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The stock market is largely collapsing because: 1.) Hedge funds levered up their capital 5 - 15x to make more money, then got caught with their pants down. So

The stock market is largely collapsing because: 1.) Hedge funds levered up their capital 5 - 15x to make more money, then got caught with their pants down. So they all panic sold at once, crashing the market. 2.) CEOs of large corporations used cash to buy back their stock, inflating the stock price, and depleting their cash reserves. So now those same companies are on the brink of collapse, causing the credit markets to collapse, the stock market to collapse, and the rest with it. They can buy 50B worth of their own stock, but cant pay employees for a month without revenue. This whole mess is in part due to financial engineering taken down by a black swan event. CEOs should be in jail and so should finance professionals. Laws need to be passed so that finance individuals cannot ruin the market for their own financial gain.

alexpetralia 7y ago
Did you miss the part about small businesses?
- codingslave 7y ago
  Everything is related. Imagine if the market only dropped a bit, large companies could support their employees, the credit markets wouldnt require massive trillion dollar spending. Supporting small businesses would be a walk in the park.
  - SpicyLemonZest 7y ago
    It's not really possible for the market to drop only a little bit in response to half the economy shutting down. Stock prices are an expectation of future cash flows, so they have to drop on news that a huge chunk of those future cash flows are cancelled.
    - codingslave 7y ago
      Look at Boeing stock. Companies dropping 50% because they miss 3 months of revenue?
      - sokoloff 7y ago
        If that 3 months risks a bankruptcy, that might be right. Long-run valuation for shareholders doesn’t matter if the bond-holders end up with the company. I suspect this is a 12-24 month economic event, maybe longer before it fully rolls through.
      - senordevnyc 7y ago
        It’s insane to think that Boeing will just return to normal in 3 months. This could depress air travel for years.
  - anigbrowl 7y ago
    You're right about the financials but wrong about the direct economic impact. It's a 3 month hit that people are accepting, with the underlying fear that it will be a year-long hit, and the sickening feeling that recovery from this will take at least 5 years.
Narkov 7y ago
I'm not disagreeing with you but is it illegal for a CEO to be bad at their job?
- Skunkleton 7y ago
  It’s illegal to be bad at many jobs in certain ways. Companies need more regulation that results in personal accountability.
- slyfocks 7y ago
  One could argue that the airline CEOs acted rationally and strategically—they know the airline industry’s importance to the US economy gives them great odds of a bailout if a black swan event were to occur, so there was more value to shareholders generated by stock buybacks than reserving cash for a worst-case event.
gregshap 7y ago
1) the stock market is collapsing because business cashflows are collapsing 2) the collapse has barely begun
- doingmyting 7y ago
  Business cashflows aren't collapsing, not yet. Big businesses aren't corner shops, they don't get paid one small transaction at a time. They typically have contracts that are quarterly or yearly. Give it a few quarters though and they'll be hurting
jdminhbg 7y ago
> The stock market is largely collapsing because: I'm gonna go with: 0) A pandemic has caused the government to shut down a double-digit percentage of the economy.
- codingslave 7y ago
  People are completely underestimating how much leverage and pumping there was on those companies, and how thats effecting us now. Companies dropping 75% because they might lose 3 months of revenue is not an expected outcome.
  - jdminhbg 7y ago
    It really doesn't matter. If 20% of the economy is zeroed out because it's not safe under current conditions, the stock market will crash. Nothing you could have done beforehand, and no hobby-horse you've ridden for no matter how long, can fix that.
    - sbashyal 7y ago
      I disagree that nothing one could have done beforehand could fix that. The argument is not that there would not be a decline in share prices at all but the magnitude of it. You need to have enough saved to survive 6 months w/o income is preached a lot in personal finance and somehow this is not practiced for businesses.It is understandable that cash-strapped startups can't afford to do this but the companies buying back shares to increase their stock price certainly could.
      - Anon1096 7y ago
        This is an article about small businesses, which make up the backbone of the economy. It makes 0 financial sense to save up 6 months of savings for any company, big or small. This is literally a once-a-century event.
        scep12 7y ago
senordevnyc 7y ago
