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I suspect that stock prices were artificially inflated over the last several* years. If we were in a bubble, then this coronavirus ends up acting more as a cata

I suspect that stock prices were artificially inflated over the last several* years. If we were in a bubble, then this coronavirus ends up acting more as a catalyst for popping the bubble, then you would see a significant drop to the market beyond the immediate effects to the market. > Even in the worst case where four or five percent of the population die and the economy is impacted by quarantines for a few years until we reached herd immunity, I don't see how this lowers future earnings by 30% and more. Though, that worst case scenario a 30% drop seems low to me. For some particularly hard-hit sectors, a lot of business would go to 0 in the scenario you described. * For some pretty ambiguous definition of "several" that I can't pin down with precision

AnthonyMouse 7y ago
> I suspect that stock prices were artificially inflated over the last several* years. If we were in a bubble, then this coronavirus ends up acting more as a catalyst for popping the bubble, then you would see a significant drop to the market beyond the immediate effects to the market. I don't really get the bubble theory. Stock prices were "artificially inflated" because the Fed was keeping interest rates low. That causes people to borrow money and use it to invest with, because the risk-adjusted return on the investments is higher than the interest they have to pay to borrow the money. Which creates more demand for stocks and drives up the prices. But that demand continues as long as the interest rates are low. It's the same as housing -- low interest rates and easy money increased housing prices, which then came to a head when interest rates started to rise and suddenly that demand fell off, sale prices fell and people were underwater on their mortgages. That's what happens when interest rates rise, which is why the Fed has been keeping them low for more than a decade, but they just fell even more. The "pop" happens when interest rates go up too fast. Stocks are down right now because of the coronavirus, not because interest rates went up. The trick is how to get out of the low interest rates without causing the market to decline, and there are two options. One is high economic growth, so that natural demand can replace the demand created by low interest rates, which you take if you can get it but hasn't been the case recently. The other is inflation -- the government creates a bunch of new money and gives it out, which creates a tendency for nominal prices to increase and offsets the decrease caused by raising interest rates. We may be at the point where that second one is making a lot of sense, because "high economic growth" seems pretty unlikely in the immediate future, but "print a bunch of money and give it to people" is exactly the sort of thing you want to do during hard times when there are existing deflationary forces in effect. And then it sets you up for a subsequent recovery that allows interest rates to rise as the deflationary forces wane and the inflationary effect from creating the new money catches up and allows you to raise interest rates without reducing nominal asset prices.

AnthonyMouse 7y ago

> I suspect that stock prices were artificially inflated over the last several* years. If we were in a bubble, then this coronavirus ends up acting more as a catalyst for popping the bubble, then you would see a significant drop to the market beyond the immediate effects to the market. I don't really get the bubble theory. Stock prices were "artificially inflated" because the Fed was keeping interest rates low. That causes people to borrow money and use it to invest with, because the risk-adjusted return on the investments is higher than the interest they have to pay to borrow the money. Which creates more demand for stocks and drives up the prices. But that demand continues as long as the interest rates are low. It's the same as housing -- low interest rates and easy money increased housing prices, which then came to a head when interest rates started to rise and suddenly that demand fell off, sale prices fell and people were underwater on their mortgages. That's what happens when interest rates rise, which is why the Fed has been keeping them low for more than a decade, but they just fell even more. The "pop" happens when interest rates go up too fast. Stocks are down right now because of the coronavirus, not because interest rates went up. The trick is how to get out of the low interest rates without causing the market to decline, and there are two options. One is high economic growth, so that natural demand can replace the demand created by low interest rates, which you take if you can get it but hasn't been the case recently. The other is inflation -- the government creates a bunch of new money and gives it out, which creates a tendency for nominal prices to increase and offsets the decrease caused by raising interest rates. We may be at the point where that second one is making a lot of sense, because "high economic growth" seems pretty unlikely in the immediate future, but "print a bunch of money and give it to people" is exactly the sort of thing you want to do during hard times when there are existing deflationary forces in effect. And then it sets you up for a subsequent recovery that allows interest rates to rise as the deflationary forces wane and the inflationary effect from creating the new money catches up and allows you to raise interest rates without reducing nominal asset prices.