"But because everyone worries and saves a little more, and invests and spends a little less, the economy gets stuck in a downturn. Recessions are an outbreak of collective madness."
Or maybe "Recessions are an outbreak of collective sanity."
>The immediate catalyst was the jobs report, which showed the strong United States economy might finally be translating into rising wages for American workers.
>American Airlines agreed this week to do something nice for its employees and arguably foresighted for its business by giving flight attendants and pilots a preemptive raise, in order to close a gap that had opened up between their compensation and the compensation paid by rival airlines Delta and United.
>Wall Street freaked out, sending American shares plummeting. After all, this is capitalism and the capital owners are supposed to reap the rewards of business success.
>“This is frustrating. Labor is being paid first again,” wrote Citi analyst Kevin Crissey in a widely circulated note. “Shareholders get leftovers.”
The bigger concern is on the interest rate hikes. Low rates were expected to help kickstart the economy and prices and wages to increase. What has happened instead is that all the cheap money has caused asset inflation. US companies now have record amount of debt.
Too fast increase in interest rates will cause their debt obligations to balloon and lower profitability. Though this will take couple of quarters to fully manifest. So, this is just a reaction in line with Amara's law applied to stock markets- We tend to overestimate the effect of a news item (technology) in the short run and underestimate the effect in the long run. I expect media to be soon cheering another round of upward zag.
You see, the problem that I have with these kind of "explanations", is that those facts have been around for a long time. Why is it that precisely today (well, yesterday) was the day that everyone decided "right guys, we're selling equities"?
The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it.
>Low rates were expected to help kickstart the economy and prices and wages to increase.
You're confusing the sales pitch used to justify low interest rates with what they were expected to do. They were expected to bail out insolvent banks and save them from the consequences of their collective bad decisions. Not raise wages. Not kickstart the economy. Fiscal stimulus is how you do that and they knew that.
Had politicians instead gone to unions and asked "what the fuck should we do now?" the answer likely would have been "let those fuckers go under, fire/lock up all management that had fraud going on underneath them, nationalise the systemically important institutions and counteract the economic contraction brought on by a wave of banrkuptices with fiscal stimulus."
That's no good though because reliable political donors like Jamie Dimon would be in an orange jumpsuit and wages might actually go up (bad for profits). So we got the band aid that was zero interest rates that kept the current lot on Wall Street who blew up the economy and encouraged fraud in a position where they still get to direct it.
This was always going to happen. Instead of trickle down we should be practicing filter up economics. Give the money to the people that need it so they can service their debts rather than turning the debts into derivatives and isolating them from the real economy.
How are rising interest rates a risk?
The Fed has been telling us they are coming for years. Long rates are finally moving up.
I think people are going to be surprised about the coming global growth, just like they said the Fed moves would cause massive inflation, or that interest rates would never go beyond zero.
By itself, this state is meaningless. This is exactly what investment kickstarting the economy looks like, as well as wasted investment on useless garbage.
> Too fast increase in interest rates will cause their debt obligations to balloon and lower profitability
Its not so bad for companies that export with a weaker dollar. Also for primarily domestic businesses where higher inflation correlates to a higher top line. In fact is advantageous to be in such a situation.
I'm surprised that nobody has mentioned what seems to me to be the obvious precipitating factor: that some guy went on national TV on Jan 30 and boasted that he was responsible for a massive increase in the stock market. When I saw that I immediately felt a warm and fuzzy feeling for the fact I had decided not to buy any stocks (except AMD) over the previous few months. I think that many people who had only half been following the market heard that claim in the speech, causing them to pay renewed attention to market values, check on their portfolio, realize that there was clearly a bubble, then decide to sell.
I am, anyway. The standard advice ("Buy low-cost index funds with dividends reinvested, keep buying on a regular basis, let it ride and don't worry about the plunges and the peaks") told us this would happen, and here we are.
How to interpret it? I'd go so far as to ask should we interpret it? They get paid for coming up with reasons why things happened (after the fact, I note, although the Economist has hardened up and just said "nobody knows"). We [1] get paid for leaving our pennies in low-cost index funds with dividends reinvested for a decade.