1) Hedge funds didn’t crash the market. There’s just no evidence for that. The market crashed because there’s enormous uncertainty and people would rather be liquid while they wait to see what happens vs losing a huge percentage of their wealth. 2) Businesses exist to make a profit for their shareholders. Yes, they should have some retained earnings as a rainy day fund, but some of these companies are losing 75-100% of their revenue (airlines, cruises) and it doesn’t make sense to try and self-insure for the most extreme tail risk ever. So they return profit to shareholders. And for various reasons, buybacks are often preferred to dividends. Would you be this up in arms if they had never done a buyback but had been paying a regular dividend to return those profits?
- dwaltrip 7y ago
  > Businesses exist to make a profit for their shareholders. It is an insidious and morally bankrupt myth that this is the only purpose of a company.
  - senordevnyc 7y ago
    I didn’t say it was the only reason, and you ignored my question. Would dividends be OK?
    - digitaltrees 7y ago
      Dividends that leave the business effectively insolvent in an emergency or financial downturn are irresponsible and should be disallowed. It should be remembered that direct stock by backs were illegal until recently as they were seen as a violation of insider trading and presented conflicts of interest. Further stock based compensation for executives is also relatively new. So we now have a situation that the incentives are clearly aligned for executives to pump stock prices to boost their own compensation through a previously illegal means of stock buy backs. Just look at the ratio of dividends to stock by backs in the last few years. You will see the result of those incentives.
      - 7y ago
preommr 7y ago
I really think we should stop conflating bad economic decisions with the current pandemic. Yes, maybe stock buybacks are bad. But even if they were banned, these companies wouldn't just have piles of cash reserves sitting around. To remain competitive, they would've had it invested in resources like additional personnel that would've gotten the axe either way when the belt has to be tightened. There needs to be better financial planning and regulations - a lot of them. But the best thing that could've helped here is better planning for national emergencies like a pandemic. Bill Gates and others have been clamoring for a long time about these dangers and we should've taken them more seriously.
- digitaltrees 7y ago
  They would unquestionably have more cash on hand though. That matters. There is also a lot of research showing that management does buy backs at exactly the wrong time. How wasteful is it in retrospect that companies did buy backs over the last two years at the peak of the market. Now they might have to sell stock to raise money at the bottom (assuming we find it soon). Mean while warren buffet was sitting on cash and building his reserves. Watch him swoop in now and just pick up businesses for pennies on the dollar.
- asdff 7y ago
  Some companies are famous for their piles of cash reserves. Apple, for instance. Other companies are definitely focused on the pump at the expense of their brand, product, and long term prospects. No C level executive sheds a tear when their company folds and they are handed their golden parachute to invest at market lows.
miketery 7y ago
While I mostly agree with #1 and #2 - not sure what this has to do with the crises we're in. The core of the current financial crisis is that demand has evaporated over the course of a week or two and / or businesses can't operate; both due to COVID-19. As a result many small business won't survive. By extension many people are impacted, won't make rent, won't make lease payments, won't make credit card payments. The stock market dropping is reflecting the above reality unwinding. And yes prices were inflated, and still are (QE is trying to hold them, we'll see how long that lasts...). Unlike the 2008 crises that had synthetic derivatives, and shitty rating agencies to blame - this isn't the case here. Though don't get me wrong I still think there are many sketchy things that go on, and many people who need to answer for them. Let's starts with the politicians that sold their shares given insider information, followed by others who curry favor with wall st.
wardnath 7y ago
Businesses that rely on walk-in customers will have to go for what looks like more than a month with little to no income. Same thing with travel related industries, surely over-leveraged portfolios exacerbated the problem but there are many other factors at play.
SamReidHughes 7y ago
Should companies not return profits to their shareholders? CEO's should be in jail for doing so? Be serious.
- mywittyname 7y ago
  I'm not sure how you got to this post after reading the OP. Company leadership should focus on returning capital when appropriate. They should not be repurchasing shares at obviously inflated prices as a last-ditch effort to further raise share prices so they can cash out their bonuses. They should be using that money to improve the business. Basically, leadership needs to think about long-term health, instead of making poor business decisions to improve executive bonuses.
