9 ms·

The Capital Sponge

112 points by jger15 5y ago

reactspa 5y ago
I would love for someone to find holes in the reasoning in this article (my own Macro Econ skills are not that good). The author is a major voice in bitcoin circles (search their name with the word "bitcoin" or "crypto" on youtube). And I find it notable that they don't mention bitcoin or crypto anywhere in this post.
- dustintrex 5y ago
  Lyn is one of the more thoughtful crypto bulls out there (admittedly a low bar), and the following post with its updates shows how her thinking has evolved. https://www.lynalden.com/cryptocurrencies/ https://www.lynalden.com/cryptocurrencies/ TL;DR stance as of July 2020: I like it as a small position within a diversified portfolio, without much concern for periodic corrections, using capital I’m willing to risk.
  - paulpauper 5y ago
    She always says small portion. That way if she is wrong it is not a problem, but can still take credit anyway if it works.
- jadbox 5y ago
  Just a few thoughts of my own. It seems to me that BTC is starting to more and more follow the trend of the S&P macro movement swings. As traders become scared of the stability of the future, they reduce their investment purchases (or sell) across all their speculative assets. This global 'market fear and exhuberance' may end up impacting BTC as much as it does wall street, compounded by automated cross-market bot trading that occurs. (I tend to follow behavioral economics)
  - paulpauper 5y ago
    BTC is highly correlated with the S&P 500 to the negative and not to the upside. A good hedge shorting BTC and going long S&P 500.
    - dustintrex 5y ago
      Except that's next to impossible to short BTC without incurring major exposure to the crypto market as a whole in process. In other words, you can gamble that BTC will go down all you like in the wonderful world of DeFi, but if your gainzzz are in $random_shitcoin then the fiat value of that will also go down the toilet. The closest you can do is shorting BTC-adjacent regular stocks like MSTR, MARA, etc.
      - paulpauper 5y ago
        put options on BITO or sell calls
        tobltobs 5y ago
        BITOs current holdings consists out of ~30% CME Bitcoin Futures, ~40% Treasure Bills and ~30% Cash. Why would that be a good proxy for Bitcoin?
- invalidname 5y ago
  Most of what she says in this particular article seems pretty on the money. It looks like the Biden admin is very aware of these things and trying to gently tame the stock market to bring it under control. The alternative is a bubble burst. I'm not sure if that's doable, but I don't see another option.
- paulpauper 5y ago
  I don't think it's a good source of investment advice. Endorsing Bitcoin for example is a major flag. She is being paid to promote bitcoin services. I see this as a conflict of interest. She makes assumptions that are wrong. like: The danger comes, however, if interest rates start going sideways, or even start going up, structurally. except that stocks rose in 2016-2017 even as interest rates were rising. Same for the 90s.
- georgeecollins 5y ago
  I am not sure I disagree but one thing I think is a little misleading is the comparison between the US havin 23% of world gdp and and 60% of world market capitalization. One small problem with that is that countries gdps are often compared by ppp (as in this case) and market capitalizations are compared in dollars. A more serious issue is that the US markets really represent much more than just the US economy. All the biggest corporations listed in the US have huge busnesses outside the US that count toward other countries GDP. I would guess WallMart is the most US based, but even they have stores in other countries. Apple is a US company that manufactures in China, buys important components in Asia and has employees and sells products all over the world.
  - bobthepanda 5y ago
    To that effect, it's also not uncommon for foreign companies to list in New York for the prestige, and because of much higher trading volumes. China was doing this until recently.
- nostrademons 5y ago
  I generally love Lyn Alden's writing but I think this is one of her weaker articles. Better long-term perspective can be found here: https://www.lynalden.com/fiscal-and-monetary-policy/ https://www.lynalden.com/fiscal-and-monetary-policy/ Along with a recent article (which I can't find - I think she takes them premium once they've been out for a while) where she said that the Fed is probably structurally unable to raise rates above inflation, but that won't prevent them from trying, and we can expect major stock market crashes each time they do. That's pretty much all you need to know: long term, the stock market is going to infinity because the dollar is going to zero (or at least, a value much less than today), but in the short term the stock market could easily see drops of > 50% because it is so heavily levered on zero interest rates right now. I'd say that the the biggest hole is that her writing ignores coupling of political risk and financial risk. (Probably out of necessity, given her audience. Investing is pointless when you can't enforce property rights.) Historically, when you get hyperinflation, you get disrespect for rule of law, civil