I'm going to explain what has happened so far. What happens next entirely depends on how inflation continues and the feds reaction.
1. We had zero percent interest rates. This causes the value of assets with cash flows out into the future (think speculative tech, Tesla) to accelerate.
2. We had massive herding in megacap tech. These valuations are high in part because for a decade you would not have beat the index without having these names in your portfolio.
3. These valuations blew up even further because of call squeezes during the 2020-2021 bull. Tesla even managed to get itself into the S&P.
5. Then in December, the megacaps we're squeezed further until the S&P 500 had a negative return relative to price!
A lot of this occured because people remained under the impression that bond yields would never normalize. Now that they have, there is a risk free alternative to stocks.
Now for the next complications: Ukraine + Russia, economic war with China, inflation, how the fed will respond, gas prices.
If inflation continues and the fed becomes aggressive with hiking, all assets are dead. Bonds will be wrecked, stocks will be wrecked, cash is wrecked, even gold (depending on how aggressively they hike) will be dead because it's actually a really good deal to buy bonds when they yield north of 10% (if we get there).
Say the fed decides not to hike as aggressively and inflation slows, then you'll be holding the S&P 500 likely for yield than growth. In the case of a recession or further inflation, that yield may be at risk depending on the sectors you're invested in.
In this context the correction in names like Target make perfect sense. The dividend was near zero at it's price before the cut. Same thing happened in a company like Newmont mining.
At 10% rates I think the fair value of the S&P becomes something like 2000 assuming the same earnings. High yield rates would moon and tons of bankruptcies would ensue. Consider how heavily pensions and retirement accounts are concentrated in stocks.
The ramifications of reaching a point like that would be devastating, so yes, I think dead is not alarmist but appropriate.
The one time in history they have gone beyond 10% it took 2 years to go from 7.32% in Sep 1977 to reach 10% in October 1979, and then peak at 15% in 1981.
It's not impossible bonds will reach 10% again. But it seems unlikely, and it seems safe to think it would take 3+ years to get there.
I think 10% happening is not that unrealistic. If oil prices return to 2008 levels ($150 a barrel) that's effectively another 36% inflation. If natural gas prices in the US converge with European prices, you have another 400% increase in the cards.
The fed will have a choice: hike rates to slow demand (10%) *OR* keep rates highish and allow financing for more supply to come online (5%). Who the hell is going to finance new gas exploration at 10%?
The OP wrote: "If inflation continues and the fed becomes aggressive with hiking, all assets are dead. Bonds will be wrecked, stocks will be wrecked, cash is wrecked, even gold (depending on how aggressively they hike) will be dead because it's actually a really good deal to buy bonds when they yield north of 10% (if we get there)."
Reads like they are referring to the Fed. Even if they aren't, US AAA-rated bonds generally track the Fed rate +1% to 1.5%[1].
So corporate bonds at 10% means the Fed rate is 8.5%+. I don't think this is realistic within the next 2 years.
OP may have speculated on outlook for the next decade, it’s possible that interest rates rise and inflation remains. This would be the case if inflation is not a domestic phenomena land is instead driven by war, china, and tariffs.
You forget very expensive crop failures caused by environmental degradation and global warming, too. India just went from promising wheat to fill the supply gap left by Ukraine to banning the export of wheat within the span of a month. Queensland's drought and now flooding is a separate disaster. It's not just too much money chasing too few microchips or cars because of logistical issues or covid shutdowns; it's too much money chasing shortages of highly inelastic basic requirements for survival, like bread and milk. This is the sort of thing that contracting the money supply can't fix, because it's not excess consumption that can be discouraged away. Considering inflation in the UK just hit 9%, EU 7.8%, even Japan going from deflation to 2.5% inflation, it seems probable this is a long haul global problem. It's a really lousy environment when the dollar is inflating and strengthening against other currencies at the same time. Higher interest rates will tamp down spending on discretionary goods, but much less so the inelastic ones we're seeing shortages of; nor will they drive investment to create more of what can be created.
That's only true if investors think the 10% rates are permanent. Future interest rates are a time series not a single value, and I suspect most will use a lower rate in later years reflecting some mean reversion.
A 10% rate on a 30-year treasury, is for all intents, permanent.
Think of it this way - a person buys a 30-year bond yielding 10%. Then, for the next 30 years, no matter what happens to interest rates or prices, they will earn a 10% return on their original bond purchase, risk free.
Remember also that 30 years is approximately your adult working life, so a really long time that people tend to think of a “permanent”.
Is it truly permanent? No, but for purposes of discussion and financial planning, it’s close enough.
If they hike the rates too much then debt servicing would be costly. This is different from 1980, because back then US gov debt was about 30% of GDP and now it is 120% of GDP (https://fred.stlouisfed.org/series/GFDEGDQ188S#0)
What are the realistic values here? I have no clue, but a good analysis should cover this.
> If they hike the rates too much then debt servicing would be costly.
The Fed doesn't care about the cost of servicing the debt. That's the US Treasury's job. By law, the Fed has the dual mandate to keep both inflation and unemployment low. That's it. Nothing to do with the cost of servicing the Government debt.
If the interest on the Government debt becomes too high, nobody will point the finger at the Fed. If however inflation is high (like now) or unemployment high, you can start hearing people accusing the Fed of gross negligence. In the extreme, the Chairman of the Fed may be sacked, then brought in front of various Congressional investigations, and may even find himself in contempt, or some other very unpleasant situation.
Bottom line: the Fed really cares about inflation, and doesn't give a damn about debt servicing.
I don't buy this argument. There are good arguments to the contrary which Jerome can bring up and has at previous hearings.
Say demand quiets but the price of inelastic goods (gas and food) continues to skyrocket due to greater demand from developing nations who demand more resources to have a better standard of living. How will hiking to 10% fix anything?
Sure you'll kill demand, but you'll also kill financing supply which will only exacerbates the issue over the long run. We need more drilling, more refining, more farming now that Russia is out of the picture and the Saudis are playing games.
Hiking too far is actually a horrible policy choice, and Powell can make a cogent argument about it: he already has mentioned this in hearings. You can't address supply related constraints with higher rates. At some point, they might justify capping rates to finance the needed supply, and that argument smells like the yield curve control of the 1940s. I suspect this argument will become more palatable if we have high unemployment and high inflation. [0]
I have a feeling whatever policy rate they pick will aim to be slightly sub neutral (negative real rates) as they pray inflation resolves itself, while constantly pointing out they have no control over whether Brazil has a successful wheat harvest.
You are not actually responding to my argument. I was arguing that the Fed does not care about the cost of servicing the Government debt. I wasn't arguing about how much the Fed will hike. They will stop hiking when they consider fit, but the interest on the Government debt will not be one of the factors they'll include in their decision.
They definitely care about second-order effects. If for example they raise the rates enough that debt servicing starts to become a real issue and this leads to higher taxes and spending cuts, then that is an extra economic headwind which they must consider.
They don’t care about the debt figure per se but they do care about the economic implications of that debt, and how other entities are likely to react to it.
> If for example they raise the rates enough that debt servicing starts to become a real issue
then they would've realized they hiked too much. That's why the current Fed hikes are conservative - a lot of people are claiming that they are late, and should've done it earlier, but i think they are doing it right. Slow and steady, and be conservative.
I actually agree that hiking too high is a very poor policy choice for a number of reasons but for your example of fuel, if you kill the demand for it, the price will not skyrocket. On the other hand, however this would also mean that the economy as a whole is dead so again not the best policy choice (but it is likely to rein in inflation)
That's true in theory, but in practice I don't think it works that way. The executive and popular opinion can put pressure on the fed, and even absent that the fed does in fact care about the stability of the nation more broadly than that mandate suggests. I agree with the parent that the fed is very unlikely to raise rates to double digit levels given the high level of government debt. More likely we'll have an extended period of high-but-manageable inflation, and inflate away some of that debt (and some of everyone's savings).
That’s just not true. The Fed will take into consideration all of the consequences of their actions. They’re not going to do whatever they want and put the country in historical depression.
This is one one of the ways to fix the economy in times like this requires congress to reign in spending. It's not just on the Fed to try to fix things, both sides of the equation need fixing.
If you think that there is some major economic turmoil ahead with dropping asset values across the board (and I personally this is fairly likely), the general advice is to aim for a positive alpha. That is, if you are moderately well off or better, invest to "go down less than your neighbors". Assets across the board lose value, but if at the end of the fall you preserved a higher fraction of your money to invest than your neighbors and are willing to pick the best assets after the collapse you can reap huge benefits.
The counter argument to this is that the above approach absolutely requires an iron discipline. And without experience non-professionals are prone to making very costly mistakes (e.g., invest on feelings, double down inappropriately, etc.). So, a general audience advice is usually: do not invest money you need within 5-10 years and do not make rash decisions; it is better to ride this train down and then hopefully back up than jump randomly. And diversify (across countries, economies, asset classes, etc.).
I think this is probably the most useful wisdom for the average person:
> do not invest money you need within 5-10 years and do not make rash decisions; it is better to ride this train down and then hopefully back up than jump randomly.
Gaming the market successfully requires a ton of skill and knowledge, and even then you are not guaranteed success.
Most people are better off focusing on asset-class diversification (i.e. spreading money across many different kinds of asset classes - i.e. physical assets, securities, commodities, cash, etc) than playing just the stock market.
And even when playing the stock market, most people are better off focusing on "time-in-the-market" vs "timing the market".
As long as you heed standard advice (treat stock as nice to have but value it at zero during wage negotiations) then the impact on your net worth should be minimal :)
> The general advice is always to aim for a positive alpha.
On the contrary, for the past 20+ years the general advice has been to specifically aim for the alpha of zero ("just use index funds"), not for a positive alpha ("don't try to beat the market", etc.).
> No investor aims for a negative alpha, regardless of the economic climate.
Factors other than alpha are way more important for most people. Many retirees put a high value on low volatility or stability of dividends and are perfectly OK with getting a small negative alpha as part of the package.
Original hedge funds (before they joined a cutthroat trading jungle) set up with a similar goal in mind: a small negative alpha, but protected against the loss of the principal. And had plenty of wealthy investors who were happy with this deal.
Alpha becomes the critical parameter to optimize for when actively investing in times of turmoil (then a negative total return on a positive alpha on the down leg is a success). But few people actually do that, so few care about alpha.
Yes, but it's unclear how to intersect this with a reasonable tax strategy for many retail investors. i.e. do I sell everything and pay capital gains or sit?
I actually don't have a good answer for this. Not financial advice. Talk to a fiduciary.
The problem with inflation is that you need to protect yourself before the fact, and at this point, it's difficult to read to what extend the fed will respond with rate hikes and how much inflation we get going forward.
In my personal view, it would be stupid to hike to 10% since that will also cut off the needed supply response: this will decapitate energy, farm, and housing expansion while at the same time decimating all forms of wealth. But there is a possibility depending on how trigger happy the fed becomes.
More likely than not, they raise rates, but it stays below the rate of inflation (3-5%), so anything that yields above that range is a good investment. Anything below would be protective.
As for stocks, I'm looking at individual companies that are cheap with high cash flow that have macro tailwinds, but I'm still waiting. There are always bull markets inside of bears, but you have to look for them. Mind you, bear markets have vicious rally from time to time which fool people into getting an all clear signal. A bear markets job is to bleed everyones money dry, which is why I'd recommend people stay away until no one is interested in stocks anymore.
> In my personal view, it would be stupid to hike to 10% since that will also cut off the needed supply response: this will decapitate energy, farm, and housing expansion while at the same time decimating all forms of wealth. But there is a possibility depending on how trigger happy the fed becomes.
The only reason Volcker managed to bring down inflation is because he was willing to actually do what needed to be done. If borrowing money is cheaper than inflation, why would anybody not just continue to borrow money indefinitely? The Federal Reserve can fight inflation or it can fight a recession; it cannot do both simultaneously.
You have to decide which is a bigger problem: a recession, or inflation. The notion that you can walk a tight rope between the two is disconnected from reality. And while you continue to make inflation worse, you only make the inevitable recession worse. Tick tock.
Lots of assumption buried in your comment/worldview about what's actually causing inflation. Is it actually just a slow accretion of growing costs for resources, distribution? Is it companies deciding that now would be a great time to increase prices "because inflation" and thus get ahead of the nascent wage growth that was threatening to take off post-pandemic? Clearly it's a mixture of the two but the implications are completely different if its 90/10 vs 10/90.
Honestly, that's really not that important for what I was saying, because we're talking about the Fed. The Federal Reserve can choose to fight inflation or it can choose to inflate assets, and that lies on a spectrum. The "why" of inflation isn't nearly as important as the severity of it. If inflation is at 10% you're not going to debate it before doing something about it - that just allows the situation to fester instead of taking initiative. The reason we're in this situation where inflation is still getting worse, a year after being told not to worry about it, is because it's politically untenable to actually try to fix the problem. Meanwhile inflation continues to worsen while we make symbolic gestures about fighting it.
Yes, understanding what's causing inflation matters. I'm not saying it doesn't. But when you have a crisis, you want to focus on mitigation first and then root causing it after the situation is averted.
Also you mention two possible causes of inflation. Limited resources and distribution, and companies deciding to raise prices because they can. What about the Fed printing money like crazy, flooding the M2 money supply? That's the one that's relevant to this conversation.
The Fed can't do much at all to stop corporate-controlled price increases. Increasing interest rates makes it more expensive to borrow money, but that has little impact on a company choosing to bump its retail prices by 25%.
M2 is only relevant to a point. The increase in the money supply does not, in and of itself, cause any change in prices at all. Individuals and corporations have to make explicit decisions to respond to what they can see of the M2 effect, and none of these decisions are a law of nature. Rents don't have to go up just because M2 grew. Landlords sense that they can, and then they choose to do so. They could choose not to do so, too, but they don't because we're taught that this would be irrational, or something.
> Individuals and corporations have to make explicit decisions to respond to what they can see of the M2 effect, and none of these decisions are a law of nature.
The law is called supply and demand. If there are more dollars and the same amount of resources, the value of a dollar goes down.
Inflation is still going up because there’s a war between Ukraine and Russia. This has caused food and energy prices to skyrocket. The Fed can raise rates to 69% but it’s still not going to cause (say) the grain in Odessa to make its way to people’s stomachs.
Is a certain amount of rate increase justified? Yes, you don’t want an inflation spiral to develop. Beyond that, we are going to have to live with a certain amount of inflation until the situation in Eastern Europe normalizes and the supply chains normalize after COVID. And the interest rates should be kept on the lower side so that companies can still finance solutions to this mess.
If it was just one item you would expect that consumers would cut back elsewhere. Instead we see that they can demand more wages, and companies can demand higher prices even if they are decoupled from wheat.
The latter is only possible if there is too much money in the system, the signal about wheat production gets lost. As the feds money printer doesn’t work evenly, those who are closer to it get more money. I can only speculate that eventually, like any corruption, the effect is to diminish productivity in the real economy in favor of a special class.
> ...until the situation in Eastern Europe normalizes and the supply chains normalize after COVID.
They won't "normalize" though (imho), as the reason is not really COVID anymore, it is China gaining ground and trying to do as much damage to the western economy as possible.
Very low interest rates and high asset prices indicate that 2020s can be another lost decade for investing that follows the great decade of 2010s. 2000s was also a lost decade, and unfortunate thing about it was that even if you managed to time the bear market perfectly and entered at the very low in 2002, the decade would still be lost to you, because the market in 2009 was below 2002 lows.
While many do not believe it's true, timing the market is possible and its a skill. *Find good active managers that have a track record of positive returns and low losses.*
While they did not beat the index in the last decade, I'm fairly certain they will going forward or more importantly minimize the drawdowns.
instead of pursuing speculative gains consider investing it in yourself or in your immediate locale or region, in the economic and ecological transformation we all sorely need
devaluation of everything is a consequence of unsustainable economics and the fix is not to find a convenient hidey-hole for your money but to invest time, money and attention building a future sans witless speculation, profligate consumption, public and corporate unaccountability, and consumer monoculture
I appreciate this comment. I think the way that it’s written might drive off, say, a more traditional conservative — but I think if rephrased, they would agree.
“Spend time at your church, and spend money to invest in a local private school” would line up perfectly w/ 75% of Republicans that I know, (and, if I may assume your views, probably does not line up with them); and yet I think it is a very similar line of thinking.
I am trying to orientate the way that I spend my money and my time more towards my local community. It’s surprisingly difficult. Not everyone does it. And we would be better off if they did!
I wrote it to try to appeal to traditionalists and progressives and people of all political persuasions!
spending time building a religious or spiritual community is fine by me, especially if it provides material services to the locality and a sense of civic responsibility
also fine with private schools although I do think they should cater to students without the means to pay exorbitant tuition (some provide tuition aid, in fact I went to one that did) and I think there is something to be said for allowing public schools some degree of curricular independence, which might make them more appealing to those who presently prefer private alternatives
really I think there's a lot most people can agree on and I hope we can begin to identify less with team R or D and reason from principles in our politics
> It’s surprisingly difficult. Not everyone does it. And we would be better off if they did!
If all assets are dead, you can spend your assets now to improve yourself or family. If you've been wanting some time to go to school or pursue some other self improvement, maybe spend some assets now to do so. Education and skills are an asset like any other, and can also be devalued though. I wonder how personal skills will fare in the coming years?
Unless you’re retiring in the next 10 years, or planning on purchasing a house in the next few years, then just make your emergency fund a little bigger and hold on to your job. Follow your normal financial planning.
You’re not going to outplay market trends, and if you’re young/middle aged then it doesn’t matter any way.
Yes it does. If you invested near the dot com peak or the japan peak, you still haven't made your money back.
This notion of passive investing that has been pounded into peoples heads for years is complete bullshit and has only worked because there was always someone else ready to pay more for the same asset and because rates were perpetually held low. Some points to consider:
(1) You have fewer millennials than baby boomers, as the baby boomers cash out from their vanguard accounts, who makes up for the difference?
(2) If the S&P 500 contains companies built for a certain macro regime (low inflation, low interest rates), and the macro regime is shifting, you can be penalized by owning a set of assets that do not provide adequate returns (Tesla is currently the 5th largest weighting in the S&P, they don't pay you squat.)
Go look at charts of the S&P 500 beyond the last 40 years when rates were more variable, you'll see the market can at times be a shit investment vehicle that might not give you a return by the time you retire and on an inflation adjusted basis has a negative return!
> If you invested near the dot com peak or the japan peak, you still haven't made
your money back.
What does this even mean? That you invested the only money you ever invested entirely in the relatively brief period of the dot com peak? Who does that? (Obviously not nobody, but ...)
To all effects and purposes, nobody does that. So what it really means is "the money you invested during that one period (perhaps a year or so), and likely only the money you invested in dot com and adjacent stocks, has yet to be made back". In the meantime, the other money you invested before and after the dot com peak has done rather well, unless you specifically made some particularly disastrous choices.