  - SamReidHughes 7y ago
    They were repurchasing shares for years and years. If shareholders were unhappy about that, they had every opportunity to replace the board. Or if they are a minority, they can sell. If you’re not a shareholder, you’re free to mind your own business.
    - SolaceQuantum 7y ago
      Shareholders are not the ones who lose the most when the ravens come to roost.
- ivalm 7y ago
  They definitely should return profits, they shouldn't take on additional debts to increase share price.
  - SamReidHughes 7y ago
    All debt is an alternative to raising capital by selling shares and diluting ownership. It doesn’t matter what order you do it in, and sometimes you get a good deal on a loan.
TheSpiceIsLife 7y ago
Why should anyone be punished for failing to plan for a black swan event? Black swan events are unpredictable and outside of what is normally expected.
- deleted 7y ago
  [deleted]
- ip26 7y ago
  I think we're learning that while the manifestation & exact timing is unpredictable, looking at the big picture one black swan or another seems to show up with surprising regularity. 1973, 1987, 2001, 2008, 2020...
- kingaillas 7y ago
  I'm not even that old and this is the 3rd black swan event in the last 2 decades: terrorist attacks of 9/11/2001, financial meltdown in 2008-2009, and this 2020 global pandemic. There were also 3 other localized outbreaks (SARS in 2003, Swine Flu in 2009, MERS in 2012) so that to me sounds like we were 3 viral mutations away from this being the 4th global pandemic in 20 years. If we're structuring business and our economies such that they fall over or require ~1 trillion dollars for bailouts, every 4-7 years on average, then something is vastly, massively, completely, extremely wrong with our approach. I don't care how many economics nobel prizes are racked up by theorists; or about efficient market theory and blah blah blah. These systems are failing in the real world and that's the only existence proof needed. Running a just-in-time razor-thin-margins all-profits-reinvested-no-savings business is great in theory but apparently the wind blowing from the wrong direction destroys it all. It has the feeling of the economics/finance version of a physicist assuming a spherical car in a perfect vacuum with a point source of gravity when designing a system that has to survive actual usage.
  - nomad1987 7y ago
    The gains inbetween these events far outweigh the cost of the bailout no? Those who prepare well (3-6 months of reserves) will be ok, other businesses will need to perish to teach others a lesson.
ravenstine 7y ago
> CEOs of large corporations used cash to buy back their stock, Not only that, but they also use borrowed money with corporate debt to buy back stocks. https://www.bloomberg.com/news/articles/2019-08-08/companies-use-borrowed-billions-to-buy-back-stock-not-to-invest https://www.bloomberg.com/news/articles/2019-08-08/companies...
nerfhammer 7y ago
The stock market is collapsing because the population is increasingly unable to go anywhere or do anything. As a result whole sectors of the economy are almost completely unable to function. They're predicting 25% GDP contraction and 25% unemployment which about the same as the peak of the Great Depression in 1933. And we don't know when that's going to end and it will probably take most of a year at least.
deleted 7y ago
[deleted]
hyperion2010 7y ago
This is not a black swan event. How many times are we going to have to go over this?
smallgovt 7y ago
1) Pretty sure you're misinformed on this point. The hedge fund sector that has gotten attention and partial blame for this meltdown is the risk-parity segment of hedge funds. These funds target a specific range of volatility, so when the market becomes wildly volatile they are forced to reduce their overall holdings. The entire risk-parity segment of the market is at most $400bn and they are levered 2-3x on average. In the grand scheme of things, this is pennies when compared to broader money flow. 2) Stock buybacks are simply a more tax-efficient way of distributing profits to shareholders. Redistribution of profit to shareholders is a fundamental trait of capitalism, so you can't really blame the CEO for doing this. You seem to be blaming CEO's for not preparing for a black swan event. If CEO's are forced to prepare for every possible black swan event, their companies would go nowhere.
- ccktlmazeltov 7y ago
  > Stock buybacks are simply a more tax-efficient way of distributing profits to shareholders This is: 1. irresponsible, due to so called black swan events 2. price manipulation, don't forget this
- OGWhales 7y ago
  As for your last point, there appears to be a black swan event quite regularly. It seems logical to prepare for this. Secondly, stock buy backs are often performed at horrible times simply because CEOs want to boost their own salary. This has repeatedly bitten them in the ass. This is what happens when short term gains are prioritized over long term strategy. So my question is, when do we learn?
