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I live in a Northern US state and we have a saying about four-wheel drive in the snow and ice: your car won’t slide as often, but when it does it will be disast

I live in a Northern US state and we have a saying about four-wheel drive in the snow and ice: your car won’t slide as often, but when it does it will be disastrous. Every winter you see the ditch filled with pickup trucks and SUVs who have four or all wheel drive. Usually so deep in the ditch that they need a tow truck. Most of the two-wheel drive vehicles get stuck on the shoulder, where a simple shovel could easily free them. The Fed can keep the market from going down, and they can keep it afloat for a long time. But all that energy builds up like a rubber band, until it snaps. The stock market is going up even though it has no reason to be going up. Which means valuations are higher than they would normally be, and keep going up even though they should be flat or going down. Usually this would be fixed through minor “corrections” like maybe a quarter or two of sliding prices and then quickly back to stability and growth again. But the longer we refuse to let nature find its equilibrium, the more catastrophic the eventual reset will be.

MiroF 6y ago
> But the longer we refuse to let nature find its equilibrium, the more catastrophic the eventual reset will be. What is this "equilibrium"? Why does the Fed taking a super contractionary policy stance seem better to you? Expenditures are rebounding and personal income is at an all time high - both of which seem like pretty obvious reasons why stock prices are not crashing.
- skohan 6y ago
  > personal income is at an all time high What's this figure? Mean income? Median? Inflation adjusted? Is investment income included in that figure? Not all the indicators are rosy right? I mean unemployment, and failure to make rent payments are both still abnormally high as far as I understand.
  - MiroF 6y ago
    Disposable personal income: https://fred.stlouisfed.org/series/DSPI https://fred.stlouisfed.org/series/DSPI > is investment income included in that figure Probably, but it's not a significant reason behind the recent rise. > unemployment Yes, unemployment is high which is why it is critical that the Fed is doing what it is doing now, while both employment and inflation are very low. > failure to make rent payments are both still abnormally high This metric is not really safe to look at to compare to 2019, given eviction/rent moratoriums.
    - skohan 6y ago
      > given eviction/rent moratoriums. But this is much more of a short-term band-aid than a real solution isn't it? As I understood the eviction moratorium is just a block preventing people from being removed from their homes. It's not rent forgiveness. So when it expires, those renters will still be on the hook for months worth of back rent, and assuming a lot of them are unable to pay because they are unemployed, this just seems like we're inflating a debt bubble to be dealt with later. That's also ignoring the financial obligations of landlords - they might also be running into trouble due to lost revenue and for now I suppose they are just supposed to bear it.
      - MiroF 6y ago
        > But this is much more of a short-term band-aid than a real solution isn't it? My point is that you can't compare rent payment rates from when you would get evicted if you didn't pay rent to rent payment rates from an eviction moratorium where there is no penalty for not paying rent. > they might also be running into trouble due to lost revenue and for now I suppose they are just supposed to bear it. The reason that landlords make the profits they do is because they're taking on this kind of risk. They are the party to bear it, and have hopefully hedged in some way. If they are overexposed, then yes, they will fail. Hopefully we don't make the same too big to fail mistake we made last time. I'm not claiming that everything is great with our economy. It's obviously not. But suggesting the Fed stop doing what it is doing would be perhaps the single worst thing you could do to the entire economy. It is good that equity prices remain high and it is good that personal income has risen. We should capitalize on those trends so that people can soon go back to work.
        skohan 6y ago
        I'm not saying the fed should stop what they're doing, but there are certainly alternatives which might have lead to a better result. For instance, in other countries, more of the government assistance was directed to maintaining payroll and to actually support rent payments rather than just delaying that obligation. It's hard for me to understand why that would not be a better approach to stabilizing the economy compared to what happened in the US. It seems that the actual result of QE has been that a huge percentage of that money has been dumped into equities, driving prices higher. Yes it's better than a total economic collapse, but it's not clear to me that this is actually a good thing, and not just an artificially inflated indicator which is essentially papering over very real risks to the economy which could cause massive issues down the road.