The dot com crash was not associated with a particularly noticeable "underwater" period for real estate, so if you bought a house during that time, you're not likely to "still be underwater", which was the GP's claim.
The obvious issue with the obvious plan is that you can only tell what's "high" and what's "low" in retrospect, and if you time your lump sum investment wrong (dot com peak, Japan peak etc), you end up negative for a long, long time. Whereas DCA or equivalent guarantees that you capture the ups as well as the downs.
Great advice. So, ummmmm, how long is patient enough? 18 months, 3 months? What's low? Is this the lowest it's going to get? If you have answers to all of this, I want to invest in your fund.
> You have fewer millennials than baby boomers, as the baby boomers cash out from their vanguard accounts, who makes up for the difference?
The Boomers are using or investing that cash, though. Sooner or later anyway. And that cash would flow to the current owners of the things they are patronizing.
It's not like they're investing in dry ice and then throwing it in the ocean.
As others have said, portfolio diversification (i.e. spreading your money around between lots of different asset classes) is more important than playing the stock market well.
Most people cannot play the stock market well, and even those who make it their day-job often don't end up playing it well. The reality is that the stock market is just too random to game reliably.
Same as always, keep investing in a well-diversified spread. The stock market as a whole will always bounce back. That or society collapses and your numbers in a computer are worthless anyway.
This is the first big downturn I've been prepared to invest in, so personally I'm going to buy more than usual. I see it as stocks being on sale.
> The stock market as a whole will always bounce back
Japan is the common counterexample. It is entirely possible the stock market will stagnate in the future as the era of American economic hegemony comes to an end.
That only provides a counter example to investing all your money into a single country. Unless you think every stock market in the world is going to do poorly, that's a reason to buy a globally diversified index fund (like VT), so even if American economic hegemony ends, you can pick up on growth of other countries.
Is there really any western country that is "on the rise"? If the US is a poor choice, what else is there? I don't wanna invest in China as that could be throwing money into a black hole. I'm sure I'm not the only one feeling this way.
It's true that 2021 saw the highest rate of GDP growth in 30 years, but that came immediately after the largest GDP decline in 30 years during 2020. So that can be explained as an aberration due to the pandemic shutdowns and subsequent rebound:
Why does it need to be collapse or all time highs? Stagnation and decay seem entirely possible. Negative real returns seem entirely possible when bonds had negative nominal returns.
Long term your best bet is still stocks. Stocks naturally resist inflation- when inflation goes up earnings will go up with them. The current P/E is high but it's not insanely high. Sure, stocks can still go down 10% or 20% (or 30% or 40% though less likely) but your cash is also going to get eroded by that much over the next few years and at least you have a productive investment.
Whether real estate is worthwhile depends on your local markets. In some parts of Europe it might be. If you need a place to live, and you think the prices are reasonable (e.g. it's a market that hasn't seen crazy prices due to QE and low rates) and you can afford it then I'd definitely consider keeping in mind that it's also a long term play, not a short term one. If it's purely investment property the calculation is different.
> Sure, stocks can still go down 10% or 20% (or 30% or 40% though less likely) but your cash is also going to get eroded by that much over the next few years and at least you have a productive investment.
The current trend is that stocks are going down in dollar value, not just in real value after adjusting for inflation. Are you saying you expect that to reverse?
Ofcourse it will reverse. Sure, the P/E is on the high side and so the expected returns won't be as good as they can be but hey, you're already 20% down (or more in real terms). If we we're going to see 8% inflation over the next few years then sitting in cash is going to see your money get erased. Bond rates are still way too low. Housing is somewhat inflation resistant but it has also been terribly inflated. So stocks look like the best option right now, if we go more down they'll be even better ;)
EDIT: Just to be more specific, I'm pretty sure that in ~5 years you'll at least maintain your real value and in 10 years you'll have a decent real return. Pretty decent probability anyways. In 10 years you'll beat the 10 year bond and the housing market (or gold, or cash or bitcoin). I'm sure some sectors will over-perform and some will under.
I'm not convinced the current trend is going to go particularly negative from a 2+ year perspective. Things got super overheated in 2020-2021 but demand is still strong, so I wouldn't be surprised if things level back off after the steam is let out.
Real estate is going to be gutted - increasing mortgage rates (already have been happening) will decimate qualified buyers. Decreasing prices will further decimate those willing to Hail Mary with cash offers hoping to get something after years of frustration.
But the effective, on-the-ground housing shortage is going to continue to keep demand for housing extremely high in almost all areas with reasonable economic options or amenity migration destinations.
The only reason there is a housing shortage is because there is an excess of jobs and money in that place.
Which is changing. Houses in sunnyvale went from 750k-1m and impossible to find one for sale to 350k (yes really!) and on the market for years around ‘08.
Nope. For one thing, there's the largest generation of the 20th century at peak retirement, cashing out of family houses that have gained huge amounts of value, and looking to move to amenity-rich locations.
For another thing, the investment industry, short of other options, has started buying houses to rent them (short or long term), squeezing supply and driving up prices in many markets.
For another thing, short term rentals (AirBnb, VRBO etc.) have had profound impacts on the availability of property in heavily visited areas (in fact, it's not so much absolute visitation rates, but vists-per-resident that characterizes this).
Other factors too. That doesn't mean the market can't crash, but it will be something very different from what happened in 2008.
> cashing out of family houses that have gained huge amounts of value, and looking to move to amenity-rich locations.
They can only cash out if people are willing to buy. And fewer people will be willing to buy (at least at the prices the retirees want) with interest rates going up.
So the retirees will either put off their plans for a while in the hopes that things will recover, or will accept lower prices for their homes.
> For another thing, short term rentals (AirBnb, VRBO etc.) have had profound impacts on the availability of property in heavily visited areas
Is this true? Last I was reading about this (a few months ago), the number of housing units in San Francisco listed on Airbnb was around 8k, which is around 2%. Meanwhile, a report from this February estimated that over 40,000 residential units (10% of total) in SF were sitting empty in 2019 (and that number has likely been growing over the past 3 years, as it has been since 2013). Why are we all upset about short-term rentals when so many real estate speculators are sitting on more than 4x as many vacant properties?
> Why are we all upset about short-term rentals when so many real estate speculators are sitting on more than 4x as many vacant properties?
I would guess partly because almost all of the short-term rentals represent either (a) previously long term rentals that are no longer available to people who live and work in that location or (b) new construction that doesn't address housing shortages.
The boomers heading into retirement situation is a reflection of 40-50 years of economic policy and has no connection with recent "cheap money".
Actual investment in single family and apartment housing is almost entirely tied to its low risk/return ratio compared with (the perception of a lack of) other options for investment at this time. The money sloshing around for investment is as much as function of the effective privatization of retirement funding as anything else.
The short term rental market is in part the perfect expression of how a relativel small number of wealthy individuals can totally distort a market to follow their own preferences, and reflects income/wealth inequality and lack of regulatory enforcement (they're freakin' B&B's people!) as much as anything else.
Cheap money has almost nothing to do with any of them.
The ‘cheap money’ issue isn’t a short term one. It’s been steadily dropping with only minor hiccups since the mid 80’s - about 40 years ago. The last time the US had a inflation hit, at that time due to the Oil crisis.
Mostly to keep juicing the economy, which has steadily been needing it more and more to grow/less responsive to stimulus.
Folks I know who have done the AirBnB route were often getting mortgages and buying properties to let out, using the short term cash flows to pay the (low interest rate) mortgage.
Which makes sense as an investment, because the mortgage was cheap (cheap money) compared to current cash flows.
It has become more and more
pervasive, until it stopped being able to make money due to saturation. Younger folks traveling around during Covid using AirBNBs helped (they were trying to avoid lockdowns and ‘dirtier’ hotels), but not sure how it is going to play out now.
Anyone who had a 30 year mortgage they got then is going to do pretty fine though as long as they have cash flow.
Bay Area has the highest price to rent ratios in the US. Rent really hasn't changed that much since 2020 and if the betting stops it'd make sense to go back to 2020 prices (which is like a 50% "crash" in parts of the Bay)
I would so much welcome a 50% crash but I’m afraid we’ll never ever see it in the Bay Area. There are just too many people, job or not, in a very strong financial position.
I’m sitting on $600k+ cash for a down payment and if I see townhouses correcting I’ll snatch one up immediately. And I am a very small fish compared to the wealth that’s around.
My personal bet is that the Bay Area will just stay at 0% growth until the market recovers.
A lot of speculators also bought assuming increasing property values, so if it’s flat for 5 years or whatever, then that’s going to nuke their gains. Meanwhile they’re paying out real cash every month.
The rental market in many previously hot areas (SF, South Bay) has taken a hit, but not sure where it will land long term.
Medium term there is a LOT less pressure with a lot of techies having relocated and remote work being accepted.
Don’t forget though that anyone who is a ‘bigger fish’ (looking to invest many millions or half a billion or so) in a high inflation environment is going to be looking for as sure a bet they can with as high a return they can.
And since money isn’t as cheap anymore, those are easier to find and get.
So while it may not be bad returns, it may be bad returns compared to something else (a new business, for instance).
It'll make housing even more expensive in 10 years as builders will be decimated like in 2008, we won't build housing for half a decade, and a new generation will look for housing while boomers sit on their 80% vacant 4bd houses they paid 1/5 of the current market price for.
>> It'll make housing even more expensive in 10 years as builders will be decimated like in 2008, we won't build housing for half a decade
This is already happening in the Midwest. Builders have stalled or trying to wait out this supply side shortage - the prices of all building materials have skyrocketed because of it and just in an adjacent neighborhood where they had torn down three houses, the lots are all vacant now and for sale. Builders who had planned to build huge mansions all pulled out and are now just selling the lots.
This has also had a ripple effect on down the amount of houses up for sale. My wife and I decided not to move and have remodeled our entire main floor and are now working on the bathrooms. We're staying put. I heard on a weekend real estate show they were saying two months ago, that out of the 15,000 houses/condo's/townhomes available, when you start to filter out townhomes and condos, then take out all the million dollar and above houses? You're left with less than 200 single and multi-family homes on the market. An absolute staggering number.
A lot of people on both sides are trying to wait this out. But like you said, its going to have some serious long-term consequences for everybody.
71 million alive in 2019 of 76 million born[0]. If the oldest boomer is 76 now, their life expectancy is over 10 years[1]. Most boomers have more years life expectancy than that i.e. most boomers will live longer than 10 years. And in a couple one will live longer, perhaps not releasing a house.
Aside: most people mentioning “boomers” normally are saying something offensive - similar to making inane stereotypical comments about disabled people as an example. The term is very American-centric, and in my country the word mostly is used offensively. We mostly don’t know what gen__ means either.
Edit: 25% of boomers don’t own a home. Today, white millennials are almost three times as likely as Black millennials to own their homes. If you are white, then every time you make a comment about a group that has it better off than you, lookout behind you. Goes double for complaints about the wealthy if you live in the US: you are the wealthy from the point of view of most people in the world.
You're arguing that those who survived this long will survive more than 10 years. I mean, yes, but
1) food in this economy is still delicious so heart disease is still the cause of 50% of deaths, and
2) humans only have one copy of p53 from each parent, so everyone dies of cancer if Heart disease or <random> doesn't get them first.
Given 1 and 2, the boomers are on their way out. My mom (born 1953) might make it another 20 years, but my dad (born 1945) is living on borrowed time (20 pk-yr history and cancer).
It is how actuarial tables work. Baby boomers in 2032 will be between 68 and 86 years old, and mortality increases rapidly up to and including those years.
Serious question: Instead of riding the ETFs down, what if I sell investments now and move to cash/gold? Cash would lose value at the rate of inflation, while ETFs can drop 30-40% more if the FED makes mistakes.
I am bullish for software developers. Since 2001 I have not been fired or laid off. I have been able to get a job within 4 weeks the whole time. (Probably 1 week if not fussy and just need money). Software is still eating the world, it just might have a bit of constipation during this period.
Developers can save companies money - handy in a recession. Developers can sell their skills globally (that has negatives too though...). And if a software company is still running it needs developers to fix the bugs, support the system.
I sure hope so because I'm out here reading Stroustrup and CLRS to start a career at 30. But it really seems like there's a glut of tech companies with investment capital paying people 300k to make apps for stuff that's trivial. Juicero tier stuff, all over the place. I worry it will collapse and SWE is gonna be your run of the mill 45k job from then on.
>> But it really seems like there's a glut of tech companies with investment capital paying people 300k to make apps for stuff that's trivial.
I work for one of the largest health care companies in the world. In the US, there are only three or four major health care companies and they're all massive. My company has repeatedly said its too big to move as fast as smaller startups who are coming in and disrupting one niche of the entire market.
For example, we have something like 4-5 different billing systems, none of which are able to talk to each other. They're monolithic, they're 10 years past what you would consider "legacy" software. So in comes all these companies building billing apps for health care companies. My company? We can't compete, so we're constantly buying other companies, and integrating their tech into our company.
Today in Health Care, startups with good ideas and good products? They're not lasting and are being bought up at a record pace. My company? Bought 15 companies last quarter, we're on pace to buy more this quarter. So instead of creating and building this tech in-house? They're just buying up these smaller startups and using their technology instead.
My advice? Build a decent product/app/platform for a niche area in Health Care and you'd be surprised how fast one of these companies will be knocking on your door.
Then you take one of those issues and see if you can find a problem worth fixing. Develop a program or application around solving that particular problem. I'd also start looking at attending healthcare conferences and focusing on that issue and going to see what industry people are complaining about and see if you can get more insight from them. Start networking with people at the conferences.
It wouldn't take long to get an inside track through networking and research to find a niche where you can build something that will really get a companies attention.
I don't think so.. good software engineers are still somewhat rare and you need good ones to not blow up your code base once it reaches a certain size/complexity.
Any high school kid can make a website, but if you want your app to grow for 3 or more years, it has to be built well-ish.
Good devs are only really needed by good companies. Majority of companies are not FAANG. Everyone else will take whatever trash they can find and those companies will probably pursue downward pricing pressure.
You could apply for jobs in businesses that are not affected by economic vagaries, or government jobs, or jobs at counter-cyclical businesses like debt collection.
invest in your education and personal development if you are young. start a startup. invest in your career. have children and invest in them. this is all real economic growth; money number is fake right now. if you are old and need financial security, invest your time in learning about future relevant sectors like energy, climate, bio. commodities. toilet paper. trash bags.
I would be very scared to hold Euros. Either CHF or USD, or a mix. It is paradoxically better to hold cash than to invest in equity, bonds or real estate.
I motice that you left out real estate from your analysis.
RE is interesting because it's both an asset as well as something you can use. So if there's general inflation, it's got both upward pressure (because it's an alternative to rent from a consumer standpoint) and downward pressure (because bonds are an alternative to RE from an investment standpoint).
I like the comment: “I think one of the problems in this discussion is that the word ‘shortage’ doesn't have a clear meaning. If gas is $6 a gallon, should we say there is a shortage of gas? If I get stuck in traffic on the way to work, can I say there is a shortage of roads? If I have to park 4 blocks away from my apartment, is there a shortage of parking?”
Worst part is the utterly absurd shortage means RE is never going to meaningfully dip for any period of time without serious structural reforms. The focus on interest rates as the main RE driver is almost completely cope and I wish I could believe it.
Low-rate mortgages certainly aren't helping, but they're "not helping" in the same way that hucking an armload of kindling into an already-raging house fire is "not helping".
I'm cautiously optimistic that societal unrest from this will eventually forcibly neuter local zoning controls but short of that we're just going to keep subsidizing demand and kicking the can down the road as if people don't need places to live.
I agree that local zoning is a problem, but I've seen a trend to try to turn it into the wild west. I'm not sure people building duplexes in R1 is really a solution. It seems like we need more medium density in commercial areas (e.g. four stories of apartments on top of one floor of commercial).
That could bring down rents and improve quality of life, and improve the suburbs as well. If you drive by a poorly-maintained house in the suburbs, that's probably someone who would live in medium density if it were available.
There’s a housing emergency in most places people want to live. If society wanted to have moderate solutions, they should have tried these conservative solutions before crisis point.
It’s like saying pouring water on a house fire is too extreme, maybe try an ABC extinguisher instead. The time for half measures is long past. If NIMBY home owners don’t like that there’s an apartment in their neighborhood, they can choke.
The problem is that everyone has their own oppinion on the matter, and will block anyone from trying out any other opinion.
At some point, you just need to build. If some ideas don’t pan out… then people will move, investors will lose. At present, even in densely populated Boston, any type of housing will command a high rate.
I've heard the idea to zone for one level above the average in an area, to avoid the wild west situation. Doubtful that would fly with some very rich single family neighbourhoods near cities, but perhaps it's too late for the gradual re-zoning and a more blunt approach is necessary.
Aside... where the heck is tech in building housing faster? Where's the prefab and automated assembly? Too many building regulations? Entrenched interests? Incredibly hard problem for large scale engineering?
New rules that mean that property owners have a mostly automatic consent, if you build within the limitations. Councils and neighbours are mostly prevented from blocking development. There are rules/constraints on height, setbacks, shadowing (recession planes) etcetera, however the restrictions are not ridiculous.
I would say NZ is fairly similar to Oregon if you want to compare size, population etcetera against the US. Although looks like NZ has more population in major cities than Oregon (Greater Auckland population 1.5M, cf Portland 650k). https://en.wikipedia.org/wiki/List_of_cities_in_New_Zealand
Government is doing everything it can to prop up the assets of voters. MBS bailouts haven't stopped, Biden housing plan is all about subsidizing buyers, mortgage forbearance is as much as ever.
Will it work idk but if there's one thing the state is scared of it's voting boomer homeowners.
New buying gets hit hard. In the US, fixed rate 30 year mortgages mean that a lot of existing owners are isolated from rates (albeit not from market price devaluations).
It's outside the US too, but holy moly is it dirt cheap in the US, averages not even 4% [1]. When I looked last year RBC showed like 8% (now 9.75%[2]) for 25 years fixed in Canada; tougher choice against 5 year terms than down South.
I just wanted to call out that must-sell (2008, falling market prices, unaffordable adjustable high-rate mortgages, low inflation) is different than can-hold (falling market prices, affordable recent low-rate mortgages, high inflation).
If you've got a fixed-rate mortgage at 3%, there are worse forms of debt...
And the must-sell, can-hold (and I'd add must-hold, where you can afford what you have but any buy+sell would be result in an untenable downgrade) statuses have a big impact on prevailing prices .. since you don't get the fire sell busts outside of must-sell
Boomers all over Silicon Valley are still paying 1976 tax rates on their properties worth $2m+ now. Disneyland is a huge beneficiary[2], but ANY efforts to reform Prop 13, even just for commercial, are met with "slippery slope" arguments from the same boomer homeowners (and PR campaigns funded by real estate groups that benefit from it).
They're paying (at most) 2.5x what they paid in 1976 (1.02 ^ (2022-1976)). In the grand scheme of things, that's not far off from 1976 rates, given that many properties have appreciated 10-20x.