  - sojournerc 7y ago
    If it's regular, by definition it is not a black swan. What other events are you referring to?
- ivalm 7y ago
  I can accept viewpoint only if we ALSO allow all unprepared companies to fail. This will then inform the next generation of CEOs to prepare more. If we socialize losses while privatizing gains we create wrong incentives. I think the general sentiment is that we cannot just organically let most companies fail, so we are forced to bail out. But if we are breaking capitalism by bailing companies out, we should at least try to incetivize them to learn from mistakes rather than learn that they can do whatever when the times are good and get bailed out when the times are bad.
hpcjoe 7y ago
I agree, CEOs that bought back stock should not have the option of a bailout. That was a self-enrichment strategy built upon cheap debt, and now it is time to pay the bill. Generally speaking, Boeing and others should not be bailed out. Capital should flow to the small businesses to keep their doors open, their people employed. I'd also argue strongly against bailing out companies that shifted their work overseas. There needs to be a price to their actions. This is a just price IMO.
AnthonyMouse 7y ago
All of the things you're saying are the direct result of the market incentives created by low interest rates. Companies borrowed money and used it to buy their own shares for the same reason everybody was borrowing money to buy shares with it -- it's what people do when it's cheap to borrow money. If your competitors are all borrowing money at low interest, you do the same or you're not competitive. The problem is we lowered interest rates in response to the housing crisis and then left them there. Because doing so inflated (really reinflated) such a ginormous credit bubble that it would take more than an entire market cycle for real economic growth to catch up to it, and (absent printing money) you can only raise interest rates to the extent that borrowing demand from real economic growth exceeds the reduction in credit caused by the higher interest rates, or you cause deflation and an economic downturn. This is also why the rate of inflation has been below historic norms since the housing crisis -- reduced to that level just by raising rates the tiny bit that they did. And now even that's gone and interest rates are at zero. This is what the fallout of long-term low interest rates looks like. The only way out of it within our lifetimes would be mass defaults (which would cause a depression) or enough inflation to devalue the outstanding debts. Considering that we're also now facing deflationary forces from these quarantines, maybe it's time to start printing some money. Certainly countering the deflation by encouraging even more borrowing would just be trying to dig our way out of a hole.
raincom 7y ago
Low interest rates are the biggest culprit in this. Low interest rates have given these CEOs to borrow money to pump their stocks. Had interest rates been higher, say 6 percent, (a) these CEOs wouldn't have borrowed money to pump their stock, and (b) many investors would not have invested 60 to 90 percent of their portfolio in stocks. Another consequence of these low interest rates is (c) the inflation of real estate in many markets. That means, the middle class (say, employees of FAANG types) have loved this gravy train. Politicians, as a class, have benefited from this: inflated equities; inflated real estate. Greenspan, Bernanke, Yellen, Powell and the political class (both Democrats and Republicans) have all contributed to this. People who invested in index funds fared better than hedge funds. And there was no real price discovery thanks to Fed put; even many small hedge funds closed their shops when they couldn't beat ETFs based on indices like SPY, VOO, QQQ, etc. Now both bonds and stocks are crashing, as the commercial paper becomes junk.
- somewhereoutth 7y ago
  Absolutely this. Someday we need to have interest rates somewhat sticky at ~5% (or whatever the sensible figure is), and lean more on fiscal policy to control the economy. Whether there is a viable path to that point is unclear. Perhaps the money printing required to cushion the economy will spike inflation, and once we get back on our feet we hike rates to control it?
eunos 7y ago
> used cash to buy back their stock So in this case, the cash ends up with the stock owner, isn't it? What are the differences between cash in the hand of company vs cash in the hand of stock owners?
titzer 7y ago
> CEOs should be in jail Will. Never. Happen. Banks committed outright fraud in 2009, by the dozens, by the hundreds. Thousands of people should have gone to jail. Not a single. Goddamn. One. Did.
edanm 7y ago
No. It's because of everything in the posted presentation - 50% of companies are SMBs (in the States), and they understandably don't keep enough reserves to weather 3 months of losses. The stock market is reflecting that the damage this will do on the economy is real, and currently unknown but expected to be pretty bad.

