A properly functioning stock market is predicting the next ~15 years of companies' profits by weighing the prior ~15 years of companies' profits combined with their current growth. Even a 12 month period of $0 profits should decrease the NPV of a firm's future earnings by 10%, not 50%.
As scary as the next 12 months appear to be, we will eventually return to a new normal, just as we did in 2010, 2004, 1990, etc.
Yes, seeing a 30% drop in GDP this quarter is huge. Just like the 5 million or so who applied for UI.
However, the expectation is in a few months, restrictions will loosen and the recovery will begin.
So yes, the stock index should drop, but not by 33%. That was an overreaction. So now the market is going up, but it will still be down 10-20% until people get back to work.
Right. Recent news say ~6.6 million, but that was new cases filed for last week. Around 1 in 10 Americans are jobless, and nearly 1 in 3 renters in the U.S. failed to pay April rent at the beginning of the month.
Businesses are planning to survive and open back up in a few months. They’ll hire back employees at that time, though probably not as fast as they dropped them.
I’m expecting something that looks more like a Nike swoosh than a V.
This is not a properly functioning stock market. People are reacting to massive money injection by the government and the government picking upcoming winners and losers.
> by weighing the prior ~15 years of companies' profits
Are they also adding in the fact that 80% of the last 15 years has been due to life-support QE?
> Even a 12 month period of $0 profits should decrease the NPV of a firm's future earnings by 10%, not 50%
... maybe a 12 month period of $0 NET profits, but what about 12 months of $0 total revenue? For many, many companies that is not a 10% drop in NPV, but bankruptcy.
I agree we will return to a new normal, but what does that look like? Do we just go back to permanent QE like before where the debt market is artificially inflated forever? Or is this bad enough that the government gets to be part of larger corporate decisions now?
There is no model where the next 12 to 24 months looks "bright" for almost any company, so the fact that the stock market is mooning is not rational right now. Trying to justify it as "properly functioning" seems very, very far off base to me.
I thinks it's just way too much liquidity sloshing around. I'm guessing we're going to see a more volatility in prices in future. A tip in any direction of an asset class will cause money sloshing into it and out again at the first sign of trouble.
That's just a guess. I think the text book answer of equivalent of this is just hyperinflation (except that's when the money starts flowing into real price of goods and services)
I think you're right. What we've been seeing for the past 10+ years with wages and real-world earnings staying about the same isn't some weird effect on salaries. It's rapidly dropping goods prices (which everyone's been asking about - why aren't prices of basic goods dropping?) due to globalisation, automation and economies of scale, combined with hyperinflation.
There's been some discussion that wages haven't actually been flat at all, just take home earnings. The difference is theorized to have been siphoned off by rapidly increasing health insurance premiums [1].
Right, this is just a dead cat bounce. A lot of people are trying to time the bottom. All of FAANG will be in even better shape post crisis. Additionally, the money has to go somewhere, and people are chasing returns at any cost.
Or highly leveraged short-selling. Institutional insiders with an information and speed advantage drive bids to test the strength of selling. Highly leveraged positions can only tolerate small losses before they have to stop out. If that is a widespread market position you get these weird market movements in the opposite direction to what makes sense, because closing out of a big short position while the price is going up, just drives the market higher and higher.
A lot of people will say that earnings expectations are higher than the current price projected and they bought. I think it is more likely that after the first up day, a lot of people saw that they could have made $4 / share (hypothetically) and started buying.
Personally, I am waiting to see what 1Q earnings are and what 2Q projections look like for a few names I like.
My 401k hasn’t changed through all of this, just any spare change I have for my fidelity account.
Even fertility, dermatology and orthopedic doctors are all closed still.
My brief analysis tells me that there will be some grinding down in Q2 with a negative peak in Q3. While the virus seems to be "managed", the consequences of millions of people dropping out of the workforce in the first world is not that pronounced. We will see bank failures and maybe dozens of cascades, all leading to the point where someone has to stand up and swallow it.
Solid states go into deep debt today, previously failed states will chew on it for the decade to come.
The government is pretty preoccupied with the current stock market, for better or for worse. If they are unable to fix the the economy and appease shareholders, the thinking might be that we have bigger problems with the value of the dollars themselves.
It seems insane to me that the market is now higher than it was at the end of 2018, given that entire sections of our economy are closed, default risk for almost every business is up, and unemployment claims are making new record highs.