Real estate is interesting. The issue is will you be able to make enough rent to actually get a return. I think at this point that's still the case over a 30 year period, but I'm not quite sure what that'll look like in time.
Aside from the leverage issues other point out in RE, you have to consider the political risk.
How safe do you feel that a piece of paper saying that plot of land is yours will hold up when there's a raging mob threatening politicians to do something about homelessness/housing prices/AirBnB/Asset managers holding all the properties?
The political risk in the West is at Emerging Markets levels. We've seen G7 nations de-bank their citizens extra-judicially, seize assets and remove licenses, remove freedom of movement, create an entire second-class of citizenship, lock up people for committing no crimes. This is normal. No one is protesting. The media agrees as does Hollywood.
If I had anything beyond my one property in which I reside I'd actually be pretty scared. This stuff happens in Emerging Markets all the time: the government tells anyone with more than one property to pick one to keep. All foreign property owners have their property forfeit or taxed to the point where they are forced to sell.
These actions are not out of the realm of possibility in the West any more, especially with the current leaders. There will be no tears shed for the poor landlords and property owners who can only keep their principal residence.
Sounds like a lot of FUD, the politicians won’t do anything like that because free stuff very easily causes divisive policies. What will happen, and is happening, is that more luxury housing is being built and less code ( regulations ) implemented. So the result is more inventory, which puts pressure on housing. Also there’s a LOT of vacant homes which have high carrying costs; eventually those owners will get margin called and have to either rent them out or sell them, which will put even more pressure. So I agree with the ends of your thesis, but not the means.
The entire reason that leveraging up real estate 5x is a widely accepted practice is that you can't get margin called as long as you keep making payments. Reg T margin will margin call you if you go under 25-50% equity, but mortgages will never margin call you.
I meant "margin called" figuratively, not literally. Essentially investors will start seeing negative cap rates and either demand redemptions or will start liquidating their RE portfolios, which isn't a real margin call, but "margin call" is a convenient term for what's happening.
Also, carrying costs of vacant properties are high. I'm predicting large writedowns of RE, and especially commercial RE in the coming 5 years.
This is absolute nonsense. Ocasio-Cortez is not far off of a bog-standard social democrat and she would be at best boring almost anywhere else in the industrialized West. (Maybe not "making majority policy", but not controversial.)
I can’t tell you how much I hope they crack down on people owning multiple houses. It’s just criminal. Not only do they own two houses but instead of renting it at market rate they put it on Airbnb an inflated price three or four fold.
The truth is under capitalism everyone cannot be a Capitalist. Please, I need you to think deeply about that last sentence. It’s not as simplistic as it sounds.
Until we treat housing as a cost and not an investment none of this will end.
They own the politicians. Its our fault. Turnout in primaries are very low, people don't even know their representatives. Its hard enough with all the tactics used to suppress candidates/prevent voting but until this changes then policy won't change.
As per some recent estimates SF commercial vacancy is over 2M sqft - this roughly translates to 2000 full apartments - more if we build dorm-rooms. We have a similar situation in other parts of CA. Is there any reason why we cannot solve homelessness by re-zoning these to temporarily to house them? Post COVID, people returning to office will be fewer. In addition if there is a recession, there will be fewer companies as well.
I wonder to what degree generational culture plays a part. My father, for example (born pre-WWII), would never buy growth stocks. Not even when he was young. He bought only dividend yielding stocks, reinvested 100% of the dividends and never sold anything until his retirement. My generation (X) has a more balanced approach, with a mix of growth and value stocks dependent on risk tolerance, trending toward value stocks the older we get. Moreover, a lot of us learned some hard lessons from the first internet bubble.
Granted that they're still younger and should be in a more risk-tolerant phase of life, but what I see in Millennials, and Gen Z especially, is a culture of growth-only, with no interest in boring old investments that are intended to earn and build value over long timescales. I think at least some of this has to do with the gamification of investing; in my Dad's time, a normal person couldn't just sit at a brokerage and watch a stock ticker all day. Free trading has intensified it by removing the barriers to full-time gambling. Remember that Millennials are a much larger generation and we're just still early in the period when they're growing wealth; I wonder if what we're seeing isn't the beginning of what it will take to change the culture... or if we'll continue to see endless bubbles because the steady-as-she-goes, long term investment mentality is just disappearing in the face of permanent FOMO. Sure, it's not glamorous, it won't make you a millionaire overnight, but that's really not what investing your savings should be about.
Yeah, I get that. And that's natural. But if a huge population swell is accustomed to treating the market as a get-rich-quick casino, the market stops serving its purpose and I guess we're in for a really bad series of shocks.
The scary thing for me is the 2nd order effects of this activity as companies try to act increasingly like meme stocks to boost share price and abandon all pretence of P/E ratios and profitability.
This. Also, in terms of downstream effects: Taking sibling's point, even now at $650B Tesla has market cap equivalent to the next 10 largest automakers combined, while having a P/E ratio ten times higher than Toyota, 32 times higher than BMW. Isn't the effect that other automakers are undercapitalized? The distortion of the market that's inflated Tesla has funneled investment away from productive non-meme competitors. That means layoffs and more supply chain problems. And that capital just gets wiped out when the bubble bursts, leaving a giant supply-side hole.
>> but that's really not what investing your savings should be about.
I just had a follow-up thought to my own post (too late to edit).
Maybe part of this culture is that many of the most aggressive young growth stock investors are not investing their savings. That is, what's been inflating these bubbles is inherited wealth being directed away from responsible investments and towards speculation. Contrary to what I'm saying, I do know a few people (not just Millennials) who have blown uncomfortably large portions of their actual earned income / work savings on bad crypto investments... but I still feel like people are more careful and conservative when they're investing money they actually worked to earn.
Or they were. Maybe the whole society tips over towards hype and FOMO when it's all we see online everyday.
Assuming you're expecting inflation to moderate over 10 years.
I think people who expect we're going to go back to pre-pandemic supply chains are vastly underestimating the difficulty of bringing a complex system like the economy up from a cold start. In my experience with complex systems that are much less complex than the economy (merely a few hundred million lines of code), it can't be done. You have to incrementally build a new system and then cut over parts of old system as their replacements start to function better than the old degraded experience.
This'll likely take a decade or two. Expect it to be a good decade for startups as changing relative prices make new business models viable against soaring existing prices. It's going to be very bad for consumers and for incumbents, though.
Luckily, this is completely tradable, so if you believe that inflation is going to average 3% over the next 10 years you can buy all those treasuries and I can short all those treasuries and one of us will be rich and the other broke. Events will tell who is who.
your point cannot be overstated. my biggest fears around the pandemic shutdowns came from my own experience managing production systems, and I think our policymakers were frighteningly naive as to what it meant to shut down the economy. and here we are.
I don't think there's even going back to pre-pandemic supply chains solely because how the West's cancel culture effectively ended globalization when Russia invaded Ukraine.
There will be no global supply chain any more. Any country with a brain now knows they have to be completely independent of the West in every aspect. Sovereign assets must be within their borders. Currency reserves? Held at domestic banks as much as possible. Even within the West there needs to be some level of distrust because history shows that there are no perpetual alliances.
We are going to have several hundred supply chains that often don't interact, even if it would make economic sense for them to do so. This is tremendously inflationary and it's only just begun.
I guess economic sanctions against belligerent aggressor nations is also 'cancel culture' now. Is that another one of those terms that is just slowly morphing to mean 'thing I don't like'?
I'll go even further: de-globalization pits governments (who want to become independent of other nation-states) against their people (who have benefitted from cheap goods, and will have to deal with the inflation). The likely outcome is that at least some of those governments are going to fall, and the nation-state system is likely to collapse.
Unfortunately this by itself isn't good for globalization, because it relies upon free trade, stable legal systems, and secure supply lines to work. So even if you get rid of the governments that seek to detach from the world economy, the goods can't get to consumers when they get intercepted by warlords.
I think that eventually the world may converge upon city-states as a cultural unit and corporate feudalism as an economic one, but it's likely to be an exceptionally bloody transition.
Standing in the way of corporate or city-state primacy is the hyper-efficiency of the modern global economy.
Bearing the cost of ones own defense and foreign policy, instead of outsourcing it to your host government, is incredibly inefficient and leaves you open to price competition from your government-sheltered peers.
That's the entire reason the global economy of politcal-economic alliances and trade policies was created: to benefit from global, lower-cost manufacturing while still retaining the benefit of government protection.
It seems more likely we'll revert to a multi-polar late-Cold War state of affairs, with global supply chains much more influenced by current military alliances.
I would've agreed with you until about 5 years ago. The reason I disagree with you now is because technology and methods of war-fighting have changed.
Emerging defense technologies like drones, lasers, robots, micro-scale manufacturing, and self-driving vehicles - along with the latest generation of existing weaponry like MANPADS and anti-tank missiles - all preference the defender. They allow a group of relatively untrained and loosely organized defenders who know the terrain well to deploy extremely effective resistance against an attacker, as long as it's at short range. A drone swarm can quite literally destroy all hostile forces within an area without risking a single person, but it can't do this beyond say 100 miles out. These technologies are all for defense, not power-projection.
This has a similar effect as the development of the musket in the 1500s. The musket allowed relatively untrained militias to enjoy superior firepower over the knights and longbowmen that had trained professionally their whole lives. As a result, smaller city-states and colonies could defend themselves against the large standing armies that kings and emperors could wield, and so the feudal system collapsed. This reversed with rifles (their greater accuracy benefitted from more professional training) and modern armor & explosives (which required an industrial base and supply chain greater than any city could muster), ushering in the era of nation-states. Military technology is changing again, and that's why I believe the nation-state system is again going to revert to smaller decentralized units.
> Emerging defense technologies like drones, lasers, robots, micro-scale manufacturing, and self-driving vehicles - along with the latest generation of existing weaponry like MANPADS and anti-tank missiles - all preference the defender.
> They allow a group of relatively untrained and loosely organized defenders who know the terrain well to deploy extremely effective resistance against an attacker, as long as it's at short range. A drone swarm can quite literally destroy all hostile forces within an area without risking a single person, but it can't do this beyond say 100 miles out.
We already have this "drone swarm", we just call it a guided missile.
The hard part in fighting a modern army isn't killing them, it's finding them. The defender is inherently at a disadvantage in this regard because they have things to defend, which necessitate that they're position in the vicinity.
Russia is struggling at the moment not because defenders are inherently advantaged but because they're relying on conscripts and relatively untrained soldiers.
> The musket allowed relatively untrained militias to enjoy superior firepower over the knights and longbowmen that had trained professionally their whole lives. As a result, smaller city-states and colonies could defend themselves against the large standing armies that kings and emperors could wield, and so the feudal system collapsed.
The exact opposite of what you're describing happened with the wide utilization of gunpowder. Pre-gunpowder, city-states and small kingdoms enjoyed relative independence due to the sheer expense of penetrating walls. Post-gunpowder, artillery (not rifles) required a whole professional organization to be utilized effectively, and formed the backbone of the army, so small states could no longer field or effectively defend against larger states, leading to increased centralization of authority, well before the creation of nation-states. "Makers of Modern Strategy from Machiavelli to the Nuclear Age" covers this transition pretty extensively.
> Russia is struggling at the moment not because defenders are inherently advantaged but because they're relying on conscripts and relatively untrained soldiers.
Yes; this, and all of NATO is assisting Ukraine with G-2 (intelligence) and G-4 (logistics).
Russia isn't struggling because of conscripts and untrained soldiers. Ukraine has conscription, and many of its TDF troops are relatively untrained. Russia is struggling because of a military philosophy that has lead to leadership failures from the officer level up to Putin himself. In addition to endemic corruption, the Russians also failed to remember things like rasputitsa, the principal of "economy of force", the importance of unit cohesion, of command centrality, of the 3:1 rule of thumb.
In other words, Russia created a military that was bad at being a military.
The only good thing that will come of this conflict is a revitalization in the study of military arts.
Cities are delicate clockwork machines with complicated supply chains: the attacker might struggle against a city’s hacker weapons, but the city will fall because a city is complex and a city needs many specialty inputs to function.
Changing topic: you said upthread “[people are] vastly underestimating the difficulty of bringing a complex system like the economy up from a cold start. In my experience with complex systems that are much less complex than the economy, it can't be done.”. Your personal example is irrelevant because it is a single person trying to restart an economy. Cities recover after earthquakes (my city Christchurch 2010) and wars (I have visited ex-Yugoslavia) due to many independent actors working, perhaps not so much due to your “command economy” example. Capitalist individuals route around damage. Although I admit effective centralised government helped Christchurch recover quickly.
Great synopsis of the trends in military technology. Very much in line with The Sovereign Individual, which states that the logic of violence determines the structure of society.
There will still be global supply chains outside of the pariah states. But purchasing will be diversified across more sources so as to mitigate the risks of disruption from politics, violence, natural disasters, pandemics, etc. This will be a more stable and resilient system, but it will be less efficient (Ricardo's Law of Comparative Advantage), and the average rate of economic growth will slow down.
The supply chain disruptions get worse as the China lockdowns and commodity prices make their way through the economy.
When you have a supply shock on raw inputs, it takes time for that to make its way through the economy. Businesses along the way keep inventory, they've locked in forward contracts, they can eat the cost increases to avoid losing market share until they're sure the price increases are persistent. But eventually they realize that everyone else in the industry is facing similar price increases and they'll go out of business if they don't, so they raise their prices too. This eventually propagates down the supply chain as inventory runs out and new contracts are negotiated. The price increases of late 2021 were triggered by the initial shock of March 2020. The Ukraine war & China lockdown shocks of early 2022 aren't going to be seen until about 2024.
By the time businesses have adapted to this round of shocks, we may be dealing with new shocks like a war in Europe or the retirement of baby boomers.
> The price increases of late 2021 were triggered by the initial shock of March 2020
It was the biggest shock: panic lockdowns across the world, not just initial. Chances are that supply chains have been adapted, and current localized lockdowns in China will not make significant damage.
But we will see.
Fed was aggressively printing starting 2008, and we didn't observe much inflation, meaning those money didn't go to real economy, but went to some big investment speculations and real estate.
This is the truth. What people do not understand is that interest rates will have to rise above inflation for in inflation to slow down. I assume the FED is trying to figure out how much inflation is caused by the money supply and how much is caused by supply chain issues. But too me this means even more trouble because they are waiting when there was obvious asset inflation well before the supply chain issues.
IMHO, we will not see a recession, we already are in a recession. What we will see a depression.
Can you explain why interest rates will HAVE to rise above inflation for it to slow down? CPI is already slowing down, although we have some very limited data points currently. A lot of inflation is driven by expectation, and raising interest rates is a way to tame those expectations for consumers, but I don't think the rates have to arbitrarily go above inflation to tamper it.
The Taylor rule gives the math behind it, but the layman's explanation is that as long as rates are lower than inflation, you turn a profit by borrowing money and buying a basket of assets, since their price will rise alongside inflation. This incentivizes people to borrow more money, which increases the money supply, which further exacerbates inflation.
This is the first term 'p' in the Taylor rule, which corrects the nominal interest rate that the Fed sets into a real interest rate that accounts for inflation.
There are plenty of assets that don't have an expiration date, like real estate or stocks of profitable companies with pricing power. And those are the assets that people are actually buying, and there prices have been going up to match.
r = nominal fed funds rate
p = the rate of inflation
y = the percent deviation between current real GDP and the long-term linear trend in GDP
As I said, the FED is betting that inflation is being caused by supply chain issues alone. This is obviously not true. It will get worse, so much worse, because the FED is in fact acting too slowly.
"interest rates sharply, and keep them high for several years, even if that causes a painful recession, as it did in the early 1980s in the United States, United Kingdom, and much of Europe. How much pain, and how deep of a dip, does it take to stop inflation and to keep inflation in check? The well-respected Taylor rule (named after my Hoover Institution colleague John B. Taylor) recommends that interest rates rise one-and-a-half times as much as inflation. So if inflation rises from 2 percent to 5 percent, interest rates should rise by 4.5 percentage points. Add a baseline of 2 percent for the inflation target and 1 percent for the long-run real rate of interest, and the rule recommends a central-bank rate of 7.5 percent. If inflation accelerates further before central banks act, reining it in could require the 15 percent interest rates of the early 1980s."
"During periods of stagnant economic growth and high inflation, such as stagflation, the Taylor rule provides little guidance to policy makers, since the terms of the equation then tend to cancel each other out"
Although I wouldn't go as far as to say we are in stagflation, it seems like the current environment wouldn't be an optimal place to use the rule. Ultimately I think the Fed took a view and have stuck with that, for better or for worse, and they are valuing consistency over diverging economic models.
The "2" is actually a parameter of the rule, and is the desired inflation target. OP is just hardcoding it in because the Fed's stated inflation target is 2%. If you leave it parameterized you can't simplify the equation further, as the 0.5 distributes over the desired inflation target parameter as well.
For that matter, the 0.5 is also a parameter, and is basically saying "Weight the goals of full employment and stable prices equally." If, say, you wanted to weight Fed policy 80% toward controlling inflation (to a target of 2%) and 20% toward maximizing employment, the equation would be r = p + 0.2y + 0.8(p - 2) + 2.
Risk-free loss? But maybe it's better than cash, the only other risk-free alternative? Perhaps you're paying for preservation of capital as the asset bubble deflates, and maybe that's not a bad deal?
If inflation somehow keeps rocking at 8.5% for a decade straight we have a much bigger problem on our hands than the relative yield of a treasury bond. Technically anything is possible…but I’m willing to risk saying that won’t happen.
I get what you are saying but the point of my comment - and I see why it didn’t come off this way - is that it won’t be 8.5% for a decade, so no, buying a treasury bond is not -5.5%. To emphasize this point, I said we’d have a lot worse problems because for it to be true the US would be experiencing an unprecedented economic catastrophe.
Yet the government keep spending like debt isn't high ($40B to Ukraine aid) and ignoring causes of inflation for political gain (Biden tweeted: it's time to for corporations to pay their share to bring down inflation)
I personally believe that the vast majority of the inflation we are seeing today has nothing to do with government debt/deficits, so the government reducing its deficit will have minimal impact on inflation.
However, a lot of people do believe, or at least claim to believe, that inflation is almost entirely being driven by government deficits, in which case corporations paying more in taxes would certainly have an impact on inflation, so tying the two together is certainly not misinformation, and if this view is correct, then it will reduce inflation.
> 1. We had zero percent interest rates. This causes the value of assets with cash flows out into the future (think speculative tech, Tesla) to accelerate.
You’re on to an important point, but your statement is inaccurate. Firstly, it’s a fall in the rate of interest that is equivalent to a rise in the present value of a future cash flow. And vice versa. Notice this has nothing to do with “high” or “low” interest rates (whatever that means, exactly), but a change in the rate of interest. Secondly, this is not related to speculative stocks. All companies with an expected future income are affected by this, ie. almost all companies in existence.
