's a major component of the money supply that is less bureaucratic than congress.

So, when Covid shutdowns hit the US, it could react (with its largest balance sheet ever), but it also could have reacted to valuation increases, it could have reacted to first and second round stimulus packages by reducing its equity holdings, it could have reacted to positivity rates and vaccine uptake.

Though the lack of the legislative and executive acting in the US can be blamed as well; That could mean, incentivizing baby boomers to stay in the workforce, increasing immigration (where food, lawn maintenance, retail industries are having worker shortages as workers have moved to warehouses, technology, and delivery), or the child tax care credit helping parents stay in the workforce (possibly with more linkage to employment), and lastly temporary tariffs where possible to reduce consumer demand for imports (via ~ taxes).

Don't forget the Ukraine war which pushed oil and natural gas prices through the roof as travel really started to open back up. Since energy is an input to most of the economy 50-100% increases in pricing will have a significant effect, and so will 50-100% decreases (though market prices fall more slowly than costs allowing higher profits).

https://www.macrotrends.net/2500/crude-oil-vs-natural-gas-ch...

People who think quantitative easing is "money printing" haven't looked at how reserves work (and how circulating money is created through loans) or at the correlation of QE/QT on either inflation or deflation in the US, the EU, or Japan. Now it does increase liquidity and that may increase asset prices slowly.

https://research.stlouisfed.org/publications/economic-synops...

The Fed did keep rates a bit low for a while, they will also keep them a bit high for a while since they are "data driven" and the data always lags. We seem to be lucky this time that delayed infrastructure stimulus (not the pandemic business handouts) is offsetting decrease in credit, but it's unlikely "this time is different" so we'll almost certainly have a recession to kill inflation expectations and a "banking event" that causes Fed rates to fall.

Interestingly, the treasury spend down caused by debt ceiling shenanigans seems to have lowered long term rates for a few months which also helped loans/spending in the short term.

I remember energy providers here in the UK went under way before Ukraine war because of electricity price spike. When war started we had another spike but it was short and prices are now at the same level as before the war but still higher than in July 2021.

Some data here: https://www.ecb.europa.eu/pub/economic-bulletin/focus/2022/h...

Why is the narrative everywhere still that prices are higher because of the war in Ukraine?

Because the true reason is political, and politicians are the ones writing the narrative.

Well, it may be political, but the reason that European gas prices rose dramatically in Dec 2021 (there were many articles in Bloomberg and FT) was due to Gazprom restricting supply... it's almost as if they new something? Maybe they were reading the NYT.

https://www.nytimes.com/2021/12/23/us/politics/russia-ukrain...

"European prices skyrocketed when the dominant external supplier, Gazprom, started to withhold supplies in Q4 2021."

I really appreciate your Chart A where one can see that prices went back down until the war started and then spiked 1.5x higher and that only because of a couple of quite mild winters. It's certainly reasonable to make the case that investment in Oil and Gas fell quite a bit from 2019 (economists were expecting a recession in 2020 before COVID), but that didn't drive rapid reductions in supply and historically high prices... a war did.

Look at gas and electricity prices. They started rising way before Q4.

When we were all shaking about electricity prices mid year 2021 no one ever mentioned anything about Russia, Ukraine or Gazprom as being the sole contributor.

"The rise in costs has been put down to a number of factors, including a cold winter earlier this year which left gas stocks depleted, as well as refineries in the US being shut down by Category 4 Hurricane Ida, according to industry analysts.

High demand for liquefied natural gas from Asia and a drop in supplies from Russia have also contributed to the price rise."

https://news.sky.com/story/why-is-a-rise-in-gas-prices-pushi...

I guess you're saying that oil at $100/barrel makes sense and I wouldn't disagree... That's about where it's been +/-$20 except during the crazy swings caused by the war and pandemic (remember it went NEGATIVE) events. Those don't really effect electricity prices so much, though. The gas market, however, is permanently altered.

