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Inflation cooling: good for everybody. Families, businesses, etc. Does the Fed deserve credit for handling the situation "correctly" despite lots of potential c

Inflation cooling: good for everybody. Families, businesses, etc. Does the Fed deserve credit for handling the situation "correctly" despite lots of potential criticisms both ways? Probably. Stock market reaction to inflation cooling: a little out of touch with reality at this point, and unfortunately only continuing to go in that direction. Slightly related: > The concentration risk in the S&P 500 is currently higher than it was at the peak of the dot com bubble in 2000, with the top five stocks representing 23% of total market capitalisation. The combined market cap of Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN) and Nvidia (NVDA) now sits at $9.5trn, equivalent to 23% of the S&P 500's market cap. At the 2000 peak, the Microsoft, Cisco (CSCO), General Electric (GE), Walmart (WMT) and Intel (INTC) reached a combined market cap of $2.3trn, which represented 19% of the S&P 500 market cap. > The average price to sales ratio of the big 5 today is 6.8x, even higher than the 6.2x seen at the 2000 peak. > While earnings multiples are less extreme, with the big 5 trading at a collective PE ratio of 40x versus almost 60x for the big 5 in 2000. However, relative to the overall market the overvaluation is similar, with the big 5 today trading at a 100% premium to the S&P 500 as was the case in 2000. https://seekingalpha.com/article/4616549-spy-concentration-risk-now-beyond-2000-bubble-peak https://seekingalpha.com/article/4616549-spy-concentration-r... Don't get me wrong, I'm not a SeekingAlpha article type of person and I'm sorry for the link/slightly off-topic-ness but, man... those stats are so interesting to me. Not from a "oh my God, doomsday is here, bubble 2.0" but... How many Americans have a 401k/IRA with Nasdaq/S&P500/Dow Jones exposure where the top 5 stocks are trading at 6.8x sales and 40x P/E? That's like... unsustainable and scary, right?

