Why can’t the fed keep interest rates low for the next, say, 15 years? That seems implied from their statements.
The market can remain irrational longer than you can remain solvent. Any bet that involves unlimited or outsized risk needs to always consider the possibility of being catastrophically wrong. This includes selling volatility, shorting delta, etc
> Why can’t the fed keep interest rates low for the next, say, 15 years?
Because inflation, the same reason the Fed has started raising rates and signalled that more raises are likely. (Of course, that could change of inflation crashed or the other side of the Fed mandate created pressure by unemployment spiking, but those each present issues, too.)
Because the fed isnt in control. They just made enough people feel like they were, whih creates a feedback loop. Just look at how the BOJ lost control of their rate curve, and now trillions of long bonds with a zero yield (only potential financial loss) are held by all their major banks... Its an avalanche in the waiting. Can you borrow for 0%?? So the fed doesnt control credit that much after all.
Shorting isnt a good idea either since all the counterparties to those contracts will be insolvent. Buy lead, gasoline, gold and seeds. Collect rainwater and plant food. That s how bad its going to be this time. 1929 was childs play in comparison.
Can anyone qualified/knowledgeable offer commentary on this? It sounds compelling, but since I don't know much about this I am suspicious of making too much of an argument where all the relevant background was provided to me by a person trying to make a point. (that is, the fact that it sounds compelling to me as a layman is very weak evidence that it's true)
He starts off with specific facts, but within 3 or 4 paragraphs it is all supposition. By the midway point, it's supposition based on supposition. At the end, its a dozen layers of supposition.
Also doesn't help his case that he misunderstands the role of equity in the Federal Reserve. Unlike equity in a private company, equity in the Federal Reserve is not an ownership interest. It's essentially a group insurance policy similar to Lloyd's.
I have been a hobbyist investor in the market since I was 20. Take my thoughts with a grain of sand as I by no-means am a professional. Full disclosure; I am also bullish.
While I will agree the market has been on an absolute rip roaring tear the last 1 1/2 years, YTD the S&P is only up 5.75%, which is marginally above pace for the historical average. 2018 has been much more volatile, with big swings, and until the last couple of week rally we've been trading nearly sideways.
The good news is there are fundamental economic reasons for the rally. Unemployment is at 10 year record lows[1]. The Trump tax cuts really improved fundamentals for companies, allowing many to repatriate capital, increase hiring, and ramp up R&D spending. The GDP growth for the second quarter of this year was an astonishing 4.1%[2]. The US is growing faster than China, and comparing markets is winning the "trade war".
Have some high tech growth stocks gotten ahead of themselves? Absolutely, look at their valuations and P/E. With that said, are we on a the verge of a recession and economic collapse, I'd argue firmly no. There are many sectors that are still undervalued in the market, chiefly banks.
Banks! My goodness. You know, banks were making tons of money right before the 2008 crash too, it's just that the loans they were making were bad ones. They're in the same situation now, wouldn't you say?
Nope I would not say. Regulation has increased, they go through stress tests, and historically they are undervalued right now. Take Bank of America which has a P/E 14.75 and 1.92% divy yield. Again, I am bullish, which I have noticed is not the general sentiment here on HN. I recognize and fully acknowledge I could be completely wrong, but the bears have been calling for a recession and market collapse ever since Trump took office. Eventually of course there will be a correction (though we've already had a few micro-corrections this year). It is much easier to be a bear and negative, because eventually they'll be right. They just have to keep preaching doomes day and wait it out. Long term though, show me a better way to get return on capital than the market.
Right, well of course I could also be wrong. But imho the market can't crash so long as the fed keeps shoving cheap money into the system, which encourages companies to take out huge loans, then buy back their own stocks with the money. Let me ask you this: so you think the trump tax cuts are going to have matching spending cuts? Of course not. So we're going to issue debt to pay for them, which we can only pay the interest on when interest rates are low, which does add a little extra foam to the bubble but will make the downside more painful when rates do have to rise.