In 2018 the fed was reducing their balance sheet - which seems to be the most important driver to equity prices rather than fundamentals.
My thought is that the majority of the markets rely on high frequency trading algorithms, which base their models off historical data. Given this is unprecedented times, the models are going haywire because nothing fits.
1. These large 20%+ rallies are always common in bear markets.
2. The Fed has committed all told nearly 10 trillion dollars, maybe more.
3. Very little macro data has been released. Market is pricing in a V-shaped recovery which isn’t out of the question if we can open up in May.
Having said all of this, I think we head lower as the health crisis turns into a really bad recession. There may not be jobs for these workers to go back to.
>Market is pricing in a V-shaped recovery which isn’t out of the question if we can open up in May.
Market was due for a fall, this was just what kicked it into gear. I doubt it'll be V shaped. I also doubt that you'll be opened back up in May. I don't see Italy opening up any time soon, and New State alone looks like it'll be worse than Italy.
I'm not sure what you mean by "alone" here. New York is by far the worst hit area of the US; many states are doing no worse than Denmark or Austria, which are going to start opening up next week.
Denmark completely shut its borders.
Austria has made everyone wear masks, and have been shutdown for a long time.
US states like Mississippi are still arguing that everyone should be essential.
There are at 11 states with double the number of confirmed cases as Denmark, and I don't see any of them actually slowing down currently. They're all experiencing 4 times more daily cases than Denmark.
> Market is pricing in a V-shaped recovery which isn’t out of the question if we can open up in May.
If we try to open up generally in May, without some massive improvement in testing and contact tracing (and the federal government withdrawing support for testing makes that less likely) the shape is going to be more like a left-right reversal of an italic N than a V, due to the devastating and probably higher second peak and the necessary response the run up to that peak will provoke.
Everything you need to know about the wisdom of the stock market can be easily discerned from this single, simple fact: They believed Donald Trump when he claimed Saudi Arabia and Russia would cooperate to raise oil prices. They did not.
Would this be the same market which completely ignored the epidemic in the Far East and the obvious implications of its trajectory, until the morning after the weekend it hit Italy?
The authorities have essentially said they aren't going to let businesses fail. Even though that's what limited liability is for, but I digress.
So if there's a much lower chance of failure, prices for equities can be higher. Corporate bonds too.
But I'm not so sure this bounce will last. There's a fair chance this is some sort of short squeeze dynamic. Longer term we'll see what the damage to the economy actually is, whether people simply go back to how it was or things have actually changed.
There is a bigger picture here: there is undeniably a crisis but it's an external factor as far as the economy is concerned. Fact of the matter is, plenty of big businesses are doing better than ever: everything online is exploding, online shopping, payments, entertainments, online education as well as delivery services.
And a more specific example(for the sake of illustration), so are many grocery stores: I have 3 small grocery shops around me in a quiet and residential area and they can take a breath. Even after the toilet paper crisis ended, every time I look out the window I see at least 5 vans unloading. And we are talking really tiny shops: the combined are of all 3 combined would probably not cover an area of 100 square meters. With that you have large production lines, warehouses, transportation companies and logistics fully operational and have probably reached their maximum capacity.
While tourism, air travel, restaurants(those that don't deliver food) and pubs, public events, concerts, all all of those will suffer for years to come, others will flourish.
And with all that, I'd argue that a lot of new markets will appear.
I'm well aware it's too soon to tell for certain but that's what seems very plausible to me.
While I agree with some of your points re: online companies doing well, I don't see how you can take anecdata about local grocery stores and extrapolate it to the rest of the economy. Also, don't forget that 16 million (that's 5%!) Americans are unemployed right now. Can you imagine the damage that's going to do to businesses across the country?
If that isn't a sign that a recession is coming, I don't know what is.
Best I can tell, the stock market is trying to look mid-term and investors are assuming (read speculating) that his whole thing will blow over and life will resume its normal cadence.
Obviously this isn't reality but if you have enough money to be considered an "investor", the 16 million unemployed aren't the people in the forefront of your mind. They're also probably watching the covid task force briefings while wearing the same rose colored glasses that our mango unchained has.
> Also, don't forget that 16 million(!!) Americans are unemployed right now.
