I understand this argument from the perspective that the US will eventually adopt negative interest rates, but has the Japan Central Bank ever been the lender and buyer of last resort like we're seeing the Federal Reserve be right now? On top of that, you mentioned the point that the US is a more consumer-based economy, which is favorable for equities. Considering this factor and Fed intervention, it's possible that we continue to see large impulses to the upside with only limited drawdowns, which of course is all artificial due to no price discovery mechanism and may be associated with a weak dollar as well. On top of that, one can argue US equities had its own Nikkei-esque consolidation period from 2000-2012. I don't know - trying to play devil's advocate here. Either way, whereas in the past investing into equities was viewed as the safest way to enjoy a comfortable retirement, there is now no better time to be diversified in other (preferably deflationary) assets, I agree with that.
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Serious The Coming Economic Recession/Depression
- Thread starter McGrrr
- Start date
Japanese companies have a different culture where they hoard ridiculous amounts of cash, so they don't have the same kind of leverage/bankruptcy risk as Western corporates (ignoring Softbank for a moment). Instead, the BoJ has been propping up the stock market by buying equity ETFs; it became the largest shareholder of Japanese equities last year. The Nikkei rally since 2012 was basically entirely as a consequence of this policy. So a roundabout answer is that the BoJ has interfered to a comparable extent to what the Fed is doing now, where price discovery has become impossible.
You're right to point out the difference in consumption behaviour, so the real question is when will consumption return? As I've already beaten to death, discretionary consumption has collapsed and that's not going to reappear overnight, while the longer term will be impacted by poorer retiring boomers and younger generations saddled with debt.
Look, I'm not saying that equities won't rally in the short term, or won't do so again in x months, but the indicators suggest that the future is grim indeed. Tesla's share price is testament to how irrational equity markets can be, and for how long they can persist that way. My bank's internal research is currently forecasting QoQ real US GDP growth of -7%/-30%/-1%/+30% (really banking on Christmas!) this year with annualised 2020 GDP of -6%. QoQ US Consumer spending is forecast to be -11%/-40%/+5%/+40%.
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"Artificial" price discovery is meaningless. If a person is willing to pay X for Y then that's the value at that time. No matter who is the entity buying and selling the Y. Value is a nebulous term that ultimately just means X is exchanging for Y. If you think that it should be Z price for Y, and everyone else thinks that it's X price for Y. You're just wrong at that moment.
Japanfication of the USA economy is certainly a valid concern, however it was mostly fueled by deflation by austerity policies by the Japanese government. It is interesting to see you being concerned about inflation while being concerned about Japanification. Can you expand on your thoughts?
USA is already helicoptering money, and it seems like more is on way. This is a good way to increase consumption btw. The economic trillion question is whether if the politicians will abandon the mistakes of austerity and move forward to printers going BRRR indefinitely or repeating the same mistake of austerity.
Japanfication of the USA economy is certainly a valid concern, however it was mostly fueled by deflation by austerity policies by the Japanese government. It is interesting to see you being concerned about inflation while being concerned about Japanification. Can you expand on your thoughts?
USA is already helicoptering money, and it seems like more is on way. This is a good way to increase consumption btw. The economic trillion question is whether if the politicians will abandon the mistakes of austerity and move forward to printers going BRRR indefinitely or repeating the same mistake of austerity.
Price discovery is important for pricing risk, which is why everything was in a bubble. A transaction made at a price which doesn't reflect the risk appetite of the buyer is a symptom of a broken market. This is why anyone cares at all that asset prices are falling - because they (or their pension) have overpaid for debt and equities that were not as safe as they expected them to be.
Deflation is a short term problem as inflation is impossible to generate when velocity of money collapses. Inflation is a long term problem obviously because fiat currency endgame yada yada yada from helicopter money etc.
If by austerity, you mean financial responsibility, why is that a mistake?
If you believe in printing money to fund everything, then why do anything whatsoever? Why bother paying taxes? Why go to work? Why make anything to sell? At some point all productive economic activity stops as it's been crowded out by fiat currency. It's a slippery slope fallacy.
Deflation is a short term problem as inflation is impossible to generate when velocity of money collapses. Inflation is a long term problem obviously because fiat currency endgame yada yada yada from helicopter money etc.
If by austerity, you mean financial responsibility, why is that a mistake?
