Paul Krugman provided his own answer a few days ago in a Twitter thread:
Two lessons here. First, the Fed saved the world economy from total disaster (again). Second, the stock rebound is not a sign that everything will soon be OK. It's not telling us that the economy is great, but rather that investment opportunities other than stocks are lousy.
https://twitter.com/paulkrugman/status/1256208478282158085
This echoes @magicsmoke's explanation at the top of this thread and helped change my mind a bit. Like you, I still expect a bloodbath eventually.
Among this article's explanation, #1-3 sound like folly to me. And I'm guessing 4 & 5 can only go so far when 1/3 of the economy is out of order. It feels like a massive (long and slow) hurricane has just made landfall and there's still too much rain and wind to see how much damage has actually been done yet. But investors seem to want to pretend when the storm clears, the economy will somehow still be standing there unscathed and everyone will be able to just head back to work.
In every scenario I can imagine, one thing seems inevitable - most people in this world are going to get poorer and suffer more. But I'm not convinced that the economy itself will sputter; we might just be ushering in a new economy that's far more unequal.
In that case, the stocks might never go down again and people who have held off from investing are never gonna get back in.
People will always get bored and people will always want nicer things, so they'll always eventually be motivated to go and get work to improve their lot. UBI won't change that. In fact, it will facilitate it.
Without travel, demand for petroleum has dropped significantly, to the point it was below 0 for a short time.
Financial services can come to a screeching halt as well if people stop buying on credit or taking loans out on housing and cars. Maybe I'm being short-sighted in only considering the consumer aspect here.
More than 100% of pre-crisis income for the service industry is being financed through the expanded unemployment and small business grant programs.
Do you have any sources for that claim?
The investment component is dependent on companies' expectations about consumption (or other companies' investment, or government spending) in the future, and obviously the net export component depends on consumption in other countries. So in that sense the ~70% [1] due to direct consumption understates the true importance of consumer spending to GDP.
[0] https://en.wikipedia.org/wiki/Gross_domestic_product#Compone...
That’s why I think we REALLY need to take the opportunity to pass a real UBI. So everybody gets to enjoy the efficiency gains.
$megacorps arent dying, they're thriving. The economies of scale they have built are doing great right now, since all the smaller players are essentially stopped, and people still need their stuff.
I honestly believe that every recession, the economy gets a little more inequal.
Stock prices are discounted future profits for about 15 to 20 years. Those profits are still there when Corona is over. From that perspective, why should share prices fall by more than 5-10% for every year that Corona is locking down the economy?
*edit: If anything, the economy will prosper because Corona has forced every company into the 21th century by requiring remote work and digital workflows.
Analysts use different methods to discount cash flows: https://www.investopedia.com/articles/professionals/072915/d...
Finding R (what to discount by) can be difficult to do: https://www.investopedia.com/articles/investing/021015/advan...
I don't work in IB or PE so take what I put with a grain of salt, just what I've learned.
Also, you know markets aren't near efficient when people invest in $ZOOM and not $ZM and when Elon tweets $TSLA stock is too high.
You can look at daily gainers and losers and watch them over the course of the week. They are extremely volatile.
If you're talking about the S&P500 it's a little easier to do. A little over 50% of the value of S&P 500 is the top 50 companies by weight. The top 100 equate to 70% and the top 250 equate to 90%.
This does provide one plausible answer to the headline question from TFA: Corporations' expected future profits are lower than they were pre-COVID, but the valuation discount rate is lower because the expected future return for assets in general is lower, so the present value of corporations' expected future profits is the same-ish as it was pre-COVID.
[0] https://johnhcochrane.blogspot.com/2018/02/stock-gyrations.h...
Stocks are based on expectations of future profits, i.e. psychology. "In the long run, the stock market is a weighing machine. In the short run, it's a voting machine."
Few investors' psychology will let them look at a year of bad news and still think "Oh, it's going to get better in the future." After about 3 months you start doubting yourself and wondering if maybe you were wrong in the first place, and you've entered a brave new world where people randomly die and commerce or long-term plans are impossible. All of the economic data - corporate earnings, employment, share prices, etc. - will reflect the new normal, so there's no reason (other than your memory of what the '10s were like) to believe that share prices would always go up.