alexpetralia 7y ago

Did you miss the part about small businesses?

codingslave 7y ago
Everything is related. Imagine if the market only dropped a bit, large companies could support their employees, the credit markets wouldnt require massive trillion dollar spending. Supporting small businesses would be a walk in the park.
- SpicyLemonZest 7y ago
  It's not really possible for the market to drop only a little bit in response to half the economy shutting down. Stock prices are an expectation of future cash flows, so they have to drop on news that a huge chunk of those future cash flows are cancelled.
  - codingslave 7y ago
    Look at Boeing stock. Companies dropping 50% because they miss 3 months of revenue?
    - sokoloff 7y ago
      If that 3 months risks a bankruptcy, that might be right. Long-run valuation for shareholders doesn’t matter if the bond-holders end up with the company. I suspect this is a 12-24 month economic event, maybe longer before it fully rolls through.
    - senordevnyc 7y ago
      It’s insane to think that Boeing will just return to normal in 3 months. This could depress air travel for years.
- anigbrowl 7y ago
  You're right about the financials but wrong about the direct economic impact. It's a 3 month hit that people are accepting, with the underlying fear that it will be a year-long hit, and the sickening feeling that recovery from this will take at least 5 years.

Narkov 7y ago

I'm not disagreeing with you but is it illegal for a CEO to be bad at their job?

Skunkleton 7y ago
It’s illegal to be bad at many jobs in certain ways. Companies need more regulation that results in personal accountability.
slyfocks 7y ago
One could argue that the airline CEOs acted rationally and strategically—they know the airline industry’s importance to the US economy gives them great odds of a bailout if a black swan event were to occur, so there was more value to shareholders generated by stock buybacks than reserving cash for a worst-case event.

gregshap 7y ago

1) the stock market is collapsing because business cashflows are collapsing 2) the collapse has barely begun

doingmyting 7y ago
Business cashflows aren't collapsing, not yet. Big businesses aren't corner shops, they don't get paid one small transaction at a time. They typically have contracts that are quarterly or yearly. Give it a few quarters though and they'll be hurting

jdminhbg 7y ago

> The stock market is largely collapsing because: I'm gonna go with: 0) A pandemic has caused the government to shut down a double-digit percentage of the economy.

codingslave 7y ago
People are completely underestimating how much leverage and pumping there was on those companies, and how thats effecting us now. Companies dropping 75% because they might lose 3 months of revenue is not an expected outcome.
- jdminhbg 7y ago
  It really doesn't matter. If 20% of the economy is zeroed out because it's not safe under current conditions, the stock market will crash. Nothing you could have done beforehand, and no hobby-horse you've ridden for no matter how long, can fix that.
  - sbashyal 7y ago
    I disagree that nothing one could have done beforehand could fix that. The argument is not that there would not be a decline in share prices at all but the magnitude of it. You need to have enough saved to survive 6 months w/o income is preached a lot in personal finance and somehow this is not practiced for businesses.It is understandable that cash-strapped startups can't afford to do this but the companies buying back shares to increase their stock price certainly could.
    - Anon1096 7y ago
      This is an article about small businesses, which make up the backbone of the economy. It makes 0 financial sense to save up 6 months of savings for any company, big or small. This is literally a once-a-century event.
      - scep12 7y ago

senordevnyc 7y ago

1) Hedge funds didn’t crash the market. There’s just no evidence for that. The market crashed because there’s enormous uncertainty and people would rather be liquid while they wait to see what happens vs losing a huge percentage of their wealth. 2) Businesses exist to make a profit for their shareholders. Yes, they should have some retained earnings as a rainy day fund, but some of these companies are losing 75-100% of their revenue (airlines, cruises) and it doesn’t make sense to try and self-insure for the most extreme tail risk ever. So they return profit to shareholders. And for various reasons, buybacks are often preferred to dividends. Would you be this up in arms if they had never done a buyback but had been paying a regular dividend to return those profits?

