But this time its different! <- said before every large stock market crash in the modern era
Alot of things to consider, 0% interest rates for over a year now, once the fed's spigot dries a bit expect to see huge drops in the market and especially alot of the speculative tech companies.
Alot of working professionals have seen huge gains in money since covid, ie. no travel, no commutes, no buying lunch/breakfast at the office, no dinner out with collegues/family, no daycare(if they are parents). Add that up and its a gigantic monthly savings, alot is going towards home stuff/renovation, its also going into the stock market.
People are forced online, with lockdowns and other restrictions people have literally been forced to find new ways to shop and entertain themselves, some may be more permanent than others. Once they are over expect large crowds in every possible way(theatres, malls, concerts etc) and drops across e-retailers.
> But this time its different! <- said before every large stock market crash in the modern era
The world is not as simple as that one liner suggests. Everyone who sat out of the market since 2011 loudly shouting about a bubble (I know more than a few of these types)....have a ton of regret and what's more... they're paralyzed by loss aversion, fear, and cling to P/E as justification they're doing the right thing.
If you can't draw out painfully obvious trends over the next decade and invest against those, I don't know what to tell you. Sure if I buy $AMZN at $3k today, it might drop to $2k next month. But I will bet a ton of money it will be far, far higher at the end of this decade. This is about network effects, the internet, scale, national security and the ability to achieve total dominance in a sector and leverage that into other sectors.
Obviously 2008 did see something of a drop in general so I guess they were right for the near term. But they were specifically ragging on companies that you'd have done very well with over the next decade+ even if you had bought in 2007.
> But I will bet a ton of money it will be far, far higher at the end of this decade. This is about network effects, the internet, scale, national security and the ability to achieve total dominance in a sector and leverage that into other sectors.
In other words, you're betting that regulators continue to permit Amazon to continue to consolidate monopolistic (if not outright monopoly) power. If regulators were to ever decide to break up Amazon - surely the stock price, so dependent on market dominance, would crater as a result.
I'm not saying you're wrong to make that bet / assumption, but it's important to note that Amazon's dominance is not a guaranteed destiny or inevitability. There are threats to their dominance.
> The world is not as simple as that one liner suggests. Everyone who sat out of the market since 2011 loudly shouting about a bubble.
And the world is not as simple as your rejoinder. 2011 came after a crisis unlike anything seen since the 1930's. And the 'fixes' to the economy since then have patched over rather than resolved the debt overhangs that led to the 2008 crisis. The great 'patch' was to print money. But the real economy (the physical universe that the financial universe simulates) still has constraints. Figuring out which one we trip over next is entrail-reading, but to think that constraints are no longer an issue is dangerous.
>but to think that constraints are no longer an issue is dangerous.
The fundamental problem is that we are not hitting those constraints. Lots of unemployed or underemployed people mean that inflation won't bit in the short term. Effective policies that put these people to work will cause inflation as usual. Inflation is a good thing in moderation.
This is my thesis too. If you aren't making great returns when they're printing money like crazy then you are losing money. Real world value of the stock market could be stagnant or even down despite the numbers going up.
I consider VOO or VTI to be a risk free return for a sufficiently long term horizon since I’m confident the US government will do whatever it takes to prop up those equity values. And if it can’t, then we probably are dealing with bigger problems like societal collapse.
But it was not AMZN at the top it would be like the equivalent of buying YAHOO back then, and even with inflated stocks and 0 interest rates YAHOO aint doing too well. So your analogy doesnt quite work.
You're ignoring that stocks crash because people have reasons to sell their stocks. If everyone "camped" then crashes wouldn't happen in the first place.
The number of stocks bought is always equal to the number of stocks bought - stocks crash because the price the marginal buyer is willing to pay goes down. Sometimes this is because there are too many sellers and the buyers can take their pick, but it need not be; it can also be because of a change in what buyers perceive the value of the stock to be.
The goal of central banks is to keep CONSUMER prices steadily increasing and employment high. I don't understand how anyone thinks this plan can involve lowering rates, which would crash asset prices, and trigger a wave of defaults leading to a recession (lower income, less spending, lower prices, and less jobs).
