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Stocks Are Recovering While the Economy Collapses

172 points by colinprince 7y ago

m3nu 7y ago
Stock markets are also priced according to _expectations_ about the future, rather than the events at this very moment. So if a recovery is expected, the market will reflect it sooner than the economy at large.
- martinko 7y ago
  You're basically saying that whatever the price is, the market is right. How do you square that with the elephant in the room, the FED's market interventions? Does it have an effect on prices? If it does, then the prices are obviously not driven only by expectations. If not, where does the excess liquidity on the other side of the FED's treasuries and bond trades go?
  - aeternum 7y ago
    >You're basically saying that whatever the price is, the market is right. Op said that the markets are priced based partly on expectations of the future, I don't see any claim that those expectations are necessarily correct. In terms of the Fed's effect: Both the Fed's immediate actions as well as expectations of future Fed actions have an effect on prices.
  - marvel_boy 7y ago
    I dont think he is assuming the market is right or wrong. The market is expected be great for some tech companies, and very bad for travel related business. No moral judgements, only expectations of future performance
  - chongli 7y ago
    The market is wrong all the time. People make money by beating the market. It’s just not easy to predict who will beat the market ahead of time. Just like how it’s not easy to predict who will win the lottery. It’s a pretty safe bet that someone will, though, at least some of the time.
    - ozim 7y ago
      No, people are not making money beating the market. See long term bets about ETF vs managed money managers. If you beat the market today like "you bough when it was 20% down" then "sell now because i went back to what it was" you have to buy again to stay in the market or never sell. Otherwise market will go up and you will stay with "one time shot" that in 5 or 10 years will be worth nothing. Time in the market makes money, so market is right.
  - smcphile 7y ago
    > You're basically saying that whatever the price is, the market is right. No, the efficient market hypothesis states that asset prices reflect all current available information. OP is not defending that hypothesis in their message, they’re just saying stock prices reflect expectations about the future, a much weaker assertion. Those expectations might turn out to be wrong, for various reasons, but they’re nevertheless what motivated people to invest in stocks rather than doing something else with their money.
    - grumple 7y ago
      > the efficient market hypothesis states that asset prices reflect all current available information. Obviously interpretations of that information could differ... and some will be right, and some will be wrong.
      - smcphile 7y ago
        Sure, individual evaluations of all currently available information can and do differ. The efficient market hypothesis is about the sum total of all those individual evaluations adding up to a rational evaluation as reflected in asset prices. Not everyone believes in the efficient market hypothesis, Warren Buffet being a famous example of someone who does not.
        camelite 7y ago
        Of course he doesn't. His existence invalidates it.
  - rich_sasha 7y ago
    Markets may well be, often are, irrational. But it's not crazy to expect the markets to rebound. People are becoming unemployed for a _transient_ reason of lockdown etc., economic recession is due to the pause button being pressed, and not a fundamental breakdown in economic activity. Of course prolonged lockdown etc. could make things worse still. But the main pain we see is definitely expected to me short-medium term. As for markets being irrational - actually, I think they are more often rational than not. They are mostly bashed for being irrational in hindsight, which, well, is not really fair. Also, it is just often rational, but with respect to different criteria than what is widely assumed.
    - bitcoinbutter 7y ago
      The market seems to be pricing in the best case scenario here. They're saying that almost everything is back to normal by Q3. This would be 4 really bad months (March-June) total. The reality is that the future is very uncertain at this point. The market drastically underestimated the virus in early February, and it appears the same phenomenon is happening now.
      - lonelappde 7y ago
        Covid 19 will eventually (a year or 2) go through the whole population and kill a lot of people, especially pensioners. Then it will be a background level killer like flu and cars. This is bad for many humans and people who love them but it's not bad for the economy.
        saati 7y ago
        Just the real estate price collapse that will follow the deaths is very bad for the economy.
  - pfortuny 7y ago
    There is little meaning in the market “being right”. There is no “right” price for anything. But it looks like the economy has already crashed and there is not so much worse to go.
- ur-whale 7y ago
  > Stock markets are also priced according to _expectations That's the theory. Markets are in practice: . far more irrational than theory admits to, mostly because theory doesn't model feedback loops properly . almost always subject to manipulation
  - pwagland 7y ago
    You are basically saying the same thing. Behavioural economics, in particular, says that expectations are not always rational. To be more precise, just because people expect that things will improve doesn't mean that they will. However expectations do drive behaviour, whether those expectations are rational or not.
- chiefalchemist 7y ago
  It's also a function of other possible investments and that risk. Rational / irrational has to be considered in the broader context. It's about risk and return. For some, despite the present situation, the stock market might be the best choice.
- amf12 7y ago
  > Stock markets are also priced according to _expectations_ about the future, That does not mean they are the right expectations and market is correct. Market could be over optimistic in this situation or just right. I know you don't mean to suggest that. But I just wanted to point that out. I feel "priced in" is the stupidest answer to questions wondering "why is this happening". And I know you aren't saying this either.
ur-whale 7y ago
> Stocks Are Recovering While the Economy Collapses Let's reconvene here in one year and ponder the "stocks are recovering" statement again. As the French saying goes: "Achetez au son des canons, vendez au son des clairons"
- tpowell 7y ago
  “Buy to the sound of cannons, sell to the sound of bugles” (I was unfamiliar. I like it.)
- mikro2nd 7y ago
  Or Mr Buffett's take: "Be afraid when everybody around you is being greedy. Be greedy when everybody is being afraid." (Something like that, anyway. From memory.)
brewdad 7y ago
Expectations have been all over the place. If you sold in February you saved a lot of paper losses in March. If you missed out on April you lost a lot of gains as expectations improved. For now, I'm keeping 5-year money (college tuition starts in a little over a year) really conservative. Retirement is staying diversified mostly in stocks and I'll try not to obsess over it too much. A little bit of "fun" money may go into play if I feel like a gamble.