dwaltrip 7y ago
> Businesses exist to make a profit for their shareholders. It is an insidious and morally bankrupt myth that this is the only purpose of a company.
- senordevnyc 7y ago
  I didn’t say it was the only reason, and you ignored my question. Would dividends be OK?
  - digitaltrees 7y ago
    Dividends that leave the business effectively insolvent in an emergency or financial downturn are irresponsible and should be disallowed. It should be remembered that direct stock by backs were illegal until recently as they were seen as a violation of insider trading and presented conflicts of interest. Further stock based compensation for executives is also relatively new. So we now have a situation that the incentives are clearly aligned for executives to pump stock prices to boost their own compensation through a previously illegal means of stock buy backs. Just look at the ratio of dividends to stock by backs in the last few years. You will see the result of those incentives.
    - 7y ago

preommr 7y ago

I really think we should stop conflating bad economic decisions with the current pandemic. Yes, maybe stock buybacks are bad. But even if they were banned, these companies wouldn't just have piles of cash reserves sitting around. To remain competitive, they would've had it invested in resources like additional personnel that would've gotten the axe either way when the belt has to be tightened. There needs to be better financial planning and regulations - a lot of them. But the best thing that could've helped here is better planning for national emergencies like a pandemic. Bill Gates and others have been clamoring for a long time about these dangers and we should've taken them more seriously.

digitaltrees 7y ago
They would unquestionably have more cash on hand though. That matters. There is also a lot of research showing that management does buy backs at exactly the wrong time. How wasteful is it in retrospect that companies did buy backs over the last two years at the peak of the market. Now they might have to sell stock to raise money at the bottom (assuming we find it soon). Mean while warren buffet was sitting on cash and building his reserves. Watch him swoop in now and just pick up businesses for pennies on the dollar.
asdff 7y ago
Some companies are famous for their piles of cash reserves. Apple, for instance. Other companies are definitely focused on the pump at the expense of their brand, product, and long term prospects. No C level executive sheds a tear when their company folds and they are handed their golden parachute to invest at market lows.

miketery 7y ago

While I mostly agree with #1 and #2 - not sure what this has to do with the crises we're in. The core of the current financial crisis is that demand has evaporated over the course of a week or two and / or businesses can't operate; both due to COVID-19. As a result many small business won't survive. By extension many people are impacted, won't make rent, won't make lease payments, won't make credit card payments. The stock market dropping is reflecting the above reality unwinding. And yes prices were inflated, and still are (QE is trying to hold them, we'll see how long that lasts...). Unlike the 2008 crises that had synthetic derivatives, and shitty rating agencies to blame - this isn't the case here. Though don't get me wrong I still think there are many sketchy things that go on, and many people who need to answer for them. Let's starts with the politicians that sold their shares given insider information, followed by others who curry favor with wall st.

wardnath 7y ago

Businesses that rely on walk-in customers will have to go for what looks like more than a month with little to no income. Same thing with travel related industries, surely over-leveraged portfolios exacerbated the problem but there are many other factors at play.

SamReidHughes 7y ago

Should companies not return profits to their shareholders? CEO's should be in jail for doing so? Be serious.

mywittyname 7y ago
I'm not sure how you got to this post after reading the OP. Company leadership should focus on returning capital when appropriate. They should not be repurchasing shares at obviously inflated prices as a last-ditch effort to further raise share prices so they can cash out their bonuses. They should be using that money to improve the business. Basically, leadership needs to think about long-term health, instead of making poor business decisions to improve executive bonuses.
- SamReidHughes 7y ago
  They were repurchasing shares for years and years. If shareholders were unhappy about that, they had every opportunity to replace the board. Or if they are a minority, they can sell. If you’re not a shareholder, you’re free to mind your own business.
  - SolaceQuantum 7y ago
    Shareholders are not the ones who lose the most when the ravens come to roost.
ivalm 7y ago
They definitely should return profits, they shouldn't take on additional debts to increase share price.
- SamReidHughes 7y ago
  All debt is an alternative to raising capital by selling shares and diluting ownership. It doesn’t matter what order you do it in, and sometimes you get a good deal on a loan.