It’s worth bearing in mind that the experience of those living through your extreme scenario will vary greatly based on age.
Someone just starting their career benefits from cheap assets, high rates mean down payments will probably be cheaper, stock declines don’t matter if you don’t hold stocks. High inflation means their wages relative to debts such as student loans or first mortgages will increase.
Retirees with fixed incomes might get crushed. These folks were pushed into stocks and alternatives due to low interest, declining assets remove income and high inflation reduces the real value of the income.
There are a lot of people in between who will experience churn. However given the current demographics of the US, having two groups experiencing different versions of the economy will pose political as well as economic challenges.
Target shocked investors because not only did they suffer from rising costs due to inflation that they are currently subsidizing by not meaningfully raising prices but because they reported rising inventory in discretionary spending categories as consumers pull back likely due to higher prices they are facing nearly everywhere.
This has more to due to impact of inflation and less so just a function of a dividend and rates.
> "Credit card balances declined by $15 billion, in line with seasonal trends typically seen at the start of the year, but are still $71 billion higher than in 2021:Q1, representing a substantial year-over-year increase."
While your points are very solid, the first point may be overweighted. I can see why some naive in stocks may weight lower on lower rates, i can tell you as someone in corp finance we never adjusted our risk rates (weighted average cost of capital) below 12% (which is what they have been 5-7 years ago. These types of downturns are modeled in. Yes there are some cowboys that aggressively drop these rates, but it’s very risky. We are seeing some folks suffer now because of this and more soon for sure.
What? Rates matter. A lot. If you are in some corp fin job and you discount projects at 12%...fine. But saying they don't matter for equity valuations doesn't make sense. The evidence, not just lately, but throughout the last 100 years is overwhelmingly that they matter.
Oh, I'm also going to add that bear markets typically have a lot of brutal rallies. We had one in march as part of the rotation from tech into value stocks. We're probably about to witness a second.
Bear markets typically have several short covering rallies of large magnitude on the way down. Use these rallies to unwind your portfolio. Use the dips to buy hard assets and stocks with high yield that can withstand inflation (honestly everyone's margins are probably screwed). Make sure you leave some portion of your portfolio to hedge. Never overstay your welcome. Risk management is key.
> it's a huge danger once a populace learns it can vote itself money. Charles Munger [1]
(This follows him saying that "inflation is how democracies die" and is followed by several historical examples)
I know several committed voters of the previous administration and an almost universal complaint of the current administration is how their _personal_ wealth is being affected. We don't [yet] have a positive sum economy: in order for someone to win, someone has to lose. In the case of the previous administration, it's future generations.
First of all, the entire stimulus was $4.5 trillion, and most of it was allocated to handouts. A lot of the handouts were necessary, like expanded unemployment, but others were complete wastes of money, e.g. giving checks to families making 6 figures or forgiving loans for billion dollar "small businesses."
Second of all, QE isn't money given to the banks. When we have a deficit, the government sells bonds to banks. "Naturally" this would drive up interest rates for businesses because unlike the government, they can't issue an infinite number of IOUs and have to compete for a limited amount of liquidity. If interest rates rise too much, businesses will be forced to shut down, especially when people spend less money during a pandemic. Quantitative easing is a tool that allows the Fed to lower interest rates purchasing by these bonds back from the banks. The more debt the government issues, the more debt the Federal Reserve needs to purchase in order to lower interest rates. Basically, the root of the problem is that Congress is incapable of balancing a budget.
> but others were complete wastes of money, e.g. giving checks to families making 6 figures
Remember that the cutoff for stimulus was from prior year's taxes. This means you could have been making 6 figures in 2019, and then be making significantly less due to covid job loss or reduction when stimulus was handed out. As a matter of fact, stimulus helped my family greatly even though we made 6 figures in 2019. So following through on your claim would have meant my family suffering. YMMV.
Should is the operative word there. One could be in school for a while deeply in debt for a decade, get a 6 figure job in a high COL area right after graduating, then lose that job due to covid within a year. How would they have a decent sized emergency fund saved up? Why would such a family not be deserving of relief?
Shrinking the money supply is an awful idea. If money supply shrinks is decreases investment, increasing unemployment. Commerce stops (because people assume there money will be worth more in the future so they reduce spending) which increases unemployment more.
There's a reasonable debate to be bad about tax rates for wealthy people. I don't think any economist on either side of politics thinks decreasing money supply is a good idea.
Taxing the wealthy does not shrink the money supply unless you destroy the taxed money (which as we all know, the government will never do). In fact, it's probably inflationary, since most wealthy people have their money invested into assets and therefore that money is not being actively spent, but the government is going to immediately spend it.
After this episode, I strongly believe Fed should be ended. They have established a very poor track record on managing monetary policy and consequences and at this point basically have zero public trust. Since Greenspan Fed has been an absolute disaster. They hiked too little, too late. Now there is no such thing as soft landing as they are espousing just as their messaging around the whole transitory inflation thing.
Institutions such as Fed are now completely detached from their mandate and instead under bureaucratic capture devoid of any meritocracy. There is a revolving door between Fed officials and Banks/capital management firms. Bernanke, Powell, Kashkari, Yellen, Brainard - these are poster children of corrupt kleptocracy with revolving door arrangements between Fed and firms like Citadel, Goldman, Pimco. At least Bernanke had economic background. Powell doesn’t even have so. And his messaging has been super confusing with very little forward guidance which constantly confuses the market. I am not sure what qualifications even they attach to these utterly detestable individuals working for Goldman, Citadel, Pimco, and Brooking when they hire them. Oh let me guess, they work for the same people that fund our executive and legislative branch officials.
Risk in this context means uncertainty - since the government can print money it is always able to pay its debts. You might not get a great return on your investment, but the government always has the capability to pay you back. There’s little reward with no risk.
When I lend 2022 dollars to the government, I give away a certain amount of buying power.
I don't know if I will get that buying power back when I get my 2032 dollars.
The government does not always have the capability to pay me back my buying power. It cannot create value at will. It can create money at will. But the more money it creates, the less value it has. So it cannot create value at will.
The FED can buy bonds in an auction at will. Because it prints the money to do so. It's not like the FED goes "Uh oh, those bonds are too expensive for me".
> How is holding a bond risk free? It is a promise to give you a certain amount of money at a certain time in the future.
I Bonds. They are guaranteed not to lose purchasing power and not to have a negative return. Unless the U.S. government defaults on its debt obligations. That is as close to risk free as one is going to get :-)
A guaranteed return of dollars. What those dollars are worth is not guaranteed.
Imagine Tesla would hand out a certain type of share that after 10 years turns into 2 shares. Nobody would call that a risk free return. Because you don't know how much dollars you will get for those two shares.
The same with dollars. You don't know how much Tesla shares you will get for those dollars.
Tesla is a poor example of speculative tech. From 2019 to present they went from losing money to substantial and growing profitability. Better example would be things like Peloton, Beyond Meat, or Robinhood who all had sky high stock prices and have yet to turn a profit.
I don't understand the US stock market, re: Beyond Meat. It's a fucking recipe. Where I live in Ireland there a dozen different fake-meat brands, and they're even getting competition from supermarket "own brand" products (burgers, sausages etc). Don't get me wrong, beyond meat isn't a bad product, but how the hell is a recipe and a few business deals worth IPO and wild speculation? What do they have beyond, uh, fake meat recipe?
It seems to me that with the pandemic ebbing, that the only systemic shock going on right now is the war in Ukraine. Russia can't sustain either its offensive or its separation from global fuel markets for very long without collapsing. Developed economies aren't sitting on giant piles of toxic assets or collapsing consumer demand and employment is still sky high. I don't see how this goes much beyond an asset correction. We've only seen companies floating on untenable valuations get hurt thus far and it seems unlikely that will be a contagion to the rest of the economy.
If inflation continues hot don’t stock prices eventually have to go up though? If Apple raises the price of iPhones 50% because its input costs went up 50% and (assuming sales remain the same, I’m only talking inflation, not a depression), then they’re making $9/share instead of $6/share so unless people think Apple at a 15 PE is overvalued its share price would go up.
bonds aren't currently yielding north of 10%. If they are currently at 2.5% (using your number, not to pick on you, but it is what I have at hand), then move to a 10% yield, the people who bought at 2.5% get a haircut.
In the hike case cash would not be wrecked. It is paradoxically a good position to hold cash. Consider this. When they hike rates you can roll very short term treasuries, and you can buy assets on the cheap.
I'm pretty sure Russia disagrees, and it remains to be seen how China and other foreign holders of US treasuries will look at US (and other foreign) bonds in the future.
1. Zero Percent interest rates doesn't necessarily cause a bubble. It's the excess liquidity in the market that causes the bubble (too many financial assets chasing real assets).
Zero percent interest rates cause a bubble because valuations have to increase to the point where their forward-looking returns are a risk premium above bonds. When rates are zero for a long time, that means valuations go very very high. When rates come back up, valuations drop. Speculation can add further overshoot in both directions.
> Are their countries with negative nominal rates without asset bubbles?
That's very hard to know, but to be clear it's negative real rates that drive the bubbles. There's much more incentive to speculate when cash is a hot potato. For example Japan is much less bubbly these days than in the 1980s, even though nominal interest rates are lower now.
> Have their been high interest rate countries with asset bubbles? E.g., dutch 1600s interest rates or 16% during Tulipmania.
Presumably, that's why Tulipmania was confined to tulips, instead of spreading euphoria to absolutely every asset class. Even with high rates it's absolutely possible to have local bubbles in things like tulips, beanie babies, or Dogecoin. It only takes the promise of high real returns. When real interest rates are negative, even the promise of zero real return becomes mouthwatering.
I'm not saying that you can time the market. It's a lot more nuanced than that.
* You don't know the long term path of interest rates. Even the Fed Chair doesn't, because they don't know what will happen with inflation. (They do know the short term timing though, which is why they're not supposed to trade.)
* Even if you're expecting a correction, you don't know when the correction will occur or by how much. It could stay aloft like Wile-E-Coyote after the fundamentals drop out, or crash early in anticipation of the fundamentals changing.
* And when it does fall, you don't know where it will land, nor how many times it will bounce along the way down.
I thought that the liquidity was driven by the money multiplier and the Fed's quantitative easing. If the fed set the interest rate at 10% but put in 20 trillion dollars into the economy there'd be bubbles everywhere.
But Feds have both put trillions of dollars into the economy and kept the interest rate near zero. So I think it’s useless to argue which exactly of these moves has caused bubbles.
Why would they be able to put 20T$ into the economy at a 10% interest rate? Who are the counterparties? In other words, who is taking those loans in your mind?
The Fed can buy mortgage backed securities like they have done since they've started quantitative easing. The Fed has purchased Apple bonds. This is in addition to US Treasuries.
My original comment was a mechanics related comment in which liquidity (credit + cash) pushes up asset prices and not rates (although there's high correlation especially in the past 20 years in the US).
The volume of mortgage backed securities is based on the volume of loans that people take. At higher interest rates, people take out fewer and smaller loans. The Fed buying up more MBS would put downwards pressure on interest rates, which would be diametrically opposed to their goal (in your scenario) of maintaining high interest rates.
There is a correlation between liquidity and rates, but it's an inverse correlation. That's Open Market Operations 101.
Besides, if your macroeconomic goal is to reduce inflation (which is the reason for raising interest rates in the first place), one subgoal should be to reduce the volume of loans that are being issued. After all, bank-issued loans are new money, which adds to demand, which helps prop up inflation. That's Monetarism 101.
Our disagreement appears to be this. You believe that zero interest rates lead to bubbles. I believe that excess liquidity is responsible for bubbles. They frequently both happen together because that's how the Fed tries to stimulate growth and spending.
My example of the Fed with high interest rates and a lot of QE was a way to see where our disagreement would appear. It's similar to the great recession where there were interest rates lower than they are now, but because the private sector wasn't extending credit (less Cash + Credit); there didn't appear to be any asset bubbles.
The volume of mortgage backed securities is based on who can and want to get loans. During the great recession it was hard to qualify for a mortgage even though many people wanted to do so.
I appreciate you trying to get to a shared understanding. I don't have too much time, so just the short version:
> The volume of mortgage backed securities is based on who can and want to get loans. During the great recession it was hard to qualify for a mortgage even though many people wanted to do so.
"Want" is a difficult word. I want a private island, but I can't afford one. So my contribution to effective demand for private islands is zero. In the same sense, I don't think the effective demand for mortgages was particularly high during the great recession. But anyway, we agree on the observation that low interest rates and low mortgage volumes can go hand-in-hand.
One point where I think we differ is the direction of causalities in central bank behavior. My point is that central bank QE causes low interest rates (but low interest rates don't necessarily cause QE). The upshot is that while "low interest rate policy, no QE policy" is possible, "high interest rate policy + QE policy" is not possible. The two policies would be in logical conflict with each other.
people withdraw into conservative assets (relative to what they have their future outgoing cashflows, ie. if they have to pay for food in dollars, they'll hold dollars to minimize risk of exchange rate shifts)
and to cause a dam burst it's enough for a trickle of retail investors to start doing this. and .. bam. you saw the last few weeks. (as others notice that there's less and less chance of making money they also withdraw to minimize risk)
Previously purchased bonds will decline in relative value. E.g. say you bought a 10 year corporate bond a couple years ago, say at 2% interest. Newer bonds will be issued at a much higher yield to be attractive in a higher fed rate/inflation environment, making all these old bonds lose value in comparison.
I think the idea is that bonds at higher rates are a better alternative ("better deal") compared to cashflow from an asset.
But if you actually buy that bond, and the rates keep going up, then new bonds will be an even better deal than the bond that you bought, and so to sell it you'd need to sell at a discount ("wrecked").
I feel like this misses a sense of scale. Sure, everyone loses, but some choices must be superior to others in a rising-rates environment.
Cash would be wrecked due to inflation. However it should be less wrecked than other asset classes in the short term. I know nothing about bonds so I also hope they reply.
This sounds a bit like doom and gloom. While I don't disagree, it is important to look at AMZN after the dot com bubble burst. Traders fled, but people who believed in the company did very well.
> Traders fled, but people who believed in the company did very well.
Yep, I did well, and I loved to show people AMZN stock price graph, like “can you identify the dot-com crash here?”. But I believed in the company then. Big question is: should I believe in the AMZN now?
Personally, I’ve stopped using Amazon when they started to support censorship - I’ve grown up in a totalitarian country and things likes censorship are revolting to me. I never suffered after leaving Amazon using Walmart for goods delivery and B&N for books. So Amazon is not unique and irreplaceable anymore.
So, let’s ask people who continue to use Amazon - how the company is doing these days? Do you think it will go on growing?
Good questions. Can they maintain the high performance culture without large stock compensation?
The best option I see following a similar path is TSLA. They currently have 2% of us auto sales. The energy business is tiny, AI/FSD is controversial, but if it works it will be worth a lot.
The goal is to sell 20M vehicles in 2030. They sold 0.93 in 2021. They are planning on Insurance,Energy,AI each to more than 10x.
P/E is 40 currently. Historically very large companies have had P/E between 4-30. So the question is what is Tesla's earnings in 2030 and what will average P/E be across all large companies.
I believe Amazon's retail business will remain on top, or highly competitive, for the foreseeable future.
AWS, in my not-quite-amateur opinion, will remain dominant in the industry. The best IAM of the big three, incredible availability and they aren't undercut on price by their kitchen sink adversaries.
Azure has Office and AD integrations, GCP has some ML advantages. But AWS is strong long term. They're peak IBM.
If you bought in at the 2000 peak, it took about ten years to break even, and you'd have to have kept holding it through the 2008 crisis when you might have been losing your house.
Also, there were a lot of other companies that people believed in that didn't fare so well.
Most people don’t save a bunch of cash and then dump it all in the market at once, though. Continue to invest in diverse assets throughout downturns and you’ll be fine.
In 1998 Greenspan cut rates due to the Asian financial crisis and worries over Y2K which blew up the dot com bubble. Then they slashed rates down to nearly ZIRP and held them low which blew up the housing and finance bubbles that deflated in 2008.
None of this started in 2008.
What is different this time is the wage inflation and the unionization drives that we're seeing. The Fed is likely to hike rates much more aggressively in order to stop that from taking off.
When you talk about inflation, though, asset prices and commodities don't matter anywhere near as much as wage inflation. And wage inflation is high due to the low number of job seekers, likely a result of other factors like death and disability due to the pandemic removing workers from the workforce and boomers retiring. As a result the rate hikes are likely to be more severe and the downturn is likely to more severe.
I would be worried that this downturn looks more like a depression than a recession. Of course it may just unwind as before and as the economy pops they slash rates and do ZIRP and the rich people buy up even more of the economy and the cycle continues.
I think there's a good chance the average Millennial gets pretty decimated by the next downturn and crypto should get tested and there's a pretty good chance that the Ponzi all unwinds and goes to zero (which will destroy all the Millennials using crypto as a 401k). I'm still not sure that crypto has gone up enough so that a few billionaires couldn't rescue it and keep the game running though.
I still think we're going to see a relief rally short term though and that the downturn won't really take off until 2023/2024 when the yield curve inverts. We're not quite there yet.
We've also had prices being out of whack with fundamentals for decades, that is also nothing new. Also don't go predicting hyperinflation or raising long rates. That has been predicted for decades as well, and it never happens. The Fed raising rates is designed to cause a recession and disinflation. Long rates won't rise and long-term inflation will remain contained. We're not in the 70s and we're not going back to the 70s.
The thing to be MOST worried about is political. Since the 2008 crisis there's been a rise of people who just seem to want the system burn and where they won't bailout the system in the event of a financial crisis. That increases the chances that the economy could really lock up and institutions could fail. There are a lot more crazies in power.
At some point the cyclical game that we're in with engineered recessions, low rates, low risk premiums, cheap money, insane valuations, asset bubbles, etc has to break. I think its way too soon to call it as broken though. The commodities inflation that we're having right now is not that unprecedented (and a lot of it is ultimately transient and due to bullwhip effects) and the Fed is showing that they're going to take action to stop it. That means that we're likely to just have another recession then another long period of ZIRP and asset bubbles and crazy valuations continuing again.
Not a direct response to the parent post but it had the most keywords in common with my question:
>The Fed is likely to hike rates much more aggressively [...]
I agree, and they're about to start letting the balance sheet run off too, though at half the rate they accumulated.
My question for the wonks here: will it be difficult or expensive to hold rates above, even say, 5% for very long if needed? US national debt is over $30T. Assuming inflation persists and rates are raised to 5%, the approximate steady-state cost of servicing the debt is $1.5T/year, more than pre-pandemic US discretionary spending, and more than 33% of federal revenues. I asked a friend about this and they said not to worry, it takes a while for the national debt to roll over, but looking this up it seems most US debt is in instruments with a horizon of less than a few years.
also, I imagine Debt:GDP is not the most appropriate stat here but in the 1970s it was 30-35% and now we're over 120%. Some other countries are over 200%. And in a recession, by definition the denominator gets bigger. Or maybe the broader question is at what point does national debt matter?