[1] Apologies for the generalisation; I needed a bigger word than "I"
Had to Google HODL and learned it means 'hold', in the context of crypto currencies losing value.
Can't comment on that, but for stocks, definitely yes. Historically, the market has always recovered from slumps. I know this does not mean it always will, but lots of people dropped out of the stock market after the crashes in 2001 or 2008 - for them, it would have been wiser to hodl.
Here's a question - people often refer to the 2008 recession as a once in a lifetime event. On what basis do they make that statement- because mortgages can't possibly pop as massively twice? What's to prevent another industry (in recent years often rumored to be student loans) from doing the same? Who's to say not another sector is as rotten as real estate was?
Mostly on the basis that it is the only way they can justify to clients/viewers/etc to "not have seen it." One would very reasonably conclude that the failure of banks/regulators/analysts to see any of this would likely be a good sign that they prob. don't really know what they are talking about, and predicting the market is actually kinda impossible, and consequently the value they add to their clients is minimal/none. So, in order to not give that impression, it is much easier to say that your models are in fact correct, but it just so happens that the financial crises was a "once in a lifetime" event.
Everyone is waiting for a dramatic bubble to pop. I think it will be a slow decline followed by generations of stagnation. You can't discharge student loans, so young people can't buy new cars, houses, things to put in houses, etc. At the same time the value of such degrees are going down as more and more rush to get them. Health care costs are eating up the income/savings of everyone else.
The companies that will do well in the future are those that cater to a low-income demographic. I hear Dollar General is doing very well.
The basis of that statement, in my opinion, is human bias. Experts protect their reputation to the external and internal (psychological) world by saying that nobody could have predict the specifics that led to that event.
Nicholas Nassim Taleb, as much as people here seem to dislike his personal style, has written extensively on these types of events. He calls them Black Swans, and says while we may not have predicted the 2008 crash, we would be wise to assume there exist unforeseeable/non-modeled events that would have non-linear impact on the system.
I think of it this way: future events* will occur that will invalidate our models and have outsized/nonlinear impact on the KPI we care about. Our blindness is because there are so many baked-in assumptions and possible futures we can't mentally model for them. Any single "Black Swan" event has a vanishingly small probability of coming true, but the sum of the Black Swan probabilities is the important metric, not any given one.
Taleb's thinking is filled with judgement of his peers, and his egotistical writing style is bombastic. His themes, however, from his trilogy of books, marries human psychology with rare outcome events to form an interesting contrarian take on the world.
* 1987 crash, dot-com crash, the Great Recession, etc.
In fact I've heard a hell of a lot of "CDOs are back and as interwoven as ever!" things. Though in theory we've learned a lot, who knows what will happen
From my understanding, American student loans can't be defaulted upon? They might be a bit too particular to hit the issues that happened with mortgages
Guys, here is my analysis (which, after reading this article, may shed more light on the matters).
We have had an asset bubble due to low interest rates. Because people don't want to keep money in banks. So we have had a bubble in crypto and stocks etc.
As interest rates rise - and they will, because the government will need to reload for the next QA or whatever - asset markets will keep taking hits.
The question is - why does the central bank really need to raise interest rates? Why not just keep things as they are and not load up on QA ammo?
Because of low interest rates and QE, which is the elephant hidden behind the rates. And they haven't really started unwinding QE (the reduction so far is homeopathic):
And the problem is: either they aggressively retire QE and the combination of withdrawal of liquidity and rising interest rate is going to create an enormous pressure on stocks, either they keep the balance sheet as it is and we enter into the next recession with the monetary tools already at 11, with very little room for the Fed to react without resulting in massive inflation.
I think the current asset bubble has to burst, it's going to be painful for investors but this is the only responsible thing to do.
I think you answered your question in the sentence above. If the fed keeps interest rates low, and we still hit another recession, they won't have the ability to react by lowering rates again.
I think we will see a bigger correction very soon. Markets crash periodically and we haven't had a crash for a while now. A periodic crash is not uncommon and actually makes a lot of sense when you think about the high level picture of what really goes on in stock markets. Stock markets are essentially dominated by greed (to get a higher ROI from stocks than through more traditional ways) and this greed leads to an increasing over valuation of assets over a period of time (multiple years). At some point the over valuation is so big that it becomes very visible to investors, at which point they get cold feet and start selling, and then... boom.
