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We are hiking interest rates, investments into businesses are harder to achieve with VC staying aside, and consumer sentiment is falling daily. Look, sometimes
by OrangeMonkey 4y ago
We are hiking interest rates, investments into businesses are harder to achieve with VC staying aside, and consumer sentiment is falling daily.
Look, sometimes when people are fearful there is a reason. Don't jump into a pool filled with razorblades because everyone is outside the pool pointing and screaming.
I personally think we are in for a ride that will remind people that stocks are, in fact, risk assets. In both theme parks and finance, know the ride you are getting on.
- lumost 4y agoIt’s interesting what happens when you look at an individual’s valuation through the lens of DCF as a function of interest rates. As an individual, your net present value diminishes as interest rates fall, and increases as they rise relative to a hypothetical growth stock. As is the case with any other productive asset. In order to fight inflation with higher rates, the fed may need to get interest rates high enough that people stop simply demanding more money from their employers, and start saving.
- OrangeMonkey 4y agoFunny you say that - there is a horror show during inflation that we haven't hit yet (but could be close to): wage-price-spiral. "Things cost more" -> "Employees demand more money" -> "Businesses have to pay them more money." -> "Businesses raise prices" -> "Things cost more" -> repeat. The only way (besides war) that this cycle is broken is with a deep hitting recession where people are just happy they have jobs forget the raises.
- lumost 4y agoI mean.. there is certainly room for profits to fall and productivity to rise in the current economy. Treating wage price dynamics as a zero-sum game does not seem like the correct approach
- OrangeMonkey 4y agoIt may not be the approach that fills us with glee, but its a historical approach. In all of history, when an economy has hit a wage-price spiral the only things that break this is war or a deep recession.
- legulere 4y agoWage is just one cost of doing business. Increasing wages to a certain percentage raises prices by a lower percentage. If you lower profits it can even be price-neutral.
- OrangeMonkey 4y agoYour statement is true - unfortunately so is this: If you lower profits even more, or even lose money selling your goods, it may even lower prices for consumers. Public businesses have a fiduciary duty to return profits to shareholders and purposefully lowering profits without a long term roi from that decision may actually be illegal. Again - I am not saying these facts should fill anyone with glee, but we live in the real world and its important to at least see how historically these have played out.
- lumost 4y agoLowering profits to more effectively compete is not illegal. If you're saying that the company does not feel competitive pressure at all then that may in fact be illegal depending on the current courts interpretation of anti-monopoly laws.
- boppo1 4y agoWhat do you mean an individual's valuation? What pattern of cash flows are you using? How is this any different than taking integrals of different time periods for a flat annual $100 CF?