If you believe in printing money to fund everything, then why do anything whatsoever? Why bother paying taxes? Why go to work? Why make anything to sell? At some point all productive economic activity stops as it's been crowded out by fiat currency. It's a slippery slope fallacy.
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There is no risk when central banks can just input whatever number they need to in their spreadsheet. This is why austerity is a mistake. This is based on a belief that sovereign debt actually means something beyond merely numbers on a spreadsheet. Austerity encourage people to not spend money because they believe that their money will be more valuable when it's saved rather than being spent, which leads to the fall of velocity of money. Good news- the central banks are transferring private risk into sovereign risk where it doesn't matter.
So, if you don't implement austerity policies, then money will be incentivized to be spent on something. In this particular case: a shut down in customer goods, it would be spent on financial products instead which is why I believe we are seeing a rise in SPY price. Yes, it is inflation of asset prices, and it would help companies to ramp up their productivity when the economy start to reopen with ample amount of money with lower interest debts.
Austerity policies would be shooting companies in its foot before we can even get started on creating more productivity and resulting into longer-drawn out recession. The good news is that central banks recognize this and signaling that they have no interest in doing this.
Your last paragraph opens up the philosophical question of what is money. You should look into the history of money. Money used to be just tally marks of what is owed and owned to other people in the Byzantine empire. There are evidences that prehistorical people used money with sticks which predate the creation of written languages. Fascinating stuff.
My personal ontology of money is a quantification of power. Quantified of power is inherently useful. So, work and creating value is inherently valuable as that it give people more power to obtain more power for whatever purpose. You're right, taxes is useless beyond making people believe in the system which is why fiat currencies rely on taxation. It doesn't have to be this way to convince people to believe in money. The expansion of quantized power simply means that the state wants to support the enterprise of its own citizens at a greater capacity.
So, if you don't implement austerity policies, then money will be incentivized to be spent on something. In this particular case: a shut down in customer goods, it would be spent on financial products instead which is why I believe we are seeing a rise in SPY price. Yes, it is inflation of asset prices, and it would help companies to ramp up their productivity when the economy start to reopen with ample amount of money with lower interest debts.
Austerity policies would be shooting companies in its foot before we can even get started on creating more productivity and resulting into longer-drawn out recession. The good news is that central banks recognize this and signaling that they have no interest in doing this.
Your last paragraph opens up the philosophical question of what is money. You should look into the history of money. Money used to be just tally marks of what is owed and owned to other people in the Byzantine empire. There are evidences that prehistorical people used money with sticks which predate the creation of written languages. Fascinating stuff.
My personal ontology of money is a quantification of power. Quantified of power is inherently useful. So, work and creating value is inherently valuable as that it give people more power to obtain more power for whatever purpose. You're right, taxes is useless beyond making people believe in the system which is why fiat currencies rely on taxation. It doesn't have to be this way to convince people to believe in money. The expansion of quantized power simply means that the state wants to support the enterprise of its own citizens at a greater capacity.
Current events are proving this true to an extent, but this is moral hazard created by the state, and isn't how a functioning Capitalist economy should behave. I understand your arguments from your point of view; your comments are not illogical based on your starting point, but suffice it to say that I disagree.
That is, money is a promise of value (if it has no value, then it shouldn't be exchangeable for anything else of value), and it is the production of the economy that gives a currency value, be it a piece of paper/stick/pebble/shell etc. If you print money to infinity and crowd out all economic production, then there would be nothing left to lend value to the currency. It would break its promise and would no longer be fit for purpose as a medium of exchange.
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I respect your disagreement. However, this is literally how money works in the reality. Fed enters number in their spreadsheet and there it is. Done. That's all really. Yes, there needs to be a restrain on how big the number is, and Fed has done an excellent job for more than a hundred years. The stock market is responding to their policy positively. In fact, they've done such as a good job that USD is now the reserve currency of the world and for the foreseeable future. You do have a point when America is literally collapsing. Is this the collapse of America, or just a reply to a pandemic? Personally, I think that it's the latter.
Infinity is an extreme exaggeration. There is a set number being printed according to their internal policies. Notice how all of the articles about Fed's programs have a set number? Hint: it's not infinity.