The markets drop to the point where the majority of investors agrees that the current valuation matches the expected ROI again and therefore stop further selling. After a couple years of conservative trading the markets return to become slightly more optimistic again and the game starts from scratch again.
It is a natural cycle and nothing we can do to change, just embrace a crash every 10-20 years or so...
Greed is "an inordinate or insatiable longing for unneeded excess". I doubt one can show that this is what drives the stock market.
What we probably can agree on is that the stock market is driven by the actions of many actors who try to maximise the utility value of the assets under their control.
an increasing over valuation of assets
We cannot show that assets are overvalued at any time. The value of an asset is very different to every actor. Everybody puts different expectations into the assets they control.
Even if we apply some 'simple' mathematical definition like the NPV of future returns, we could not say if an asset is overvalued in regards to that. Because the future returns are unkown. And we cannot say in hindsight either. Because the value of an asset is a statistical function of possible future outcomes. So the actual outcome does not tell us what the statistical function looked like.
It's really interesting that the yield curve has risen.
There's been a huge amount of negative sentiment on it's flattening, and more talk about the bonds being overbought...
China's sell off [0] was interesting and generated a lot of chatter about the value of the bonds, but it was to serve their interest (S&P lowered their ratings[0]), rather than them acting on some information.
But now, the yield curve has risen even if it's overbought?
The specter of rising interest rates in the US (driven by higher inflation expectations) appears to be a factor.
Fast-growing companies which are investing aggressively today and whose profits lie far in the future, in particular, are exposed to rising interest rates, due to the higher duration of such companies' cash flows. Duration, for those here who don't know, is a measure of the sensitivity of present value to interest rates.[a] Duration rises with the amount of time an investor must wait for cash flows, and vice versa.
For example, the present value of $100,000 of cash flow to be generated in 10 years, if the 10-year rate is 2%, is equal to $100,000/(1.02^10) = $82,000; if the 10-year rate rises, say, from 2% to 3%, the present value declines to $100,000/(1.03^10) = $74,000, or a -10% decline. However, if the $100,000 in cash flow is to be generated in 30 years, and the 30-year rate rises from 2% to 3%, the present value declines from $100,000/(1.02^30) = $55,000 to $100/(1.03^30) = $41,000, or a -25% decline. In this example, an increase in duration from 10 to 30 years changes the sensitivity of present value to a 1 percentage-point rise in interest rates from a -10% decline to a -25% decline. The longer an investor has to wait for cash flows, the greater the sensitivity of present value to changes in interest rates.
The same ruthless logic applies to companies. The present value of companies whose profitability is in a distant future declines much faster when interest rates rise than the present value of companies certain to generate cash flows in the near future. Until recently, due to historically low interest rates and no prospects for inflation, the stock market has been rewarding high-investment companies that are sacrificing current profits for growth. If interest rates continue to rise (along with inflation expectations), I would expect this pleasant state of affairs to change abruptly -- in which case, strap on your seat belts!
If you compare something like Netflix or Tesla, whose valuations are based on the proposition of 10x-ing profits sometime in the future, to something like Apple or GM, whose profits are here and now and may not even increase, would that mean Apple/GM (as an example) might fare better while the market adjusts to rising rates? So far, everything is dropping kind of evenly, it seems, but wouldn't companies with near term cash flows be worth more in a rising rates environment?
Guessing the bottom is hard. Spreading risk, like you have done, is a better idea. Maybe be more granular than "money market" and "stocks" though. There's bonds, annuities, real estate, foreign derivitives, and other vehicles too.
Up. If you hope for a crash so that you can invest your other money in a dip, you are foolish to try to time the market and would probably be better of to invest it earlier and just spend more time in the market.
The article mentions that but half dismisses it by saying that nobody can know for sure:
>The swoon set tongues to wagging, about its cause and likely effect. There can be no knowing about the former. Markets may have worried that rising wages would crimp profits or trigger a faster pace of growth-squelching interest-rate increases, but a butterfly flapping its wings in Indonesia might just as well be to blame.