Oh - to answer the question about return on capital: use the money to convert the power grid to 100% renewables, which might literally save the world in a few decades time. There is more to life than maximizing profits in the short term.
I believe that is vastly over exaggerating "save the world in the few decades". Do you have trustworthy scientific research to suggest the world is going to end in a few decades if we don't find "100% renewable energy"? I'd imagine that would be headline news.
I know that I am being tongue and cheek, but that's the point. Fear tactics to push political or economic agenda should not be tossed around so casually (absolutely on both sides) without scientific data.
Furthermore I believe the US government is horrendous at spending money and innovating, so I'd much rather leave energy solutions and innovation up to private companies. Do you honestly believe that big oil and energy companies are not working on this? The first one that crack the 100% renewable nut literally will be printing money for eons.
Are you genuinely willing to be open to the possibility that climate change might be worse than you think? If you are curious about the science behind climate change, here:
is a link to a paper by James Hansen from 2013, which provides a technical but good overview of the whole field. My favorite quote:
"Burning all fossil fuels would produce a different, practically uninhabitable, planet. Let us first consider a 12 W m−2 greenhouse forcing, which we simulated with 8×CO2. ...
Our calculated global warming in this case is 16°C, with warming at the poles approximately 30°C. Calculated warming over land areas averages approximately 20°C. Such temperatures would eliminate grain production in almost all agricultural regions in the world [130]. ...
More ominously, global warming of that magnitude would make most of the planet uninhabitable by humans. The human body generates about 100 W of metabolic heat that must be carried away to maintain a core body temperature near 37°C, which implies that sustained wet bulb temperatures above 35°C can result in lethal hyperthermia. Today, the summer temperature varies widely over the Earth's surface, but wet bulb temperature is more narrowly confined by the effect of humidity, with the most common value of approximately 26–27°C and the highest approximately of 31°C. A warming of 10–12°C would put most of today's world population in regions with wet a bulb temperature above 35°C [132]."
The reason this is not more well known has to do with the fact that climate denial is funded by very deep pocketed fossil fuel companies and ideological activists:
The problem here is that many people on the right have a deep set ideological, almost religious belief system that markets are rational and can solve every problem, when that is clearly and obviously not the case. Corporations only act to increase shareholder value; to the extent that they behave morally it's because of the legal framework they operate in. And if they can buy politicians to avoid paying the costs of pollution, and save money by doing so, then of course they will. And that's what is happening. If they are doing a cost benefit analysis, and the benefit of humanity at large is a cost to them, then they don't care.
Yea and dont forget that 'limited liability' is illegitimate, hence equity can go below zero in case of lawsuits. This will eventually be recognized, then watch the stampede out of equity markets.
Courts only pierce the veil of limited liability when the opposing party can show that the company was deliberately undercapitalized (meaning, insufficiently funded to satisfy its liabilities).
On his key point: “The Federal Reserve Has Lost Control”: it never had control. Monetary policy has limited power, mostly to moderate short-term effects and stop them (or slow them) from becoming runaway catastrophes. The real power is in fiscal policy, which requires the government (as opposed to central bank) to act, usually through Congress. Recently—despite modest and inadequate action in the Great Recession—Congress has been basically asleep at the switch on fiscal stimulus, leaving the Fed on its own with monetary policy as the only lever. Whether this is a limited-time historic aberration or a durable condition is unclear. He's probably right to the extent that collapse is inevitable, even if the timing is far from clear, if the Fed continues to be left alone with monrtary policy as the only took available. He's also right that if Congress were to respond to that by obliterating the Fed and taking on monetary policy itself, things would go from bad to worse.
Maybe encouraging riskier bets is a feature not a bug. With a lot of ‘free’ capital floating around, we’ve got people building rockets and AI, people researching how to bring the material resources on an asteroid back to earth. Really ridiculous shit, tbh. But maybe that’s the intent - encouraging risk-taking in search of the next big thing.
I could be talking out of my ass though, or I could be completely right and those bets fail anyways.
