The statement about the lack of inflation from QE and other stimulus programs from 2008 is pretty questionable. There's been little inflation as measured using usual consumer price indices, but the construction of those indices is typically fairly focused on consumer goods and underweights the assets that rich people tend to invest in (stocks, real estate, bonds, etc).
The QE and stimulus programs from 2008 were significantly more targeted toward the upper and upper-middle classes (arguably without that much trickle-down), and so there wouldn't be much significant inflation as measured by consumer price indices.
But if we look at the assets that rich people invest in (since it's mostly wealthier people who benefited from the 2008 stimulus programs), then I'd say there's been a significant amount of inflation - P/E ratios for stocks have been historically high in the last few years, real estate in desirable cities has gotten significantly more expensive, and bond yields have been low.
We seem to be already seeing some of the same, with the stock market being pushed up by the Fed's commitment to 4T+ in stimulus this time around and ever lower interest rates.
QE never really worked, bailed out a bunch of corrupt and broken companies that should have gone bankrupt, and kicked the can down the road. They were supposed to unwind QE1 but they never did. And $4T in toxic QE1 assets sat on the Fed's balance sheet going into this mess. The Fed is propping up the bond market and toying with the idea of buying equities. We just had 17 million people file for unemployment in 3 weeks and the Dow went up a few hundred points. Our markets have been completely decoupled from economic reality because the Fed is faking demand and not letting the markets crash like they should. Our fiscal deficit is already $3 trillion this year and it's only April. This is a recipe for disaster. How much of corporate America will the Fed own when this all comes crashing down? Will we have a nationalized economy by default?
The markets dropped because other countries already had similar issues.
The stock has it mostly priced in, but the rise of the stock is attributed to the fact that European countries are flattening, vaccines and ramped up testing in the US.
To paraphrase Luke Skywalker in The Last Jedi, everything in that sentence is wrong--or at least seriously questionable.
> The stock has it mostly priced in
It does? I've seen about the same number of analyses indicating that companies are doing dubious things to bolster their earnings on paper (and haven't priced in the full cost of the crisis) as I've seen supporting your argument.
> but the rise of the stock is attributed to the fact
Explanations for this abound. From basically every corner, qualified, popular, neither, and both. Post-Black-Swan shockwaves are usually accompanied by a lot of confusion and after-the-fact pseudorationalization, and this situation is no different.
> European countries are flattening
Sort of (recorded clusters/outbreaks keep getting reported),
partially (some countries are doing really well, some are not), and only according to really, really new data.
> vaccines
Presumably you mean vaccine research getting underway? This is happening, to be sure. Still has the attribution (after-the-fact potential for false correlation) problem mentioned above.
> ramped up testing in the US
There's not consensus on the effect of more testing on the markets either. Testing builds confidence/information on the one hand but, in many US states, it has revealed worse-than-expected (well, really worse-than-hoped) numbers of sick people on the other.
I guess the upshot of the above is: you make a very authoritative statement about why the markets have behaved in a certain way. That information isn't even beginning to be known, or, at this early phase, knowable, with any sort of confidence.
QE1 worked well and the banks are not corrupt. It's in the later years, while stocks and the economy were on a tear, that the Fed at. al. refused to raise interest rates ... this perpetuated the housing bubble among other things, which is the #1 source of inequality (hint, it's not between the billionaires and the rest of us, it's between the propertied and the unpropertied).
QE1 did not work at all. And the Fed's 0 percent interest rates have distorted capital markets causing corporate debt to skyrocket. That alone is propping up zombie companies and this overleverage is what will make the coming recession / depression even worse than 2008. Note: the Fed is violating the Federal Reserve Act by using BlackRock as a proxy for bond purchases. So please do not tell me they are not corrupt. They're beyond corrupt.
This. The 'race to the bottom', committed globally by central banks, to get to 0% interest rates, and keep them there for the sake of keeping the markets 'up', exacerbated by top level politicians' desires/directives.
If there's no cost to borrow, why not keep borrowing? And keep borrowing? And lending? Until things really unwind in a recession/depression that will de-lever everything/everyone.
The moral hazard? I try to maintain my own family finances, keep a budget, save for expensive things. And in the span of 3 weeks the US has spent $7,000 of every individual's future ($2T / 340M people).
> And in the span of 3 weeks the US has spent $7,000 of every individual's future ($2T / 340M people).
You can’t really claim that. The reality in the progressively taxed US is the higher tax brackets pay the overwhelming majority of the total tax bill.
In reality, the payback of that $2T will fall on the top taxpayers. So it’s more like $10 for most Americans and $100000+ for the top percentiles. Bezos types will pay tens of millions.