- abootstrapper 7y ago
  Oof. I blew my “fun” money in a couple weeks. My mistake was thinking the stock market tracked the economy and would fall on bad news. I was wrong, and learned I don’t know shit about the stock market. Buy and hold. Amen.
ryndbfsrw 7y ago
3.85 million more Americans filed for unemployment last week and the stock market barely moved. Its because your Fed is printing money to buy up assets and corporate junk bonds. https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... This is also the sign of the kind of plumbing that is baked into the US system - protect capital when things go belly up and allow labor to hit the reset button through unemployment and wage cuts. Flood the market with cheap credit and then eventually growth comes back. It’s a rehash of the financial crisis response because it’s the only sort of response the USA is configured for.
- kortilla 7y ago
  The Feds mandate is to maintain low unemployment. They keep the credit markets flowing to keep the unemployment from becoming 10x worse than it already is.
  - DrAwdeOccarim 7y ago
    That's a funny thing to say since you can't get 10x worse than it is--we're already at 25% unemployment. Maybe you can say 2x?
    - darkerside 7y ago
      Depending how you calculate it, that's not necessarily true. Reported unemployment numbers are calculated as a percentage of people who are actively working or seeking work. It's possible for the denominator to increase for some reason (like more people needing to find work due to state and federal aid drying up). Said another way, the current workforce is 25% unemployed. If that corresponds to 5m out of a potential workforce of 25m, but the workforce increased to 100m, unemployment could increase 10x to 50m, while only doubling as a percentage. And I just looked it up and these numbers are totally detached from reality, but I've written too much to delete now, so I'm just going to publish it! (And besides, I think it's still useful to question what's behind statistics)
      - 7y ago
Aloha 7y ago
The markets seem to be priced with lots of 'hopium' and Federal Reserve dollars propping them up. Assets have been overvalued by a lot for quite sometime now.
- CalRobert 7y ago
  Only 11-12 years ago the Federal government propped up many companies that were poorly run and would have died without assistance by robbing taxpayers and giving the money to said companies. If you view ownership of said failing companies as a way to get on the Fed gravy train it makes sense. They're not even "overvalued" if that's how you look at them. How many people who would have started new, competing companies went on to have their taxes fund the competition?
  - kortilla 7y ago
    > by robbing taxpayers and giving the money to said companies ... as loans, which had to be paid back with interest (and were).
    - attilakun 7y ago
      If the loans came from money printing then the taxpayer still paid for it by having their savings inflated away, albeit not the full amount.
    - jcbrand 7y ago
      It's not only via loans. By pushing down interest rates via QE, the Fed has allowed so-called zombie companies to exist longer than they otherwise would have in an unmanipulated interest rate environment.
TekMol 7y ago
Or in other terms "Money tanks while an unprecedented amount of it is printed". When looking at a stock chart, don't forget it is not the value of the company you are looking at. It is the ratio of two values. Of the company and a currency.
- jknz 7y ago
  The Euro at $1.10 is at one of its lowest level. This suggests that the dollar does not drop in value, or that the Euro drops faster.
  - TekMol 7y ago
    Well, while the FED is printing $, the ECB is printing €. Who prints more is hard to say. One reason is the question, which definition of money we look at. Only central bank money? Or also private bank money? And there are many other forms of money. Even if we only look at central bank money, it is tricky: Central bank money is not only created at the central bank. But also in private banks. For example in Germany, the central bank just announced they will back up 100% of loans that private banks give to businesses. So the private banks now can loan money without risk. Basically printing central bank money on their own.
  - redis_mlc 7y ago
    The euro is a fictional currency, backed loosely by one real economy and several failed ones. The euro is actually worth about 10 US cents, if that.
    - raverbashing 7y ago
      Cool so you're telling me you will sell me 10kEUR for 1kUSD? Where do I send the money to?
- blackrock 7y ago
  Working your ass off for a buck, to pay for your rent and food, feels rather pointless, when the government just prints money out of thin air, and hands it to the rich, and those that don’t need or deserve the help. Meanwhile, you’re taxed like crazy. Health insurance costs is a heavy burden on your earnings. And any savings you have, will now be cut in half. I feel like we just got robbed by the Fed. Again.
computator 7y ago
> The Fed has committed to lend or buy [up to] $8 trillion in financial assets The M2 money supply[1] is currently $16T. If the Fed creates $8T in new money, does that mean that the M2 grows to $24T and therefore the purchasing power of U.S. dollars will be 2/3 of what it used to be? If your nest egg is mostly in cash right now, what should you do? [1] https://www.federalreserve.gov/releases/h6/current/ https://www.federalreserve.gov/releases/h6/current/
- gridlockd 7y ago
  Putting the money on the balance sheet by itself does not affect prices, only the expectation that it will be spent - along with the expectation that even more money will be created. Now the question is, what will that money be spent on? It's not the stuff that's in the CPI, therefore the average consumer will not immediately lose purchasing power, at least for domestic goods. This is why we have seen massive asset price inflation but very little inflation in terms of CPI. It's politically convenient, people don't really notice it unless they want to buy a house. If they have a stock portfolio, they're happy about the paper profits. > If your nest egg is mostly in cash right now, what should you do? The following is not financial advice: If you're 100% cash, you should diversify. Asset prices are bound to stay inflated, the value of the dollar (and other currencies) in terms of assets is bound to go lower. You should look at rising stock prices within an economic crisis as an indicator of cash losing value. Also consider that pretty much all governments are now creating money, so there's no safe-haven currency. Could the market turn again, could you buy at a lower price yet? Absolutely. If that happens, are the governments going to create even more money to stop the slide? Most likely.
- wegs 7y ago
