Comment by grey-area | Hacker News Reader

Comment by grey-area | Hacker News Reader

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The second crash this year has already started, perhaps triggered by the realisation that tech stocks are not as insulated from the global recession as previously hoped. Central banks are out of ammunition and have been reduced to buying corporate debt indiscriminately and promising ZIRP forever, having less and less impact on markets.

FANGMAN has lost $1.4tn in mkt cap since beginning of Sep w/#Apple quietly down 22.6% from highs, #Netflix down 18.3%, #Nvidia 17.2%, #Facebook 17.1%, #Amazon down 16.8%, #Google 15.9%, #Microsoft down 14%.

https://twitter.com/Schuldensuehner/status/13072058719073361...

Things are highly volatile right now. Frothy stocks like Tesla are moving 20% in a day both ways, which is neither normal nor desirable, CAPE at 1929 levels, 5 largest companies (all tech) were > 20% of S&P, IPOs reaching 140x earnings on first day (snowflake), fraud like We Work and Nikola constantly coming to light, companies like Softbank (of We infamy) making huge speculative bets on options. All the signs are here for a remarkable speculative bubble in tech stocks.

All this in the face of the sharpest recession on record, with worse unemployment than the great recession of the 1930s. I'm not convinced US equities will continue to provide the remarkable returns seen this year (with no basis in the real economy). Tech companies like Amazon need other tech companies to spend on AWS and consumers to buy, companies like FB/Google need other companies to spend on ads, companies like Apple/Netflix need consumers with disposable income. Everything is connected.

Central banks are not out of ammunition. I think you underestimate the impact of "open-ended QE", as well as the dozens of incredible and never-seen-before programs set up during COVID; sometimes stretching the mandate through "special purpose vehicles".

Everyone expects the Fed to inject as many trillions of dollars as needed to the _stock market_ to keep stock prices up. The effects on the economy are more uncertain; but we know the Fed can, has, and said they will do "whatever it takes" to ensure an "orderly market"; which is just an euphemism for "stop stocks from crashing".

TINA. There is no alternative, and if you look at long term treasury rates (YCC has not happened _yet_), people are believing interest rates will be around the 1% mark for the _next 30 years_.

When the long term risk free rate goes from 2% to 1%; stocks become worth twice as much.

Such a strategy in the face of high unemployment will end poorly. It's effectively currency debasement to prop up your top corporations stock prices at the expense of the real economy.

You'll be left with 5-100 megacaps, carrying less real revenue than when the debasement started. Consumers, SMBs, and employees will have had their dollars eroded.

If our currency is debased, where's the inflation?

Asset prices have grown faster than incomes in the U.S for the last several decades; this trend appears to be accelerating. In my neighborhood of Boston, YoY condo prices are growing at 8%. On paper I've been paid to live in my condo for the last few years.

<Speculation>

IMHO the method that the Fed uses to inject currency biases towards asset classes by controlling borrowing costs. In an industrial economy, this would typically result in direct investment into new equipment, and an agricultural economy the tilling of new land. However, growth in services or tech is rarely debt-financed as there are relatively low CapEx costs and high opex loads. Given the relative maturity of the industrial and agricultural sectors, there aren't many places in the economy that can productively absorb debt-backed financing.

What we end up with is relatively static asset classes absorbing massive debt-based financing and inflating overall asset prices. Unfortunately, several of these asset prices bleed over as costs to workers who need a home, a rent for their place of business, or an education to acquire skills.

While in a healthy economy, everyone's cost is someone else's income. As long as the Central bank is applying a QE strategy, your cost is a mortgage or a rent backed by a mortgage; the "income" side of the equation is just the central bank.

Asset holders benefit from holding assets that magically increase in price.

</Speculation>

Inflating asset prices is just UBI for the wealthy.

Seems to have turned up in insane asset prices, making the rich richer. Unfortunate that it's the wrong kind of inflation.

Or maybe conditions in the world have changed that make assets more valuable... If the currency was "debased" it would show up everywhere.

>If the currency was "debased" it would show up everywhere

Not necessarily.

Prices are dictated by supply/demand - and different goods have different amounts of supply/demand.

As so, it's theoretically possible to continually print money into existence, and use it all to buy Tesla stock, until there are no more shares of Tesla stock left for sale.

