The S&P 500 is back up to where it was at the beginning of October.
How could the stock market be so detached from worldwide economic reality?
I think you need to challenge your suppressed premises here. Why would the stock market ever reflect worldwide economic reality? When has the stock market ever done so?
Sure, we get told that it does, but what data actually suggests that? Efficient market theory is just an axiom that gets thrown around. It has never actually been demonstrated, and a mountain of evidence stands to disprove it, but a lot of quasi-religious economic philosophies are based on it, so who’d dare to question it?
I think we need to know who’s investing right now?
We have an unusual unemployment situation right now in that many, many of these who are unemployed were happily employed just 8 weeks ago and had no reason to believe they wouldn’t be in the same spot or even better this time next year. It’s not the classic slowdown in which companies gradually shed jobs over a 6-12 month period.
Clearly, my timeline in the post above is off and it may be off for a while, but I am fairly confident that the markets will not hold. I don’t think they’ll completely collapse either of course, but the initial decline was not just panic selling but also a modest correction - which the markets probably needed. But the real financial crisis, I think, is yet to come, and markets will get dragged down with everything else.
Everything will eventually come down to cash. It’s a question of how much cash on hand individual households have, how much cash small businesses have, how much retailers have, and how much municipal and state governments have. When they start running out of cash, it will then be a question of whether congress and the president have the appetite to keep feeding them.
The decision to reopen governments will probably introduce a wave of optimism in the short term, but if you look at the hard data and dig a little bit past the aggregate cases and fatalities, you will see that corona ain’t goin’ anywhere. Cases are declining in the initial hot spots of New York, Seattle, and a few other places, but the epidemic is surging elsewhere. We will very likely be dealing with more waves of outbreaks, except that instead of a massive outbreak in a city like New York that gets the world media’s attention, we’ll be seeing smaller outbreaks that crush local health systems, driving many providers into insolvency.
We’re heading for a disaster.
From Paul Krugman in the NYT last week:
@GreenWyvern Proof positive that Paul Krugman is a blithering moron. An influential blithering moron, but a blithering moron nonetheless.
The only alternative to Stocks are Bonds… in what universe? Heaven forbid anyone spend any money on capital expenditures, small businesses, commodities or other real assets. Nope. Gotta speculate on securities!
Negative yield on bonds. So… why not gold then? Oh, but gold has no yield! …despite appreciating in nominal price… when all other markets are down…
Optimistic take: The people with big money don’t think the future is going to be as economically disastrous as a lot of models are forecasting.
I hope they’re right! Based on my understanding of the current world situation, I don’t get it. But, I sincerely hope my understanding is proven to be too pessimistic.
He’s not talking about what would be for the best in an ideal world. He’s talking about the way a lot of people with cash to invest actually do so in practice.
Do you have a better explanation for the rise in the stock market?
Yes. For years it’s been the fed artificially inflating the stock market. Been that way since 2008, which was artificially terminated before clearing out the mountains of malinvestment. I rail about it in thread after thread, and post something like this link, but apparently it never sticks.
Odds are the stock market is going to explode upwards. Unfortunately, that upwards explosion isn’t going to be increased purchasing-power, but rather, the consequence of - and I’m quoting the fed here - “unlimited” money printing.
Lots of people. For example I have a 401K through my employer that purchases about 90% stocks twice a month. Millions of people are like me.
It doesn’t matter how low or how high the marker it, it gets purchased.
Isn’t that what Paul Krugman said?
“Because the bond market … believes that the Federal Reserve will continue pursuing easy-money policies for the foreseeable future.”
How exactly do you think the increase in federal assets is boosting the stock market?
According to this breakdown, over 50% of federal assets consist of student loans, up from 10% in 2009.
Krugman is a Neo-Keynesian. He advocates for the fed doing this (claiming there are no negative side effects to QE). Needless to say, there are many and varied negative effects of QE, but they’re simply ignored or considered unimportant because hey, he & his clients are the beneficiaries!
It’s complicated and multifauceted. He isn’t wrong to say that nuking the bond yields has a strongly positive effect on stocks. But he’s wrong about why.
When you lower bond yields, you make companies that should neither qualify for debt and nor continue existing without bankruptcy suddenly able to afford a massive amount of debt that they can use to pay off their current debt (if you did this, you’d go to prison for Kiting) and then use any extra to repurchase stocks. Companies that were otherwise healthy are also perversely incentivised to take on low interest debt and repurchase shares. Capital expenditures or other investments simply cannot compare to the earnings/share growth garnered from taking on next-to-free debt and buying up shares. This is why something like 50% of SP500 growth has come from share buybacks.
It also forces fund managers to do stupid, irresponsible stuff, because the safe and sane things have had all their yields nuked by the fed to prop up prices. Those stupid things include buying mortgage backed securities and other phenomenally craptastic derivatives. Point of fact, the entire 2008 crisis happened because interest rates were too low for banks to make reasonable profit from sane lending, so they started to lend to unqualified recipients after they found a way to pass the risk off on the obvious sucker in this equation (ultimately You and Me via derivatives bailed out by tax payers). Now rates are even lower, and the malinvestment continues unabated.
The federal government has nothing to do with the federal reserve. They’re slightly more related than Federal Express, but not by much. It’s a private corporation with limited government involvement. You want to reference these:
Almost none of it is student debt - that’s owned by the Federal Government.