You weren't going to get to %150 higher prices for gas (which drives marginal electricity prices) in Dec 21 or %200 higher prices for gas in Feb 22 without Gazprom supplies being cut. The winter before was plenty cold in 2021 (coldest since 2010) and it only caused a %60 higher price for electricity and 30% higher for gas for a month. We're over a year into Ukraine and gas is stable at 50% higher than it's start which was the previous temporary winter peak. It'll go crazy again this winter if it's cold, but that will also be transitory and probably come back down to a 50-60% higher new normal barring "events".

> ... a mix of massive fiscal stimulus and supply chains that got blown up by the pandemic

If pandemic-related supply chain issues are really a major factor in the inflation we're seeing, with time we'd expect most prices to be returning to pre-pandemic levels, or at least close. I don't think I've heard anyone seriously suggest that could happen. Instead, we're celebrating a small reduction in the slope of a line that has been and continues to be moving up at an alarmingly steep angle.

And while you could argue that fiscal stimulus isn't a direct action from the fed, it's certainly related and can ultimately be attributed to the same group of delusional people in the driver's seat.

A major factor is missing - lack of competition due to decades of unrestrained mergers allowed large price increase sending corporate profits to record levels

"Firefighters cause massive water damage when fighting massive fire, news at 11"

Jerome Powell himself admitted they overdid stimulus, massively contributing to inflation.

Much better to overdo stimulus in a crisis and prevent a cratering economy (and human suffering) than the opposite. Stimulus is hard, politically, basically only possible at the peak of the crisis. Raising rates to undo it after you know the stimulus did its job is easy.

Under-stimulating is what happened in 2008+ thanks to Republican obstruction and fear of electoral "anger", and we got years of extra suffering as a result.

But you also have to consider the counterfactual: we did way too little stimulus after the GFC in 2008, leading to the economy being depressed much longer than it needed to be. Obviously it would've been nice if we had done exactly the right amount of stimulus, and easy to armchair-quarterback in retrospect and say the "right amount" was obvious, but at the time it was not.

> Fed causes massive problem, and then eventually stops it from getting worse... Hooray?

Was it the Fed or was it Congress through policy? Congress needed to do something in the response to the pandemic for the people, right? Therefore, why does Congress deserve blame? They helped people out, didn't they?

> Inflation is still twice the target rate at 4%

First of all, the article says inflation is at 3%.

Sounds like you're over-reacting here. 4% may be "double" (if that's the number you want to go with), but it's not a huge difference. Some economists even think the target is too low, and 3% would be completely fine. On top of that 1) it takes time for all these interest rate hikes to give their full effect, 2) inflation is currently going down, 3) killing jobs just to get slightly closer to a magic number no one really knows is essential to achieve is odd.

Inflation is already low and under control. Being alarmist about (not actually) 4% is odd.

For reference, 2% inflation over 30 years is an 82% rise in prices. 4% inflation over 30 years is a 232% rise in prices. Many people underestimate the effect of compounding interest and how much of a difference rates of return make.

Many people underestimate the effect of compounding unemployment.

Unemployment doesn't compound, though. The highest it can go is 100%, and in practice people have a strong incentive to get new jobs and make new jobs long before it reaches that point. Unemployment has a negative feedback loop: the more people who are unemployed, the more wages drop, which makes it more cost effective to employ people, which reduces unemployment. Inflation has a positive feedback loop: the higher prices rise, the more people need to hunt for raises to make ends meet, which means higher costs and even higher prices. Or alternatively, the more time they spend looking for new jobs, meaning less actual work done, meaning lower productivity, less output, greater scarcity, and higher prices.

That was the big realization of the late 70s and early 80s. When the 70s inflation first got going in the late 60s, people thought "Eh, a little inflation is preferable to mass unemployment." By the end of the 70s, they'd learned that if you choose inflation, you get both, because people can't make prudent investments in the future if prices are not stable.

The effects of unemployment on people compounds. It screws them over during their life, and affects the economy, over and over.