Sales of stocks means that the main market movers want to liquidate their assets. Escaping a possible crash or fear of overvaluation are not the only reasons you want cash. You could also be preparing for a huge investment. Considering how privatized USA is, they could be preparing to invest in some government related action or venue. This could even mean an impending war.
Dow Jones had just had it's biggest intraday drop in history and no one has any idea why. I blame quants and their trading bots. Nothing makes sense any more.
I guess some people have borrowed to invest in crypto money, or worse in stocks, and so need liquidity to anticipate credit raise.
The reason the credit rate might be increased (my guessing) is because lending money creates vritual money and thus inflation. The other reason is because it would allow banks to profit from the european economy recovery. America has currently enough growth to absorb the negative effect of a credit rate increase.
[+] [-] jnsaff2|8 years ago|reply
Or maybe "Recessions are an outbreak of collective sanity."
[+] [-] Economics4u|8 years ago|reply
[deleted]
[+] [-] minikites|8 years ago|reply
>The immediate catalyst was the jobs report, which showed the strong United States economy might finally be translating into rising wages for American workers.
We even punish individual companies for this: https://www.vox.com/new-money/2017/4/29/15471634/american-ai...
>American Airlines agreed this week to do something nice for its employees and arguably foresighted for its business by giving flight attendants and pilots a preemptive raise, in order to close a gap that had opened up between their compensation and the compensation paid by rival airlines Delta and United.
>Wall Street freaked out, sending American shares plummeting. After all, this is capitalism and the capital owners are supposed to reap the rewards of business success.
>“This is frustrating. Labor is being paid first again,” wrote Citi analyst Kevin Crissey in a widely circulated note. “Shareholders get leftovers.”
[+] [-] thisisit|8 years ago|reply
Too fast increase in interest rates will cause their debt obligations to balloon and lower profitability. Though this will take couple of quarters to fully manifest. So, this is just a reaction in line with Amara's law applied to stock markets- We tend to overestimate the effect of a news item (technology) in the short run and underestimate the effect in the long run. I expect media to be soon cheering another round of upward zag.
[+] [-] fwdpropaganda|8 years ago|reply
The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it.
[+] [-] crdoconnor|8 years ago|reply
You're confusing the sales pitch used to justify low interest rates with what they were expected to do. They were expected to bail out insolvent banks and save them from the consequences of their collective bad decisions. Not raise wages. Not kickstart the economy. Fiscal stimulus is how you do that and they knew that.
Had politicians instead gone to unions and asked "what the fuck should we do now?" the answer likely would have been "let those fuckers go under, fire/lock up all management that had fraud going on underneath them, nationalise the systemically important institutions and counteract the economic contraction brought on by a wave of banrkuptices with fiscal stimulus."
That's no good though because reliable political donors like Jamie Dimon would be in an orange jumpsuit and wages might actually go up (bad for profits). So we got the band aid that was zero interest rates that kept the current lot on Wall Street who blew up the economy and encouraged fraud in a position where they still get to direct it.
[+] [-] rorykoehler|8 years ago|reply
[+] [-] tonyedgecombe|8 years ago|reply
Yes, and the economy is at record size, nothing surprising here.
[+] [-] Economics4u|8 years ago|reply
I think people are going to be surprised about the coming global growth, just like they said the Fed moves would cause massive inflation, or that interest rates would never go beyond zero.
[+] [-] marcosdumay|8 years ago|reply
By itself, this state is meaningless. This is exactly what investment kickstarting the economy looks like, as well as wasted investment on useless garbage.
[+] [-] akhatri_aus|8 years ago|reply
Its not so bad for companies that export with a weaker dollar. Also for primarily domestic businesses where higher inflation correlates to a higher top line. In fact is advantageous to be in such a situation.
[+] [-] the-dude|8 years ago|reply
[+] [-] dboreham|8 years ago|reply
[+] [-] ekianjo|8 years ago|reply
[+] [-] EliRivers|8 years ago|reply
I am, anyway. The standard advice ("Buy low-cost index funds with dividends reinvested, keep buying on a regular basis, let it ride and don't worry about the plunges and the peaks") told us this would happen, and here we are.
