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Incorrect. The expectation of inflation and the low yields of bonds means that equities are the best place for your money. Asset values will get inflated while

Incorrect. The expectation of inflation and the low yields of bonds means that equities are the best place for your money. Asset values will get inflated while cash loses value.

mcguire 6y ago
The market you describe is a Ponzi scheme. The value of any investment is the present value of it's future cash flows. Anything beyond that is going to end badly.
- quickthrowman 6y ago
  Guess what, interest rates going down means future cash flows go up! If your cost of capital is lower, your return on investment is: (A) Higher (B) Higher (C) Higher Which one is it, A B or C?
  - lumost 6y ago
    This implies that the interest rate reduction counter-balances the reduction in future cash flows. In an economy with 15-20% unemployment and entire industries on the brink of destruction ( airlines/travel ) this is not a given. If the 5-10 year revenue projections of air-travel are 1/5th of the pre-covid economy, then a small change to cost of capital won't allow you to continue investing as if nothing happened. The risk inherent to Google's bottom line from long-term structural unemployment and lower ad-revenue should outweigh even a 0% cost of capital.
    - ozi 6y ago
      FWIW I travelled from LAX to SFO yesterday. Both were much busier than they had been just a few weeks ago. I'm long DAL based on what I saw yesterday.
      - MiroF 6y ago
        I've been aggressively long JETS since the crash, that investment has performed wonderfully.
  - lubujackson 6y ago
    Don't forget how ridiculously over-leveraged almost every big company already is. They are saddled with huge debt and many are struggling to pay the interest on the debt, let alone the principal. So the Fed can force rates to nothing so companies can get more debt to pay down their existing debt, but the point where they are actually profitable gets further and further away. Meanwhile, they get more and more vulnerable to even the slightest increase in rates. Everyone can close their eyes and keep driving faster off this cliff for a while, but best case is we become Japan with 100 year mortgages and a market that is flat for the next 30 years because it is half owned by the government. The real problem is the companies that hit the wall first and go bankrupt suddenly, I think Dave and Busters just announced and October is whispered to be full of incoming bankruptcies. Confidence in stocks won't hold when companies keep randomly dropping 20% in a day. TINA doesn't consider "not losing money" is a very reasonable alternative that people will eventually realize.
- mxschumacher 6y ago
  Nominal cash flows can be expected to go up in an inflationary environment
  - MiroF 6y ago
    We're not in an "inflationary environment."
    - mxschumacher 6y ago
      But we might enter one...
      - MiroF 6y ago
        We're not even close to hitting an inflationary environment - we've been consistently under inflationary targets for like a decade.
        mxschumacher 6y ago
        "it hasn't been true in the recent past, therefore it won't be true in the future" isn't a strong line of argument. Huge QE and extremely low interest rates can of course result in considerable inflation in the coming years.
        MiroF 6y ago
        No the argument is that long-term inflation moving averages are determined by what has occurred in the past (because they're moving averages), so a much higher inflation now would actually be good. Due to a collapse in AD, that's not going to happen.
