Have the record number of investors in the stock market lost their minds?(newyorker.com)
newyorker.com
Have the record number of investors in the stock market lost their minds?
https://www.newyorker.com/news/our-columnists/have-the-record-number-of-investors-in-the-stock-market-lost-their-minds
490 comments
Betting on that now is insane.
We haven’t even felt the main wave of bankruptcies and disruption yet.
Credit is locking up (try getting an unsecured loan) and people aren’t paying bills. 50% of New York tenants didn’t pay rent. Every seasonal business is dead. Life looks ok for IT people working in their underwear right now, but we are heading into a very challenging time with fundamental changes in consumer behavior.
The next big thing will be underwater mortgages.
We haven’t even felt the main wave of bankruptcies and disruption yet.
Credit is locking up (try getting an unsecured loan) and people aren’t paying bills. 50% of New York tenants didn’t pay rent. Every seasonal business is dead. Life looks ok for IT people working in their underwear right now, but we are heading into a very challenging time with fundamental changes in consumer behavior.
The next big thing will be underwater mortgages.
That's a fair point, but most of those Mortgage assets have already lost 70-80% of their value. Look at the REM ETF.
So are you making the argument that mortgage-centric stocks are going to go to zero?
It should be no surprise that Tech/NASDAQ is doing well since both individuals and companies are investing more in tech during this crisis, while industrial/travel/etc are all still down substantially.
Maybe the banks will take a larger hit, but the overall market has already priced in what you are saying.
So are you making the argument that mortgage-centric stocks are going to go to zero?
It should be no surprise that Tech/NASDAQ is doing well since both individuals and companies are investing more in tech during this crisis, while industrial/travel/etc are all still down substantially.
Maybe the banks will take a larger hit, but the overall market has already priced in what you are saying.
The risk is in financial contagion. The economy can handle individual firms going bankrupt - they'll just get replaced by other firms. The problem is when creditors start taking haircuts and going bankrupt themselves. At that point, things that people thought were secure assets (like, say, their bank accounts) suddenly get called into question, and markets lock up because of panic.
In 2008 we thought that the problem was contained to the subprime housing market, and once the Fed started supporting that market people breathed a sigh of relief and there was a rally and recovery from March-May. It wasn't until first Bear Stearns and then Lehman Brothers failed that people realized we were in a crisis. These were centuries-old, multi-hundred-billion-dollars institutions. The idea that they could cease to exist was unthinkable to anyone not actively looking at their balance sheet and doing the math, which is why there was such a panic when they did cease to exist.
In 2008 we thought that the problem was contained to the subprime housing market, and once the Fed started supporting that market people breathed a sigh of relief and there was a rally and recovery from March-May. It wasn't until first Bear Stearns and then Lehman Brothers failed that people realized we were in a crisis. These were centuries-old, multi-hundred-billion-dollars institutions. The idea that they could cease to exist was unthinkable to anyone not actively looking at their balance sheet and doing the math, which is why there was such a panic when they did cease to exist.
> At that point, things that people thought were secure assets (like, say, their bank accounts)
what possible justification is there to be worried about their FDIC-insured bank accounts? even sticking that in as an off-hand comment is spreading FUD.
what possible justification is there to be worried about their FDIC-insured bank accounts? even sticking that in as an off-hand comment is spreading FUD.
This is describing what happened in 2008. The FDIC limit was only $100,000 but many people assumed they had no reason to worry about the security of higher balances in excess of the FDIC limits. So when big stable banks started to fail or were at risk of failing that caught folks by surprise.
As a result:
> The Emergency Economic Stabilization Act of 2008 is signed on Oct. 3, 2008. This temporarily raises the basic limit of federal deposit insurance coverage from $100,000 to $250,000 per depositor.
The limit was subsequently permanently raised. So with a limit of $250,000 there’s less reason to worry about bank accounts today. But the important point remains, what causes panic is when things that everyone assumes to be safe turn out to no longer be so safe after all.
As a result:
> The Emergency Economic Stabilization Act of 2008 is signed on Oct. 3, 2008. This temporarily raises the basic limit of federal deposit insurance coverage from $100,000 to $250,000 per depositor.
The limit was subsequently permanently raised. So with a limit of $250,000 there’s less reason to worry about bank accounts today. But the important point remains, what causes panic is when things that everyone assumes to be safe turn out to no longer be so safe after all.
Who assumes that a bank account over the FDIC limit is safe?
And who cares if rich people take a haircut in a recession?
And who cares if rich people take a haircut in a recession?
People who want to head off a financial panic. A compounding panic makes it difficult to address the underlying cause of financial issues that triggered the panic in the first place.
> The problem is when creditors start taking haircuts and going bankrupt themselves.
But this isn't really a risk to the broader market, because the government has already made it plain that it's going to backstop the liquidity to prevent any liquidity crisis, from buying commercial debt, to even buying equity. ...so if the gov't is the lender of last resort, then your argument doesn't make sense because.
Lehman Brothers going under is something the Fed has said it will not let happen again. Particularly in this scenario where bad debt is due to a pure externality.
...not to mention that people's bank accounts are protected by FDIC, and equity/retirement accounts are protected by a similar program.
Not that it really matters, because the banks are all much better capitalized than they were in 2008.
The real danger here is the potential for snap-back inflation (in a stagflation scenario), which I'd argue actually makes equities MORE attractive, not less - since stocks are inherently inflation protected.
But this isn't really a risk to the broader market, because the government has already made it plain that it's going to backstop the liquidity to prevent any liquidity crisis, from buying commercial debt, to even buying equity. ...so if the gov't is the lender of last resort, then your argument doesn't make sense because.
Lehman Brothers going under is something the Fed has said it will not let happen again. Particularly in this scenario where bad debt is due to a pure externality.
...not to mention that people's bank accounts are protected by FDIC, and equity/retirement accounts are protected by a similar program.
Not that it really matters, because the banks are all much better capitalized than they were in 2008.
The real danger here is the potential for snap-back inflation (in a stagflation scenario), which I'd argue actually makes equities MORE attractive, not less - since stocks are inherently inflation protected.
I'd agree that inflation is probably a bigger risk right now than a 2008-style liquidity crunch. This is not necessarily mutually exclusive to a financial panic though.
Stocks tend to perform chaotically during major inflationary episodes. Over the long run corporate earnings are inflation-protected. The problem is that inflation hits unevenly, depending on where relative shortages are, and some businesses can raise prices much more than other businesses can. That can make some businesses non-competitive (= insolvent) during an episode of high inflation, while also pooling profits within a small number of survivors. You often see a big consolidation of winners, great companies of the next era born, and then a lot of bankruptcies. Mainstream investors are often not very good at predicting the winners, so you get panic and malaise in the short term.
Stocks tend to perform chaotically during major inflationary episodes. Over the long run corporate earnings are inflation-protected. The problem is that inflation hits unevenly, depending on where relative shortages are, and some businesses can raise prices much more than other businesses can. That can make some businesses non-competitive (= insolvent) during an episode of high inflation, while also pooling profits within a small number of survivors. You often see a big consolidation of winners, great companies of the next era born, and then a lot of bankruptcies. Mainstream investors are often not very good at predicting the winners, so you get panic and malaise in the short term.
> Mainstream investors are often not very good at predicting the winners
Index investors don't care about that part.
Index investors don't care about that part.
A very likely outcome of inflation is for the indexes to underperform and gains to be concentrated in a few big winners (like, say, FAANG stocks). The big winners from inflation are generally chokepoints in the economy, companies that have monopoly pricing power over their industry, so by definition the majority of companies will be losers. Index fund investors are effectively subsidizing individual investors of the winners: the savvy individual investor gets in (looking at the competitive position of the company), their profits rise, the less-savvy individual investor gets in (looking at the new P/E ratios), the indexes rebalance to include more of stocks with higher market caps, and then the index rebalance forces index fund investors to buy in, raising the prices further for shareholders who already bought.
To some extent, this is already happening: the S&P 500 is down about 15%, but stocks like Amazon, Zoom, and Beyond Meat are skyrocketing.
To some extent, this is already happening: the S&P 500 is down about 15%, but stocks like Amazon, Zoom, and Beyond Meat are skyrocketing.
Right, "savvy investors", mostly professionals, compete with each other to be first to set the market prices at their truer values. The index investor just goes along for the ride.
> then the index rebalance forces index fund investors to buy in
That's not really how it works for cap weighted whole market indices. They remain cap weighted as prices change, there's no need to "buy more" of a winning stock, you already had the stock, it won, now you have more of it (in USD terms).
> then the index rebalance forces index fund investors to buy in
That's not really how it works for cap weighted whole market indices. They remain cap weighted as prices change, there's no need to "buy more" of a winning stock, you already had the stock, it won, now you have more of it (in USD terms).
Yes, this is the big unknown at the moment.
Governments and central banks will certainly attempt to prevent contagion by buying assets and handing out bailout cash.
Does that fix the problem and then we go back to normal? Does it result in Weimar-style hyperinflation? Does it cause negative rates on long-term bonds?
I can only think of two historical precedents for guidance on how this might play out. First, Japan's "Lost Decade" (which was really more like 25 years). And second, the 2008 financial collapse.
Not sure either of these are directly comparable to the current predicament, though.
Governments and central banks will certainly attempt to prevent contagion by buying assets and handing out bailout cash.
Does that fix the problem and then we go back to normal? Does it result in Weimar-style hyperinflation? Does it cause negative rates on long-term bonds?
I can only think of two historical precedents for guidance on how this might play out. First, Japan's "Lost Decade" (which was really more like 25 years). And second, the 2008 financial collapse.
Not sure either of these are directly comparable to the current predicament, though.
How did the markets do during the 70's stagflation? Not so well.
That was fundamentally different because it was caused by an increase in INPUT costs and pre-dates the current monetary system.
So it's not a useful comparison.
So it's not a useful comparison.
> already lost 70-80% of their value
And don’t forget, property taxes are based on their value as of Jan. 1 - huge, unpayable tax bills are coming this year, too.
And don’t forget, property taxes are based on their value as of Jan. 1 - huge, unpayable tax bills are coming this year, too.
Cook County in Illinois is reassessing property taxes for commercial real estate based on post pandemic valuations.
They’re already deep in the red financially, but there is some relief for the property owner.
They’re already deep in the red financially, but there is some relief for the property owner.
Reassessments just change the way the pie is divvied up. It makes things more equitable, it isn’t a relief unless the assessment rolls are out of whack. (Like California)
I'm glad that taxpayers who work for a living will end up subsidizing property owners, who have other people work for their living.
I too am dismayed. Short of being actively engaged in the political process, your only other option is to remove yourself from the jurisdiction.
reits aren't doing well... but you are missing that credit/debt drives the economy not the stock market. And land values are actually the biggest store of wealth... and house prices haven't even registered any effects yet.
I know you meant land when you said "house prices", but it helps to keep using the correct term to avoid misleading confusion. Houses are terrible money pits. Land (in an economically active location) is a scarce valuable resource.
This is important because people overbuild SFH not understanding the expenses, and people ruin their financial lives buying mobile or fake-mobile homes to put on rented land, not understanding that the land is where all the value is.
This is important because people overbuild SFH not understanding the expenses, and people ruin their financial lives buying mobile or fake-mobile homes to put on rented land, not understanding that the land is where all the value is.
The divide here is what you're calling "doing well" is "all time highs" and tech is "cutting edge retail/ads".
At the peak of the last financial crisis in 2008 a stock I had been keeping my eye on dropped nearly 50% in value, so I dumped a bunch of money (for me at the time anyway) into.
I told a friend about it and he looked at me like I was crazy. "The system is melting down! What makes you think the stock market is ever going to recover?"
Six years later I sold that stock for a pretty massive profit.
The stock market will always recover because people are always going to want to make money. Yes, some businesses will fall by the wayside, and yes, we don't know when it will get better, but people like making money and that fundamental truth will always keep the economy moving forward after things like this.
I told a friend about it and he looked at me like I was crazy. "The system is melting down! What makes you think the stock market is ever going to recover?"
Six years later I sold that stock for a pretty massive profit.
The stock market will always recover because people are always going to want to make money. Yes, some businesses will fall by the wayside, and yes, we don't know when it will get better, but people like making money and that fundamental truth will always keep the economy moving forward after things like this.
> The stock market will always recover because people are always going to want to make money.
Maybe.
SPY closed at ~$145 in June 2000
SPY closed at ~$80 in October 2002
SPY closed at ~$145 in July 2007
SPY closed at ~$75 in March 2009
SPY closed at ~$145 in December 2012
Nothing but dividends for a decade or so unless you did some clever selling high and buying low.
It's been mostly up since 2012, but there is no guarantee it is up from here in 2030.
Maybe.
SPY closed at ~$145 in June 2000
SPY closed at ~$80 in October 2002
SPY closed at ~$145 in July 2007
SPY closed at ~$75 in March 2009
SPY closed at ~$145 in December 2012
Nothing but dividends for a decade or so unless you did some clever selling high and buying low.
It's been mostly up since 2012, but there is no guarantee it is up from here in 2030.
This is only true if you choose the worst case scenario. If you bought SPY in almost any random day since 93 you could have sold it with profit without having to wait too much. On the worst case you had to wait for 5 years or so, but that wasn't a surprising situation.
According to the example you gave (which isn't the fairest, since you started at June 2020, which is the peak of the Internet bubble), the stock market still did manage to recover. It took 12 years but it did recover, and now SPY is just 2x of $145.
There’s not a perfect investment out there, so the real question is what beat equities over that time span?
You have to do something with your savings. “Nothing but dividends” over 10 years still beats the heck out of holding cash over that period of time, for example.
You have to do something with your savings. “Nothing but dividends” over 10 years still beats the heck out of holding cash over that period of time, for example.
That is why you don't try to time the market and just put in the same amount every month. The overall trend has been up for the past 100 years, and ignoring dips that are always temporary, this is true on smaller time scales as well.
That what I am doing just putting £1500 or so every month into my ISA and learning to live with the big up and downs on a daily basis.
Keep in mind that those dividends would give you a ~20% gain (although probably offset by inflation)
I agree with your point, but your numbers don't accurately reflect total-return (ie. include dividends).
The peak (aka trough) was about six months after the start, so if you want to try this strategy it is important to have patience and not rush in too soon.
This sounds an awful lot like the logic that makes people get into multi-level-marketing schemes...
Yeah but the stock market isn't 50% off right now. It's bounce back is temporary and most people should hold cash right now until we really start to see blood in the streets.
It's a game of chicken. Everyone is waiting for other people to sell which will make prices fall so they can buy the dip.
This would be a sound theory if the fed weren't printing money.
The fed, however, is more interested in preventing deflation and/or complete economic collapse, than it is in rewarding prudent investers.
The fed, however, is more interested in preventing deflation and/or complete economic collapse, than it is in rewarding prudent investers.
>Life looks ok for IT people working in their underwear right now, but we are heading into a very challenging time with fundamental changes in consumer behavior.
Ah ha! The MUI is being skewed by IT workers expanding their new office wardrobes: https://en.m.wikipedia.org/wiki/Men%27s_underwear_index
Now it all makes sense!
Ah ha! The MUI is being skewed by IT workers expanding their new office wardrobes: https://en.m.wikipedia.org/wiki/Men%27s_underwear_index
Now it all makes sense!
> Credit is locking up (try getting an unsecured loan)
Yep. Wife works for one of the big banks. They stopped taking applications for personal lines of credit this week. Stopped taking HELOC applications a couple of weeks ago.
Yep. Wife works for one of the big banks. They stopped taking applications for personal lines of credit this week. Stopped taking HELOC applications a couple of weeks ago.
USBank was pushing these pretty heavily last week (the offer was only supposed go through end of April but they had extended it)
I was able to get an unsecured loan with a low interest rate for a classic car within a few hours after I applied.
Wouldn't the parameters for a car loan be wildly different than for a home loan or for a personal line of credit that's unsecured?
I don’t know, just throwing in my anecdote that it was really easy for me to get unsecured credit last week.
A classic car is secured by the car, right?
No, with an unsecured loan I hold the title- not a lien holder(lender). I would probably be taken to court if I defaulted. I think I am fortunate that my credit is good enough to get the loan, however.
Why is betting on that now insane? Are you saying that you don't think the market will reach, and exceed, the present level in 10 to 20 years? I don't think it's insane... I don't want to put words in the parent poster's mouth, but I bet they will keep buying through any additional dips that happen between now and the "main wave".
Disasters don’t always happen in a snap. We’re in the middle of a slow motion disaster, any anything can happen.
Literally. POTUS could wake up tomorrow and say anything and do almost anything. That rolling of the dice problem with a very serious economic disaster makes it exponentially more dangerous in this phase.
We’re probably closer to a depression that we have been since 1929, and that depression didn’t bottom out until 1932.
Also my assumption is that folks in a public forum are middle class people with retirement funds and some home equity. Gambling with your retirement or the kids college savings is dumb. If you’re sitting on a few million liquid bucks or are very young, your situation is different.
Literally. POTUS could wake up tomorrow and say anything and do almost anything. That rolling of the dice problem with a very serious economic disaster makes it exponentially more dangerous in this phase.
We’re probably closer to a depression that we have been since 1929, and that depression didn’t bottom out until 1932.
Also my assumption is that folks in a public forum are middle class people with retirement funds and some home equity. Gambling with your retirement or the kids college savings is dumb. If you’re sitting on a few million liquid bucks or are very young, your situation is different.
> We’re probably closer to a depression that we have been since 1929, and that depression didn’t bottom out until 1932.
And even in the great depression GDP rebounded within 10 years and had grown substantially by 20 years.
And even in the great depression GDP rebounded within 10 years and had grown substantially by 20 years.
Rent I get is going to be weird. But with the plan to just pretend that the last 3 months didn’t happen for mortgages and add the payments at the end I can’t really imagine a huge string of defaults happening. And nothing about the pandemic made the houses themselves more or less valuable so why would home owners be underwater?
It isn't just houses. It's commercial real estate.
In NYC at least, almost all restaurants, bars, and retail stores absolutely depend on very high volume.
That volume is simply not coming back.
The tourists are not coming back anytime soon.
And the office workers are not all coming back ever. Many will continue to work from home and many more will work only 2-3 days a week in the office rather than 5. And many of those will pack lunch or get lunch delivered rather than go out to restaurants.
And a lot of locals are going to be very reluctant to eat in crowded restaurants where tables are 3-4 feet apart and everyone is constantly bumping into each other.
I believe there are going to be a lot of vacant stores and shops in nyc once the immediate crisis is over.
In NYC at least, almost all restaurants, bars, and retail stores absolutely depend on very high volume.
That volume is simply not coming back.
The tourists are not coming back anytime soon.
And the office workers are not all coming back ever. Many will continue to work from home and many more will work only 2-3 days a week in the office rather than 5. And many of those will pack lunch or get lunch delivered rather than go out to restaurants.
And a lot of locals are going to be very reluctant to eat in crowded restaurants where tables are 3-4 feet apart and everyone is constantly bumping into each other.
I believe there are going to be a lot of vacant stores and shops in nyc once the immediate crisis is over.
And the banks themselves are overexposed due to what appears to be systematic cooking of the books on these loans. See this article published yesterday about one whistleblower’s fight to expose this:
https://www.propublica.org/article/whistleblower-wall-street...
To pull out just one of several frightening figures from that article, just one of the commercial backed securities they analyzed appeared to have over half its properties fudged to appear more profitable.
https://www.propublica.org/article/whistleblower-wall-street...
To pull out just one of several frightening figures from that article, just one of the commercial backed securities they analyzed appeared to have over half its properties fudged to appear more profitable.
> several frightening figures
It's hard not to imagine some pretty frightening scenarios on how this might play out over the next 12-24 mos. The far-reaching unemployment this could cause (if/when lenders start calling these loans) has significant long term implications.
It's hard not to imagine some pretty frightening scenarios on how this might play out over the next 12-24 mos. The far-reaching unemployment this could cause (if/when lenders start calling these loans) has significant long term implications.
Maybe. The other possibility -- with people 3-4 feet apart -- is that demand will outstrip supply. You'll have far less capacity for people to eat, perhaps by much more than fewer diners.
Two things are sure: (1) Things are gonna get weirder (2) Landlords aren't going to do as well.
Two things are sure: (1) Things are gonna get weirder (2) Landlords aren't going to do as well.
Landlords will probably do fine in a currency-printing world.
> That volume is simply not coming back.
I keep hearing versions of this. Such dire finality. Do you actually believe that in 1 or 2 years time bars in Times Square won't be as busy as ever? If yes I think you are radically underestimating New Yorkers.
I keep hearing versions of this. Such dire finality. Do you actually believe that in 1 or 2 years time bars in Times Square won't be as busy as ever? If yes I think you are radically underestimating New Yorkers.
Look at the Spanish flu after that 1919 you had the roaring 20's people did not change behaviour radically after that.
Entirely depends upon whether or not people feel safe in crowds.
More effective treatments, a vaccine, herd immunity, better testing and tracing, or some combination thereof could make people feel safe in crowds again.
But I do think there will be a large shift toward more "work from home" for office workers with fewer open office cube farms and more contained offices for individuals/small teams, so I would expect the lunch and afterwork crowds in Manhattan to thin out. It's not going to be fun going out to happy hour when you might get sick with a dangerous virus that could kill your parents if you visit them that weekend.
And 1-2 years is more than enough time for all of those bars in Times Square to go out of business. Someone will open new ones when a vaccine comes out, of course, but that could be a long time.
And if the schools do not reopen in the fall in the city but they do in the suburbs, a lot of families will leave. I might :(. Remote schooling has been a disaster.
More effective treatments, a vaccine, herd immunity, better testing and tracing, or some combination thereof could make people feel safe in crowds again.
But I do think there will be a large shift toward more "work from home" for office workers with fewer open office cube farms and more contained offices for individuals/small teams, so I would expect the lunch and afterwork crowds in Manhattan to thin out. It's not going to be fun going out to happy hour when you might get sick with a dangerous virus that could kill your parents if you visit them that weekend.
And 1-2 years is more than enough time for all of those bars in Times Square to go out of business. Someone will open new ones when a vaccine comes out, of course, but that could be a long time.
And if the schools do not reopen in the fall in the city but they do in the suburbs, a lot of families will leave. I might :(. Remote schooling has been a disaster.
New Yorkers don't go to times square, rich tourists do.
> depend on high volume
And they’re taxed accordingly. Governments are going to be facing huge revenue shortfalls, too, and they’re going to be coming after already squeezed taxpayers to make up for it.
And they’re taxed accordingly. Governments are going to be facing huge revenue shortfalls, too, and they’re going to be coming after already squeezed taxpayers to make up for it.
>And a lot of locals are going to be very reluctant to eat in crowded restaurants where tables are 3-4 feet apart and everyone is constantly bumping into each other.
i don't see any issue here as long as everybody wears their rabbies ... err .. coronavirus vaccination and immunity certifying tags/armbands/bracelets. Those can even be automatically read upon entering businesses, offices, subway, etc.
The crisis in many respects is incorrectly blamed on the virus whereis it is mostly self-inflicted by lack of coherent response and is self-prolonged and made much more severe by the failure so far to launch any real counter-pandemic measures like for example massive testing and contact tracing.