helen___keller 3y ago
> 401k/IRA Don’t forget HSA
- pc86 3y ago
  You're right, this changes the calculus entirely!
hackernewds 3y ago
tldr response, markets are forward looking. a lot of the downtrend of a recession have already been telegraphed a mile away with ample headway (good job Feds) and hence priced in.
- MuffinFlavored 3y ago
  > tldr response, markets are forward looking. https://www.gurufocus.com/economic_indicators/6061/sp-500-pe-ratio-with-forward-estimate https://www.gurufocus.com/economic_indicators/6061/sp-500-pe... Current market level: 4500 Current forward P/E ratio: ~19.9x Previous market level: 3600 (October 2022) Previous forward P/E ratio then: ~19.9x So in 2022-10, EPS were $180 Now in 2023-06, EPS are $226 An increase in 25%, which basically matches the growth we've seen past 9 months
  - nostrademons 3y ago
    That's basically a bet that "corporate prices rise while rates remain unchanged" - to have a present P/E of ~25 and a forward P/E of ~20 implies earnings growth of 25%, and to maintain that ratio over time implies that earnings grow steadily at 25%. This actually matches pretty well with anecdotal complaints from people, about them getting 4% raises while inflation ran at 10%. All those price increases have to go somewhere, and in this case they went to corporate profits, particularly of the largest (S&P 500) firms. Which is exactly what people complain about when they say inflation is driven by corporate profits, except they get the causality wrong. Problem is that it's inconsistent with today's stats. If inflation is now 3% but wages are going up 4% and unemployment remains the same, that means corporate profits are shrinking. It has to, by an identity - every dollar the company pays out in wages is a dollar it's not making in profit. So again the market response makes no sense - investors are assuming a future that looks like the past, while the stats indicate the near future is different from the past. I guess you could make up for it with productivity - if a workers output 1% more goods for their efforts, prices rise by 3%, and their wages go up 4%, that just implies workers capture all the price surplus from companies, and earnings growth should be roughly flat. But the long-term trend for productivity is down (though the short-term one is up, coming off pandemic lows), so this doesn't seem like a durable explanation for being able to pay out 4% more in wages while only raising prices by 3%.
Der_Einzige 3y ago
Generative AI is the gift that keeps on giving and it will counter the economic forces which are pushing tech companies away from being profitable. This is why stocks keep going up despite high interest rates. Lol this struck a chord. Maybe folks here need to explain why generative AI isn’t a several trillion dollar industry and why it won’t positively impact stock prices for a ton of companies rather than just downvote.
- blitzar 3y ago
  > why generative AI isn’t a several trillion dollar industry It is already.
- MattGaiser 3y ago
  Or why AI isn’t going to become part of every product, service, and supply chain in the next decade.
- green_man_lives 3y ago
  I think that since you are making the claim that generative AI is propping up stocks, that the burden of proof is on you to explain why it is so useful. Right now you are just repeating a platitude that was already beaten to death by tech hype influencers. I am not saying that you're wrong, but I think there is more uncertainty with AI than there is certainty. If you claim to be certain about something then the burden of proof is on you.
  - blitzar 3y ago
    It doest matter if it is useful or not. People are investing on the prospect of it being useful. A laptop with a LLC and a vague plan to build a LLM can get you investment with a valuation of a billion at the moment.
  - MuffinFlavored 3y ago
    > I think that since you are making the claim that generative AI is propping up stocks I do think a very large part of the 9-month S&P500 run from 3600 -> 4500 has to do with NVIDIA + Microsoft, for what it's worth.
nostromo 3y ago
> Does the Fed deserve credit for handling the situation "correctly" despite lots of potential criticisms both ways? Probably. Fed causes massive problem, and then eventually stops it from getting worse... Hooray? Inflation is still twice the target rate at 4%. Every dollar has lost about 18% of it's buying power since 2020. If you haven't received an 18% salary increase in that time, the Fed printed you into a pay cut.
- drexlspivey 3y ago
  More like the federal government causes massive problem and Fed comes to the rescue
  - nostromo 3y ago
    Both were the problem. The Federal Reserve buying up 1.5 trillion dollars of mortgages around 2020, for example, surely contribute to housing cost inflation. https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB
    - jjoonathan 3y ago
      It was eye-opening to watch how the news reported the two prongs of stimulus. Garden-hose of money aimed at poor people? Wailing, gnashing of teeth, pearl clutching, hand wringing. Fire-hose of money aimed at rich people? Complete silence. On the few occasions it was reported, it was dropped like a boring but inevitable fact without any accompanying inflation rhetoric, despite the much larger dollar amounts.
      - drexlspivey 3y ago
        That's because "Fire-hose of money aimed at rich people?" (I assume you mean QE with that) does not cause CPI inflation which is the main problem.
- HPsquared 3y ago
  Firefighting tends to be a good career strategy. Everyone remembers the heroic rescue, few point fingers.
fullshark 3y ago