- ozi 6y ago
  You seem to be ignoring supply and demand for the assets themselves irrespective of the asset's value or earning potential. Low interest rates increases demand for asset types like property and equities.
  - mcguire 6y ago
    Certainly. But in the end, they are buying stocks in the belief that the price will go up, while the underlying asset, the cash flows, do not seem likely to do so for some time, and not to the extent that the stock prices require. That's pure speculation. You can't eat stocks.
  - adventured 6y ago
    > Low interest rates increases demand for asset types like property and equities. Interest rates have been low for over ten years. Interest rates were at de facto 0% in 2015 (and still close to it for 2016) while Apple had a sub 10 PE and Microsoft was around a 15-16 PE. Now they have multiples in the mid 30s despite slow growth. The S&P 500 PE is about 40-50% higher than in 2014-2015, with a worse economic situation. The Eurozone and Japan have had negative real rates across many years in the past without the type of stock market valuations the US is seeing now. One doesn't guarantee the other. It's obvious this all comes apart at some point. Interest rates at 0% won't prevent that. There's nothing that stops the market from going back to 2014-2015 style valuations. Companies like Snowflake aren't going to be worth $70 billion (~140 times sales) on the backside of this insanity. Quick, someone dig up the remains of DrKoop.com and do an IPO. Maybe they can be reincarnated as a telemedicine EV maker that sells hydrogen powered big data machine learning HTML5 supercomputer cloudlets that drift downhill via gravity, producing perpetual energy. Or maybe they can just analyze logs and lose a lot of money for a cool $10 billion valuation. What we have going on now is primarily mania, not low interest rates. The economy in 2015 was healthier than the economy is today, multiples were nowhere near this, and rates were on the floor for many years at that point. So how about we just reset valuations back to when interest rates were close to 0% in 2015, what will that do to the market? It'll crash it big time, that's what. It's certainly possible that valuations will remain elevated due to forever low rates. That doesn't mean the mania part of it will sustain, that is likely to be temporary. The public market mania is now so far beyond what was previously going on in the private market, companies have collectively switched modes and are rushing for the exits (Snowflake's recent public valuation was six times the private valuation they were fetching in February). WeWork in hindsight should have waited a year to try to IPO, this market would bid them up.
- aeternum 6y ago
  How do you calculate the present value of it's future cash flows? You 'discount' the future cash flows by the cost of capital.. which is tied to the interest rate. So if interest rates go down, the present value of those future cash flows increases and share price increases.
  - mcguire 6y ago
    I urge you to try the exercise and determine either the discount rate you need to use to get reasonable future valuations or the valuations you get with a reasonable discount rate.
    - aeternum 6y ago
      Sure, let's look at FB. AA corp bonds are around 2%, so let's use that for the discount rate and assume Fb maintains their 40% growth for 3 years then transitions to 10% for 7 years. Cash flows per share would be just under $50 during the growth period and just over $200 during the stability period. Basically 10 years to break even with the current share price. Not very far out of line with historical PE ratios.

