This article is trying to explain stock market prices. In particular, why stocks didn't go down on Wednesday after the Fed announced an interest rate hike at 2pm. But it doesn't seem to have any...
This article is trying to explain stock market prices. In particular, why stocks didn't go down on Wednesday after the Fed announced an interest rate hike at 2pm.
But it doesn't seem to have any particular evidence for why we should believe the explanation, and anyway, the stock market went down today. So this explanation never was worth much, and it's already obsolete.
(There are all sorts of reasons for price changes, or the lack thereof. One possible reason for why a price doesn't go down on bad news is that it was already priced in. But without evidence for one theory over another, any particular day's price changes could just be random noise.)
I know a lot of people like axios’ style but I honestly don’t like it because it seems like I am not getting the entire story when I read their articles. It’s a bunch of bullet points that do not...
I know a lot of people like axios’ style but I honestly don’t like it because it seems like I am not getting the entire story when I read their articles. It’s a bunch of bullet points that do not seem to connect well.
Rate hike and inflation expectations do appear to largely be driving the market. On Wednesday there was a significant change in expectations of rate hikes. The chance of only a 50 basis hike in...
Rate hike and inflation expectations do appear to largely be driving the market.
On Wednesday there was a significant change in expectations of rate hikes.
The chance of only a 50 basis hike in July went up to 20%. Of course, the chance of a 100 basis points hike in July went up to 10%.
This popular idea that once inflation is under control the federal reserve will swoop back in and wave the magic wand to create another bull market is kind of worrying. The federal reserve has been acting like it has a third mandate for decades. People are so used to them lowering rates even lower, driving asset prices higher. The Fed have been warning for a while that there is a limit to what they can do, and that congress needs to step up. Which seems unlikely. Worse, this is a global problem.
If they actually do manage to tame inflation without a recession then I think the stock market would go up without the Fed doing anything in particular?
If they actually do manage to tame inflation without a recession then I think the stock market would go up without the Fed doing anything in particular?
Powell says he might be able to do that, but he has to say that. He can't exactly say that we are fucked. This recession is one of the most broadly expected recessions I have ever seen. I like...
Powell says he might be able to do that, but he has to say that. He can't exactly say that we are fucked.
This recession is one of the most broadly expected recessions I have ever seen. I like your almost contrarian attitude, but the other angle is, what if this isn't just another recession. What if it is far, far worse?
I basically believe nobody really knows what's coming. To do that you would have to had to predict the pandemic and the invasion of Ukraine, as well as their financial effects. For example, for...
I basically believe nobody really knows what's coming. To do that you would have to had to predict the pandemic and the invasion of Ukraine, as well as their financial effects.
For example, for all we know, Putin could die tomorrow. There are reports he's had serious medical issues.
Yes, you are correct, no one really knows. But Robert Shiller has accurately predicted bubbles twice now. This time he is concerned of a bubble in everything, tied to low rates. (Yet even he...
Yes, you are correct, no one really knows.
But Robert Shiller has accurately predicted bubbles twice now. This time he is concerned of a bubble in everything, tied to low rates. (Yet even he recommends remaining invested, just diversify. Sadly, he doesn't suggest where you can diversify in an everything bubble.)
And the yield curve has been remarkably successful in predicting recessions. I would say, if the yield curve inverts, as looks likely, it is not unreasonable to be more conservative for the next 12-18 months. (Because if you lose 50% of your assets, you need to double your returns to return where you were. Rule #1 of investing. Don't lose money.)
I really like the options market as the ultimate crowd sourced prediction model. It assumes a lognormal curve of probabilities. If the chance of catastrophic failure increases, so too does the chance of outsized market returns.
All we really know is that the market expects abnormal returns. And recessions happen periodically when inflation gets out of control, often caused by central banks raising rates. And inflation is definitely out of control. And when rates rise after credit has been flowing freely, that is when you find out who is over leveraged. And debt is at an all time high. And all asset prices are largely driven by rates (see the linked article from the above article which does a good job of explaining the effects of interest rates on the DCF model.)
But I am always bearish. Don't listen to my fearmongering.
How can everything be overvalued? Aren't all prices relative? You're exchanging one thing for another. Something has to be valued more in order for other things to be valued less. Also, isn't...
How can everything be overvalued? Aren't all prices relative? You're exchanging one thing for another. Something has to be valued more in order for other things to be valued less.
Also, isn't inflation what happens when the prices of many things go up, relative to cash?
That makes sense to me. In my mental model, prices are rising relative to cash. It's my understanding that the years of easy, low-interest money flooding the economy has increased wealth on paper:...
That makes sense to me. In my mental model, prices are rising relative to cash.
It's my understanding that the years of easy, low-interest money flooding the economy has increased wealth on paper: housing and other assets have skyrocketed. Many asset-owning Americans feel wealthier.
But that increase in wealth does not map 1-to-1 with the fundamental physical economy. Labor and goods have not significantly increased, at least to the same degree as asset prices. Labor is scarcer (for myriad reasons that I don't understand beyond expensive urban housing markets). Goods are scarcer due to supply chain disruptions.