How to interpret it? I'd go so far as to ask should we interpret it? They get paid for coming up with reasons why things happened (after the fact, I note, although the Economist has hardened up and just said "nobody knows"). We [1] get paid for leaving our pennies in low-cost index funds with dividends reinvested for a decade.
[1] Apologies for the generalisation; I needed a bigger word than "I"
[+] [-] f_allwein|8 years ago|reply
Can't comment on that, but for stocks, definitely yes. Historically, the market has always recovered from slumps. I know this does not mean it always will, but lots of people dropped out of the stock market after the crashes in 2001 or 2008 - for them, it would have been wiser to hodl.
[+] [-] Apocryphon|8 years ago|reply
[+] [-] ChicagoBoy11|8 years ago|reply
[+] [-] barnfire|8 years ago|reply
The companies that will do well in the future are those that cater to a low-income demographic. I hear Dollar General is doing very well.
[+] [-] kmfrk|8 years ago|reply
[+] [-] tinymollusk|8 years ago|reply
Nicholas Nassim Taleb, as much as people here seem to dislike his personal style, has written extensively on these types of events. He calls them Black Swans, and says while we may not have predicted the 2008 crash, we would be wise to assume there exist unforeseeable/non-modeled events that would have non-linear impact on the system.
I think of it this way: future events* will occur that will invalidate our models and have outsized/nonlinear impact on the KPI we care about. Our blindness is because there are so many baked-in assumptions and possible futures we can't mentally model for them. Any single "Black Swan" event has a vanishingly small probability of coming true, but the sum of the Black Swan probabilities is the important metric, not any given one.
Taleb's thinking is filled with judgement of his peers, and his egotistical writing style is bombastic. His themes, however, from his trilogy of books, marries human psychology with rare outcome events to form an interesting contrarian take on the world.
* 1987 crash, dot-com crash, the Great Recession, etc.
[+] [-] gerbilly|8 years ago|reply
Sometimes I suspect it's all rotten.
[+] [-] rtpg|8 years ago|reply
In fact I've heard a hell of a lot of "CDOs are back and as interwoven as ever!" things. Though in theory we've learned a lot, who knows what will happen
From my understanding, American student loans can't be defaulted upon? They might be a bit too particular to hit the issues that happened with mortgages
[+] [-] isolli|8 years ago|reply
As to why it is different now, this article [1] contains some answers (anyone can decide whether they agree or not).
[0] https://en.wikipedia.org/wiki/Comparisons_between_the_Great_...
[1] http://cepr.net/blogs/beat-the-press/it-actually-doesn-t-fee...
[+] [-] EGreg|8 years ago|reply
We have had an asset bubble due to low interest rates. Because people don't want to keep money in banks. So we have had a bubble in crypto and stocks etc.
As interest rates rise - and they will, because the government will need to reload for the next QA or whatever - asset markets will keep taking hits.
The question is - why does the central bank really need to raise interest rates? Why not just keep things as they are and not load up on QA ammo?
That depends - are you an Austrian economist? :)
[+] [-] cm2187|8 years ago|reply
https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
And the problem is: either they aggressively retire QE and the combination of withdrawal of liquidity and rising interest rate is going to create an enormous pressure on stocks, either they keep the balance sheet as it is and we enter into the next recession with the monetary tools already at 11, with very little room for the Fed to react without resulting in massive inflation.
I think the current asset bubble has to burst, it's going to be painful for investors but this is the only responsible thing to do.
[+] [-] aceinaday|8 years ago|reply
[+] [-] pcnix|8 years ago|reply
[+] [-] oculusthrift|8 years ago|reply
[+] [-] dustinmoris|8 years ago|reply
The markets drop to the point where the majority of investors agrees that the current valuation matches the expected ROI again and therefore stop further selling. After a couple years of conservative trading the markets return to become slightly more optimistic again and the game starts from scratch again.
It is a natural cycle and nothing we can do to change, just embrace a crash every 10-20 years or so...
http://macromarkets.ie/wp-content/uploads/2016/09/Asset-Pric...