Inflation is under control, and there is no expectation of high inflation, so we do not have the same trade off as in the 70s at all.

Core inflation is 4.8%, and that’s the number that’s usually used as a benchmark.

These headlines are really starting to get on my nerves. When NPR was talking about it last night they threw a line in there about core inflation but the rest the few minutes was celebratory about hitting 3%.

That's a pretty naive way to characterize the economic system, which is designed to include inflation in order to motivate participation in the economy. If you're hiding wads of cash in a suitcase under your bed, you either don't understand this or you've chosen to lock in reduced buying power year after year to avoid a greater loss due to a market collapse.

Rich people don't hide wads of cash in their mattress and aren't hurt by inflation.

Poor people do live paycheck to paycheck, and often their paychecks lag inflation. And that's why inflation usually hurts the poor first and foremost.

If the Fed and it's quantitative easing caused the problem, then you'd expect to see more inflation in countries with more easing and less in countries with less easing.

There is a correlation between the amount easing and inflation, but it is very low, making it quite clear that the Fed was not the primary cause.

Source?

It's a relatively easily falsifiable statement, so stop JAQing off.

Not really, finance is global now. Money printing in the US can and does drive up prices in China, and vice-versa.

Globalization of finance and trade strengthens the effect, it doesn't weaken it.

If you double the number of dollars floating around compared to Euros, the dollar:euro exchange rate adjusts accordingly, so anything priced in dollars would now be ~50% cheaper in Europe.

Ah, yes, the classic "the Fed is supposed to micromanage everything".

Aren't neoclassicals supposed to deny the influence of money on the economy?

You'd need a 22% raise to make up for the dollar only being worth $0.82.

.82 x 1.22 ~= 1

Or did I read that wrong?

If you're going to use P/E metrics it seems wrong to group AAPL, MSFT, and GOOGL with the likes of AMZN and NVDA when the latter have P/Es an order of magnitude higher than the former.

It's not like 2000 because today it's the only game in town. If the money exist it must go somewhere. The US stock market is it. Real estate is equally if not more so over valued. Other markets are not attractive, emerging markets have lost appeal, and now even crypto is losing ground. The only serious threat is some sort of BRIC market alternative, but it's not even very serious.

The risk now is more inflation and further rate increases. Inflation has cooled not mainly from intervention but market restoration.

An engineered bust is pretty much the only way to prevent revolution. The existing and incoming inflation is really pushing the wealth divide and not just from the 1% to the 99%. But from those who hold assets to those who don't.

Right now, currently, the economic opportunities that were available as little as 10 years ago simply do not exist.

A median income job does not put you on a path to meaningful asset acquisition and may not even be enough to get most people out of student loan debt.

The other side of the equation with asset prices is household debt and it's sky high and these are generally opposite ends of the spectrum.

> The risk now is more inflation and further rate increases. Inflation has cooled not mainly from intervention but market restoration.

Can you expand on this please?

Right now there are two contributing factors to inflation. Increased money supply is the biggest one. Second is the actual shortage of goods production which we are still seeing some long tail effects of from covid shutdowns. The slowing of inflation has been because we are getting caught up with goods production.

There is still 1.7 trillion in Reverse Repos. The increased rates have been able to draw some of that out into long term treasury products. Which is great. But it's still astronomically high.

> How many Americans have a 401k/IRA with Nasdaq/S&P500/Dow Jones exposure where the top 5 stocks are trading at 6.8x sales and 40x P/E? That's like... unsustainable and scary, right?

S&P 500 P/E is actually a stat that is tracked, and currently stands at about 26. I agree this makes no sense in the current interest rate environment. Investors are betting that rates are going to drop while corporate profits remain unchanged or corporate profits rise while rates remain unchanged, which also makes no sense, but at least the numbers are more reasonable than FAANG P/Es.

https://news.ycombinator.com/item?id=36727617

Check my comment here and tell me what you think.

