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I'm going to explain what has happened so far. What happens next entirely depends on how inflation continues and the feds reaction. 1. We had zero percent inte

by fny 4y ago

I'm going to explain what has happened so far. What happens next entirely depends on how inflation continues and the feds reaction. 1. We had zero percent interest rates. This causes the value of assets with cash flows out into the future (think speculative tech, Tesla) to accelerate. 2. We had massive herding in megacap tech. These valuations are high in part because for a decade you would not have beat the index without having these names in your portfolio. 3. These valuations blew up even further because of call squeezes during the 2020-2021 bull. Tesla even managed to get itself into the S&P. 5. Then in December, the megacaps we're squeezed further until the S&P 500 had a negative return relative to price! A lot of this occured because people remained under the impression that bond yields would never normalize. Now that they have, there is a risk free alternative to stocks. Now for the next complications: Ukraine + Russia, economic war with China, inflation, how the fed will respond, gas prices. If inflation continues and the fed becomes aggressive with hiking, all assets are dead. Bonds will be wrecked, stocks will be wrecked, cash is wrecked, even gold (depending on how aggressively they hike) will be dead because it's actually a really good deal to buy bonds when they yield north of 10% (if we get there). Say the fed decides not to hike as aggressively and inflation slows, then you'll be holding the S&P 500 likely for yield than growth. In the case of a recession or further inflation, that yield may be at risk depending on the sectors you're invested in. In this context the correction in names like Target make perfect sense. The dividend was near zero at it's price before the cut. Same thing happened in a company like Newmont mining.