It's actually worse than that. The 16.8 million figure is for new jobless claims over the last three weeks [1]. There's additional people who were already unemployed before this, and there may be even more who've lost their jobs but haven't been able to successfully file a unemployment claim yet (due to the systems being overwhelmed).
The US is a very different beast altogether. I'm a bit far away from there but as a spectator, I'd say the US had the absolutely __WORST__ reaction to this situation. Given that about 40 to 45% of all confirmed covid19 cases are in the US suggests that to put it mildly. As a matter of fact, most of the world's reaction was nothing short of appalling. But there are exceptions to the rule: as an eastern European myself, most of the countries in Europe, east of Germany have managed to contain the situation really well. It might have something to do with considerable experiences with crisis(of different nature in all 1 billion instances over the past 100 years), but let's hope that's been to our benefit for once. Again - only time will tell
I never said average Joe won't be affected by this. What I am saying is that the big players will still be big once this is over but there will be new players as well. Also China will likely lose ground in the global production lines, and companies will likely look at alternatives, even if they have to make a compromise with scale and price. Investors like safe bets and what the current situation has taught is is that China isn't a safe option. We knew that already but the nets around the foxconn factories are a bit... Out of sight, out of mind.
16 million is a horrific number and I sincerely hope they pull through without paying a heavy price. But put your mind in a different mindset - 16 million is an incredible amount of manpower. For the 16 million - that's a tragedy but for the people with deep pockets - that's a once in a lifetime opportunity if they play their cards well. And I'm more than certain that many out there will.
I honestly doubt this, the virus triggered some events that will ripple through the economy and companies with WFH tools like Zoom and Slack won't be able to make up for the losses.
There's plenty of big companies I know that need to cut costs, spend less on ads (which is bad for Google & Facebook), lay off people who then won't be able to consume as much and this will get worse in the coming months
It's not exactly over yet, it's just gotten less reported on - my local Jewel still has none on the shelf, and Amazon is out of brand-names (only sketchy sellers still have product).
It's interesting to note that gold has significantly outperformed S&P500 over the last 5 years (and so has Bitcoin and many other 0-yield assets).
If we were to redraw stock charts using gold as the x axis (instead of $ USD), we would realize that company stocks have in fact all been dropping for the last 5 years.
The US dollar is not so different from the Venezuelan bolivar, it's also inflating and making the stock market appear to grow... But it's not the value of the stock which is growing, it's the value of the dollar which is shrinking (and so are all other fiat currencies which are pegged to it).
Stock is a bet on the company until the end of time, and 30 years from now, nobody will remember the Great Pandemic of 2020. Even if we imagine a worst case worse than the predictions, things will probably be fine for the economy. If 10% of the human race dies tomorrow, that just means everyone else needs to do 10% more work; a 40 hour workweek becomes a 44 hour workweek.
(Obviously if sucks if you or your loved ones die. But the economy doesn't care.)
this doesn't make any sense. by that logic, why do recessions simply not exist since in 30+ years we'll probably have overcome whatever current problem we're facing now
Is it bad for the economic market and current company earnings to be disjoint? I'm not an economist and perhaps I'm reading too much into the ".. again" but it sounds like you find this very bad and I don't know enough about macroeconomics to know why this is bad.
What makes this worse is that it isn't even necessary.
Allowing companies (even ones that are large and considered important like airlines) to "fail" just means that they'd have to go through bankruptcy proceedings and that the owners would lose some money - it doesn't mean that their operations will shutter, or that the planes will suddenly disappear, or that everyone in those companies will suddenly be out of work.
There are many examples of how this works - a recent one being PG&E in California, who filed for bankruptcy last year. Our electricity is still running and the linemen are still working.
Investing is inherently risky and prices ought to reflect a companies viability and performance. 401ks give a variety of options to reduce risk including money markets, bonds, and stocks in different sectors with diversification options
Just optimizing for 401ks is going about it wrong. $500b from the stimulus went to corporations, which indirectly boosts stock prices, which indirectly boosts 401ks. (unless the market still crashes). It's essentially trickle-down economics. If we wanted to improve individual's retirement savings then it would more effective to just divert more of that $500b to social security.
The stimulus packages seem more focused on ensuring that asset prices remain inflated. The idea that the average person will see any major impact from the S&P500 dropping to 2000 points is laughable.