Right, but who’s buying? Who’s making stock purchases right now?
It’s not entirely out of the ordinary to have stock runs even during times when economic data is horrific. There were upswings during the Depression and also during the Great Recession.
I’m just curious as to who is making the decisions to buy at a time when it’s very uncertain that we’re anywhere near the worst of both the public health and the economic crisis.
That’s ridiculous. It was created by an act of congress. Its leaders are appointed by the president and confirmed by the senate. Its profits are remitted to the Treasury. It’s an arm of the federal government.
The board only. And that board is not like the board of a normal corporation. What really matters is the FOMC, which does include the board, but also representatives from the member banks over which congress has little to no input whatsoever.
Profits, as in what’s left over after money is transferred to the member banks/share holders. The term profit is not to be confused with “revenue” and what counts as an expense in that context is important to note here.
Not even remotely. The federal government has little to no influence over the fed, except for appointing the board. They don’t even have recall powers. And the influence of the board is not so great as one might be initially inclined to think.
There are three branches of the Federal Government, and the Federal Reserve isn’t one of them. It’s a private corporation - complete with shareholders - that has limited government intervention (namely, appointing the board).
You’ve raised some other valid and important issues, but this claim is silly. Sure, some degree of independence is desirable in the Fed, just as independence is desirable for the judicial branch of government. But that doesn’t mean that the Fed is not still ultimately a government entity, just like the Supreme Court is a government entity.
The supreme court is established in the constitution. It’s a separate, co-equal branch etc etc. It is not incorporated. It doesn’t have private shareholders. We can argue if congress was afforded the ability to delegate their powers to the fed, as was argued to death in many supreme court cases, but you can’t compare the supreme court to the fed, not at all.
It’s a private corporation with private shareholders. The only relation it has to the government is that it has assumed powers granted to congress by the constitution (whatever your opinion on that, the Supreme Court okayed it over 100 years ago so the argument is dead) and that 7 people are appointed to the board by congress. That’s it. The fed is not even a monolithic institution, it’s actually twelve (privately owned) institutions that coordinate with each other under the umbrella of the board and FOMC.
I want to add this, to put paid to this tangent:
From wikipedia…
And the only relation the earth has to the sun is that the sun provides all the energy to support life.
The technical details of the administrative setup of the Fed as a private corporation are irrelevant. It is under the jurisdiction of the Federal government, with a mandate specified by the Federal government, and its credibility in financial market operations derives from the fact that the power of the Federal government stands behind it.
I’m not going to add anything else to this sidetrack, other than to point out that you’re undermining any discussion of your other serious points with this.
Where do these strange FedRes memes come from? I guess Ron Paul was pushing them once. Is it his son? Alex Jones? Yahoo gold bugs?
A majority of the Fed’s Board of Governors as well as a majority of its OMC are appointed by the President. Member banks get a fixed 6% dividend on their actual mandatory investments, a very small share of FedRes profits these days.
The FedRes follows its mandates to target a 2% inflation rate and, subject to that restraint, maximize employment. The Fed’s economists are quite aware that low interest rates and high QE are symptoms of economic trouble, and tried to raise interest rates and sell their QE holdings during 2017-2019 but retreated when the results were disappointing. (In particular, the yield curve “inverted.”)
I don’t think FedRes economists are trying to make billionaires even richer — they just want to keep the awkward economy struggling along. Their actions — which, yes, do keep stock prices high and bond yields low — are a symptom, not the cause, of ongoing problems. As long as inflation remains low, expect the easy-money policies to continue. AFAIK nobody has offered a good alternative approach.
I agree that the Federal government is corrupt, and corruptly enriches big banks. But neither the FedRes structure nor the 6% dividend is relevant to the real corruption.
See, this method of argumentation only ever works if you can demonstrate equivalent logic between statements. So how does this relate to or reflect anything I’ve said?
We’re arguing about the technical details of the fed, of course it’s organizational principles matter.
Only insofar as all US based corporations are under the jurisdiction of the federal government. Congress has no recall authority over the fed, nor does the president. Once nominated, the appointees can flip congress the bird and there is literally nothing that congress can do about it. Several fed chairs have *done *this to several presidents.
Actually, no. The debts owed by countries world-wide are denominated not in things issued by the treasury but in Federal Reserve Notes. Virtually every government on the face of the planet must acquire Federal Reserve Notes to pay off their obligations, and the only place to get them is… the Federal Reserve. This includes the US government, btw.
The “full faith and credit” of the US is only the stated reason for the dollar’s value, but it’s not the reality. The tail wags the dog. Everyone needs dollars (that is, Federal Reserve Notes) to conduct international trade, and so much of government debt is in dollars, which is why most countries will only accept dollars for trade… a vicious cycle.
I provided a direct quote from the supreme court about this. I linked to the wikipedia article that explains the member banks in detail. I have only laid out basic facts. If that is discrediting in your eyes, then you are completely divorced from reality. You will never understand the world financial system, or the motivations driving the actors therein, if you can’t even accept how things are currently organized.
I should also point out that even if I were wrong about one thing(and as a human being, there’s sure to be plenty I get wrong) it wouldn’t invalidate any other thing or factual argument I’ve made. Arguments stand on their own, independent of the speaker. To believe otherwise is a genetic fallacy.