pmorici 4y ago
Tesla is a poor example of speculative tech. From 2019 to present they went from losing money to substantial and growing profitability. Better example would be things like Peloton, Beyond Meat, or Robinhood who all had sky high stock prices and have yet to turn a profit.
- raffraffraff 4y ago
  I don't understand the US stock market, re: Beyond Meat. It's a fucking recipe. Where I live in Ireland there a dozen different fake-meat brands, and they're even getting competition from supermarket "own brand" products (burgers, sausages etc). Don't get me wrong, beyond meat isn't a bad product, but how the hell is a recipe and a few business deals worth IPO and wild speculation? What do they have beyond, uh, fake meat recipe?
  - michael1999 4y ago
    What is Coca-Cola besides a recipe, a brand, and some business deals?
    - raffraffraff 4y ago
      Exactly. I don't get it.
freediver 4y ago
> that bond yields would never normalize. Now that they have, there is a risk free alternative to stocks. Treasury bond yields are 3%, inflation is 8.5%, so in real terms you are guaranteed to lose 5.5% annually if you hold bonds. Or basically instead of risk-free gain you are holding gain-free risk.
- nradov 4y ago
  The longer term TIPS have positive yield in real terms. https://home.treasury.gov/policy-issues/financing-the-government/interest-rate-statistics https://home.treasury.gov/policy-issues/financing-the-govern...
- abirch 4y ago
  The good news is the US Government doesn't have to pay back 5.5% of its debt. Unfortunately the spending keeps increasing.
  - hackernewds 4y ago
    Yet the government keep spending like debt isn't high ($40B to Ukraine aid) and ignoring causes of inflation for political gain (Biden tweeted: it's time to for corporations to pay their share to bring down inflation)
    - abirch 4y ago
      I'm not a Bezos fan in general but his response to Biden's tweet was spot on. https://www.twitter.com/JeffBezos/status/1525309091970699265 https://www.twitter.com/JeffBezos/status/1525309091970699265
      - thawaya3113 4y ago
        I disagree with Biden’s tweet and Bezos’s tweet. I personally believe that the vast majority of the inflation we are seeing today has nothing to do with government debt/deficits, so the government reducing its deficit will have minimal impact on inflation. However, a lot of people do believe, or at least claim to believe, that inflation is almost entirely being driven by government deficits, in which case corporations paying more in taxes would certainly have an impact on inflation, so tying the two together is certainly not misinformation, and if this view is correct, then it will reduce inflation.
fddhjjj 4y ago
Very clearly explained recent history. Thank you. > Then in December, the megacaps we're squeezed further until the S&P 500 had a negative return relative to price! What does this mean? What is negative return relative to price?
- SnowHill9902 4y ago
  OP can clarify what they meant but I understand it as: sum return_i/yield_i - price < 0
  - nuclearnice3 4y ago
    I don't follow your equation. https://ycharts.com/indicators/sp_500_monthly_return https://ycharts.com/indicators/sp_500_monthly_return Yours is unweighted, but return of the S&P in Dec 2021 4.36% The dividend yield about 1.37% The price ~4600. 4.36/1.37 - 4600 indeed very less than zero. The relationship means nothing to me. I must be getting this all wrong.
    - SnowHill9902 4y ago
      It’s the sum over all periods into the future.
      - nuclearnice3 4y ago
        How do we get the returns or dividend yields for future periods?
    - HFguy 4y ago
      I've been at top HFs the last 15 years, I do this for a living, and I have no idea what the guy is talking about either.
abirch 4y ago
1. Zero Percent interest rates doesn't necessarily cause a bubble. It's the excess liquidity in the market that causes the bubble (too many financial assets chasing real assets).
- Spooky23 4y ago
  One drives the other.
  - abirch 4y ago
    I thought that the liquidity was driven by the money multiplier and the Fed's quantitative easing. If the fed set the interest rate at 10% but put in 20 trillion dollars into the economy there'd be bubbles everywhere.
    - atq2119 4y ago
      Why would they be able to put 20T$ into the economy at a 10% interest rate? Who are the counterparties? In other words, who is taking those loans in your mind?
      - abirch 4y ago
        The Fed can buy mortgage backed securities like they have done since they've started quantitative easing. The Fed has purchased Apple bonds. This is in addition to US Treasuries. My original comment was a mechanics related comment in which liquidity (credit + cash) pushes up asset prices and not rates (although there's high correlation especially in the past 20 years in the US). This is based on my understanding of Ray Dalio. https://www.youtube.com/watch?v=PHe0bXAIuk0 https://www.youtube.com/watch?v=PHe0bXAIuk0
        atq2119 4y ago
        The volume of mortgage backed securities is based on the volume of loans that people take. At higher interest rates, people take out fewer and smaller loans. The Fed buying up more MBS would put downwards pressure on interest rates, which would be diametrically opposed to their goal (in your scenario) of maintaining high interest rates. There is a correlation between liquidity and rates, but it's an inverse correlation. That's Open Market Operations 101. Besides, if your macroeconomic goal is to reduce inflation (which is the reason for raising interest rates in the first place), one subgoal should be to reduce the volume of loans that are being issued. After all, bank-issued loans are new money, which adds to demand, which helps prop up inflation. That's Monetarism 101.
tempsy 4y ago
Target shocked investors because not only did they suffer from rising costs due to inflation that they are currently subsidizing by not meaningfully raising prices but because they reported rising inventory in discretionary spending categories as consumers pull back likely due to higher prices they are facing nearly everywhere. This has more to due to impact of inflation and less so just a function of a dividend and rates.
- nemo44x 4y ago
  Credit card debt is extremely high right now and subprime loan defaults are rising fast. In essence, a lot of people are tapped out.
  - djbusby 4y ago
    Credit Card report https://www.newyorkfed.org/microeconomics/hhdc https://www.newyorkfed.org/microeconomics/hhdc New all time high
    - heartbreak 4y ago
      The relevancy of a report from February 2020 is…not great.
      - djbusby 4y ago
        My bad, wrong link, I've updated.
        ac29 4y ago
        Your current link says "Credit card balances declined by $15 billion"
        shrikant 4y ago
        > "Credit card balances declined by $15 billion, in line with seasonal trends typically seen at the start of the year, but are still $71 billion higher than in 2021:Q1, representing a substantial year-over-year increase."
Proven 4y ago
[dead]
throwaway_1928 4y ago
> Bonds will be wrecked, stocks will be wrecked, cash is wrecked, even gold What will happen to the housing market?
- don_neufeld 4y ago
  Expect a steep drop. Leverage is much more expensive (from sub 3% mortgages, we already have 5%+ rates), which means buyers can afford less, plus significant withdrawal of “cash” buyers from the market who were really just borrowing against their (now much smaller) equity positions. I wouldn’t want to be in a forced sale position anytime soon.
  - tempsy 4y ago
    5% for a 30 year mortgage is not really that high historically speaking. The problem is more that prices are very high and supply remains very low.
- zhdc1 4y ago
  Anything from nothing to a small correction. Mortgage payments set a ceiling on how high property prices can rise. However, people seem to be willing to spend more on mortgage payments than they probably should, so it’s likely that this ceiling hadn’t been reached yet. The other factor is simple supply and demand. A large factor in 2008 was a large inventory of housing that came on the market. As far as I’m aware, there is no current corollary in the US now.
  - toomuchtodo 4y ago
    I would like to qualify this. This is true in markets where labor is the majority purchasers. In markets like the sunbelt, where retirees are moving and buying properties with a combination of cash, previous real estate equity, and retirement assets, mortgage payments don’t restrict home prices. This crowds out anyone who does need financing to buy their home, especially as interest rates rise and inventory remains low.
- nemo44x 4y ago
gitfan86 4y ago
This sounds a bit like doom and gloom. While I don't disagree, it is important to look at AMZN after the dot com bubble burst. Traders fled, but people who believed in the company did very well.
- MikePlacid 4y ago
  > Traders fled, but people who believed in the company did very well. Yep, I did well, and I loved to show people AMZN stock price graph, like “can you identify the dot-com crash here?”. But I believed in the company then. Big question is: should I believe in the AMZN now? Personally, I’ve stopped using Amazon when they started to support censorship - I’ve grown up in a totalitarian country and things likes censorship are revolting to me. I never suffered after leaving Amazon using Walmart for goods delivery and B&N for books. So Amazon is not unique and irreplaceable anymore. So, let’s ask people who continue to use Amazon - how the company is doing these days? Do you think it will go on growing?
  - gitfan86 4y ago
    Good questions. Can they maintain the high performance culture without large stock compensation? The best option I see following a similar path is TSLA. They currently have 2% of us auto sales. The energy business is tiny, AI/FSD is controversial, but if it works it will be worth a lot.
    - seanp2k2 4y ago
      My question for TSLA bulls is how much of that future is already priced in? I have a hard time believing that it will 10x again.
      - gitfan86 4y ago
        The goal is to sell 20M vehicles in 2030. They sold 0.93 in 2021. They are planning on Insurance,Energy,AI each to more than 10x. P/E is 40 currently. Historically very large companies have had P/E between 4-30. So the question is what is Tesla's earnings in 2030 and what will average P/E be across all large companies.
Vaslo 4y ago
While your points are very solid, the first point may be overweighted. I can see why some naive in stocks may weight lower on lower rates, i can tell you as someone in corp finance we never adjusted our risk rates (weighted average cost of capital) below 12% (which is what they have been 5-7 years ago. These types of downturns are modeled in. Yes there are some cowboys that aggressively drop these rates, but it’s very risky. We are seeing some folks suffer now because of this and more soon for sure.
- HFguy 4y ago
  What? Rates matter. A lot. If you are in some corp fin job and you discount projects at 12%...fine. But saying they don't matter for equity valuations doesn't make sense. The evidence, not just lately, but throughout the last 100 years is overwhelmingly that they matter.
chmod600 4y ago
I motice that you left out real estate from your analysis. RE is interesting because it's both an asset as well as something you can use. So if there's general inflation, it's got both upward pressure (because it's an alternative to rent from a consumer standpoint) and downward pressure (because bonds are an alternative to RE from an investment standpoint).
- hackernewds 4y ago
  RE is at massive peak levels already though that buyers cannot shell out those prices, esp as mortgage prices go up.
  - rcpt 4y ago
    Government is doing everything it can to prop up the assets of voters. MBS bailouts haven't stopped, Biden housing plan is all about subsidizing buyers, mortgage forbearance is as much as ever. Will it work idk but if there's one thing the state is scared of it's voting boomer homeowners.
  - architravesty 4y ago
    Worst part is the utterly absurd shortage means RE is never going to meaningfully dip for any period of time without serious structural reforms. The focus on interest rates as the main RE driver is almost completely cope and I wish I could believe it. Low-rate mortgages certainly aren't helping, but they're "not helping" in the same way that hucking an armload of kindling into an already-raging house fire is "not helping". I'm cautiously optimistic that societal unrest from this will eventually forcibly neuter local zoning controls but short of that we're just going to keep subsidizing demand and kicking the can down the road as if people don't need places to live.