How many people do you know that truly had their lives ruined by the 2008 crash? Allowing the markets to find a bottom and recover creates opportunities for social mobility.
The people who don't want asset prices to drop are rich people. They are the ones who own the assets.
It isn't going to be every company. It's better in the long run for the health of the market if companies' financial success correlates with their asset prices - it isn't good for investor confidence to add in an X factor of whether companies are going to have the political capital needed to get bailed out.
Not sure that's realistic. When companies go bankrupt, things don't just skip merrily along as if nothing is happening. Business partners start getting a lot more worried about getting paid, employees start thinking the same and moving on if they can, etc. It's like stepping in molasses--everything gets slower.
Perhaps they should just be allowed to fail, but it's far from risk-free, especially when we're diving into a deep Depression the likes of which none of us have ever seen.
I agree with you (to an extent) and was admittedly glossing over the costs - I'm just not convinced that market manipulation is going to be an effective way to prevent depressions. I'm not even convinced that anyone pulling these strings doesn't know this.
Some of the costs that you describe, like folks being less willing to invest in and work on things that have proven themselves to be unprofitable, may actually be benefits.
It might overwhelm the legal system. Then people will propose flattening the curve on bankrupcies. Maybe it’ll encourage the legal system to go all online. Somehow I doubt the courts will be powered by DocuSign faster than corona kills off the unadapted.
Also, beneficiaries of bankruptcies are the same billionaires and hedge funds being bailed out now. Distressed private equity funds will be salivating over all the fire sales.
Part of the reason why private equity loves bankruptcy is because they're so successful at divesting all the risk and costs of acquiring toxic assets. Change these dynamics by making the employees whole first.
That's not the whole calculation. For one, big corps are much more tolerant of the social distancing rules. Small businesses are getting crushed, but publicly-traded corps are just asking people to WFH. The stock market is all big corps. I think the other big factor is that this recession is 100% exogenous in nature. There is no major correction or uncertainty about the long-term viability of any industries. So long as big companies can dip into cash reserves and stimulus funds, they just need to weather the next 6 months and it's likely that we can return to business as usual. This is completely different from the financial meltdown of 2007 or the dotcom bubble of 2001 where entire verticals of industry were called into question and underwent sea changes in culture.
There are major unknowns about the long-term viability of everything from airlines, hotels to ice cream parlors. Consumer behavior will change as a result of this, and more so when the second (and third...) waves of the virus start to hit in the fall. Even if the orders are lifted, a good chunk of the population is not going to venture out but take a lets-see approach.
Also even at the end of the current quarantine period, companies are not going to pop out and be ready to go just as they were before. The economic landscape will look like after a hurricane has hit, companies that have laid off people are not going to be in a hurry to rehire them in my opinion. Companies are in general unlikely to rehire previously reduced folks (and reduced folks are likewise unlikely to want to return to previous employers), and are instead going to look for new candidates. What we typically see after recessions is massive movements of people between the sectors. The recovery will be a long hard slog. I'd love to share your optimism, but I think the hurricane analogy is apt, even after the sun starts to shine we'll be living in the aftermath of unprecedented economic destruction.
Previous pandemics of comparable severity haven't affected the long-term viability of hotels and ice cream parlors. It's unrealistic to expect that people won't want to travel or eat out.
Airplanes I'll grant you - I can definitely see a world where flights swing closer to a luxury good like they were decades ago.
Swine flu killed a couple hundred thousand only 10 years ago or so. There were a pair of flu pandemics each lasting about a year, one in the 1950s, and one in the 60s. Each of those killed a million.
The Spanish flu killed like ?? tens of millions, also in a year or two.
There was a more protracted pandemic that killed a million around 1910-1920, but it wasn't a flu.
> It's unrealistic to expect that people won't want to travel or eat out.
Yes, people will want to eat out. But it will be fewer than a few months ago because a) layoffs, b) less disposable income, c) the fear of less/no income soon, d) the fear/risk of getting sick, and other reasons I can't guess.
Whether that is -10%, -50% or -95% has yet to be seen and near impossible to predict usefully right now.
That’s what’s telling about so many companies buying back their stocks. They’re admitting they are unable to use any further liquidity to better their business. Essentially their business is at a maximum level and any additional profit is only useful for building their market cap. They’ve considered all growth and development options and found them all less valuable than buying their own stock.
Tells me their profit margins and market powers are holding the market back greatly.