I sort of feel the Fed is playing everyone's expectations, talking to cool things off and even name-dropping Volcker while hoping to keep interest rates more at 4% than his 20%. I'm not crying conspiracy or complaining -- if it works they could get their soft (now "soft-ish") landing.
> We've also had prices being out of whack with fundamentals for decades, that is also nothing new.
isn't this a bit more complicated than that? for example in housing though the prices are propped up by the tech companies (and startups), which can pay all those high salaries thanks to their valuations and cashflows (which are fueled by cheap credit, eg. credit cards). but also low rates allowed people to get bigger mortgages. so in that sense the fundamentals (cashflows) are there, but things with limited supply blow the fuck up, whereas wages barely moved up in comparison, and PCE was slightly below 2% (which was the target).
> There are a lot more crazies in power.
very underappreciated risk.
> At some point the cyclical game that we're in with engineered recessions, low rates, low risk premiums, cheap money, insane valuations, asset bubbles, etc has to break.
yes, but also these valuations are so high because the expected cashflows are also high, because almost everything (not just tech) is global and the world got a LOT richer (eg China)
the risks are structural (politics, eg. wars, crazy tariffs, brexit), but the potential for solving them are too (easier migration [eg Japan], more trade harmonization [US-EU], education and healthcare reform [US])
Speaking as someone who experienced both the dot-com crash and the financial crisis from ground zero, this feels nothing like them. I did not see widespread risk taking across the board. A lot of Gen Xers, such as myself, almost instinctively recognized current bubbles and either steered away from them or played them as such. People are also a lot more financially savvy. Even if people made leveraged bets, they leveraged with options instead of loans which meant they didn't lose more than what they committed. Sure, some parts of crpyto is very fluffy but I still don't think it is all that widespread.
I think a lot of people calling for a great crash will be disappointed this time around.
I really think it’s insulated especially compared to the housing market collapse. This is because most banks will not take your crypto as 1:1 collateral whereas housing was perceived to be nearly risk-free. A big difference. I am not saying we are not in an asset bubble. But it would be a mistake to draw simplistic comparisons.
You’re forgetting about the overpaid tech workers who are soon to be laid off, possibly underwater on their mortgages, and decide it’s time to downsize.
Would you like to place a wager? I bet that the median home price in tech-centric metro areas (seattle, sf/bay, la, nyc) will decline by 10% or more in July 2023 versus July 2022.
For many in tech metros their homes could decrease in value by 25% or more from their current values and the home would still be worth more than they paid for.
In any case they won’t want to sell for a mortgage that effectively costs the same over a 30 year loan with a higher interest rate.
They are not valued on a binary positive or negative cashfows. They are valued at NPV of future cashflows. You can justify a high burn rate with the expectation of earnings in the distant future. But as inflation/rfr goes up then then investors value money today more and more and money in the future less and less.
Overpaid in the same way publicly traded tech stocks and VC/PE valuations were grossly inflated. Salaries are going to come down just like valuations. As people generally won’t accept paycuts, it’ll come in the form of laying off 2 engineers and backfilling 1 of them at half the prior salary rate.
VC backed companies will start dropping like flies and the market will flood and salary requirements will drop fast.
Totally anecdotal, but I know a couple who are renting out their house they highly and renting a place to live because the interest rate they secured (2.75%) means renters paid their mortgage and then some (about 40% on top), so they basically make like $200/mo to live somewhere else as renters pay for their home.
This doesn't make sense or you are omitting key information.
If a homeowner rents their place for more than it costs them in mortgage + property taxes and makes $200 on top, that's fine and quite a nice deal. However you're suggesting they're also subsidizing their own rental and +$200.
That only makes sense if they're renting well below their means or in a different market entirely while their home is in an ultra prime location. If not the renter of their home should simply have rented out the place the owners are living at a substantial discount.
New Orleans has wild real estate. It’s not San Francisco but it’s way above the average income here and swings wildly from neighborhood to neighborhood. Home prices flip radically even just a few blocks over. We’re talking $400k->$800k if you move 5, maybe 6 blocks. Sometimes fewer than that - saw a near-turnkey place go for $500k and another for $900k 2 blocks from each other right by me about 3 or 4 years ago (obviously the latter was very nice new construction, but you get the point).
They own in a solid neighborhood, one that was “up and coming” 5 years ago, and rent in an average one (it’s in a higher risk flood zone which factors in a ton). Irish Channel vs. midcity, if you know the area at all.
They don’t have kids and see their rental as a place to sleep. It’s small, barely what I’d qualify as enough for two people. But it works for them so power to them I guess. Making out like bandits.
I get why you’re skeptical but it’s not like I’m lying here. Not sure why I would? The whole point of this anecdote is to show how crazy these interest rates were.
But it also means that recent buyers might have stretched and won't be able to make payments. If stocks do badly or someone gets laid off they'll need to sell and downsize or rent
It depends on a recession and how bad it is. Even if you're locked into a low mortgage, if you lose your job, can't pay, and due to rising interest rates are now underwater 500K on a mortgage, nothing good happens.
Like it or not there's a lot of chaff to cut in software engineering. How many of these SaaS businesses can survive, and how many engineers bought nice homes with massive salaries that might go poof?
it will be very small fraction of homeowners: those who bought in in last 2-3 years. All others will be significantly over water, and may take equity loans instead of selling houses to preserve low mortgage interest rates.
Eventually and all sellers and no buyers market will catch up with prices. Matter of how long it can be bridged. Every equity loan taken out against higher values will shorten that bridge.
And then homeowner will have strong incentive to move to smaller rental unit and rent his primary residence, or maybe he will be able to find job in this few years secured by equity loan.
> Eventually
Eventually maybe. FED gave 20T free money to current home owners in addition to existing tax incentives, how long it will take to chew through them? Maybe generation?
I think most people are doing fixed rate loans in this economy, right? Genuinely asking. I think I might be misunderstanding this aspect of your point here.
Leverage is much more expensive (from sub 3% mortgages, we already have 5%+ rates), which means buyers can afford less, plus significant withdrawal of “cash” buyers from the market who were really just borrowing against their (now much smaller) equity positions.
I wouldn’t want to be in a forced sale position anytime soon.
Mortgage payments set a ceiling on how high property prices can rise. However, people seem to be willing to spend more on mortgage payments than they probably should, so it’s likely that this ceiling hadn’t been reached yet.
The other factor is simple
supply and demand. A large factor in 2008 was a large inventory of housing that came on the market. As far as I’m aware, there is no current corollary in the US now.
I would like to qualify this. This is true in markets where labor is the majority purchasers. In markets like the sunbelt, where retirees are moving and buying properties with a combination of cash, previous real estate equity, and retirement assets, mortgage payments don’t restrict home prices. This crowds out anyone who does need financing to buy their home, especially as interest rates rise and inventory remains low.
It’s all a function of interest rates. We are seeing prices stabilize now after a couple years of meteoric rises. If interest rates really climb for an extended time then home values will fall.
> I would be planning to ride this thing out for at least eighteen months or more.
I'm betting more like three to five years.
I was talking to a friend (another old guy, like me, but really rich, unlike me).
We've both been through at least two recessions (big, nasty ones, with teeth and claws). We realized that there's an entire generation of folks; many running companies, that have never seen a real bear market.
It's likely they are having a shit hemorrhage, right now.
The company I used to work for, was (still is) an over 100-year-old Japanese company. They lasted through a devastating war, a depression, multiple recessions, and were still around. I'm hoping that they stay around. They've made some choices that could be disastrous (I think that sidelining my team was one ;), but not the same kind a lot of companies are making now. Lots of people are leveraged to the hilt. Bad place to be, when the economy starts tanking.
HODL is the word. Live cheaply, so you don't need to cash out in a trough. Don't rely on other people's money, keep debt way down, keep margins high, optimize processes, etc.
Old-fashioned stuff. It worked 100 years ago, and still works today.
>there's an entire generation of folks; many running companies, that have never seen a real bear market
If anything, this is a problem that is much less bad than it was in previous down markets.
"7% of CEOs were younger than 50 years old at the end of 2018, compared with about 16% at the end of 2009." [0]
"Data on S&P 500 companies measured over the last two decades by executive recruiter Spencer Stuart shows a small but steady increase in the age of the CEO." [1]
S&P 500 CEO's. That's a very select subset of CEOs. Many large companies aren't public today and this leaves out CEOs of small-to-mid sized businesses.
The number of private companies that are comparable to the size of the ones in the S&P 500 is quite low. [0] If we're talking about macro trends, public co's are much more important than private ones.
Do you have a source for small-to-mid sized businesses having a decreasing average age of CEOs?
That's exactly what people said back in 2008. "It happened in part because most of these finance people weren't around to experience the dot-com crash in 2000".
We live in a competitive world where organisms (including companies) need to take advantage of every edge they can to out-compete their peers. If they don't, they risk getting left behind or being devoured by their competitors.
Taking advantage of near zero interest cash to grow like crazy is one of those. If you don't, your competitors will. Kind of a game theory situation.
Sometimes, things don't work out for individual organisms. But in aggregate, the ones that through luck and/or foresight manage to make the in hindsight correct decisions emerge as winners.
I’m 32. I graduated high school in 2008. I didn’t know a recession happened at the time. My family was already relatively poor, living in a somewhat rural area, so it didn’t really impact us.
So I’ve technically lived through a recession, even as an “adult” (18), but a recession now would be entirely different for me.
Graduate college in mid 2008 and will mostly look like the economy has only even gone up for your entire 14 year career. If you were smart though you'd at least be familiar with the concept of cyclical downturns and maybe plan for it, though lots of people have a hard time tightening their belt when times are good.
As CEOs (also, the 2008 recession didn't hit the tech sector nearly as hard as this one. The 2000 bubble burst would be a better comparison). When you have that job, the priorities are vastly different from as a W2 earner.
What was wrong with you? Weren't you aware that a D&D MMO was available? Shame on you. It's free now, so stop what you're doing, roll an Artificer & grab a rune arm, take some initiative and go find yourself a Beholder to kill.
If you want to be traditional a then a fighter, thief or wizard is fine too, but roll something.
> In the early 80s, the G7 economies tightened the money supply, raising interest rates dramatically, in an effort to bring inflation under control.
This article points out a similarity between the early 80s and now. So I think it's appropriate to point out a major difference as well.
Consider this chart[1] which shows both the short term interest rate (Federal Funds rate) and long term interest rate (10-year Treasury yield) since 1962. Before rates started rising in the late 70s, the market was used to an interest rate between 5-10% (both long and short term), after which it rose to 15% (long term) and 20% (short term). Compare this with the current situation. Markets now have been used to 0% short term interest rates and 2-3% long term interest rates for over 10 years. The little blip you see to the far right of the chart is how much interest rates have risen so far (to 0.83% short term and 2.85% long term). If such a tiny blip (historically speaking) is the cause of the current correction, then it seems reasonable to expect that this is only a tiny part of a much greater correction that comes if interest rates get even close to the levels seen in the start 80s.
Surely speculation about the rise in interest rates has been taken into account by the market, though? If I expected stocks to decrease _drastically_ in the future as the fed increases rates, I would just sell right now, maybe even hold a short position. I feel that real interest rates do effect the market, but the expected future interest rates must also be a part of the "where do I put my money right now" formula.
Relevant point. I agree that the current correction is a reflection of the market’s expectations/predictions. But only for the medium term. The market has no idea what the interest rate will look like in 10 years — which is at least how long it’s going to take if it ever gets to 15-20%. There are simply too many unknowns to predict that.
Getting really annoying to have to keep track of macro events affecting my life year after year instead of just being able to live a normal peaceful life.
The reality is that, regardless of time and place, there is always some shit going on. It will be as true 50 (or 1,000) years from now as it was 50 (or 1,000) years ago.
> live a normal peaceful life.
Being able to blindly live a normal peaceful life, if it really has even ever been possible for anyone, is the exception, not the rule.
Most time periods for most people are fraught with risk and conflict. It is the nature of being.
The alternative to blindly living a normal peaceful life is having and exercising meaningful agency, which the modern state really doesn't want you to do.
Certanily makes it really difficult to focus on skill development and improving as a coder. I get that some people can handle it and I'll probably be selected out from the field for my lack of ability to ignore the macro distractions if this keeps going though.
This year, I've really put effort into building my skills and not spending so many hours reading the news. I find myself feeling happier andI'm currently studying for two highly valued certifications.
Do you really though? If you are a long term investor, just picking a couple of core asset classes and then rebalancing regularly (rebalancing is key because it is an automatic way of selling thing when prices are higher and buying when they are lower), and never paying attention to the news, it's a winning strategy.
When you buy a home -- the largest single purchase one makes in the middle class -- you lock in the purchase price, but not the interest rate. Housing prices still haven't recovered in Japan to their 1990 highs. So if you don't pay attention to the macro environment, you could be costing yourself a great deal. Fortunately, other asset purchases like mutual funds in retirement accounts are DCA'ed in by the paycheck, and not done all at once.
US commenters hopefully know they can re-finance when rates go down. Locked in, with the option of re-fi'ing. Only possible when rates drop but we're yet to have a period of 30 years of continually rising rates.
Yes, I didn't mean to imply that wasn't the case. I meant that in the US, homebuyers can fully protect themselves from the downside risk, an option that doesn't exist in many other countries (like Canada).
imagine being like 85 and having lived in China through WW2, revolution, famine, cultural revolution, and then the last 30 years of growth and prosperity. a lot of places have to worry about global macro and history, anyone who doesn't is living a charmed life and maybe a fool's paradise.
My grandfather was born in 1909 in China. When he was 3 years old, the Emperor fell. When he was 7, the Warlord Period began. When he was 17, the country was unified under Chiang Kai-Shek; when he was 18, it fell apart again and the Chinese Civil War began. When he was 22, the Japanese invaded, and he emigrated to the Philippines. When he was 32 (and my dad was 2), the Japanese invaded the Philippines too. When he was 35 (my dad was 5), the Americans invaded, and his house was bombed, and he had to move up to a camp in the mountains and shit in the river. A year later the Americans had won and he made a fortune off occupying G.I.s, opening the only restaurant with a slot machine in the city. When he was 40 the Nationalist government that had been, well, "the government" when he grew up fell to the Communists, and he was left stateless. He ended up sending his kids to North America, one by one, and finally emigrated in the early 80s and lived out his last years in peace, but my dad's obsession with geopolitics is in retrospect pretty justified by world events.
Yes, there are limitations to the tools available to the Federal Reserve and what can be done with monetary policy. At the end of the day you are trying to control individual's behaviors with gravitational pulls of satellite objects, and that doesn't really work. The analogy continues as even astrology enthusiasts might do things because of the believed influence of a celestial body's location, but can really still do anything they want.
Milton Friedman showed in "Monetary History of the United States" that the free banking era had more stability in its blind reaction to market forces than the Fed ever did with their deliberate "steady hand" on the throttle.
It depends, an individual may be affected financially or emotionally.
I used to say what you just said, and then somebody replied to me that there is value in our time and life too, and sure they could be financially fine in 5-10-15 years but what if they had other plans in the short term? Now those life plans are disrupted. Eventually, will they be fine financially? Probably. Have they lost the one shot they had in their life to do something they really wanted? Without a doubt.
But I am afraid it is is transmissible by 'respiratory droplets'.
> "Monkeypox virus is transmitted from one person to another by close contact with lesions, body fluids, respiratory droplets and contaminated materials such as bedding."
This is fear-mongering. You cannot predict the future and the CDC tracks dozens of novel virus outbreaks each year that never go anywhere. It’s less transmissible, and responds to vaccines that we already have.
Depends how old you are. Even the youngest member of the UK cabinet is old enough to be my father, but the real decision makers are old enough to be my grandfather. I don't keep close track of US politicians but as far as I can tell, its even worse there.
Think about who the current generation voted for. When politicians are voted in because of their fiscally irresponsible proposals, who is really to blame?
People are voting themselves money out of the treasury. This is the result.
Except the previous government gave out a lot more money.
Massive tax cuts, votes secured by giving over $40bn to farmers who were negatively impacted by a pointless and thoughtless trade war with China, and most of the COVID aid was given by the previous administration (although they did delay it because the previous President was insisting his name should be on a check that would be physically mailed to everyone).
Governor Newsom has a $100 billion surplus. But only if he ignores the unfunded pension liability. That surplus is due to federal covid grant money, and the recent stock market bubble.
Newsom has plans to spend every dime, including raining $400 checks onto every Californian with a car.
It's massive irresponsibility. Do you think Newsom will be coming for a bailout next year as that capital gains money dries up and no more Biden Bucks?
And we will create yet another mess for our children. Or at least what's left of them because we decided not to have any, which is a problem in itself.
Pointing fingers isn't going to help with anything, whether its your parents or your next door neighbor. At some point we just need to take ownership and work towards a better future, but accountability seems to be pretty rare these days(whether its your issue or not).
Here’s how I’m reading the scenario: Rather than admit that the wording of your comment is easily taken out of the context you intended (that is, taking accountability for your previous statement), you claim that I’m “twisting” your comment to my view (for some unknown reason).
And all this spawning from your post claiming that nobody these days takes accountability (but they did in the past).
And none of that includes mention of your snide “hehe, I’m right you’re wrong” ending comment. (Really raising the bar of interaction here).
There are lots of people who have not paid much attention to these “macro events” you speak of and it has not impacted them in any meaningful way.
Covid came closest to impacting my life. But I got the Pfizer shot as early as I was legally able, same thing with a booster and pretty much have just gone about my life as usual for most of the pandemic while never getting Covid.
The rest of it going on - I just don’t even pay attention to it.
Covid impacted most people around the world. Professionally and socially. The Ukraine war started as a local war, but now it's affecting Europe and third-world countries who depended on Ukraine for wheat.
These last macro-events caught many people by surprised. This inflation cycle is also affecting most of the world (since import prices will factor in lots of goods).
What if the COVID epidemic doesn't end in this decade? The US continues to have about half a million dead per year, and a lot of lost productivity due to long COVID. This is the most likely scenario.
What if the war in Europe doesn't end in this decade? The optimistic scenario is that Russia bites off some of Ukraine and we go back to a cold war, with everybody in Europe building up serious military power to keep Russian expansion at bay. There are worse outcomes.
What if global warming starts to produce mass starvation in many areas of the world? This is looking likely, and it's already started.
What if supply chain problems don't go away? It's become clear that the incentives of the free market no longer insure abundance across the board. Americans could once deride the USSR's "short-blanket economy", where stores were always out of something. Now that's the norm in America.