    - ethbr0 4y ago
      Local zoning codes change on the order of decades. That will take a long time to play out.
EGreg 4y ago
Why would bonds and cash be wrecked? You even say that bonds would be a good deal
- 55555 4y ago
  Cash would be wrecked due to inflation. However it should be less wrecked than other asset classes in the short term. I know nothing about bonds so I also hope they reply.
- chmod600 4y ago
  I think the idea is that bonds at higher rates are a better alternative ("better deal") compared to cashflow from an asset. But if you actually buy that bond, and the rates keep going up, then new bonds will be an even better deal than the bond that you bought, and so to sell it you'd need to sell at a discount ("wrecked"). I feel like this misses a sense of scale. Sure, everyone loses, but some choices must be superior to others in a rising-rates environment.
- ironSkillet 4y ago
  Previously purchased bonds will decline in relative value. E.g. say you bought a 10 year corporate bond a couple years ago, say at 2% interest. Newer bonds will be issued at a much higher yield to be attractive in a higher fed rate/inflation environment, making all these old bonds lose value in comparison.
cyberge99 4y ago
We also had a previous US administration handing out cash like candy in the form of stimulus checks.
- CyanLite4 4y ago
  That was “only” a few hundred billion. It pales in comparison to the $9 trillion in QE over the past decade given to the largest banks.
  - hackernewds 4y ago
    That doesnt add up. An inordinate amount of money was printed in the last 2 years (up to 25% of the supply[1] [1] https://www.cityam.com/almost-a-fifth-of-all-us-dollars-were-created-this-year/ https://www.cityam.com/almost-a-fifth-of-all-us-dollars-were...
  - Aunche 4y ago
    First of all, the entire stimulus was $4.5 trillion, and most of it was allocated to handouts. A lot of the handouts were necessary, like expanded unemployment, but others were complete wastes of money, e.g. giving checks to families making 6 figures or forgiving loans for billion dollar "small businesses." Second of all, QE isn't money given to the banks. When we have a deficit, the government sells bonds to banks. "Naturally" this would drive up interest rates for businesses because unlike the government, they can't issue an infinite number of IOUs and have to compete for a limited amount of liquidity. If interest rates rise too much, businesses will be forced to shut down, especially when people spend less money during a pandemic. Quantitative easing is a tool that allows the Fed to lower interest rates purchasing by these bonds back from the banks. The more debt the government issues, the more debt the Federal Reserve needs to purchase in order to lower interest rates. Basically, the root of the problem is that Congress is incapable of balancing a budget.
    - ModernMech 4y ago
      > but others were complete wastes of money, e.g. giving checks to families making 6 figures Remember that the cutoff for stimulus was from prior year's taxes. This means you could have been making 6 figures in 2019, and then be making significantly less due to covid job loss or reduction when stimulus was handed out. As a matter of fact, stimulus helped my family greatly even though we made 6 figures in 2019. So following through on your claim would have meant my family suffering. YMMV.
ryanSrich 4y ago
How does inflation slow if rates aren’t hiked? Isn’t the only means of combating inflation raising rates?
- drdec 4y ago
  Just because raising rates is the tool of choice for central banks to fight inflation doesn't mean it is the only thing that affects inflation. E.g. if supply chains were restored and suddenly there was a lot more product to purchase that would cause prices to fall.
- OrvalWintermute 4y ago
  Some rates are already rising. My HCOL region is seeing a big change in the RE market as Mortgage interest rates hit >5%
vintagedave 4y ago
So for non-finance-experts, what should we be doing with our money? Investing in what? Keeping in the bank? It sounds from your comment like there is _nothing_ that won't be devalued, even gold. Is real estate worthwhile? (Note: I am in the EU not US.)
- deleted 4y ago
  [deleted]
- ptero 4y ago
  If you think that there is some major economic turmoil ahead with dropping asset values across the board (and I personally this is fairly likely), the general advice is to aim for a positive alpha. That is, if you are moderately well off or better, invest to "go down less than your neighbors". Assets across the board lose value, but if at the end of the fall you preserved a higher fraction of your money to invest than your neighbors and are willing to pick the best assets after the collapse you can reap huge benefits. The counter argument to this is that the above approach absolutely requires an iron discipline. And without experience non-professionals are prone to making very costly mistakes (e.g., invest on feelings, double down inappropriately, etc.). So, a general audience advice is usually: do not invest money you need within 5-10 years and do not make rash decisions; it is better to ride this train down and then hopefully back up than jump randomly. And diversify (across countries, economies, asset classes, etc.). Just my 2c; not an investment advice!
  - nradov 4y ago
    The general advice is always to aim for a positive alpha. No investor aims for a negative alpha, regardless of the economic climate.
    - etrautmann 4y ago
      Yes, but it's unclear how to intersect this with a reasonable tax strategy for many retail investors. i.e. do I sell everything and pay capital gains or sit?
    - 4y ago
TekMol 4y ago
there is a risk free alternative to stocks How is holding a bond risk free? It is a promise to give you a certain amount of money at a certain time in the future. The value of that money depends on how scarce it is. The government constantly raises and lowers that scarcity at will. Sometimes the government decides to double the supply in just a few years: https://fred.stlouisfed.org/series/BOGMBASE https://fred.stlouisfed.org/series/BOGMBASE So it seems highly risky to me.
- kube-system 4y ago
  “Risk” usually refers to default risk in financial terms. T-bills are generally considered to have zero default risk. The inflation for two different assets traded in the same currency are equal, so there’s not much of a comparison to be made there.
- senthil_rajasek 4y ago
  >How is holding a bond risk free? No asset is risk free. Bonds are a relatively less risky asset. >The government constantly raises and lowers that scarcity at will. Nope. Notes, Bills, Bonds are auctioned.
  - TekMol 4y ago
    The FED can buy bonds in an auction at will. Because it prints the money to do so. It's not like the FED goes "Uh oh, those bonds are too expensive for me".
    - senthil_rajasek 4y ago
      It's a recent phenomenon. During the covid crisis the fed became a buyer of last resort. It's not usual.
      - TekMol 4y ago
        Maybe it's the new normal? Just like doubling the money supply every couple of years seems to be the new normal since it started in 2008?
tootie 4y ago
It seems to me that with the pandemic ebbing, that the only systemic shock going on right now is the war in Ukraine. Russia can't sustain either its offensive or its separation from global fuel markets for very long without collapsing. Developed economies aren't sitting on giant piles of toxic assets or collapsing consumer demand and employment is still sky high. I don't see how this goes much beyond an asset correction. We've only seen companies floating on untenable valuations get hurt thus far and it seems unlikely that will be a contagion to the rest of the economy.
- AnotherGoodName 4y ago
  That's a big one though. It hits food and energy prices which are very fundamental.
Apocryphon 4y ago
> even gold And for now, even crypto?
lamontcg 4y ago
This has all happened before. In 1998 Greenspan cut rates due to the Asian financial crisis and worries over Y2K which blew up the dot com bubble. Then they slashed rates down to nearly ZIRP and held them low which blew up the housing and finance bubbles that deflated in 2008. None of this started in 2008. What is different this time is the wage inflation and the unionization drives that we're seeing. The Fed is likely to hike rates much more aggressively in order to stop that from taking off. When you talk about inflation, though, asset prices and commodities don't matter anywhere near as much as wage inflation. And wage inflation is high due to the low number of job seekers, likely a result of other factors like death and disability due to the pandemic removing workers from the workforce and boomers retiring. As a result the rate hikes are likely to be more severe and the downturn is likely to more severe. I would be worried that this downturn looks more like a depression than a recession. Of course it may just unwind as before and as the economy pops they slash rates and do ZIRP and the rich people buy up even more of the economy and the cycle continues. I think there's a good chance the average Millennial gets pretty decimated by the next downturn and crypto should get tested and there's a pretty good chance that the Ponzi all unwinds and goes to zero (which will destroy all the Millennials using crypto as a 401k). I'm still not sure that crypto has gone up enough so that a few billionaires couldn't rescue it and keep the game running though. I still think we're going to see a relief rally short term though and that the downturn won't really take off until 2023/2024 when the yield curve inverts. We're not quite there yet. We've also had prices being out of whack with fundamentals for decades, that is also nothing new. Also don't go predicting hyperinflation or raising long rates. That has been predicted for decades as well, and it never happens. The Fed raising rates is designed to cause a recession and disinflation. Long rates won't rise and long-term inflation will remain contained. We're not in the 70s and we're not going back to the 70s. The thing to be MOST worried about is political. Since the 2008 crisis there's been a rise of people who just seem to want the system burn and where they won't bailout the system in the event of a financial crisis. That increases the chances that the economy could really lock up and institutions could fail. There are a lot more crazies in power. At some point the cyclical game that we're in with engineered recessions, low rates, low risk premiums, cheap money, insane valuations, asset bubbles, etc has to break. I think its way too soon to call it as broken though. The commodities inflation that we're having right now is not that unprecedented (and a lot of it is ultimately transient and due to bullwhip effects) and the Fed is showing that they're going to take action to stop it. That means that we're likely to just have another recession then another long period of ZIRP and asset bubbles and crazy valuations continuing again.
shrimpx 4y ago
> there is a risk free alternative to stocks Really? 2.5% bonds in a 7% inflation environment is an attractive bargain? This part didn’t compute: > Bonds will be wrecked […] because it's actually a really good deal to buy bonds when they yield north of 10% (if we get there).
- mellavora 4y ago
  bonds aren't currently yielding north of 10%. If they are currently at 2.5% (using your number, not to pick on you, but it is what I have at hand), then move to a 10% yield, the people who bought at 2.5% get a haircut.
  - shrimpx 4y ago
    Got it, thanks!
- jdkee 4y ago
  I-bonds. See https://www.wsj.com/articles/series-i-savings-bonds-what-you-should-know-11652834560 https://www.wsj.com/articles/series-i-savings-bonds-what-you...
polynomial 4y ago
> Bonds will be wrecked, stocks will be wrecked, cash is wrecked, even gold I'm sorry to be that person, but what sort of effect if any might that have on crypto markets?
- pas 4y ago
  people withdraw into conservative assets (relative to what they have their future outgoing cashflows, ie. if they have to pay for food in dollars, they'll hold dollars to minimize risk of exchange rate shifts) and to cause a dam burst it's enough for a trickle of retail investors to start doing this. and .. bam. you saw the last few weeks. (as others notice that there's less and less chance of making money they also withdraw to minimize risk)
lvl102 4y ago