  Yes it does. Value is being destroyed by the lock-down. Nest eggs are drying up. There's a lot Congress could do to stem the bleeding from a flood to a trickle, but it's not doing it. I don't think there's much individuals can do to protect themselves; folks on Wall St. are looking for the same sorts of places to stash their wealth, with much bigger teams. If someone finds a safe place, the value goes up as people buy it up. That's the point of index funds. In an ideal case, everything would lose value at about the same speed -- cash and stocks -- so a $100 index fund is still worth $100 (with obvious winners and losers within). That's inflation, but it distorts things less. Inflation hurts people with savings, but helps people with debt. There's way too much debt in the system right now, which is causing structural harm as people can't keep up with payments (be that airplane leases, mortgages, student loans, or otherwise). A little inflation right now is healthy. If your nest egg is cash, and that's worth 2/3, that's still a lot better for you than if it doesn't inflate, but the US economy collapses. So I'd accept the inflation. But there are smarter policies we could put in place if we hadn't elected politicians who were qualified, rather than ones who acted relateable. Next year doesn't look better: it's Biden v. Trump at the federal level, and likewise down the line. We needed a Warren or a Bloomberg -- someone who isn't dumb.
ciconia 7y ago
> ...these moves by the Fed and governments are the equivalent of flooding a drought stricken area with water for a few days. It feels like a relief, but if there is no rain in the months after, it does little good. That's a very insightful metaphor. At this point, after 12 years of QE policies that were meant to maintain the status quo, it's clear that the global economy is failing. Those "floods" of liquidity don't have any connection with actual value. They're just there to maintain the illusion of growth. Without central banks propping up stock markets, the entire globe would have already been deep in a painful unprecedented contraction. At some point all this will unravel. Just like actual floods where a huge quantity of water washes the landscape, removing topsoil and flowing to the sea, so will those ever-growing floods of make-believe money wash the economy, removing what little real value still exists, and disappear into nothingness.
- tasuki 7y ago
  > ever-growing floods of make-believe money Does there exist any other kind of money? > removing what little real value still exists Care to elaborate how an influx money should remove real value that exists? Isn't the relation between influx of money and real value a relatively loose one?
  - ciconia 7y ago
    How? Central banks are essentially buying stock. The aid given to "normal" people is peanuts in comparison. This will further tip the balance between rich and poor, capital and labour. Lots of people lost their jobs, the value of labour is taking a nosedive. But yes, your are of course right. Money has no intrinsic value.
buboard 7y ago
As a non-US person, where would i invest instead of US equity ?
- deleted 7y ago
  [deleted]
- tarsinge 7y ago
  I'm a layman but my understanding is that this is in fact the issue stated in the article, there is nowhere else to invest, real economy is stopped, so currently everyone from individual to institutions and corporations put their money into stocks, thus the price increase.
- ornornor 7y ago
  Vanguard’s VT tracks the world (including US). They have other indices that exclude the US.
LatteLazy 7y ago
"Hibernates" seems more accurate to me. And for big sections of the economy (healthcare, Amazon) is a fantastic time to be in business!
- Leherenn 7y ago
  Healthcare not so much, most non emergency procedures have been cancelled. I don't know about the US, but over here a lot of staff has temporarily been laid off, and hospitals are struggling financially.
  - makomk 7y ago
    It's all over the US news that the healthcare system is having this exact same problem - because of all the procedures being cancelled, hospitals are in a terrible financial state and staff are being furloughed, laid off, and having their pay cut all over the place. What's interesting is that Americans seem to think that this is the result of some unique failure in how healthcare is structured over there.
- quickthrowman 7y ago
  Amazon reported yesterday they expect to spend their entire previously forecasted Q2 profit of $4 billion on COVID related expenses. I wouldn’t call that a fantastic outcome.
alkonaut 7y ago
This isn't countrerintuitive. This isn't just about massive money printing and stimulus packages or some voodoo economics. People rush to stocks because stocks are long term investments, and there are no other good investments.
solatic 7y ago
Article's argument boils down to the claim that outright inflation would buoy the prices of airlines, hotels, and retailers, and since that isn't happening, therefore QE isn't causing inflation. Ongoing wealth inequality is producing a divergence in where currency is distributed in the economy, and thus producing an uneven effect on pricing. Where desirable investments exist, excess capital is flooding in to capture limited supply and causing inflation in the prices of those investments. Without a return to high employment, injections into capital markets cannot and will not reach Main Street and restore demand. Where demand is primarily driven by Main Street and is relatively elastic, we are beginning to see deflation, e.g. in the CPI which saw 0.4% deflation in March alone. Arguing that the dollar, as a single fiat currency, has a single value is slowly becoming an outdated concept. The dollar is increasingly valued by Main Street and decreasingly valued by Wall Street. Ordinarily, this would be bridged by arbitrage - by Wall Street purchasing deflated investments and by Main Street selling inflating assets. But Wall Street can't capitalize on the low price of airline and retail stocks until governments permit those businesses to fully return to the market (whether they go bankrupt or not before that happens still being an open question, in spite of the Fed's injections), and Wall Street is failing to capitalize on other deflated opportunities, most spectacularly the failure to seize the opportunity posed by the collapsing price of oil due to a lack of storage. Meanwhile, Main Street has no appreciating assets to sell - the most common of which used to be real estate, but the failure of housing policy to encourage affordable mortgages and home-ownership has caused more and more of Main Street to rent their housing instead. So there's real deflation that's being masked by an assets bubble. What will burst the bubble? If the Fed is committed to infinite QE, then eventually, political intervention. Look for the following: * Intervention in housing: price-controls in rent and mortgages, as they become increasingly inaffordable for a Main Street with no income. * Intervention in medical care: expansion of Medicare and Medicaid, as the demand for healthcare grows among the unemployed who have lost access to employer-provided health insurance. * Intervention in additional markets that cater mostly to Main Street demand - food, clothing, energy. Already we see Trump intervening in meat production to force meat suppliers to stay open. Why does the government have to force meat suppliers to stay open, unless they're no longer profitable because of production cuts (i.e. unavailability of labor) for reasons outside of their control? The Caracas Stock Exchange, denominated in bolivars, has been doing exceptionally well, some 220% YTD ROI. Anybody in the audience running to purchase bolivars?