We're about to find out what global QE to infinity does.
I'd expect more events like the recent boom in stock prices in spite of massive global unemployment and the wave of unrest nicknamed the Arab spring which came after 2008 and had origins in economic disruption. Revolutions often come after the unbearable has passed.
Even if we quickly overcome the virus the global economic impact of the lockdown and QE will be severe and long lasting. It's quite possible that due to QE/stimulus none of that will show up in stock prices and they will shoot up, boosting inequality again.
Based on past experience post-dot-com-bust-bailout and post-2008-bailout:
Prepare for the $1.5M starter home financed by an 0.08% interest 90 year no money down mortgage, $800k student loans at 0% interest, and business lines of credit at 2% to any business that has shown any revenue at all in the last month and that can produce one mammal capable of fogging glass. Any mammal with provable respiration will be able to get a car loan and a credit card.
Go long on real estate, stocks, bonds, Bitcoin, Litecoin, Dogecoin, all the shitcoins that don't even work, gold, oil, cow farts, and pogo stick futures.
Expect more monstrously overfunded "unicorn" startups that lose massive amounts of money and produce very little. These are basically Ponzi schemes targeting the very rich and venture funds.
Wages however will continue to stagnate. Everything always goes up but wages.
As a result of wage stagnation in 2024 or 2028 another even more asinine Populist than Trump will be elected; whether they are "right-wing" or "left-wing" will depend on which side is able to produce a louder demagogue and better memes. Meanwhile the rich will build orbital bases and prepare to leave the planet.
You've put into words what I was thinking about the other day.
I always hear folks say "Weird there was no inflation after the 2008 stimulus" or even experts try to claim that there is none.
But it's not about inflation of everyday consumer goods, it's about the massive inflation in things that consumers don't purchase regularly (things like houses). And at this point, I think we've done a lot to essentially price regular consumers out of that market.
Think about that. We've priced regular folk out of things that build wealth. It's going to lead to something terrible down the road. Even more terrible than what we're already living in.
Every HN thread on economics has a bunch of comments like these that are earnestly misinformed about economics. When commenting on something outside of your wheelhouse, please recall Socrates from the Apology: "I observed that even the good artisans fell into the same error as the poets; because they were good workmen they thought that they also knew all sorts of high matters, and this defect in them overshadowed their wisdom."
I'll point out just two deficiencies in these threads and leave the rest to you. If P/E ratios in the US are "too high," then people would invest their money elsewhere for better return, right? Maybe international stocks or bonds or whatever. And why don't they, if they have every incentive to seek a better return? Because there are no better returns, even in countries with higher interest rates. So how could P/E ratios be too high? The more likely explanation is that this is the "new normal" - savings outpaces investment opportunities for many reasons (aging populations, growth in countries with stronger saving cultures, etc.), which pushes up the premium on assets.
Second, on the subject of interest rates and QE, a little international perspective would make you reconsider the effect on the overall economy. All other developed economies have lower interest rates, more QE, and slower growth than the US. Look at Europe, look at Japan. The issues of "why are asset prices rising" and "why is inflation low" are much larger than just US policy. We are talking global trade and demographic factors that influence these things. The current stance of fiscal and monetary policy is the symptom, not the cause. And in fact the US has been significantly more successful than our counterparts on that topic, as a fast and strong response in 2008 pre-empted the kind of drawn out economic malaise seen in Europe, where the ECB waited years before easing policy to the degree that we had. Now Europe has lower rates, more QE, lower inflation, a worse labor market, and less growth than the US. And that's before factoring in the coronavirus crisis. Policy may have increased inequality in some ways, but if you're going to make that claim you have to also answer the corresponding counter-factual: potentially the poor would have been even worse off (relative to the rich) if there were no policy interventions and the labor market collapsed. There have been some papers on the topic, and it is not at all obvious that inequality is worse now than it would have been if there was less policy intervention.
I never said that P/E ratios in the US are "too high". I said that they've been higher in recent years than in past history.
This is, as you said, because the amount of money chasing investment opportunities is increasing. I agree that the reasons for this are complex, but one significant reason that the amount of money chasing investment opportunities is increasing is central bank stimulus (not just in the US, but worldwide).
The rise of asset prices definitely is a much more complex issue than just US policy, but I'd still argue that stimulus by the US is one of the causes, not only a symptom.
I agree with you that the US has been more successful in managing the 2008 crisis than the ECB, and that part of that was because we recognized that we needed stimulus earlier on in the crisis. But this doesn't contradict anything else that I said.