Speaking as someone who experienced both the dot-com crash and the financial crisis from ground zero, this feels nothing like them. I did not see widespread risk taking across the board. A lot of Gen Xers, such as myself, almost instinctively recognized current bubbles and either steered away from them or played them as such. People are also a lot more financially savvy. Even if people made leveraged bets, they leveraged with options instead of loans which meant they didn't lose more than what they committed. Sure, some parts of crpyto is very fluffy but I still don't think it is all that widespread. I think a lot of people calling for a great crash will be disappointed this time around.
- plonk 4y ago
  Cryptocurrencies have huge market caps though. If they crash (like the Luna disaster last week), that has to have some kind of impact, right?
  - lvl102 4y ago
    I really think it’s insulated especially compared to the housing market collapse. This is because most banks will not take your crypto as 1:1 collateral whereas housing was perceived to be nearly risk-free. A big difference. I am not saying we are not in an asset bubble. But it would be a mistake to draw simplistic comparisons.
runeks 4y ago
> 1. We had zero percent interest rates. This causes the value of assets with cash flows out into the future (think speculative tech, Tesla) to accelerate. You’re on to an important point, but your statement is inaccurate. Firstly, it’s a fall in the rate of interest that is equivalent to a rise in the present value of a future cash flow. And vice versa. Notice this has nothing to do with “high” or “low” interest rates (whatever that means, exactly), but a change in the rate of interest. Secondly, this is not related to speculative stocks. All companies with an expected future income are affected by this, ie. almost all companies in existence.
zby 4y ago
If they hike the rates too much then debt servicing would be costly. This is different from 1980, because back then US gov debt was about 30% of GDP and now it is 120% of GDP (https://fred.stlouisfed.org/series/GFDEGDQ188S#0 https://fred.stlouisfed.org/series/GFDEGDQ188S#0) What are the realistic values here? I have no clue, but a good analysis should cover this.
- deleted 4y ago
  [deleted]
- kyrra 4y ago
  This is one one of the ways to fix the economy in times like this requires congress to reign in spending. It's not just on the Fed to try to fix things, both sides of the equation need fixing.
- credit_guy 4y ago
  > If they hike the rates too much then debt servicing would be costly. The Fed doesn't care about the cost of servicing the debt. That's the US Treasury's job. By law, the Fed has the dual mandate to keep both inflation and unemployment low. That's it. Nothing to do with the cost of servicing the Government debt. If the interest on the Government debt becomes too high, nobody will point the finger at the Fed. If however inflation is high (like now) or unemployment high, you can start hearing people accusing the Fed of gross negligence. In the extreme, the Chairman of the Fed may be sacked, then brought in front of various Congressional investigations, and may even find himself in contempt, or some other very unpleasant situation. Bottom line: the Fed really cares about inflation, and doesn't give a damn about debt servicing.
  - fny 4y ago
    I don't buy this argument. There are good arguments to the contrary which Jerome can bring up and has at previous hearings. Say demand quiets but the price of inelastic goods (gas and food) continues to skyrocket due to greater demand from developing nations who demand more resources to have a better standard of living. How will hiking to 10% fix anything? Sure you'll kill demand, but you'll also kill financing supply which will only exacerbates the issue over the long run. We need more drilling, more refining, more farming now that Russia is out of the picture and the Saudis are playing games. Hiking too far is actually a horrible policy choice, and Powell can make a cogent argument about it: he already has mentioned this in hearings. You can't address supply related constraints with higher rates. At some point, they might justify capping rates to finance the needed supply, and that argument smells like the yield curve control of the 1940s. I suspect this argument will become more palatable if we have high unemployment and high inflation. [0] I have a feeling whatever policy rate they pick will aim to be slightly sub neutral (negative real rates) as they pray inflation resolves itself, while constantly pointing out they have no control over whether Brazil has a successful wheat harvest. [0]: https://libertystreeteconomics.newyorkfed.org/2020/04/how-the-fed-managed-the-treasury-yield-curve-in-the-1940s/ https://libertystreeteconomics.newyorkfed.org/2020/04/how-th...
unicornmama 4y ago
In the hike case cash would not be wrecked. It is paradoxically a good position to hold cash. Consider this. When they hike rates you can roll very short term treasuries, and you can buy assets on the cheap.
cup_of_joe 4y ago
"If inflation continues and the fed becomes aggressive with hiking, all assets are dead." This sounds incredibly short-term-oriented and alarmist. Dead is a word to describe the end of something's existence. Market turbulence is not a novel occurrence, nor are unsustainably inflated economies driven by cheap money and speculation.
- draw_down 4y ago
- fny 4y ago
  At 10% rates I think the fair value of the S&P becomes something like 2000 assuming the same earnings. High yield rates would moon and tons of bankruptcies would ensue. Consider how heavily pensions and retirement accounts are concentrated in stocks. The ramifications of reaching a point like that would be devastating, so yes, I think dead is not alarmist but appropriate.
  - scarab92 4y ago
    That's only true if investors think the 10% rates are permanent. Future interest rates are a time series not a single value, and I suspect most will use a lower rate in later years reflecting some mean reversion.
    - qq66 4y ago
      But you can lock in rates for decades.
    - MR4D 4y ago
      A 10% rate on a 30-year treasury, is for all intents, permanent. Think of it this way - a person buys a 30-year bond yielding 10%. Then, for the next 30 years, no matter what happens to interest rates or prices, they will earn a 10% return on their original bond purchase, risk free. Remember also that 30 years is approximately your adult working life, so a really long time that people tend to think of a “permanent”. Is it truly permanent? No, but for purposes of discussion and financial planning, it’s close enough.
dustingetz 4y ago
hey, reduced income inequality at least! (all that wealth is fake zombie wealth anyway right?)
D_Alex 4y ago
>a risk free alternative to stocks I'm pretty sure Russia disagrees, and it remains to be seen how China and other foreign holders of US treasuries will look at US (and other foreign) bonds in the future.
lumost 4y ago
It’s worth bearing in mind that the experience of those living through your extreme scenario will vary greatly based on age. Someone just starting their career benefits from cheap assets, high rates mean down payments will probably be cheaper, stock declines don’t matter if you don’t hold stocks. High inflation means their wages relative to debts such as student loans or first mortgages will increase. Retirees with fixed incomes might get crushed. These folks were pushed into stocks and alternatives due to low interest, declining assets remove income and high inflation reduces the real value of the income. There are a lot of people in between who will experience churn. However given the current demographics of the US, having two groups experiencing different versions of the economy will pose political as well as economic challenges.
noduerme 4y ago
I wonder to what degree generational culture plays a part. My father, for example (born pre-WWII), would never buy growth stocks. Not even when he was young. He bought only dividend yielding stocks, reinvested 100% of the dividends and never sold anything until his retirement. My generation (X) has a more balanced approach, with a mix of growth and value stocks dependent on risk tolerance, trending toward value stocks the older we get. Moreover, a lot of us learned some hard lessons from the first internet bubble. Granted that they're still younger and should be in a more risk-tolerant phase of life, but what I see in Millennials, and Gen Z especially, is a culture of growth-only, with no interest in boring old investments that are intended to earn and build value over long timescales. I think at least some of this has to do with the gamification of investing; in my Dad's time, a normal person couldn't just sit at a brokerage and watch a stock ticker all day. Free trading has intensified it by removing the barriers to full-time gambling. Remember that Millennials are a much larger generation and we're just still early in the period when they're growing wealth; I wonder if what we're seeing isn't the beginning of what it will take to change the culture... or if we'll continue to see endless bubbles because the steady-as-she-goes, long term investment mentality is just disappearing in the face of permanent FOMO. Sure, it's not glamorous, it won't make you a millionaire overnight, but that's really not what investing your savings should be about.
- rcpt 4y ago
  For young people betting on the far future looks just as crazy as GME calls
  - noduerme 4y ago
    Yeah, I get that. And that's natural. But if a huge population swell is accustomed to treating the market as a get-rich-quick casino, the market stops serving its purpose and I guess we're in for a really bad series of shocks.
    - SgtBastard 4y ago
      The scary thing for me is the 2nd order effects of this activity as companies try to act increasingly like meme stocks to boost share price and abandon all pretence of P/E ratios and profitability.
simonebrunozzi 4y ago
> Bonds will be wrecked Why? Also, isn't it in contrast with: > it's actually a really good deal to buy bonds when they yield north of 10% (if we get there).
- somebodythere 4y ago
  It's not in contrast. They are saying bonds will be wrecked (prices go down, yields go up), causing them to become a good deal in the future.
  - simonebrunozzi 4y ago
    Ah, got it.
jliptzin 4y ago
If inflation continues hot don’t stock prices eventually have to go up though? If Apple raises the price of iPhones 50% because its input costs went up 50% and (assuming sales remain the same, I’m only talking inflation, not a depression), then they’re making $9/share instead of $6/share so unless people think Apple at a 15 PE is overvalued its share price would go up.
mercy_dude 4y ago
After this episode, I strongly believe Fed should be ended. They have established a very poor track record on managing monetary policy and consequences and at this point basically have zero public trust. Since Greenspan Fed has been an absolute disaster. They hiked too little, too late. Now there is no such thing as soft landing as they are espousing just as their messaging around the whole transitory inflation thing. Institutions such as Fed are now completely detached from their mandate and instead under bureaucratic capture devoid of any meritocracy. There is a revolving door between Fed officials and Banks/capital management firms. Bernanke, Powell, Kashkari, Yellen, Brainard - these are poster children of corrupt kleptocracy with revolving door arrangements between Fed and firms like Citadel, Goldman, Pimco. At least Bernanke had economic background. Powell doesn’t even have so. And his messaging has been super confusing with very little forward guidance which constantly confuses the market. I am not sure what qualifications even they attach to these utterly detestable individuals working for Goldman, Citadel, Pimco, and Brooking when they hire them. Oh let me guess, they work for the same people that fund our executive and legislative branch officials.
fny 4y ago
Oh, I'm also going to add that bear markets typically have a lot of brutal rallies. We had one in march as part of the rotation from tech into value stocks. We're probably about to witness a second. Bear markets typically have several short covering rallies of large magnitude on the way down. Use these rallies to unwind your portfolio. Use the dips to buy hard assets and stocks with high yield that can withstand inflation (honestly everyone's margins are probably screwed). Make sure you leave some portion of your portfolio to hedge. Never overstay your welcome. Risk management is key.