disorder, collapse of infrastructure, and revolution in very short order. Commerce can't survive in these conditions, let alone finance. (This is one of the factors that accelerates inflation into hyperinflation - as predictability disappears, so does production, leading to even more scarcity.) Lyn's predictions exist in the uncanny valley where the petrodollar system collapses and the dollar loses its reserve currency status, but we still retain Internet access, orderly financial markets, bank accounts, property rights, and physical security. I'm not sure this is a given. Historically, transitions to a major new economic system inevitably require a war or at least a revolution, because the winners of the previous economic system will not give up without a fight. There's no guarantee that the new government will honor property rights guaranteed by the old one. (In fact, in most cases the new government explicitly strips property from the previous wealthy elite, and that's a major part of its appeal to the common people.)
  - md_ 5y ago
    Agreed, though I think the causality is a little more nuanced than that: political disorder tends to be a necessary component of bad central banking policy, and thus is a cause as well as an effect of hyperinflation.
  - stereolambda 5y ago
paulpauper 5y ago
2) If US corporate tax rates don’t keep going lower like they have been, that also takes away another lever that has contributed to their persistently strong performance. There seems to be less political and public appetite for more corporate tax cuts. This does not matter much. The likelihood of taxes going up are very slim. Biden and congress has shown little inclination to want to raise taxes. What matters more is that corporate profits are at record highs. Major tech companies are generating 30% margins vs. 2-4% GDP and CPI, and that is $ that must go to shareholders regardless, hence higher stock prices (because dividend yields are so low). Also, low interest rates and market dominance. Investors are paying a premium to own shares of companies are are bigger and more dominant than ever...less uncertainty of losing marketshare and hence profits to competitors means higher stock prices and valuations.
- panarky 5y ago
  > Major tech companies are generating 30% margins ... and that is $ that must go to shareholders regardless That's not how it works. Margins != net income != cash flow. And a company's cash flow does not necessarily flow to shareholders.
arcticbull 5y ago
It's really interesting watching the crypto talking heads repeat the same messages that William Devane uses at 2 am to sell gold coins to the Fox News "fell asleep in front of the TV" crowd. [1] It's all going to crash, this time it's different, buy my unproductive (or in Bitcoin's case, net negative productivity) asset. Generally structured as gish gallop to justify their preconceived notions of structural and societal collapse - and only they can save you, with this one weird trick. [1] https://www.youtube.com/watch?v=VVcdvT09qr4 https://www.youtube.com/watch?v=VVcdvT09qr4
- paulpauper 5y ago
  I'm way more bullish on big tech than bitcoin. MSFT and Google are always making news highs, bitcoin is 40% off highs.
  - arcticbull 5y ago
    Indeed, because they are productive businesses with revenues, cash flows, assets and most importantly, growth. Folks point to GOOG growing from $800/share 5 years ago to $2800/share today (3.5X roughly) as a sign of inflation, when of course their price to sales ratio has remained roughly constant (some delta for lower interest rates, higher leverage, cyclical trends, etc) and their revenues have grown and continue to grow exponentially. Up almost 3X since 2017. [1] [1] https://www.macrotrends.net/stocks/charts/GOOGL/alphabet/price-sales https://www.macrotrends.net/stocks/charts/GOOGL/alphabet/pri...
- jerry1979 5y ago
  I thought this article provided a fairly short and reasonable macro view on the United States equity market and its financial relationship with the rest of the world. I understand that Lyn Alden has favorable views on Bitcoin, but I didn't notice any mention of crypto or bitcoin in this article. Was there something about her analysis in this article that you felt led readers astray? edit I see that she included btc price in the overview next to oil and the 10-yr info.
  - paulpauper 5y ago
lumost 5y ago
> Equity valuations in general could simply become so high that the ongoing fund flows required to keep them up at these levels could become insufficient, especially as the Federal Reserve tightens its monetary policy in response to inflation. Upward momentum could turn into downward momentum, causing the marginal investor to shift away to other assets and other markets. I'd honestly be curious if the Fed would try to shore up fund flows to keep stock prices rising. It sounds like an awful idea, and effectively amounts to a naked "let's make up money and hand it to rich people" play. But is it really that different from bond purchases?
- tobltobs 5y ago
  "Yellen says Fed purchases of stocks, corporate bonds could help in a downturn" https://www.reuters.com/article/us-usa-fed-yellen-purchases-idUSKCN11Z2WI https://www.reuters.com/article/us-usa-fed-yellen-purchases-...
