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I, lay person here, to see if I get it: > Huge amounts of cheap debt allow companies to buy lots of stock, driving up prices. > Stock prices inflated in such

by lbotos 7y ago

I, lay person here, to see if I get it: > Huge amounts of cheap debt allow companies to buy lots of stock, driving up prices. > Stock prices inflated in such a way are not supported by fundamentals and so the downside risk greatly increases. The price is driven up by "demand" but the demand is not "real" because it wasn't due to the business actually _innovating_ but actually just "stock changing hands"? > Once the downside eventually materializes, markets drop violently. At first, the FED ignores this, but eventually it bails. The funds rate is once again lowered, so the game can continue. When/how does that happen? > All of this causes massive asset price inflation. There is no way for it to "not" right? It's sort of like measuring volume of action, but the action didn't actually produce any real "value"? > The CPI doesn't immediately reflect this kind of inflation, so the FED gets to claim "there is no inflation" and everything is "just fine". Well, it's not fine and they know it, they just can't really do anything about it. Is there a better measure that _does_ reflect it? It sounds like it can be modeled with corporate debt / buyback on a graph? Again, layperson here, hoping to learn stuff.

streetcat1 7y ago
You will not see market dropping or any sudden move. Basically there is no alternative to risk (the riskless rate will drop below 0) . There will also be no inflation (maybe deflation due to the increasing part of software in products)
gridlockd 7y ago
> The price is driven up by "demand" but the demand is not "real" because it wasn't due to the business actually _innovating_ but actually just "stock changing hands"? The demand is real, but the fundamentals do not support it. Fundamentals include things like price vs. earnings or debt vs. assets, dividend yields, etc. If you like at this graph of price vs. earnings, you can can see dramatic rises relating to stock market bubbles: https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe > When/how does that happen? It has already happened and we're in the middle of it. When the markets tanked in late 2018, the Fed stopped hiking. When the markets tanked again in May, the Fed announced a rate cut. Now that the rate cut is in place, the markets are tanking again, perhaps because a bigger rate cut was priced in. We'll see what happens in the coming months. > There is no way for it to "not" right? It's sort of like measuring volume of action, but the action didn't actually produce any real "value"? I guess that's a fair way of looking at it. > Is there a better measure that _does_ reflect it? Of course there are indicators that you can use to show that this kind of inflation is taking place, like the S&P 500 PE ratio I showed earlier, or rent income vs. property prices.
- pojzon 7y ago
  Do I understand it correctly that when the bubble is going to burst, the value of money pretty much globally will decrease, so its better to allocate them now in assets that are always in demand like land or flats ?

by lbotos 7y ago

streetcat1 7y ago

You will not see market dropping or any sudden move. Basically there is no alternative to risk (the riskless rate will drop below 0) . There will also be no inflation (maybe deflation due to the increasing part of software in products)

gridlockd 7y ago

> The price is driven up by "demand" but the demand is not "real" because it wasn't due to the business actually _innovating_ but actually just "stock changing hands"? The demand is real, but the fundamentals do not support it. Fundamentals include things like price vs. earnings or debt vs. assets, dividend yields, etc. If you like at this graph of price vs. earnings, you can can see dramatic rises relating to stock market bubbles: https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe > When/how does that happen? It has already happened and we're in the middle of it. When the markets tanked in late 2018, the Fed stopped hiking. When the markets tanked again in May, the Fed announced a rate cut. Now that the rate cut is in place, the markets are tanking again, perhaps because a bigger rate cut was priced in. We'll see what happens in the coming months. > There is no way for it to "not" right? It's sort of like measuring volume of action, but the action didn't actually produce any real "value"? I guess that's a fair way of looking at it. > Is there a better measure that _does_ reflect it? Of course there are indicators that you can use to show that this kind of inflation is taking place, like the S&P 500 PE ratio I showed earlier, or rent income vs. property prices.

pojzon 7y ago
Do I understand it correctly that when the bubble is going to burst, the value of money pretty much globally will decrease, so its better to allocate them now in assets that are always in demand like land or flats ?