by fny 4y ago

pmorici 4y ago

Tesla is a poor example of speculative tech. From 2019 to present they went from losing money to substantial and growing profitability. Better example would be things like Peloton, Beyond Meat, or Robinhood who all had sky high stock prices and have yet to turn a profit.

raffraffraff 4y ago
I don't understand the US stock market, re: Beyond Meat. It's a fucking recipe. Where I live in Ireland there a dozen different fake-meat brands, and they're even getting competition from supermarket "own brand" products (burgers, sausages etc). Don't get me wrong, beyond meat isn't a bad product, but how the hell is a recipe and a few business deals worth IPO and wild speculation? What do they have beyond, uh, fake meat recipe?
- michael1999 4y ago
  What is Coca-Cola besides a recipe, a brand, and some business deals?
  - raffraffraff 4y ago
    Exactly. I don't get it.

freediver 4y ago

> that bond yields would never normalize. Now that they have, there is a risk free alternative to stocks. Treasury bond yields are 3%, inflation is 8.5%, so in real terms you are guaranteed to lose 5.5% annually if you hold bonds. Or basically instead of risk-free gain you are holding gain-free risk.

nradov 4y ago
The longer term TIPS have positive yield in real terms. https://home.treasury.gov/policy-issues/financing-the-government/interest-rate-statistics https://home.treasury.gov/policy-issues/financing-the-govern...
abirch 4y ago
The good news is the US Government doesn't have to pay back 5.5% of its debt. Unfortunately the spending keeps increasing.
- hackernewds 4y ago
  Yet the government keep spending like debt isn't high ($40B to Ukraine aid) and ignoring causes of inflation for political gain (Biden tweeted: it's time to for corporations to pay their share to bring down inflation)
  - abirch 4y ago
    I'm not a Bezos fan in general but his response to Biden's tweet was spot on. https://www.twitter.com/JeffBezos/status/1525309091970699265 https://www.twitter.com/JeffBezos/status/1525309091970699265
    - thawaya3113 4y ago
      I disagree with Biden’s tweet and Bezos’s tweet. I personally believe that the vast majority of the inflation we are seeing today has nothing to do with government debt/deficits, so the government reducing its deficit will have minimal impact on inflation. However, a lot of people do believe, or at least claim to believe, that inflation is almost entirely being driven by government deficits, in which case corporations paying more in taxes would certainly have an impact on inflation, so tying the two together is certainly not misinformation, and if this view is correct, then it will reduce inflation.

fddhjjj 4y ago

Very clearly explained recent history. Thank you. > Then in December, the megacaps we're squeezed further until the S&P 500 had a negative return relative to price! What does this mean? What is negative return relative to price?

SnowHill9902 4y ago
OP can clarify what they meant but I understand it as: sum return_i/yield_i - price < 0
- nuclearnice3 4y ago
  I don't follow your equation. https://ycharts.com/indicators/sp_500_monthly_return https://ycharts.com/indicators/sp_500_monthly_return Yours is unweighted, but return of the S&P in Dec 2021 4.36% The dividend yield about 1.37% The price ~4600. 4.36/1.37 - 4600 indeed very less than zero. The relationship means nothing to me. I must be getting this all wrong.
  - SnowHill9902 4y ago
    It’s the sum over all periods into the future.
    - nuclearnice3 4y ago
      How do we get the returns or dividend yields for future periods?
  - HFguy 4y ago
    I've been at top HFs the last 15 years, I do this for a living, and I have no idea what the guy is talking about either.

abirch 4y ago

1. Zero Percent interest rates doesn't necessarily cause a bubble. It's the excess liquidity in the market that causes the bubble (too many financial assets chasing real assets).

Spooky23 4y ago
One drives the other.
- abirch 4y ago
  I thought that the liquidity was driven by the money multiplier and the Fed's quantitative easing. If the fed set the interest rate at 10% but put in 20 trillion dollars into the economy there'd be bubbles everywhere.
  - atq2119 4y ago
    Why would they be able to put 20T$ into the economy at a 10% interest rate? Who are the counterparties? In other words, who is taking those loans in your mind?
    - abirch 4y ago
      The Fed can buy mortgage backed securities like they have done since they've started quantitative easing. The Fed has purchased Apple bonds. This is in addition to US Treasuries. My original comment was a mechanics related comment in which liquidity (credit + cash) pushes up asset prices and not rates (although there's high correlation especially in the past 20 years in the US). This is based on my understanding of Ray Dalio. https://www.youtube.com/watch?v=PHe0bXAIuk0 https://www.youtube.com/watch?v=PHe0bXAIuk0
      - atq2119 4y ago
        The volume of mortgage backed securities is based on the volume of loans that people take. At higher interest rates, people take out fewer and smaller loans. The Fed buying up more MBS would put downwards pressure on interest rates, which would be diametrically opposed to their goal (in your scenario) of maintaining high interest rates. There is a correlation between liquidity and rates, but it's an inverse correlation. That's Open Market Operations 101. Besides, if your macroeconomic goal is to reduce inflation (which is the reason for raising interest rates in the first place), one subgoal should be to reduce the volume of loans that are being issued. After all, bank-issued loans are new money, which adds to demand, which helps prop up inflation. That's Monetarism 101.

tempsy 4y ago

Target shocked investors because not only did they suffer from rising costs due to inflation that they are currently subsidizing by not meaningfully raising prices but because they reported rising inventory in discretionary spending categories as consumers pull back likely due to higher prices they are facing nearly everywhere. This has more to due to impact of inflation and less so just a function of a dividend and rates.

nemo44x 4y ago
Credit card debt is extremely high right now and subprime loan defaults are rising fast. In essence, a lot of people are tapped out.
- djbusby 4y ago
  Credit Card report https://www.newyorkfed.org/microeconomics/hhdc https://www.newyorkfed.org/microeconomics/hhdc New all time high
  - heartbreak 4y ago
    The relevancy of a report from February 2020 is…not great.
    - djbusby 4y ago
      My bad, wrong link, I've updated.
      - ac29 4y ago
        Your current link says "Credit card balances declined by $15 billion"
        shrikant 4y ago
        > "Credit card balances declined by $15 billion, in line with seasonal trends typically seen at the start of the year, but are still $71 billion higher than in 2021:Q1, representing a substantial year-over-year increase."

Proven 4y ago

[dead]

throwaway_1928 4y ago

> Bonds will be wrecked, stocks will be wrecked, cash is wrecked, even gold What will happen to the housing market?

don_neufeld 4y ago
Expect a steep drop. Leverage is much more expensive (from sub 3% mortgages, we already have 5%+ rates), which means buyers can afford less, plus significant withdrawal of “cash” buyers from the market who were really just borrowing against their (now much smaller) equity positions. I wouldn’t want to be in a forced sale position anytime soon.
- tempsy 4y ago
  5% for a 30 year mortgage is not really that high historically speaking. The problem is more that prices are very high and supply remains very low.
zhdc1 4y ago
Anything from nothing to a small correction. Mortgage payments set a ceiling on how high property prices can rise. However, people seem to be willing to spend more on mortgage payments than they probably should, so it’s likely that this ceiling hadn’t been reached yet. The other factor is simple supply and demand. A large factor in 2008 was a large inventory of housing that came on the market. As far as I’m aware, there is no current corollary in the US now.
- toomuchtodo 4y ago
  I would like to qualify this. This is true in markets where labor is the majority purchasers. In markets like the sunbelt, where retirees are moving and buying properties with a combination of cash, previous real estate equity, and retirement assets, mortgage payments don’t restrict home prices. This crowds out anyone who does need financing to buy their home, especially as interest rates rise and inventory remains low.
nemo44x 4y ago

gitfan86 4y ago

This sounds a bit like doom and gloom. While I don't disagree, it is important to look at AMZN after the dot com bubble burst. Traders fled, but people who believed in the company did very well.