Even dividends would be more thoughtful than stock buybacks. Such things are usually planned out for quarters at a time meaning they reflect some moderately deep portion of the business plan. Buybacks are just saying “we have this money in hand. We could use it for R&D to grow our business in some way (opening new branches, new plants, or just anything that could cost money up front for more money later), but instead we’re going to plaster this cash onto the facade of the business. We literally have no better use for it.”
I mean I'm asking, how are they actually different, besides one being worse for the shareholders w.r.t. taxes? They both involve transferring $X to shareholders.
Dividends are also saying "we have this amount of money on hand or cash flow, and no better use for it, so here you go"
I don't see the difference. Stock buyback looks to me like dividends without the tax - imagine a dividend reinvestment plan without the middle step and the tax bill.
That's not the whole story though. Public companies are punished greatly for making big bets that fail, or for making bets that take a long time.
For example, maybe Boeing has a design for a brand new plane that can carry 1000 people and go Mach 3. But it might take them 10 years to develop such technology.
The market would punish them severely for pursuing such a thing, so it makes more sense to buy back stock, otherwise they might get sued out of existence by their shareholders.
The market no longer values long term bets unless you are very special (Apple, Google, somehow Tesla). All those companies have mastered marketing their long term bets.
> Which means that the market is 100% detached from the overall economy, economic outlooks, and company earnings.. again.
100% feels a little hyperbolus, but, in general, hasn't that always been true--hence the common phrase "The stock market is not the economy." The stock market only partially reflects on the economy.
I've read so much amateur and professional analysis on what's happening. The one common thing I realized is it's all entirely speculative and offers little to no empiricism (stats aren't empirical evidence, they're an explanation of data).
Absolutely no one knows what's happening right now. There are many explanations that are attempting to rationalize the behavior of the markets but the reality is the system has gotten so complex and there are so many derivative financial instruments and institutions who make their living off of some type of market manipulation that what we are likely witnessing is a confounding of different mechanisms all occurring at once.
The one absolutely conclusive thing you can gather from all of this is the prices of stocks have been and will likely continue to be detached from fundamentals for the foreseeable future.
My guess is that a future economist will gain their fame studying what is happening right now and creating a new theory out of it.
One word: inflation. The government is turning on the printing presses and while investors expect real returns to take a hit, they expect nominal returns to do fine. In an inflationary environment, assets like equities will outperform.
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[ 4.5 ms ] story [ 116 ms ] threadAs scary as the next 12 months appear to be, we will eventually return to a new normal, just as we did in 2010, 2004, 1990, etc.
We have a real hard time with 1 year out.
Yes, seeing a 30% drop in GDP this quarter is huge. Just like the 5 million or so who applied for UI.
However, the expectation is in a few months, restrictions will loosen and the recovery will begin.
So yes, the stock index should drop, but not by 33%. That was an overreaction. So now the market is going up, but it will still be down 10-20% until people get back to work.
I’m expecting something that looks more like a Nike swoosh than a V.
This is not a properly functioning stock market. People are reacting to massive money injection by the government and the government picking upcoming winners and losers.
> by weighing the prior ~15 years of companies' profits
Are they also adding in the fact that 80% of the last 15 years has been due to life-support QE?
> Even a 12 month period of $0 profits should decrease the NPV of a firm's future earnings by 10%, not 50%
... maybe a 12 month period of $0 NET profits, but what about 12 months of $0 total revenue? For many, many companies that is not a 10% drop in NPV, but bankruptcy.
I agree we will return to a new normal, but what does that look like? Do we just go back to permanent QE like before where the debt market is artificially inflated forever? Or is this bad enough that the government gets to be part of larger corporate decisions now?
There is no model where the next 12 to 24 months looks "bright" for almost any company, so the fact that the stock market is mooning is not rational right now. Trying to justify it as "properly functioning" seems very, very far off base to me.
That's just a guess. I think the text book answer of equivalent of this is just hyperinflation (except that's when the money starts flowing into real price of goods and services)
[1] http://laborcenter.berkeley.edu/health-care-costs-under-job-...
I think (?) retail isn't much of the overall market, but it certainly seems like it would increase the agility of retail investment flows.
Personally, I am waiting to see what 1Q earnings are and what 2Q projections look like for a few names I like.