Wrt. the stocks - the government has already made it pretty clear that they are propping those pure numbers up, real economy and people be damned, at least until the elections.
i don't see any issue here as long as everybody wears their rabbies ... err .. coronavirus vaccination and immunity certifying tags/armbands/bracelets. Those can even be automatically read upon entering businesses, offices, subway, etc.
The crisis in many respects is incorrectly blamed on the virus whereis it is mostly self-inflicted by lack of coherent response and is self-prolonged and made much more severe by the failure so far to launch any real counter-pandemic measures like for example massive testing and contact tracing.
Wrt. the stocks - the government has already made it pretty clear that they are propping those pure numbers up, real economy and people be damned, at least until the elections.
> And nothing about the pandemic made the houses themselves more or less valuable
Supply and demand. If people are moving out of Manhattan (and they are), then demand went down and the house is less valuable. If people have lost their job and can't afford mortgage and sell their home and move into a rental apartment, supply for homes increased and the house is less valuable.
Supply and demand. If people are moving out of Manhattan (and they are), then demand went down and the house is less valuable. If people have lost their job and can't afford mortgage and sell their home and move into a rental apartment, supply for homes increased and the house is less valuable.
That's not how it works, at least not in 2009. If you don't have enough equity, the bank is not interested in letting you short-sell your house and thus won't approve it (they would rather you default on the loan!) People who have more equity in their homes will decide to sit tight so they don't have to take a loss. Even commercial real-estate will let their properties lie fallow rather than lower the rent.
"Supply and demand" is a nice platitude and economic theory but it doesn't reflect reality.
"Supply and demand" is a nice platitude and economic theory but it doesn't reflect reality.
Because commercial can keep getting loans to because the property price generally goes up. If lending tightens and prices stagnate you might, and I believe will, see a lot of comm defaults soon.
Manhattan expats are going to boost demand in the commutable tristate suburbs.
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>pretend that the last 3 months didn’t happen for mortgages and add the payments at the end
How are people who can't afford three morgage payments going to afford a triple payment at the end?
How are people who can't afford three morgage payments going to afford a triple payment at the end?
The traditional reading is "at the end of the mortgage" (ie, at the end of the 30 year period), not "the end of shelter-in-place". If the median age of a 30 year mortgage is 15 years, it doesn't seem unreasonable to think that borrowers will be able to pay for the payments in 15 years.
Though to be clear, there are some lenders that implementing it as "at the end of shelter-in-place", but they're in for a hard lesson.
There is also the corner case where the mortgage matures ~now, which is unfortunate, but that's not the case for most of them.
Though to be clear, there are some lenders that implementing it as "at the end of shelter-in-place", but they're in for a hard lesson.
There is also the corner case where the mortgage matures ~now, which is unfortunate, but that's not the case for most of them.
>(ie, at the end of the 30 year period)
My understanding is that the traditional reading was that the mortgages would be extended for N months, so there is no balloon payment ever; just the loan lasting a bit longer than expected.
My understanding is that the traditional reading was that the mortgages would be extended for N months, so there is no balloon payment ever; just the loan lasting a bit longer than expected.
They’re gonna pay the mortgage for three extra months, not a lump sum at the end.
That’s a sweet deferral for people: at the end of their mortgage period, their mortgage payment is worth a lot less than it is today.
It's not like this for all mortgages. Some lenders are demanding a lump sum of the 3 payments after the 90 days.
Oh, so then it's nicer than what they're doing with rent.
This is a valid point, and folks who take a long-term view tend to come out ahead over the long periods, even going through worse disruptions than COVID (which, in my view is not that big when compared to wars, revolutions and such).
I am not a financial planner, but just a few thoughts. First, folks who try to invest in crashes or divest on peaks tend to do it too early. Most of such events give you more than one opportunity to buy/sell and not being first in/out can give big advantages.
Second, we did not (yet?) see a big drop. A rise of 20% would put S&P at or near all-time highs. For comparison, during the 2008 crash, S&P dropped by over 50%, so the rise back would give you ~120% return. Thus the reward for "catching the knife" today is much, much smaller than in 2008.
Finally, a lot of stocks are now indexed and held in retirement accounts. Many folks there hold more than they should in stocks because they have been going up and seem to be the only game in town beating inflation. And all advisors say "leave your retirement accounts as is, long term view, yada yada". If a significant number of people start moving retirement money out of index funds, which they might do in uncertainty, there may be a lot of pain for stocks. For example, many smaller stocks just do not have the trading volumes to withstand even a moderate sales increase driven by index funds. My 2c.
I am not a financial planner, but just a few thoughts. First, folks who try to invest in crashes or divest on peaks tend to do it too early. Most of such events give you more than one opportunity to buy/sell and not being first in/out can give big advantages.
Second, we did not (yet?) see a big drop. A rise of 20% would put S&P at or near all-time highs. For comparison, during the 2008 crash, S&P dropped by over 50%, so the rise back would give you ~120% return. Thus the reward for "catching the knife" today is much, much smaller than in 2008.
Finally, a lot of stocks are now indexed and held in retirement accounts. Many folks there hold more than they should in stocks because they have been going up and seem to be the only game in town beating inflation. And all advisors say "leave your retirement accounts as is, long term view, yada yada". If a significant number of people start moving retirement money out of index funds, which they might do in uncertainty, there may be a lot of pain for stocks. For example, many smaller stocks just do not have the trading volumes to withstand even a moderate sales increase driven by index funds. My 2c.
> If a significant number of people start moving retirement money out of index funds
A significant number of people do not also control a significant portion of total stock ownership. Droves of retail investors could sell, but their ownership is rather inconsequential: the top 10% of Americans own 84% of stock. https://money.com/stock-ownership-10-percent-richest/
A significant number of people do not also control a significant portion of total stock ownership. Droves of retail investors could sell, but their ownership is rather inconsequential: the top 10% of Americans own 84% of stock. https://money.com/stock-ownership-10-percent-richest/
There would still be consequences in the short term if droves of retail investors begin to sell. Consider normal daily/weekly volume, and what would happen if a large percentage of retail decides to liquidate at once. More sellers than buyers will depress share price irrespective of those sellers total % of ownership.
Yes, and? What percent of that 10% are nearing retirement age or retired, and might want to de-risk?
And personally I'd say that the 90th-99th percentile investor (if not 99.9th percentile) would still qualify as "retail" - what proportion of stocks do the top 1% (or 0.1%) of holders own?
And personally I'd say that the 90th-99th percentile investor (if not 99.9th percentile) would still qualify as "retail" - what proportion of stocks do the top 1% (or 0.1%) of holders own?
> If a significant number of people start moving retirement money out of index funds
If a significant number of people start moving money out of index funds, causing a decrease in the price of index funds, then that is just an opportunity for profit-making from other investors, which will stabilize the price.
If a significant number of people start moving money out of index funds, causing a decrease in the price of index funds, then that is just an opportunity for profit-making from other investors, which will stabilize the price.
If an index fund was an "atomic" independently traded unit, probably. But in index fund, for each $1 sold, managers must sell the underlying stocks that comprise the index in the exactly prescribed proportions. While this is not a problem for many heavily traded stocks, a lot of smaller stocks, even in SP500, do not have the volume to support a lot of shares changing hands, so their prices will likely collapse way more than the index. Which may trigger more selling. There was a discussion on this on HN a few months ago.
This is not a problem for actively managed funds, which have caveats that allow managers a lot of freedom. If there are no buyers for stock X, they do not have to sell it. Index funds do not get any such flexibility. The impact is amplified as the amounts invested in indices ballooned in recent years.
I do not think anyone knows if this scenario will happen and, if so, how bad the fallout will be, but there are systemic risks that go beyond sales uniformly depressing a price for a basket of stocks.
This is not a problem for actively managed funds, which have caveats that allow managers a lot of freedom. If there are no buyers for stock X, they do not have to sell it. Index funds do not get any such flexibility. The impact is amplified as the amounts invested in indices ballooned in recent years.
I do not think anyone knows if this scenario will happen and, if so, how bad the fallout will be, but there are systemic risks that go beyond sales uniformly depressing a price for a basket of stocks.
Nope. If prices of the underlying stock collapse because of index selling due to movement out of retirement funds, then other investors will buy the underlying stock, stabilizing the price - even if they are not buying the fund.
Selling doesn't automatically trigger more selling, that's just a media narrative.
This might be true for very illiquid assets, but that is not publicly traded stocks.
Selling doesn't automatically trigger more selling, that's just a media narrative.
This might be true for very illiquid assets, but that is not publicly traded stocks.
"I’m betting that the U.S. economy will not stay depressed for 10-20 years, which seems like a pretty good bet."
I'm with you on this one, but it also feels like there's no other choice. Where else can you get high liquidity, with good returns, and a government ready to spring into action if the market goes down too much? European and Japanese markets generally have lower returns. Emerging markets are iffy. Bonds don't yield as much as equities.
It's like "I'm gonna take a bet that I'm going to keep working a 9-5 job". Most people have no other real choice.
You have no choice but to invest in a mix of US equities and bonds to be able to retire in a sane timeline.
I'm with you on this one, but it also feels like there's no other choice. Where else can you get high liquidity, with good returns, and a government ready to spring into action if the market goes down too much? European and Japanese markets generally have lower returns. Emerging markets are iffy. Bonds don't yield as much as equities.
It's like "I'm gonna take a bet that I'm going to keep working a 9-5 job". Most people have no other real choice.
You have no choice but to invest in a mix of US equities and bonds to be able to retire in a sane timeline.
"and a government ready to spring into action if the market goes down too much?"
This is an important aspect to the current craze not mentioned in the article.
There are people - retail & institutional players - literally banking large sums of money on this dynamic of socializing losses. So long as this continues, we'll see an artificially inflated market.
This is an important aspect to the current craze not mentioned in the article.
There are people - retail & institutional players - literally banking large sums of money on this dynamic of socializing losses. So long as this continues, we'll see an artificially inflated market.
There's two aspects of the government "springing into action":
1) The government trying to preserve businesses and jobs (both capital and employment) in a crisis through general Keynesian stimulus and industry-specific bailouts (a sort of corporate clientelism, whatever the justification may be).
2) The government having to pay to shore up losses of business where the business should have known better. This is the general populace taking the hit for particular bets gone wrong by private actors. I don't see that as much in this crisis. The closest I can tell is companies spending so much on dividends and buy-backs in the past few years without keeping any sort of cushion. The companies that are most distressed are the squeaky nails that get the hammer. This is a moral hazard. Of course, you must seem sympathetic to the present administration and, to a lesser extent, the public too. That's why airlines have been bailed out but not cruise companies.
1) The government trying to preserve businesses and jobs (both capital and employment) in a crisis through general Keynesian stimulus and industry-specific bailouts (a sort of corporate clientelism, whatever the justification may be).
2) The government having to pay to shore up losses of business where the business should have known better. This is the general populace taking the hit for particular bets gone wrong by private actors. I don't see that as much in this crisis. The closest I can tell is companies spending so much on dividends and buy-backs in the past few years without keeping any sort of cushion. The companies that are most distressed are the squeaky nails that get the hammer. This is a moral hazard. Of course, you must seem sympathetic to the present administration and, to a lesser extent, the public too. That's why airlines have been bailed out but not cruise companies.
Airlines are also important in ways that cruise companies are not.
Air travel is important. Airline companies are not.
I mean, obviously the choice is to not demand big returns during a crisis.
The parent was talking about the long term horizon here, not about expected positive returns during this crisis.
That still holds, though.
Stock market vs. cryptocurrency vs. cash vs. guns in a bunker is all a bet on what the future looks like. When you say "There's no other choice - where else can you get high liquidity with good returns and a government backstopping the risk?", that's an implicit bet that a.) people will continue to demand stocks b.) for more money than they pay now and c.) under the government as it exists currently. That has been a good bet for the last 80 years.
But there's a saying in financial markets: "past performance is no indicator of future results". If you believe that the future will be worse than the present for the vast majority of people, your priority shouldn't be to make more money in the future - it should be to preserve what you have and make sure you're not the one left without a chair when the music stops.
And the way in which the music stops determines which asset class you might want to hold. If you believe that investors en masse will have a loss of confidence in the future earning power of American business, but without a monetary or political collapse, you should move to cash. If you believe that the government's support of the stock market will hyperinflate the currency, you might want to look into one of the many cryptocurrencies that promise quick transactions. If you believe we're headed for widespread social collapse, you should get some guns and plant a garden in a small non-descript home (or bunker) in the middle of nowhere.
Stock market vs. cryptocurrency vs. cash vs. guns in a bunker is all a bet on what the future looks like. When you say "There's no other choice - where else can you get high liquidity with good returns and a government backstopping the risk?", that's an implicit bet that a.) people will continue to demand stocks b.) for more money than they pay now and c.) under the government as it exists currently. That has been a good bet for the last 80 years.
But there's a saying in financial markets: "past performance is no indicator of future results". If you believe that the future will be worse than the present for the vast majority of people, your priority shouldn't be to make more money in the future - it should be to preserve what you have and make sure you're not the one left without a chair when the music stops.
And the way in which the music stops determines which asset class you might want to hold. If you believe that investors en masse will have a loss of confidence in the future earning power of American business, but without a monetary or political collapse, you should move to cash. If you believe that the government's support of the stock market will hyperinflate the currency, you might want to look into one of the many cryptocurrencies that promise quick transactions. If you believe we're headed for widespread social collapse, you should get some guns and plant a garden in a small non-descript home (or bunker) in the middle of nowhere.
>You have no choice but to invest in a mix of US equities and bonds to be able to retire in a sane timeline.
Plant trees in the tropics, then your money has roots and grows fast.
Different types of hardwoods give you a 5, 10, 20 year time to harvests.
Plus the monkeys, parrots etc like it (if you do it right). Many of my 5 yr old trees are already 10" dbh and 15m tall. Straight timber, some with cacao below.
~75 acres can increase your net worth by about $3k/day, indefinitely.
Plant trees in the tropics, then your money has roots and grows fast.
Different types of hardwoods give you a 5, 10, 20 year time to harvests.
Plus the monkeys, parrots etc like it (if you do it right). Many of my 5 yr old trees are already 10" dbh and 15m tall. Straight timber, some with cacao below.
~75 acres can increase your net worth by about $3k/day, indefinitely.
Not a bad idea...how do I get into that. Do you have more info? I'm gonna look into it
Buy cheap land in the rainy tropics that needs reforestation (~$500-$3000/ha), then plant trees. Labour at ~$15/day per worker is abundant and comes with much valuable local knowledge about the best trees etc. Interplanting the hardwoods with leguminous inga edulis trees to shade out the weeds and fertilize the soil is a preferred method, as per https://www.rainforestsaver.org/advice-for-farmers
This year we'll have planted another 7 hectares of Guazuma ulmifolia at a density of 2mx3m or ~1700 trees/hectare using the Inga alley cropping method. They should have an average trunk section at least one foot square and 26' tall in 10 years. (ie 1x1x26x12= 312 board ft) so if you do the math at just $1/board ft then it's about $150/day/hectare. (ie 1700x312x1/10/365= ~$145). So 7 hectares makes your net worth increase by about $1000/day. The nice thing about these type of trees is that they re-sprout after harvest so no need to replant, ie continuous harvest indefinitely by cutting blocks only 1/10th of your trees per year, so the first cut trees are ready to cut again when the last, much bigger, are harvested.
(I've got some teak & mahogany planted too but not a big fan, too slow. I'm not a fan of non-native pines nor eucalyptus either.)
Those numbers go way up if you process the lumber and make furniture, flooring etc.
Also many trees are valuable medicinals. For example a water extract (ie tea) from the bark of the G. Ulmifolia tree (bolaina negra, not blanca) kills virus, lowers fever and reduces pain. See https://www.rain-tree.com/mutamba.htm
Along with bark from uña de gato with lemon (immune system stimulus), chanca piedra (other antivirus & more), tumeric with black pepper (anti-inflammatory), ginger, moringa and matico leaves (antibacterial). Is our anti-virus go-to, much better than what is available in pharmacies.
This year we'll have planted another 7 hectares of Guazuma ulmifolia at a density of 2mx3m or ~1700 trees/hectare using the Inga alley cropping method. They should have an average trunk section at least one foot square and 26' tall in 10 years. (ie 1x1x26x12= 312 board ft) so if you do the math at just $1/board ft then it's about $150/day/hectare. (ie 1700x312x1/10/365= ~$145). So 7 hectares makes your net worth increase by about $1000/day. The nice thing about these type of trees is that they re-sprout after harvest so no need to replant, ie continuous harvest indefinitely by cutting blocks only 1/10th of your trees per year, so the first cut trees are ready to cut again when the last, much bigger, are harvested.
(I've got some teak & mahogany planted too but not a big fan, too slow. I'm not a fan of non-native pines nor eucalyptus either.)
Those numbers go way up if you process the lumber and make furniture, flooring etc.
Also many trees are valuable medicinals. For example a water extract (ie tea) from the bark of the G. Ulmifolia tree (bolaina negra, not blanca) kills virus, lowers fever and reduces pain. See https://www.rain-tree.com/mutamba.htm
Along with bark from uña de gato with lemon (immune system stimulus), chanca piedra (other antivirus & more), tumeric with black pepper (anti-inflammatory), ginger, moringa and matico leaves (antibacterial). Is our anti-virus go-to, much better than what is available in pharmacies.
Thanks a ton for sharing. This is such a great comment.
this is it for me. the government just pretty much admitted when things get ugly they will save it. why wouldn't you invest in that?
it's like the US government has been bluffing about capitalism being the answer the whole time and that bluff just got called.
it's like the US government has been bluffing about capitalism being the answer the whole time and that bluff just got called.
The US government has been performing standard Keynesian monetary & fiscal stimulus measures during crises since the Depression. That's what I mean when I say the government is ready to spring into action. It's possible to imagine a totally laissez-faire world where they wouldn't do that. Despite the strength of free-marketeers in the US, we're not quite there yet.
BTW I achieved "Financial Independence, Retire Early", but didn't like it - though it was tremendous fun getting there, by creating value that I and others valued - being a good, contributing member of society felt good. (And the motivation of FIRE helped.)
Plus, you don't really retire, your job is now investing. If you really love that particular job (like Buffett does), then this works out well.
But if your innate talents and interests lie elsewhere, you'd be happier doing that... and the need for money can help motivate you, during those times you don't feel like it.
It doesn't seem like extra motivation should be important, but is was for me personally. Maybe I'm lacking somehow, as I note that many independently wealthy people do keep working without that motivation. e.g. YC itself. (Though pg now does seem to have really retired, or maybe is a fulltime career parent - there is no more important job!)
Thoughts on motivation?
Plus, you don't really retire, your job is now investing. If you really love that particular job (like Buffett does), then this works out well.
But if your innate talents and interests lie elsewhere, you'd be happier doing that... and the need for money can help motivate you, during those times you don't feel like it.
It doesn't seem like extra motivation should be important, but is was for me personally. Maybe I'm lacking somehow, as I note that many independently wealthy people do keep working without that motivation. e.g. YC itself. (Though pg now does seem to have really retired, or maybe is a fulltime career parent - there is no more important job!)
Thoughts on motivation?
For me, after retiring at 33, I just turned my existence into an adventure playground. For me, getting there was very little fun - I accidentally built a successful business that I ended up hating like a prison sentence, so getting out was a huge relief.
I live off grid in the middle of nowhere, and I am busy and engaged, all day, every day, doing and learning. I’ve become an infrastructure engineer, a construction engineer and labourer, a farmer, an arboriculturist, and at night I’m an astronomer, an author, and an automation coder. Right now I’m putting together a multi-stage solar and hydro dump heating setup. All sorts of interesting challenges, and I’m experimenting with welding and (safely) testing large pressure vessels, which is a first for me.
Am I contributing to society? Not really - but I’m not taking anything from it either, other than passive income. My portfolio just sits there and grows for my dotage, the rental properties provide an income, and I do a tiny bit of tech consulting, both paid and pro bono, because it’s fun.
So, motivation? Do something you enjoy. That’s pretty much all there is to it. I like screwing around with matter and information and learning and making things, so I do that.
I live off grid in the middle of nowhere, and I am busy and engaged, all day, every day, doing and learning. I’ve become an infrastructure engineer, a construction engineer and labourer, a farmer, an arboriculturist, and at night I’m an astronomer, an author, and an automation coder. Right now I’m putting together a multi-stage solar and hydro dump heating setup. All sorts of interesting challenges, and I’m experimenting with welding and (safely) testing large pressure vessels, which is a first for me.
Am I contributing to society? Not really - but I’m not taking anything from it either, other than passive income. My portfolio just sits there and grows for my dotage, the rental properties provide an income, and I do a tiny bit of tech consulting, both paid and pro bono, because it’s fun.
So, motivation? Do something you enjoy. That’s pretty much all there is to it. I like screwing around with matter and information and learning and making things, so I do that.
FWIW, I suspect that folks like you are the whole point of civilization. It's like you "won" history. :) Congratulations.
(Just to be really really clear, I'm being sincere. I'm glad that somebody out there is okay in a deep and meaningful way, as contrasted with the horror show that nearly everybody has had to put up with since... 40,000 A.D.? 1,000,000 A.D.? Fuck yeah dude!)
(Just to be really really clear, I'm being sincere. I'm glad that somebody out there is okay in a deep and meaningful way, as contrasted with the horror show that nearly everybody has had to put up with since... 40,000 A.D.? 1,000,000 A.D.? Fuck yeah dude!)
I think you could contribute just by sharing your projects and designs online. I love reading about projects like this.
Bonus if you pick a bad accent and use a lot of nonsense swear words.
Bonus if you pick a bad accent and use a lot of nonsense swear words.
You are contributing to society. You've shown your value to the economy and got rewarded capital for it, which you now move in an efficient (?) way.
Unlike those essential workers, pfft. I think this juxtaposition highlights a problem with our current economies. He built a business he didn't like and made bank on it and now he can extract wealth from the economy indefinitely, meanwhile people are essentially forced into subjecting themselves to potential death for "peanuts" and no real financial security. How "essential" was his business, and how "essential" are the current grunts on the front line? Why the disparity in compensation? The economy has a weird way of justifying who is worthy of rewards.
I agree entirely. The system stinks to high hell, and I’d much rather see wealth more evenly distributed - it would make a better world for all. What we have now is little better than indentured servitude - actually, it’s worse, as it’s dressed up as “freedom”.
My business started out as trying to solve precisely this - we wanted to democratise ecommerce, and make it accessible for anyone, even with no capital, to become bourgeoisie.
Unfortunately, I learned the hard way that the lure of lucre is too strong for most to resist, and my partner, and our investors, dragged me kicking and screaming down the road of helping the rich get richer. There’s a reason (well, among many) that I cashed in my chips and left.
This way, I’m at least not actively making the world worse, and don’t feel the crushing guilt that came to characterise my existence.
My business started out as trying to solve precisely this - we wanted to democratise ecommerce, and make it accessible for anyone, even with no capital, to become bourgeoisie.
Unfortunately, I learned the hard way that the lure of lucre is too strong for most to resist, and my partner, and our investors, dragged me kicking and screaming down the road of helping the rich get richer. There’s a reason (well, among many) that I cashed in my chips and left.