Incorrect. The expectation of inflation and the low yields of bonds means that equities are the best place for your money. Asset values will get inflated while cash loses value.

mcguire 6y ago

The market you describe is a Ponzi scheme. The value of any investment is the present value of it's future cash flows. Anything beyond that is going to end badly.

quickthrowman 6y ago
Guess what, interest rates going down means future cash flows go up! If your cost of capital is lower, your return on investment is: (A) Higher (B) Higher (C) Higher Which one is it, A B or C?
- lumost 6y ago
  This implies that the interest rate reduction counter-balances the reduction in future cash flows. In an economy with 15-20% unemployment and entire industries on the brink of destruction ( airlines/travel ) this is not a given. If the 5-10 year revenue projections of air-travel are 1/5th of the pre-covid economy, then a small change to cost of capital won't allow you to continue investing as if nothing happened. The risk inherent to Google's bottom line from long-term structural unemployment and lower ad-revenue should outweigh even a 0% cost of capital.
  - ozi 6y ago
    FWIW I travelled from LAX to SFO yesterday. Both were much busier than they had been just a few weeks ago. I'm long DAL based on what I saw yesterday.
    - MiroF 6y ago
      I've been aggressively long JETS since the crash, that investment has performed wonderfully.
- lubujackson 6y ago
  Don't forget how ridiculously over-leveraged almost every big company already is. They are saddled with huge debt and many are struggling to pay the interest on the debt, let alone the principal. So the Fed can force rates to nothing so companies can get more debt to pay down their existing debt, but the point where they are actually profitable gets further and further away. Meanwhile, they get more and more vulnerable to even the slightest increase in rates. Everyone can close their eyes and keep driving faster off this cliff for a while, but best case is we become Japan with 100 year mortgages and a market that is flat for the next 30 years because it is half owned by the government. The real problem is the companies that hit the wall first and go bankrupt suddenly, I think Dave and Busters just announced and October is whispered to be full of incoming bankruptcies. Confidence in stocks won't hold when companies keep randomly dropping 20% in a day. TINA doesn't consider "not losing money" is a very reasonable alternative that people will eventually realize.
mxschumacher 6y ago
Nominal cash flows can be expected to go up in an inflationary environment
- MiroF 6y ago
  We're not in an "inflationary environment."
  - mxschumacher 6y ago
    But we might enter one...
    - MiroF 6y ago
      We're not even close to hitting an inflationary environment - we've been consistently under inflationary targets for like a decade.
      - mxschumacher 6y ago
        "it hasn't been true in the recent past, therefore it won't be true in the future" isn't a strong line of argument. Huge QE and extremely low interest rates can of course result in considerable inflation in the coming years.
        MiroF 6y ago
        No the argument is that long-term inflation moving averages are determined by what has occurred in the past (because they're moving averages), so a much higher inflation now would actually be good. Due to a collapse in AD, that's not going to happen.
ozi 6y ago
You seem to be ignoring supply and demand for the assets themselves irrespective of the asset's value or earning potential. Low interest rates increases demand for asset types like property and equities.
- mcguire 6y ago
  Certainly. But in the end, they are buying stocks in the belief that the price will go up, while the underlying asset, the cash flows, do not seem likely to do so for some time, and not to the extent that the stock prices require. That's pure speculation. You can't eat stocks.
- adventured 6y ago
  > Low interest rates increases demand for asset types like property and equities. Interest rates have been low for over ten years. Interest rates were at de facto 0% in 2015 (and still close to it for 2016) while Apple had a sub 10 PE and Microsoft was around a 15-16 PE. Now they have multiples in the mid 30s despite slow growth. The S&P 500 PE is about 40-50% higher than in 2014-2015, with a worse economic situation. The Eurozone and Japan have had negative real rates across many years in the past without the type of stock market valuations the US is seeing now. One doesn't guarantee the other. It's obvious this all comes apart at some point. Interest rates at 0% won't prevent that. There's nothing that stops the market from going back to 2014-2015 style valuations. Companies like Snowflake aren't going to be worth $70 billion (~140 times sales) on the backside of this insanity. Quick, someone dig up the remains of DrKoop.com and do an IPO. Maybe they can be reincarnated as a telemedicine EV maker that sells hydrogen powered big data machine learning HTML5 supercomputer cloudlets that drift downhill via gravity, producing perpetual energy. Or maybe they can just analyze logs and lose a lot of money for a cool $10 billion valuation. What we have going on now is primarily mania, not low interest rates. The economy in 2015 was healthier than the economy is today, multiples were nowhere near this, and rates were on the floor for many years at that point. So how about we just reset valuations back to when interest rates were close to 0% in 2015, what will that do to the market? It'll crash it big time, that's what. It's certainly possible that valuations will remain elevated due to forever low rates. That doesn't mean the mania part of it will sustain, that is likely to be temporary. The public market mania is now so far beyond what was previously going on in the private market, companies have collectively switched modes and are rushing for the exits (Snowflake's recent public valuation was six times the private valuation they were fetching in February). WeWork in hindsight should have waited a year to try to IPO, this market would bid them up.
aeternum 6y ago
How do you calculate the present value of it's future cash flows? You 'discount' the future cash flows by the cost of capital.. which is tied to the interest rate. So if interest rates go down, the present value of those future cash flows increases and share price increases.
- mcguire 6y ago
  I urge you to try the exercise and determine either the discount rate you need to use to get reasonable future valuations or the valuations you get with a reasonable discount rate.
  - aeternum 6y ago
    Sure, let's look at FB. AA corp bonds are around 2%, so let's use that for the discount rate and assume Fb maintains their 40% growth for 3 years then transitions to 10% for 7 years. Cash flows per share would be just under $50 during the growth period and just over $200 during the stability period. Basically 10 years to break even with the current share price. Not very far out of line with historical PE ratios.