- boppo1 5y ago
  > let's make up money and hand it to rich people" play. But is it really that different from bond purchases In my (frankly, barely educated) opinion, this is exactly what bond purchases are. I think it's the main factor in the increase of wealth inequality since 2008.
imtringued 5y ago
Let it crash, I want to see some violence. Gotta teach those people with jobs a lesson by raising interest rates. It would have been more sensible to end the stock market with a land value tax but people want to see some blood. Especially their own.
skybrian 5y ago
It seems odd to single out Saudi Arabia for investing in US financial markets when many other countries are doing it too. Aren't their trade surpluses with the US a lot more than needed to fund their oil imports?
- pydry 5y ago
  The petrodollar does seem to be the lynchpin that holds it all together. If that part falters and oil importing countries stop treating oil as their most critical import then the decades long capital inflows would slowly turn to outflows as oil importing countries start hedging their import risks by selling American assets and buying up non american assets instead. And, a trickle of capital outflows could easily lead to a stampede for the exit. The US would probably exacerbate the crisis by raising interest rates.
  - skybrian 5y ago
    I kind of think the lynchpin might be that a company can make lots of money by selling things in the US? Then they have to decide what to do with the earnings. Maybe compare with US tech companies that have lots of overseas earnings. They don't necessarily have a better idea about where to invest the money. It's not like there is a plan to earn money in a certain country to achieve some other goal. It's that making money is good and figuring out what to do with it is a nice problem to have.
mercy_dude 5y ago
A much bigger issue that I keep seeing not getting enough emphasis is when the real rates go up US will have to keep raising their debt ceiling substantially to fund their debt (34 trillions and counting). If the last deb ceiling raising debacle was of any indication, this will be a very difficult political process in a rising rate environment, not to say US having to pay for interest expenses equivalent to another military when rates go higher by a mere 2-3% is not far fetched anymore at this level of borrowing. So something is got to give, either there is sovereign default which is unlikely or stagflation of some sort with rising rates, I don’t know. I just don’t think Fed is as independent as people would like to think they are. Also May be I am a moron but how does raising rates help the supply chain crisis when all else said that is what’s behind driving the inflation (at least that’s still the narrative from the administration and mainstream economists)? I mean if the expectations is Americans with their 2 trillion households savings are just gonna start shoring up their cash and stop spending because the rates went up by 75 basis point, I just don’t buy it. May be the Feds don’t want inflation expectations become embedded which I understand even though that seems to be the reality at least for a while till at least 2023.
- dmichulke 5y ago
  They'd gradually stop spending because they'd start saving or paying back their variable interest rate loan.
  - mercy_dude 5y ago
    > They’d gradually stop spending How though? Reducing spending on Social security or military, would be incredibly unpopular.
    - dmichulke 5y ago
      I'm saying households would do that. Not the government.
- boppo1 5y ago
  > that is what’s behind driving the inflation (at least that’s still the narrative from the administration and mainstream economists Some of us just don't believe this.
zbyforgotpass 5y ago
My brain dump on this: after USD become decoupled with gold it became a kind of measure of total USA production capacity (capital) - that is mostly equities and real estate. The Feds for now has all the levers to make it so - and make the equities and real estate prices go up smoothly. But it is also a reserve currency of the world - and with globalization this task is bigger and bigger and sucks in more and more USD while the US economy is smaller and smaller part of the global economy. That pumps US equities up (but according to the article not real estate) - and this is why the US equities are 61% of world equities while GDP is only 23%. This can stop in a rapid phase shift once people realize that USD is not such a safe asset any more. Gold bugs have been wrong for 50 years about that and nobody believes this any more - but actually 50 years is not that long for a world wide buffer to fill up. And this time is really different than 1980 because of higher US debt, smaller economy. The US debt will at some point become too big and Feds will not be able to defend USD (higher rates means more money goes into debt financing - and if the world stops buying that debt it goes into a self reinforcing loop)..
- baxtr 5y ago
  > This can stop in a rapid phase shift once people realize that USD is not such a safe asset any more. Why would they think it is not a safe asset and if so what would they do instead with it? Also: Why do you think this shift would be rapid like in a phase shift?