I agree with you, if I saw "current P/E 26x", I'd think "overbought, investing deemed risky" but if you check forward P/E instead of current P/E, it's unchanged in the past 9 months despite the 25% runup in SP500 price...

Maybe, maybe not. Certainly price-to-sales ratio is not a relevant metric when tech companies are enormously profitable and have very high profit margins relative to many traditional companies. And IMO they still have lots of growth potential. Look at companies like Sony in Japan or Samsung in SK, they are basically conglomerates with multiple verticals: not just electronics but banking, insurance, entertainment, automotive. The big tech companies can (and are) expanding into these other areas.

Does that justify there current valuation? Again, maybe, maybe not, I’m not a stock analyst, but if you are just looking at a trailing P/E I don’t think that’s telling the whole story.

And the US market and economy is just structurally different from Europe and other economies. Massive energy abundance now to start with, and also work attitudes/culture. On the positive sides dynamism, willing to tolerate failure, new business formation, and on the (arguably I guess) negative side prioritization of work/profits over personal life and social welfare.

> 401k/IRA

Don’t forget HSA

You're right, this changes the calculus entirely!

The next few years will be about ensuring the boomers can cash out their assets: 401k and houses. The government / federal reserve will not let the value of those drop substantially. After that and a generation is unable to buy a house or retire unless they inherited it from their parents, something will have to give.

Why the next few years and not the foreseeable future when older people have more voting influence than younger people (due to both demographics and differences in voter participation rates)?

Also, payers of state/county/city taxes which eventually pay government employees with defined benefit pensions and retiree healthcare are also directly effected by lack of public equity performance since the savings for those deferred compensation plans are in the markets, and without the assumed investment returns, taxes would have to increase to make up the difference (and/or cuts to benefits).

Bottom line, assume the purchasing power of the USD will be trashed as much as needed/possible, so not being invested in the US public equity markets is a dicey proposition in my opinion.

The exact timeline isn’t clear to me so I chose “few” to be intentionally vague. I agree with you but they’re also the relative size of each cohort and the relative pain the younger generation is feeling to consider. Also maybe some policies are passed to alleviate pressure, or maybe we just accept the post WW2 era was unique in American history and now it’s a mature society without the class mobility which is what was once considered fundamental to its DNA.

tldr response, markets are forward looking. a lot of the downtrend of a recession have already been telegraphed a mile away with ample headway (good job Feds) and hence priced in.

> tldr response, markets are forward looking.

https://www.gurufocus.com/economic_indicators/6061/sp-500-pe...

Current market level: 4500

Current forward P/E ratio: ~19.9x

Previous market level: 3600 (October 2022)

Previous forward P/E ratio then: ~19.9x

So in 2022-10, EPS were $180

Now in 2023-06, EPS are $226

An increase in 25%, which basically matches the growth we've seen past 9 months

That's basically a bet that "corporate prices rise while rates remain unchanged" - to have a present P/E of ~25 and a forward P/E of ~20 implies earnings growth of 25%, and to maintain that ratio over time implies that earnings grow steadily at 25%.

This actually matches pretty well with anecdotal complaints from people, about them getting 4% raises while inflation ran at 10%. All those price increases have to go somewhere, and in this case they went to corporate profits, particularly of the largest (S&P 500) firms. Which is exactly what people complain about when they say inflation is driven by corporate profits, except they get the causality wrong.

Problem is that it's inconsistent with today's stats. If inflation is now 3% but wages are going up 4% and unemployment remains the same, that means corporate profits are shrinking. It has to, by an identity - every dollar the company pays out in wages is a dollar it's not making in profit. So again the market response makes no sense - investors are assuming a future that looks like the past, while the stats indicate the near future is different from the past.

I guess you could make up for it with productivity - if a workers output 1% more goods for their efforts, prices rise by 3%, and their wages go up 4%, that just implies workers capture all the price surplus from companies, and earnings growth should be roughly flat. But the long-term trend for productivity is down (though the short-term one is up, coming off pandemic lows), so this doesn't seem like a durable explanation for being able to pay out 4% more in wages while only raising prices by 3%.