It's my understanding that the house of cards begins to fall when people try to cash in their paper wealth for real things that they discover that their real wealth doesn't measure up to their paper wealth. So a correction is due.
And on this note, I think that cryptocurrency is an extreme example of a nonproductive asset. Pouring investment in crypto raises its prices, and consequently its holders momentarily feel...
And on this note, I think that cryptocurrency is an extreme example of a nonproductive asset. Pouring investment in crypto raises its prices, and consequently its holders momentarily feel wealthier — but no real wealth is produced. No goods production is built or expanded. No services are rendered.
Crypto has been an absolute bloodbath lately, red across the board. Right now people aren't flush with cash for speculation. They are cashing out to buy gas and bread. Crypto is crashing hard just...
Crypto has been an absolute bloodbath lately, red across the board. Right now people aren't flush with cash for speculation. They are cashing out to buy gas and bread. Crypto is crashing hard just like Tulips and Florida real-estate back when they were the hot ponzi schemes and hard times rolled up. Losing two major crypto players recently didn't help, but it's more about the recession in my mind.
It's brutal for cryptobros right now. But this is good for bitcoin in the long run - or so they keep saying. :P Perhaps if it causes some of the crypto people to rethink their ecosystem and stop burning electricity it will be.
The rest of us get brand new graphics cards at below MSRP for a little while. Despite the recession, this is definitely the time to get that new GPU. :)
I think we should distinguish between prices going down relative to cash (a bear market, as has been happening this year in stocks and especially crypto) and the worth of an asset becoming less...
I think we should distinguish between prices going down relative to cash (a bear market, as has been happening this year in stocks and especially crypto) and the worth of an asset becoming less due to other prices increasing (inflation).
I don't know if a "correction" (prices going down) will happen in residential real estate, even though inflation does mean it's losing some value compared to other things?
Everything should be overvalued when rates are near zero. Valuations are largely driven by rates. The DCF model linked above explains how that works for stocks. Shiller recently stated that...
Everything should be overvalued when rates are near zero. Valuations are largely driven by rates. The DCF model linked above explains how that works for stocks. Shiller recently stated that everything is reasonably valued as long as rates remain very low. Which is the point of the entire article above. Normalizing inflation to allow rates to go back down is the best thing for stocks in the medium term.
Also, isn't inflation what happens when the prices of many things go up, relative to cash?
Yes. Inflation is the change in prices of a basket of goods in USD. Not sure what your point is here. Fed Reserve tries to keep inflation at around 2%. When inflation is higher than that goal, they hike rates above the natural rate. For a while, the Fed wanted inflation to run over 2% to make up for a few years of being under 2%.
I'm guessing that by "everything" you might mean something like "all stocks" or "all investments." But does that include commodities? Oil is expensive, but is it overvalued?
I'm guessing that by "everything" you might mean something like "all stocks" or "all investments." But does that include commodities? Oil is expensive, but is it overvalued?
A recession is not defined by stock prices, it is defined by two consecutive quarters of contracting GDP. Sustained periods of stock market contraction are called a bear market. These things often...
A recession is not defined by stock prices, it is defined by two consecutive quarters of contracting GDP. Sustained periods of stock market contraction are called a bear market.
These things often go together but this is not guaranteed. For example, right now we are already in bear market territory, but all signs point to continued GDP growth. Meanwhile, 2020 experienced a brief recession that was ongoing while the stock market was skyrocketing.
This article is trying to explain stock market prices. In particular, why stocks didn't go down on Wednesday after the Fed announced an interest rate hike at 2pm.
But it doesn't seem to have any particular evidence for why we should believe the explanation, and anyway, the stock market went down today. So this explanation never was worth much, and it's already obsolete.
(There are all sorts of reasons for price changes, or the lack thereof. One possible reason for why a price doesn't go down on bad news is that it was already priced in. But without evidence for one theory over another, any particular day's price changes could just be random noise.)
I know a lot of people like axios’ style but I honestly don’t like it because it seems like I am not getting the entire story when I read their articles. It’s a bunch of bullet points that do not seem to connect well.
Rate hike and inflation expectations do appear to largely be driving the market.
On Wednesday there was a significant change in expectations of rate hikes.
The chance of only a 50 basis hike in July went up to 20%. Of course, the chance of a 100 basis points hike in July went up to 10%.
https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
This popular idea that once inflation is under control the federal reserve will swoop back in and wave the magic wand to create another bull market is kind of worrying. The federal reserve has been acting like it has a third mandate for decades. People are so used to them lowering rates even lower, driving asset prices higher. The Fed have been warning for a while that there is a limit to what they can do, and that congress needs to step up. Which seems unlikely. Worse, this is a global problem.
If they actually do manage to tame inflation without a recession then I think the stock market would go up without the Fed doing anything in particular?
Powell says he might be able to do that, but he has to say that. He can't exactly say that we are fucked.