dr-detroit 7y ago
Are you 6? Its a well documented fact that bad things usually raise the GDP. Its still bad, just not for the elites in the finance sector.
tempf123 7y ago
My 2c as an active trader: There’s a lot of speculation, and I love it. Keeping an open mind is a necessity. Think of from the perspective of the funds managing billions of dollars: it’s not in their interest to be predictable. There’s nothing in the stock market that can be explained by a single headline. Misdirect, delay, prepare. Coronavirus in February was already a red alert and we had a brief panic, but the stock market went back up. I promise you it wasn’t a return to normal, it was a strategic delay. It’s fun exercise to follow the timestamps, the down move started at exactly opex. The move back up was more statistically sound than you’d think. The headlines saying expect a double bottom were basing that on history and ignoring the magnitude of the move. We were many many many standard deviations out of expectations. Put another way, the massive amount of short positions opened when closed out would put us roughly back at (starting price - 2 ln). A smooth drop would line up with expected move models and would have room to continue. You have to be very careful drawing conclusions between current news and current stock prices. You also can’t explain it all by forward looking expectations. If you’re actively trading and don’t have a full model based on past, present and future these types of articles will ruin you.
- Traster 7y ago
  In your entire description, not once do you actually mention the performance of the companies in the stock market. Which is kind of the point of the article.
- gdubs 7y ago
  Technical trading is astrology — convince me otherwise.
  - amf12 7y ago
    I don't mean to challenge you, I don't believe in technical trading too. But I don't think its equivalent to astrology, which IMO is completely bogus. Technical patterns work somewhat better than a coin toss in the short term. It is basically follow the trend. They might not be the most optimal, and might as well be self-fulfilling prophecies, but I don't think it can be compared with astrology.
indymike 7y ago
The future isn't as dark as the present.
aazaa 7y ago
Hypothesis: the face-ripping rally in stocks and total disconnect from the real economy is the result of trading bots that have mistaken the flood of central bank liquidity as a demand spike. The algos haven't yet been updated to reflect the fact that there's a man behind the curtain with an infinite supply of liquidity pumping, pumping as fast as he can. And it's far from clear that the distinction matters anymore. Assets have become a kind of video game. When you strip stocks and bonds from their anchors to valuation (P/E multiple or inflation), you're left essentially with something very similar to gold and cryptocurrencies - assets that are difficult to value by any conventional means, but which become sensitive to central bank shenanigans. This could explain why all asset classes are now moving in unison.
- ThePowerOfDirge 7y ago
  Alternative hypothesis: bailouts are a temporary smoke screen for the pension and hedge funds, other financial institutions and the super rich to cash out, once they have liquidated their positions, the real crash happens.
  - rileymat2 7y ago
    Alternate hypothesis: The next year to 18 months of earnings reductions due to covid is not enough to justify a 30% drop in net present value of the market at large.
    - rayiner 7y ago
      To the top with you!
    - scrimps 7y ago
      The the companies were accurately priced prior to COVID then that would be the case. If companies were in an overvalued bubble before COVID then that would not be the case.
    - amf12 7y ago
      Another alternative also is investors fleeing from emerging markets. With Fed's backing the US stock market is a better bet than some others as compared with moving to cash, bonds, Gold, etc.
adventured 7y ago
After the peak of unemployment during the great recession, it took three years to get the U3 unemployment rate down from 10% and back below 8%. Three years. 2%. We're somewhere around 23% right now. Call the peak 28%-30%. Assume a sharper bounce from the peak for various likely reasons. Can you imagine what things are going to look like in three years, if we're still near 14% unemployment? How about six years to get back to the worst of the great recession levels? It's going to take nearly a decade to get back to a normal job market. The market obviously isn't properly pricing based on the economic destruction and the fiscal consequences that will be entailed. The stock market is rolling around on the floor high on the Fed's supply while the house is on fire. How long can that last? I'm going to specifically watch for the inflection point of how fast the economy bounces back (or not), as that'll be an enormous confidence juncture for the market. It's pricing for the sharpest V shaped recovery imaginable, when the real recovery is more likely to look like a jagged, slowish, prodding swoosh; the difference between those two realities and how the present is being priced, is supplied by the Fed. Can the US Government spend an extra $8 trillion beyond what they already have to pad everything through the next three years? They can, I don't know if they will. I suspect after this very brief period of barely bipartisan voting to support the population and economy, Congress will rip at eachother like we've rarely seen before. The partisan walls will go back up before this year is out. Each stimulus measure will separate the parties a bit more than the last. There will be wild political brawling between those who have survived this mostly intact and don't want to keep spending at the highly elevated rates, and those who want to keep providing full stimulus-level benefits to the very large number of unemployed persons for many years. The cost will be something beyond extreme to handle a situation with unemployment ranging between 10%-30% for a mere three years (how about if we spend six years elevated beyond the great recession peak unemployment rate?). Sympathy will dwindle rapidly in large segments of the population and people will begin to argue primarily from their personal bias and economic condition, seeking to guard their own survival against economic disaster.
moosey 7y ago
The stock market is perfectly representing, well, something. Any attempts to explain it require loads of mental gymnastics because it's a layer of abstraction over so many layers of abstraction that I fear we've collectively lost sight of human welfare and real human advancement. I can assure you that the stock market doesn't represent that.
stjohnswarts 7y ago
It's a bit early for any of these predictions.
boublepop 7y ago
The stock market is perfectly accurately representing the fact that every world leader and everyone filling their pockets have so much wealth invested in the assumption of the stock market increasing that no-matter the reality, every government in the world will print money and do everything in their power to keep the stocks valuable even while the companies they represent stakes in go bankrupt.