For the past half century, large scale trouble in the US has been mostly about the business cycle. But this time, the business cycle doesn't dominate the other problems.
baby boomers and the greatest generation dying an additional half million per year accelerate the biggest wealth transfer in history - rebalancing portfolios to be demand for undervalued stocks and different consumptive spending patterns
Covid is over, the excess deaths are low, or even zero. War in ukraine would be a nothingburger if americans were involved (like noone cares about yemen, syria, now somalia, and noone cared about afghanistan, iraq, and even serbia).
Most of the current problems that we have are caused by the politicians directly, and not by covid/war/whatever, and sadly, they're the first that will have to go, if we want to return to somewhat normal future.
Russia invades ukraine, world becomes hysterical, mass sanctions, everyone stands with ukraine
America invades a country that has nothing to do with 9/11 and kills 500k+ (realistically 1mm+) civilians, no one stands with Iraq, and if they do they're terrorist states.
Not sure you are correct here. Ukraine war is in Europe, America's sphere of influence and features America's traditional enemy. America was involved in Afghanistan and Iraq which you claimed no one cared about. Russia and Ukraine produce a significant portion of the worlds food, energy and fertilizer supply.
The current situations are caused by politicians but politicians from dozens of countries. Politicians chose to invade Ukraine. Politicians financed the making of vaccines which provided enough confidence for economies to open up again. Politicians chose China's zero covid policy. Politicians flooded the market with money which led to inflation but also prevented a collapse during covid and allowed the poorest among us to survive. Politicians do both good and cause harm. They also provide representation, without them your other options are dictatorships or anarchy.
"they're the first that will have to go, if we want to return to somewhat normal future." how are you suggesting they "go"?
This is a normal future, there is very little going on right now that has not happened a dozen times before, its just people doing people things.
so what... A country has a minority, minority wants to separate, the main country won't let them, and fights happen between the main country and the minority, a big player steps in and destroys the main country to "save the minority" (and gain whatever their geopolitical interest was). Kosovo, ukraine, same shit, different players.
> The current situations are caused by politicians but politicians from dozens of countries. Politicians chose to invade Ukraine. Politicians financed the making of vaccines which provided enough confidence for economies to open up again. Politicians chose China's zero covid policy. Politicians flooded the market with money which led to inflation but also prevented a collapse during covid and allowed the poorest among us to survive. Politicians do both good and cause harm. They also provide representation, without them your other options are dictatorships or anarchy.
Meh... you need just one large country to succeed in their "revolution" (or whatever it will be called), by pulling their politicians out from their high security buildings and removing them from power one way or another, a few more will follow, and the rest will get scared and start actually doing something good for the people. The hypocricy we've seen during the covid era should not ever be forgotten, and the human rights violations neither. Let's also not forget the people who fly to Brussles twice per week in private government planes and tell their people not to drive cars due to ecology.
> "they're the first that will have to go, if we want to return to somewhat normal future." how are you suggesting they "go"?
In serbia people stormed the government buildings until milosevic stepped down. In france, they used a bit stronger, headless approach. It all depends on what works.
> This is a normal future, there is very little going on right now that has not happened a dozen times before, its just people doing people things.
Not really... in the past, the politicians were "removed" one way or another many many times,... this current peaceful era is more of an anomaly.
>so what... A country has a minority, minority wants to separate, the main country won't let them, and fights happen between the main country and the minority, a big player steps in and destroys the main country to "save the minority" (and gain whatever their geopolitical interest was). Kosovo, ukraine, same shit, different players.
This... almost works for the crimea situation years ago but Russia is now just attempting a full scale takeover of the country. I can tell Ukraine isn't into it because of how much they're fighting back.
I mean... nato bombed whole (what was then left of) yugoslavia, including civilian targets and destroyed civil infrastructure, to make the country give up the southern part (kosovo)... they even bombed a tobacco factory in Niš and the national TV station in Belgrade which have nothing to do with kosovo, and threw cluster bombs on residential areas "just because". So yeah... putin is basically doing the same to destroy the military infrastructure, and is now taking over the russian minority regions.
The only real difference is propaganda.... US was "bombing for peace" ( https://content.time.com/time/magazine/archive/covers/1995/1... ), and the current RUS-UA propaganda is basically a giant shitshow, where by reading the media, russia is losing every day, and the fighters from azovstal are being "evacuated" (...by russia... as prisoners of war... but the word used was "evacuated").
> caused by the politicians directly, and not by covid/war/whatever, and sadly, they're the first that will have to go, if we want to return to somewhat normal future.
> Not really... in the past, the politicians were "removed" one way or another many many times,... this current peaceful era is more of an anomaly.
I'm going to go out on a limb here and say this poster seems to essentially be dog whistling for assassinations.
Look at america for example... a bunch of senile should-be-pensioners are leading the country on basically all levels. Look at EU, a bunch of unelected people in brussles want to break e2e encryption and intruduce private message monitoring.. "for the children". Look at shanghai and their lockdowns. Look at global realestate prices. Look at the profits vs wages ratio.
I mean... something will happen sooner or later, if we want it, call for it, or not.
America is a good example. A country that has a population that is essentially 50/50 divided on almost every single thing. There is no "hey we kicked them out" and now everything is good, it ends in a massive pogrom. The us has elections where we have the option to kick them out every 4 years, the current focus on eroding trust in that process is weakening America and has me more concerned than anything else. Elections provide a way to vent pressure, one side takes over and then the other. Messing with elections and eroding trust in them leads to an increase in that pressure without a vent.
No matter what the revolution, it never leads to utopia, it just leads to another group of politicians. An effective Democracy is the best option. Issue is a ton of people choose not to vote and instead just complain. Its far from perfect but better than the alternatives.
"Look at global realestate prices. Look at the profits vs wages ratio" these are the results of capitalism and while I agree there are some massive limitations to it, it has lifted billions out of poverty and subsistence level living. Perhaps technology will lead to a better solution but right now I dont think we have one and just kicking over the sandcastle is not going to make things better and will very likely make things much much worse.
My view is that capital and investment will dry up and companies that are operating at a loss(many in tech right now) will either have to downsize or close up completely. This will cause a domino effect. People will lose jobs, and some of those people will have bought a million dollar shack in the past 2 years and they might have to sell at a loss or foreclose. Generally I think we have yet to see any real macroeconomic fallout from the markets cooling. I see many people already comparing this to '08 and saying 'it's definitely not that bad this time' but the reality is we haven't even seen any fallout yet.
Nearly all of Alphabet and Meta’s profits are not from customers paying them to use their product, but advertisers who are trying to convince FB/GOOG customers to use their products.
If those companies start disappearing, or cutting back on ad budgets, FB/GOOG don’t have a business model anymore.
People have been arguing that the ad tech industry is overdue for a reckoning due to its opacity and overblown promises. The book Subprime Attention Crisis is one treatment of the topic. Tightening brand budgets might force that reckoning.
Most of these advertisers are not VC-backed unprofitable companies who are selling dollars for 99 cents, but the boring, ordinary companies who manufacture stuff, ship it from China and make boring, ordinary profit margins. They are not going to be hit harder than the rest of the economy; probably, less.
That could be true but the impact would still be limited compared to 2008. Credit/bank failures are far worse for the general economy than some tech startups failing.
I'm not 100% sure of that. Think of how many services depend on tech, and how much of that tech is built by companies operating at a loss.
For example, if Cloudflare were to do mass layoffs, and potentially fail/go bankrupt, what would the ripple effects be on enterprises throughout the US?
Negligible. Cloudflare is tiny compared to AWS, which itself is a fraction of total computer infrastructure. On-prem is still big, reason why cloud companies keep showing massive growth.
I don’t think that tech companies are the systemic risk here, but they could certainly start the chain of events. In 2008 the governments and central banks had tools to use to try to bring us out quickly. Todays risk involves the possibility of stagflation, which is a long slog to get out of.
I agree we are working through an asset bubble in tech and housing - P/E's went quite a ways above the historical line, as did housing prices.
But think about the chip shortage (automotive, consumer electronics) - raising interest rates does not "fix" supply and make prices lower. Think about oil & gas markets. Think about labor shortages.
When supply is broken, it's not only a monetary policy problem. Most of these things are "U-shaped" and not "V-shaped" - they will take longer to come back.
Housing is not a bubble, at least not in the U.S.A. The prices are supported by a fundamental shortage of the product. It is not driven by speculation but demographic pressure.
The reason there's a housing shortage is that almost all US cities have insanely terrible urban planning and zoning policies. There's no guarantee this will continue forever. In fact, I see quite a bit of evidence that Americans are gradually waking up to the fact it's possible to have decent, livable cities if you don't do everything completely backwards.
So, for instance, I think it's actually possible (not guaranteed) a substantial amount of housing will be built in the Bay Area in the next 10 years, which will decrease the willingness of people to pay $2M for a generic small house in a suburb.
I think there's been quite a lot of speculation in RE, actually. With rates so stupidly low, people have been purchasing rental properties as the only other investment besides stocks that made any sense in the last 2 years.
A bubble can still form on the back of strong fundamental growth trends. To the extent that people have convinced themselves that housing can't be a bubble because demographics are in its favour, they may also be willing to buy in at any price, and thereby make a bubble.
Really? It was obviously not true back then and is obviously true now. Housing starts hit nearly an all-time record high in the U.S. in January 2006. But then housing starts almost hit zero in 2009, and have never recovered.
It's not just automotive. It's everywhere. E.g. power supplies are apparently a big deal right now... And sure, you can't easily re-design, re-qualify, re-tool for something very different than what is in your design. Companies do that typically for EOL'd components but they usually have a bit more of a heads up and opportunity to buy some extra of those to buffer their redesigns.
I can't speak for it's relation to inflation, but have you _tried_ getting a new mid-range mirrorless camera or other similar electronic consumer good? Chip shortage is real.
Could you elaborate? I'd love to read some analysis on this, but just claiming the whole shortage was fake has some real "no trees on flat earth" energy.
Be wary of anyone making firm statements about the future of anything. This article doesn’t do that.
This article is merely drawing similarities with past events and concludes:
> First, we need to see the economy slow down and inflation slow down. We need to see stocks bottom out and hang out there for a while. And we need to be patient. None of this is going to happen fast.
This seems reasonable. Wait and see based on variables that were important in the only comparable period in recent times.
Eh, not really. Having a plan to ride it out if things get bad is never a terrible idea. Personally you should have a rainy day fund that can sustain you and your family for 12 months. You should have the same as a business, but that fund should really be like 24 months instead of 12.
Buy an index fund and when the market is down try and buy more.
If you do wish to do something to actively manage things, try giving Nassim Taleb books a read, or just read about his or Mark Spitznagel's investment strategy. They also keep 97% of their money in an index fund, but the other 3% are slowly wasted away buying far out-of-the-money PUT options on boring stocks that are very cheap to buy because they'll "never happen". And most of the time, they lose that money. But when COVID hits, or airplanes crash into famous buildings, or <insert next surprise here>, those little never-gonna-happen options pay for all the damage to the 97%.
Their core theory is that humanity systematically underestimates the probability of very rare events. So it's not about timing the market, it's about using this exploit in human psychology to reduce or eliminate your "risk of ruin" from very rare events.
To give a brief counter to the Taleb/Spitznagel Empirica Kurtosis strategy, the pricing of deep out of the money options is systematically overvalued in relation to the Black-Scholes model, suggesting that the market correctly prices in fat tails.
The volatility smile pattern describes the 'overvalued' nature of these options, and the SKEW index tracks their pricing.
I wonder if this adjustment is enough... Spitznagel's fund did return 4,144% in Q1 2020. Maybe they found some other similar hole, but one seems to still exist.
It's certainly possible that even with the volatility smile markets still underprice unlikely events, but high returns from a tail-heding fund during a black swan event hardly provides any evidence. Regardless of pricing, the expectation of the strategy is infrequent high returns and frequent poor or negative returns. Whether the market accurately prices these events also depends on how bad returns are during years without anomalous market conditions, and the intervals between fat-tail events.
Here it’s entirely about the source. Fred Wilson is an unusually smart and honest investor, and has experienced more market corrections than I have. So I weight his opinion higher than mine.
I also weight his opinion higher than my favorite financial columnists because he’s the man in the arena, and focused on the part of the economy I care about — startups — while columnists have to think about housing prices and other stuff.
Maybe, but Barron's also has plenty of day-trader hype. How do you separate the good long-term predictions in Barron's from the bad ones? Read someone else. (You can optimize the process by skipping Barron's entirely.)
There are domains where I feel I can judge an argument solely on its content. Predicting the economy isn't one of them. While I can discard some bogus arguments, there are plenty of coherent and self-consistent arguments pointing in different directions. So I have to consider the source.
I'm still not sure why you'd weigh his opinion higher, he may be honest or have experienced more recessions than you have, but why not find an old columnist who doesn't lie? His lack of consideration for the other parts of the economy like real estate, etc. and his focus on startups to me seems like a handicap and not something that makes his economic predictions more accurate.
The best you can do is to build a market thesis that represents your views, try to find reasons that you are wrong to help harden / shape your views, and only then try to find others that believe the same way your thesis does to try to see how they predict.
Everyone has their own crystal ball, and everyone believes theirs is the right one. If you look at fintwit, you will see "the world is ending", "the worlds ended, we going up", and "lets wait and see". At least a few of them will get it right, to some extent or another. I dont think you can figure out at this time which is the right one.
So, best you can do is form your own thesis I think. I've formed mine. It helps me not panic when things are temporarily against me.
I am generally generally wary of one liner predictions that people throw out on Twitter.
We have all seen those recently:
"This is going to be worse that dot com", "This is nowhere near the bottom" and basically bold but unsupported predictions of that flavor.
This, however, seems like a reasonably balanced take. Tries to take cues from the historical events, which doesn't always work imo but still is _something_ to base your arguments on.
I don't navigate it. It's a bit like trying to predict the weather. You can kind of guess that it's going to rain tomorrow, but you can't guess if it's going to rain in a year, let alone how much rain there will be in the next 10
I just buy a little bit of monero, funnel money into 30+ year tax advantaged retirement savings, and work on my skills I guess
This isn't much of a prediction. It's saying this correction is going to look like all the others. We had an overheated market in an inflationary feedback loop with pandemic relief, and that stopped, and now prices have corrected and we wait for growth to start again. That's... like predicting autumn will come some time after the end of summer.
The takeaway here is that there are no unique circumstances at play. This is a market cycle just like any other.
Take every major future scenario and make sure you have some idea of how your strategy and portfolio survives it. There is no difference between a useful and useless economic prediction in a highly uncertain environment — they’re all roughly plausible.
You need to understand more about macroeconomics, monetary policy, ad government, along with studying past how past markets behaved under similar conditions.
History doesn't repeat but it rhymes becomes the mantra.
I have a real problem with pieces like this that define "recession" in terms of abstract measurements of bits of the economy. Real recessions are about actual people and their lives, and although there's a definite correlation between the sorts of measures cited here and people's lives, it's much weaker than the article implies. We have very low unemployment right now, and most the features of a people-affecting recession are absent. Yes, the economic situation is really complicated and has some worrying signs, but calling it a recession based on the quoted numbers even when they are embedded in a not-seen-in-100-years context seems rash to me.
"The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
Like another comment said, recessions hit the ordinary folks last. But their stress is already evident. Employment numbers can turn on a dime. as can retail sales.
RPI is down because of inflation though, not because of a decline in GDP, increase in unemployment etc. So yes, uncharted territory but not necessarily on the recession continent.
This is circular reasoning. It's also wrong as a general claim. Personal income, at least as traditionally measured, fell for a large number of US workers over a 35+ year period during which inflation was non-zero and yet there was not a recession covering the entire period.
Second half of 1940s and early 1950s are, IMO, a much better data point on how asset prices and economy would develop than 1970-80s than the author chooses.
The situation in 1940s, with massive post-war government debt and high inflation is a much better match to today's state than 1970s with low debt and high inflation.
There are other huge differences though, right? In the second half of the 40s the US had a giant manufacturing economy whereas the rest of the world's manufacturing output was devastated by the war. I'm not an expert in this area but had the impression that it was this imbalance between the US and the rest of the world that played a huge part in our hegemonic success following that period, so I'm not sure what the purpose of comparing to that period would be, you wouldn't seem to be able to meaningfully extrapolate anything about the future out of it.
Certainly. There are big differences between now and 1940s in many things: manufacturing capacity, education levels, societal cohesion, easier acceptance of risk to life, etc. etc.
I am just saying that purely from the economic perspective and its key characteristics of asset prices and inflation (that the author focuses on), today is much closer to the 1940s than to the 1970s. And I am personally investing on this assumption, as I think that the fiscal and monetary choices that US will be forced to make will drive the economy along a path with many similarities to the post-war decade. Just my 2c (and, obviously, not an investment advice).
Good news everyone! By destroying our economy we have successfully reduced the real cost of the debt by 80%! Unfortunately, we now need to print massive piles of money to incentivize economic activity again!
I agree it’s risky business, but that is what happened in the 70ties. So it is possible to let inflation eat say half of the US national debt. That’s 13 trillion USD…
Even if the US economy shrinks by 5% in the process it may still be beneficial for many. This is the extraordinary economic incentive I was referring to above.
Inflation is the most destablising thing in an economy. It would be wise to keep raising interest rates until inflation gets back to 2/3% even if that causes a recession.
I agree. But many Swedes are heavily indebted (with mortgages), and their parents made a fortune from negative real interest rates in the 70-ties + the asset bubble of the 2000s. Now they want the same. Understandable.
The Swedish Riksbank (actually the oldest central bank in the world) is formally independent, but everything is politics in Sweden. I would not be surprised if the indebted middle class come out on top here.
That's a simplification, they didn't make a fortune from the inflation on things being higher than the interest rate, they made it from salary increases.
I looked at my SBAB account and indeed I have 0.50% on that now. So maybe we'll see another salary inflation event, but as long as food/electricity and fuel is rising faster than your salary there is still a BIG problem (right now you got 2% vs. 6%)!
How can they raise salaries while debt is becoming more expensive? Well you need to increase productivity, how do you do that; you consume more energy.
The inflation we have now isn't really monetary at all, it's scarcity inflation. And that never ends, because energy is finite!
Any way you turn this thing; it's the end of the financial system, because no matter what they do they cannot print energy.
> That's a simplification, they didn't make a fortune from the inflation on things being higher than the interest rate, they made it from salary increases.
I don’t really see the distinction. There was an energy angle to it in the 70ties too (the oil crisis). Whenever there is significant price inflation there will be salary inflation too, sooner or later.
No, in the 70s Nixon had just removed the gold standard, the real reason for the salary inflation WAS to convince people that the newly invented petrodollar had value by increasing the interest rate AND the salary to compete with the gold price; by extracting more energy from the Saudis to do the work.
Without the petrodollar and expedient Saudi oil, raising interest rates to fight a "permanent for the rest of eternity" physical lack of energy is going to go terribly wrong.
I suspect they will stop at 1% in Sweden when all households/businesses start to fail (because we have more debt than in the 70s) and then we'll get cashless UBI, which will lead to monetary inflation on top of the scarcity inflation.