  - zbyforgotpass 5y ago
    The number one scenario - inflation starts, Feds raises rates, debt service costs raise => debt grows even more and at some point people realize that it cannot be paid back without too much inflation. Reinforcement in raised rates => depression and stock market crash => investors stop using US equities and real estate as value store. And Feds needs to raise rates - because of negative effective funds rate (https://www.lynalden.com/wp-content/uploads/newsletter-2022-1-real-rates.png https://www.lynalden.com/wp-content/uploads/newsletter-2022-...) - this is also something that people might not perceive for a long time - but then suddenly see it.
prakhar897 5y ago
Damodaran gave a neat insight on this. "Equities are expensive. Against what? History? We can't go back in time and buy stocks. If we take out money from stocks, where will we park it." Emerging markets exposes to forex risks. Real estate, gold, bonds does not give much returns, crypto is even more riskier. There is nowhere else for money to go.
- baxtr 5y ago
  It's the so called TINA effect. There Is No Alternative
- pydry 5y ago
  Asian equities? Emerging market equities?
  - baxtr 5y ago
    Risk is definitely higher with those.
  - prakhar897 5y ago
    As mentioned above, asian markets performs better but the currency also get devalued consistently which eats into the gains dollarwise.
- zbyforgotpass 5y ago
  """ If 10-year Treasury notes yield 5%, for example, and you want at least a 3% equity risk premium, then you’ll only invest in a stock if you think you can get an 8% annualized return or higher. However, if 10-year Treasury yields are 1.5%, and you still want a 3% risk premium, then you’re willing to pay a higher valuation, and thus accept a lower dividend yield and lower expected returns from stocks; even 4.5% expected annualized returns would be better than a 1.5% Treasury yield. """ That is from the article. But it only works if US assets are the only game in town.
- nightski 5y ago
  Equities are expensive against future earning potential. Simple as that. I agree though, there aren't a lot of alternatives at the moment. But you need either growth or dividends to earn on stock. Growth might become a lot harder in a rising interest rate environment and dividends are not a great return with current market levels.
vertak 5y ago
Regarding inflation: Ray Dalio has a bit in his latest book Changing World Order where he points out what nations/empires in the past have done when faced with similar situations that the US now finds itself in. When debt is high, and country fundamentals are decreasing (like internal stability, and global share of economic output) countries can either buckle down and take the austerity measures required to increase output + decrease the debt… or they can print more money to pay off the debt which leads to inflation. They almost always choose to print money. Get rdy for some events that haven’t happened in earnest for around 80 years.
- zby 5y ago
  Dalio has gathered quite a lot of data - but he fails to discuss one difference between those past empires and USA. In the past money was based on gold and debasing the currency was quite easy to spot. With pure fiat money there is no such clear measure to tell that it is inflated.
  - ur-whale 5y ago
    > With pure fiat money there is no such clear measure to tell that it is inflated. Especially if you read HN, where many people believe and will try to explain why currency debasement is a completely outdated idea, generally not applicable in our modern financial system.
    - lumost 5y ago
      I’ve been in a company heading for the layoff more than once. The final sign that it’s coming is a strange ossification of goals and thinking around ideas that more or less amount to “focus on every other data point other than the ones we’re failing at”.
  - didericis 5y ago
    I’m still reading that book, but he describes pure fiat as response to that kind of dynamic (people noticing the value of the debt being reduced relative to hard money and it being harder to sell). I believe he cited a couple other examples of pure fiat/lack of gold or hard asset convertibility, but don’t remember what they are. This wikipedia article mentions some examples: https://en.wikipedia.org/wiki/Fiat_money https://en.wikipedia.org/wiki/Fiat_money
mleonhard 5y ago
The simpler explanation for the disparity between US GDP and stocks is that the stock valuations are inflated. The market has corrected many times in the past. The article did not explain why the current bubble is different from previous ones. The article starts out with a mis-labeled graph. It says "For example, public US equities now represent about 200% of US GDP, which is an all-time high:" but the graph actually shows value of US equities in dollars. Here is the actual graph showing it in percentage of GDP: https://fred.stlouisfed.org/series/DDDM01USA156NWDB https://fred.stlouisfed.org/series/DDDM01USA156NWDB You can see that the stock market reached 146% in 2000 and 137% in 2007 before previous crashes. In 2017 it was at 153%. Presumably the author's 200% number is correct, but it's still not much higher than previous peaks. I expect the article contains other similar errors.