172 points by colinprince 7y ago

m3nu 7y ago

Stock markets are also priced according to _expectations_ about the future, rather than the events at this very moment. So if a recovery is expected, the market will reflect it sooner than the economy at large.

martinko 7y ago
You're basically saying that whatever the price is, the market is right. How do you square that with the elephant in the room, the FED's market interventions? Does it have an effect on prices? If it does, then the prices are obviously not driven only by expectations. If not, where does the excess liquidity on the other side of the FED's treasuries and bond trades go?
- aeternum 7y ago
  >You're basically saying that whatever the price is, the market is right. Op said that the markets are priced based partly on expectations of the future, I don't see any claim that those expectations are necessarily correct. In terms of the Fed's effect: Both the Fed's immediate actions as well as expectations of future Fed actions have an effect on prices.
- marvel_boy 7y ago
  I dont think he is assuming the market is right or wrong. The market is expected be great for some tech companies, and very bad for travel related business. No moral judgements, only expectations of future performance
- chongli 7y ago
  The market is wrong all the time. People make money by beating the market. It’s just not easy to predict who will beat the market ahead of time. Just like how it’s not easy to predict who will win the lottery. It’s a pretty safe bet that someone will, though, at least some of the time.
  - ozim 7y ago
    No, people are not making money beating the market. See long term bets about ETF vs managed money managers. If you beat the market today like "you bough when it was 20% down" then "sell now because i went back to what it was" you have to buy again to stay in the market or never sell. Otherwise market will go up and you will stay with "one time shot" that in 5 or 10 years will be worth nothing. Time in the market makes money, so market is right.
- smcphile 7y ago
  > You're basically saying that whatever the price is, the market is right. No, the efficient market hypothesis states that asset prices reflect all current available information. OP is not defending that hypothesis in their message, they’re just saying stock prices reflect expectations about the future, a much weaker assertion. Those expectations might turn out to be wrong, for various reasons, but they’re nevertheless what motivated people to invest in stocks rather than doing something else with their money.
  - grumple 7y ago
    > the efficient market hypothesis states that asset prices reflect all current available information. Obviously interpretations of that information could differ... and some will be right, and some will be wrong.
    - smcphile 7y ago
      Sure, individual evaluations of all currently available information can and do differ. The efficient market hypothesis is about the sum total of all those individual evaluations adding up to a rational evaluation as reflected in asset prices. Not everyone believes in the efficient market hypothesis, Warren Buffet being a famous example of someone who does not.
      - camelite 7y ago
        Of course he doesn't. His existence invalidates it.
- rich_sasha 7y ago
  Markets may well be, often are, irrational. But it's not crazy to expect the markets to rebound. People are becoming unemployed for a _transient_ reason of lockdown etc., economic recession is due to the pause button being pressed, and not a fundamental breakdown in economic activity. Of course prolonged lockdown etc. could make things worse still. But the main pain we see is definitely expected to me short-medium term. As for markets being irrational - actually, I think they are more often rational than not. They are mostly bashed for being irrational in hindsight, which, well, is not really fair. Also, it is just often rational, but with respect to different criteria than what is widely assumed.
  - bitcoinbutter 7y ago
    The market seems to be pricing in the best case scenario here. They're saying that almost everything is back to normal by Q3. This would be 4 really bad months (March-June) total. The reality is that the future is very uncertain at this point. The market drastically underestimated the virus in early February, and it appears the same phenomenon is happening now.
    - lonelappde 7y ago
      Covid 19 will eventually (a year or 2) go through the whole population and kill a lot of people, especially pensioners. Then it will be a background level killer like flu and cars. This is bad for many humans and people who love them but it's not bad for the economy.
      - saati 7y ago
        Just the real estate price collapse that will follow the deaths is very bad for the economy.
- pfortuny 7y ago
  There is little meaning in the market “being right”. There is no “right” price for anything. But it looks like the economy has already crashed and there is not so much worse to go.
ur-whale 7y ago
> Stock markets are also priced according to _expectations That's the theory. Markets are in practice: . far more irrational than theory admits to, mostly because theory doesn't model feedback loops properly . almost always subject to manipulation
- pwagland 7y ago
  You are basically saying the same thing. Behavioural economics, in particular, says that expectations are not always rational. To be more precise, just because people expect that things will improve doesn't mean that they will. However expectations do drive behaviour, whether those expectations are rational or not.
chiefalchemist 7y ago
It's also a function of other possible investments and that risk. Rational / irrational has to be considered in the broader context. It's about risk and return. For some, despite the present situation, the stock market might be the best choice.
amf12 7y ago
> Stock markets are also priced according to _expectations_ about the future, That does not mean they are the right expectations and market is correct. Market could be over optimistic in this situation or just right. I know you don't mean to suggest that. But I just wanted to point that out. I feel "priced in" is the stupidest answer to questions wondering "why is this happening". And I know you aren't saying this either.

ur-whale 7y ago

> Stocks Are Recovering While the Economy Collapses Let's reconvene here in one year and ponder the "stocks are recovering" statement again. As the French saying goes: "Achetez au son des canons, vendez au son des clairons"

tpowell 7y ago
“Buy to the sound of cannons, sell to the sound of bugles” (I was unfamiliar. I like it.)
mikro2nd 7y ago
Or Mr Buffett's take: "Be afraid when everybody around you is being greedy. Be greedy when everybody is being afraid." (Something like that, anyway. From memory.)

brewdad 7y ago

Expectations have been all over the place. If you sold in February you saved a lot of paper losses in March. If you missed out on April you lost a lot of gains as expectations improved. For now, I'm keeping 5-year money (college tuition starts in a little over a year) really conservative. Retirement is staying diversified mostly in stocks and I'll try not to obsess over it too much. A little bit of "fun" money may go into play if I feel like a gamble.