Under such a hypothetical scenario, INFLATION would only happen in Tesla's Stock price - as all this extra money spurred DEMAND for Tesla stock and wasn't accompanied by an increase in SUPPLY of Tesla stock. However, the price of shirts would remain the same - as none of this money changed the SUPPLY/DEMAND of shirts.

As so - inflation doesn't necessarily have to happen everywhere.

Note, this is mainly why CPI is a bad indicator of inflation - as it doesn't track the inflation that is happening around us - inflation in assets like stocks / real estate. This also explains why prices of real estate in certain cities are way pricier than others, and also why the stock market can be way overvalued when the economy is doing bad.

Is it the job of the fed and QE to boost stock prices?

That's not what it was supposed to do. It also wasn't supposed to be policy forever but a carefully calculated (quantitative) intervention.

I'm not even sure it's working any more to boost stock prices.

The job of the Fed is to maintain inflation and employment targets. Since both inflation and employment are below target, they are engaging in an expansionary monetary policy.

I'm honestly baffled by so many people thinking that a contractionary stance would be better?

We should consider that the fed's methods of measuring inflation and/or injecting capital could be flawed.

If the money injected by the fed is not making it to consumers, then we should expect that inflation measured via some kind of consumer price index would not move.

> consumers

Consumers take out loans, that's a fact. Interest rates are lower, that's also a fact. Therefore, the money is making it to consumers.

If the Fed is able to expand the monetary supply without inflation, then that is a good thing (again) and the Fed should continue doing so until inflation does move.

Have a significant number of consumers taken out new loans? What percentage of consumers actually benefit, especially if they do not purchase a new home?

>If the Fed is able to expand the monetary supply without inflation, then that is a good thing

Expanding the money supply alone does not seem like the right goal. Suppose the fed decided to expand the money supply by cutting a check to the top 1%. I wouldn't expect to see any inflation in the pricing of general consumer goods since that segment of the population just isn't competing for those goods.

Doesn't seem like the levers they have are working. Economic growth rather than inflation is the goal. The measures are not the goal.

Maybe that needs massive investment rather than monetary policy. Certainly QE has had many other impacts, but it hasn't led to a positive change in the measure that matters - consumer price inflation.

> Doesn't seem like the levers they have are working. Economic growth rather than inflation is the goal.

Nope, economic growth is not the goal. Inflation targeting and unemployment targeting is the goal.

I don't see how you can claim that the levers "aren't" working if you don't know what would have occurred without the Fed action.

The other poster said "doesn't seem," which is already an admittance that it is just anecdotal observation.

I'm also not sure what you're hoping to accomplish here. Yes, quantifiable claims are better than subjective ones, but "no one knows what would have happened otherwise" is just an argument that justifies literally any action.

> just an argument that justifies literally any action.

I'm saying having a model for what you're talking about and also having empirical research about what has happened with similar interventions on the aggregate is good.

Looking at a single intervention in response to a massive calamity and saying "well that didn't work because things were bad after!" is what I'm trying to critique.

A key lesson I've learned arguing about macro online:

Anyone who claims that the Fed is "out of ammo" is not worth arguing with.

I think they eventually have to release all ammunitions that they have. It is not a good sign, it means that they are desperate, it is their last chance, live or die. We should not be complacent that everything will be ok. They need to maintain status quo. If they fail, all of us will be in precarious situation.

> I think you underestimate the impact of "open-ended QE"

Until it comes time to settle. Then they’ll have to either borrow more, by raising interest rates, or literally print money.

> Central banks are out of ammunition and have been reduced to buying corporate debt indiscriminately and promising ZIRP forever, having less and less impact on markets.

This is wrong. The Fed will keep doing QE to prop things up for as long as long as it takes. Do you read the FOMC meeting minutes or listen to Jerome Powell talk? There wouldn’t be massive inflows to equities without the Fed put (QE).

No, I listened to economists who are skeptical that quantitative easing works for the original purpose (to increase liquidity and stimulate real economic growth). If you ignore the interviewer this chat with Lyn Alden and Jeff Snider on QE is interesting.

https://m.youtube.com/watch?feature=youtu.be&v=B4xcCO9v-Os

Those aren't economists lmao

True :) Economists have questioned the efficacy of QE though.

No mainstream economists are saying the things that are being said in this thread about QE and the Fed.

But still they are up like 50+% this year?