TheSpiceIsLife 7y ago

Why should anyone be punished for failing to plan for a black swan event? Black swan events are unpredictable and outside of what is normally expected.

deleted 7y ago
[deleted]
ip26 7y ago
I think we're learning that while the manifestation & exact timing is unpredictable, looking at the big picture one black swan or another seems to show up with surprising regularity. 1973, 1987, 2001, 2008, 2020...
kingaillas 7y ago
I'm not even that old and this is the 3rd black swan event in the last 2 decades: terrorist attacks of 9/11/2001, financial meltdown in 2008-2009, and this 2020 global pandemic. There were also 3 other localized outbreaks (SARS in 2003, Swine Flu in 2009, MERS in 2012) so that to me sounds like we were 3 viral mutations away from this being the 4th global pandemic in 20 years. If we're structuring business and our economies such that they fall over or require ~1 trillion dollars for bailouts, every 4-7 years on average, then something is vastly, massively, completely, extremely wrong with our approach. I don't care how many economics nobel prizes are racked up by theorists; or about efficient market theory and blah blah blah. These systems are failing in the real world and that's the only existence proof needed. Running a just-in-time razor-thin-margins all-profits-reinvested-no-savings business is great in theory but apparently the wind blowing from the wrong direction destroys it all. It has the feeling of the economics/finance version of a physicist assuming a spherical car in a perfect vacuum with a point source of gravity when designing a system that has to survive actual usage.
- nomad1987 7y ago
  The gains inbetween these events far outweigh the cost of the bailout no? Those who prepare well (3-6 months of reserves) will be ok, other businesses will need to perish to teach others a lesson.

ravenstine 7y ago

> CEOs of large corporations used cash to buy back their stock, Not only that, but they also use borrowed money with corporate debt to buy back stocks. https://www.bloomberg.com/news/articles/2019-08-08/companies-use-borrowed-billions-to-buy-back-stock-not-to-invest https://www.bloomberg.com/news/articles/2019-08-08/companies...

nerfhammer 7y ago

The stock market is collapsing because the population is increasingly unable to go anywhere or do anything. As a result whole sectors of the economy are almost completely unable to function. They're predicting 25% GDP contraction and 25% unemployment which about the same as the peak of the Great Depression in 1933. And we don't know when that's going to end and it will probably take most of a year at least.

deleted 7y ago

[deleted]

hyperion2010 7y ago

This is not a black swan event. How many times are we going to have to go over this?

smallgovt 7y ago

1) Pretty sure you're misinformed on this point. The hedge fund sector that has gotten attention and partial blame for this meltdown is the risk-parity segment of hedge funds. These funds target a specific range of volatility, so when the market becomes wildly volatile they are forced to reduce their overall holdings. The entire risk-parity segment of the market is at most $400bn and they are levered 2-3x on average. In the grand scheme of things, this is pennies when compared to broader money flow. 2) Stock buybacks are simply a more tax-efficient way of distributing profits to shareholders. Redistribution of profit to shareholders is a fundamental trait of capitalism, so you can't really blame the CEO for doing this. You seem to be blaming CEO's for not preparing for a black swan event. If CEO's are forced to prepare for every possible black swan event, their companies would go nowhere.

ccktlmazeltov 7y ago
> Stock buybacks are simply a more tax-efficient way of distributing profits to shareholders This is: 1. irresponsible, due to so called black swan events 2. price manipulation, don't forget this
OGWhales 7y ago
As for your last point, there appears to be a black swan event quite regularly. It seems logical to prepare for this. Secondly, stock buy backs are often performed at horrible times simply because CEOs want to boost their own salary. This has repeatedly bitten them in the ass. This is what happens when short term gains are prioritized over long term strategy. So my question is, when do we learn?
- sojournerc 7y ago
  If it's regular, by definition it is not a black swan. What other events are you referring to?
ivalm 7y ago
I can accept viewpoint only if we ALSO allow all unprepared companies to fail. This will then inform the next generation of CEOs to prepare more. If we socialize losses while privatizing gains we create wrong incentives. I think the general sentiment is that we cannot just organically let most companies fail, so we are forced to bail out. But if we are breaking capitalism by bailing companies out, we should at least try to incetivize them to learn from mistakes rather than learn that they can do whatever when the times are good and get bailed out when the times are bad.