This way, I’m at least not actively making the world worse, and don’t feel the crushing guilt that came to characterise my existence.
Thanks for the agreement, and obviously the problem isn't directly your fault, or one person's job to tackle alone. Also a tinkerers paradise is probably what I'd also do if I had the capital to cash out.
What would you think happens in a system where capital is evenly distributed? Think of it from a game perspective, how would that play out if you search for an equilibrium?
I don't think he means exactly even, but ideally there is less reliance on desperation being the motivating factor for people working.
Well people paid him to do it, so it seemed essential to someone.
And it's not like the right will continue indefinitely - if they fail in their skill they will start losing returns and losing that right (capital).
And it's not like the right will continue indefinitely - if they fail in their skill they will start losing returns and losing that right (capital).
People pay for junk all the time. Capital being spent is not an endorsement of the quality of the item it was spent on, nor evidence that it was "essential", especially given the definition of "essential" in the era of Covid-19.
There are plenty of examples of highly paid execs making poor choices, and getting rewarded well for it. Even more reason spent capital is poor evidence of quality.
There are plenty of examples of highly paid execs making poor choices, and getting rewarded well for it. Even more reason spent capital is poor evidence of quality.
Thanks! I also was about 33. And it did become like a prison, at the end (I think because I gradually shifted focus from value, to money).
Your adventure sounds like trememdous fun too. I think you retired with much more money than me (I stopped at the absolute minimum, when it was really taking off).
Learning etc is creating value, and could well be valuable to society long-term - just lacking that immediate feedback. Your consulting gives that. (I did some consulting too, but can quit if non-tech issues make it unpleasant. That's the point of wealth, isn't it?... but it also meant I didn't have work to out how to solve/overcome/deal with it).
Your adventure sounds like trememdous fun too. I think you retired with much more money than me (I stopped at the absolute minimum, when it was really taking off).
Learning etc is creating value, and could well be valuable to society long-term - just lacking that immediate feedback. Your consulting gives that. (I did some consulting too, but can quit if non-tech issues make it unpleasant. That's the point of wealth, isn't it?... but it also meant I didn't have work to out how to solve/overcome/deal with it).
> I think you retired with much more money than me (I stopped at the absolute minimum, when it was really taking off).
Maybe, maybe not - I know many, many people far wealthier than me who are still deep in the rat race, and can’t see a way out. I had enough to blow a chunk on travel (highlight was a month in Antarctica, and I’m toying with applying to do a season or two with the BAS once things are a bit more settled on the homestead), to buy two apartments (well, unused basements with scope for conversion in a world heritage city), and two rural houses (one with half a roof, one with no roof), and to renovate them, which we did on a shoestring by doing everything we could do ourselves. My wife has become an accomplished conservation mason in the process, and I learned how to roof, plaster (lime, never worked with gypsum), pour concrete, plumb, wire, and all the rest - got offered jobs by the people I asked to come inspect and sign off on my work, which was really flattering.
The remaining cash I stuck in stocks I believed in, and continue to believe in.
I’m 36 now - it took three more years of hard graft (but enjoyable graft) to turn a lump of cash (oh, screw it - £400k) into earning assets that we can comfortably live off in a country with a low cost of living. Going off grid was part of the formula, as after the capital outlay for power and water, our cost here comprises food, and diesel for the truck - although I plan to do a TEC this summer and dispense with fossil fuels entirely, and their cost, and I’m hopeful that we’ll have two decent harvests this year. Good thing I like beans and potatoes and fruit.
I’ve got mortgages on the rentals, so do have exposure on interest rates, but this is why I went for mid term furnished rentals - allows me flexibility with rents, and means my tenants are usually businesspeople deployed elsewhere, with a corporation paying their rent, so I can command a premium, and not feel like I’m exploiting workers who can’t get out of the rent trap.
I’m toying with the idea of starting a YouTube channel to share the adventure, but I’m held back by the prospect of haters - I dealt with enough venom in the business to just not want to expose myself to it again, and I don’t want to accidentally turn my “quiet” life into a business.
Maybe, maybe not - I know many, many people far wealthier than me who are still deep in the rat race, and can’t see a way out. I had enough to blow a chunk on travel (highlight was a month in Antarctica, and I’m toying with applying to do a season or two with the BAS once things are a bit more settled on the homestead), to buy two apartments (well, unused basements with scope for conversion in a world heritage city), and two rural houses (one with half a roof, one with no roof), and to renovate them, which we did on a shoestring by doing everything we could do ourselves. My wife has become an accomplished conservation mason in the process, and I learned how to roof, plaster (lime, never worked with gypsum), pour concrete, plumb, wire, and all the rest - got offered jobs by the people I asked to come inspect and sign off on my work, which was really flattering.
The remaining cash I stuck in stocks I believed in, and continue to believe in.
I’m 36 now - it took three more years of hard graft (but enjoyable graft) to turn a lump of cash (oh, screw it - £400k) into earning assets that we can comfortably live off in a country with a low cost of living. Going off grid was part of the formula, as after the capital outlay for power and water, our cost here comprises food, and diesel for the truck - although I plan to do a TEC this summer and dispense with fossil fuels entirely, and their cost, and I’m hopeful that we’ll have two decent harvests this year. Good thing I like beans and potatoes and fruit.
I’ve got mortgages on the rentals, so do have exposure on interest rates, but this is why I went for mid term furnished rentals - allows me flexibility with rents, and means my tenants are usually businesspeople deployed elsewhere, with a corporation paying their rent, so I can command a premium, and not feel like I’m exploiting workers who can’t get out of the rent trap.
I’m toying with the idea of starting a YouTube channel to share the adventure, but I’m held back by the prospect of haters - I dealt with enough venom in the business to just not want to expose myself to it again, and I don’t want to accidentally turn my “quiet” life into a business.
Thanks! That is much more. Also, although your hard graft was enjoyable (working autonomously etc), your full amount would be far higher still.
Re youtube channel: I think you're right on both counts, people will love it, people will hate it. Ironically, charging for it would be one filter. FWIW I think you're right to not risk it! (maybe a book would be safer?)
Re youtube channel: I think you're right on both counts, people will love it, people will hate it. Ironically, charging for it would be one filter. FWIW I think you're right to not risk it! (maybe a book would be safer?)
Thanks for sharing. Sounds like a dream.
You retired on £400K?
"in a country with a low cost of living"
In a country with a low cost of living, one can live like a king for £1k a month. With £400k that's yearly withdrawal rate of 3%, which seems safe enough.
In a country with a low cost of living, one can live like a king for £1k a month. With £400k that's yearly withdrawal rate of 3%, which seems safe enough.
Yup, this wouldn't really work in the UK. In Portugal, however, it goes a long way. It helps that the properties are yielding about 20%, as I went for the corporate rental market, and the portfolio has grown about 450% since '17. It's all gone better than hoped for, and I am earning more screwing about in the woods than I did working 16 hour days. My net worth has increased fairly substantially since I threw it all in.
If the world doesn't go to hell, I will keep farming the excess back into working assets - most likely property, following the same formula of buying shitholes in nice areas and turning them into miniature palaces and renting them to banks and tech firms.
If the world does fall apart, we have everything we need here to be entirely self-sufficient. Land to grow food on, a river for power and water.
We're actually spending less than €500/mo on living expenses - more on hardware, tools, materials - which we do in Spain (as does everyone else in this neck of the woods), as it's a lot cheaper than Portugal for that kind of stuff, and the border is only 10km away. For the really esoteric stuff, there's Alibaba, if you don't mind waiting for the slow boat from China.
If the world doesn't go to hell, I will keep farming the excess back into working assets - most likely property, following the same formula of buying shitholes in nice areas and turning them into miniature palaces and renting them to banks and tech firms.
If the world does fall apart, we have everything we need here to be entirely self-sufficient. Land to grow food on, a river for power and water.
We're actually spending less than €500/mo on living expenses - more on hardware, tools, materials - which we do in Spain (as does everyone else in this neck of the woods), as it's a lot cheaper than Portugal for that kind of stuff, and the border is only 10km away. For the really esoteric stuff, there's Alibaba, if you don't mind waiting for the slow boat from China.
Very cool story! Given that the exciting part of your retirement is learning and making things, I'm curious to hear why you decided not to try starting another business that would allow you to develop your skills in a similar way and also create money as a bonus.
It sounds like your first business was particularly soul-crushing, but do you view this as an inevitable quality in any for-profit activity? Or is it more that with any business there will always be lots of annoying tasks to do that you'd rather not spend time on, whereas your retirement is characterized by total freedom in what you learn and make?
It sounds like your first business was particularly soul-crushing, but do you view this as an inevitable quality in any for-profit activity? Or is it more that with any business there will always be lots of annoying tasks to do that you'd rather not spend time on, whereas your retirement is characterized by total freedom in what you learn and make?
That sounds awesome - enjoy!!
Please have you got more info on your lifestyle?
Just buy land to deprive society of assets, charge people to live there, and spend the stolen labor on whatever nonsense you like.
- I'm not sure how buying land means depriving society of assets, even in shared economies every person would have access to a share of said assets.
- Moreover, is it stolen labor if you provide goods (land) in exchange of money (rent)?
- Moreover, is it stolen labor if you provide goods (land) in exchange of money (rent)?
Renting isn't the biggest evil out there, all things considered, but it's not the most moral thing either. You are by definition (for what this guy is doing) profiting off of a limited resource, because you have better financial leverage than the end user. You are making interest money. I'm no muslim but I see merit in calling making interest money a sin.
But then so is making money from index funds so I suppose we're all going to hell!
But then so is making money from index funds so I suppose we're all going to hell!
This is insane. There are plenty of reasons to rent besides financial leverage, chief among them flexibility. Providing housing that you don’t have to commit to for thirty years is a valuable service and that’s why people pay for it.
It depend on rent/mortgage ratio in where you look, and they do vary a lot.
Alas if the market and the banks are prepared to sell a mortgaged house the deal is not much less flexible than rent, the transaction costs are not zero but often less than cost of moving your stuff.
I suppose this depends on what kind of landlord you are. At the end of the day, a lot of people don't want to deal with home ownership and want to think about providing society with other things. Is that evil?
Bravo!
amiga_500(3)
> Thoughts on motivation?
Lose yourself in the service of others (Ghandi). Find a problem that speaks to your skills and curiosity, something that feeds your soul by doing.
This has helped me find my path, I hope it helps you find yours.
Lose yourself in the service of others (Ghandi). Find a problem that speaks to your skills and curiosity, something that feeds your soul by doing.
This has helped me find my path, I hope it helps you find yours.
Good advice. It's strange that something so rewarding is so often overlooked. It challenges our egos, I think, eh?
[deleted]
> Plus, you don't really retire, your job is now investing.
This can be as easy or lazy as you like. Don't want to do anything? Get a target date/balanced fund and eat the slightly larger expense ratio and realised income. Ok with rebalancing maybe once a year or so? Put X% into a stock index fund, Y% into a bond index fund, reinvestment on and look on your birthday/whatever day once a year to see if you need to rebalance.
You can of course spend more time, but if you don't like it, you don't have to.
This can be as easy or lazy as you like. Don't want to do anything? Get a target date/balanced fund and eat the slightly larger expense ratio and realised income. Ok with rebalancing maybe once a year or so? Put X% into a stock index fund, Y% into a bond index fund, reinvestment on and look on your birthday/whatever day once a year to see if you need to rebalance.
You can of course spend more time, but if you don't like it, you don't have to.
True, but it's not zero work, and you must retain sufficient investing expertise to interpret and respond wisely. Maybe "responsibility" is more apt than "job".
And over decades, things change, e.g. GFC and now covid19, world wars etc. I'm not sure, does a bond index protect you? You'll at least need sufficient buffer to ride it out, perhaps several years worth.
House rentals have issues too, long-term maintenance, council issues, vacancies in a depressed economy.
And over decades, things change, e.g. GFC and now covid19, world wars etc. I'm not sure, does a bond index protect you? You'll at least need sufficient buffer to ride it out, perhaps several years worth.
House rentals have issues too, long-term maintenance, council issues, vacancies in a depressed economy.
> True, but it's not zero work, and you must retain sufficient investing expertise to interpret and respond wisely. Maybe "responsibility" is more apt than "job".
The "expertise" you need is to buy & hold and try to avoid selling when it is low.
The "expertise" you need is to buy & hold and try to avoid selling when it is low.
The stock market is not the economy, as we can tell today.
I do think “things are different” in many ways, in the sense that it’s impossible to ignore the interventions the Fed has taken to blow up their balance sheet to $7T and will likely reach $10T by end of year. The speed and size is unprecedented.
Unfortunately I think Millennials will be the ones that have to deal with the massive debt we are in as a country and unwinding of the Fed’s massive balance sheet, which will play out 10-20 years from now.
I do think “things are different” in many ways, in the sense that it’s impossible to ignore the interventions the Fed has taken to blow up their balance sheet to $7T and will likely reach $10T by end of year. The speed and size is unprecedented.
Unfortunately I think Millennials will be the ones that have to deal with the massive debt we are in as a country and unwinding of the Fed’s massive balance sheet, which will play out 10-20 years from now.
Yes, and there are even commenters in this thread whom openly admit the fed 'backstop' is a factor in their decision to play equities.
This market is highly manipulated and disconnected from reality on many levels - that's overtly obvious and intentional maneuvering via fed and pres. Only this pump and dump scheme isn't perpetuated by some shady OTC penny stock hype stunt.
When the equity bubble does burst (not if, but when) it will be very painful and unfortunately not just for those who are directly exposed but the collateral damage of all the free money will adversely affect those who are not day trading on the golf course, instead sold their clubs just to put food on the plate.
This market is highly manipulated and disconnected from reality on many levels - that's overtly obvious and intentional maneuvering via fed and pres. Only this pump and dump scheme isn't perpetuated by some shady OTC penny stock hype stunt.
When the equity bubble does burst (not if, but when) it will be very painful and unfortunately not just for those who are directly exposed but the collateral damage of all the free money will adversely affect those who are not day trading on the golf course, instead sold their clubs just to put food on the plate.
> This market is highly manipulated and disconnected from reality on many levels
I feel like this presumes some "baseline" market that never really existed. The Fed has a dual mandate - they will and should engage in whatever sort of outlandish monetary policy is necessary to achieve that mandate.
> When the equity bubble does burst (not if, but when)
Absurd that so many people think they can make predictions like these.
I feel like this presumes some "baseline" market that never really existed. The Fed has a dual mandate - they will and should engage in whatever sort of outlandish monetary policy is necessary to achieve that mandate.
> When the equity bubble does burst (not if, but when)
Absurd that so many people think they can make predictions like these.
The dual mandate is full employment and price stability. Neither has to do with the stock market.
But the market reacts to action by the fed, for obvious reasons. That doesn't mean the market is "manipulated" any more than finding a cure for coronavirus would be "manipulating" the market when it jumps in response to the news.
>> The stock market is not the economy, as we can tell today.
This is spot on. There are a lot of regulatory forces which help to prop up the stock market artificially. It's hard to imagine that pro-corporation regulations can go much further without severely damaging the underlying economy on which the stock market depends.
This is spot on. There are a lot of regulatory forces which help to prop up the stock market artificially. It's hard to imagine that pro-corporation regulations can go much further without severely damaging the underlying economy on which the stock market depends.
What unwinding? The Fed's balance sheet is never going down substantially. How much did it unwind in the past decade?
See the Fed’s attempt in December 2018.
Fed tried to raise rates and let bonds purchased mature naturally and roll off the balance sheet. The market immediately tanked hard.
Fed tried to raise rates and let bonds purchased mature naturally and roll off the balance sheet. The market immediately tanked hard.
Agree. I'm not a CFA, but I do have a masters degree in finance and have studied it fairly closely the past few years. Investing should be thought of in terms of years, at a minimum. You're thinking about it in terms of decades, which I think is even better.
However, I offer up two counter thoughts to consider:
1) You say you don't need the money, but how do you know? There could be a better investment opportunity that comes up or we could go into a prolonged depression. Leaving some money not invested gives you more flexibility to allocate your capital down the road. You'll have lower highs but higher lows, which in the long run is good.
2) I actually do know a lot of people who are investing toady in hopes that there is a V-shaped recovery. This is particularly worrying to me and I can't tell you how many times I've overheard amateur investors at work say things like "the market is at a bottom so now is a good time to invest". These are people who have never invested before and only look at the stock price as the determining factor. Like Howard Marks says, market bottoms don't occur until all hope is lost. I'm not sure we've felt that yet.
However, I offer up two counter thoughts to consider:
1) You say you don't need the money, but how do you know? There could be a better investment opportunity that comes up or we could go into a prolonged depression. Leaving some money not invested gives you more flexibility to allocate your capital down the road. You'll have lower highs but higher lows, which in the long run is good.
2) I actually do know a lot of people who are investing toady in hopes that there is a V-shaped recovery. This is particularly worrying to me and I can't tell you how many times I've overheard amateur investors at work say things like "the market is at a bottom so now is a good time to invest". These are people who have never invested before and only look at the stock price as the determining factor. Like Howard Marks says, market bottoms don't occur until all hope is lost. I'm not sure we've felt that yet.
> There could be a better investment opportunity that comes up or we could go into a prolonged depression. Leaving some money not invested gives you more flexibility to allocate your capital down the road. You'll have lower highs but higher lows, which in the long run is good.
What would that look like for a regular, middle class person? We've been educated to stay away from individual stocks; there is too little money and connections to suddenly be part of some lucrative real estate development plan or invest in some rocket ship ML startup. Most "normal" people incrementally a few grant here or there and what's available in the Vanguard or Fidelity account is what's on the menu. Maybe I am too narrow minded?
What would that look like for a regular, middle class person? We've been educated to stay away from individual stocks; there is too little money and connections to suddenly be part of some lucrative real estate development plan or invest in some rocket ship ML startup. Most "normal" people incrementally a few grant here or there and what's available in the Vanguard or Fidelity account is what's on the menu. Maybe I am too narrow minded?
The market overreacts to bad news. So Buffett bought American Express during a scandal, which (he checked) didn't actually affect their business.
For the USA, business is affected, the question is if it's long term: Will closed businesses reopen? Will unemployed find work? Will the US lose its centrality to China? But however bad it is, the market overreacts.
For the USA, business is affected, the question is if it's long term: Will closed businesses reopen? Will unemployed find work? Will the US lose its centrality to China? But however bad it is, the market overreacts.
> I’m betting that the U.S. economy will not stay depressed for 10-20 years, which seems like a pretty good bet.
Not to mention most americans' retirement is tied to their homes\ equity and their 401k/stocks. So it is political suicide for the government to let either drop in value for an extended period of time. Therefore, over the long term, house prices and stock prices will likely go up because politicians want to be reelected.
The only caveat is that eventually, we will reach out "limit" ( demographically, economically, etc ) and then housing/stock prices will drop and stay down for decades/maybe forever. Japan hit their limit in the early 90s and their housing prices and the nikkei today is a fraction of what it was back then.
https://tradingeconomics.com/japan/stock-market
If the check the 50Y chart, you'll see that the nikkei was at 37000 in the early 90s and is now at 20000. 30 years in and still nearly 50% down.
Not to mention most americans' retirement is tied to their homes\ equity and their 401k/stocks. So it is political suicide for the government to let either drop in value for an extended period of time. Therefore, over the long term, house prices and stock prices will likely go up because politicians want to be reelected.
The only caveat is that eventually, we will reach out "limit" ( demographically, economically, etc ) and then housing/stock prices will drop and stay down for decades/maybe forever. Japan hit their limit in the early 90s and their housing prices and the nikkei today is a fraction of what it was back then.
https://tradingeconomics.com/japan/stock-market
If the check the 50Y chart, you'll see that the nikkei was at 37000 in the early 90s and is now at 20000. 30 years in and still nearly 50% down.
One if the problems in Japan is they can’t tolerate unemployment. Despite decades of stagnation their unemployment rate since the early 90s has been about half that of the US. One of the great strengths of the American economy is embracing creative destruction. That of course has terrible costs to individuals, but companies know they can shed workers in hard times, and safely hire them again when needed without being locked into costly long term employment contracts. As a result, along with efficient capital markets, the US can adapt very rapidly to economic change.
Don’t get me wrong, I’m a Brit and, though generally conservative, believe we have a batter balance between social support and economic flexibility. The US health care system appals me for example. That doesn’t blind me to the advantages of the US system.
Don’t get me wrong, I’m a Brit and, though generally conservative, believe we have a batter balance between social support and economic flexibility. The US health care system appals me for example. That doesn’t blind me to the advantages of the US system.
There has been relatively little creative destruction in the US in the past decade, thanks to the Federal Reserve's policy of easy money, propping up badly managed companies.
That's why the unemployment rate (which measures the dynamics of job losses) has been so low.
That's why the unemployment rate (which measures the dynamics of job losses) has been so low.
> it is political suicide ...
Politicians have different time horizons than the cities, provinces and nations that they govern.
It's not political suicide if the politician enriched himself at the expense of the public and is out of office when the consequences are realized.
Politicians have different time horizons than the cities, provinces and nations that they govern.
It's not political suicide if the politician enriched himself at the expense of the public and is out of office when the consequences are realized.
The government has no control of bubble bursts.. in fact they usually aggravate the possibility. According to history, bubble pops usually happen with one small pop and another much larger one after the fact. This second one will happen when people least expect it because the media has thus far spun a narrative of extreme optimism in contrast to reality. The reality is the economic numbers don't look great and will take awhile to bounce back.
> The government has no control of bubble bursts
Pretty sure the Fed has been spending trillions to keep asset bubbles from bursting.
So far it's been working, but also exacerbating social tensions and wealth inequality.
Pretty sure the Fed has been spending trillions to keep asset bubbles from bursting.
So far it's been working, but also exacerbating social tensions and wealth inequality.
How many bubbles have popped since the Fed has been QEing? What happened in 2008?
None, because as they finally pulled back on QE in 2019 the yields inverted and the overnights jumped, so Trump forced them to dive back in around Sept '19 to keep the gravy-train trucking for the election year bragging rights.
I'm looking at different times scales. There have been pops every 7-10 years or so and they get worse every time. That is part of the business cycle. Sure, things recover (in huge part do to QE), but that doesn't mean bubbles do not happen on a pet frequent basis?
That's a good point. It is not political suicide for those leaving politics. But it is political suicide for those that are elected or want to be re-elected.
For example, Bush Jr left the economy in a mess but he was a 2 term president with no political future. So Bush Jr is fine, but Obama who was elected and who wants to be re-elected has to re-inflate housing and stock prices. That's why the housing prices and stock prices won't stay low for extended periods of time. That is until we arrive at the limit of our growth/expansion when no political or economic measure will do any good.
For example, Bush Jr left the economy in a mess but he was a 2 term president with no political future. So Bush Jr is fine, but Obama who was elected and who wants to be re-elected has to re-inflate housing and stock prices. That's why the housing prices and stock prices won't stay low for extended periods of time. That is until we arrive at the limit of our growth/expansion when no political or economic measure will do any good.
Continuously ramping land prices ahead of real growth is national suicide.
> So it is political suicide for the government to let either drop in value for an extended period of time. Therefore, over the long term, house prices and stock prices will likely go up because politicians want to be reelected.