MikePlacid 4y ago
> Traders fled, but people who believed in the company did very well. Yep, I did well, and I loved to show people AMZN stock price graph, like “can you identify the dot-com crash here?”. But I believed in the company then. Big question is: should I believe in the AMZN now? Personally, I’ve stopped using Amazon when they started to support censorship - I’ve grown up in a totalitarian country and things likes censorship are revolting to me. I never suffered after leaving Amazon using Walmart for goods delivery and B&N for books. So Amazon is not unique and irreplaceable anymore. So, let’s ask people who continue to use Amazon - how the company is doing these days? Do you think it will go on growing?
- gitfan86 4y ago
  Good questions. Can they maintain the high performance culture without large stock compensation? The best option I see following a similar path is TSLA. They currently have 2% of us auto sales. The energy business is tiny, AI/FSD is controversial, but if it works it will be worth a lot.
  - seanp2k2 4y ago
    My question for TSLA bulls is how much of that future is already priced in? I have a hard time believing that it will 10x again.
    - gitfan86 4y ago
      The goal is to sell 20M vehicles in 2030. They sold 0.93 in 2021. They are planning on Insurance,Energy,AI each to more than 10x. P/E is 40 currently. Historically very large companies have had P/E between 4-30. So the question is what is Tesla's earnings in 2030 and what will average P/E be across all large companies.

Vaslo 4y ago

While your points are very solid, the first point may be overweighted. I can see why some naive in stocks may weight lower on lower rates, i can tell you as someone in corp finance we never adjusted our risk rates (weighted average cost of capital) below 12% (which is what they have been 5-7 years ago. These types of downturns are modeled in. Yes there are some cowboys that aggressively drop these rates, but it’s very risky. We are seeing some folks suffer now because of this and more soon for sure.

HFguy 4y ago
What? Rates matter. A lot. If you are in some corp fin job and you discount projects at 12%...fine. But saying they don't matter for equity valuations doesn't make sense. The evidence, not just lately, but throughout the last 100 years is overwhelmingly that they matter.

chmod600 4y ago

I motice that you left out real estate from your analysis. RE is interesting because it's both an asset as well as something you can use. So if there's general inflation, it's got both upward pressure (because it's an alternative to rent from a consumer standpoint) and downward pressure (because bonds are an alternative to RE from an investment standpoint).

hackernewds 4y ago
RE is at massive peak levels already though that buyers cannot shell out those prices, esp as mortgage prices go up.
- rcpt 4y ago
  Government is doing everything it can to prop up the assets of voters. MBS bailouts haven't stopped, Biden housing plan is all about subsidizing buyers, mortgage forbearance is as much as ever. Will it work idk but if there's one thing the state is scared of it's voting boomer homeowners.
- architravesty 4y ago
  Worst part is the utterly absurd shortage means RE is never going to meaningfully dip for any period of time without serious structural reforms. The focus on interest rates as the main RE driver is almost completely cope and I wish I could believe it. Low-rate mortgages certainly aren't helping, but they're "not helping" in the same way that hucking an armload of kindling into an already-raging house fire is "not helping". I'm cautiously optimistic that societal unrest from this will eventually forcibly neuter local zoning controls but short of that we're just going to keep subsidizing demand and kicking the can down the road as if people don't need places to live.
  - ethbr0 4y ago
    Local zoning codes change on the order of decades. That will take a long time to play out.

EGreg 4y ago

Why would bonds and cash be wrecked? You even say that bonds would be a good deal

55555 4y ago
Cash would be wrecked due to inflation. However it should be less wrecked than other asset classes in the short term. I know nothing about bonds so I also hope they reply.
chmod600 4y ago
I think the idea is that bonds at higher rates are a better alternative ("better deal") compared to cashflow from an asset. But if you actually buy that bond, and the rates keep going up, then new bonds will be an even better deal than the bond that you bought, and so to sell it you'd need to sell at a discount ("wrecked"). I feel like this misses a sense of scale. Sure, everyone loses, but some choices must be superior to others in a rising-rates environment.
ironSkillet 4y ago
Previously purchased bonds will decline in relative value. E.g. say you bought a 10 year corporate bond a couple years ago, say at 2% interest. Newer bonds will be issued at a much higher yield to be attractive in a higher fed rate/inflation environment, making all these old bonds lose value in comparison.

cyberge99 4y ago

We also had a previous US administration handing out cash like candy in the form of stimulus checks.

CyanLite4 4y ago
That was “only” a few hundred billion. It pales in comparison to the $9 trillion in QE over the past decade given to the largest banks.
- hackernewds 4y ago
  That doesnt add up. An inordinate amount of money was printed in the last 2 years (up to 25% of the supply[1] [1] https://www.cityam.com/almost-a-fifth-of-all-us-dollars-were-created-this-year/ https://www.cityam.com/almost-a-fifth-of-all-us-dollars-were...
- Aunche 4y ago
  First of all, the entire stimulus was $4.5 trillion, and most of it was allocated to handouts. A lot of the handouts were necessary, like expanded unemployment, but others were complete wastes of money, e.g. giving checks to families making 6 figures or forgiving loans for billion dollar "small businesses." Second of all, QE isn't money given to the banks. When we have a deficit, the government sells bonds to banks. "Naturally" this would drive up interest rates for businesses because unlike the government, they can't issue an infinite number of IOUs and have to compete for a limited amount of liquidity. If interest rates rise too much, businesses will be forced to shut down, especially when people spend less money during a pandemic. Quantitative easing is a tool that allows the Fed to lower interest rates purchasing by these bonds back from the banks. The more debt the government issues, the more debt the Federal Reserve needs to purchase in order to lower interest rates. Basically, the root of the problem is that Congress is incapable of balancing a budget.
  - ModernMech 4y ago
    > but others were complete wastes of money, e.g. giving checks to families making 6 figures Remember that the cutoff for stimulus was from prior year's taxes. This means you could have been making 6 figures in 2019, and then be making significantly less due to covid job loss or reduction when stimulus was handed out. As a matter of fact, stimulus helped my family greatly even though we made 6 figures in 2019. So following through on your claim would have meant my family suffering. YMMV.

ryanSrich 4y ago

How does inflation slow if rates aren’t hiked? Isn’t the only means of combating inflation raising rates?

drdec 4y ago
Just because raising rates is the tool of choice for central banks to fight inflation doesn't mean it is the only thing that affects inflation. E.g. if supply chains were restored and suddenly there was a lot more product to purchase that would cause prices to fall.
OrvalWintermute 4y ago
Some rates are already rising. My HCOL region is seeing a big change in the RE market as Mortgage interest rates hit >5%

vintagedave 4y ago

So for non-finance-experts, what should we be doing with our money? Investing in what? Keeping in the bank? It sounds from your comment like there is _nothing_ that won't be devalued, even gold. Is real estate worthwhile? (Note: I am in the EU not US.)

deleted 4y ago
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ptero 4y ago
If you think that there is some major economic turmoil ahead with dropping asset values across the board (and I personally this is fairly likely), the general advice is to aim for a positive alpha. That is, if you are moderately well off or better, invest to "go down less than your neighbors". Assets across the board lose value, but if at the end of the fall you preserved a higher fraction of your money to invest than your neighbors and are willing to pick the best assets after the collapse you can reap huge benefits. The counter argument to this is that the above approach absolutely requires an iron discipline. And without experience non-professionals are prone to making very costly mistakes (e.g., invest on feelings, double down inappropriately, etc.). So, a general audience advice is usually: do not invest money you need within 5-10 years and do not make rash decisions; it is better to ride this train down and then hopefully back up than jump randomly. And diversify (across countries, economies, asset classes, etc.). Just my 2c; not an investment advice!
- nradov 4y ago
  The general advice is always to aim for a positive alpha. No investor aims for a negative alpha, regardless of the economic climate.
  - etrautmann 4y ago
    Yes, but it's unclear how to intersect this with a reasonable tax strategy for many retail investors. i.e. do I sell everything and pay capital gains or sit?
  - 4y ago