hpcjoe 7y ago

I agree, CEOs that bought back stock should not have the option of a bailout. That was a self-enrichment strategy built upon cheap debt, and now it is time to pay the bill. Generally speaking, Boeing and others should not be bailed out. Capital should flow to the small businesses to keep their doors open, their people employed. I'd also argue strongly against bailing out companies that shifted their work overseas. There needs to be a price to their actions. This is a just price IMO.

AnthonyMouse 7y ago

All of the things you're saying are the direct result of the market incentives created by low interest rates. Companies borrowed money and used it to buy their own shares for the same reason everybody was borrowing money to buy shares with it -- it's what people do when it's cheap to borrow money. If your competitors are all borrowing money at low interest, you do the same or you're not competitive. The problem is we lowered interest rates in response to the housing crisis and then left them there. Because doing so inflated (really reinflated) such a ginormous credit bubble that it would take more than an entire market cycle for real economic growth to catch up to it, and (absent printing money) you can only raise interest rates to the extent that borrowing demand from real economic growth exceeds the reduction in credit caused by the higher interest rates, or you cause deflation and an economic downturn. This is also why the rate of inflation has been below historic norms since the housing crisis -- reduced to that level just by raising rates the tiny bit that they did. And now even that's gone and interest rates are at zero. This is what the fallout of long-term low interest rates looks like. The only way out of it within our lifetimes would be mass defaults (which would cause a depression) or enough inflation to devalue the outstanding debts. Considering that we're also now facing deflationary forces from these quarantines, maybe it's time to start printing some money. Certainly countering the deflation by encouraging even more borrowing would just be trying to dig our way out of a hole.

raincom 7y ago

Low interest rates are the biggest culprit in this. Low interest rates have given these CEOs to borrow money to pump their stocks. Had interest rates been higher, say 6 percent, (a) these CEOs wouldn't have borrowed money to pump their stock, and (b) many investors would not have invested 60 to 90 percent of their portfolio in stocks. Another consequence of these low interest rates is (c) the inflation of real estate in many markets. That means, the middle class (say, employees of FAANG types) have loved this gravy train. Politicians, as a class, have benefited from this: inflated equities; inflated real estate. Greenspan, Bernanke, Yellen, Powell and the political class (both Democrats and Republicans) have all contributed to this. People who invested in index funds fared better than hedge funds. And there was no real price discovery thanks to Fed put; even many small hedge funds closed their shops when they couldn't beat ETFs based on indices like SPY, VOO, QQQ, etc. Now both bonds and stocks are crashing, as the commercial paper becomes junk.

somewhereoutth 7y ago
Absolutely this. Someday we need to have interest rates somewhat sticky at ~5% (or whatever the sensible figure is), and lean more on fiscal policy to control the economy. Whether there is a viable path to that point is unclear. Perhaps the money printing required to cushion the economy will spike inflation, and once we get back on our feet we hike rates to control it?

eunos 7y ago

> used cash to buy back their stock So in this case, the cash ends up with the stock owner, isn't it? What are the differences between cash in the hand of company vs cash in the hand of stock owners?

titzer 7y ago

> CEOs should be in jail Will. Never. Happen. Banks committed outright fraud in 2009, by the dozens, by the hundreds. Thousands of people should have gone to jail. Not a single. Goddamn. One. Did.

edanm 7y ago

No. It's because of everything in the posted presentation - 50% of companies are SMBs (in the States), and they understandably don't keep enough reserves to weather 3 months of losses. The stock market is reflecting that the damage this will do on the economy is real, and currently unknown but expected to be pretty bad.