Computing this depends on estimating/forecasting/extrapolating/guessing a lot of values. E.g. what kind of revenue growth the company will have. How the structure of company expenses may change. Parameters like a discount rate make a huge difference in the estimated value. In many cases the majority of the value for a discounted cash flow valuation of a stock comes from the tail term where you give up trying to unroll the contribution for each year and make a simpler approximation of what the company will be doing 20 years+ in the future.
The computed share value has a lot of sensitivity to adjusting some of these inputs, and in many cases it is not at all obvious what values parameters should be set to.
Many of these are permanent consequences that will absolutely effect earnings 15-20 years in the future. The market seems to be pricing in an assumption that this will be a blip: we'll reopen, businesses will rehire, and 2021 will look much like 2019. I don't believe that's likely.
Take my mother in law as example. Hard core shopoholic. Amazon and QVC packages coming in daily. Hair nails etc done weekly at salons. Now for two weeks silence. She lost her job and empty bank account hit her like reality check. Shes on her way to a friend - they will do each other hair and nails. And when I told her it will all go back to normal on January 1st, so many people died she tells me “i am not going out anyways for very long time”
1 - https://www.cdc.gov/nchs/nvss/vsrr/covid19/excess_deaths.htm
This is especially worrying, now that the US military is barring previously hospitalized COVID survivors from enlisting and not allowing waivers.
That's almost certainly a temporary policy because of the lack of information enacted with the expectation that it will be evolved based on future information, not something that should make the lack of information more worrying.
Regardless, who knows? I'm just curious to know
https://www.cdc.gov/nchs/nvss/vsrr/covid19/excess_deaths.htm
https://www.nytimes.com/interactive/2020/04/21/world/coronav...
If you have a patient at your hospital and you are able to give them a covid diagnosis, you get $8k from the federal government. If you can put them on a ventilator for a few minutes, you get $35k from the federal government. This is intended to help offset the costs of care for covid patients to healthcare providers. You can get a covid diagnosis by having some of the sympoms... like coughing, weakness, shortness of breath, etc. I imagine it's difficult to die from anything without some weakness or shortness of breath. So it is very easy to say the patient had "covid-like" symptoms, and put covid as the cause of death.
Now, keep in mind that at the same time, healthcare providers are furloughing and laying off workers. Since "non-essential" care is on hold, there's not enough work for people to do in most places in the country. This places healthcare providers in a difficult moral position where they can inflate a number and keep their employees on payroll, or strictly follow it and lay everyone off.
One easy way to help with this data issue is to simply differentiate the deaths where a person had covid-like symptoms vs a death where a person actually tested positive for covid.
What's clear is society now seems to be willing to let COVID run its course (and kill discriminately) as long as we keep below hospital capacity. If we allow that to happen, then we'll reach herd immunity, regardless of vaccine availability, within a couple of years.
Let's just hope it doesn't mutate.
I’m giving some background because it means kids and children today have antibodies created by the innate system that fights off novel coronavirus. Which means their adaptive system will be able to remember and fight back against this virus. This means mutations, specifically this means weaker general strains in the future akin to the cold/flu.
Let me put it this way.. RSV is a nasty respiratory illness but we as a species survive quite well along side it even if it happens to kill a few babies and old people every year
Risk adjustment.
1-Risk of death/bankruptcy for companies.
2-Risk of reduced consumer spending. This can happen because people are in financial shock, or because unemployment stays high. Perhaps some of these layoffs aren't "furloughs." Some of these businesses won't survive, like many restaurants. My expense is your revenue, but I won't spend if I don't feel "safe" physically and financially and if I don't have a job, well... On top of which, what if some part of society stops going out?
3-Risk of permanently slowed economic activity due to coronavirus spread in trading partners.
4-Risk that the vaccines don't work out and there is no "time after corona." Even if this risk is small, it is non-zero, and catastrophic.
Thats the theory. In practice stock prices wildly oscillate around expected value (which is a gradual curve up and to the right), with no apparent logic. As shiller points out in irrational exuberance, stock markets do not consistently reflect expected long term returns.
... but I find that most people who complain about irrational markets lack the conviction to bet against it.
Judging by people's behavior, and the politicization of even common sense measures like mask wearing in the US, I think this is likely. I hope I'm wrong.
I feel bad for you guys watching from the north here.