TekMol 4y ago

there is a risk free alternative to stocks How is holding a bond risk free? It is a promise to give you a certain amount of money at a certain time in the future. The value of that money depends on how scarce it is. The government constantly raises and lowers that scarcity at will. Sometimes the government decides to double the supply in just a few years: https://fred.stlouisfed.org/series/BOGMBASE https://fred.stlouisfed.org/series/BOGMBASE So it seems highly risky to me.

kube-system 4y ago
“Risk” usually refers to default risk in financial terms. T-bills are generally considered to have zero default risk. The inflation for two different assets traded in the same currency are equal, so there’s not much of a comparison to be made there.
senthil_rajasek 4y ago
>How is holding a bond risk free? No asset is risk free. Bonds are a relatively less risky asset. >The government constantly raises and lowers that scarcity at will. Nope. Notes, Bills, Bonds are auctioned.
- TekMol 4y ago
  The FED can buy bonds in an auction at will. Because it prints the money to do so. It's not like the FED goes "Uh oh, those bonds are too expensive for me".
  - senthil_rajasek 4y ago
    It's a recent phenomenon. During the covid crisis the fed became a buyer of last resort. It's not usual.
    - TekMol 4y ago
      Maybe it's the new normal? Just like doubling the money supply every couple of years seems to be the new normal since it started in 2008?

tootie 4y ago

It seems to me that with the pandemic ebbing, that the only systemic shock going on right now is the war in Ukraine. Russia can't sustain either its offensive or its separation from global fuel markets for very long without collapsing. Developed economies aren't sitting on giant piles of toxic assets or collapsing consumer demand and employment is still sky high. I don't see how this goes much beyond an asset correction. We've only seen companies floating on untenable valuations get hurt thus far and it seems unlikely that will be a contagion to the rest of the economy.

AnotherGoodName 4y ago
That's a big one though. It hits food and energy prices which are very fundamental.

Apocryphon 4y ago

> even gold And for now, even crypto?

lamontcg 4y ago

This has all happened before. In 1998 Greenspan cut rates due to the Asian financial crisis and worries over Y2K which blew up the dot com bubble. Then they slashed rates down to nearly ZIRP and held them low which blew up the housing and finance bubbles that deflated in 2008. None of this started in 2008. What is different this time is the wage inflation and the unionization drives that we're seeing. The Fed is likely to hike rates much more aggressively in order to stop that from taking off. When you talk about inflation, though, asset prices and commodities don't matter anywhere near as much as wage inflation. And wage inflation is high due to the low number of job seekers, likely a result of other factors like death and disability due to the pandemic removing workers from the workforce and boomers retiring. As a result the rate hikes are likely to be more severe and the downturn is likely to more severe. I would be worried that this downturn looks more like a depression than a recession. Of course it may just unwind as before and as the economy pops they slash rates and do ZIRP and the rich people buy up even more of the economy and the cycle continues. I think there's a good chance the average Millennial gets pretty decimated by the next downturn and crypto should get tested and there's a pretty good chance that the Ponzi all unwinds and goes to zero (which will destroy all the Millennials using crypto as a 401k). I'm still not sure that crypto has gone up enough so that a few billionaires couldn't rescue it and keep the game running though. I still think we're going to see a relief rally short term though and that the downturn won't really take off until 2023/2024 when the yield curve inverts. We're not quite there yet. We've also had prices being out of whack with fundamentals for decades, that is also nothing new. Also don't go predicting hyperinflation or raising long rates. That has been predicted for decades as well, and it never happens. The Fed raising rates is designed to cause a recession and disinflation. Long rates won't rise and long-term inflation will remain contained. We're not in the 70s and we're not going back to the 70s. The thing to be MOST worried about is political. Since the 2008 crisis there's been a rise of people who just seem to want the system burn and where they won't bailout the system in the event of a financial crisis. That increases the chances that the economy could really lock up and institutions could fail. There are a lot more crazies in power. At some point the cyclical game that we're in with engineered recessions, low rates, low risk premiums, cheap money, insane valuations, asset bubbles, etc has to break. I think its way too soon to call it as broken though. The commodities inflation that we're having right now is not that unprecedented (and a lot of it is ultimately transient and due to bullwhip effects) and the Fed is showing that they're going to take action to stop it. That means that we're likely to just have another recession then another long period of ZIRP and asset bubbles and crazy valuations continuing again.

shrimpx 4y ago

> there is a risk free alternative to stocks Really? 2.5% bonds in a 7% inflation environment is an attractive bargain? This part didn’t compute: > Bonds will be wrecked […] because it's actually a really good deal to buy bonds when they yield north of 10% (if we get there).

mellavora 4y ago
bonds aren't currently yielding north of 10%. If they are currently at 2.5% (using your number, not to pick on you, but it is what I have at hand), then move to a 10% yield, the people who bought at 2.5% get a haircut.
- shrimpx 4y ago
  Got it, thanks!
jdkee 4y ago
I-bonds. See https://www.wsj.com/articles/series-i-savings-bonds-what-you-should-know-11652834560 https://www.wsj.com/articles/series-i-savings-bonds-what-you...

polynomial 4y ago

> Bonds will be wrecked, stocks will be wrecked, cash is wrecked, even gold I'm sorry to be that person, but what sort of effect if any might that have on crypto markets?

pas 4y ago
people withdraw into conservative assets (relative to what they have their future outgoing cashflows, ie. if they have to pay for food in dollars, they'll hold dollars to minimize risk of exchange rate shifts) and to cause a dam burst it's enough for a trickle of retail investors to start doing this. and .. bam. you saw the last few weeks. (as others notice that there's less and less chance of making money they also withdraw to minimize risk)

lvl102 4y ago

Speaking as someone who experienced both the dot-com crash and the financial crisis from ground zero, this feels nothing like them. I did not see widespread risk taking across the board. A lot of Gen Xers, such as myself, almost instinctively recognized current bubbles and either steered away from them or played them as such. People are also a lot more financially savvy. Even if people made leveraged bets, they leveraged with options instead of loans which meant they didn't lose more than what they committed. Sure, some parts of crpyto is very fluffy but I still don't think it is all that widespread. I think a lot of people calling for a great crash will be disappointed this time around.

plonk 4y ago
Cryptocurrencies have huge market caps though. If they crash (like the Luna disaster last week), that has to have some kind of impact, right?
- lvl102 4y ago
  I really think it’s insulated especially compared to the housing market collapse. This is because most banks will not take your crypto as 1:1 collateral whereas housing was perceived to be nearly risk-free. A big difference. I am not saying we are not in an asset bubble. But it would be a mistake to draw simplistic comparisons.

runeks 4y ago

> 1. We had zero percent interest rates. This causes the value of assets with cash flows out into the future (think speculative tech, Tesla) to accelerate. You’re on to an important point, but your statement is inaccurate. Firstly, it’s a fall in the rate of interest that is equivalent to a rise in the present value of a future cash flow. And vice versa. Notice this has nothing to do with “high” or “low” interest rates (whatever that means, exactly), but a change in the rate of interest. Secondly, this is not related to speculative stocks. All companies with an expected future income are affected by this, ie. almost all companies in existence.

zby 4y ago

If they hike the rates too much then debt servicing would be costly. This is different from 1980, because back then US gov debt was about 30% of GDP and now it is 120% of GDP (https://fred.stlouisfed.org/series/GFDEGDQ188S#0 https://fred.stlouisfed.org/series/GFDEGDQ188S#0) What are the realistic values here? I have no clue, but a good analysis should cover this.