> Whenever there is significant price inflation there will be salary inflation too, sooner or later.
You better be damn sure about that, because othervise when the music stops you got nowhere to sit!
FOMC members are paid 250 thousand dollars per diner not by American savers but by bankers and high asset value types. FED will go back to inflating asset bubbles at the first opportunity.
The shock from the Target and Walmart earnings that caused the single largest drop since the 80s for both companies was not just the pain of inflation that is adding to their costs but also from rising inventories because consumers seem to be already sacrificing discretionary purchases.
Will be interesting to see if discretionary spend continues to meaningfully drop and whether we will actually start seeing price cuts/discounts eg deflation as retailers look to reduce inventory.
I can't speak for Walmart and Target, but the COVID supply chain disruptions caused my business and likely many others to over-invest in inventory because it takes longer to restock, and the inventory will sell at slimmer margins because I paid 2X+ the normal shipping rate to get it to the destination country. Many businesses are sitting on large amounts of inventory that can barely be sold at a profit. Now discretionary income is dropping, meaning demand and price points will fall. We have too much landed inventory we paid too much for and less people spending less to buy it. It's not pretty.
Exactly. Inventory is high because companies looked at the supply chain shutdown and thought "I'll load on up extra inventory, to hedge in case this happens again."
Those prices are going to come down to entice the consumers scared off by inflation.
From reading their investor statements it was more complicated than that. They overpurchased inventory of goods that saw lowering demand as people started going back to the office or spending money elsewhere as pandemic restrictions lifted. Ex. People shifted discretionary expenditures from TVs to vacations. Given how tight the labor market is I don’t think we’ve really seen the impact of overall lower discretionary spending yet - that probably won’t play out until this coming holiday season.
> In the early 80s, the G7 economies tightened the money supply, raising interest rates dramatically, in an effort to bring inflation under control. You can see the effect in this image:
It's fascinating how much attention the Federal Reserve gets when it comes to the business cycle. It's not clear what's being referenced above, but the reference to the Fed funds rate chart below suggests it's "the Fed" and company.
It's possible, though, that the Fed is irrelevant.
Have a look at a different interest rate chart: the 30-year Treasury yield (10-year chart looks similar). This is the risk-free price of money that comes due in 30 years [zoom out by clicking "max"]. Given the three-decade duration, this is about as close as one can get to answering the question: what is the economy likely to look like if the Fed didn't matter? This market is giving a peek into the relative level of growth and inflation expectation in the distant future.
The chart peaks around 1981 and from there it's a fully-loaded train barreling down the hill without a brake and only hitting the occasional bump along the way. Through recession (grey bands) and recoveries (after the grey bands), through manias (1999-2000, 2006-2007, 2020-?) this long-term rate sets lower highs and lower lows, year after year.
During all this time, the Fed is doing its thing, pumping up the idea that it controls "the money supply" and it alone can fight inflation or get the economy out of recession.
That is, until this year. Depending on how you look at it, the top of the long-term trend line may have been broken this year, or just barely touched. In other words, this chart sits at a possible inflection point marking either the beginning of a new regeime (much higher interest rates) or reversion to the status quo (much lower and likely negative interest rates).
The point of all of this is that if the Fed were indeed the center of the financial universe, is this the kind of chart you'd expect to see? What factor(s) in the real economy are capable of producing a chart like that, independent of the Fed? Finally, what happens when/if this chart crosses the x-axis, or breaks decisively above trend?
Long term demographics shifting older and growth shifting lower has driven interest rates down since as long as most of the posters here have been alive.
We have hit an inflection point where interest rates are being raised as a tool to fight generational highs in inflation. This is the usual tool the central banks use in such a scenario. The resulting slowdown in markets and economy is the usual result. How smooth the slow down is to prevent overheating is always the risk they take.
What is in question is how effective this will be if a lot of the inflation was simply pent up COVID demand, supply chain constraints (China shutdowns), car makers getting caught flat footed while transitioning to EVs but unable to secure battery&chip supplies, and war induced energy price spikes. Some of these things will be resolved by demand dropping due to interest rates rising, many will not. For some things this will cause double pain - cost of money is higher and energy prices remain high due to war.
So we are probably in for 6-24 months of pain, with 12-18 months being the 90% scenario. Another question is if the clock started ticking in November when tech peaked or January when the broader market peaked.
Another question is the amount Wall St vs Main St, is this just going to be a market drawdown or a wider economic recession. So far what we've seen is GDP/unemployment have not really reflected the same bearish picture (yet).
GFC was more of a broader economic collapse story versus DotCom collapse which was more sector & market specific..
So now would be a good time to hunker down, manage your personal&company burn rates, and maybe be an opportunistic buyer or investor if you see specific opportunities.
> So far what we've seen is GDP/unemployment have not really reflected the same bearish picture (yet).
This has been puzzling me so far. Tech hiring is hot as ever even with a few notable companies doing hiring freezes to various degrees. Can't help but feel like the market has to cool at some point.
re: Lag - someone joining a new job today was probably given an offer 3 months ago, and begun their recruiting process 6 months ago.
re: Realness
1) I've been through a number of interview rounds at a number of firms in the last 3 months where either the role itself or the comp previously discussed suddenly became in question, and the process delayed or went on hold. I have 2x as many irons in the fire as usual this job hunt as I find continual head fakes, ghosting and just general flakiness.
2) From the other end I can tell you my management has asked our team to do what-if scenarios for anything from -50% to +50% staffing recently. With scenarios of cutting some/most consultants with 0 backfills, or converting some, adding full-timers, etc.
3) Even some of the shops I interview have made mention of cutting consultants as of late, so some of the hiring could just be conversion.
4) Lot of tech headlines of hiring freezes or pauses or chills
I kind of disagree with the analysis, largely because there’s now a large block of the world separated from western commerce.
Russia isn’t purchasing goods, yet the west is giving them wealth for oil, natural gas, wheat, etc.
That’s effectively wealth leaving the system and entering there’s.
More over, the west is increasingly looking at China as a threat AND China has locked down a large amount of economic output.
This is just starting imo and it’s not likely to improve for the time being.
In the 70s and 80s the US had a large manufacturing base and purchasers around the globe.
Today the largest exporter is China and most nations have china as their largest import. China is supporting Russia and looks like their looking to leave the western financial system. This is on a downward spiral far different than the 70s and 80s and I don’t see it reversing until the market bottoms out at its new size (much smaller than previously).
Genuinely curious : Russia’s GDP is < 10% that of the US or China. What’s up with this fascination with Russia (economically speaking — the humanitarian tragedy they are creating is a different topic)? The only question is if they align with the west or with china —-they’ve already lost as a super power, and their best strategic choice is to become a prized and expensive proxy between the west and china. The thing is, china and the west _trade_, so the calculus for russia is losing on all fronts. they can inflict a decade worth of pain to europe energetically, and then what?
All GDP is not equal. As an example, Ireland’s GDP was ~1/3 tourism, with covid they lost that GDP.
Russia GDP is primarily raw goods, commodities. They also have a decent domestic market for manufactured goods. Look up the global production of wheat, natural gas, oil, etc and look for Russia and Belarus. To put it bluntly, USA GDP is a mix and has everything from commodities to information tech to finance. Russia is a producer of raw goods.
Commodity prices are made at the margin, meaning a 1-2% reduction in supply could cause prices to go up 5-10% (similar for the reverse).
So Russia has an outsized ability to both weather sanctions (they don’t import as much raw materials, particularly energy) AND the world must continue to purchase their goods and/or dramatically reduce in production themselves.
For instance, German energy prices are up 500% (as of feb 2022) when compared to two years prior.
It’s now up 1000-1500%, how is German GDP going to be impacted? While Russia’s will maintain much of its GDP, Germans will likely drop substantially, as they’re effectively deindustrializing. Their factories / industries can’t function economically at such high prices.
> so the calculus for russia is losing on all fronts
I see Russia winning on all fronts tbh. They’re increasing domestic resilience and culture. They’re also winning the war in Ukraine (see Mariupol, Donbas encirclement), and winning the economic war with the west paying them even with the sanctions.
What’s their goals? To me it seems they are achieving the objectives Putin laid out at the rambling speech at the beginning of the war (independence from the west and “freeing” Russian sections of Ukraine)
I find it so interesting people think Russia is losing. I just don’t see it.
How anyone can look at how the war is going in Ukraine and think that it's any measure of success for Russia is simply not basing this in reality. Russia has already been decisively defeated in Ukraine. Their success is taking Mariupol is like if the US invaded Tijuana and then got stopped on the way to Ensenada. And what Donbas encirclement? The Russians "started" trying to encircle the Donbas in February. They've had no fundamental improvement in their position in the region since then, in fact, their facing their own issues with their defeat in Kharkiv.
> Russia has already been decisively defeated in Ukraine.
Ugh, then the war would be over.
I think the media creates a large set of biases. Recall, much of the media around this is banned. Here are some channels / people I’d recommend for various insights:
The war isn't over because Putin doesn't care what the costs are. It's not sustainable though. Ukraine will keep fighting and the west will keep supporting it. What are Russia's options?
So sure, not decisively defeated. It's not like the entire Russian army was wiped out and Ukrainians are marching in Moscow. But still defeated for all intents and purposes and all around loss (world status, material etc.). This has got to be the dumbest war ever.
My prediction is that they’re going to take the Russian speaking portions of the country as they originally laid out. That’s effective up to the middle of the country. If Ukraine keeps fighting they may take Odessa and leave Ukraine without a sea port.
That’s something like 60-70% of Ukraine’s GDP btw. Russians have already captured 30% of Ukrainian GDP. I don’t think that’s a loss by any measure.
Wars typically last years, I don’t put much stock into 90 days of conflict. Already 20% of Ukraine is taken, most of its armaments destroyed, Russia has been targeting the west’s attempts to rearm.
For whom? I don’t think any war is good, by definition it reduces both sides ability to produce and trade (ie hurting everyone).
That said, the Russians have their objectives and clearly thought it worth while. It’s dangerous to underestimate and not understand the motivations of an enemy.
Again, you keep making claims about "most of its armaments destroyed." This is clearly not the case, instead it should be reversed and say that the Russians have lost most of their tanks... They've lost over 1000, and with 10 per BTG, that's 100 BTGs that are without their most powerful weapons.
The Russians have also used up most of the precision guided weapons and are having to resort to using unguided bombs and rockets for the majority of their attacks. With sanctions in place, they won't be able to replace these weapon stocks due to their reliance on Western electronics.
Russia didn't go into this war trying to liberate the Donbas; and if fact most of the Russian speaking citizens of Ukraine have turned against Russia. Russia wanted the entire country and failed.
And Russia will shortly have two new NATO members on its borders. That's a huge geopolitical failure. Russia has instantly strengthened and rejuvenated NATO with its invasion of Ukraine.
But you keep pushing that Russian Success Strategy. We'll see how things pan out by August.
I do not, and anyone else not trying to be contrarian and edgy on the back's of a humanitarian catastrophe does not either. Russia's goal was a blitzkrieg surprise win, measured in hours, taking over the capital and the government, before the West could even muster up sanctions. They have failed abysmally at that, and capturing a few towns in Eastern Ukraine (just a little bit more than they already had captured since 2014) is Putin's attempt to have something in his hands to present as a victory and hope not to get couped to death (a fate all warmongers rightfully deserve).
They seem to have lost their initial short term objectives, and the fog of war is real/I can’t tell how good or bad they’re currently doing, but I think regardless of their competency or resolve it’s foolish to underestimate a China-Russia coalition’s resiliency long term, if only due to their much more totalitarian hold over their populace. The lack of easy avenues for a change in leadership even if extremely disastrous for most Russians is a significant difference.
That said, I think there are rumblings of regime change in China. The housing market crash and extreme lockdowns seem to have a lot of people upset.
Seems like we’re living through interesting times, unfortunately… I’m probably delusional, but I’m somewhat optimistic that people will be better off once the dust settles. Depends on how rough it gets and whether we can manage a smooth landing.
There's definitely fog of war but the front lines have barely moved despite Russia bringing all its might to bear. We saw the images of those demolished Russian forces at that ill fated river crossing. We keep seeing evidence of Russia suffering continuous losses.
What we don't see much of is the Ukrainian side's losses. Their morale and will seem extremely high though.
The Ukrainians have a numerical advantage over the mobilized Russian army. They have an advantage as a defender and they have a double advantage because they are defending their families and homes. The Russians don't know what they're fighting for and why they're even there.
The Ukrainians are backed by the west (though maybe not enough) with potential access to weaponry that can tip the balance. They appear to generally be applying better tactics vs. the Russians brute force and level everything to the ground approach. So really the only thing stopping them from pushing the Russians out right now is access to more and better weapons (which might be improving in the coming weeks with the new US aid package).
Re: China I think they're looking at this and recalculating. Taiwan is probably not happening. Their "strategic" partner that's supposed to be a super power turned out to be full of hot air. Western weapon superiority is proven again. They want to win economically, they don't like instability. And sure, just like anywhere else, totalitarian regimes don't last for ever.
Another factor is that other countries are looking at this and also reaching the conclusion that the western hegemony that appears to maybe be not doing so great actually is still doing pretty well.
All that said, it's probably going to get worse before it gets better. This is just so stupid.
Agree 1000% about the stupid part, the pain being caused right now is so tragic and unnecessary. And I hope you’re right about the rest/think you probably are, but its important not to get too arrogant about our position given the stakes.
> do not, and anyone else not trying to be contrarian and edgy on the back's of a humanitarian catastrophe does not either. Russia's goal was a blitzkrieg surprise win, measured in hours, taking over the capital and the government, before the West could even muster up sanctions.
Where does that assumption come from? No Russian source has ever said that. The only sources I’ve seen were the US propaganda arm. Putin said that they were now in a defensive war with the west (his words, not mine). I don’t think they expected that to be over any time soon.
But just for fun let’s assume you’re correct. Their objective is to conquer Ukraine..?
It still doesn’t change the fact Ukraine isn’t winning. They’ve lost territory, most of the military assets, and the territory they’ve lost thus far is their most productive (industry and agriculture is based around the coast). By no measure is that trending toward victory.
Now my position on this — Recall, Ukraine had one of the largest standing armies prior to this war. Order of magnitude more prepared than Iraq in the 90s or 2000s. With better equipment, heavily entrenched and much larger by land mass.
I don’t think there’s any way that Russia expected to conquer Ukraine with 50k troops (1/5 the size of Ukraine’s standing army) in 90 days. But I also don’t think Ukraine is the only theater of battle. The real war is the war of logistics and in that, Russia is far better prepared and capable.
To say your "facts" are in error is to say water is wet.
Russian started the war with roughly 100 BTGs. These have roughly 1k troops when fully equipped (as you would expect before the start of hostilities). They've added another 10-15 BTGs to replace the 45 or so that have been attritted by Ukrainian forces. So no, they didn't expect to conquer Ukraine with 50K troops, but closer to twice that.
RuAF also tried to decapitate Ukraine by seizing Hostomel with airborne troops, and then rushing Kiev with troops located very closely in Belarus. You don't commit airborne troops like this when you don't have a)strategic surprise, b) tactical surprise, c) air supremacy. Russia expected a quick coup de main, and when the VdV got wrecked in Hostomel, they lost the war.
Since the invasion in February, Ukraine has recovered most of the territory they lost in the north. In the south, the RuAF has made minimal gains past the lines of the 2014 conflict.
You believe that Ukraine has lost most of their military assets? They currently have more tanks than when the war started, due to how many they've captured from Russia. Not to mention what has been contributed by NATO (Poland/Czechia etc.). They still have a well functioning and effective air force that has prevented the Russian air force from exerting control over the battlefield. They even managed to sink the flagship of the Black Sea Fleet.
Russia has lost over 30k dead, and roughly 3x that as WIA. Over 1000 tanks. Over 350 aircraft (counting helicopters). Thousands of BMPs, MTLBs, BMDs, artillery, trucks, all destroyed. The RuAF has culminated.
All Russia has achieved is shelling indiscriminately. They haven't shown the ability to hold terrain, to resupply their troops, to prevent the Ukrainians from doing anything they want. They couldn't even reduce Mariupol's garrison for three months.
Russia's military, outside of it's nukes is a Potemkin affair.
Here's your source on a "Russian Blitzkrieg" being the opinion of the Russian political classes, and an ex-Army Colonel trying to pour water on it - _before_ the war started.
About the author: Mikhail Mikhailovich Khodarenok - ex-head of the group of the 1st direction of the 1st directorate of the Main Operational Directorate of the General Staff of the RF Armed Forces, Colonel
You can google "Credit Suisse strategist Zoltan Pozsar - Bretton Woods 3"... His thesis is that we are going from dollar based monetary order to commodities based order. Not everyone agrees with Pozsar (I don't) but this is making waves.
Russia forcing Europe to pay for gas in roubles is significant step, no matter the outcome on the battlefields... And financial markets reflect that fact through EURRUB and USDRUB...
Are you claiming that since Russia invaded Ukraine and various sanctions were applied, the value of goods that we purchase from them has not decreased as much as the value of goods that we sell them? That's the opposite of what I would expect, do you have a source on that?
This seems quite accurate, and enforces my own sentiment. Personally, I'm seeing even more doomsday scenario, but I'm not sure if that's just fear talking. I'm not even worried about the market, but I'm worried how everyone is going to actually survive, especially in poor countries. As in, how many % of the world population will die.
Both energy and food are scarce, and at the same time monetary inflation is running record-high, caused by monetary stimulus. To me it looks like we're entering an era of unprecedented global stagflation.
I could be totally wrong, and in general I trust the error-correction capability of humans, so take this with a big grain of salt. However, if wrong political decisions and monetary policies are used, instead of relying mostly on free markets, it will very likely make the problem worse.
This is based mostly on intuition. It's just how I feel right now. I don't have the tools to predict something like this accurately.
I was very close to switching from a safe-but-boring FAANG type job to a slightly more exciting but very wary stage startup. While there were a few other signals that it might not be the right place for me, the biggest factor was that I wasn’t confident in the company’s ability to survive the next two years, for the exact same reasons the author outlines in that post: tightened money supply spells doom for startups founded when money was flowing freely, especially if they haven’t found a good market fit yet.
history doesn't repeat but it often rhymes is a useful base construct, how much do the macro differences between the 80s example cited in the post and today change the model?
we know the world is now much more interdependent, interconnected and moves at a faster pace, and that this can result in massive growth, but that we are also much more fragile to shocks.
does it also mean that post-shock 'new normals' or 'next normals' may be fundamentally different than the previous state - punctuated equilibrium type models?
How does all this look to the federal government and deficit spending?
What happens when they can't borrow money at near-zero any more, and need to borrow more money at 5-10%?
Everyone always said the debt was nothing to worry about. It's been repeated for a long time as our debt keeps rising, but it was most apparent with the recent spending bills and virtually no pushback on trillions in unfunded spending.