An interesting economic policy that I would like to happen for America:
https://www.theamericanconservative...ut-giving-everyone-a-federal-reserve-account/
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You think is this the last round? You said yourself that "central banks can just input whatever number they need to in their spreadsheet". By setting a limit, the Fed will just lose any credibility that they have left if/when they announce the next package. The right option would be to stop, so I do hope that they keep to their limit.
Infinity is the fiat currency endgame. As mentioned, "printing $x dollars would be good" is a slippery slope fallacy, because if $x is good, why not print $x+$100B? $x+$1T? $x+infinity? But as every example in history demonstrates, from the Roman Empire to the Weimar Republic, Zimbabwe, and Venezuela, the endgame is hyperinflation and destruction of the currency.
QE is a strange game; the only winning move is not to play. Once you start, the economy grows reliant on it, so tightening becomes impossible without causing a crash (the Fed quickly abandoned any attempt at tapering). Like an addict that builds a tolerance, more and more QE must therefore follow to have any impact. So you have to take away the drug, allow the subsequent crash, and let the chips fall where they may. That is the only way to get healthy.
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Of course not. This isn't the last round of QE. The question is: when is it the final round of QE and the people just give up on the US economy? Is this the one or one down the road? I think it's the latter. Also, you invested into bonds with belief that USD will be worthless in this round of QE. Your actions simply do not reflect what you think is going on.
Actually, my portfolio is in cash (for liquidity) and gold. My pension has been in UK gilts since March 2019 (as stated on page 1), which was a short term play waiting for the crash. Unfortunately, my work pension scheme doesn't have the options that I want, so I'll likely end up sticking it into equities and hoping for the best.
Also, I've been consistently saying that USD will appreciate in the short term, but QE is a long term currency risk issue. At no point did I say that I believe USD will be worthless in this round of QE, but it will be worthless if QE continues indefinitely. Look, I've been trying to give you the benefit of the doubt in this thread, but you've contradicted yourself a couple of times now and also demonstrated that you don't understand my replies. I'm going to stop replying to you.
Also, I've been consistently saying that USD will appreciate in the short term, but QE is a long term currency risk issue. At no point did I say that I believe USD will be worthless in this round of QE, but it will be worthless if QE continues indefinitely. Look, I've been trying to give you the benefit of the doubt in this thread, but you've contradicted yourself a couple of times now and also demonstrated that you don't understand my replies. I'm going to stop replying to you.
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I don't get why this is called a fallacy. At a time of economic recession, those labor and raw materials were staying unused. Saying it "could've been used" is kinda meaningless, because raw materials and labor can be used for a lot of things, but that doesn't mean they will be unless it's profitable - it's not as if the market always utilizes available labor and raw materials. You may just have the window you started out with, but now money has changed hands, and (assuming there is a difference of spending power between the window owner and the repairman) that should cause a multiplier effect in demand. It's not nothing, it's a roundabout way of propping up consumer demand. Breaking a window of each house and getting window-repairers to fix it is in effect taxing all house-owners and giving a stimulus check to repair workers (well, +labor and raw material going the other way), and that does have an effect on the economy.
Similar thing with war - "the economy" in aggregate may not have more in stock by the end of it, but money changes hands through deals that wouldn't have happened otherwise, and some sectors (e.g those that produce military equipment) end up significantly increasing their capital and production capacity by the end of it. You're assuming war is supposed to be good for "the economy" in abstract, but what if it's supposed to be good for specific sectors of the economy, that would never have the demand they do unless there were wars? Looking at "the economy" as an abstraction and not looking at specific actors that gain or lose misses out on what is actually happening. Governments tend not to be actor-blind when making decisions like this.
The assumption is that resources are finite, so it would be fallacious to conclude that society would be better off in the long term by breaking and fixing a broken window, because those finite resources would be wasted.
Yes, money has changed hands, and in a vacuum that would appear to benefit the economy, but this does not happen in a vacuum. That money could have been used on literally anything non-destructive and be a net gain to society.
If there is no demand for a product or service, is it actually desired by society? If not, then why should artifical demand be created for it? Should you build a bridge to nowhere that serves nobody just to pay construction workers? You may as well give the workers "free" money, which is what governments worldwide are doing (and this has its own unintended consequences).
The sectors that are stimulated in war are different from the sectors that would benefit society during peacetime. If the goal is long term peace, then warfare misallocates finite resources, and the fallacy is most obvious when considering the cost of war to human capital (i.e. lives lost).