The next few years will be about ensuring the boomers can cash out their assets: 401k and houses. The government / federal reserve will not let the value of those drop substantially. After that and a generation is unable to buy a house or retire unless they inherited it from their parents, something will have to give.
- lotsofpulp 3y ago
  Why the next few years and not the foreseeable future when older people have more voting influence than younger people (due to both demographics and differences in voter participation rates)? Also, payers of state/county/city taxes which eventually pay government employees with defined benefit pensions and retiree healthcare are also directly effected by lack of public equity performance since the savings for those deferred compensation plans are in the markets, and without the assumed investment returns, taxes would have to increase to make up the difference (and/or cuts to benefits). Bottom line, assume the purchasing power of the USD will be trashed as much as needed/possible, so not being invested in the US public equity markets is a dicey proposition in my opinion.
  - fullshark 3y ago
    The exact timeline isn’t clear to me so I chose “few” to be intentionally vague. I agree with you but they’re also the relative size of each cohort and the relative pain the younger generation is feeling to consider. Also maybe some policies are passed to alleviate pressure, or maybe we just accept the post WW2 era was unique in American history and now it’s a mature society without the class mobility which is what was once considered fundamental to its DNA.
sharedbeans 3y ago
Maybe, maybe not. Certainly price-to-sales ratio is not a relevant metric when tech companies are enormously profitable and have very high profit margins relative to many traditional companies. And IMO they still have lots of growth potential. Look at companies like Sony in Japan or Samsung in SK, they are basically conglomerates with multiple verticals: not just electronics but banking, insurance, entertainment, automotive. The big tech companies can (and are) expanding into these other areas. Does that justify there current valuation? Again, maybe, maybe not, I’m not a stock analyst, but if you are just looking at a trailing P/E I don’t think that’s telling the whole story. And the US market and economy is just structurally different from Europe and other economies. Massive energy abundance now to start with, and also work attitudes/culture. On the positive sides dynamism, willing to tolerate failure, new business formation, and on the (arguably I guess) negative side prioritization of work/profits over personal life and social welfare.
khuey 3y ago
If you're going to use P/E metrics it seems wrong to group AAPL, MSFT, and GOOGL with the likes of AMZN and NVDA when the latter have P/Es an order of magnitude higher than the former.
nostrademons 3y ago
> How many Americans have a 401k/IRA with Nasdaq/S&P500/Dow Jones exposure where the top 5 stocks are trading at 6.8x sales and 40x P/E? That's like... unsustainable and scary, right? S&P 500 P/E is actually a stat that is tracked, and currently stands at about 26. I agree this makes no sense in the current interest rate environment. Investors are betting that rates are going to drop while corporate profits remain unchanged or corporate profits rise while rates remain unchanged, which also makes no sense, but at least the numbers are more reasonable than FAANG P/Es.
- MuffinFlavored 3y ago
  https://news.ycombinator.com/item?id=36727617 https://news.ycombinator.com/item?id=36727617 Check my comment here and tell me what you think. I agree with you, if I saw "current P/E 26x", I'd think "overbought, investing deemed risky" but if you check forward P/E instead of current P/E, it's unchanged in the past 9 months despite the 25% runup in SP500 price...
hattmall 3y ago
It's not like 2000 because today it's the only game in town. If the money exist it must go somewhere. The US stock market is it. Real estate is equally if not more so over valued. Other markets are not attractive, emerging markets have lost appeal, and now even crypto is losing ground. The only serious threat is some sort of BRIC market alternative, but it's not even very serious. The risk now is more inflation and further rate increases. Inflation has cooled not mainly from intervention but market restoration. An engineered bust is pretty much the only way to prevent revolution. The existing and incoming inflation is really pushing the wealth divide and not just from the 1% to the 99%. But from those who hold assets to those who don't. Right now, currently, the economic opportunities that were available as little as 10 years ago simply do not exist. A median income job does not put you on a path to meaningful asset acquisition and may not even be enough to get most people out of student loan debt. The other side of the equation with asset prices is household debt and it's sky high and these are generally opposite ends of the spectrum.
- MuffinFlavored 3y ago
  > The risk now is more inflation and further rate increases. Inflation has cooled not mainly from intervention but market restoration. Can you expand on this please?
  - hattmall 3y ago
    Right now there are two contributing factors to inflation. Increased money supply is the biggest one. Second is the actual shortage of goods production which we are still seeing some long tail effects of from covid shutdowns. The slowing of inflation has been because we are getting caught up with goods production. There is still 1.7 trillion in Reverse Repos. The increased rates have been able to draw some of that out into long term treasury products. Which is great. But it's still astronomically high.