abootstrapper 7y ago
Oof. I blew my “fun” money in a couple weeks. My mistake was thinking the stock market tracked the economy and would fall on bad news. I was wrong, and learned I don’t know shit about the stock market. Buy and hold. Amen.

ryndbfsrw 7y ago

3.85 million more Americans filed for unemployment last week and the stock market barely moved. Its because your Fed is printing money to buy up assets and corporate junk bonds. https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... This is also the sign of the kind of plumbing that is baked into the US system - protect capital when things go belly up and allow labor to hit the reset button through unemployment and wage cuts. Flood the market with cheap credit and then eventually growth comes back. It’s a rehash of the financial crisis response because it’s the only sort of response the USA is configured for.

kortilla 7y ago
The Feds mandate is to maintain low unemployment. They keep the credit markets flowing to keep the unemployment from becoming 10x worse than it already is.
- DrAwdeOccarim 7y ago
  That's a funny thing to say since you can't get 10x worse than it is--we're already at 25% unemployment. Maybe you can say 2x?
  - darkerside 7y ago
    Depending how you calculate it, that's not necessarily true. Reported unemployment numbers are calculated as a percentage of people who are actively working or seeking work. It's possible for the denominator to increase for some reason (like more people needing to find work due to state and federal aid drying up). Said another way, the current workforce is 25% unemployed. If that corresponds to 5m out of a potential workforce of 25m, but the workforce increased to 100m, unemployment could increase 10x to 50m, while only doubling as a percentage. And I just looked it up and these numbers are totally detached from reality, but I've written too much to delete now, so I'm just going to publish it! (And besides, I think it's still useful to question what's behind statistics)
    - 7y ago

Aloha 7y ago

The markets seem to be priced with lots of 'hopium' and Federal Reserve dollars propping them up. Assets have been overvalued by a lot for quite sometime now.

CalRobert 7y ago
Only 11-12 years ago the Federal government propped up many companies that were poorly run and would have died without assistance by robbing taxpayers and giving the money to said companies. If you view ownership of said failing companies as a way to get on the Fed gravy train it makes sense. They're not even "overvalued" if that's how you look at them. How many people who would have started new, competing companies went on to have their taxes fund the competition?
- kortilla 7y ago
  > by robbing taxpayers and giving the money to said companies ... as loans, which had to be paid back with interest (and were).
  - attilakun 7y ago
    If the loans came from money printing then the taxpayer still paid for it by having their savings inflated away, albeit not the full amount.
  - jcbrand 7y ago
    It's not only via loans. By pushing down interest rates via QE, the Fed has allowed so-called zombie companies to exist longer than they otherwise would have in an unmanipulated interest rate environment.

TekMol 7y ago

Or in other terms "Money tanks while an unprecedented amount of it is printed". When looking at a stock chart, don't forget it is not the value of the company you are looking at. It is the ratio of two values. Of the company and a currency.

jknz 7y ago
The Euro at $1.10 is at one of its lowest level. This suggests that the dollar does not drop in value, or that the Euro drops faster.
- TekMol 7y ago
  Well, while the FED is printing $, the ECB is printing €. Who prints more is hard to say. One reason is the question, which definition of money we look at. Only central bank money? Or also private bank money? And there are many other forms of money. Even if we only look at central bank money, it is tricky: Central bank money is not only created at the central bank. But also in private banks. For example in Germany, the central bank just announced they will back up 100% of loans that private banks give to businesses. So the private banks now can loan money without risk. Basically printing central bank money on their own.
- redis_mlc 7y ago
  The euro is a fictional currency, backed loosely by one real economy and several failed ones. The euro is actually worth about 10 US cents, if that.
  - raverbashing 7y ago
    Cool so you're telling me you will sell me 10kEUR for 1kUSD? Where do I send the money to?
blackrock 7y ago
Working your ass off for a buck, to pay for your rent and food, feels rather pointless, when the government just prints money out of thin air, and hands it to the rich, and those that don’t need or deserve the help. Meanwhile, you’re taxed like crazy. Health insurance costs is a heavy burden on your earnings. And any savings you have, will now be cut in half. I feel like we just got robbed by the Fed. Again.

computator 7y ago

> The Fed has committed to lend or buy [up to] $8 trillion in financial assets The M2 money supply[1] is currently $16T. If the Fed creates $8T in new money, does that mean that the M2 grows to $24T and therefore the purchasing power of U.S. dollars will be 2/3 of what it used to be? If your nest egg is mostly in cash right now, what should you do? [1] https://www.federalreserve.gov/releases/h6/current/ https://www.federalreserve.gov/releases/h6/current/

gridlockd 7y ago
Putting the money on the balance sheet by itself does not affect prices, only the expectation that it will be spent - along with the expectation that even more money will be created. Now the question is, what will that money be spent on? It's not the stuff that's in the CPI, therefore the average consumer will not immediately lose purchasing power, at least for domestic goods. This is why we have seen massive asset price inflation but very little inflation in terms of CPI. It's politically convenient, people don't really notice it unless they want to buy a house. If they have a stock portfolio, they're happy about the paper profits. > If your nest egg is mostly in cash right now, what should you do? The following is not financial advice: If you're 100% cash, you should diversify. Asset prices are bound to stay inflated, the value of the dollar (and other currencies) in terms of assets is bound to go lower. You should look at rising stock prices within an economic crisis as an indicator of cash losing value. Also consider that pretty much all governments are now creating money, so there's no safe-haven currency. Could the market turn again, could you buy at a lower price yet? Absolutely. If that happens, are the governments going to create even more money to stop the slide? Most likely.
wegs 7y ago
Yes it does. Value is being destroyed by the lock-down. Nest eggs are drying up. There's a lot Congress could do to stem the bleeding from a flood to a trickle, but it's not doing it. I don't think there's much individuals can do to protect themselves; folks on Wall St. are looking for the same sorts of places to stash their wealth, with much bigger teams. If someone finds a safe place, the value goes up as people buy it up. That's the point of index funds. In an ideal case, everything would lose value at about the same speed -- cash and stocks -- so a $100 index fund is still worth $100 (with obvious winners and losers within). That's inflation, but it distorts things less. Inflation hurts people with savings, but helps people with debt. There's way too much debt in the system right now, which is causing structural harm as people can't keep up with payments (be that airplane leases, mortgages, student loans, or otherwise). A little inflation right now is healthy. If your nest egg is cash, and that's worth 2/3, that's still a lot better for you than if it doesn't inflate, but the US economy collapses. So I'd accept the inflation. But there are smarter policies we could put in place if we hadn't elected politicians who were qualified, rather than ones who acted relateable. Next year doesn't look better: it's Biden v. Trump at the federal level, and likewise down the line. We needed a Warren or a Bloomberg -- someone who isn't dumb.