My 401k hasn’t changed through all of this, just any spare change I have for my fidelity account.
Even fertility, dermatology and orthopedic doctors are all closed still.
Solid states go into deep debt today, previously failed states will chew on it for the decade to come.
The government is pretty preoccupied with the current stock market, for better or for worse. If they are unable to fix the the economy and appease shareholders, the thinking might be that we have bigger problems with the value of the dollars themselves.
In 2018 the fed was reducing their balance sheet - which seems to be the most important driver to equity prices rather than fundamentals.
Or put comically: I'm sure all video games are seeing a surge in players with people in self-quarantine.
2. The Fed has committed all told nearly 10 trillion dollars, maybe more.
3. Very little macro data has been released. Market is pricing in a V-shaped recovery which isn’t out of the question if we can open up in May.
Having said all of this, I think we head lower as the health crisis turns into a really bad recession. There may not be jobs for these workers to go back to.
Market was due for a fall, this was just what kicked it into gear. I doubt it'll be V shaped. I also doubt that you'll be opened back up in May. I don't see Italy opening up any time soon, and New State alone looks like it'll be worse than Italy.
If we try to open up generally in May, without some massive improvement in testing and contact tracing (and the federal government withdrawing support for testing makes that less likely) the shape is going to be more like a left-right reversal of an italic N than a V, due to the devastating and probably higher second peak and the necessary response the run up to that peak will provoke.
So if there's a much lower chance of failure, prices for equities can be higher. Corporate bonds too.
But I'm not so sure this bounce will last. There's a fair chance this is some sort of short squeeze dynamic. Longer term we'll see what the damage to the economy actually is, whether people simply go back to how it was or things have actually changed.
And a more specific example(for the sake of illustration), so are many grocery stores: I have 3 small grocery shops around me in a quiet and residential area and they can take a breath. Even after the toilet paper crisis ended, every time I look out the window I see at least 5 vans unloading. And we are talking really tiny shops: the combined are of all 3 combined would probably not cover an area of 100 square meters. With that you have large production lines, warehouses, transportation companies and logistics fully operational and have probably reached their maximum capacity.
While tourism, air travel, restaurants(those that don't deliver food) and pubs, public events, concerts, all all of those will suffer for years to come, others will flourish.
And with all that, I'd argue that a lot of new markets will appear.
I'm well aware it's too soon to tell for certain but that's what seems very plausible to me.
If that isn't a sign that a recession is coming, I don't know what is.
Obviously this isn't reality but if you have enough money to be considered an "investor", the 16 million unemployed aren't the people in the forefront of your mind. They're also probably watching the covid task force briefings while wearing the same rose colored glasses that our mango unchained has.
It's actually worse than that. The 16.8 million figure is for new jobless claims over the last three weeks [1]. There's additional people who were already unemployed before this, and there may be even more who've lost their jobs but haven't been able to successfully file a unemployment claim yet (due to the systems being overwhelmed).
[1] https://www.nytimes.com/2020/04/09/business/economy/unemploy...
I never said average Joe won't be affected by this. What I am saying is that the big players will still be big once this is over but there will be new players as well. Also China will likely lose ground in the global production lines, and companies will likely look at alternatives, even if they have to make a compromise with scale and price. Investors like safe bets and what the current situation has taught is is that China isn't a safe option. We knew that already but the nets around the foxconn factories are a bit... Out of sight, out of mind.
16 million is a horrific number and I sincerely hope they pull through without paying a heavy price. But put your mind in a different mindset - 16 million is an incredible amount of manpower. For the 16 million - that's a tragedy but for the people with deep pockets - that's a once in a lifetime opportunity if they play their cards well. And I'm more than certain that many out there will.
It's not exactly over yet, it's just gotten less reported on - my local Jewel still has none on the shelf, and Amazon is out of brand-names (only sketchy sellers still have product).
If we were to redraw stock charts using gold as the x axis (instead of $ USD), we would realize that company stocks have in fact all been dropping for the last 5 years.
The US dollar is not so different from the Venezuelan bolivar, it's also inflating and making the stock market appear to grow... But it's not the value of the stock which is growing, it's the value of the dollar which is shrinking (and so are all other fiat currencies which are pegged to it).
(Obviously if sucks if you or your loved ones die. But the economy doesn't care.)
Investors are betting that powerful interventions from Washington will protect the long-term profitability of major companies.