112 points by jger15 5y ago

I would love for someone to find holes in the reasoning in this article (my own Macro Econ skills are not that good). The author is a major voice in bitcoin circles (search their name with the word "bitcoin" or "crypto" on youtube). And I find it notable that they don't mention bitcoin or crypto anywhere in this post.

dustintrex 5y ago
Lyn is one of the more thoughtful crypto bulls out there (admittedly a low bar), and the following post with its updates shows how her thinking has evolved. https://www.lynalden.com/cryptocurrencies/ https://www.lynalden.com/cryptocurrencies/ TL;DR stance as of July 2020: I like it as a small position within a diversified portfolio, without much concern for periodic corrections, using capital I’m willing to risk.
- paulpauper 5y ago
  She always says small portion. That way if she is wrong it is not a problem, but can still take credit anyway if it works.
jadbox 5y ago
Just a few thoughts of my own. It seems to me that BTC is starting to more and more follow the trend of the S&P macro movement swings. As traders become scared of the stability of the future, they reduce their investment purchases (or sell) across all their speculative assets. This global 'market fear and exhuberance' may end up impacting BTC as much as it does wall street, compounded by automated cross-market bot trading that occurs. (I tend to follow behavioral economics)
- paulpauper 5y ago
  BTC is highly correlated with the S&P 500 to the negative and not to the upside. A good hedge shorting BTC and going long S&P 500.
  - dustintrex 5y ago
    Except that's next to impossible to short BTC without incurring major exposure to the crypto market as a whole in process. In other words, you can gamble that BTC will go down all you like in the wonderful world of DeFi, but if your gainzzz are in $random_shitcoin then the fiat value of that will also go down the toilet. The closest you can do is shorting BTC-adjacent regular stocks like MSTR, MARA, etc.
    - paulpauper 5y ago
      put options on BITO or sell calls
      - tobltobs 5y ago
        BITOs current holdings consists out of ~30% CME Bitcoin Futures, ~40% Treasure Bills and ~30% Cash. Why would that be a good proxy for Bitcoin?
invalidname 5y ago
Most of what she says in this particular article seems pretty on the money. It looks like the Biden admin is very aware of these things and trying to gently tame the stock market to bring it under control. The alternative is a bubble burst. I'm not sure if that's doable, but I don't see another option.
paulpauper 5y ago
I don't think it's a good source of investment advice. Endorsing Bitcoin for example is a major flag. She is being paid to promote bitcoin services. I see this as a conflict of interest. She makes assumptions that are wrong. like: The danger comes, however, if interest rates start going sideways, or even start going up, structurally. except that stocks rose in 2016-2017 even as interest rates were rising. Same for the 90s.
georgeecollins 5y ago
I am not sure I disagree but one thing I think is a little misleading is the comparison between the US havin 23% of world gdp and and 60% of world market capitalization. One small problem with that is that countries gdps are often compared by ppp (as in this case) and market capitalizations are compared in dollars. A more serious issue is that the US markets really represent much more than just the US economy. All the biggest corporations listed in the US have huge busnesses outside the US that count toward other countries GDP. I would guess WallMart is the most US based, but even they have stores in other countries. Apple is a US company that manufactures in China, buys important components in Asia and has employees and sells products all over the world.
- bobthepanda 5y ago
  To that effect, it's also not uncommon for foreign companies to list in New York for the prestige, and because of much higher trading volumes. China was doing this until recently.
nostrademons 5y ago
I generally love Lyn Alden's writing but I think this is one of her weaker articles. Better long-term perspective can be found here: https://www.lynalden.com/fiscal-and-monetary-policy/ https://www.lynalden.com/fiscal-and-monetary-policy/ Along with a recent article (which I can't find - I think she takes them premium once they've been out for a while) where she said that the Fed is probably structurally unable to raise rates above inflation, but that won't prevent them from trying, and we can expect major stock market crashes each time they do. That's pretty much all you need to know: long term, the stock market is going to infinity because the dollar is going to zero (or at least, a value much less than today), but in the short term the stock market could easily see drops of > 50% because it is so heavily levered on zero interest rates right now. I'd say that the the biggest hole is that her writing ignores coupling of political risk and financial risk. (Probably out of necessity, given her audience. Investing is pointless when you can't enforce property rights.) Historically, when you get hyperinflation, you get disrespect for rule of law, civil disorder, collapse of infrastructure, and revolution in very short order. Commerce can't survive in these conditions, let alone finance. (This is one of the factors that accelerates inflation into hyperinflation - as predictability disappears, so does production, leading to even more scarcity.) Lyn's predictions exist in the uncanny valley where the petrodollar system collapses and the dollar loses its reserve currency status, but we still retain Internet access, orderly financial markets, bank accounts, property rights, and physical security. I'm not sure this is a given. Historically, transitions to a major new economic system inevitably require a war or at least a revolution, because the winners of the previous economic system will not give up without a fight. There's no guarantee that the new government will honor property rights guaranteed by the old one. (In fact, in most cases the new government explicitly strips property from the previous wealthy elite, and that's a major part of its appeal to the common people.)
- md_ 5y ago
  Agreed, though I think the causality is a little more nuanced than that: political disorder tends to be a necessary component of bad central banking policy, and thus is a cause as well as an effect of hyperinflation.
- stereolambda 5y ago