Facebook makes more profit than some stock markets as a whole (might be an exaggeration). Tech companies did well in the crisis, adapted better than others and were generally pretty good in making even more money.

I do agree: lots of people loose in this crisis. But we are probably in fact living in times of super inflation; the EU has for the first time ever taken debt; US and China race for debt.

All you can do (I feel): is watch and be taken for a ride. The gap between rich and poor will grow, so will the gap between “fast adapters” and “the good old industries”.

It may sound harsh: but the economy in the US probably doesn’t really care about those that lost the most and were the most vulnerable.

Hitchhikers Guide to the Galaxy may be the book we all should be reading (again) these days...

The thing that the Bitcoin people got right is that the dollar is worth less than most people realize. The government can erase much of the debt by printing money. Owning cash is a bad idea. Sure the P/E of Tesla looks like a bubble. But what alternative is there to do with cash right now?

Foreign currency (preferably physical, especially if things such as RMB) or gold.

America isn't alone with its approach to QE & low interest rates, foreign currencies won't help you in many cases.

That is true, but there are still currencies with very low QE and high interest rates.

Feel free to name a few

Isn't it the case for Vietnam, Philippines, Indonesia or India [0]?

[0] https://vietreader.com/business/finance/16638-why-is-vietnam...

Buy a house

History has shown us that the concentration in any one asset class, in any one country, in any one anything, really, is dangerous.

I think this asset class is crazy on the west coast of the US. Putting all your money in an illiquid asset, in a place where it might experience a significant earthquake, just to hedge against inflation. What could possibly go wrong?

But.... It's the one asset class where normal people are allowed to leverage themselves heavily. And you can live in it.

When you buy a house to live in, it magnifies the tension between maximizing lifestyle (schools, work, amenities, friends, family, etc.) and maximizing returns.

In practice, by and large, you have to balance towards the former, which means your financial returns tend to be lower.

> It's the one asset class where normal people are allowed to leverage themselves heavily

Which is... a good thing?

It is, if you like to live dangerously.

Earthquakes are not a significant risk to most single family homes on the US west coast. Yes, there is more than zero risk, but its nothing like areas prone to tornados, hurricanes, floods, or wildfires which can and fairly regularly do destroy entire neighborhoods.

An 8 in the Bay area, or a 9 in Seattle, what would that do?

Significant risk includes likelihood, not just damage. If you want to hedge bets against highly unlikely events best hold as few physical belongings as possible

I know how to compute the expected value. No, if I want to hedge I'd spend a lot of money on earthquake insurance and hope it actually pays out. Damaging earthquakes are not unlikely event in these locales. In the next 20 years a 6+ magnitude quake is above 90% in the Bay. Something like 60% for a 7+. Cascadia subduction zone produces 9s almost periodically, and it is overdue as well.

Warren Buffet has argued the opposite as long as you know what you are doing.

Buy puts on the house you own then (insurance, etc.).

Buy small houses in multiple countries.

Instead of Tesla specifically, you could buy the S&P index, of which the company was excluded from.

I own shares of SPXT, an S&P 500 index fund that excludes tech because I work in tech and my fortunes are already tied to the sector.

> The second crash this year has already started

It was what, a little over 30% drawdown, that's a crash now? I've lived through 5 crashes then, hope to live through a few more.

> with worse unemployment than the great recession of the 1930s

Great Depression, not recession, and nope. During the Great Depression the unemployment rate hit 25% and was over 15% for most of a decade, here's the graph: https://en.wikipedia.org/wiki/Great_Depression#/media/File:U....

It was what, a little over 30% drawdown, that's a crash now?

I did say started, not finished :)

Sorry Great Depression. We're in the first few months of this recession, which may well become a depression, and crucially is happening worldwide in almost every country and slowing trade at the same time. It's certainly been a much sharper shock than the Great Depression - the US has seen unemployment rise faster:

https://www.pewresearch.org/fact-tank/2020/06/11/unemploymen...

And there has been nothing like these levels in the US since the Great Depression.

https://www.cnbc.com/2020/05/19/unemployment-today-vs-the-gr...

Since it usually takes these things several years to play out, I'm not convinced that the high water mark for unemployment has been reached yet. There are also hints that the true rate in early 2020 was more like 20% (department of labour statistics). We'll know in a few years, but this is certainly the sharpest recession on record (due to the imposed nature of it), and the only comparable is the Great Depression.

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