The obituary for Capitalism will point to this factor. The politicians killed it.
The obituary for Capitalism will point to this factor. The politicians killed it.
>I’m betting that the U.S. economy will not stay depressed for 10-20 years, which seems like a pretty good bet.
Everyone forgets about Climate Change...
Everyone forgets about Climate Change...
Yes but if you’re betting on a huge long-term economic slowdown then does this blip even matter to your investing strategy?
Well this is interesting to consider. Disasters often create economic activity: maybe millions of rich people will be rebuilding their coastal houses. On the other hand, if it's so hot that humans can not go outside, that will dampen the economy- but I don't see this happening in temperate zones. But it very well could happen in places where there would be future expected economic growth.
Millions of rich people will be attempting to relocate, on top of hundreds of millions of poor people. Some will profit from this in the short term, as they do in the wake of disasters and refugee crises today, but the overall trend will almost certainly be downward.
It's not just climate change either. There's a whole host of interconnected ecological crises brewing, and most people with a stake in the global financial system either don't recognize or believe this, choose to ignore it, or have much more pressing problems (e.g., providing for themselves and their families).
It's not just climate change either. There's a whole host of interconnected ecological crises brewing, and most people with a stake in the global financial system either don't recognize or believe this, choose to ignore it, or have much more pressing problems (e.g., providing for themselves and their families).
Yes, you can tell by the increase in insurance premiums and plummeting insurance stocks.
If you think you have an investment that will do better in terms of climate change than the general stock market, I'm all ears
Is it a given that climate change would be bad for companies? Changing needs usually means opportunities.
That’s exactly how I felt reading the article. Their worse case historic scenario is 3 years? Not many people should be investing with a shorter timeline than that anyway!?
I suggest taking a look at the dragon portfolio
https://taylorpearson.me/thedragon/
The basic idea is that you create a balanced portfolio of assets that are negatively correlated with each other so that, over a very long time horizon , your wealth retains its value even in the face of uncertainty, black swan events, and volatility. An example would be owning an equal proportion of stock, cash, bitcoin, gold, fixed income, commodities, and volatility. (Harder for the average person to get exposure to commodities and volatility - but I think bitcoin checks those boxes).
Edit: include original paper that describes the portfolio by Christopher Cole: https://docsend.com/view/taygkbn
https://taylorpearson.me/thedragon/
The basic idea is that you create a balanced portfolio of assets that are negatively correlated with each other so that, over a very long time horizon , your wealth retains its value even in the face of uncertainty, black swan events, and volatility. An example would be owning an equal proportion of stock, cash, bitcoin, gold, fixed income, commodities, and volatility. (Harder for the average person to get exposure to commodities and volatility - but I think bitcoin checks those boxes).
Edit: include original paper that describes the portfolio by Christopher Cole: https://docsend.com/view/taygkbn
Why so risk-averse in the big picture? Just skimming for now, it seems like this could easily lock a person out of huge gains made by e.g. actively trading during a dynamic market event. Which is weird because there are really effective ways to cover risks during such periods as well, only they aren't nearly as deadly to one's overall profit.
It seems like one of the selling points must be "set and forget," which makes me wonder if the target audience is just people who don't want to actively learn about a thing, but would rather take someone else's word.
It seems like one of the selling points must be "set and forget," which makes me wonder if the target audience is just people who don't want to actively learn about a thing, but would rather take someone else's word.
For someone interested in learning about how to cover risk while taking during a dynamic market event, what would you recommend? My investment education pretty much stopped at "A Random Walk Down Wall Street".
A bit more context around “really effective ways to cover risk” would be helpful. Are you referring to derivatives such as covered calls on stocks you already own? Or collecting premium by selling naked puts?
At least link the original paper!
Christopher Cole is wicked smart, deserves attribution.
https://docsend.com/view/taygkbn
Christopher Cole is wicked smart, deserves attribution.
https://docsend.com/view/taygkbn
Isn't this simply another name for diversification?
Yes, but it's branded to sell you products and ignores differences in each item's volatility & leverage.
This is what wealth preservation trusts like Personal Assets, RIT, Brunner and Caledonian do (all listed in London).
But you aren't betting on the economy, you're betting on the perceived value of current publicly traded equities. For example, if a company you invest in goes bankrupt, you don't get that money back later when the economy recovers.
Betting on one company always has that risk. Most people are investing in index funds and Fortune 500 companies which aren't going bankrupt.
If GM (in indexes) goes bankrupt and Tesla (not in indexes) stays alive, or if IBM (in indexes) goes bankrupt and Palantir (not in indexes) stays alive, then you as an investor in public indexes do not reap benefits of the economy improving.
Tesla is in indexes. If they're a publicly traded company, they are in indexes.
Palantir is privately held and thus not super relevant to this discussion.
Palantir is privately held and thus not super relevant to this discussion.
Palantir is relevant because you cannot invest in it. That's the whole point. Did you read the previous part of this discussion about how publicly traded indexes do not represent a targeted bet on the economy because there are plenty of companies that are not a part of them (e.g. Tesla not in the S&P 500) that can completely replace the ones that are?
I agree that betting on publicly traded indices does not represented a targeted bet on the economy. I disagree that bankruptcy is a big risk to index fund investors.
The problem with that reasoning is that the stock market is NOT the economy. It’s a secondary market that is more or less necessary depending on your views. Buybacks instead of dividends definitely have set the market in the speculation territory. Sure the US economy can not stay depressed for 20 years, but drawing a causality with stock price is not automatic and is an opinion at this point.
> Sure the US economy can not stay depressed for 20 years...
Are familiar with Japan's history over the last few decades?
Are familiar with Japan's history over the last few decades?
Investors are betting that while the US government will continue to shrug off higher and higher unemployment numbers, any significant move downwards in the stock market will spur immediate action from both the administrative and legislative parts of the Federal government.
This is not a bad bet at all. The dominant ideology in Washington seems to be laissez faire when big businesses are doing well and bailouts when they aren’t. It must be nice to play with a stacked deck like that.
This is not a bad bet at all. The dominant ideology in Washington seems to be laissez faire when big businesses are doing well and bailouts when they aren’t. It must be nice to play with a stacked deck like that.
It makes me wonder if this is moment is going to become a lesson in future finance courses about when we inflated the dollar's value out of existence just to keep the S&P 500 chart moving in a positive direction
Inflation won't happen until spending for goods/services increases. These Fed bailouts all end up in the pockets of people who don't compete for the same goods/services we use, so the money has little inflationary impact. Unfortunately it does give those people a massive amount of influence and power over policy. I think it's like inflation on democracy.
People have been warning about inflation for more than a decade, but here we are in another deflationary environment, even with the Fed throwing endless fuel on the fire.
Inflationary expectations and wage growth remain low and the Fed has plenty of tools to tame it (interest rates, a huge balance sheet), so the question really is now: where is the inflation going to come from?
Inflationary expectations and wage growth remain low and the Fed has plenty of tools to tame it (interest rates, a huge balance sheet), so the question really is now: where is the inflation going to come from?
I can't claim to be an expert in economics or finance, and I don't know if inflation per se is a threat at the moment, but I will say the current state of the economy doesn't make sense to me.
If it really is the case that 30+ million Americans can be out of a job and the stock market reaction is to continue climbing on the assumption that the fed will continue to grow the balance sheet, doesn't that point to a fundamental decoupling between the value of the currency and real-world value? I mean are we really going to live in a society where the government pays companies so that their stock price can remain stable, even when demand for their products no longer exists because their customers are all out of work? It seems like a paper economy which essentially only serves to bail out investors.
I'm not sure what the catalyst would be for that kind of a system to come crashing down, but I just don't understand how it could be sustainable.
If it really is the case that 30+ million Americans can be out of a job and the stock market reaction is to continue climbing on the assumption that the fed will continue to grow the balance sheet, doesn't that point to a fundamental decoupling between the value of the currency and real-world value? I mean are we really going to live in a society where the government pays companies so that their stock price can remain stable, even when demand for their products no longer exists because their customers are all out of work? It seems like a paper economy which essentially only serves to bail out investors.
I'm not sure what the catalyst would be for that kind of a system to come crashing down, but I just don't understand how it could be sustainable.
The catalyst to a crash is when those 30 million people take to the streets and demand change.
Unfortunately media has everyone misdirected to worry about guns/race instead of demanding the government serve the people instead of corporations.
Unfortunately media has everyone misdirected to worry about guns/race instead of demanding the government serve the people instead of corporations.
It took a full two years after the 2008 transfer of taxpayer money to financial institutions for the Occupy movement to get going.
It’s possible that the scale of the current corporate welfare program + health pandemic + inaccessible healthcare + unemployment leads to faster and larger response from the plebes.
It’s possible that the scale of the current corporate welfare program + health pandemic + inaccessible healthcare + unemployment leads to faster and larger response from the plebes.
The media is also doing a poor job covering possible/impending/discussions of rent strikes.
The revolution, as they say, will not be televised.
The revolution, as they say, will not be televised.
The thing is if America was a closed system then yes we would see massive inflation right now and a collapse of the stock market. But as a member of global community where everyone is the world is seeing the same financial problems, America is seen as the safest bet. People in other countries are investing in American companies and the American dollar more than ever. This is the only reason the stock market has not tanked, because it is still seen a safe bastion for your money. However, once unemployement stimulus runs out, PPP loans run out of forgiveness, bankrupcies begin to occur on a massive scale, and taxes have to be raised to cover more spending we will see a further crash. YOu can't just have 36 million unemployed people (which will be 50 million once PPP forgiveness runs out) and expect everything to remain normal. A large part of those people will not have a job to return as every company will try to cut costs.
"I mean are we really going to live in a society where the government pays companies so that their stock price can remain stable, even when demand for their products no longer exists because their customers are all out of work? It seems like a paper economy which essentially only serves to bail out investors."
To the last sentence, yes, a totally blatant wealth transfer scheme. Anecdotally, I think many of those suddenly "engaging" are just playing into the game - getting their dopamine and ego fix by showing dumb gains on nominal investments thinking that they too are wealthy and smarter than the next one :/
Of greater long term concern though is the decreasing transparency into which companies are benefiting disproportionately from government intervention.
These fed manipulations will lead to an even more dysfunctional marketplace down the road because once the water is tainted - we don't know how much, where, or with what exactly. It's impossible to go back to safe and clean drinking water again from this source.
Historically, the real value of the "stock market" has been that of a place for informed decisions based on consistent measurement and analysis of commonly reported variables regarding the well being of corporations. There's a reason a public company must abide by certain rules and regulations to go and remain public...it's so that investors can expect a certain amount of disclosure to actually make decisions on whether or not to invest. While public disclosure requirements have not changed lately (to my knowledge) - there is no way for the feds bailout factors to be decoupled from earnings.
I would argue that aspect, which represents a huge value proposition of the "stock market" to investors of all sizes near and far, is quickly disappearing. I'm not sure what this means for the future.
To the last sentence, yes, a totally blatant wealth transfer scheme. Anecdotally, I think many of those suddenly "engaging" are just playing into the game - getting their dopamine and ego fix by showing dumb gains on nominal investments thinking that they too are wealthy and smarter than the next one :/
Of greater long term concern though is the decreasing transparency into which companies are benefiting disproportionately from government intervention.
These fed manipulations will lead to an even more dysfunctional marketplace down the road because once the water is tainted - we don't know how much, where, or with what exactly. It's impossible to go back to safe and clean drinking water again from this source.
Historically, the real value of the "stock market" has been that of a place for informed decisions based on consistent measurement and analysis of commonly reported variables regarding the well being of corporations. There's a reason a public company must abide by certain rules and regulations to go and remain public...it's so that investors can expect a certain amount of disclosure to actually make decisions on whether or not to invest. While public disclosure requirements have not changed lately (to my knowledge) - there is no way for the feds bailout factors to be decoupled from earnings.
I would argue that aspect, which represents a huge value proposition of the "stock market" to investors of all sizes near and far, is quickly disappearing. I'm not sure what this means for the future.
I’ve got a bit of a hypothesis about why we’ve seen a decade+ of near-0 rates with virtually no inflation. It’s all about the wealth disparity.
The wealthiest already have huge amounts of money saved and invested in the markets. Adding to the money supply primarily benefits those who already have the most money. So something like 80% of new money winds up in the hands of the top 1%, who save it, consume no extra (aside from stocks), and have no impact on the basket of goods.
I think this also partly explains the high P/E ratios we’ve seen over the past decade+.
Nothing in economics is that simple. But this feels reasonable to me. Anything I’m missing?
The wealthiest already have huge amounts of money saved and invested in the markets. Adding to the money supply primarily benefits those who already have the most money. So something like 80% of new money winds up in the hands of the top 1%, who save it, consume no extra (aside from stocks), and have no impact on the basket of goods.
I think this also partly explains the high P/E ratios we’ve seen over the past decade+.
Nothing in economics is that simple. But this feels reasonable to me. Anything I’m missing?
There’s been plenty of inflation. Lunch and rent have doubled here in ~15 years. Education and healthcare are up much more than that. Sure consumer items get cheaper but it is small consolation.
the basic cause of inflation is more money chasing the same amount of real goods/services. so it stands to reason that which goods/services inflate depend on who is getting the new dollars. of course, things are always more complicated in macro.
I'm by no means an economist, but I think the same. I understand inflation to be the shifting reference point of purchasing power per unit of currency. So without an increase in pay for the lower class in the U.S., it actually prevents prices from moving up.
Giant megacorps that pay their workers minimum wage (i.e. Walmart) have done a tremendous amount to put downward pressure on inflation as well.
The inflation rate is calculated by tracking price of a specific set of goods. The fed tracks this number and aims to set it at about 2%. So what happens is the inflation creeps up in everything that is not measured in this basket. For example, the price of homes, college education, and equities have gone up much faster than the 2% target.
It is another one of those cases of Goodharts law. The way they are measuring inflation is no longer capturing the drop in the value of money.
It is another one of those cases of Goodharts law. The way they are measuring inflation is no longer capturing the drop in the value of money.
Seems like we are seeing inflation, it’s just in assets not commodities. How else do you explain the current P/E ratio of the stock market?
At 20.53 [0] why does it need explaining? It's been higher many times in the past.
[0]: https://www.multpl.com/s-p-500-pe-ratio
[0]: https://www.multpl.com/s-p-500-pe-ratio
Your chart shows the median P/E of 14.82. That would make us 38.5% over priced based on historical standards. Meanwhile, we just had the most significant unemployment event in our country’s history.
If you believe economic fundamentals support historically-high valuations, I think it does deserve an explanation.
Forward P/E at highest levels in 18 years: https://markets.businessinsider.com/news/stocks/stock-market...
If you believe economic fundamentals support historically-high valuations, I think it does deserve an explanation.
Forward P/E at highest levels in 18 years: https://markets.businessinsider.com/news/stocks/stock-market...
Fed’s ever expanding balance sheet. It failed to reduce its size prior to the pandemic.
Seems like in the long run the Fed will end up owning the whole market. It gets to invest with unlimited money in the most depressed assets every time there’s a downturn, and as an institution it’s horizon is forever. It seems like this ought to be a bizarre funding mechanism for the treasury. Perhaps the federal government should sell downturn insurance on assets. After all, it’s basically like the Fed is pretending it sold puts on much of the market when it in fact did not. Maybe the Fed should actually sell puts?
Asset price inflation and real inflation are two very different things. Asset price inflation has undoubtedly increased.
We may be conflating "asset inflation" with "consumer product inflation"
But for the later, it will come from the reduced value of the dollar. Which (for more than a decade) has been muted by the reserve currency status of the USD.
But for the later, it will come from the reduced value of the dollar. Which (for more than a decade) has been muted by the reserve currency status of the USD.
Inflation happens when the dollar is no longer the global reserve currency.
That may not be for awhile, but the more debt the government takes on the more likely it is to happen. (The US government can literally print money to pay debt, but that devalues the dollar, aka inflation.)
How long will the USA be the most trusted economy?
That may not be for awhile, but the more debt the government takes on the more likely it is to happen. (The US government can literally print money to pay debt, but that devalues the dollar, aka inflation.)
How long will the USA be the most trusted economy?
The Big Short - "It's possible that we are in a completely fraudulent system."
This quote was at the point in the film where banks were keeping prices artificially high until they sold their positions off. Similar is "Banks that bundled bad debt and bet against it" https://www.nytimes.com/2009/12/24/business/24trading.html
Basically my take-away was: don't bet against the house, even if it's crumbling. Because they won't agree you've won the bet until they resell it off to some other sucker; or they'll declare bankruptcy and you won't get paid; or they'll get bailed out and you'll be wrong even though you were right. [I'm not a finance person, so this is all a layperson's interpretation.]
Basically my take-away was: don't bet against the house, even if it's crumbling. Because they won't agree you've won the bet until they resell it off to some other sucker; or they'll declare bankruptcy and you won't get paid; or they'll get bailed out and you'll be wrong even though you were right. [I'm not a finance person, so this is all a layperson's interpretation.]
I could live with the libertarian ideal of “regulation” via consequences imposed by market forces and I could live with the New Left ideal of regulation via, well, regulation. But no consequences and no regulations is insane.
Our entire economy is like a mining company that steadily mines a gold seam, paying out healthy dividends and executive bonuses all the while and then as soon as the seam is mined out declares bankruptcy leaving toxic waste cleanup and employee pensions for the government to take care of. We don’t just allow ourselves to be exploited by sociopaths, we actively seek it out.
Our entire economy is like a mining company that steadily mines a gold seam, paying out healthy dividends and executive bonuses all the while and then as soon as the seam is mined out declares bankruptcy leaving toxic waste cleanup and employee pensions for the government to take care of. We don’t just allow ourselves to be exploited by sociopaths, we actively seek it out.
Privatize profits and socialize costs
I think what you're seeing is the implementation of the libertarian ideal. No regulation when companies are doing well, but no stomach to suffer losses when they aren't.
I would retort that real libertarians would be very much in favor of consequences, but of course that would be to fall victim to the No True Scotsman fallacy. I think the best we can say in the current environment is that libertarianism is a philosophy that a large number of elected officials promote for the purposes of getting votes, but also a philosophy that most don't really have the stomach for when the excrement hits the fan. Maybe there really are no libertarians in foxholes?
That's cronyism, and has no relation to Libertarianism whatsoever. Libertarians will never support government bailouts, as the only way they are possible is by taking money from someone more productive to give to someone less productive, backed by the threat of force. Nothing Libertarian about that.
Libertarianism is the free market version of Communism. Maybe it will be good if it reaches a pure implementation but in reality it has never been achieved and probably never will be.
If Libertarianism isn’t implemented fully then it will almost for sure devolve into cronyism. It can only work if there is no way to influence government or courts to do things your way. It also can’t really deal with things like pandemics or probably even war. In a pandemic you would have a lot of people die before the truly free market figures out which treatments work and which are scam.
If Libertarianism isn’t implemented fully then it will almost for sure devolve into cronyism. It can only work if there is no way to influence government or courts to do things your way. It also can’t really deal with things like pandemics or probably even war. In a pandemic you would have a lot of people die before the truly free market figures out which treatments work and which are scam.
In the US, it was the catastrophic failure of government that led to inadequate testing and fears of ventilator shortages. Businesses stepped up with tests that work and factories shifted production to ventilators and PPE to rapidly make up the shortfall.
Do you think business would have planned for this? I agree that government has failed but I doubt business would have done any better. Who would pay for stockpiling supplies?
The ones that did plan for this would have made an obscene profit, so that would lead me to believe that some businesses would indeed plan for this. But I'll admit I have no way of knowing.
It’s hard to prepare for a black swan event. Most likely you will run out of money before the event. As a company it would be irresponsible to bet on an event that may happen or may not happen for a very long time.
What you've described is the antithesis of libertarianism.
Why would this be anyone’s ideal? You are not being charitable towards libertarians.
Then they're being treated exactly as they prefer--no charity all bootstraps baby! :P
Libertarians have no problem with voluntary charity, just with compulsory charity.
> You are not being charitable towards libertarians.
Why would anyone, including other libertarians, be charitable toward them?
Why would anyone, including other libertarians, be charitable toward them?
I'm not saying what's happening is the libertarian ideal, I'm saying what's happening is what happens when the libertarian ideal is implemented. A libertarian may want to not bail out big businesses when times are bad - they may truly believe that ideally you just let the bad businesses fail and the market is stronger for it. The problem is that in reality, you're talking about letting voters take a huge amount of pain a few months before an election. So as a result you end up in a situation where you can have a laissez faire approach to regulations when the economy is booming, but you can't actually allow all the people who vote for you to lose their jobs.
That's fair but also fair to consider what practically happens when big government philosophy is implemented.
People get good quality healthcare and spend less doing it?
We could just study any other wealthy country, no?
Nothing in modern US politics comes even close to libertarianism. Libertarianism opposes all regulation of business unless it is in concert with the non-aggression principle (i.e. don't kill, steal, commit fraud, etc.).
Libertarian thinking on antitrust is that it's unnecessary because there is no such thing as a natural monopoly; monopolies are the result of government regulation. Eliminate the regulations that privilege certain businesses over others, and competition will ensure an efficient market.
In reality what we have in the US is a political class which constantly molds regulation to further benefit the shareholders of big businesses. Sometimes they remove regulations to this end, but much more frequently they create or alter them. There's no philosophical bent behind this at all, it's just the strong using government as a tool to oppress the weak (exactly what libertarianism warns us about).
Nobody has ever pandered to libertarians when trying to justify their policies, so I have no idea why people like to blame them.
To me a sign that the libertarians are on to something is that no government has ever dared to try it. Governments are comprised of powerful people and if they did they would lose all that power...
Libertarian thinking on antitrust is that it's unnecessary because there is no such thing as a natural monopoly; monopolies are the result of government regulation. Eliminate the regulations that privilege certain businesses over others, and competition will ensure an efficient market.
In reality what we have in the US is a political class which constantly molds regulation to further benefit the shareholders of big businesses. Sometimes they remove regulations to this end, but much more frequently they create or alter them. There's no philosophical bent behind this at all, it's just the strong using government as a tool to oppress the weak (exactly what libertarianism warns us about).
Nobody has ever pandered to libertarians when trying to justify their policies, so I have no idea why people like to blame them.
To me a sign that the libertarians are on to something is that no government has ever dared to try it. Governments are comprised of powerful people and if they did they would lose all that power...
Libertarians get picked on for being a constant "other". Grassroots blue and red teams each start with a desire for freedom, but are then led by the professional politicians into supporting authoritarian policies to attack the other team and benefit those politicians' true employers. Libertarians don't subscribe to the ensuing narratives, thereby appearing directly opposed to each of the two popular teams.
Furthermore, libertarianism ends up being quite left-brained which makes for a quick short circuit to authoritarianism via logical contradiction. The Party entertains these to gain sponsors the same way the reds and blues do, and there is little doubt it would take on the same corrupt role as the other teams if given a whiff of power.
Furthermore, libertarianism ends up being quite left-brained which makes for a quick short circuit to authoritarianism via logical contradiction. The Party entertains these to gain sponsors the same way the reds and blues do, and there is little doubt it would take on the same corrupt role as the other teams if given a whiff of power.
> In reality what we have in the US is a political class which constantly molds regulation to further benefit the shareholders of big businesses.