helen___keller 3y ago

> 401k/IRA Don’t forget HSA

pc86 3y ago
You're right, this changes the calculus entirely!

hackernewds 3y ago

tldr response, markets are forward looking. a lot of the downtrend of a recession have already been telegraphed a mile away with ample headway (good job Feds) and hence priced in.

MuffinFlavored 3y ago
> tldr response, markets are forward looking. https://www.gurufocus.com/economic_indicators/6061/sp-500-pe-ratio-with-forward-estimate https://www.gurufocus.com/economic_indicators/6061/sp-500-pe... Current market level: 4500 Current forward P/E ratio: ~19.9x Previous market level: 3600 (October 2022) Previous forward P/E ratio then: ~19.9x So in 2022-10, EPS were $180 Now in 2023-06, EPS are $226 An increase in 25%, which basically matches the growth we've seen past 9 months
- nostrademons 3y ago
  That's basically a bet that "corporate prices rise while rates remain unchanged" - to have a present P/E of ~25 and a forward P/E of ~20 implies earnings growth of 25%, and to maintain that ratio over time implies that earnings grow steadily at 25%. This actually matches pretty well with anecdotal complaints from people, about them getting 4% raises while inflation ran at 10%. All those price increases have to go somewhere, and in this case they went to corporate profits, particularly of the largest (S&P 500) firms. Which is exactly what people complain about when they say inflation is driven by corporate profits, except they get the causality wrong. Problem is that it's inconsistent with today's stats. If inflation is now 3% but wages are going up 4% and unemployment remains the same, that means corporate profits are shrinking. It has to, by an identity - every dollar the company pays out in wages is a dollar it's not making in profit. So again the market response makes no sense - investors are assuming a future that looks like the past, while the stats indicate the near future is different from the past. I guess you could make up for it with productivity - if a workers output 1% more goods for their efforts, prices rise by 3%, and their wages go up 4%, that just implies workers capture all the price surplus from companies, and earnings growth should be roughly flat. But the long-term trend for productivity is down (though the short-term one is up, coming off pandemic lows), so this doesn't seem like a durable explanation for being able to pay out 4% more in wages while only raising prices by 3%.

Der_Einzige 3y ago

Generative AI is the gift that keeps on giving and it will counter the economic forces which are pushing tech companies away from being profitable. This is why stocks keep going up despite high interest rates. Lol this struck a chord. Maybe folks here need to explain why generative AI isn’t a several trillion dollar industry and why it won’t positively impact stock prices for a ton of companies rather than just downvote.

blitzar 3y ago
> why generative AI isn’t a several trillion dollar industry It is already.
MattGaiser 3y ago
Or why AI isn’t going to become part of every product, service, and supply chain in the next decade.
green_man_lives 3y ago
I think that since you are making the claim that generative AI is propping up stocks, that the burden of proof is on you to explain why it is so useful. Right now you are just repeating a platitude that was already beaten to death by tech hype influencers. I am not saying that you're wrong, but I think there is more uncertainty with AI than there is certainty. If you claim to be certain about something then the burden of proof is on you.
- blitzar 3y ago
  It doest matter if it is useful or not. People are investing on the prospect of it being useful. A laptop with a LLC and a vague plan to build a LLM can get you investment with a valuation of a billion at the moment.
- MuffinFlavored 3y ago
  > I think that since you are making the claim that generative AI is propping up stocks I do think a very large part of the 9-month S&P500 run from 3600 -> 4500 has to do with NVIDIA + Microsoft, for what it's worth.

nostromo 3y ago

> Does the Fed deserve credit for handling the situation "correctly" despite lots of potential criticisms both ways? Probably. Fed causes massive problem, and then eventually stops it from getting worse... Hooray? Inflation is still twice the target rate at 4%. Every dollar has lost about 18% of it's buying power since 2020. If you haven't received an 18% salary increase in that time, the Fed printed you into a pay cut.

drexlspivey 3y ago
More like the federal government causes massive problem and Fed comes to the rescue
- nostromo 3y ago
  Both were the problem. The Federal Reserve buying up 1.5 trillion dollars of mortgages around 2020, for example, surely contribute to housing cost inflation. https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB
  - jjoonathan 3y ago
    It was eye-opening to watch how the news reported the two prongs of stimulus. Garden-hose of money aimed at poor people? Wailing, gnashing of teeth, pearl clutching, hand wringing. Fire-hose of money aimed at rich people? Complete silence. On the few occasions it was reported, it was dropped like a boring but inevitable fact without any accompanying inflation rhetoric, despite the much larger dollar amounts.
    - drexlspivey 3y ago
      That's because "Fire-hose of money aimed at rich people?" (I assume you mean QE with that) does not cause CPI inflation which is the main problem.
HPsquared 3y ago
Firefighting tends to be a good career strategy. Everyone remembers the heroic rescue, few point fingers.

fullshark 3y ago

The next few years will be about ensuring the boomers can cash out their assets: 401k and houses. The government / federal reserve will not let the value of those drop substantially. After that and a generation is unable to buy a house or retire unless they inherited it from their parents, something will have to give.