paulpauper 5y ago

2) If US corporate tax rates don’t keep going lower like they have been, that also takes away another lever that has contributed to their persistently strong performance. There seems to be less political and public appetite for more corporate tax cuts. This does not matter much. The likelihood of taxes going up are very slim. Biden and congress has shown little inclination to want to raise taxes. What matters more is that corporate profits are at record highs. Major tech companies are generating 30% margins vs. 2-4% GDP and CPI, and that is $ that must go to shareholders regardless, hence higher stock prices (because dividend yields are so low). Also, low interest rates and market dominance. Investors are paying a premium to own shares of companies are are bigger and more dominant than ever...less uncertainty of losing marketshare and hence profits to competitors means higher stock prices and valuations.

panarky 5y ago
> Major tech companies are generating 30% margins ... and that is $ that must go to shareholders regardless That's not how it works. Margins != net income != cash flow. And a company's cash flow does not necessarily flow to shareholders.

arcticbull 5y ago

It's really interesting watching the crypto talking heads repeat the same messages that William Devane uses at 2 am to sell gold coins to the Fox News "fell asleep in front of the TV" crowd. [1] It's all going to crash, this time it's different, buy my unproductive (or in Bitcoin's case, net negative productivity) asset. Generally structured as gish gallop to justify their preconceived notions of structural and societal collapse - and only they can save you, with this one weird trick. [1] https://www.youtube.com/watch?v=VVcdvT09qr4 https://www.youtube.com/watch?v=VVcdvT09qr4

paulpauper 5y ago
I'm way more bullish on big tech than bitcoin. MSFT and Google are always making news highs, bitcoin is 40% off highs.
- arcticbull 5y ago
  Indeed, because they are productive businesses with revenues, cash flows, assets and most importantly, growth. Folks point to GOOG growing from $800/share 5 years ago to $2800/share today (3.5X roughly) as a sign of inflation, when of course their price to sales ratio has remained roughly constant (some delta for lower interest rates, higher leverage, cyclical trends, etc) and their revenues have grown and continue to grow exponentially. Up almost 3X since 2017. [1] [1] https://www.macrotrends.net/stocks/charts/GOOGL/alphabet/price-sales https://www.macrotrends.net/stocks/charts/GOOGL/alphabet/pri...
jerry1979 5y ago
I thought this article provided a fairly short and reasonable macro view on the United States equity market and its financial relationship with the rest of the world. I understand that Lyn Alden has favorable views on Bitcoin, but I didn't notice any mention of crypto or bitcoin in this article. Was there something about her analysis in this article that you felt led readers astray? edit I see that she included btc price in the overview next to oil and the 10-yr info.
- paulpauper 5y ago

lumost 5y ago

> Equity valuations in general could simply become so high that the ongoing fund flows required to keep them up at these levels could become insufficient, especially as the Federal Reserve tightens its monetary policy in response to inflation. Upward momentum could turn into downward momentum, causing the marginal investor to shift away to other assets and other markets. I'd honestly be curious if the Fed would try to shore up fund flows to keep stock prices rising. It sounds like an awful idea, and effectively amounts to a naked "let's make up money and hand it to rich people" play. But is it really that different from bond purchases?