ciconia 7y ago

> ...these moves by the Fed and governments are the equivalent of flooding a drought stricken area with water for a few days. It feels like a relief, but if there is no rain in the months after, it does little good. That's a very insightful metaphor. At this point, after 12 years of QE policies that were meant to maintain the status quo, it's clear that the global economy is failing. Those "floods" of liquidity don't have any connection with actual value. They're just there to maintain the illusion of growth. Without central banks propping up stock markets, the entire globe would have already been deep in a painful unprecedented contraction. At some point all this will unravel. Just like actual floods where a huge quantity of water washes the landscape, removing topsoil and flowing to the sea, so will those ever-growing floods of make-believe money wash the economy, removing what little real value still exists, and disappear into nothingness.

tasuki 7y ago
> ever-growing floods of make-believe money Does there exist any other kind of money? > removing what little real value still exists Care to elaborate how an influx money should remove real value that exists? Isn't the relation between influx of money and real value a relatively loose one?
- ciconia 7y ago
  How? Central banks are essentially buying stock. The aid given to "normal" people is peanuts in comparison. This will further tip the balance between rich and poor, capital and labour. Lots of people lost their jobs, the value of labour is taking a nosedive. But yes, your are of course right. Money has no intrinsic value.

buboard 7y ago

As a non-US person, where would i invest instead of US equity ?

deleted 7y ago
[deleted]
tarsinge 7y ago
I'm a layman but my understanding is that this is in fact the issue stated in the article, there is nowhere else to invest, real economy is stopped, so currently everyone from individual to institutions and corporations put their money into stocks, thus the price increase.
ornornor 7y ago
Vanguard’s VT tracks the world (including US). They have other indices that exclude the US.

LatteLazy 7y ago

"Hibernates" seems more accurate to me. And for big sections of the economy (healthcare, Amazon) is a fantastic time to be in business!

Leherenn 7y ago
Healthcare not so much, most non emergency procedures have been cancelled. I don't know about the US, but over here a lot of staff has temporarily been laid off, and hospitals are struggling financially.
- makomk 7y ago
  It's all over the US news that the healthcare system is having this exact same problem - because of all the procedures being cancelled, hospitals are in a terrible financial state and staff are being furloughed, laid off, and having their pay cut all over the place. What's interesting is that Americans seem to think that this is the result of some unique failure in how healthcare is structured over there.
quickthrowman 7y ago
Amazon reported yesterday they expect to spend their entire previously forecasted Q2 profit of $4 billion on COVID related expenses. I wouldn’t call that a fantastic outcome.

alkonaut 7y ago

This isn't countrerintuitive. This isn't just about massive money printing and stimulus packages or some voodoo economics. People rush to stocks because stocks are long term investments, and there are no other good investments.

solatic 7y ago

Article's argument boils down to the claim that outright inflation would buoy the prices of airlines, hotels, and retailers, and since that isn't happening, therefore QE isn't causing inflation. Ongoing wealth inequality is producing a divergence in where currency is distributed in the economy, and thus producing an uneven effect on pricing. Where desirable investments exist, excess capital is flooding in to capture limited supply and causing inflation in the prices of those investments. Without a return to high employment, injections into capital markets cannot and will not reach Main Street and restore demand. Where demand is primarily driven by Main Street and is relatively elastic, we are beginning to see deflation, e.g. in the CPI which saw 0.4% deflation in March alone. Arguing that the dollar, as a single fiat currency, has a single value is slowly becoming an outdated concept. The dollar is increasingly valued by Main Street and decreasingly valued by Wall Street. Ordinarily, this would be bridged by arbitrage - by Wall Street purchasing deflated investments and by Main Street selling inflating assets. But Wall Street can't capitalize on the low price of airline and retail stocks until governments permit those businesses to fully return to the market (whether they go bankrupt or not before that happens still being an open question, in spite of the Fed's injections), and Wall Street is failing to capitalize on other deflated opportunities, most spectacularly the failure to seize the opportunity posed by the collapsing price of oil due to a lack of storage. Meanwhile, Main Street has no appreciating assets to sell - the most common of which used to be real estate, but the failure of housing policy to encourage affordable mortgages and home-ownership has caused more and more of Main Street to rent their housing instead. So there's real deflation that's being masked by an assets bubble. What will burst the bubble? If the Fed is committed to infinite QE, then eventually, political intervention. Look for the following: * Intervention in housing: price-controls in rent and mortgages, as they become increasingly inaffordable for a Main Street with no income. * Intervention in medical care: expansion of Medicare and Medicaid, as the demand for healthcare grows among the unemployed who have lost access to employer-provided health insurance. * Intervention in additional markets that cater mostly to Main Street demand - food, clothing, energy. Already we see Trump intervening in meat production to force meat suppliers to stay open. Why does the government have to force meat suppliers to stay open, unless they're no longer profitable because of production cuts (i.e. unavailability of labor) for reasons outside of their control? The Caracas Stock Exchange, denominated in bolivars, has been doing exceptionally well, some 220% YTD ROI. Anybody in the audience running to purchase bolivars?

