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The subhead gives the entire answer: Investors are betting that powerful interventions from Washington will protect the long-term profitability of major compan

The subhead gives the entire answer: 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.

lucb1e 7y ago
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.
- caseysoftware 7y ago
  It encourages risk taking towards the extremes. To make it concrete: - 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?
mandelbrotwurst 7y ago
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.
- naveen99 7y ago
  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.
  - Red_Leaves_Flyy 7y ago
    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.
- deleted 7y ago
  [deleted]
- j-walker 7y ago
  Isn't the counter-point to this the stock price of PG&E? Look at its performance over the last 5 years, it's down to ~$11 from ~$50. If the the whole market looked like this in the next year, people's 401k accounts would probably be demolished.
  - Guest42 7y ago
    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
  - paulhodge 7y ago
    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.
    - bitcoinbutter 7y ago
      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.
  - mandelbrotwurst 7y ago
    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.
  - 7y ago
- downerending 7y ago
  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.
  - mandelbrotwurst 7y ago
    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.
- boublepop 7y ago
  It might be good for the overall market in the long term. But it’s not good for the stock investments of the politicians making the decisions.
tootie 7y ago
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.
- TenJack 7y ago
  Seems like the negative effects on companies could be longer than 6 months.
- Saaster 7y ago
  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.
  - SpicyLemonZest 7y ago
    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.
ianai 7y ago
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.
- dmoy 7y ago
  How is that at all different from companies issuing dividends? Isn't returning value to the shareholders the entire point of selling stock to investors in the first place?
  - ianai 7y ago
    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.”
    - dmoy 7y ago
      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.
- jedberg 7y ago
  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.
wisemanwillhear 7y ago
> 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. https://www.marketplace.org/2019/09/30/the-stock-market-is-not-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?
Mc_Big_G 7y ago
>Which means that the market is 100% detached from the overall economy, economic outlooks, and company earnings.. again. Which is another way of saying it's rigged.

lucb1e 7y ago

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.

caseysoftware 7y ago
It encourages risk taking towards the extremes. To make it concrete: - 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?

mandelbrotwurst 7y ago

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.

naveen99 7y ago
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.
- Red_Leaves_Flyy 7y ago
  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.
deleted 7y ago
[deleted]
j-walker 7y ago
Isn't the counter-point to this the stock price of PG&E? Look at its performance over the last 5 years, it's down to ~$11 from ~$50. If the the whole market looked like this in the next year, people's 401k accounts would probably be demolished.
- Guest42 7y ago
  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
- paulhodge 7y ago
  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.
  - bitcoinbutter 7y ago
    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.
- mandelbrotwurst 7y ago
  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.
- 7y ago
downerending 7y ago
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.
- mandelbrotwurst 7y ago
  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.
boublepop 7y ago
It might be good for the overall market in the long term. But it’s not good for the stock investments of the politicians making the decisions.

tootie 7y ago

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.

TenJack 7y ago
Seems like the negative effects on companies could be longer than 6 months.
Saaster 7y ago
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.
- SpicyLemonZest 7y ago
  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.

ianai 7y ago

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.

dmoy 7y ago
How is that at all different from companies issuing dividends? Isn't returning value to the shareholders the entire point of selling stock to investors in the first place?
- ianai 7y ago
  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.”
  - dmoy 7y ago
    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.
jedberg 7y ago
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.

wisemanwillhear 7y ago

> 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. https://www.marketplace.org/2019/09/30/the-stock-market-is-not-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?

Mc_Big_G 7y ago

>Which means that the market is 100% detached from the overall economy, economic outlooks, and company earnings.. again. Which is another way of saying it's rigged.