- freehunter 6y ago
  The equilibrium is wherever “the market” decides it is. With the Fed pumping trillions of dollars into the market and dropping rates to 0% for extended periods of time, that’s not “the market”, that’s just the Fed. And I’m not just talking about now, at this moment. It goes all the way back to 2008, when rates dropped to near-zero and didn’t even break 3% before they had to drop to near-zero again for the next recession (right now). The Fed gave up almost all their normal tools and never asked for them back, and now they’re gone. Which means if the economy gets worse (and staying the same as right now for an extended period of time is the same as “getting worse”), there’s not a whole lot anyone can do about it. Basically, if the Fed is out of tools already, the only thing the Fed can do is cash injections. Which they’ve already done this year, trillions of dollars worth. And that might keep the market afloat for another year or two or ten... all while the stock market keeps going up. Not because investors think these businesses are worth that much, but because they know there will never be a decline in the market overall. And what happens when the market becomes completely decoupled from the value of the businesses they’re trading? And better question... what happens when the Fed changes their mind?
  - MiroF 6y ago
    > The equilibrium is wherever “the market” decides it is Remind me the last time "the market" decided on an equilibrium without the Fed. 1912? > The Fed gave up almost all their normal tools and never asked for them back, and now they’re gone. Which means if the economy gets worse (and staying the same as right now for an extended period of time is the same as “getting worse”), there’s not a whole lot anyone can do about it. Despite its popularity as a talking point, there is actually little economic evidence that Fed policy becomes ineffective at the zero bound. Nor really any evidence that the Fed is "out of tools." There is huge empirical evidence that taking a expansionary stance during a recession helps lessen the impact of the recession and lower unemployment. Why would it be better for the Fed to take a contractionary approach during a recession? So the stock market better reflects how you feel it should look?
    - freehunter 6y ago
      You’re right, the Fed is supposed to help stabilize the market. But their current position of “never let it crash” is unprecedented and dangerous. It’s not about a “feeling” and it’s not a “contractionary approach”. My concern is the Fed has taken the position that the stock market must always go up, no matter what. It’s like saying we must never allow wildfires... well eventually something will happen outside of your control and now the entire west coast is burning and there’s nothing you can do to stop it. If you just let the smaller fires burn when they wanted/needed to, we wouldn’t be in that situation. You seem to be drawing a hard black and white line, that either the Fed does nothing or they do everything imaginable. As always, there is a middle ground... let the market make its corrections and if something big happens then step in and help ease the pain. The problem with the “do anything and everything to make sure the market NEVER goes down” approach is at some point it will. At some point something will happen that scares investors and the market will drop faster than the Fed can print money. And the more out of touch the markets are, the harder it will drop and the more painful it will be. But even if the eventual crash never comes, if the Fed is willing to print trillions of dollars every year to keep the stock market up, is it really even a stock market? At that point it’s just a high-interest savings account for the ultra-rich, paid for by inflation (which hurts everyone who doesn’t own stocks). And the way that ends is the rich get richer until we end up with an oligarchy. It’s dangerous and unprecedented for the Fed to say they will keep printing unlimited amounts of money [2] in order to make sure the markets never go down. Their job is to prevent a depression, not prevent Wall Street from losing even a single dollar. [1] https://tradingeconomics.com/united-states/interest-rate https://tradingeconomics.com/united-states/interest-rate [2] https://www.marketwatch.com/story/fed-announces-unlimited-qe-and-sets-up-several-new-lending-programs-2020-03-23 https://www.marketwatch.com/story/fed-announces-unlimited-qe...
Invictus0 6y ago
It's like you haven't just seen stocks tumble 20% in the last couple weeks.