dr-detroit 7y ago

Are you 6? Its a well documented fact that bad things usually raise the GDP. Its still bad, just not for the elites in the finance sector.

tempf123 7y ago

My 2c as an active trader: There’s a lot of speculation, and I love it. Keeping an open mind is a necessity. Think of from the perspective of the funds managing billions of dollars: it’s not in their interest to be predictable. There’s nothing in the stock market that can be explained by a single headline. Misdirect, delay, prepare. Coronavirus in February was already a red alert and we had a brief panic, but the stock market went back up. I promise you it wasn’t a return to normal, it was a strategic delay. It’s fun exercise to follow the timestamps, the down move started at exactly opex. The move back up was more statistically sound than you’d think. The headlines saying expect a double bottom were basing that on history and ignoring the magnitude of the move. We were many many many standard deviations out of expectations. Put another way, the massive amount of short positions opened when closed out would put us roughly back at (starting price - 2 ln). A smooth drop would line up with expected move models and would have room to continue. You have to be very careful drawing conclusions between current news and current stock prices. You also can’t explain it all by forward looking expectations. If you’re actively trading and don’t have a full model based on past, present and future these types of articles will ruin you.

Traster 7y ago
In your entire description, not once do you actually mention the performance of the companies in the stock market. Which is kind of the point of the article.
gdubs 7y ago
Technical trading is astrology — convince me otherwise.
- amf12 7y ago
  I don't mean to challenge you, I don't believe in technical trading too. But I don't think its equivalent to astrology, which IMO is completely bogus. Technical patterns work somewhat better than a coin toss in the short term. It is basically follow the trend. They might not be the most optimal, and might as well be self-fulfilling prophecies, but I don't think it can be compared with astrology.

indymike 7y ago

The future isn't as dark as the present.

aazaa 7y ago

Hypothesis: the face-ripping rally in stocks and total disconnect from the real economy is the result of trading bots that have mistaken the flood of central bank liquidity as a demand spike. The algos haven't yet been updated to reflect the fact that there's a man behind the curtain with an infinite supply of liquidity pumping, pumping as fast as he can. And it's far from clear that the distinction matters anymore. Assets have become a kind of video game. When you strip stocks and bonds from their anchors to valuation (P/E multiple or inflation), you're left essentially with something very similar to gold and cryptocurrencies - assets that are difficult to value by any conventional means, but which become sensitive to central bank shenanigans. This could explain why all asset classes are now moving in unison.

ThePowerOfDirge 7y ago
Alternative hypothesis: bailouts are a temporary smoke screen for the pension and hedge funds, other financial institutions and the super rich to cash out, once they have liquidated their positions, the real crash happens.
- rileymat2 7y ago
  Alternate hypothesis: The next year to 18 months of earnings reductions due to covid is not enough to justify a 30% drop in net present value of the market at large.
  - rayiner 7y ago
    To the top with you!
  - scrimps 7y ago
    The the companies were accurately priced prior to COVID then that would be the case. If companies were in an overvalued bubble before COVID then that would not be the case.
  - amf12 7y ago
    Another alternative also is investors fleeing from emerging markets. With Fed's backing the US stock market is a better bet than some others as compared with moving to cash, bonds, Gold, etc.

adventured 7y ago

After the peak of unemployment during the great recession, it took three years to get the U3 unemployment rate down from 10% and back below 8%. Three years. 2%. We're somewhere around 23% right now. Call the peak 28%-30%. Assume a sharper bounce from the peak for various likely reasons. Can you imagine what things are going to look like in three years, if we're still near 14% unemployment? How about six years to get back to the worst of the great recession levels? It's going to take nearly a decade to get back to a normal job market. The market obviously isn't properly pricing based on the economic destruction and the fiscal consequences that will be entailed. The stock market is rolling around on the floor high on the Fed's supply while the house is on fire. How long can that last? I'm going to specifically watch for the inflection point of how fast the economy bounces back (or not), as that'll be an enormous confidence juncture for the market. It's pricing for the sharpest V shaped recovery imaginable, when the real recovery is more likely to look like a jagged, slowish, prodding swoosh; the difference between those two realities and how the present is being priced, is supplied by the Fed. Can the US Government spend an extra $8 trillion beyond what they already have to pad everything through the next three years? They can, I don't know if they will. I suspect after this very brief period of barely bipartisan voting to support the population and economy, Congress will rip at eachother like we've rarely seen before. The partisan walls will go back up before this year is out. Each stimulus measure will separate the parties a bit more than the last. There will be wild political brawling between those who have survived this mostly intact and don't want to keep spending at the highly elevated rates, and those who want to keep providing full stimulus-level benefits to the very large number of unemployed persons for many years. The cost will be something beyond extreme to handle a situation with unemployment ranging between 10%-30% for a mere three years (how about if we spend six years elevated beyond the great recession peak unemployment rate?). Sympathy will dwindle rapidly in large segments of the population and people will begin to argue primarily from their personal bias and economic condition, seeking to guard their own survival against economic disaster.

moosey 7y ago

The stock market is perfectly representing, well, something. Any attempts to explain it require loads of mental gymnastics because it's a layer of abstraction over so many layers of abstraction that I fear we've collectively lost sight of human welfare and real human advancement. I can assure you that the stock market doesn't represent that.

stjohnswarts 7y ago

It's a bit early for any of these predictions.

boublepop 7y ago

The stock market is perfectly accurately representing the fact that every world leader and everyone filling their pockets have so much wealth invested in the assumption of the stock market increasing that no-matter the reality, every government in the world will print money and do everything in their power to keep the stocks valuable even while the companies they represent stakes in go bankrupt.