I also never made the claim that the counterfactual of no stimulus would have been better - I personally believe it would have been worse, since the economy and labor market would have likely went through a longer and more serious collapse. But again, this does not contradict what I said about central bank stimulus being one of the significant causes in the rise of prices in financial assets.
I appreciate your response and think you're mostly on the right track. I didn't intend to call you out, more to point out a few mistakes in thinking that are common in these kinds of threads on HN (and indeed are more egregious elsewhere in the responses to this OP).
> I also never made the claim that the counterfactual of no stimulus would have been better
To be fair, that wasn't the only option. There was the debate in 2007/08 about how much of the stimulus should be monetary vs handouts directly to taxpayers vs infrastructure. There's some who believe that the "infrastructure" portion was too small of the pie, hence the stomach for things like "Infrastructure Week" from Trump or "Green New Deal" from the left wing of the Democrats.
In the abstract, I liked the idea of spending it on infrastructure, but over the ensuing decade I’ve become deeply skeptical of the ability of the US government to effectively spend more money. California high speed rail and the NY subway are exhibits a and b.
I agree with you (to your point) about California high speed rail: a solution looking for a problem. But NY subway is arguably something that could generate huge returns if the capex was committed to modernizing and automating the public transport of the biggest city in the USA and a major financial capital.
CAHSR is mostly proof of a few things that America gets wrong
- heavy reliance on consultants is not a financially prudent exercise compared to building up a competent civil service, particularly since consultants want to keep the gravy train running
- sustained funding for projects is the way to build up a civil service that can push out projects; conversely, "get a ballot measure passed first and ask questions later" is a very bad model.
Economics is a weird discipline where everyone becomes an expert on it at age 15. I've even seen people confidently expound on economics when it's clear they don't even understand the difference between revenue and profit.
In contrast, nobody is willing to argue with a physicist unless they are at least as educated in physics as their counterpart is.
It's really a shame that although we live in a market economy, there is no attempt whatsoever in K-12 to explain how markets, business, and accounting work. A high school graduate is unlikely to even grasp what compound interest is.
There are a number of subjects like this. I feel it has something to do with not making predictions about the future -- leaves no clear indication of good/bad decisions that are tied to skill.
The really interesting areas like this is something like fringe/doomsday religions, that do make predictions about the future. When these predictions inevitably fail to pass, the believers double down.
Because economics isn't a real science. As soon as someone starts talking about it like it is a science my bullshit alarm rings and I politely extract myself from the conversation.
This is basically my point. Didn't particularly mean to criticize davidxc, more the tendency for people on HN to assume that because they're good at programming they must also know a lot about economics, the stock market, and etc.
To be fair, there might not be anyone who can opine on economics and be correct. It's all either survivor/hindsight bias, or making indistinct, unverifiable predictions.
Economics happens to have high stakes, so people flock to it. Nobody really knows what's going on.
We do know a few things, such as attempts to repeal the law of Supply & Demand fails again and again. We also know there is no Free Lunch, as every effort to implement one has failed.
It's like I am no physicist, but I know that anyone who claims he's invented a Perpetual Motion machine is either a fraud or made a mistake.
"a bunch of comments like these that are earnestly misinformed about economics. "
" savings outpaces investment opportunities for many reasons (aging populations, growth in countries with stronger saving cultures, etc.), which pushes up the premium on assets."
The savings rate is not correlated with stock prices. [1]
"All other developed economies have lower interest rates, more QE, and slower growth than the US. "
No, they have similar rates per capita. US grows because it brings in more bodies [2]. Moving warm bodies from A->B implying a loss somewhere and again somewhere else isn't exactly growth. (I mean - yes, they probably can be more productive in America). But this is not an economic marvel.
The OPs statements concerning inflation of financial assets is very, very reasonable economics.
The argument is not that the US savings rate pushes up the value of financial assets in the US, I'm talking about globally (i.e. the global savings glut hypothesis). Countries like China, Saudi Arabia, and Germany have significant capital account surpluses which continue to get invested in assets in the US, particularly the stock market.
This is a fair point. But the Fed has been playing funny money during all this time, backing dollars with garbage real-estate, so I don't think it's fair to say this is just a regular 'new normal' as in asset prices were marked properly.
'New Funny Money Normal' - maybe, but the massive Fed balance sheet first enables those with assets, not those who don't i.e. 'the rich'.
This is unlikely to be read given how late it is -- but one major flaw in your argument is the statement "people would invest their money elsewhere". It is very clear that the largest investors are not using "their money" but borrowed money. Ultra-cheap debt has enabled hedge funds and companies to leverage up and purchase far more stock than they could otherwise afford, massively driving up demand and pumping up equity prices to the high P/E ratios that you dismiss -- and low interest rates are the enabler.