Notice that assets are conveniently not included in Central Banks' measures of inflation. Assets can inflate to infinity. It's irrelevant. The Fed's goal isn't to prevent wealth inequality. It's to keep CONSUMER prices steadily increasing and people employed. House prices, bitcoin, and meme stocks aren't in the consumer price index. It doesn't matter if they're appreciating rapidly.
Mortgage payments are included in the price indexes, though! They happen to make up a big chunk of the ratio, too. And guess what? Central Banks are making them cheaper for 90% of home owners (now ~67% of the population) by artificially manipulating rates to make their payments lower.
What does that mean? The more central banks lower rates and the higher home prices climb, the more likely "inflation will continue to be stubbornly low".
Central banks aren't normalizing rates any time soon. They're much more likely to print a ton more money because people AREN'T spending more money on airplane tickets, gasoline, bananas, and (importantly) their mortgages.
The solution to the problem is a bigger problem. When all you have is a hammer everything is a nail.
>The goal of central banks is to keep CONSUMER prices steadily increasing and employment high.
Yeah it's surprising that many people don't understand this.
>I don't understand how anyone thinks this plan can involve lowering rates, which would crash asset prices, and trigger a wave of defaults leading to a recession (lower income, less spending, lower prices, and less jobs).
It can involve lowering interest rates because the old assumption is that there is basically an endless amount of profitable work to be done in the country (or economic union) the central bank is in. It conveniently ignores that doing the endless amount of work elsewhere (developing countries) can actually be even more profitable.
>Notice that assets are conveniently not included in Central Banks' measures of inflation. Assets can inflate to infinity. It's irrelevant.
Yeah it's true, consumer prices are the real target. The irony of course is that if you keep inflating assets your economy will rot from the inside. Companies can just drink straight from the money faucet. There is no need to actually employ anyone in the country the central bank is operating in.
>Mortgage payments are included in the price indexes, though! They happen to make up a big chunk of the ratio, too. And guess what? Central Banks are making them cheaper for 90% of home owners (now ~67% of the population) by artificially manipulating rates to make their payments lower.
Payments tend to stay the same though because the housing market is competitive in a lot of locations. Housing values keep increasing instead. One could argue that real estate will indirectly employ construction workers but the fundamental problem is that many places simply are not willing to build more housing. It's almost criminally insane but that's how it is, unfortunately. In places where there is little competition it is possible to get good deals but not everyone is willing to do that. Those deals are also disappearing now that remote work is forced upon everyone.
>What does that mean? The more central banks lower rates and the higher home prices climb, the more likely "inflation will continue to be stubbornly low".
Well, yes because the money isn't reaching the right places. A lot of it is sitting in some random bank account. The money that is actually put to use is just going back to asset owners (remember we want it in the hands of consumers) because a lot of the hard labor is done abroad but the profits are collected at home. Despite the surplus of money companies are not willing to spend money on training even though it will make more profitable work available domestically. College often doesn't work because it's not actually based on what companies want. Students chase their own dreams which is fine in principle but it means the training problem is still unsolved.
>Central banks aren't normalizing rates any time soon. They're much more likely to print a ton more money because people AREN'T spending more money on airplane tickets, gasoline, bananas, and (importantly) their mortgages.
And as you said, they keep spending it on the wrong things.
>The solution to the problem is a bigger problem. When all you have is a hammer everything is a nail.
The reason for that is that the central bank does not have the power to solve all the problems it's responsible for. It's almost comical. It has to make sure the economy is not broken but it only has one lever. That lever can fix the economy with the right timing and correct usage. However, that lever can only go so low and opportunities in which it makes sense to pull the lever grow more scarce as you keep overusing it. At this point it's time to recognize that the rest of the government is failing to do it's part through fiscal policy. The central bank has already done far more than it's share of the work.