tobltobs 5y ago
"Yellen says Fed purchases of stocks, corporate bonds could help in a downturn" https://www.reuters.com/article/us-usa-fed-yellen-purchases-idUSKCN11Z2WI https://www.reuters.com/article/us-usa-fed-yellen-purchases-...
boppo1 5y ago
> let's make up money and hand it to rich people" play. But is it really that different from bond purchases In my (frankly, barely educated) opinion, this is exactly what bond purchases are. I think it's the main factor in the increase of wealth inequality since 2008.

imtringued 5y ago

Let it crash, I want to see some violence. Gotta teach those people with jobs a lesson by raising interest rates. It would have been more sensible to end the stock market with a land value tax but people want to see some blood. Especially their own.

skybrian 5y ago

It seems odd to single out Saudi Arabia for investing in US financial markets when many other countries are doing it too. Aren't their trade surpluses with the US a lot more than needed to fund their oil imports?

pydry 5y ago
The petrodollar does seem to be the lynchpin that holds it all together. If that part falters and oil importing countries stop treating oil as their most critical import then the decades long capital inflows would slowly turn to outflows as oil importing countries start hedging their import risks by selling American assets and buying up non american assets instead. And, a trickle of capital outflows could easily lead to a stampede for the exit. The US would probably exacerbate the crisis by raising interest rates.
- skybrian 5y ago
  I kind of think the lynchpin might be that a company can make lots of money by selling things in the US? Then they have to decide what to do with the earnings. Maybe compare with US tech companies that have lots of overseas earnings. They don't necessarily have a better idea about where to invest the money. It's not like there is a plan to earn money in a certain country to achieve some other goal. It's that making money is good and figuring out what to do with it is a nice problem to have.

mercy_dude 5y ago

A much bigger issue that I keep seeing not getting enough emphasis is when the real rates go up US will have to keep raising their debt ceiling substantially to fund their debt (34 trillions and counting). If the last deb ceiling raising debacle was of any indication, this will be a very difficult political process in a rising rate environment, not to say US having to pay for interest expenses equivalent to another military when rates go higher by a mere 2-3% is not far fetched anymore at this level of borrowing. So something is got to give, either there is sovereign default which is unlikely or stagflation of some sort with rising rates, I don’t know. I just don’t think Fed is as independent as people would like to think they are. Also May be I am a moron but how does raising rates help the supply chain crisis when all else said that is what’s behind driving the inflation (at least that’s still the narrative from the administration and mainstream economists)? I mean if the expectations is Americans with their 2 trillion households savings are just gonna start shoring up their cash and stop spending because the rates went up by 75 basis point, I just don’t buy it. May be the Feds don’t want inflation expectations become embedded which I understand even though that seems to be the reality at least for a while till at least 2023.

dmichulke 5y ago
They'd gradually stop spending because they'd start saving or paying back their variable interest rate loan.
- mercy_dude 5y ago
  > They’d gradually stop spending How though? Reducing spending on Social security or military, would be incredibly unpopular.
  - dmichulke 5y ago
    I'm saying households would do that. Not the government.
boppo1 5y ago
> that is what’s behind driving the inflation (at least that’s still the narrative from the administration and mainstream economists Some of us just don't believe this.

zbyforgotpass 5y ago

My brain dump on this: after USD become decoupled with gold it became a kind of measure of total USA production capacity (capital) - that is mostly equities and real estate. The Feds for now has all the levers to make it so - and make the equities and real estate prices go up smoothly. But it is also a reserve currency of the world - and with globalization this task is bigger and bigger and sucks in more and more USD while the US economy is smaller and smaller part of the global economy. That pumps US equities up (but according to the article not real estate) - and this is why the US equities are 61% of world equities while GDP is only 23%. This can stop in a rapid phase shift once people realize that USD is not such a safe asset any more. Gold bugs have been wrong for 50 years about that and nobody believes this any more - but actually 50 years is not that long for a world wide buffer to fill up. And this time is really different than 1980 because of higher US debt, smaller economy. The US debt will at some point become too big and Feds will not be able to defend USD (higher rates means more money goes into debt financing - and if the world stops buying that debt it goes into a self reinforcing loop)..