The political class you are talking about serves specific masters. They also mold ideological discourse which is where modern libertarianism comes from in the first place. Go check who's funding all of these libertarian speakers and institutes.
The political class you are talking about serves specific masters. They also mold ideological discourse which is where modern libertarianism comes from in the first place. Go check who's funding all of these libertarian speakers and institutes.
So libertarian are in power?
Libertarians are non-interventionists, so clearly not effecting foreign policy. Against gov spending and gov debt, clearly not winning there. We are making progress on civil rights, gay marriage, ending the drug war.
The size and scope of government continues to increase every year, so I don't see how anyone could call that libertarian.
The size and scope of government continues to increase every year, so I don't see how anyone could call that libertarian.
The role of modern libertarians is not to hold power. It is to foment confusion and conflict around any initiatives that would limit the power of private capital (e.g., anything that would address the climate crisis in a meaningful way).
I like the bit where (and maybe it's in the same scene), he says:
> You still believe in the system, don't you
> You still believe in the system, don't you
You would probably get a better deck too if you provided flights for millions of people or helped disburse money or manufactured vehicles to keep people going to their jobs.
Why do individuals think they should receive the same treatment as key infrastructure companies?
Why do individuals think they should receive the same treatment as key infrastructure companies?
The companies as such aren’t at risk, only the investors. Take the cruise industry. If Carnival goes bust, the ships and crew will still be there. They will just be bought up by fresh investors at bargain prices and soon be up and running again. If long terms demand for cruises does fall some ships might be scrapped, but that would happen with or without a bailout. The risk of losing necessary infrastructure for that industry without a bailout is close to zero.
The same is true of most industries, bailouts protect investors not economic capacity, but there are exceptions. I don’t like it but there are very few big banks, and it’s just not possible for fresh investors to rapidly buy up the assets of a failed bank and start a new bank. The heavy regulation of the industry is a serous obstacle to that kind of renewal and this is a dangerous problem.
The same is true of most industries, bailouts protect investors not economic capacity, but there are exceptions. I don’t like it but there are very few big banks, and it’s just not possible for fresh investors to rapidly buy up the assets of a failed bank and start a new bank. The heavy regulation of the industry is a serous obstacle to that kind of renewal and this is a dangerous problem.
It's not a forgone conclusion that the ships will be there. In liquidation those ships have valuable equipment and scrap metal that could be broken down and sold, returning value to creditors and investors.
Ship breaking is big business.
Ship breaking is big business.
As they mentioned, if the ship is worth more as scrap than as a ship, they would have happened with or without a bailout.
sure, but the ship might suddenly become worth less as a working vessel in the absence of a functioning cruise line to operate it. my guess is that a operating a single cruise ship is considerably less profitable than each ship in an n-ship fleet.
If they are key infrastructure companies let’s regulate them like utilities.
Why?
They need a bailout every 10 years, otherwise, they're autonomous. While far from perfect, they're better than the government could do if they had to develop their own systems for handling travelers.
Pennies.
They need a bailout every 10 years, otherwise, they're autonomous. While far from perfect, they're better than the government could do if they had to develop their own systems for handling travelers.
Pennies.
So you are saying companies such as Blackrock, Marriot, and Carnival Cruiselines are critical infrastructure?
Maybe OP would start a company that does one or more of those things if the companies dominating those industries were ever allowed to fail.
Why let them fail - so we can wait another decade until someone figures out the knowhow to start a reliable, national airline? So we can keep travellers idle for yet another year without business until a new company is figured out?
"Save the ship if it sinks, let it float if it goes."
"Save the ship if it sinks, let it float if it goes."
One thing that I don’t see addressed in these posts, but I think makes a huge difference, is that the stock price reflects global demand for ROI. It’s entirely possible for stock values to go up while SP500 expected profitability goes down if the expected profitability of other markets goes down even more, shifting money out of Europe/HK/Japan into the USA.
Aka you don’t have to outrun the bear just the other guys.
Aka you don’t have to outrun the bear just the other guys.
And it's important to note that one of the "other guys" is plain cash. Interest rates are near 0, in many places they are negative, so I think it's a fair bet to think "In 10 years it will make more sense to own a sizable investment in the productive capacity of the US, vs dollars which the fed has been printing like crazy."
Value of cash is determined by inflation, not by interest rates. Since the fed prints money to hit inflation targets, this reasoning doesn't really make sense.
Most people are putting that cash somewhere, aka a bank, so interest rates absolutely determine the expected rate of return on that cash.
Yes, but focusing on the interest rates is reasoning from a price change. Interest rates are going down due to central bank action to combat deflationary pressure, so you can’t just look at interest rates in a vacuum and say that the rate of return is going down.
Otherwise why has the value of the dollar increased since early March?
Also, you realize that when the fed “sets rates” it’s not literally the rate of interest in your bank account, right?
Otherwise why has the value of the dollar increased since early March?
Also, you realize that when the fed “sets rates” it’s not literally the rate of interest in your bank account, right?
Agreed, and nor is this point addressed in the dogmatic claim I see at many places that "markets always go up". They dont go up regularly for japan, greece, italy, australia in the previous decades. Also, all this growth at the cost of others has led to the "historic returns of 7% in s&p", another dogmatic claim in FIRE circles.
It is not clear how these two are sustainable.
It is not clear how these two are sustainable.
> "historic returns of 7% in s&p"
Seven percent is generally accepted as the expected market return over a period of time sufficiently long enough to mitigate systemic risk, not that seven percent is the highest return in market history. Or said another way, if there's ever a chance to buy a treasury bill with a seven percent or better return, take it, because that's the best you'll earn in the market but with much much much less risk.
Seven percent is generally accepted as the expected market return over a period of time sufficiently long enough to mitigate systemic risk, not that seven percent is the highest return in market history. Or said another way, if there's ever a chance to buy a treasury bill with a seven percent or better return, take it, because that's the best you'll earn in the market but with much much much less risk.
Great point. I don't think people generally consider what makes up the growth of the stock market. I think two major components are value creation in the real economy (which sort of is what GDP is supposed to measure) and inflation, as you suggest. I think profits are merged into "GDP"? That doesn't account for 7 percent. I can think of another component, "survivorship bias". The market is not all companies, just the ones doing well.
And why has that not been true for Japanese or Greek markets for decades?
Where does 7% come from? It is Inflation adjusted correct? 2-3% profits, 2-3% gdp growth? 2-3% others (growth at the cost of smaller companies, other countries etc). I'm not sure how this is all sustainable.
Looking at Japan, none of them are sustainable, not even Inflation. Even as bank of Japan prints immense amount of money and props up all the assets as liquidity injections.
Where does 7% come from? It is Inflation adjusted correct? 2-3% profits, 2-3% gdp growth? 2-3% others (growth at the cost of smaller companies, other countries etc). I'm not sure how this is all sustainable.
Looking at Japan, none of them are sustainable, not even Inflation. Even as bank of Japan prints immense amount of money and props up all the assets as liquidity injections.
Seven percent is the historical return of the US stock market. Other markets have different historical returns. This "comes from" the historical data of US stock prices. Comparison to GDP or inflation rates don't apply.
I might be misunderstanding you.
You said "Seven percent is generally accepted as the expected market return over a period of time sufficiently long enough to mitigate systemic risk, ". Also, When people say "historical return is 7%", they do not say it as a historical fact, but as a forward expectation like you did.
So, you need to provide why 7% is generally accepted, and why not 2%, or 70%.
Comparison to gdp and inflation definitely apply. Business profits in an index grow with Inflation and gdp growth, and stock value is the expectation of future profits discounted over time.
You said "Seven percent is generally accepted as the expected market return over a period of time sufficiently long enough to mitigate systemic risk, ". Also, When people say "historical return is 7%", they do not say it as a historical fact, but as a forward expectation like you did.
So, you need to provide why 7% is generally accepted, and why not 2%, or 70%.
Comparison to gdp and inflation definitely apply. Business profits in an index grow with Inflation and gdp growth, and stock value is the expectation of future profits discounted over time.
Oh, and generally accepted as in one could cherry pick certain, short time periods and show that, say for three years in the early 80’s, the average return wasn’t seven percent. So, it’s generally accepted that “over some sufficiently long time period” one should reasonably expect to make seven percent when invested in a sufficiently diverse portfolio of stocks because that’s been the case historically
Why seven percent is considered a good rate of return, I don’t know. The answer is partially in the question itself, because that’s been the rate of return of the stock market. That though isn’t exactly satisfactory
Sorry I wasn’t clear. Generally accepted as in “a good return,” or “the best anyone should expect.” There’s no doubt that seven percent is the historical average.
Add to which, to be clear, I'm not defending an economic system that depends on continued growth, nor would I. GDP is and has always been a terrible metric by which to measure economic prosperity. I also do not believe that past performance is a sufficient guarantee of future performance. That said, all of this is orthongal to what has been the historical rate of return of the US stock market.
> is that the stock price reflects global demand for ROI
Says who? For which stock? I understand a company's stock price to represent the net present value of the expected future performance of that company alone. I don't see how there can be one expected return on investment that applies equally to all companies, as expected return on investment will be determined heavily by risk which will vary considerably company by company.
Says who? For which stock? I understand a company's stock price to represent the net present value of the expected future performance of that company alone. I don't see how there can be one expected return on investment that applies equally to all companies, as expected return on investment will be determined heavily by risk which will vary considerably company by company.
For people who think stocks are overpriced: what would be an appropriate price and how did you come up with that number? I haven't seen an answer to this yet from the "stock market is irrational" crowd.
I think in 99% of cases it's just a feeling - that the decline should have been bigger given how bad the economic impact seem.
I think in 99% of cases it's just a feeling - that the decline should have been bigger given how bad the economic impact seem.
Let me take a stab at this:
When I say "I think stocks are overpriced" I don't necessarily have a specific number in mind. Rather, it's shorthand for "I think that the Fed and USG attempts to avoid deflation at all costs have created an economic environment that over-promotes stocks as an investment vehicle. In addition, I feel that these attempts have worsened inequality by injecting liquidity in a way that increases asset prices more than it increases the velocity of money".
When I say "I think stocks are overpriced" I don't necessarily have a specific number in mind. Rather, it's shorthand for "I think that the Fed and USG attempts to avoid deflation at all costs have created an economic environment that over-promotes stocks as an investment vehicle. In addition, I feel that these attempts have worsened inequality by injecting liquidity in a way that increases asset prices more than it increases the velocity of money".
The Shiller P/E ratio for the S&P500 is around 26 now. Mean/median historical values are around 16. So a 40% decline in the stock market assuming no change in earnings would make stocks not seem overpriced to me.
Why do you think the historical value is more valid than the current trend? Is there some dynamic in the market that keeps the p/e ratio above 15, for example?
I would think to calculate a "good" ratio you would need to compare it to returns from property and other investments?
I would think to calculate a "good" ratio you would need to compare it to returns from property and other investments?
How do you decide that stocks are P/E is too high now as opposed to it being too low in the past. The us equity market has historically had much higher returns than the rest of the world. There's no reason to believe that could continue forever. At some point world markets will reach an equilibrium.
If that 16 was a useful number, you could just sell when prices got to 17 and buy when they got to 15.
> that over-promotes stocks as an investment vehicle.
But what else is there? Holding cash is terrible because it even loses value and the real estate market feels grossly over-expensive. So if you earn more than you spend, where do you put your extra money? I don't think that bonds, p2p-lending or precious metals perform better in risk/reward.
But what else is there? Holding cash is terrible because it even loses value and the real estate market feels grossly over-expensive. So if you earn more than you spend, where do you put your extra money? I don't think that bonds, p2p-lending or precious metals perform better in risk/reward.
"But what else is there? Holding cash is terrible ..."
Holding cash might be terrible. Certainly the returns are and it makes sense that (the entire world) would be chasing higher yields elsewhere.
However, if those assets take a 50% haircut at some point in the near future, holding cash will have looked like a fantastic idea.
Given the current Schiller P/E of 26 (!) that was mentioned elsewhere in this discussion, a 50% haircut in US equities is not at all outlandish to consider.
Holding cash might be terrible. Certainly the returns are and it makes sense that (the entire world) would be chasing higher yields elsewhere.
However, if those assets take a 50% haircut at some point in the near future, holding cash will have looked like a fantastic idea.
Given the current Schiller P/E of 26 (!) that was mentioned elsewhere in this discussion, a 50% haircut in US equities is not at all outlandish to consider.
> But what else is there?
That's my point. Stocks outperforming cash, bonds, and precious metals isn't some universal truth. It's a product of Fed/USG policy (and other factors).
That's my point. Stocks outperforming cash, bonds, and precious metals isn't some universal truth. It's a product of Fed/USG policy (and other factors).
Stocks represent ownership of business producing goods and services and selling them for profit. Cash, bonds, and precious metals are just an accounting mechanism. The value is created by business. So it pretty much is universal truth.
If stock prices represent anything concrete, how is it that Snapchat's market cap is higher than Ford's?
Do any of us actually believe that Snap's stock price is reflective of its value to society?
Today, stock prices are all about perception and company image. Most shares are non-voting, and don't pay dividends. And you can't take your stock and march to a company headquarters to demand that they give you something of value in exchange.
To an average small investor, shares in almost every company might as well be Magic cards. Their only value is to sell them later to a different collector.
Do any of us actually believe that Snap's stock price is reflective of its value to society?
Today, stock prices are all about perception and company image. Most shares are non-voting, and don't pay dividends. And you can't take your stock and march to a company headquarters to demand that they give you something of value in exchange.
To an average small investor, shares in almost every company might as well be Magic cards. Their only value is to sell them later to a different collector.
> If stock prices represent anything concrete, how is it that Snapchat's market cap is higher than Ford's?
> Do any of us actually believe that Snap's stock price is reflective of its value to society?
of course not. the stock price doesn't represent the value to society; it represents the (perceived) value to investors, taking into account potential for growth. ford is an established, stable company, but it's hard to see any avenues for massive growth over the next decade. I don't personally believe snapchat will grow massively, but it's more likely than ford to do that or get purchased for a huge amount of money by a tech giant.
> Do any of us actually believe that Snap's stock price is reflective of its value to society?
of course not. the stock price doesn't represent the value to society; it represents the (perceived) value to investors, taking into account potential for growth. ford is an established, stable company, but it's hard to see any avenues for massive growth over the next decade. I don't personally believe snapchat will grow massively, but it's more likely than ford to do that or get purchased for a huge amount of money by a tech giant.
If you re-read the last sentence of the GP's comment ("To an average small investor, shares in almost every company might as well be Magic cards. Their only value is to sell them later to a different collector"), I think that you're strengthening their position rather than disagreeing with them.
In context, the GGP is positing that stocks should have a higher rate of return than other modes of investment because, to paraphrase, "companies create value". The point of the GP is that perceived value to investors drives the stock price more than value to society, thus countering the notion that stocks are inherently "better".
In context, the GGP is positing that stocks should have a higher rate of return than other modes of investment because, to paraphrase, "companies create value". The point of the GP is that perceived value to investors drives the stock price more than value to society, thus countering the notion that stocks are inherently "better".
I'm not sure I fully agree with either position.
first of all, whether or not a company "creates value for society" is a red herring. it doesn't matter to an individual looking for an investment vehicle.
> To an average small investor, shares in almost every company might as well be Magic cards. Their only value is to sell them later to a different collector
this is true to the extent that thinking of stocks this way probably wouldn't hurt you as a small investor, but it obscures the reason why stocks have value and are different from bonds. when you buy a stock, you are locking in a fraction of future real productivity, whether or not you can derive cashflow from it directly. with a bond, you are locking in a nominal return, which could result in a real loss over time. although stocks have significantly outperformed bonds historically, I would hesitate to say that one is inherently better than the other; they just carry different risks.
as an aside, I'm really not sure why non-voting shares that don't pay dividends are valuable, but AFAIK, these are not as common as nrclark suggests.
first of all, whether or not a company "creates value for society" is a red herring. it doesn't matter to an individual looking for an investment vehicle.
> To an average small investor, shares in almost every company might as well be Magic cards. Their only value is to sell them later to a different collector
this is true to the extent that thinking of stocks this way probably wouldn't hurt you as a small investor, but it obscures the reason why stocks have value and are different from bonds. when you buy a stock, you are locking in a fraction of future real productivity, whether or not you can derive cashflow from it directly. with a bond, you are locking in a nominal return, which could result in a real loss over time. although stocks have significantly outperformed bonds historically, I would hesitate to say that one is inherently better than the other; they just carry different risks.
as an aside, I'm really not sure why non-voting shares that don't pay dividends are valuable, but AFAIK, these are not as common as nrclark suggests.
Treating stocks as fractions of future real productivity ignores why companies sell shares in the first place. If the value of a company was wholly in its future real productivity, then companies would never part with ownership. However, companies do sell shares because they need liquidity now, whereas the future value of the company is purely speculative. Shares are but one of many alternatives for companies to raise liquidity. These alternatives provide opportunities to investors with different risk/reward profiles. As you say, there's nothing special about stocks that makes them inherently superior to other forms of investment.
> Most shares are non-voting, and don't pay dividends.
80% of S&P 500 companies pay a dividend [0] and non-voting shares are actually very rare. In fact, Snap even wrote in its IPO paperwork that "to our knowledge, no other company has completed an initial public offering of non-voting stock on a U.S. stock exchange" [1].
[0]: https://www.forbes.com/sites/investor/2019/11/20/20-bargain-...
[1]: https://www.vox.com/2017/2/21/14670314/snap-ipo-stock-voting...
80% of S&P 500 companies pay a dividend [0] and non-voting shares are actually very rare. In fact, Snap even wrote in its IPO paperwork that "to our knowledge, no other company has completed an initial public offering of non-voting stock on a U.S. stock exchange" [1].
[0]: https://www.forbes.com/sites/investor/2019/11/20/20-bargain-...
[1]: https://www.vox.com/2017/2/21/14670314/snap-ipo-stock-voting...
Ford's value is low because they pay out 8% dividend yield every yea. This has hurt their growth because other companies are reinvesting that money. Additionally dividends are objectively worse than buybacks because of the tax implications.
Stocks represent ownership and shareholder rights, which extend beyond voting rights.
Equities are a piece of creative energy applied to capital.
I am not saying you can’t lose money with wallstreetbets or that you can’t make a business of cash. But a creative business around money transmission and risk management is equities not cash itself.
Equities are a piece of creative energy applied to capital.
I am not saying you can’t lose money with wallstreetbets or that you can’t make a business of cash. But a creative business around money transmission and risk management is equities not cash itself.
Bonds are not just an accounting mechanism; bonds are an alternative to stocks for investment. Even government bonds create value---if not funding something tangible (such as infrastructure), just the existence of a stable and functioning legal system is hugely valuable.
Cash is more than an accounting system too, especially since the end of the gold standard. There isn't a fixed supply of dollars that businesses just move around.
Also, with regards to both cash and precious metals: their value is as media for economic transactions; their value increases each time they change hands. Would you want to barter to buy shares of a company? Trade sheep to invest in Microsoft?
Cash is more than an accounting system too, especially since the end of the gold standard. There isn't a fixed supply of dollars that businesses just move around.
Also, with regards to both cash and precious metals: their value is as media for economic transactions; their value increases each time they change hands. Would you want to barter to buy shares of a company? Trade sheep to invest in Microsoft?
I didn’t say bonds and cash can’t be investments, just that they don’t generate new goods and services. Cash and cash equivalents only generate value through passage of time. There isn’t any creativity involved. Creativity is long term more valuable than just the time value of money.
That same reductionist argument can also be applied to stocks. Share ownership doesn't generate value in and of itself either.
You're saying that businesses generate value. No disagreement from me there.
But then you're saying that stocks are the only way to share the value that businesses create. That's where you lose me. Selling shares is not the only way for a company to raise funds to operate. Companies can also sell bonds or take out loans (i.e. cash). Your argument that stocks are inherently more valuable would only make sense if stocks were the only way to invest in a company.
You're saying that businesses generate value. No disagreement from me there.
But then you're saying that stocks are the only way to share the value that businesses create. That's where you lose me. Selling shares is not the only way for a company to raise funds to operate. Companies can also sell bonds or take out loans (i.e. cash). Your argument that stocks are inherently more valuable would only make sense if stocks were the only way to invest in a company.
Without share ownership, there is no business... you can have a business without loans. business generates value. Shares assign ownership. Loans just price risk of capital. Pricing the risk is also a business.
Bonds are very similar to equity. I've just recently realized this.
Companies get funding from two sources, equity and debt. The sum of those are equal to assets in the balance sheet. Both represent different forms of ownership of the company. Equity holders decide how the company is managed, debt holders have priority in income distribution and in liquidation.
Companies get funding from two sources, equity and debt. The sum of those are equal to assets in the balance sheet. Both represent different forms of ownership of the company. Equity holders decide how the company is managed, debt holders have priority in income distribution and in liquidation.
I think that you and I have fundamentally different views on what it means for a company to sell shares.
Sorry to beat a dead horse, but...
Someone already owns a company before company sells (issues / dilutes) shares. That ownership is just shares. No shares need to ever be sold for them to exist. Founders create shares out of nothing when they create a business.
Someone already owns a company before company sells (issues / dilutes) shares. That ownership is just shares. No shares need to ever be sold for them to exist. Founders create shares out of nothing when they create a business.
With that line of reasoning you're countering your original point.
If companies don't sell shares, then there's no stock market. If there's no stock market, then there's no rate of return for stocks. If there's no rate of return for stocks, then stocks aren't an inherently superior investment to bonds, cash, or goods.
If someone founds a company that's 100% owned by that one person, then you (as an outside investor) aren't partaking in any of the value that that business creates. Let's say you want part of the ownership of that company. Companies don't just give out shares of ownership because they feel like it. Companies give out shares because they need liquidity. They can exchange fractional ownership for liquidity directly (e.g. selling shares) or indirectly (e.g. giving employees stock options instead of salary). However, shares are not the only way for companies to gain liquidity.
Ownership that is not traded has no value to investors. Ownership that is traded is traded for a reason, and must be compared to alternatives. Those alternatives are not inherently less valuable than shares.
If companies don't sell shares, then there's no stock market. If there's no stock market, then there's no rate of return for stocks. If there's no rate of return for stocks, then stocks aren't an inherently superior investment to bonds, cash, or goods.
If someone founds a company that's 100% owned by that one person, then you (as an outside investor) aren't partaking in any of the value that that business creates. Let's say you want part of the ownership of that company. Companies don't just give out shares of ownership because they feel like it. Companies give out shares because they need liquidity. They can exchange fractional ownership for liquidity directly (e.g. selling shares) or indirectly (e.g. giving employees stock options instead of salary). However, shares are not the only way for companies to gain liquidity.
Ownership that is not traded has no value to investors. Ownership that is traded is traded for a reason, and must be compared to alternatives. Those alternatives are not inherently less valuable than shares.
> just that they don’t generate new goods and services.
The highway down the street from me was funded using Bonds. I even own a few Hospital bonds, which were used to construct hospitals.
The highway down the street from me was funded using Bonds. I even own a few Hospital bonds, which were used to construct hospitals.
Bitcoin.
> over-promotes stocks as an investment vehicle.