lotsofpulp 3y ago
Why the next few years and not the foreseeable future when older people have more voting influence than younger people (due to both demographics and differences in voter participation rates)? Also, payers of state/county/city taxes which eventually pay government employees with defined benefit pensions and retiree healthcare are also directly effected by lack of public equity performance since the savings for those deferred compensation plans are in the markets, and without the assumed investment returns, taxes would have to increase to make up the difference (and/or cuts to benefits). Bottom line, assume the purchasing power of the USD will be trashed as much as needed/possible, so not being invested in the US public equity markets is a dicey proposition in my opinion.
- fullshark 3y ago
  The exact timeline isn’t clear to me so I chose “few” to be intentionally vague. I agree with you but they’re also the relative size of each cohort and the relative pain the younger generation is feeling to consider. Also maybe some policies are passed to alleviate pressure, or maybe we just accept the post WW2 era was unique in American history and now it’s a mature society without the class mobility which is what was once considered fundamental to its DNA.

sharedbeans 3y ago

Maybe, maybe not. Certainly price-to-sales ratio is not a relevant metric when tech companies are enormously profitable and have very high profit margins relative to many traditional companies. And IMO they still have lots of growth potential. Look at companies like Sony in Japan or Samsung in SK, they are basically conglomerates with multiple verticals: not just electronics but banking, insurance, entertainment, automotive. The big tech companies can (and are) expanding into these other areas. Does that justify there current valuation? Again, maybe, maybe not, I’m not a stock analyst, but if you are just looking at a trailing P/E I don’t think that’s telling the whole story. And the US market and economy is just structurally different from Europe and other economies. Massive energy abundance now to start with, and also work attitudes/culture. On the positive sides dynamism, willing to tolerate failure, new business formation, and on the (arguably I guess) negative side prioritization of work/profits over personal life and social welfare.

khuey 3y ago

If you're going to use P/E metrics it seems wrong to group AAPL, MSFT, and GOOGL with the likes of AMZN and NVDA when the latter have P/Es an order of magnitude higher than the former.

nostrademons 3y ago

> How many Americans have a 401k/IRA with Nasdaq/S&P500/Dow Jones exposure where the top 5 stocks are trading at 6.8x sales and 40x P/E? That's like... unsustainable and scary, right? S&P 500 P/E is actually a stat that is tracked, and currently stands at about 26. I agree this makes no sense in the current interest rate environment. Investors are betting that rates are going to drop while corporate profits remain unchanged or corporate profits rise while rates remain unchanged, which also makes no sense, but at least the numbers are more reasonable than FAANG P/Es.

MuffinFlavored 3y ago
https://news.ycombinator.com/item?id=36727617 https://news.ycombinator.com/item?id=36727617 Check my comment here and tell me what you think. I agree with you, if I saw "current P/E 26x", I'd think "overbought, investing deemed risky" but if you check forward P/E instead of current P/E, it's unchanged in the past 9 months despite the 25% runup in SP500 price...

hattmall 3y ago

It's not like 2000 because today it's the only game in town. If the money exist it must go somewhere. The US stock market is it. Real estate is equally if not more so over valued. Other markets are not attractive, emerging markets have lost appeal, and now even crypto is losing ground. The only serious threat is some sort of BRIC market alternative, but it's not even very serious. The risk now is more inflation and further rate increases. Inflation has cooled not mainly from intervention but market restoration. An engineered bust is pretty much the only way to prevent revolution. The existing and incoming inflation is really pushing the wealth divide and not just from the 1% to the 99%. But from those who hold assets to those who don't. Right now, currently, the economic opportunities that were available as little as 10 years ago simply do not exist. A median income job does not put you on a path to meaningful asset acquisition and may not even be enough to get most people out of student loan debt. The other side of the equation with asset prices is household debt and it's sky high and these are generally opposite ends of the spectrum.

MuffinFlavored 3y ago
> The risk now is more inflation and further rate increases. Inflation has cooled not mainly from intervention but market restoration. Can you expand on this please?
- hattmall 3y ago
  Right now there are two contributing factors to inflation. Increased money supply is the biggest one. Second is the actual shortage of goods production which we are still seeing some long tail effects of from covid shutdowns. The slowing of inflation has been because we are getting caught up with goods production. There is still 1.7 trillion in Reverse Repos. The increased rates have been able to draw some of that out into long term treasury products. Which is great. But it's still astronomically high.