MiroF 6y ago

> But the longer we refuse to let nature find its equilibrium, the more catastrophic the eventual reset will be. What is this "equilibrium"? Why does the Fed taking a super contractionary policy stance seem better to you? Expenditures are rebounding and personal income is at an all time high - both of which seem like pretty obvious reasons why stock prices are not crashing.

skohan 6y ago
> personal income is at an all time high What's this figure? Mean income? Median? Inflation adjusted? Is investment income included in that figure? Not all the indicators are rosy right? I mean unemployment, and failure to make rent payments are both still abnormally high as far as I understand.
- MiroF 6y ago
  Disposable personal income: https://fred.stlouisfed.org/series/DSPI https://fred.stlouisfed.org/series/DSPI > is investment income included in that figure Probably, but it's not a significant reason behind the recent rise. > unemployment Yes, unemployment is high which is why it is critical that the Fed is doing what it is doing now, while both employment and inflation are very low. > failure to make rent payments are both still abnormally high This metric is not really safe to look at to compare to 2019, given eviction/rent moratoriums.
  - skohan 6y ago
    > given eviction/rent moratoriums. But this is much more of a short-term band-aid than a real solution isn't it? As I understood the eviction moratorium is just a block preventing people from being removed from their homes. It's not rent forgiveness. So when it expires, those renters will still be on the hook for months worth of back rent, and assuming a lot of them are unable to pay because they are unemployed, this just seems like we're inflating a debt bubble to be dealt with later. That's also ignoring the financial obligations of landlords - they might also be running into trouble due to lost revenue and for now I suppose they are just supposed to bear it.
    - MiroF 6y ago
      > But this is much more of a short-term band-aid than a real solution isn't it? My point is that you can't compare rent payment rates from when you would get evicted if you didn't pay rent to rent payment rates from an eviction moratorium where there is no penalty for not paying rent. > they might also be running into trouble due to lost revenue and for now I suppose they are just supposed to bear it. The reason that landlords make the profits they do is because they're taking on this kind of risk. They are the party to bear it, and have hopefully hedged in some way. If they are overexposed, then yes, they will fail. Hopefully we don't make the same too big to fail mistake we made last time. I'm not claiming that everything is great with our economy. It's obviously not. But suggesting the Fed stop doing what it is doing would be perhaps the single worst thing you could do to the entire economy. It is good that equity prices remain high and it is good that personal income has risen. We should capitalize on those trends so that people can soon go back to work.
      - skohan 6y ago
        I'm not saying the fed should stop what they're doing, but there are certainly alternatives which might have lead to a better result. For instance, in other countries, more of the government assistance was directed to maintaining payroll and to actually support rent payments rather than just delaying that obligation. It's hard for me to understand why that would not be a better approach to stabilizing the economy compared to what happened in the US. It seems that the actual result of QE has been that a huge percentage of that money has been dumped into equities, driving prices higher. Yes it's better than a total economic collapse, but it's not clear to me that this is actually a good thing, and not just an artificially inflated indicator which is essentially papering over very real risks to the economy which could cause massive issues down the road.
freehunter 6y ago
The equilibrium is wherever “the market” decides it is. With the Fed pumping trillions of dollars into the market and dropping rates to 0% for extended periods of time, that’s not “the market”, that’s just the Fed. And I’m not just talking about now, at this moment. It goes all the way back to 2008, when rates dropped to near-zero and didn’t even break 3% before they had to drop to near-zero again for the next recession (right now). The Fed gave up almost all their normal tools and never asked for them back, and now they’re gone. Which means if the economy gets worse (and staying the same as right now for an extended period of time is the same as “getting worse”), there’s not a whole lot anyone can do about it. Basically, if the Fed is out of tools already, the only thing the Fed can do is cash injections. Which they’ve already done this year, trillions of dollars worth. And that might keep the market afloat for another year or two or ten... all while the stock market keeps going up. Not because investors think these businesses are worth that much, but because they know there will never be a decline in the market overall. And what happens when the market becomes completely decoupled from the value of the businesses they’re trading? And better question... what happens when the Fed changes their mind?
- MiroF 6y ago
  > The equilibrium is wherever “the market” decides it is Remind me the last time "the market" decided on an equilibrium without the Fed. 1912? > The Fed gave up almost all their normal tools and never asked for them back, and now they’re gone. Which means if the economy gets worse (and staying the same as right now for an extended period of time is the same as “getting worse”), there’s not a whole lot anyone can do about it. Despite its popularity as a talking point, there is actually little economic evidence that Fed policy becomes ineffective at the zero bound. Nor really any evidence that the Fed is "out of tools." There is huge empirical evidence that taking a expansionary stance during a recession helps lessen the impact of the recession and lower unemployment. Why would it be better for the Fed to take a contractionary approach during a recession? So the stock market better reflects how you feel it should look?
  - freehunter 6y ago
    You’re right, the Fed is supposed to help stabilize the market. But their current position of “never let it crash” is unprecedented and dangerous. It’s not about a “feeling” and it’s not a “contractionary approach”. My concern is the Fed has taken the position that the stock market must always go up, no matter what. It’s like saying we must never allow wildfires... well eventually something will happen outside of your control and now the entire west coast is burning and there’s nothing you can do to stop it. If you just let the smaller fires burn when they wanted/needed to, we wouldn’t be in that situation. You seem to be drawing a hard black and white line, that either the Fed does nothing or they do everything imaginable. As always, there is a middle ground... let the market make its corrections and if something big happens then step in and help ease the pain. The problem with the “do anything and everything to make sure the market NEVER goes down” approach is at some point it will. At some point something will happen that scares investors and the market will drop faster than the Fed can print money. And the more out of touch the markets are, the harder it will drop and the more painful it will be. But even if the eventual crash never comes, if the Fed is willing to print trillions of dollars every year to keep the stock market up, is it really even a stock market? At that point it’s just a high-interest savings account for the ultra-rich, paid for by inflation (which hurts everyone who doesn’t own stocks). And the way that ends is the rich get richer until we end up with an oligarchy. It’s dangerous and unprecedented for the Fed to say they will keep printing unlimited amounts of money [2] in order to make sure the markets never go down. Their job is to prevent a depression, not prevent Wall Street from losing even a single dollar. [1] https://tradingeconomics.com/united-states/interest-rate https://tradingeconomics.com/united-states/interest-rate [2] https://www.marketwatch.com/story/fed-announces-unlimited-qe-and-sets-up-several-new-lending-programs-2020-03-23 https://www.marketwatch.com/story/fed-announces-unlimited-qe...

Invictus0 6y ago

It's like you haven't just seen stocks tumble 20% in the last couple weeks.