[+] [-] TekMol|8 years ago|reply
What we probably can agree on is that the stock market is driven by the actions of many actors who try to maximise the utility value of the assets under their control.
We cannot show that assets are overvalued at any time. The value of an asset is very different to every actor. Everybody puts different expectations into the assets they control.Even if we apply some 'simple' mathematical definition like the NPV of future returns, we could not say if an asset is overvalued in regards to that. Because the future returns are unkown. And we cannot say in hindsight either. Because the value of an asset is a statistical function of possible future outcomes. So the actual outcome does not tell us what the statistical function looked like.
[+] [-] reallymental|8 years ago|reply
There's been a huge amount of negative sentiment on it's flattening, and more talk about the bonds being overbought...
China's sell off [0] was interesting and generated a lot of chatter about the value of the bonds, but it was to serve their interest (S&P lowered their ratings[0]), rather than them acting on some information.
But now, the yield curve has risen even if it's overbought?
[0] https://www.ft.com/content/a1ad3848-ba05-11e7-8c12-5661783e5...
[+] [-] drawkbox|8 years ago|reply
Interest rates are going to be increasing, always dings the market and debt.
A re-trench helps the stock buy backs coming from the tax cuts, hedge funds probably helping engineer that volatility.
[+] [-] cs702|8 years ago|reply
Fast-growing companies which are investing aggressively today and whose profits lie far in the future, in particular, are exposed to rising interest rates, due to the higher duration of such companies' cash flows. Duration, for those here who don't know, is a measure of the sensitivity of present value to interest rates.[a] Duration rises with the amount of time an investor must wait for cash flows, and vice versa.
For example, the present value of $100,000 of cash flow to be generated in 10 years, if the 10-year rate is 2%, is equal to $100,000/(1.02^10) = $82,000; if the 10-year rate rises, say, from 2% to 3%, the present value declines to $100,000/(1.03^10) = $74,000, or a -10% decline. However, if the $100,000 in cash flow is to be generated in 30 years, and the 30-year rate rises from 2% to 3%, the present value declines from $100,000/(1.02^30) = $55,000 to $100/(1.03^30) = $41,000, or a -25% decline. In this example, an increase in duration from 10 to 30 years changes the sensitivity of present value to a 1 percentage-point rise in interest rates from a -10% decline to a -25% decline. The longer an investor has to wait for cash flows, the greater the sensitivity of present value to changes in interest rates.
The same ruthless logic applies to companies. The present value of companies whose profitability is in a distant future declines much faster when interest rates rise than the present value of companies certain to generate cash flows in the near future. Until recently, due to historically low interest rates and no prospects for inflation, the stock market has been rewarding high-investment companies that are sacrificing current profits for growth. If interest rates continue to rise (along with inflation expectations), I would expect this pleasant state of affairs to change abruptly -- in which case, strap on your seat belts!
[a] https://www.investopedia.com/terms/d/duration.asp
[+] [-] Talyen42|8 years ago|reply
[+] [-] TekMol|8 years ago|reply
I cannot decide if I should hope for the stock market to go up or down. What do the wise people of HN think?
[+] [-] tyingq|8 years ago|reply
[+] [-] sumedh|8 years ago|reply
[+] [-] maaaats|8 years ago|reply
[+] [-] andrewmcwatters|8 years ago|reply
[+] [-] willvarfar|8 years ago|reply
But this short snippet by the BBC explains that the market anticipates that interest rates will rise as wages rise faster than expected - http://www.bbc.com/news/av/world-us-canada-42955578/us-marke...
[+] [-] simias|8 years ago|reply
>The swoon set tongues to wagging, about its cause and likely effect. There can be no knowing about the former. Markets may have worried that rising wages would crimp profits or trigger a faster pace of growth-squelching interest-rate increases, but a butterfly flapping its wings in Indonesia might just as well be to blame.
[+] [-] nurettin|8 years ago|reply
[+] [-] sethgecko|8 years ago|reply
[+] [-] chmike|8 years ago|reply
The reason the credit rate might be increased (my guessing) is because lending money creates vritual money and thus inflation. The other reason is because it would allow banks to profit from the european economy recovery. America has currently enough growth to absorb the negative effect of a credit rate increase.