This recession is one of the most broadly expected recessions I have ever seen. I like your almost contrarian attitude, but the other angle is, what if this isn't just another recession. What if it is far, far worse?
I basically believe nobody really knows what's coming. To do that you would have to had to predict the pandemic and the invasion of Ukraine, as well as their financial effects.
For example, for all we know, Putin could die tomorrow. There are reports he's had serious medical issues.
Yes, you are correct, no one really knows.
But Robert Shiller has accurately predicted bubbles twice now. This time he is concerned of a bubble in everything, tied to low rates. (Yet even he recommends remaining invested, just diversify. Sadly, he doesn't suggest where you can diversify in an everything bubble.)
And the yield curve has been remarkably successful in predicting recessions. I would say, if the yield curve inverts, as looks likely, it is not unreasonable to be more conservative for the next 12-18 months. (Because if you lose 50% of your assets, you need to double your returns to return where you were. Rule #1 of investing. Don't lose money.)
I really like the options market as the ultimate crowd sourced prediction model. It assumes a lognormal curve of probabilities. If the chance of catastrophic failure increases, so too does the chance of outsized market returns.
All we really know is that the market expects abnormal returns. And recessions happen periodically when inflation gets out of control, often caused by central banks raising rates. And inflation is definitely out of control. And when rates rise after credit has been flowing freely, that is when you find out who is over leveraged. And debt is at an all time high. And all asset prices are largely driven by rates (see the linked article from the above article which does a good job of explaining the effects of interest rates on the DCF model.)
But I am always bearish. Don't listen to my fearmongering.
How can everything be overvalued? Aren't all prices relative? You're exchanging one thing for another. Something has to be valued more in order for other things to be valued less.
Also, isn't inflation what happens when the prices of many things go up, relative to cash?
Food and energy prices are up, at least.
That makes sense to me. In my mental model, prices are rising relative to cash.
It's my understanding that the years of easy, low-interest money flooding the economy has increased wealth on paper: housing and other assets have skyrocketed. Many asset-owning Americans feel wealthier.
But that increase in wealth does not map 1-to-1 with the fundamental physical economy. Labor and goods have not significantly increased, at least to the same degree as asset prices. Labor is scarcer (for myriad reasons that I don't understand beyond expensive urban housing markets). Goods are scarcer due to supply chain disruptions.
It's my understanding that the house of cards begins to fall when people try to cash in their paper wealth for real things that they discover that their real wealth doesn't measure up to their paper wealth. So a correction is due.
And on this note, I think that cryptocurrency is an extreme example of a nonproductive asset. Pouring investment in crypto raises its prices, and consequently its holders momentarily feel wealthier — but no real wealth is produced. No goods production is built or expanded. No services are rendered.
Crypto has been an absolute bloodbath lately, red across the board. Right now people aren't flush with cash for speculation. They are cashing out to buy gas and bread. Crypto is crashing hard just like Tulips and Florida real-estate back when they were the hot ponzi schemes and hard times rolled up. Losing two major crypto players recently didn't help, but it's more about the recession in my mind.
It's brutal for cryptobros right now. But this is good for bitcoin in the long run - or so they keep saying. :P Perhaps if it causes some of the crypto people to rethink their ecosystem and stop burning electricity it will be.
The rest of us get brand new graphics cards at below MSRP for a little while. Despite the recession, this is definitely the time to get that new GPU. :)
I think we should distinguish between prices going down relative to cash (a bear market, as has been happening this year in stocks and especially crypto) and the worth of an asset becoming less due to other prices increasing (inflation).
I don't know if a "correction" (prices going down) will happen in residential real estate, even though inflation does mean it's losing some value compared to other things?
Everything should be overvalued when rates are near zero. Valuations are largely driven by rates. The DCF model linked above explains how that works for stocks. Shiller recently stated that everything is reasonably valued as long as rates remain very low. Which is the point of the entire article above. Normalizing inflation to allow rates to go back down is the best thing for stocks in the medium term.
Yes. Inflation is the change in prices of a basket of goods in USD. Not sure what your point is here. Fed Reserve tries to keep inflation at around 2%. When inflation is higher than that goal, they hike rates above the natural rate. For a while, the Fed wanted inflation to run over 2% to make up for a few years of being under 2%.
I'm guessing that by "everything" you might mean something like "all stocks" or "all investments." But does that include commodities? Oil is expensive, but is it overvalued?
All investments are in an everything bubble. Commodities are more an inflationary measure than an alternative investment.
Is it really a "recession" if it's all horrifically and artificially inflated and needs to be corrected back to some semblance of reality?
A recession is not defined by stock prices, it is defined by two consecutive quarters of contracting GDP. Sustained periods of stock market contraction are called a bear market.
These things often go together but this is not guaranteed. For example, right now we are already in bear market territory, but all signs point to continued GDP growth. Meanwhile, 2020 experienced a brief recession that was ongoing while the stock market was skyrocketing.