> That's basically a bet that "corporate prices rise while rates remain unchanged" - to have a present P/E of ~25 and a forward P/E of ~20 implies earnings growth of 25%, and to maintain that ratio over time implies that earnings grow steadily at 25%.

To me that describes "Apple keeps their product line the same and charges 25% more" instead of (the more likely in my opinion) "they charge the same for their existing products, keep their margins the same, but grow revenue", no?

Right, but the macro environment (S&P 500) is different from the micro environment (AAPL). Apple can charge 25% more because their customer base is largely the economic winners, the ~10% of people in professional jobs who have seen their compensation go up by 15-20% rather than 4%. And an iPhone is a small portion of their total expenses, so as long as Apple is continuing to add value, they can cannibalize spending that might otherwise go to meals out, or trips, or paying hourly workers more rather than raising software engineer salaries.

Or for them to charge the same but grow revenue, that implies they ship more iPhones. This again implies a shift in spending from other goods to iPhones, which comes out of some other firm's revenues.

The macro environment doesn't work like that. Every dollar that someone spends on iPhone is something they don't spend on Coke, or snack foods, or Home Depot. When you aggregate across all firms, you have very few free variables. If everybody is raising their prices, that's inflation, which we saw a lot of before but the stats now say that it's coming down. If they're shipping more product in total, that's an increase in output (real GDP). Within all the total revenues that all companies take in, some goes to other firms (payments), some goes to labor (wages), some goes to land (rents), some goes to the government (taxes), some goes to debt holders (interest), and some goes to equity holders (profits), and the sum of all of these has to equal the total revenues.

The past ~20 years has seen marked declines in the share of income that goes to labor (real wages), the share going to the government (taxes), and the share going to debt holders (interest), with rents remaining roughly constant nationwide (but skyrocketing in certain municipalities like the Bay Area) and the balance of the gains largely going to profits. It looks like the macro environment has changed within the last year so that labor has more bargaining power, the government is ceasing several stimulus payments and may be raising taxes, and interest rates are going way up. Those will all increase the share of national income going to labor, government, and debt holders significantly, and so the balance has to come from landlords or equities. There's currently a tug-of-war going on for who's going to be the bagholder, will it be real estate or stock owners, and that hasn't fully played out. But if current trends continue it's going to be one of them, and yet this hasn't been priced into the price of those assets.

Ironically, all of the forces behind this are wildly politically popular, which is perhaps why they're starting to get traction. People want to get paid more, and see their fellow workers get paid more. People want the government to collect more taxes from corporations and rich people. People want their savings account to earn more. They just haven't made the connection that the other side of the trade is their 401(k) and brokerage account.

Generative AI is the gift that keeps on giving and it will counter the economic forces which are pushing tech companies away from being profitable. This is why stocks keep going up despite high interest rates.

Lol this struck a chord. Maybe folks here need to explain why generative AI isn’t a several trillion dollar industry and why it won’t positively impact stock prices for a ton of companies rather than just downvote.

> why generative AI isn’t a several trillion dollar industry

It is already.

Or why AI isn’t going to become part of every product, service, and supply chain in the next decade.

I think that since you are making the claim that generative AI is propping up stocks, that the burden of proof is on you to explain why it is so useful. Right now you are just repeating a platitude that was already beaten to death by tech hype influencers.

I am not saying that you're wrong, but I think there is more uncertainty with AI than there is certainty. If you claim to be certain about something then the burden of proof is on you.

It doest matter if it is useful or not. People are investing on the prospect of it being useful.

A laptop with a LLC and a vague plan to build a LLM can get you investment with a valuation of a billion at the moment.

> I think that since you are making the claim that generative AI is propping up stocks

I do think a very large part of the 9-month S&P500 run from 3600 -> 4500 has to do with NVIDIA + Microsoft, for what it's worth.

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