In a normal economy, where there is demand, supply will follow; just like how alcoholic beverage companies have switched to hand sanitiser production, and how technology companies have redeployed to manufacture ventilators. The point is that investment shifts to where it is needed without someone breaking a metaphorical window to force spending.
Yes, money has changed hands, and in a vacuum that would appear to benefit the economy, but this does not happen in a vacuum. That money could have been used on literally anything non-destructive and be a net gain to society.
If there is no demand for a product or service, is it actually desired by society? If not, then why should artifical demand be created for it? Should you build a bridge to nowhere that serves nobody just to pay construction workers? You may as well give the workers "free" money, which is what governments worldwide are doing (and this has its own unintended consequences).
The sectors that are stimulated in war are different from the sectors that would benefit society during peacetime. If the goal is long term peace, then warfare misallocates finite resources, and the fallacy is most obvious when considering the cost of war to human capital (i.e. lives lost).
In a normal economy, where there is demand, supply will follow; just like how alcoholic beverage companies have switched to hand sanitiser production, and how technology companies have redeployed to manufacture ventilators. The point is that investment shifts to where it is needed without someone breaking a metaphorical window to force spending.
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Just asking but places like Oklahoma did great compared to places like New York or California during the Great Recession(2007-2009), do you think places like that will still have the same immunity against the fall of the economy for the upcoming Coronavirus recession.
I don't know enough about the relative immunity of certain US regions vis-a-vis New York/California during the last crisis to have an informed opinion. That said, it's not obvious to me why anywhere would be spared this time around.
Congrats to orch on perfectly calling the bottom.
I disagree with the OP basically saying we were in a bubble. Equity valuation were high but nothing to suggest such a bubble like 2000 for example. Credit spreads were tight, but the economy was in a great place. Home prices also nothing like the last crisis. Banks are well capitalized.
This is an economic shock, not a slowdown from problems in the financial system like last time. So I think the recovery will be quick. This isn't like 2008 in many ways, unemployed is worse, but there has not been a "Lehman moment", the Fed and Govt has been more supportive now than then.
I've been buying the dip and will continue to dollar cost average through the recovery. And really just want to say "works at IB" is not qualification for personal finance advice, to all those looking for advice. I suggest reading "a random walk down wall st" for a good introduction to investing
I disagree with the OP basically saying we were in a bubble. Equity valuation were high but nothing to suggest such a bubble like 2000 for example. Credit spreads were tight, but the economy was in a great place. Home prices also nothing like the last crisis. Banks are well capitalized.
This is an economic shock, not a slowdown from problems in the financial system like last time. So I think the recovery will be quick. This isn't like 2008 in many ways, unemployed is worse, but there has not been a "Lehman moment", the Fed and Govt has been more supportive now than then.
I've been buying the dip and will continue to dollar cost average through the recovery. And really just want to say "works at IB" is not qualification for personal finance advice, to all those looking for advice. I suggest reading "a random walk down wall st" for a good introduction to investing
Genuinely, good luck. I absolutely hope that I'm wrong, because the outcomes that more intelligent people than I am are discussing are bleak as fuck.
Here are my observations from New Zealand. In my city there are currently 0 active cases. There are 74 active cases in the whole country and we have the worlds biggest moat. We've come out of lockdown today, though there are still some pretty serious restrictions on gatherings (no more than 100 people in a single venue, no personal gatherings of more than 10 people). My partner owns a small hair salon, it has opened today. She is only having one hairdresser work at a time (she has one other hairdresser working with her) to allow her to maintain distance between clients, but she is going to be open 7 days and is pretty much fully booked for three weeks.
So, this is pretty much a best case scenario for coming out of a lockdown. And shit here seems pretty grim to me.
Decimation seems hopeful for the hospitality industry. Unless rents collapse? Which seems good to me but I am sure will have some kind of negative follow on effect for the wider economy. Tourism is gone. Tourism and hospitality is basically how money gets into the hands of young people. My partner mostly doesnt focus on younger clients, but she definitely has some! That's gonna be a big part of her revenue that is going down drastically. There's a lot of other hairdressers around who might be hit a lot harder than she is.