21 comments
[ 2.7 ms ] story [ 50.0 ms ] threadThe market can remain irrational longer than you can remain solvent. Any bet that involves unlimited or outsized risk needs to always consider the possibility of being catastrophically wrong. This includes selling volatility, shorting delta, etc
Because inflation, the same reason the Fed has started raising rates and signalled that more raises are likely. (Of course, that could change of inflation crashed or the other side of the Fed mandate created pressure by unemployment spiking, but those each present issues, too.)
Also doesn't help his case that he misunderstands the role of equity in the Federal Reserve. Unlike equity in a private company, equity in the Federal Reserve is not an ownership interest. It's essentially a group insurance policy similar to Lloyd's.
While I will agree the market has been on an absolute rip roaring tear the last 1 1/2 years, YTD the S&P is only up 5.75%, which is marginally above pace for the historical average. 2018 has been much more volatile, with big swings, and until the last couple of week rally we've been trading nearly sideways.
The good news is there are fundamental economic reasons for the rally. Unemployment is at 10 year record lows[1]. The Trump tax cuts really improved fundamentals for companies, allowing many to repatriate capital, increase hiring, and ramp up R&D spending. The GDP growth for the second quarter of this year was an astonishing 4.1%[2]. The US is growing faster than China, and comparing markets is winning the "trade war".
Have some high tech growth stocks gotten ahead of themselves? Absolutely, look at their valuations and P/E. With that said, are we on a the verge of a recession and economic collapse, I'd argue firmly no. There are many sectors that are still undervalued in the market, chiefly banks.
[1] https://data.bls.gov/timeseries/LNS14000000 [2] https://www.wsj.com/articles/strong-economic-growth-boosts-u...
I know that I am being tongue and cheek, but that's the point. Fear tactics to push political or economic agenda should not be tossed around so casually (absolutely on both sides) without scientific data.
Furthermore I believe the US government is horrendous at spending money and innovating, so I'd much rather leave energy solutions and innovation up to private companies. Do you honestly believe that big oil and energy companies are not working on this? The first one that crack the 100% renewable nut literally will be printing money for eons.
http://rsta.royalsocietypublishing.org/content/371/2001/2012...
is a link to a paper by James Hansen from 2013, which provides a technical but good overview of the whole field. My favorite quote:
"Burning all fossil fuels would produce a different, practically uninhabitable, planet. Let us first consider a 12 W m−2 greenhouse forcing, which we simulated with 8×CO2. ...
Our calculated global warming in this case is 16°C, with warming at the poles approximately 30°C. Calculated warming over land areas averages approximately 20°C. Such temperatures would eliminate grain production in almost all agricultural regions in the world [130]. ...
More ominously, global warming of that magnitude would make most of the planet uninhabitable by humans. The human body generates about 100 W of metabolic heat that must be carried away to maintain a core body temperature near 37°C, which implies that sustained wet bulb temperatures above 35°C can result in lethal hyperthermia. Today, the summer temperature varies widely over the Earth's surface, but wet bulb temperature is more narrowly confined by the effect of humidity, with the most common value of approximately 26–27°C and the highest approximately of 31°C. A warming of 10–12°C would put most of today's world population in regions with wet a bulb temperature above 35°C [132]."
The reason this is not more well known has to do with the fact that climate denial is funded by very deep pocketed fossil fuel companies and ideological activists:
https://www.theguardian.com/environment/2013/feb/14/funding-...
The problem here is that many people on the right have a deep set ideological, almost religious belief system that markets are rational and can solve every problem, when that is clearly and obviously not the case. Corporations only act to increase shareholder value; to the extent that they behave morally it's because of the legal framework they operate in. And if they can buy politicians to avoid paying the costs of pollution, and save money by doing so, then of course they will. And that's what is happening. If they are doing a cost benefit analysis, and the benefit of humanity at large is a cost to them, then they don't care.
Very much like in astrology, you try to make future predictions based on made up theories often using some historical coincidences.
I could be talking out of my ass though, or I could be completely right and those bets fail anyways.