Close. The federal reserve (or any central bank) will lend money to other banks at a rate just below the target rate, and it will borrow from other banks at a rate just above. Because banks can borrow and lend largely risk free at those two rates, banks will transact amongst themselves at a rate in between. This is how the federal reserve makes banks transact at the target rate.
If you're asking why banks lend money to each other, it's mostly because banks need liquidity (e.g. $ in an account) in order to do transactions and meet legally mandated reserve requirements. If I'm a bank, rather than constantly be sitting on a huge pile of money for the (relatively) rare event that I have a huge transactions to make, I'll mostly do something more useful with my money, and then borrow it from another bank on a short-term basis when I need a bunch of cash.
The fed does this for banks that can't find another bank to transact with, albeit at a slightly higher rate. The fed will also borrow money from banks at a slightly lower rate. This causes the banks to naturally lend among each other between those two rates. This is how the fed controls the interest rate.
The other thing the fed does is buy treasuries. I think this is where the "printing" of money happens. The fed buys a treasury on the market and pays for it by printing money and placing it in the appropriate account. This is how the fed controls money supply.
Yes, but the main effect is how much it costs to “buy” money - if the fed rate is zero then companies can often get money at 1% or so - which means if they have a way of making only 1.5% on the money it’s worth doing it and they grow.
When the rates rise, it’s no longer worth doing these marginal businesses and so growth slows down. You’re not going to borrow at 5% to make 3%.
One factor that I think might be different this time than from the 1980's is productivity increases from WFH. There are a number of studies showing that WFH has resulted in an increase in overall productivity. And has also helped curtail the demand for gas, although that is picking up. It remains to be seen if the Fed can wrangle the so called "soft landing", but productivity increase could potentially make that a bit more likely.
Although we've had gains from Q4 2019 to Q4 2021, I am not sure they are significantly higher than baseline in other periods. I would be skeptical of a productivity increase due to WFH simply because of the supply crunch that in many ways hindered the ability of people to output at maximum levels.
True, it depends on sectors but that is always the case with productivity, it never improves across the board, any automation or other changes will positively affect some sectors and negatively others. It's the macro net effect I think that could change things. I just think there has been some real fundamental changes due to the lock down that may have a lasting impact and make it difficult to use past patterns to make predictions.
Global economic problems were not caused by COVID19; it was just a convenient opportunity deflect blame away from more fundamental issues. One of the main real problems is that a decade of near 0% interest rates had led to money printing on such a scale that certain activities which would otherwise not have been profitable were able to be profitable (in nominal fiat terms)... But while these activities were reaping high nominal revenues and profits, they were destroying real value from the economy.
Eventually, the situation became clear to some people at the top but by that point it was too late to prevent a catastrophic economic crash, so when they heard about COVID19, they pressured politicians to respond aggressively with lockdowns; that way the virus could serve as a convenient scapegoat for the crash and as a justification for massive fiscal stimulus to allow the elites to quickly cash out of their investments... The elites knew that after 2008, their reputations couldn't take another beating. They couldn't let themselves take the blame again.
The unfortunate reality is that the COVID19 fiscal stimulus didn't solve any problem at all for the average person; it was purely a money-printing scheme to allow the elites to cash out by appropriating the wealth of regular citizens via the dilution of the value of their employment contracts and fiat-denominated savings.
The inflation we are experiencing now is a direct result of the elites' appropriation of public funds from the money printers.
Now we are facing some significant problems; after a decade of living in a parallel monetary universe in which irrationality, recklessness and negligence is rewarded, we have collectively lost our common sense. Our ideas about business, success, startups, finance, the economy, politics, everything is all wrong. For 10+ years, we trained ourselves to function in a totally dysfunctional environment and learned all kinds of lessons which only make sense in the context of that dysfunction.
As we head into a more contractionary monetary environment, we have to unlearn everything and re-evaluate all business relationships; we have to disregard people's past financial track records (since they are meaningless in the context of a functioning system). In fact, it seems unlikely that someone who is particularly successful in the context of a dysfunctional system would also be successful in the context of a functional system... It's a totally different skillset.
> For 10+ years, we trained ourselves to function in a totally dysfunctional environment and learned all kinds of lessons which only make sense in the context of that dysfunction.
For me, cryptocurrencies and Web 3.0 are the culmination and perfect distillation of this whole era. Interested to see how they weather this storm. I heard a commercial the other day which stated along the lines "have you ever wished you could invest your retirement account in crypto? Well now you can!" That's when I knew the shark has officially been jumped.
And it all comes back to the fact that has been true since 2003 that Google earns 90% of its revenue on ads, and despite decades of trying at this point they still can't figure out how to move past that.
I mean, I think they've improved a bit, I've seen the number 70%, but still; a company as innovative as Google should be making money from innovations, not selling ads. Where's the disconnect?
It's about how we live in a world where companies are incentivized by short term quarterly growth expectations to outsource literally everything, including its core competency. What is left of a company like this? It's a legal structure and holder of IP, all of which is completely imaginary, yet every company aspires to be as such. Why? Because it's profitable, which is of course a made up concept.
Yet what if every company aspires to do evolve this way? What happens to an entire country if the corporations therein are just empty shells that hold IP? What happens if everything important you do is done "somewhere else"?.
So if every company is either just holding intellectual property (imaginary), moving around money (imaginary), producing advertising (imaginary), holding other companies (imaginary concepts), redirecting eyeballs, aggregating data (but never doing anything with it), and all the legal machinations therein... then what actual work is anyone doing?! All of that is just imaginary made-up trifling nonsense.
I once read that RedBull is really just an advertising firm. The whole company. They don't do a damn thing but make ads. Everything that goes into the actual drink itself is "done elsewhere".
Even the actual work that gets done, like building homes, is meaningless. Yes people do actual work to create the home and the materials, but to what end? To house a human being? No! Of course not! All that work was done to create an investment vehicle that will remain empty, but whose sole purpose is to inflate a number on a balance sheet (imaginary). All of the trees that were felled and processed into lumber, the iron that was extracted from the ground and turned into nails, the tools, the shipping of all the materials around the world, the equipment delivered to the job site, the innumerable man hours of all the humans involved in directing this supply chain to bring this house into existence... all of that work just to inflate an imaginary number that will be traded on an imaginary market.
And so we see the consequence is the emergence of proto-trillionaires who use their ownership of assets (imaginary) to borrow money (imaginary) to buy companies (imaginary) that have a real impact on public discourse. If you think I'm talking about Musk here, I had Bezos in mind, but the point is that if you're a billionaire, you buy a media company to influence public discourse. It's part of your evolution. And you might say the assets are real but of course their values are not! Covid times revealed a complete disconnect between stock price and company valuation, revenue, or any other real metrics and proved once and for all that the stock market as a system is completely imaginary as well. It's measuring nothing of worth whatsoever.
But that's not the worst of it. Circling back to Google, and let's throw Facebook into the mix as well, is that they have such an outsized impact on the industry that they and the rest of FAANG suck up so much talent that it creates a vortex. And what do they do with that talent but put them to work on maximizing metrics like "engagement" so that they can drive eyeballs to advertisements, and collect data for resell. Again, completely imaginary work. So then everyone wants to do this kind of thing. And even if you don't, you need to compete with everyone who does, because they're offering ridiculous salaries of $200k+, which of course are pegged to ridiculous stock prices that are completely disconnected from anything tangible Google produces. So Google and Facebook and all the rest of them are paying their employees imaginary wages pegged to imaginary valuations so they can do imaginary work.
And it impacts absolutely everything! Universities can't hire professors because FAANG is sucking up all the CS PhDs. Research is funded by FAANG; conferences are funded by FAANG; grad students are therefore doing research aligned with FAANG interests; professors are writing grant proposals on those same lines and getting governments to fund them as well; undergrads dream of working for FAANG; professors are therefor asked to spend time teaching students to pass FAANG entrance exams... all for what? For what?! To drive eyeballs to ads and collect data. It's maddening.
So anyway... seems like this should hold up in the long run yeah? A society of people devoted to doing imaginary work sounds durable and will certainly hold up well under a crisis like a global pandemic, or worse.
Thanks for this interesting read. It fully resonates with me. It does feel like the economy of many developed countries has been hollowed out. Our economies are built on rent-extraction, dividends, royalties and interest. It feels like we produce nothing, but the elites in our society just collect free money from all over the world because they own a lot of assets overseas. Any country which decided to opt out of the globalist agenda and take control of their national assets would suddenly find themselves rich from not having to constantly send money to overseas investors.
> The unfortunate reality is that the COVID19 fiscal stimulus didn't solve any problem at all for the average person; it was purely a money-printing scheme to allow the elites to cash out by appropriating the wealth of regular citizens via the dilution of the value of their employment contracts and fiat-denominated savings.
If the value of fiat-denomiated savings is being diluted, then how exactly are elites cashing out?
I wonder how much irreparable damage the lockdowns did to the economy as we knew it before the pandemic.
The more subjective aspects of the economy are hard to map - are people motivated enough to work? Do they feel invested enough in the future to work? Have they been burnt out by the yoyo cycle of work/lockdowns? Was their industry severely damaged and they pivoted to other careers?
Like there’s a massive pilot shortage. I have friends who are pilots. They were already planning on retiring by 40 (pilots get paid very handsomely here) and starting a business. They just shifted their plans forward by 5 years instead of sitting at home and doing nothing. That’s two skilled captains the airlines will have to find replacements for.
I really don’t think anyone really sat down and thought through these issues when the lockdowns were announced. You can’t expect people to go from 100 to 0 and back to 100 over two years. People are not resources that can be put to use or discarded whenever you want.
"I really don’t think anyone really sat down and thought through these issues when the lockdowns were announced."
People clearly thought very hard about this. Different parts of the world came to different conclusions about it. Nobody thought that the lockdowns wouldn't cause immense amounts of economical and societal damage.
The calculation was whether they would have a worse impact than letting huge numbers of people die. And huge numbers of people died anyway!
I'd like to learn more about the economic impact of over a million deaths (in the USA). I would expect that to affect communities and industries in very complicated ways as well.
Most of those deaths probably had a positive or null effect, since they primarily occurred in the 65+ demographic.
edit: It is interesting to contemplate the possibility that the death of so many seniors exacerbated the inflation problem. That's a lot of assets that were previously tied up in retirement accounts and real estate that suddenly flowed into the hands of middle aged people.
Seems callous and erroneous. Also ignoring increased morbidity and strain on the healthcare system. Plus that would have the opposite effect on inflation
65+ and often at the lower end of economic scale (at least in the USA). I can't imagine that much flowed. E.g., housing prices would have feel as supply outpaced demand.
For the non 65+ that died, that's a negative for the economy. Loss of productive years, etc.
There are also follow on effects. My Inlaws passed away over the last three years. It has been a huge time sink and blow to productivity this whole time.
Long Covid among the survivors is the big unknown to productivity
Additionally, if we had people sit down and think about the situation, we would have protected and isolated the elderly instead of the insipid and endless all or nothing crusade we were handed instead.
Current CDC estimate has 220k deaths among working age people (under 65). Maybe you’re not meaning to minimize that impact, but that’s sort of how your comment reads
I'm sure a good chunk of the same people who were "irreparably damaged by COVID" would have been irreparably damaged by diseases such as lyme, fibromyalgia, chronic fatigue syndrome, etc. in another universe.
What's Your point? You are suggesting that this people would find another disease to get out of job market? If so that is some high level dystopian stuff you believe.
>I wonder how much irreparable damage the lockdowns did to the economy as we knew it before the pandemic.
You can also look at it the other way round:
The lockdown forced companies to establish home office, something that was overdue for up to 20 years.
This can enhance the economy much more in the long run than it harmed during the last two years. Maybe the productivity gains are big enough that they outweigh the amount of artificially generated money. Then there shouldn't be much of an inflation.
I was very productive over 2 years working from home. I actually managed to complete a few home construction projects while answering a few slack questions from my phone once in awhile.
Well the other quiet part that executives don't say out loud often is that if the job can be done from home, then it can be done from Mexico, India, or Eastern Europe as well which is where that job is now. To be fair, that was happening before even the pandemic, and I was mentally half checked out too. Now I work in healthcare which has a bit more of a US centric moat to it.
>Well the other quiet part that executives don't say out loud often is that if the job can be done from home, then it can be done from Mexico, India, or Eastern Europe as well which is where that job is now.
Or heading to. Yea, I largely agree. But I fired two people during pandemic from not-exactly-wfh, so I’m perhaps a little biased.
One thing I learned is that many jobs that are considered essential are also considered dead-end. I assume that's pretty demotivating for anyone doing such a job.
The thing that I learned was that “essential” really meant “an acceptable loss of life so long as the profits keep flowing to the upper management class”.
This isn’t just demotivating, its dehumanizing, and it’s the reason so many people I work with now won’t lift a finger to help stop the collapse of society. Just the opposite in fact: many people seem to be looking for a match to start the fire.
> and it’s the reason so many people I work with now won’t lift a finger to help stop the collapse of society
I'm sorry but what exactly do these people do that this is a power they have?
The "collapse of society" so frequently seems to be "small business owners need to actually give their staff enough hours and stop treating them valid targets for abuse".
Is this a bad thing to though? The pilots are doing what they eventually wanted to do. Hopefully they are happier.
As for the shortage in general: economies have to adapt. Maybe that means more robotic flown aircraft. Or train travel increases. Or people stay at home and do more virtual visits.
When you said “0 to 100 back to 0” I think that applies more to existing business models rather than how workers perceive / enjoy / want to their jobs.
> Name a government or public sector institution that lost power during covid.
I honestly think: "Nearly all of them."
We've seen some significant exercise of power, but the underlying legitimacy that gives rise to power is severely eroded. So I am not at all sure that the various institutions have come out of this ahead.
Only in their unification against Russia have I seen an increase in organizational capacity.
> Like there’s a massive pilot shortage. I have friends who are pilots. They were already planning on retiring by 40 (pilots get paid very handsomely here) and starting a business. They just shifted their plans forward by 5 years instead of sitting at home and doing nothing. That’s two skilled captains the airlines will have to find replacements for.
> I really don’t think anyone really sat down and thought through these issues when the lockdowns were announced. You can’t expect people to go from 100 to 0 and back to 100 over two years. People are not resources that can be put to use or discarded whenever you want.
Didnt the paycheck protection program work towards this? We made a system to avoid unemployment strife and later inefficiency of rehiring everyone once it was over, by funding payrolls.
> I wonder how much irreparable damage the lockdowns did to the economy as we knew it before the pandemic.
Reasonable enough to wonder, but not without the corollary question: how much damage would have been to the economy without lockdowns? Yes, there were no doubt many side effects of the lockdowns that were not anticipated. But we lost at least 1M people in the USA (significantly more if you use excess death data). Lockdowns may have prevented that from being anywhere from 2-5 times higher. If we had lost 3M people, we get close to 1% of the total population of the USA, and the impact of that on the economy seems potentially enormous.
Probably biggest change between this recession and all the others is the people's willingness to work in an office. This is all orthogonal to the massive $24T budget deficit, not sure what impact that growing deficit will have, but it's been pretty large for decades now anyway.
US is mainly a services driven economy, which means people can work from anywhere. Offices and adjacent sectors will suffer irreparable damage, but the gain in productivity in other sectors will more than compensate for it. I think we will come out with a stronger and more efficient economy after this recession.
I wonder how much irreparable damage the central banks have done by "printing" unprecedented amounts of money. And that is what makes this "cycle" unique (i.e., is comparing it to the 80s accurate). Is it realistic to expect the economy to "catch up" given the excessive amounts of money supply that's been pumped into it?
Is there actually a major pilot shortage? Can I not book a flight and get anywhere in the continental US and be there in 24 hours from now? I suppose I'm asking, in what ways is the shortage presenting in a way practically visible to the consumer?
Yes, they did sit down and think that through. That's their job. This is not the first epidemic. Public health departments, unlike people on the Internet, actually study the topic.
You might consider sitting down and thinking about who is making these decisions and what their backgrounds are before you pronounce that they didn't take something into account. On what basis are you making that accusation? Do you have any idea what other things went into that decision?
Perhaps they made the wrong choice. But they weren't guessing. And I don't have a lot of respect for your guess about it if you don't even know that much.
When scientists in the U.K. started talking about herd immunity - the only way out of a pandemic - people went nuts and they quickly had to stop using the term and start reassuring more than informing.
Average pandemic is about four years, not much has changed. They just had to keep people going at the time.
Except they accidentally did a real-world experiment and we discovered that people needed to be consoled and not confronted too suddenly with the inevitable
I agree, which basically sums up this entire thread and all others like it over the past couple weeks.
Air-chair economists pontificating on what will happen to our economy over the next 12-24 months like they know with certainty what they’re talking about.
I thought this article was arguably the most rational outlook I’ve seen. It’s insane to me that a small fraction of companies have had a couple routine layoffs, the market slightly dips as it always does cyclically, and people are already running around saying the sky is falling.
My plan is simple:
I stopped investing in the market for the moment.
Using that money to pay off debt and get my 6 month emergency fund back up. Should be set in a couple months and debt free.
Then just save every penny I can until the markets are bleeding and people are saying all assets are worthless.
Then I am going to invest everything.
Down payment on a rental property
And the rest 50% crypto / 50% S&P 500 index funds.
i mean personally for me worst case scenario is I end up debt free with a 6 month emergency fund. As long as I am not in margin and I invest in eth and btc only i am fine. so the market goes down further, I'm still fine and either way i got in lower that I would have if I went all in now.
"In the early 80s" Ronald Reagan was elected President of the United States of America, Iran immediately gave up the hostages they'd been holding for over a year under Carter, and overall the world and the US rejoiced that a real leader was finally in charge of the US. That is what happened.
1. We had zero percent interest rates. This causes the value of assets with cash flows out into the future (think speculative tech, Tesla) to accelerate.
2. We had massive herding in megacap tech. These valuations are high in part because for a decade you would not have beat the index without having these names in your portfolio.
3. These valuations blew up even further because of call squeezes during the 2020-2021 bull. Tesla even managed to get itself into the S&P.
5. Then in December, the megacaps we're squeezed further until the S&P 500 had a negative return relative to price!
A lot of this occured because people remained under the impression that bond yields would never normalize. Now that they have, there is a risk free alternative to stocks.
Now for the next complications: Ukraine + Russia, economic war with China, inflation, how the fed will respond, gas prices.
If inflation continues and the fed becomes aggressive with hiking, all assets are dead. Bonds will be wrecked, stocks will be wrecked, cash is wrecked, even gold (depending on how aggressively they hike) will be dead because it's actually a really good deal to buy bonds when they yield north of 10% (if we get there).
Say the fed decides not to hike as aggressively and inflation slows, then you'll be holding the S&P 500 likely for yield than growth. In the case of a recession or further inflation, that yield may be at risk depending on the sectors you're invested in.
In this context the correction in names like Target make perfect sense. The dividend was near zero at it's price before the cut. Same thing happened in a company like Newmont mining.