Stock Buybacks By Corporations The Largest Share of U.S. Equity Demand
you can't make such a grandiose condemnation of "earnest misinformation" and then not make perfectly defensible arguemnts, lest you make the exact same mistake you condemn.
p/e ratios at historical highs is a statement that they've disconnected from their fundamentals, i.e., the price of a share of a company is (often much) more than the expected present value of all future cash flow for that share.
that there are no better alternative investments just strengthens the case that those p/e ratios are irrationally high for those assets, not that the strategy of investing in the best available alternative is irrational.
I don't understand what you're trying to say. You can't easily say that asset prices are "disconnected from their fundamentals" - the price is what people are willing to pay for the future earnings of those companies. People are willing to pay a higher premium for those earnings now than they have in the past. Instead of the comparison to historical highs, try looking at developing countries, with lower P/E's and higher interest rates. Yet investors are still willing to pay a premium for US stocks. If you're going to say that the price is wrong, you need to account for that discrepancy. It seems that the argument you want to make is that people buy overvalued US companies because they think everyone else will continue to buy overvalued US companies?
i'm saying the premium you mention is the additional willingness-to-pay for those equities being the best available, not something intrinsic to the underlying business. it's on top of the value of the cash flows.
in a hypothetical market with 2 relatively correlated (similar beta) stocks, one that historically returns 10% and one that returns 2% and an expectation that those returns continue in the near future, you'd put all your money on the first stock, regardless of the price and regardless of systemic conditions.
in that scenario, you'd expect to be making your most rational choice even if you overpay severely. in the case that the market crashes, you'd lose less money than the opposite scenario. the price says nothing about the value of the underlying cash flows (the fundamentals).
Edit: is this not a fair question? Putting one's own money on the line is a reasonable test of what one's convictions are. For example, I'm optimistic about the market, and have put my money where my mouth is. Of course, that doesn't mean I'm right, but I have a level of confidence that I am.
that's mostly a gamble about timing, not the validity of the p/e ratio--that you can both get into and get out of a short position with sufficiently precise timing.
I think your question is riding the edge of what might be considered too confrontational on HN.
the overall sentiment is reasonable, of course. you shouldn't listen to people who say the sky is about to fall while they continue buying $SPY every other friday.
yes, basic consumer goods didn’t see much inflation. But what about housing, education, even stuff like cars and travel. Of course, other factors are at play too, but abundant “cheap” money certainly increase prices of those
It's American consumerism fueled by available credit.
What's really fascinating is that what you said applies to McMansions, and ... private aircraft too.
Cessna cancelled their basic $300,000 new 172 because people were only ordering the $400,000 glass panel model. The price is so high they took it off the website for the first time. (And older pilots were expecting it come in at $80,000. lol.)
Cubcrafters makes composite Cubs(!) that are priced starting in the $190,000 range for LSA and $317,000 for Part 23, and again, mainly sell the maxed out versions.
The increasing volatility of future economic prosperity in most places, as well as concentration of burgeoning businesses into a few select cities is not factored into the CPI, and is probably not able to be factored.
The difference in probabilities of future life outcomes for living in certain prosperous neighborhoods and cities and the compound effect of children growing up in those is very material nowadays. This especially effects how much more housing and land costs in certain cities, and how much people are willing to gamble on it by leveraging more to "buy in" to those probabilities of future success.
Not only are they included they account for almost a third of CPI. Thing is it is measuring nationwide housing costs which may not be moving in sync with Bay Area rents
If we look at inflation for consumer goods (not oil, healthcare, housing etc.) there may be another, non-fiscal policy aspect coming into play shortly.
Formerly Chinese (and sometimes subsidized I suspect) dirt cheap items might become a lot more expensive. Non stick frying pans and pool swim noodles type things. I can't believe that returns exactly to how it has been.
Another way of looking at it: consumer goods (as measured by CPI) have radically dropped in price relative to non-CPI goods over the past few years (perhaps driven by automation and optimization of global supply chains) while, at the same time, the general price level has risen as we've exploded the money supply.
The QE and stimulus programs from 2008 were significantly more targeted toward the upper and upper-middle classes (arguably without that much trickle-down), and so there wouldn't be much significant inflation as measured by consumer price indices.
But if we look at the assets that rich people invest in (since it's mostly wealthier people who benefited from the 2008 stimulus programs), then I'd say there's been a significant amount of inflation - P/E ratios for stocks have been historically high in the last few years, real estate in desirable cities has gotten significantly more expensive, and bond yields have been low.
We seem to be already seeing some of the same, with the stock market being pushed up by the Fed's commitment to 4T+ in stimulus this time around and ever lower interest rates.