We've had low interest rates in Europe for years now, and the effects are massive. Some random thoughts, I am not an economist and have armchair knowledge of the whole thing at best so take these with a few kilos of salt:
- Europe lowered interest rates on loans by a lot, going into the negative [1]
- This allowed mortgage interest rates to be lowered by a lot as well, because competition.
- Mortgage interest rates are linked to savings account rates, so their interest went way down as well - going into 0% or negative rates here and there.
- This de-incentivized saving money; that plus low mortgage interest rates mean people are buying houses or putting their money into the stock market.
- Low mortgage interest rates + people buying houses as investment = rising housing prices. Housing prices in NL have gone up by a lot. Brexit, international companies and expats didn't help (mainly around the big cities).
- The pandemic and pressure / encouragement to work from home more has caused a lot of people who live in the big cities (in shit circumstances because of the ridiculous cost of living) to scratch their head and consider moving to the countryside, raising housing prices there as well.
Inflation. For whatever reason inflation has been very slow for some time now. If it ever starts to speed up, the fed will tighten the monetary supply quickly to keep it under control.
My taxes, land for a home purchase, out of pocket maximum and deductibles for health insurance, health insurance premiums, tuition are all increasing at quite a clip for me. I have to save an increasing proportion of income due to higher (perceived) volatility of future income, as well as the expected increasing prices in the aforementioned expenses.
This year has quite simply broken the way the CPI works.
They try not to re-weight items in the CPI year by year. Motor fuel is still 2.9% of the index. Transportation, including air travel is still 5% of the index. Demand and price for these has crashed this year. They still keep the same weighting year in year out since the items in the CPI aren't meant to be changed and re-weighted every year. (See the Oct 2019 vs Oct 2020 column)
Demand for air travel has collapsed. Prices have not, because airline have correctly figured out that the few people still flying (particularly internationally) are doing so because they have to and will pay top dollar if they need to.
Tuition, health insurance, and deductibles ARE included in CPI. Taxes largely aren't - unless you're talking about sales taxes. Land prices definitely are not. And you are literally doing the opposite of buying something when you save, so that is also (obviously) not included in CPI.
What inflation "feels like" and the CPI are completely different things. This is becoming more problematic if you're on the wrong side of the trade (i.e. saving cash instead of swimming in a mountain of mortgage debt).
I don’t save in cash, my savings are in various investments such as equity index funds or businesses and real estate.
But every year a dollar seems to buy less of what I need, and I can’t imagine how people who earn far less than me can deal with it. If you don’t keep investing, you certainly are falling further and further behind, but how can you invest if you’re just making ends meet as it is.
>I can’t imagine how people who earn far less than me can deal with it
Succinctly? [Under/un]treated mental illness due to the maladaptive coping skills needed to survive as a poor American. Poor people make sacrifices to live another day. Whether it's (healthy) food, exercise, healthcare (who can afford insulin or an epipen these days?), or their time. Some people pay the doctors to go to them, others pay for people to do the tediousstuff like cooking or cleaning or laundry or fighting the bank over a $40 overdraft fee that ate that weeks food budget.
Central banks only care about consumer inflation and if you have to save an increasing proportion of income instead of spending it on consumer goods that is by definition consumer deflation. You have less and less money remaining to spend on consumer goods which means that demand for consumer goods falls flat. The irony is that overinflated assets can allocate more money away from consumer goods to assets and thereby fuel even more consumer deflation despite expanding the money supply.
Alot of things to consider, 0% interest rates for over a year now, once the fed's spigot dries a bit expect to see huge drops in the market and especially alot of the speculative tech companies.
Alot of working professionals have seen huge gains in money since covid, ie. no travel, no commutes, no buying lunch/breakfast at the office, no dinner out with collegues/family, no daycare(if they are parents). Add that up and its a gigantic monthly savings, alot is going towards home stuff/renovation, its also going into the stock market.
People are forced online, with lockdowns and other restrictions people have literally been forced to find new ways to shop and entertain themselves, some may be more permanent than others. Once they are over expect large crowds in every possible way(theatres, malls, concerts etc) and drops across e-retailers.