This begs the question. You've just hidden your premise in this paragraph. What external metric makes an asset over-promoted or under-promoted?
This begs the question. You've just hidden your premise in this paragraph. What external metric makes an asset over-promoted or under-promoted?
You can estimate the earnings yield you get on a business based on its price. So, if you have a lemonade stand that earns $100 per year, and you buy it for $100, that’s a great price. You’ll make your money back in a year. After that it’s profit, baby! If you pay $100000, it’ll take 1000 years to earn back your original investment in nominal terms. But it still might be an OK investment, if you are very certain that you can double earnings every year for long enough.
That’s basically how you evaluate what to pay for a company. When you buy stocks, you buy fractional ownership in a company.
Edit: many think the market is overvalued, because it’s currently at historically high price relative to the estimated earnings potential. This, while risk of insolvency for many companies is much higher.
That’s basically how you evaluate what to pay for a company. When you buy stocks, you buy fractional ownership in a company.
Edit: many think the market is overvalued, because it’s currently at historically high price relative to the estimated earnings potential. This, while risk of insolvency for many companies is much higher.
>historically high price relative to the estimated earnings potential
It's high compared to expected earnings over the next year. Which is to be expected, because the ratio of expected lifetime earnings over expected 12 month earnings is also at a high, owing to a pandemic significantly impairing earnings for a year or so but not forever. Looking at 12 month numbers is usually fine as a proxy, but terrible now.
It's high compared to expected earnings over the next year. Which is to be expected, because the ratio of expected lifetime earnings over expected 12 month earnings is also at a high, owing to a pandemic significantly impairing earnings for a year or so but not forever. Looking at 12 month numbers is usually fine as a proxy, but terrible now.
There's even a historical graph of this, called the Shiller P/E Ratio: https://www.multpl.com/shiller-pe
We are still at the highest point ever except for the dotcom bubble and black tuesday of 1929 (and directly before the recent crash, although not by much).
So to answer the parent, pick a ratio somewhere below that. Price has been the main thing moving upward disproportionately for the past decade, now earnings will take a dive.
We are still at the highest point ever except for the dotcom bubble and black tuesday of 1929 (and directly before the recent crash, although not by much).
So to answer the parent, pick a ratio somewhere below that. Price has been the main thing moving upward disproportionately for the past decade, now earnings will take a dive.
The Shiller Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years and the recent earnings weren't really affected by the virus yet and thus the current 10 years of earnings happen to align with the longest period without a recession in US history so it's no surprise that metric is high. The current P/E ratio is 20.53 [0] and there have been many periods in which it has been higher.
[0]: https://www.multpl.com/s-p-500-pe-ratio
[0]: https://www.multpl.com/s-p-500-pe-ratio
We still require a 25% drop in P/E to bring us back to the historical mean. There are reasonable arguments as to why we may never mean revert, why this time is different (possibly permanently low interest rates, stocks as a leading indicator of future inflation due to Fed printing inflating asset prices , etc). But as a rule, I like to bet on mean reversion, not against it.
High Shiller P/E doesn't necessarily mean stocks are overpriced. Intrinsic value is based on future cash flows, what happened 10 years ago may or may not be relevant to future cash flows.
My point was - people say stocks are overpriced, presumably vs their intrinsic DCF valuation. Why do people conclude that without making a valuation?
>Why do people conclude that without making a valuation?
Most retail investors are not making any valuations whatsoever. The investment criteria is "this company's future is bright/bad", even though price is the most important factor. Then, recent momentum makes you look good...for now.
Most retail investors are not making any valuations whatsoever. The investment criteria is "this company's future is bright/bad", even though price is the most important factor. Then, recent momentum makes you look good...for now.
What makes you think that they aren’t?
That I have asked this a bunch of times - "What would be an appropriate price and how did you come up with that number?" - and never got a reply.
Historical rate of return on stocks is about 7%. So in theory, a stock trading at a price to earnings ratio of 14 or less is good value, whereas a stock trading at 15 times earnings is not so much.
However, other factors could play a part, as certain industries are favoured over others, risk, projecting earnings growth, etc.
As such, you can make the argument that stocks are overvalued because they're trading at all time or near all time highs in terms of price to earnings ratios and other metrics. And especially so now given that projected future earnings will have dropped considerably while stock valuations have not.
However, other factors could play a part, as certain industries are favoured over others, risk, projecting earnings growth, etc.
As such, you can make the argument that stocks are overvalued because they're trading at all time or near all time highs in terms of price to earnings ratios and other metrics. And especially so now given that projected future earnings will have dropped considerably while stock valuations have not.
> Historical rate of return on stocks is about 7%. So in theory, a stock trading at a price to earnings ratio of 14 or less is good value
Why? I'm not saying it's incorrect but I've never seen such an approach to valuation.
Why? I'm not saying it's incorrect but I've never seen such an approach to valuation.
> And especially so now given that projected future earnings will have dropped considerably while stock valuations have not.
Really that depends on your time horizon. The Fed has signaled that it is willing to act aggressively to boost AD, so that seems to me to be a signal that projected future earnings will not be that low.
Really that depends on your time horizon. The Fed has signaled that it is willing to act aggressively to boost AD, so that seems to me to be a signal that projected future earnings will not be that low.
For 7% a P/E of 14.285714285 or less would be good to be very precise.
If many restaurants, event spaces, etc. fail then it’s possible many people will have to liquidate their savings. This sell pressure would push down prices and likely cascade. The market thus far has been protected by stimulus funds, generous ui benefits, etc. Could that slack be taken up? Sure but it seems unlikely, especially with a second wave of shutdowns. Trying to predict the bottom or top is a fool’s errand. I’m also not sure how ETF/Index funds dispose of assets when they’re sold. They may be a dam holding back a flood.
There's a good interview with Michael Mauboussin[0] in which he mentions the power of regression to the mean and base rates. He gets those ideas from Daniel Khanmen, I think. Anyway, an appropriate price is impossible to predict ahead of time, but using reversion to the mean as your guide, you see that we're pretty overvalued right now.
We're above the mean earnings ratios, FCF yields, etc, while at the same time knowing that we're almost certainly in the first leg of a major recession, and a period unprecedented economic uncertainty.
I think the bear case is much stronger than the bull case right now.
[0] https://www.youtube.com/watch?v=X5xoKZBcS4Y
We're above the mean earnings ratios, FCF yields, etc, while at the same time knowing that we're almost certainly in the first leg of a major recession, and a period unprecedented economic uncertainty.
I think the bear case is much stronger than the bull case right now.
[0] https://www.youtube.com/watch?v=X5xoKZBcS4Y
The answer is they don't know how to value cashflows or businesses, they just buy brand names they like.
Which stock? If you want to price any individual company, traditional value-based analysis using earnings, assets, and future revenue growth expectations will get you a number. This number varies wildly between different companies. If you're talking about a broad index like the S&P, I personally look at 30 years of price history, draw a best fit line to average out growth to a normal level, then discount 7% for our current economic trough (5% output drop Q1, likely 10% or more this quarter). By this method, S&P should be somewhere around 2150.
The problem, of course, is that we've been in an unprecedented financial situation since 2009 fueled by massive debt inflation among corporations due to near-free money from the government for an entire decade. When will the party end? Who knows. The other problem is that it's hard to predict what will happen post-lockdown globally. As a result, traditional analysis is easily beat by irrational investment even on multi-year timescales these days.
The problem, of course, is that we've been in an unprecedented financial situation since 2009 fueled by massive debt inflation among corporations due to near-free money from the government for an entire decade. When will the party end? Who knows. The other problem is that it's hard to predict what will happen post-lockdown globally. As a result, traditional analysis is easily beat by irrational investment even on multi-year timescales these days.
> For people who think stocks are overpriced: what would be an appropriate price and how did you come up with that number? I haven't seen an answer to this yet from the "stock market is irrational" crowd.
> I think in 99% of cases it's just a feeling - that the decline should have been bigger given how bad the economic impact seem.
As you are suggesting, prices are simply what they are, whether or not someone views them as being "too high" or "too low" the only Goldilocks price is the one you agree to.
However, the markets can be distorted. The Federal Reserve, through policies such as lowering interest rates to zero, eliminating reserve requirements, and announcing purchases of corporate debt, has all but published "we will not let the stock market crash under any economic circumstance" as their official policy.
> I think in 99% of cases it's just a feeling - that the decline should have been bigger given how bad the economic impact seem.
As you are suggesting, prices are simply what they are, whether or not someone views them as being "too high" or "too low" the only Goldilocks price is the one you agree to.
However, the markets can be distorted. The Federal Reserve, through policies such as lowering interest rates to zero, eliminating reserve requirements, and announcing purchases of corporate debt, has all but published "we will not let the stock market crash under any economic circumstance" as their official policy.
Let’s remove the fed money printing machine and find out what real investors think of the market.
That seems like it would be a terrible idea. The ability to create money up until the point of inflation seems like a key tool to manage economic disasters like COVID-19.
There’s no inflation when the fed buys corporate bonds or bails out failed corporations. It is just propping up the market.
If the fed had given that money directly to consumers we might have inflation problems. They’ll never do that. Socialism only exists in America for corporations.
If the fed had given that money directly to consumers we might have inflation problems. They’ll never do that. Socialism only exists in America for corporations.
The fed cannot give directly to consumers. However, congress can and did give directly to consumers with the 1200 check, the 600 a week increase in unemployment, and indirectly by funding payroll for small businesses and the airlines. However, that created a whole lot of debt which the fed has been predominantly buying with their printed dollars as you can see in their balance sheet [0].
[0]: https://www.federalreserve.gov/releases/h41/current/h41.htm
[0]: https://www.federalreserve.gov/releases/h41/current/h41.htm
The fed is legally barred from directly lending to businesses or households except for in an emergency where they can do virtually anything they want.
Congress authorizes $300 billion in direct checks to consumers. The remaining $2.7 trillion went to businesses.
The fed has separately printed several trillion dollars lending to businesses, buying corporate bonds, and other actions.
What should the stock market be at right now? Who knows. We have no way to know because we won’t allow the market to tank.
Congress authorizes $300 billion in direct checks to consumers. The remaining $2.7 trillion went to businesses.
The fed has separately printed several trillion dollars lending to businesses, buying corporate bonds, and other actions.
What should the stock market be at right now? Who knows. We have no way to know because we won’t allow the market to tank.
> The remaining $2.7 trillion went to businesses.
Nope (and the total bill was 2.1 trillion not 3 trillion): https://en.wikipedia.org/wiki/Coronavirus_Aid,_Relief,_and_E...
> The fed has separately printed several trillion dollars lending to businesses, buying corporate bonds, and other actions.
Also not even remotely true, they are predominately buying U.S. Treasury securities and Mortgage-backed securities: https://www.federalreserve.gov/releases/h41/current/h41.htm
Got any sources to back up your claims?
Nope (and the total bill was 2.1 trillion not 3 trillion): https://en.wikipedia.org/wiki/Coronavirus_Aid,_Relief,_and_E...
> The fed has separately printed several trillion dollars lending to businesses, buying corporate bonds, and other actions.
Also not even remotely true, they are predominately buying U.S. Treasury securities and Mortgage-backed securities: https://www.federalreserve.gov/releases/h41/current/h41.htm
Got any sources to back up your claims?
When there's no worries about inflation, is there a downside to the fed doing this?
> There’s no inflation when the fed buys corporate bonds or bails out failed corporations. It is just propping up the market.
Respectfully, please read an economics textbook.
Respectfully, please read an economics textbook.
Trillions printed, inflation flat.
Please tell me more.
Please tell me more.
You're reasoning from a price change. Inflation is flat/decreasing only slightly because of the "printing", otherwise it would be sharply downwards.
The fed is engaging in aggressive monetary policy to prevent deflation.
The suggestion that buying corporate bonds (while holding everything else constant) is not inflationary is just not right. You can hold on to your mistaken beliefs, but just know that if you do so, it is in willing ignorance of the facts.
The fed is engaging in aggressive monetary policy to prevent deflation.
The suggestion that buying corporate bonds (while holding everything else constant) is not inflationary is just not right. You can hold on to your mistaken beliefs, but just know that if you do so, it is in willing ignorance of the facts.
I'm not convinced the Fed has added enough liquidity to even offset deflation. There's a lot of GDP not happening in Q2.
SPX at ~1600 so that CAPE matches its historical median. 1600 would be the "neutral" position on that metric.
And, if history is any guide, SPX can fall all the way to ~500 without breaking all time lows on CAPE (this would be extreme, but is not entirely impossible, and inflation is not required for this scenario - look at 1950s).
Numbers would have to be adjusted if inflation speeds up. It hasn't sped up at all yet, in fact all we see today is deflation.
And, if history is any guide, SPX can fall all the way to ~500 without breaking all time lows on CAPE (this would be extreme, but is not entirely impossible, and inflation is not required for this scenario - look at 1950s).
Numbers would have to be adjusted if inflation speeds up. It hasn't sped up at all yet, in fact all we see today is deflation.
A stock is worth whatever people will pay for it. However it's fair to point out that the price does not match the underlying asset or its future growth.
Governments are directly buying ETFs
https://alhambrapartners.com/2020/03/11/what-happens-when-ce...
https://alhambrapartners.com/2020/03/11/what-happens-when-ce...
An equally interesting question: for people who think stocks are accurately priced, how did you come up with that number?
Here: http://aswathdamodaran.blogspot.com/2020/03/a-viral-market-m...
It's a 2 month old article by perhaps the most respected figure in valuation. He came up with 2750 for S&P at that time (market value was much lower, maybe he would be more pessimistic now). You can enter your own assumptions into his spreadseet and it will output a valuation.
It's a 2 month old article by perhaps the most respected figure in valuation. He came up with 2750 for S&P at that time (market value was much lower, maybe he would be more pessimistic now). You can enter your own assumptions into his spreadseet and it will output a valuation.
That's easy. You come up with that number because the market organically came up with it thru supply and demand. You could argue the government interfered unfairly but the price is the price either way.
I don't agree because that argument says that the price is sensible because it is the price. You could equally make that statement about the price of tulips in 17th Century Holland, where "single tulip bulbs sold for more than 10 times the annual income of a skilled craftsworker." [1]
Of course the price is what it is due to supply and demand but I don't think that's what most people mean when they say the price is 'not sensible'.
The stock prices are so high because stocks and real estate are the only investments that might provide any sort of real return, and we've been in that situation since bond returns crashed in the wake of the 2008 financial crisis. In that context, stock values are massively inflated (in terms of P/E) relative to what investors may have considered sensible before 2008.
[1] https://en.wikipedia.org/wiki/Tulip_mania
Of course the price is what it is due to supply and demand but I don't think that's what most people mean when they say the price is 'not sensible'.
The stock prices are so high because stocks and real estate are the only investments that might provide any sort of real return, and we've been in that situation since bond returns crashed in the wake of the 2008 financial crisis. In that context, stock values are massively inflated (in terms of P/E) relative to what investors may have considered sensible before 2008.
[1] https://en.wikipedia.org/wiki/Tulip_mania
The suggestion that modern financial markets are similar to markets in 17th century Holland is certainly interesting.
Even academic detractors of the efficient market hypothesis agree that it is accurate on the macro-scale.
Even academic detractors of the efficient market hypothesis agree that it is accurate on the macro-scale.
That may be what your ECON101 text book says, but its plainly obvious that's not the case in reality.
Full disclosure, I hold a short GOOG position right now, but I'm long on a similar company, so it's a hedge. I don't think Google's worth more today than it was on Jan 1. You're right that it's a feeling, but it seems crazy to think that with 15% unemployment, it's still worth that.
I'm also leaning towards a longer recovery in consumer discretionary right now. Someone posted a story here about how people started self locking down before government lockdowns. While I think people are over the strict versions and are ready to get out of the house, I also think they'll be slow to return to malls and movie theaters.
I'm also leaning towards a longer recovery in consumer discretionary right now. Someone posted a story here about how people started self locking down before government lockdowns. While I think people are over the strict versions and are ready to get out of the house, I also think they'll be slow to return to malls and movie theaters.
> I don't think Google's worth more today than it was on Jan 1. You're right that it's a feeling, but it seems crazy to think that with 15% unemployment, it's still worth that.
Pricing takes into account projected future earnings.
Pricing takes into account projected future earnings.
I have most of my stocks in FZROX which is a total market index.
It does make me wonder how many people are using total market indexes without caring about anything in them and how that could prop up the underlying assets.
This isn’t an original idea, there’s been lots of talk about index funds being a bubble, but there isn’t a great alternative.
Though I’m starting to wonder if I should pull most of the money out and split it between Apple, Amazon, Google, Microsoft, and Facebook.
The long tail of the market index funds I find more likely to have issues than these companies (particularly Amazon and Apple).
It does make me wonder how many people are using total market indexes without caring about anything in them and how that could prop up the underlying assets.
This isn’t an original idea, there’s been lots of talk about index funds being a bubble, but there isn’t a great alternative.
Though I’m starting to wonder if I should pull most of the money out and split it between Apple, Amazon, Google, Microsoft, and Facebook.
The long tail of the market index funds I find more likely to have issues than these companies (particularly Amazon and Apple).
I would personally compare the current price to past prices. If the S&P500 price has been the same this past couple of weeks as it was in, say, October 2019: then I might interpret this as the markets predicting that future earnings today are similar to future earnings as one would predict in October 2019. The markets may turn out to be right about this, but it's a very surprising prediction given the current economic carnage.
It’s surprising to see just how much higher many tech stocks are valued right now than they were six months ago:
MSFT +21%
AAPL +15%
AMZN +37%
FB +6%
NFLX +50%
UBER +21%
SQ +22%
SNAP +16%
MTCH +10%
NVDA +60%
TSLA +128%Of that list, I understand why MSFT, AAPL, AMZN, and NVDA would be up. The rest aren’t so clear to me.
NFLX - streaming is up but consumers exhaust the content library faster and competitors (Disney) will now want to gain market share at any cost
FB, SNAP - exposure to ad dollars (brand, travel, hospitality, entertainment) that won’t be coming back for awhile
UBER - unit economics of food delivery aren’t attractive + hyper competitive market, demand for core rideshare business likely depressed for a long time given it’s dependency on events and business travel
SQ, MTCH - no opinion, neutral sentiment
TSLA - with gas so cheap, electric vehicles are less attractive
I buy the tech multiple expansion thesis but that would apply to every company on this list.
NFLX - streaming is up but consumers exhaust the content library faster and competitors (Disney) will now want to gain market share at any cost
FB, SNAP - exposure to ad dollars (brand, travel, hospitality, entertainment) that won’t be coming back for awhile
UBER - unit economics of food delivery aren’t attractive + hyper competitive market, demand for core rideshare business likely depressed for a long time given it’s dependency on events and business travel
SQ, MTCH - no opinion, neutral sentiment
TSLA - with gas so cheap, electric vehicles are less attractive
I buy the tech multiple expansion thesis but that would apply to every company on this list.
> TSLA - with gas so cheap, electric vehicles are less attractive
One suggestion was that the big players will postpone electric while their ICEs get a temp boost, thus giving TSLA an even more unassailable lead.
One suggestion was that the big players will postpone electric while their ICEs get a temp boost, thus giving TSLA an even more unassailable lead.
The EV run is on government incentives worldwide, not cost per mile. Outside US the fuel price is marginally related to raw petroleum, i.e. in Europe dropped some 25% when petroleum went down to basically zero.
price to earnings ratio
P/E fails to account for future earnings (ok, so F P/E), it doesn't account for assets and liabilities, and it ignores that security's relative value to other companies an other investments. And suppose profit margins are 7%, annual revenue is $1.2B, throw in a few more stats. What should the company's market cap be?
I think the underlying question is "what is the alternative?". Twice a month everyone in the US from the middle class up, has to invest a fairly substantial chunk of money. With the FIRE movement this is only growing. Where but in the stock market should that money go? We've created this firehose that will continue to pump money into the market regardless of what the economy is doing. If you take the perspective of an individual, long-term investor, this isn't even irrational. What else are you supposed to do with the money? Keep it in cash? You also don't want to start playing the market timing game. So the firehose keeps on hosing.
I do wonder and am concerned what the endgame is. Is this all gonna crumble like a Ponzi scheme? Is it just gonna smooth off as more investors start retiring and pulling money out? Maybe at that point this will all just turn into a fairly indirect redistribution from working, young people to current retirees, as we see in some national pension systems?
One thing is for sure, the stock market reflecting on people's near- to mid-term outlook of the economy is likely over.
I do wonder and am concerned what the endgame is. Is this all gonna crumble like a Ponzi scheme? Is it just gonna smooth off as more investors start retiring and pulling money out? Maybe at that point this will all just turn into a fairly indirect redistribution from working, young people to current retirees, as we see in some national pension systems?
One thing is for sure, the stock market reflecting on people's near- to mid-term outlook of the economy is likely over.
> What else are you supposed to do with the money? Keep it in cash?
Yes. That's where my RIA has 33% of my assets now, we moved them in 2019. We will be "piecing back into" the market over the next 12 months. I'm 50 and have a 30 year investment horizon. I've been investing since I was 21. I've been through two massive drops in the market that took years to recover. Don't panic. Valuations will correct themselves and fundamentals will continue to hold until the next bubble. I think that is model we're facing at the upper limit of an exponential.
> Is this all gonna crumble like a Ponzi scheme?
It has to stay alive so that the rich can get richer. Remember the players in the Panama Papers? There's an entire society that runs the planet. And this isn't a conspiracy, it's out in the open! Look at the Carlyle Group: it is an investing firm funded by people liek MBS (The Saudi), the Clintons, the Bushes, and many other politically-culturally diametrically opposed clients. It's no mystery that rich world leaders who go to war with each other give their money to the same investors.
You know that there are investments only available to people with $5, $10, or $100 million more in holdings? There are entire class of investment devices that you and I will never see. It takes tens of millions to even play in hedge funds. The "real" markets are for the 0.1%. Those will continue to feed off the other markets, which they need to distance themselves from the pack. (Look at wealth distribution over the past 50 years.) But these top tier funds require us schlubs to hand them money while we scrape by with 5-8% yearly returns. They will keep the dials set just right so that we'll have a reasonable retirement while they own the planet (Larry Ellison owns a Hawaiian island. Techbros are buying up New Zealand [Theil]. Think about what happens when trillionaires start to buy entire countries.
Yeah, the market will survive and make sure the upper middle class continues to invest, otherwise there won't be a wealth generating machine for the 0.1-0.01%. As for people who can't afford to even put money in a 401k? Well, we know what one political party things about those people.
Yes. That's where my RIA has 33% of my assets now, we moved them in 2019. We will be "piecing back into" the market over the next 12 months. I'm 50 and have a 30 year investment horizon. I've been investing since I was 21. I've been through two massive drops in the market that took years to recover. Don't panic. Valuations will correct themselves and fundamentals will continue to hold until the next bubble. I think that is model we're facing at the upper limit of an exponential.
> Is this all gonna crumble like a Ponzi scheme?
It has to stay alive so that the rich can get richer. Remember the players in the Panama Papers? There's an entire society that runs the planet. And this isn't a conspiracy, it's out in the open! Look at the Carlyle Group: it is an investing firm funded by people liek MBS (The Saudi), the Clintons, the Bushes, and many other politically-culturally diametrically opposed clients. It's no mystery that rich world leaders who go to war with each other give their money to the same investors.