Now think about this in a country where covid is still present. Unless youre just committing to the 1 in 50 risk of dying of covid then like, you cant take a train, you cant go to a restaurant, you cant go to the hairdressers. Those places employ people, those people cant spend money they arent earning at other places. Those places employ people.
Money needs to get into the hands of people somehow or they will die. I dont see how you can expect that to happen without killing them anyway when you have covid around. Unless you're gonna try some Socialism, which I think we can pretty safely say isnt gonna happen in the USA any time soon.
This post is pretty depressing. So to end on something positiveish. Giving money to the poor is the only way things are going to get better from here. I dont really care about the details, but the poor need this money. And not need like I need a new computer desk, but need like, people are going to die without it. Your libertarian idealogical nonsense can wait until after the crisis.
And then put all the fuckers responsible for the appalling response to this virus in the USA in prison. Except not an American prison because those things are inhumane. You need to release everyone from those crimes against humanity.
So, this is pretty much a best case scenario for coming out of a lockdown. And shit here seems pretty grim to me.
Decimation seems hopeful for the hospitality industry. Unless rents collapse? Which seems good to me but I am sure will have some kind of negative follow on effect for the wider economy. Tourism is gone. Tourism and hospitality is basically how money gets into the hands of young people. My partner mostly doesnt focus on younger clients, but she definitely has some! That's gonna be a big part of her revenue that is going down drastically. There's a lot of other hairdressers around who might be hit a lot harder than she is.
Now think about this in a country where covid is still present. Unless youre just committing to the 1 in 50 risk of dying of covid then like, you cant take a train, you cant go to a restaurant, you cant go to the hairdressers. Those places employ people, those people cant spend money they arent earning at other places. Those places employ people.
Money needs to get into the hands of people somehow or they will die. I dont see how you can expect that to happen without killing them anyway when you have covid around. Unless you're gonna try some Socialism, which I think we can pretty safely say isnt gonna happen in the USA any time soon.
This post is pretty depressing. So to end on something positiveish. Giving money to the poor is the only way things are going to get better from here. I dont really care about the details, but the poor need this money. And not need like I need a new computer desk, but need like, people are going to die without it. Your libertarian idealogical nonsense can wait until after the crisis.
And then put all the fuckers responsible for the appalling response to this virus in the USA in prison. Except not an American prison because those things are inhumane. You need to release everyone from those crimes against humanity.
Just shows why you don’t panic liquidate your retirement accounts and keep contributing (assuming you can afford to). If you did this on every economic panic you’d have nothing when you retire. They say the best long term performers are those who are dead because they don’t mess around. Just don’t be scared out of the markets. Most of us are young, we have time.
Even if you turned to a “safe haven” like gold/silver/bitcoin, that has done decent as well. Silver is still sort of catching up and trades way under physical premiums. Same concept with these safety assets you can’t be scared out and then keep all your money on the sidelines. When equity markets crash these will also sell off sharply to cover margin calls and then rebound.
Short term outlook only, dark pool money was buying at an unbelievable rate at around SPY 240 and dark pool flow continues to remain on the buy side. The fed/Mnuchin stated themselves they have “unlimited” resources and will do “whatever it takes” to provide economic stimulus, and to "buy it all". My prediction is there is a good chance negative rates are coming whether you like it or not. If negative rates happen you will see a surge in the giga cap dividend tech stocks despite how high the NASDAQ is already. I have never seen such weak market breadth ever in investing, but that is the current environment. Even if you think it is unsustainable, the markets are fake or propped up or whatever for continuing to rise with bad economic data/outlook, have to play what’s in front of you if you are trading. Unless I see the warning signs again in dark pool and VIX ETP activity, staying long.
Even if you turned to a “safe haven” like gold/silver/bitcoin, that has done decent as well. Silver is still sort of catching up and trades way under physical premiums. Same concept with these safety assets you can’t be scared out and then keep all your money on the sidelines. When equity markets crash these will also sell off sharply to cover margin calls and then rebound.
Short term outlook only, dark pool money was buying at an unbelievable rate at around SPY 240 and dark pool flow continues to remain on the buy side. The fed/Mnuchin stated themselves they have “unlimited” resources and will do “whatever it takes” to provide economic stimulus, and to "buy it all". My prediction is there is a good chance negative rates are coming whether you like it or not. If negative rates happen you will see a surge in the giga cap dividend tech stocks despite how high the NASDAQ is already. I have never seen such weak market breadth ever in investing, but that is the current environment. Even if you think it is unsustainable, the markets are fake or propped up or whatever for continuing to rise with bad economic data/outlook, have to play what’s in front of you if you are trading. Unless I see the warning signs again in dark pool and VIX ETP activity, staying long.