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kyrra 4y ago
This is one one of the ways to fix the economy in times like this requires congress to reign in spending. It's not just on the Fed to try to fix things, both sides of the equation need fixing.
credit_guy 4y ago
> If they hike the rates too much then debt servicing would be costly. The Fed doesn't care about the cost of servicing the debt. That's the US Treasury's job. By law, the Fed has the dual mandate to keep both inflation and unemployment low. That's it. Nothing to do with the cost of servicing the Government debt. If the interest on the Government debt becomes too high, nobody will point the finger at the Fed. If however inflation is high (like now) or unemployment high, you can start hearing people accusing the Fed of gross negligence. In the extreme, the Chairman of the Fed may be sacked, then brought in front of various Congressional investigations, and may even find himself in contempt, or some other very unpleasant situation. Bottom line: the Fed really cares about inflation, and doesn't give a damn about debt servicing.
- fny 4y ago
  I don't buy this argument. There are good arguments to the contrary which Jerome can bring up and has at previous hearings. Say demand quiets but the price of inelastic goods (gas and food) continues to skyrocket due to greater demand from developing nations who demand more resources to have a better standard of living. How will hiking to 10% fix anything? Sure you'll kill demand, but you'll also kill financing supply which will only exacerbates the issue over the long run. We need more drilling, more refining, more farming now that Russia is out of the picture and the Saudis are playing games. Hiking too far is actually a horrible policy choice, and Powell can make a cogent argument about it: he already has mentioned this in hearings. You can't address supply related constraints with higher rates. At some point, they might justify capping rates to finance the needed supply, and that argument smells like the yield curve control of the 1940s. I suspect this argument will become more palatable if we have high unemployment and high inflation. [0] I have a feeling whatever policy rate they pick will aim to be slightly sub neutral (negative real rates) as they pray inflation resolves itself, while constantly pointing out they have no control over whether Brazil has a successful wheat harvest. [0]: https://libertystreeteconomics.newyorkfed.org/2020/04/how-the-fed-managed-the-treasury-yield-curve-in-the-1940s/ https://libertystreeteconomics.newyorkfed.org/2020/04/how-th...

unicornmama 4y ago

In the hike case cash would not be wrecked. It is paradoxically a good position to hold cash. Consider this. When they hike rates you can roll very short term treasuries, and you can buy assets on the cheap.

cup_of_joe 4y ago

"If inflation continues and the fed becomes aggressive with hiking, all assets are dead." This sounds incredibly short-term-oriented and alarmist. Dead is a word to describe the end of something's existence. Market turbulence is not a novel occurrence, nor are unsustainably inflated economies driven by cheap money and speculation.

draw_down 4y ago
fny 4y ago
At 10% rates I think the fair value of the S&P becomes something like 2000 assuming the same earnings. High yield rates would moon and tons of bankruptcies would ensue. Consider how heavily pensions and retirement accounts are concentrated in stocks. The ramifications of reaching a point like that would be devastating, so yes, I think dead is not alarmist but appropriate.
- scarab92 4y ago
  That's only true if investors think the 10% rates are permanent. Future interest rates are a time series not a single value, and I suspect most will use a lower rate in later years reflecting some mean reversion.
  - qq66 4y ago
    But you can lock in rates for decades.
  - MR4D 4y ago
    A 10% rate on a 30-year treasury, is for all intents, permanent. Think of it this way - a person buys a 30-year bond yielding 10%. Then, for the next 30 years, no matter what happens to interest rates or prices, they will earn a 10% return on their original bond purchase, risk free. Remember also that 30 years is approximately your adult working life, so a really long time that people tend to think of a “permanent”. Is it truly permanent? No, but for purposes of discussion and financial planning, it’s close enough.

dustingetz 4y ago

hey, reduced income inequality at least! (all that wealth is fake zombie wealth anyway right?)

D_Alex 4y ago

>a risk free alternative to stocks I'm pretty sure Russia disagrees, and it remains to be seen how China and other foreign holders of US treasuries will look at US (and other foreign) bonds in the future.

lumost 4y ago

It’s worth bearing in mind that the experience of those living through your extreme scenario will vary greatly based on age. Someone just starting their career benefits from cheap assets, high rates mean down payments will probably be cheaper, stock declines don’t matter if you don’t hold stocks. High inflation means their wages relative to debts such as student loans or first mortgages will increase. Retirees with fixed incomes might get crushed. These folks were pushed into stocks and alternatives due to low interest, declining assets remove income and high inflation reduces the real value of the income. There are a lot of people in between who will experience churn. However given the current demographics of the US, having two groups experiencing different versions of the economy will pose political as well as economic challenges.

noduerme 4y ago

I wonder to what degree generational culture plays a part. My father, for example (born pre-WWII), would never buy growth stocks. Not even when he was young. He bought only dividend yielding stocks, reinvested 100% of the dividends and never sold anything until his retirement. My generation (X) has a more balanced approach, with a mix of growth and value stocks dependent on risk tolerance, trending toward value stocks the older we get. Moreover, a lot of us learned some hard lessons from the first internet bubble. Granted that they're still younger and should be in a more risk-tolerant phase of life, but what I see in Millennials, and Gen Z especially, is a culture of growth-only, with no interest in boring old investments that are intended to earn and build value over long timescales. I think at least some of this has to do with the gamification of investing; in my Dad's time, a normal person couldn't just sit at a brokerage and watch a stock ticker all day. Free trading has intensified it by removing the barriers to full-time gambling. Remember that Millennials are a much larger generation and we're just still early in the period when they're growing wealth; I wonder if what we're seeing isn't the beginning of what it will take to change the culture... or if we'll continue to see endless bubbles because the steady-as-she-goes, long term investment mentality is just disappearing in the face of permanent FOMO. Sure, it's not glamorous, it won't make you a millionaire overnight, but that's really not what investing your savings should be about.

rcpt 4y ago
For young people betting on the far future looks just as crazy as GME calls
- noduerme 4y ago
  Yeah, I get that. And that's natural. But if a huge population swell is accustomed to treating the market as a get-rich-quick casino, the market stops serving its purpose and I guess we're in for a really bad series of shocks.
  - SgtBastard 4y ago
    The scary thing for me is the 2nd order effects of this activity as companies try to act increasingly like meme stocks to boost share price and abandon all pretence of P/E ratios and profitability.

simonebrunozzi 4y ago

> Bonds will be wrecked Why? Also, isn't it in contrast with: > it's actually a really good deal to buy bonds when they yield north of 10% (if we get there).

somebodythere 4y ago
It's not in contrast. They are saying bonds will be wrecked (prices go down, yields go up), causing them to become a good deal in the future.
- simonebrunozzi 4y ago
  Ah, got it.

jliptzin 4y ago

If inflation continues hot don’t stock prices eventually have to go up though? If Apple raises the price of iPhones 50% because its input costs went up 50% and (assuming sales remain the same, I’m only talking inflation, not a depression), then they’re making $9/share instead of $6/share so unless people think Apple at a 15 PE is overvalued its share price would go up.

mercy_dude 4y ago

After this episode, I strongly believe Fed should be ended. They have established a very poor track record on managing monetary policy and consequences and at this point basically have zero public trust. Since Greenspan Fed has been an absolute disaster. They hiked too little, too late. Now there is no such thing as soft landing as they are espousing just as their messaging around the whole transitory inflation thing. Institutions such as Fed are now completely detached from their mandate and instead under bureaucratic capture devoid of any meritocracy. There is a revolving door between Fed officials and Banks/capital management firms. Bernanke, Powell, Kashkari, Yellen, Brainard - these are poster children of corrupt kleptocracy with revolving door arrangements between Fed and firms like Citadel, Goldman, Pimco. At least Bernanke had economic background. Powell doesn’t even have so. And his messaging has been super confusing with very little forward guidance which constantly confuses the market. I am not sure what qualifications even they attach to these utterly detestable individuals working for Goldman, Citadel, Pimco, and Brooking when they hire them. Oh let me guess, they work for the same people that fund our executive and legislative branch officials.

fny 4y ago

Oh, I'm also going to add that bear markets typically have a lot of brutal rallies. We had one in march as part of the rotation from tech into value stocks. We're probably about to witness a second. Bear markets typically have several short covering rallies of large magnitude on the way down. Use these rallies to unwind your portfolio. Use the dips to buy hard assets and stocks with high yield that can withstand inflation (honestly everyone's margins are probably screwed). Make sure you leave some portion of your portfolio to hedge. Never overstay your welcome. Risk management is key.