You know that there are investments only available to people with $5, $10, or $100 million more in holdings? There are entire class of investment devices that you and I will never see. It takes tens of millions to even play in hedge funds. The "real" markets are for the 0.1%. Those will continue to feed off the other markets, which they need to distance themselves from the pack. (Look at wealth distribution over the past 50 years.) But these top tier funds require us schlubs to hand them money while we scrape by with 5-8% yearly returns. They will keep the dials set just right so that we'll have a reasonable retirement while they own the planet (Larry Ellison owns a Hawaiian island. Techbros are buying up New Zealand [Theil]. Think about what happens when trillionaires start to buy entire countries.
Yeah, the market will survive and make sure the upper middle class continues to invest, otherwise there won't be a wealth generating machine for the 0.1-0.01%. As for people who can't afford to even put money in a 401k? Well, we know what one political party things about those people.
> Yes. That's where my RIA has 33% of my assets now, we moved them in 2019.
That's a bummer - you missed out on the rally and pricing is about the same as what it was in 2019.
That's a bummer - you missed out on the rally and pricing is about the same as what it was in 2019.
>I think the underlying question is "what is the alternative?". Twice a month everyone in the US from the middle class up, has to invest a fairly substantial chunk of money. With the FIRE movement this is only growing. Where but in the stock market should that money go?
At a certain point, we should just admit that we're taking money from the middle class and using it to play-act private investment while actually socializing investment. We should then go the full distance and actually socialize most of the economy, so that twice a month people are compensated not with abstract, speculative 401(k) prospectuses, but with an equal vote and a dividend in their own workplace.
https://www.jacobinmag.com/2017/08/sweden-social-democracy-m...
https://journals.sagepub.com/doi/full/10.1177/08969205134853...
At a certain point, we should just admit that we're taking money from the middle class and using it to play-act private investment while actually socializing investment. We should then go the full distance and actually socialize most of the economy, so that twice a month people are compensated not with abstract, speculative 401(k) prospectuses, but with an equal vote and a dividend in their own workplace.
https://www.jacobinmag.com/2017/08/sweden-social-democracy-m...
https://journals.sagepub.com/doi/full/10.1177/08969205134853...
I'm keeping my money there since it's backed by the US economy. Yes, the value of the economy is lower than 6 months ago, and while likely be lower in a year.
What else should it be backed with? Dollars are subject to (hyper)inflation. Real estate is nice, but I need more liquidity.
Seems like owning a chunk of the economy is where the action is.
What else should it be backed with? Dollars are subject to (hyper)inflation. Real estate is nice, but I need more liquidity.
Seems like owning a chunk of the economy is where the action is.
> With the FIRE movement this is only growing
Honest question about FIRE: you hear stories about people retiring and dying a few years later in part because they lost their purpose in life, or people nearing 65 asking themselves "what am I going to do with my time." Purpose in life is strongly tied to emotional well being. What's FIRE's answer to that? Retirement is not an end unto itself.
Honest question about FIRE: you hear stories about people retiring and dying a few years later in part because they lost their purpose in life, or people nearing 65 asking themselves "what am I going to do with my time." Purpose in life is strongly tied to emotional well being. What's FIRE's answer to that? Retirement is not an end unto itself.
A few years before I started working, I read Average is Over. Made a good case that labor power's decline would ramp up ever further. People like to poo-poo AI, but I have been following AI since the dark times before 2012. Winograd schemas, style transfer, GTP-2, image recognition - it is hard for people now to understand how impossible these tasks seemed at the time. The rate of progress is insane and it is foolish to bet against it.
Perhaps we are approaching a time where capital can be converted directly into labor in a way that scales. If this is the case the market is ridiculously undervalued, almost comically so.
I have maintained high savings rates and acquired capital ever since I read that book, regardless of valuations. I consider my portfolio insurance against this scenario.
Perhaps we are approaching a time where capital can be converted directly into labor in a way that scales. If this is the case the market is ridiculously undervalued, almost comically so.
I have maintained high savings rates and acquired capital ever since I read that book, regardless of valuations. I consider my portfolio insurance against this scenario.
You put into words the vague thesis I've been operating under. Robots aren't going to take everyone's jobs tomorrow, but we've entered a period where growth comes ever decreasingly from labor and ever increasingly from technology.
The shutdown already spotlights the fact that the true economic value of non-essential business and workers is primarily as consumers.
The shutdown already spotlights the fact that the true economic value of non-essential business and workers is primarily as consumers.
If you analyze specific sectors or stocks, it really isn’t as irrational as it seems. Hotel, airline and restaurant stocks are more than 50% down YTD while tech/saas stocks are flat to positive. That said, there are some stocks that seem mispriced like Chipotle, which is still up YTD.
And investors probably are too optimistic about some tech companies since the recession will surely impact enterprise spending.
But it’s not as irrational as you may think once you look at the individual companies doing good and bad now.
And investors probably are too optimistic about some tech companies since the recession will surely impact enterprise spending.
But it’s not as irrational as you may think once you look at the individual companies doing good and bad now.
> that seem mispriced like Chipotle, which is still up YTD
Chipotle has bought some good will in the past and probably is making decent cash on deliveries.
Chipotle has bought some good will in the past and probably is making decent cash on deliveries.
I'm going to hell for this but could a virus that removes people past the retirement age be actually beneficial to an economy? I can think of a few mechanisms: 1. Reduced draw from social security and pensions. 2. Less long term medical costs. 3. Increases housing supply.
I am not advocating for removing old people from the economy. I am just thinking of some economic consequences of this terrible pandemic.
I am not advocating for removing old people from the economy. I am just thinking of some economic consequences of this terrible pandemic.
> I'm going to hell for this
I'll take it a step further. Animals have coexisted with nasty viruses for a long time, and lots of animals are still susceptible to them. Are threats that constantly cull the population beneficial to the strength of the species? Are there viruses some species are genetically immune to because the virus killed indiscriminately, while other viruses provided a net benefit?
I'll take it a step further. Animals have coexisted with nasty viruses for a long time, and lots of animals are still susceptible to them. Are threats that constantly cull the population beneficial to the strength of the species? Are there viruses some species are genetically immune to because the virus killed indiscriminately, while other viruses provided a net benefit?
I can't be sure, but I imagine this would be offset by the productive segment of the older population who die from the virus. Older workers are valuable because often they have the widest experience and are best able to train others.
I said retired people. Meaning, they don't work anymore.
Ah, I misread it. Interesting concept but the point is sort of moot since a virus can't specifically target people who dont work. Sure, a virus can be more likely to be fatal in older people, but there are still a lot of older people who work, and enough unproductive young people that i still think it would be a net negative.
The virus doesn’t make this distinction. You lose both.
> they don't work anymore.
I see you haven't met my dad.
I see you haven't met my dad.
If they had just disappeared overnight probably, but on our case the cost of the pandemic is going to dwarf whatever you might have gained.
This may be true for the flu, but the coronavirus has much more potential to overload the hospital system, and as it would kill an order of magnitude more people, the economy has to be stopped to save them.
I'm reminded of the anecdote / legend that Joseph Kennedy (or JP Morgan) decided to sell his stock portfolio as the market crash of 1929 approached, because he started getting stock tips from a shoeshine boy.
https://seekingalpha.com/article/2788885-how-old-was-that-sh...
https://seekingalpha.com/article/2788885-how-old-was-that-sh...
It's funny that I learned this right as bitcoin approached $17,000... and was treated to sitting in a bathroom taking a poop while one of the low level managers came in on the phone telling his wife he was buying $50,000 worth of Bitcoin that day.
Is there some kind of requirement that this gets posted below every article about the stock market?
What's the average P/E ratio these days? 20-ish? That implies a direct return of 5% (what's the English word for this?), assuming no future growth or reduction in earnings.
That's a low risk premium if you measure it against historical interest rates, but it doesn't seem completely unreasonable when interest rates are expected to be ~0% for the forseeable future, and the inflationary pressure on the dollar could be on the order of 40%.
It's certainly very high in historical terms, but you can't consider the history in isolation.
That's a low risk premium if you measure it against historical interest rates, but it doesn't seem completely unreasonable when interest rates are expected to be ~0% for the forseeable future, and the inflationary pressure on the dollar could be on the order of 40%.
It's certainly very high in historical terms, but you can't consider the history in isolation.
Just to provide some data to back up your point:
Forward earnings yield (from analyst forecasts & company guidance) for the S&P 500 is 4.84% vs 0.67% for 10 yr treasuries.
This document looks at the historical trend from a variety of perspectives: https://www.yardeni.com/pub/valuationfed.pdf
Current valuations are roughly in line with post-2008 history, but looking at a longer history suggests that they’re actually undervalued relative to other assets.
This document looks at the historical trend from a variety of perspectives: https://www.yardeni.com/pub/valuationfed.pdf
Current valuations are roughly in line with post-2008 history, but looking at a longer history suggests that they’re actually undervalued relative to other assets.
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We've got literally record-levels of unemployment, and things are worsening still. There's no reason to believe that this has no impact on earnings. This isn't reflected in the Q1 figures, and even not fully in the Q2 figures.
If there's a sharp rebound and everyone gets re-hired in a month when things open up again, and there's no second wave, then perhaps this will all blow over soon given valuations are based on future cashflows of which two months isn't a big deal.
But there's lots of reason to believe that will not happen. There is no vaccine, the virus is highly infectious, restrictions will be relaxed but they will need to remain in partial effect and this will impact employment/productivity in many sectors.
And eventually (particularly leveraged or low-margin industries) companies will simply collapse, there won't be any organisational framework to rehire these people and you'll just have to rely on new companies to form from scratch, which is a much slower process than rehiring furloughed workers under business-as-usual.
If there's a sharp rebound and everyone gets re-hired in a month when things open up again, and there's no second wave, then perhaps this will all blow over soon given valuations are based on future cashflows of which two months isn't a big deal.
But there's lots of reason to believe that will not happen. There is no vaccine, the virus is highly infectious, restrictions will be relaxed but they will need to remain in partial effect and this will impact employment/productivity in many sectors.
And eventually (particularly leveraged or low-margin industries) companies will simply collapse, there won't be any organisational framework to rehire these people and you'll just have to rely on new companies to form from scratch, which is a much slower process than rehiring furloughed workers under business-as-usual.
https://www.multpl.com/s-p-500-pe-ratio
Average, but to believe it you have to assume the E doesn’t change meaningfully over the next couple of months.
Average, but to believe it you have to assume the E doesn’t change meaningfully over the next couple of months.
The word you're looking for is "earnings yield."
Which earnings are you calculating P/E ratios from? Q1 2020 doesn’t seem like a great metric given how different Q2 has been so far.
Some of the classic recession indicators (Sahm, Chauvet) are just starting to peak [1]. Both have led multi-year declines in stock prices. Is this time different from last time and the time before that?
[1] https://fred.stlouisfed.org/graph/?g=qYNJ
[1] https://fred.stlouisfed.org/graph/?g=qYNJ
The stock market is nothing more than a casino of supply and demand. It is not rational and is based on nothing more than greed and fear. It has absolutely nothing to do with the “economy”.
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The number of people here convinced there is no alternative to stocks and that they are a good bet makes me wonder whether we’re at a temporary peak.
After the previous bottom sUch threads here, on reddit and on the financial times were convinced markets had nowhere to go but down and couldn’t possibly go up.
After the previous bottom sUch threads here, on reddit and on the financial times were convinced markets had nowhere to go but down and couldn’t possibly go up.
I think the problem a lot of people have when looking at the stock market is they assume everything is modeled against current time.
The price of any asset in the market is best viewed as a predictive time portal into the sum of all potential future value that can be generated by that asset. So, when you see TSLA at $800, that does NOT mean that investors, the market, et. al. are perceiving Tesla as worth that much today or even this decade. The market is continually modeling and adjusting how much that asset could be worth in 5+ years considering everything everyone knows at current time.
It is easy to fall into the trap of believing that the market is operating in first-order terms. Obviously, stocks react immediately to bad or good news on a quarterly or better basis, and this can send hilariously-conflicting signals regarding the longer-term modeling that is implicit with every asset price. This is where day-traders and other near-term speculators always get stuck. They make a few observations and then believe they have identified a regime in which the stock market does indeed operate in first-order terms. And then out of nowhere, their assets are wiped to zero or worse because of some sell-side risk model that was just run at Goldman Sachs indicating that no one wants electric cars in 2025. Obviously, this example is totally bullshit, but it's conceptually how you get burned when you play the short game.
The price of any asset in the market is best viewed as a predictive time portal into the sum of all potential future value that can be generated by that asset. So, when you see TSLA at $800, that does NOT mean that investors, the market, et. al. are perceiving Tesla as worth that much today or even this decade. The market is continually modeling and adjusting how much that asset could be worth in 5+ years considering everything everyone knows at current time.
It is easy to fall into the trap of believing that the market is operating in first-order terms. Obviously, stocks react immediately to bad or good news on a quarterly or better basis, and this can send hilariously-conflicting signals regarding the longer-term modeling that is implicit with every asset price. This is where day-traders and other near-term speculators always get stuck. They make a few observations and then believe they have identified a regime in which the stock market does indeed operate in first-order terms. And then out of nowhere, their assets are wiped to zero or worse because of some sell-side risk model that was just run at Goldman Sachs indicating that no one wants electric cars in 2025. Obviously, this example is totally bullshit, but it's conceptually how you get burned when you play the short game.
The worth today and net present value of worth tomorrow are the exact same thing. So I am not quite sure what you mean by "when you see TSLA at $800, that does NOT mean that investors, the market, et. al. are perceiving Tesla as worth that much today or even this decade".
"The reason the stock market is hard to predict is because it is a prediction."
https://futureoflife.org/2017/07/31/podcast-art-predicting-a...
https://futureoflife.org/2017/07/31/podcast-art-predicting-a...
> I think the problem a lot of people have when looking at the stock market is they assume everything is modeled against current time.
Absolutely, and quite a few people making this error on this thread.
Absolutely, and quite a few people making this error on this thread.
It is all relative - stocks prices are in dollars, if USD goes down - then it is rational to buy stocks with it even if the business perspectives are not perfect. In other words there is so much USD being printed that high inflation seems probably (this time - the same thing was said in 2008 - but this time the printing is even bigger). Look at gold prices: https://goldprice.org/gold-price-chart.html. Also there is some non negligible danger of USD losing its reserve currency status: https://www.linkedin.com/pulse/chapter-1-big-picture-tiny-nu... , https://www.linkedin.com/pulse/money-credit-debt-ray-dalio/ , https://www.linkedin.com/pulse/changing-value-money-ray-dali...
Update: I think I need to add that I have no economic education - I wrote this after reading recent Ray Dalio posts to see what others think about it.
Update: I think I need to add that I have no economic education - I wrote this after reading recent Ray Dalio posts to see what others think about it.
If you look at TIPS bonds, consumer inflation (CPI) is not actually substantially higher over 5 or 10 years, if at all. The expected inflation rate is the same tenor Treasury yield minus the TIPS.
Consumer prices and asset prices have decoupled.
Most consumers don’t have direct access to cheap FED money and the trickle-down effects (startup boom) have had limited impact on average wages.
Most consumers don’t have direct access to cheap FED money and the trickle-down effects (startup boom) have had limited impact on average wages.
Yes personally I would look at the rising CAPE as an indicator of asset inflation (too much capital chasing too few earnings).
Would be cool if someone built a simple S&P500 or All-world stock index, expressed in gold instead of USD, or expressed in a weighted basket of all currency index. This may give a better representation of the stock market value, corrected for some of the inflationary effects of quantitative easing.
Anyone ever seen such indices?
Anyone ever seen such indices?
Neat chart. So it’s been decreasing but still above 1. Maybe that means there’s room for the sp500 to go down more (or gold up)?
You'll find them here:
http://pricedingold.com/
http://pricedingold.com/
There is no excess of money "being printed." There is actually a reduction in supply, because of the way the system works. The quantity available depends on the flow, and the flow is greatly reduced.
The source of the flow of dollars is changing, because businesses are shut down, so dollars are flowing more directly from the Fed, which is trying to make up for the loss of flow elsewhere in the economy.
Gold prices are up because of the collective fiction around the idea of "assets" and "store of value."
There is no risk of loss of "reserve currency" status. There is always jostling around relative currency valuations, but the Fed has only strengthened its position as world premiere source of liquidity. And for the west there is no viable alternative.
The source of the flow of dollars is changing, because businesses are shut down, so dollars are flowing more directly from the Fed, which is trying to make up for the loss of flow elsewhere in the economy.
Gold prices are up because of the collective fiction around the idea of "assets" and "store of value."
There is no risk of loss of "reserve currency" status. There is always jostling around relative currency valuations, but the Fed has only strengthened its position as world premiere source of liquidity. And for the west there is no viable alternative.
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From my armchair, the market situation looks very simple. When the economy hits the ceiling, people at the top create a crisis, collect the remaining value and let the newly poor labor work hard to earn a better life and create value for the owners. Then the cycle repeats. It's somewhat similar to how the combustion engine works.
The stock market is growing because the owners want to start the new growth cycle. They think that's enough value have been collected, they have no intent to destroy the engine, and want to start the new cycle. They achieve it by letting Fed print trillions and buy the stocks. This dilutes the share of everybody not invested in the stocks, but it works for the US because dollar is the internatiinal common stock and the US has the right to issue new shares. Whoever complains gets a friendly visit by aircraft carriers and experiences sudden difficulties in participating in the international economy.
It's possible that the owners have messed up this time, as they are often just lazy greedy types, and the engine will stall, but in that situation it won't matter whether you hold dollars or sp500.
The stock market is growing because the owners want to start the new growth cycle. They think that's enough value have been collected, they have no intent to destroy the engine, and want to start the new cycle. They achieve it by letting Fed print trillions and buy the stocks. This dilutes the share of everybody not invested in the stocks, but it works for the US because dollar is the internatiinal common stock and the US has the right to issue new shares. Whoever complains gets a friendly visit by aircraft carriers and experiences sudden difficulties in participating in the international economy.
It's possible that the owners have messed up this time, as they are often just lazy greedy types, and the engine will stall, but in that situation it won't matter whether you hold dollars or sp500.
The Fed isn’t actually buying any stocks. And neither are companies diluting anybody to sell anything to the Fed.
What the Fed is buying is bonds. Which are non-dilutive.
I understand the sentiment, but let’s try to get the facts right
What the Fed is buying is bonds. Which are non-dilutive.
I understand the sentiment, but let’s try to get the facts right
"If you invest five thousand dollars in Apple or Tesla, the five or ten dollars you saved in fees won’t have much effect on the ultimate outcome."
The author is way out of touch if he thinks this. Many of my friends playing around in the stock market have a portfolio of less than $1000. When I started learning it my portfolio wasn't much bigger. At that level, if you trade even semi-actively, you get eaten alive by fees
The author is way out of touch if he thinks this. Many of my friends playing around in the stock market have a portfolio of less than $1000. When I started learning it my portfolio wasn't much bigger. At that level, if you trade even semi-actively, you get eaten alive by fees
My amateur guess is the stock prices are being adjusted for the implied inflation due to trillions being pumped into the economy.
The stocks are not worth more inherently, you just need more (depreciating) dollar units to describe the price.
The stocks are not worth more inherently, you just need more (depreciating) dollar units to describe the price.
Nothing changed recently, the situation is bad in some sense since people started treating stocks like toys and not as pieces of companies. Investing used to be building companies and shares were the ways to raise the required capital, now people play with it and more money are extracted from playing with the stock than the actual output of the company the stocks are speculated.
They are toys. You pay money and get nothing in return. Let’s say AMZN shuts down. What do common equity holders get? What if they never shut down? Then what do the common equity holders get?
You get a part of that company and dividends. If you have enough shares, you have influence, control or even ownership of the company. That is the primary purpose of shares.
people can gamble if they want to.
But the borrowed funds used to do this is probably not as productive as investing in capital infrastructure.
But the borrowed funds used to do this is probably not as productive as investing in capital infrastructure.
If you think of stocks as a form of currency, given that the dollar and euro are being so heavily inflated, perhaps it makes sense to stay in the markets than convert to cash at a definite loss?
> perhaps it makes sense to stay in the markets than convert to cash at a definite loss?
Equities are less exposed to low to moderate inflation than assets with fixed pay-outs. No need to model stocks as currency.
Equities are less exposed to low to moderate inflation than assets with fixed pay-outs. No need to model stocks as currency.
Why? Or source?
> Why?
Long story short, corporate earnings can absorb small and moderate inflation shocks. That lets dividends, and enterprise exit values, respond to low inflation.
Long story short, corporate earnings can absorb small and moderate inflation shocks. That lets dividends, and enterprise exit values, respond to low inflation.
If the stock market is wrong, what will force it to correct?
Does it take a lot of companies going bankrupt?
Is it enough for lots of companies to report big revenue drops? Or is that priced in the minds of most investors?
Does it take a lot of companies going bankrupt?
Is it enough for lots of companies to report big revenue drops? Or is that priced in the minds of most investors?
It takes more people selling shares (or being forced to sell shares) than there are buyers.
Maybe I have some shares I bought for $10; the price dropped and now I can only sell them for $8. There is a solar farm off to one side selling bonds at some unreasonably high yield.
I could be stubborn and hold the shares until the price comes back - but that would lose me money in the big picture. Instead I sell for whatever I can get and put the money where it will be generating a good return.
If a bunch of people behave like that, sellers quickly overwhelm buyers (potential buyers are flocking to the new opportunity too) and the price corrects to something reasonably fair.
Maybe I have some shares I bought for $10; the price dropped and now I can only sell them for $8. There is a solar farm off to one side selling bonds at some unreasonably high yield.
I could be stubborn and hold the shares until the price comes back - but that would lose me money in the big picture. Instead I sell for whatever I can get and put the money where it will be generating a good return.
If a bunch of people behave like that, sellers quickly overwhelm buyers (potential buyers are flocking to the new opportunity too) and the price corrects to something reasonably fair.
[deleted]
For every stock sold there’s always a corresponding buyer at the market price.
You might want to look into order books to get a better understanding of the price determination mechanism of stocks/assets: https://en.m.wikipedia.org/wiki/Order_book_(trading)
Thanks for your link. I read it. But does it explain/re-affirm that prices go down when there are more people selling than there are people buying?
Typically there are different types of orders as well:
https://en.m.wikipedia.org/wiki/Order_(exchange)
For assets with high liquidity there will always be buyers and sellers, depending on how many are on either side and what their price limits are (if they set any) transactions will occur at different prices. Depending on the order size the price can vary even within a single order (if you need multiple buyers or sellers with different limits to fill it). The market price is just an indication of the current equilibrium price at which there is the most liquidity for an asset. If there are more people that want to sell than people that want to buy at a given price the sellers will have to reduce their ask price to close orders, that drags the market price down. The same dynamic moves the price up when there are more buyers than sellers.
https://en.m.wikipedia.org/wiki/Order_(exchange)
For assets with high liquidity there will always be buyers and sellers, depending on how many are on either side and what their price limits are (if they set any) transactions will occur at different prices. Depending on the order size the price can vary even within a single order (if you need multiple buyers or sellers with different limits to fill it). The market price is just an indication of the current equilibrium price at which there is the most liquidity for an asset. If there are more people that want to sell than people that want to buy at a given price the sellers will have to reduce their ask price to close orders, that drags the market price down. The same dynamic moves the price up when there are more buyers than sellers.