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lol
bitcoin is wildly volatile and open to manipulation. It's a way to diversify your portfolio a bit, and has the potential to gain the status of a safe haven, but I very much doubt that a period of grave uncertainty is the time for that. bitcoin isn't a safe haven until people believe it is. And I hate to say it, but while bitcoin can still lose 50% of its value in a matter of hours nobody is seriously gonna believe that.
I'm concerned of a second wave hitting us later on this year. Without massively ramping up testing and tracking we're realistically looking at that, at least in the UK. And even then, it's going to continue to hurt the economy. Until a vaccine is developed (which is probably at least a year away), things like pubs and restaurants will be forced to run at lower capacities to maintain social distancing. And these are businesses that don't have the margins to support such a shock to their revenue. In theory governments can turn on the money printer to keep them afloat in the meantime, which I'm fine with if the alternative is people becoming destitute. But I don't know if a conservative UK government would ever do that.
The silver lining for developed countries at least, is that they *can* feed, house and educate people still. People don't need to die. But it's a resource allocation problem. How do you make sure of that when half the country isn't working. The UK's furlough scheme is great for that at least, even if they completely dropped the ball with controlling the virus's spread: if you just put cash into everyone's hands it means people can buy food and pay rent. It causes inflation as well but fuck you, saving lives is the most important thing here.
Second and subsequent waves are inevitable, especially when flu season starts again in Autumn. I think this is why the British Government has been so keen to return to some semblance of "business as usual"; if we can't successfully open the economy by Summer, then what hope do we have once flu season returns? Remaining in lockdown until next Summer would be disastrous as we don't have the option of printing money to infinity, because Sterling isn't the global reserve currency. If that happens, I can see us going cap in hand to the International Monetary Fund.
You're right about pubs and restaurants; that space is going to get decimated. Many recognisable chains will simply not reopen and those that do will have to adapt to lagging demand and social distancing, which means fewer covers and lower revenues.
FYI, inflation is impossible in the short term (as previously discussed) because the velocity of money has completely crashed as people are only spending on essentials. This is why I can get behind a temporary UBI policy, even if it's a terrible long term idea, because the immediate reality is that people are going to die without money.
You're right about pubs and restaurants; that space is going to get decimated. Many recognisable chains will simply not reopen and those that do will have to adapt to lagging demand and social distancing, which means fewer covers and lower revenues.
The scheme is supposed to be phased out by the end of October, but may continue beyond that. The Government is in negotiations with private sector employers to pick up a share of the expense from August, but that will just force companies to examine which jobs are actually still viable. Expect redundancies as soon as the Government attempts to shift the burden. 7.5M of the ~28M workforce (excluding self-employed) is currently furloughed. That's a terrifying number.
FYI, inflation is impossible in the short term (as previously discussed) because the velocity of money has completely crashed as people are only spending on essentials. This is why I can get behind a temporary UBI policy, even if it's a terrible long term idea, because the immediate reality is that people are going to die without money.
why would we need IMF help in such a situation?
To be explicit, we would likely default on the national debt and go to the IMF for a bailout in the form of new loans with strings attached. There is precedent for this from 1976.
I used quotes for labeling them safe havens because Bitcoin is indeed volatile and in the face of a real sell off there is basically no asset that will avoid it completely unless they are market short instruments. The safe haven label is all in the eye of the beholder. In the small 2018 equity bear market bitcoin lost about half its value and in the recent equity bear market it lost about 60% value. If it is not something a person is willing to hold through they should not invest in it. In terms of manipulation, the same could be said with paper metals controlled by the big banks, shady secondaries, and I have seen market makers and algo driven events forcefully tank a stock just to bring it back up in minutes.
Know what you are investing in and how it behaves before blindly believing anything is "safe" or a "good buy", especially in the face of these banks/analysts that have an agenda. If you have proven/strong balance sheet stocks like Microsoft, stocks you believe in and are fundamentally sound, or you understand the risks, it is much easier to hold through volatility.