My wife and I have been discussing logistics to get somewhere safer in the event of different scenarios, but at the end... it's just difficult to predict what might happen and where.
Better to build local relationships where you are and focus on mutual aid & defense agreements with friendly local communities. The threat model here is a breakup of the U.S, not an invasion. The threat model to an individual is much less if you're in a community where the other individuals have your back, than if you're a minority or outcast in unfriendly territory.
Feels weird to write all this. I'm not much one for "wild" sounding theories, but all this feels like it's coming to a head, and things may change a lot.
The amount of batshit antics that passed for democracy gives a healthy perspective on current events.
The Union endures.
I'm out west where we got luckier and maybe also managed it better. But Canada had the advantage of strong leadership at this time and only ten provinces that are mostly on the same page.
[1] https://www.cnbc.com/2019/01/09/shutdown-highlights-that-4-i...
Do you even read your sources fully?
> 51 percent of those making less than $50,000 usually or always live paycheck to paycheck to make ends meet
This is from the lowest income bracket in the 2017 survey.
It tells us 0 about how many are in the "usually" category.
It tells us 0 on does this account for investments or not.
Highly likely: Coronavirus is going to be circulating until the end of 2021 (based on transmissibility & vaccine timeline). We'll have better therapeutics to blunt the symptoms.
But steps required to (intermittently) re-suppress transmission (NYC is ~20% exposed? So at minimum 1-2 more spike repeats) are going to continue to harm the economy over that period.
There is no version of social distancing or lockdown that permits normal brick and mortar economic activity (and therefore normal employment levels).
And there is nothing shy of those that dent infection spread once it gets going in an urban center.
50/50: Government stimulus cannot replace normal market demand over that period (i.e. "V-shaped recovery").
Firms and industries that can adapt (curbside pickup, work from home, pivot to online delivery) and are deemed essential do fine by cannibalizing their peers.
Eventually, the demand destruction will hit the markets. You can't sell product to people who are unemployed and have no disposable income.
Consequently, adaptive companies are going to survive & maybe thrive. Everyone else looks pretty economically grim under likely scenarios.
What that potentially means is that they will act as effectively a fire-break for the broader population.
Basically a burning of the highest throughput avenues for mass spread.
If true, that would mean we get lots of localized outbreaks, but the probability of that spreading back out into an uncontrolled pandemic is much lower.
If that is the case then places like NYC are probably pretty close.
https://www.medrxiv.org/content/10.1101/2020.04.27.20081893v... - Individual variation in susceptibility or exposure to SARS-CoV-2 lowers the herd immunity threshold
This effect will be amplified if the initial vaccinations are given (as they should be) to the potential superspreaders, like healthcare workers and essential manual laborers.
I'm not sure how effective this 'firebreak' will be in practice but it will certainly slow the spread to some degree.
I happen to agree, which is why I struggle to explain the last few week's stock price gains for companies that can hardly adapt e.g. DRI, SIX. Sit-down restaurants and theme parks.
One nearly certain continuation is cheap (low interest) debt. Cheap debt allows for further stock repurchases by corporations, and the cycle continues.
They accomplish this by bundling together like stocks, such that each's individual volatility balances out others.
This essentially allows you to buy "oil stocks" or "retail stocks" or "all large-cap US companies."
However, what goes into those buckets are any companies that meet the criteria. Hence why ETF fees are lower than actively managed mutual funds.
The downside is that you own all the companies in that bucket. If half of those companies can coronavirus-adapt and the other half cannot, is that the bucket you want to be holding?
Recovery will be highly company specific and overall reduced consumer spending will hurt even those companies who can operate under social distancing.
It is called asset price inflation. Most assets will devalue at some point but, in the broader range, won't go to zero.
This is not clear for FIAT money.
It's a decent article. Here are their 5 reasons:
1. Bets on a “V-Shaped” Recovery
2. Market Leaders Keep Rising
3. Corporate-Earnings Expectations Remain High
4. Old Habits Die Hard
5. The Fed’s Backing
Personally, I'm betting we're still headed to a bloodbath, but slowly. This quarter's earnings are expected to be terrible, so this is already priced in. But the market is expecting a recovery soon after society starts opening up again. If (when) this strong recovery doesn't happen, the bottom falls out. If the reopening is combined with a second wave of epidemic and a renewed lockdown, something akin to financial panic ensues.