baxtr 5y ago
> This can stop in a rapid phase shift once people realize that USD is not such a safe asset any more. Why would they think it is not a safe asset and if so what would they do instead with it? Also: Why do you think this shift would be rapid like in a phase shift?
- zbyforgotpass 5y ago
  The number one scenario - inflation starts, Feds raises rates, debt service costs raise => debt grows even more and at some point people realize that it cannot be paid back without too much inflation. Reinforcement in raised rates => depression and stock market crash => investors stop using US equities and real estate as value store. And Feds needs to raise rates - because of negative effective funds rate (https://www.lynalden.com/wp-content/uploads/newsletter-2022-1-real-rates.png https://www.lynalden.com/wp-content/uploads/newsletter-2022-...) - this is also something that people might not perceive for a long time - but then suddenly see it.

prakhar897 5y ago

Damodaran gave a neat insight on this. "Equities are expensive. Against what? History? We can't go back in time and buy stocks. If we take out money from stocks, where will we park it." Emerging markets exposes to forex risks. Real estate, gold, bonds does not give much returns, crypto is even more riskier. There is nowhere else for money to go.

baxtr 5y ago
It's the so called TINA effect. There Is No Alternative
pydry 5y ago
Asian equities? Emerging market equities?
- baxtr 5y ago
  Risk is definitely higher with those.
- prakhar897 5y ago
  As mentioned above, asian markets performs better but the currency also get devalued consistently which eats into the gains dollarwise.
zbyforgotpass 5y ago
""" If 10-year Treasury notes yield 5%, for example, and you want at least a 3% equity risk premium, then you’ll only invest in a stock if you think you can get an 8% annualized return or higher. However, if 10-year Treasury yields are 1.5%, and you still want a 3% risk premium, then you’re willing to pay a higher valuation, and thus accept a lower dividend yield and lower expected returns from stocks; even 4.5% expected annualized returns would be better than a 1.5% Treasury yield. """ That is from the article. But it only works if US assets are the only game in town.
nightski 5y ago
Equities are expensive against future earning potential. Simple as that. I agree though, there aren't a lot of alternatives at the moment. But you need either growth or dividends to earn on stock. Growth might become a lot harder in a rising interest rate environment and dividends are not a great return with current market levels.

vertak 5y ago

Regarding inflation: Ray Dalio has a bit in his latest book Changing World Order where he points out what nations/empires in the past have done when faced with similar situations that the US now finds itself in. When debt is high, and country fundamentals are decreasing (like internal stability, and global share of economic output) countries can either buckle down and take the austerity measures required to increase output + decrease the debt… or they can print more money to pay off the debt which leads to inflation. They almost always choose to print money. Get rdy for some events that haven’t happened in earnest for around 80 years.

zby 5y ago
Dalio has gathered quite a lot of data - but he fails to discuss one difference between those past empires and USA. In the past money was based on gold and debasing the currency was quite easy to spot. With pure fiat money there is no such clear measure to tell that it is inflated.
- ur-whale 5y ago
  > With pure fiat money there is no such clear measure to tell that it is inflated. Especially if you read HN, where many people believe and will try to explain why currency debasement is a completely outdated idea, generally not applicable in our modern financial system.
  - lumost 5y ago
    I’ve been in a company heading for the layoff more than once. The final sign that it’s coming is a strange ossification of goals and thinking around ideas that more or less amount to “focus on every other data point other than the ones we’re failing at”.
- didericis 5y ago
  I’m still reading that book, but he describes pure fiat as response to that kind of dynamic (people noticing the value of the debt being reduced relative to hard money and it being harder to sell). I believe he cited a couple other examples of pure fiat/lack of gold or hard asset convertibility, but don’t remember what they are. This wikipedia article mentions some examples: https://en.wikipedia.org/wiki/Fiat_money https://en.wikipedia.org/wiki/Fiat_money

mleonhard 5y ago

The simpler explanation for the disparity between US GDP and stocks is that the stock valuations are inflated. The market has corrected many times in the past. The article did not explain why the current bubble is different from previous ones. The article starts out with a mis-labeled graph. It says "For example, public US equities now represent about 200% of US GDP, which is an all-time high:" but the graph actually shows value of US equities in dollars. Here is the actual graph showing it in percentage of GDP: https://fred.stlouisfed.org/series/DDDM01USA156NWDB https://fred.stlouisfed.org/series/DDDM01USA156NWDB You can see that the stock market reached 146% in 2000 and 137% in 2007 before previous crashes. In 2017 it was at 153%. Presumably the author's 200% number is correct, but it's still not much higher than previous peaks. I expect the article contains other similar errors.