There are exactly as many buys/sells. You can't have more "Sellers". The price can move down, however, without much trading. For stocks with low trading/high volatility it might make sense to give the mid order book price rather than last trade.
Imagine a closed off room of 100 traders. There are three sets of people here: a group of pairs doing a transaction, a group of pairs negotiating a strike price, no deals yet, and a final group "sitting on their hands". Only the executed trades are ordered in descending timestamps. The one at the top is the market price. It's the only reliable indicator of what actually got sold and bought.
So, in this room, the price of each transaction, from any negotiations, is a consequence of the conviction of each party in the negotiations and eventually the trade. This includes how optimistic or pessimistic they feel about the value of the stock, how aggressive each one's stance about the predicted future price of the stock, how much greed or fear exists in the minds of the traders etc. This is what moves the price. Prices can move just as rapidly (be more volatile) with a few traders and many sitting on their hands as can be the case that prices hardly move with the entire 100 people transacting.
Conclusion: what moves prices up or down are opposing beliefs with differing levels of conviction in the minds of the traders.
So, in this room, the price of each transaction, from any negotiations, is a consequence of the conviction of each party in the negotiations and eventually the trade. This includes how optimistic or pessimistic they feel about the value of the stock, how aggressive each one's stance about the predicted future price of the stock, how much greed or fear exists in the minds of the traders etc. This is what moves the price. Prices can move just as rapidly (be more volatile) with a few traders and many sitting on their hands as can be the case that prices hardly move with the entire 100 people transacting.
Conclusion: what moves prices up or down are opposing beliefs with differing levels of conviction in the minds of the traders.
That's a massive and dangerous over-simplification of the market. The market is really complex and the factors that play in determining and moving the price are inter-mingled in a very complex way.
Here are a few ones of the top of my head:
- Someone getting liquidated on a big contract and crashing the whole market with him. (see Oil prices a few weeks ago).
- Someone trading exotic/complex derivatives. His trades on the stock will not make sense unless you account for his whole trade/structure that he created. He can/does move the market in unusual ways.
- Someone trading in a certain way because of taxes. His trades will not make sense if the tax rate was 0%.
- Someone laundering money through the market by buying the stock somewhere and selling it somewhere else in a derivative market making his net position neutral and trying in the process to move proceeds from one place to another. This is, actually, a big one.
- Someone getting out of position when it would be profitable for him not to. But he has better alpha somewhere else he is going to chase.
Here are a few ones of the top of my head:
- Someone getting liquidated on a big contract and crashing the whole market with him. (see Oil prices a few weeks ago).
- Someone trading exotic/complex derivatives. His trades on the stock will not make sense unless you account for his whole trade/structure that he created. He can/does move the market in unusual ways.
- Someone trading in a certain way because of taxes. His trades will not make sense if the tax rate was 0%.
- Someone laundering money through the market by buying the stock somewhere and selling it somewhere else in a derivative market making his net position neutral and trying in the process to move proceeds from one place to another. This is, actually, a big one.
- Someone getting out of position when it would be profitable for him not to. But he has better alpha somewhere else he is going to chase.
Sure you can have more sellers than buyers at a price, you can’t have more transactions, but limit orders can expire or be partially filled.
I can't tell if you are saying that in support or opposition, but yes - the imbalance in buyers and sellers is what causes the price to move until everything matches again.
I am saying that in opposition.
Sellers do not overwhelm buyers _when_ the price goes down, or vice-versa. There is no "overwhelming" of one group over the other. Nor do prices go down _because_ of an independent phenomenon other than buying and selling. The price is judged on the _value_ sellers and buyers ascribe to the stock at a given time. If they match, a transaction takes place. In the end there are always exactly equal buyers as there are sellers.
Sellers do not overwhelm buyers _when_ the price goes down, or vice-versa. There is no "overwhelming" of one group over the other. Nor do prices go down _because_ of an independent phenomenon other than buying and selling. The price is judged on the _value_ sellers and buyers ascribe to the stock at a given time. If they match, a transaction takes place. In the end there are always exactly equal buyers as there are sellers.
What is meant here is that if we have a closed room with 100 people.
If there are 60 investors who want to sell stocks and 40 who want to buy always equally as much for simplification purposes and the price is $50, the price will keep moving down until there's 50 investors who want to sell and 50 investors who want to buy.
40 trades will happen on $50 price, but then there is 20 sellers still left who want to sell at this price. Since there are no buyers, price will go lower and slowly some sellers don't want to sell lower than $50, so there might be 15 sellers left at $45 and 5 buyers, they will do the trade and then there will be 10 sellers left. let's at $40 there will be 5 who decided it's good to buy now and this is where the fair price will have landed, at $40.
If there are 60 investors who want to sell stocks and 40 who want to buy always equally as much for simplification purposes and the price is $50, the price will keep moving down until there's 50 investors who want to sell and 50 investors who want to buy.
40 trades will happen on $50 price, but then there is 20 sellers still left who want to sell at this price. Since there are no buyers, price will go lower and slowly some sellers don't want to sell lower than $50, so there might be 15 sellers left at $45 and 5 buyers, they will do the trade and then there will be 10 sellers left. let's at $40 there will be 5 who decided it's good to buy now and this is where the fair price will have landed, at $40.
If more people are interested to sell than to buy, that will create downward pressure on the price - even if in the end for every individual trade there is both a buyer and a seller, that is a sort of "overwhelming", if you think of the buyer as a (name, bid) pair.
Unless they are selling to themselves through a triangle of ETFs
Or a trip switch has killed trading in an asset - or perhaps the entire market.
Buyers and sellers only match under normal trading conditions. Good luck expecting your stop loss orders to mean anything when there's a mass panic.
Buyers and sellers only match under normal trading conditions. Good luck expecting your stop loss orders to mean anything when there's a mass panic.
Great question! I know of the standard simplistic answer, but still curious about how it works in detail. In theory a share represents your claim on the future profits of the firm and grants you some control over its decisions. So when the prospects of the firm look bleaker, more shareholders will sell, pushing the price down until there is a consensus that the current price fairly represents the value of a share.
What bothers me is that most traders don't care about control or profits - they just want the number to go up (or down). How does the price get grounded in reality in this case? The answer is presumably: in trades between speculators and those who do care about profits and control. But where is the guarantee that those trades happen? What if speculators mostly trade among themselves?
What bothers me is that most traders don't care about control or profits - they just want the number to go up (or down). How does the price get grounded in reality in this case? The answer is presumably: in trades between speculators and those who do care about profits and control. But where is the guarantee that those trades happen? What if speculators mostly trade among themselves?
Perhaps the tax preference should be shifted from capital gains to dividends.
Perhaps we should eliminate dividends and shift to buybacks and fractional shares. Then stockholders could choose when to cash out but would reinvest by default.
Perhaps W2 employees should get unlimited IRA contributions and no age requirements for distributions.
Dividends should really be taxed as normal income, then you can abandon corporation tax which seems option for multi-nationals.
Perhaps one might think most companies are either:
1) fundamentally sound, in which case buy on the dip, or
2) going to get bought out by a stronger company, in which case buy in before the sale
There might be a few companies that fall into neither group, being so fundamentally unsound that they will simply be shuttered with no sale, but that would surely be a small percentage of the stock market.
There might be a few companies that fall into neither group, being so fundamentally unsound that they will simply be shuttered with no sale, but that would surely be a small percentage of the stock market.
> If the stock market is wrong, what will force it to correct?
How about not "correcting" the corrections in the first place? Let the market actually be a market, don't inject huge amounts of money into it?
Not to be confused with helping out ordinary people who need money for spending.
How about not "correcting" the corrections in the first place? Let the market actually be a market, don't inject huge amounts of money into it?
Not to be confused with helping out ordinary people who need money for spending.
By correct I meant to go to the "correct" value. The premise was that the stock market is overvalued (is this premise true? I don't know).
Actually the premise is "the market is overvalued and therefore there will be a significant correction."
Technically the current value is the correct value. The question isn't whether this value is "wrong" - it isn't, by definition - but whether or not Mr Market is delusional and prices will crash at some point in the near/mid future.
Explicitly, the distinction is between investors who are looking at fundamentals, and investors who are looking at market momentum and trying to factor in their guesses about politics and Fed policy.
If you consider fundamentals, P/E is up to insane levels in a barely functioning economy. If you consider politics - optimism may be justified. Possibly.
But if it is - what does that say about the value stock markets are supposed to provide?
Technically the current value is the correct value. The question isn't whether this value is "wrong" - it isn't, by definition - but whether or not Mr Market is delusional and prices will crash at some point in the near/mid future.
Explicitly, the distinction is between investors who are looking at fundamentals, and investors who are looking at market momentum and trying to factor in their guesses about politics and Fed policy.
If you consider fundamentals, P/E is up to insane levels in a barely functioning economy. If you consider politics - optimism may be justified. Possibly.
But if it is - what does that say about the value stock markets are supposed to provide?
All these predictions and no one mentions the serious tax cuts by the government that was the cause of the pre-corona rally.
Markets need to go way down before things normalize ( eg. Tax cuts won't hold I think)
We are now back at the level before tax-cuts, which is nuts considering people are not spending currently.
Markets need to go way down before things normalize ( eg. Tax cuts won't hold I think)
We are now back at the level before tax-cuts, which is nuts considering people are not spending currently.
Near the bottom of the market in March, HN said to wait. N% of past crashes went lower than this. It's like catching a falling knife. It will get worse.
I bought any way.
I'm up 24%. The average annual increase for the S&P 500 is 6%.
Now HN is saying it's crazy to buy.
I see stores reopening. Local stores in Seattle, but also chains. Apple is planning to reopen its US stores soon. Grocery store shelves are full.
NYC is opening its beaches for Memorial Day.
Yet again, "it will get worse." I see the market going sideways.
I think I'm going to hold on.
I bought any way.
I'm up 24%. The average annual increase for the S&P 500 is 6%.
Now HN is saying it's crazy to buy.
I see stores reopening. Local stores in Seattle, but also chains. Apple is planning to reopen its US stores soon. Grocery store shelves are full.
NYC is opening its beaches for Memorial Day.
Yet again, "it will get worse." I see the market going sideways.
I think I'm going to hold on.
For me it is either US stocks, gold, or bitcoin , or USD / EUR. Central banks have made it clear they plan to destroy your wealth. Bitcoin is still frowned upon, gold is out of reach, so what's left?
Sure, US stocks is a pyramid, but Euro stocks have been and keep performing very bad. Only china could surprise the world , but they are not going to open up their economy anytime within the next 2 years.
Sure, US stocks is a pyramid, but Euro stocks have been and keep performing very bad. Only china could surprise the world , but they are not going to open up their economy anytime within the next 2 years.
The market is still down 13-14% in 3 months. Besides, where else are you supposed to put your money? I don't have much confidence in predicting where the market will be next week or next month, but I have a lot more confidence in stocks over the next 10-20 years than any other place I can store my money, so I'm gonna keep buying stocks.
It's like the author doesn't know you can bet on the stock market falling.
They certainly don't explain what people are actually betting on.
It makes total sense to bet now. The incumbants are fish out of water. Their algorithms isn't built for this.
Does it make more sense to compete in a normal decade long stable market against billion dollar companies? That's stupid.
They certainly don't explain what people are actually betting on.
It makes total sense to bet now. The incumbants are fish out of water. Their algorithms isn't built for this.
Does it make more sense to compete in a normal decade long stable market against billion dollar companies? That's stupid.
You're saying that amateurs have an easier time adjusting to changes in stock markets than professionals. Even suggesting that people should trade short. Now why should a professional argue against that? Amateur volume is good for business.
Most amateurs are investing basically at random, so there is nothing to adjust.
The article is talking volume not so much me. You can't sit at home and watch tv and invest without some volume.
Basically they wanted a /r/WallStreetBets angle but didn't want to say the word which confused the article.
The article is talking volume not so much me. You can't sit at home and watch tv and invest without some volume.
Basically they wanted a /r/WallStreetBets angle but didn't want to say the word which confused the article.
So it has become a casino, people are not investing, people are betting.
A casino bet has negative expected returns, while a long position in the stock market has positive expected returns.
> people are not investing, people are betting
These are two different ways of expressing the same thing. (Gambling versus investing, on the other hand, are different. But a “bet” can be utilitarian, i.e. not entered into for fun.)
These are two different ways of expressing the same thing. (Gambling versus investing, on the other hand, are different. But a “bet” can be utilitarian, i.e. not entered into for fun.)
The stock market in nominal terms means very little when the currency has been grossly inflated.
Purchasing power is what's important.
Purchasing power is what's important.
The article makes great points. Alot of commenters here all make great points. However, what part of "The U.S. has pumped $20 trillion dollars" do people not understand? There is a massive amount of stimulus and the Federal Reserve has also said it'll do more if necessary.
Stocks prices react to supply and demand and there is genuinely more demand than ever before relative to supply (no, it's not all just Fed's doing as somebody in the comment section always wants to say). Population is aging and retirement savings is all time high. Global pension assets were 44.1 trillion worldwide at the end of 2018. Large part of that sums stays in stock and goes to stocks, no matter what.
Say, you are risk averse investor who has 15-20 year investment time horizon. What you should do? Will bonds yield better returns? I don't think so. You should keep doing what you do. Dollar-cost averaging reduces the volatility over long term. If you have some balanced strategy like 60/40 stocks/bonds then rebalance like before.
Say, you are risk averse investor who has 15-20 year investment time horizon. What you should do? Will bonds yield better returns? I don't think so. You should keep doing what you do. Dollar-cost averaging reduces the volatility over long term. If you have some balanced strategy like 60/40 stocks/bonds then rebalance like before.
DCA assumes you have a lump sum to invest right? If you did have a lump sum, dropping it in one go vs DCA has the same expected value (or perhaps all in one go has higher EV due to reduced transaction costs).
I would also of thought volatility over 15-20 year term when choosing between DCA or lump investment is largely irrelevant and not worth hedging against.
I would also of thought volatility over 15-20 year term when choosing between DCA or lump investment is largely irrelevant and not worth hedging against.
> I would of thought volatility over 15-20 year term when choosing between DCA or lump investment is largely irrelevant.
You can see the effect for the total return of your investment even in 15-20 years. Try for example SP500TR for 20-year period and slide the starting point over dot-com-bubble. 20 year ROI(TR) alternates from >300% to 180% and back to >300% within 3-4 years.
You can see the effect for the total return of your investment even in 15-20 years. Try for example SP500TR for 20-year period and slide the starting point over dot-com-bubble. 20 year ROI(TR) alternates from >300% to 180% and back to >300% within 3-4 years.
> dropping it in one go vs DCA has
a higher expected value. If you expect positive returns, the sooner all your money is earning the better.
a higher expected value. If you expect positive returns, the sooner all your money is earning the better.
I think a lot of people commenting here are taking a surprisingly narrowminded approach to predicting possible consequences. It's like their spectrum of conceivable outcomes runs from Great Depression to Baby Boom. But many worse things have happened in human history than the Great Depression, and this could well be one of them.
I wrote up a more detailed argument at https://gitlab.com/kragen/derctuo/-/blob/master/pandemic-col....
I wrote up a more detailed argument at https://gitlab.com/kragen/derctuo/-/blob/master/pandemic-col....
The market timing strategy rationale for investing now is that the world economy and the U.S. economy will resume growing. "I don't need the money for 20 years. Surely by then we will have grown our way out of this." What if that is not true, despite being true for the last 100 years? Western populations are ageing. Populations are shrinking in some countries, like Russia. The real costs of fossil fuel and resource extraction are starting to hit hard. Environmental devastation may unleash more viruses. I'm not predicting, I'm just saying continued growth may not resume or even be desirable.
I found this particular post from a hedge fund owner quite insightful why the the stock market is unlikely to crash spectacularly if things keep going the way they go with the Fed bank-rolling https://medium.com/@dan_60967/devils-advocate-the-bull-case-.... The ones stating the market is going to crash are also the ones that are either shorting or have closed out their positions, and waiting to swoop in to profit.
I think one should look at the velocity of money very closely right now to get a good sense of where the general market will be headed in the next couple of years. As the velocity slows down, economic activity overall will slow and no amount of government stimulus is going to help.
https://fred.stlouisfed.org/series/M1V
https://fred.stlouisfed.org/series/M1V
If you think the stock market is overvalued, buy. If you don't, sell. Money talks, articles in the New Yorker don't.
In other news, https://variety.com/2020/digital/news/conde-nast-layoffs-100...
(Condé Nast publishes the New Yorker)
(Condé Nast publishes the New Yorker)
Heh
"The market" has become a tool for politics, so we can assume politicians will never let the market die. They will just keep dumping money into it.
And, investors know that Republicans, Democrats, everyone will sacrifice everything to save "market growth".
Seems like a rational, safe bet.
And, investors know that Republicans, Democrats, everyone will sacrifice everything to save "market growth".
Seems like a rational, safe bet.
If not stocks, then what? I wonder if there's some other investment vehicle that's become more appealing than it was before in this shifting landscape. Obviously not real-estate. Is hoarding cash really the advice for now?
Anything that doesn't fit into a keynesian model is called "animal spirits". Wouldn't it be great if we could keep newtonian physics and call all that radioactivity stuff "quantum spirits"?
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Are there any indicies that track companies that are positioned to capitalise on the current new norm? (ecomm, distribution, gaming, streaming...)
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Record number of investors means dumb money, just like 2000. If you don't know who the greater fool is...it's you
It's sentiment like this that keep stocks from becoming too overpriced. The market at work!
> “The consensus seems to be, ‘Don’t worry, the Fed has your back,’ ” Druckenmiller said in his presentation. “There’s one problem with that: our analysis says it’s not true.”
No, investors haven't lost their minds. They are betting that the Fed will backstop the stock markets by any means necessary.
Try this though experiment. Which US companies will not be allowed to fail under any circumstances? You might be surprised to find companies far outside of the banking and national defense industries on this list. Given the chain reaction that often takes place in debt defaults, you might be surprised to find almost every large US company on the list.
That's what the Fed needs to "backstop." The scale is beyond any balance sheet expansion currently being discussed. Of course, this isn't capitalism, either, but that seems to bother fewer people than it should given their rabid espousal of anti-socialist doctrine.
Whatever you calculate the current US national debt to be needs to factor in the market value of those companies that can not fail under any circumstances. Most tallies don't.
Now, try to use any traditional metric of value (P/E ratio, dividend yield) or risk to buy some stocks. You'll quickly throw in the towel and remember that ultimately the Fed has your back. Right?
No, investors haven't lost their minds. They are betting that the Fed will backstop the stock markets by any means necessary.
Try this though experiment. Which US companies will not be allowed to fail under any circumstances? You might be surprised to find companies far outside of the banking and national defense industries on this list. Given the chain reaction that often takes place in debt defaults, you might be surprised to find almost every large US company on the list.
That's what the Fed needs to "backstop." The scale is beyond any balance sheet expansion currently being discussed. Of course, this isn't capitalism, either, but that seems to bother fewer people than it should given their rabid espousal of anti-socialist doctrine.
Whatever you calculate the current US national debt to be needs to factor in the market value of those companies that can not fail under any circumstances. Most tallies don't.
Now, try to use any traditional metric of value (P/E ratio, dividend yield) or risk to buy some stocks. You'll quickly throw in the towel and remember that ultimately the Fed has your back. Right?
I was under the impression that the vast majority of investing was automated, algorithm-based, no?
The total executed volume in the market are dominated by automated trading systems, capturing small differences in relative value between correlated products. They don't determine prices because they're not actually putting anything into the market in net, they have their capital and they're just redistributing it back and forth between a handful of different products capturing small amounts of edge from the real investors.
They are betting on soaking up QE money. That's it.
Have the financial markets become decoupled from the real economy? Like a parasite consuming its host, now they just wait to be bailed out to bankroll stock buyback schemes...
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If the FED pumps so much money in the market, at what point do they start getting such significant stakes in the companies that they get board seats? Does it not become a roundabout 'socialism' if the state owns huge stakes in publicly listed companies?
I'd dump all stock right now if I was holding, thank the tax payer and buy bullion.. don't know why people would still remain invested in a market that will obviously crash..
I'd dump all stock right now if I was holding, thank the tax payer and buy bullion.. don't know why people would still remain invested in a market that will obviously crash..
The FED is mainly buying U.S. Treasury securities and Mortgage-backed securities [0]. They just started buying bonds this week but haven't bought very much and they haven't bought any equities.
[0]: https://www.federalreserve.gov/releases/h41/current/h41.htm
[0]: https://www.federalreserve.gov/releases/h41/current/h41.htm
One thing I appreciate these days is the stock market can be disconnected from the realities of the economy and can remain that way for an indefinite period of time.
The best way I’ve found to trade is to listen to what the market is telling you. Take positions with discipline. Scale out when you have profits. Wait for next sign of direction.
It is as easy as that while at the same time very challenging.
The best way I’ve found to trade is to listen to what the market is telling you. Take positions with discipline. Scale out when you have profits. Wait for next sign of direction.
It is as easy as that while at the same time very challenging.
It's comments like these that make me think we're in a bubble. People who confidently talk about investing in the stock market but are actually talking absolute nonsense. 'Take positions with discipline'? 'Listen to what the market is telling you'. 'Wait for next sign of direction'. 'It is as easy as that while at the same time very challenging.'
None of what you said means anything. You may as well be saying "Listen to what the roulette wheel is telling you".
None of what you said means anything. You may as well be saying "Listen to what the roulette wheel is telling you".
Seriously? Take a daily chart, plot a 10d moving average and tell me you can’t make money.
It is the wisdom of the crowds. People do know that the group think and hysteria are all made up.
For all the scare mongering sheltering at home the facts are that the disease is not radically dangerous.
Note the hysteria and the fake outrage when pointing out that an 80 year old' "premature" death is not nearly as sad, impactful or tragic as that of 30 year old'.
Modern society keep its citizens in check by promising them that they are all "equal" and that they will do "everything" possible for everyone. The outrage is to salvage that facade, that illusion.
For all the scare mongering sheltering at home the facts are that the disease is not radically dangerous.
Note the hysteria and the fake outrage when pointing out that an 80 year old' "premature" death is not nearly as sad, impactful or tragic as that of 30 year old'.
Modern society keep its citizens in check by promising them that they are all "equal" and that they will do "everything" possible for everyone. The outrage is to salvage that facade, that illusion.
I did not invest heavily during the 2008 financial crisis, and looking back, I have regrets about that. I invested more aggressively this time around on the downturn.
And my younger siblings and colleagues all seem to be taking the same long-term approach. They all read /r/personalfinance and some are trying to “FIRE”—again, on a 10-20 year plan.
The article seems to take an implied short-term view by talking about how the recovery might or might not be V-shaped. Honestly that seems like the crazy approach. I don’t know anyone, personally, who is investing today with hopes of pulling that money back out in a few months. That is what a symmetrical “V” would be at this time. Obviously that is not going to happen.