Which means that the market is 100% detached from the overall economy, economic outlooks, and company earnings.. again.
- If you go to the casino with your own money, rational people will gamble what they can afford to lose.
- If you go to the casino but are told that whatever you lose, someone else will cover your losses, how much will a rational person gamble?
Allowing companies (even ones that are large and considered important like airlines) to "fail" just means that they'd have to go through bankruptcy proceedings and that the owners would lose some money - it doesn't mean that their operations will shutter, or that the planes will suddenly disappear, or that everyone in those companies will suddenly be out of work.
There are many examples of how this works - a recent one being PG&E in California, who filed for bankruptcy last year. Our electricity is still running and the linemen are still working.
If the the whole market looked like this in the next year, people's 401k accounts would probably be demolished.
How many people do you know that truly had their lives ruined by the 2008 crash? Allowing the markets to find a bottom and recover creates opportunities for social mobility.
The people who don't want asset prices to drop are rich people. They are the ones who own the assets.
Perhaps they should just be allowed to fail, but it's far from risk-free, especially when we're diving into a deep Depression the likes of which none of us have ever seen.
Some of the costs that you describe, like folks being less willing to invest in and work on things that have proven themselves to be unprofitable, may actually be benefits.
Also, beneficiaries of bankruptcies are the same billionaires and hedge funds being bailed out now. Distressed private equity funds will be salivating over all the fire sales.
Also even at the end of the current quarantine period, companies are not going to pop out and be ready to go just as they were before. The economic landscape will look like after a hurricane has hit, companies that have laid off people are not going to be in a hurry to rehire them in my opinion. Companies are in general unlikely to rehire previously reduced folks (and reduced folks are likewise unlikely to want to return to previous employers), and are instead going to look for new candidates. What we typically see after recessions is massive movements of people between the sectors. The recovery will be a long hard slog. I'd love to share your optimism, but I think the hurricane analogy is apt, even after the sun starts to shine we'll be living in the aftermath of unprecedented economic destruction.
Airplanes I'll grant you - I can definitely see a world where flights swing closer to a luxury good like they were decades ago.
The Spanish flu killed like ?? tens of millions, also in a year or two.
There was a more protracted pandemic that killed a million around 1910-1920, but it wasn't a flu.
Yes, people will want to eat out. But it will be fewer than a few months ago because a) layoffs, b) less disposable income, c) the fear of less/no income soon, d) the fear/risk of getting sick, and other reasons I can't guess.
Whether that is -10%, -50% or -95% has yet to be seen and near impossible to predict usefully right now.
Tells me their profit margins and market powers are holding the market back greatly.
Isn't returning value to the shareholders the entire point of selling stock to investors in the first place?
Dividends are also saying "we have this amount of money on hand or cash flow, and no better use for it, so here you go"
I don't see the difference. Stock buyback looks to me like dividends without the tax - imagine a dividend reinvestment plan without the middle step and the tax bill.
For example, maybe Boeing has a design for a brand new plane that can carry 1000 people and go Mach 3. But it might take them 10 years to develop such technology.
The market would punish them severely for pursuing such a thing, so it makes more sense to buy back stock, otherwise they might get sued out of existence by their shareholders.
The market no longer values long term bets unless you are very special (Apple, Google, somehow Tesla). All those companies have mastered marketing their long term bets.
I think it’s highly problematic. It stifles pure research from the companies that have the most capital and talent to do it.
100% feels a little hyperbolus, but, in general, hasn't that always been true--hence the common phrase "The stock market is not the economy." The stock market only partially reflects on the economy.
https://www.marketplace.org/2019/09/30/the-stock-market-is-n...
Why not retain or increase investments in stocks, and thereby propping stock prices up, especially if it's a long-term investment?
Which is another way of saying it's rigged.
Absolutely no one knows what's happening right now. There are many explanations that are attempting to rationalize the behavior of the markets but the reality is the system has gotten so complex and there are so many derivative financial instruments and institutions who make their living off of some type of market manipulation that what we are likely witnessing is a confounding of different mechanisms all occurring at once.
The one absolutely conclusive thing you can gather from all of this is the prices of stocks have been and will likely continue to be detached from fundamentals for the foreseeable future.
My guess is that a future economist will gain their fame studying what is happening right now and creating a new theory out of it.