This will be blamed on COVID-19, but the problems go much deeper. Last year the Fed lost control of the repo market. the event was widely discounted at the time as an end-of-tax-year fluke. It wasn't. Six month ago, the yield curve inverted. People who should have known better said "this time is different."
Speculators have been trained over the course of 10+ years to buy the dip. The Fed has your back.
What we're seeing is the beginning of the end of that resolve.
The last time this happened was during the GFC. It's not normal, and it's probably not a one-time event, either.
Third option is that it is an indicator as long as people aren't treating it as one, but once people react to it then it ceases having the power to indicate what is happening.
I've been skeptical of the whole yield curve as metric thing because it's not directly tied to the actual state of the economy directly just to the sentiment about the market X years in the future. Given how much we know the whole market is prone to group think, self delusion, and outright manipulation I've grown very skeptical of any indicator about the market that comes directly from the market.
I always wonder how much of a self-fulfilling prophecy it is, especially now the yield-curve-inversions-precede-recessions thing is so well known, i.e. people see the yield curve inverts and therefore believe the market will drop, therefore it does. Markets are just a reflection of aggregate human beliefs after all.
In most places yeah which is why the kind of highly instrumented self reflection of the sentiment like the yield curve inversion can be dangerous. It's not a sign that says there's going to be a recession it's just a sign the people in that market think there will be one.
Another way to put it is that Coronavirus is forcing people to realize that we’ve been papering-over weaknesses with easy money for quite some time. That said, “economists have predicted 5 out of the last 3 recessions” — people have been warning against one for years now.
But the problem is that coronavirus is threatening the real “brick and mortar” economy — travel, restaurants, retail, etc. Its hard to address that without fiscal stimulus, and we haven’t seen much talk in terms of that yet.
Add to the list sub-prime auto loans, a huge amount of student loan debt...
Check out the graphs presented, particularly the last one. Default is very likely for those most likely to have student loan debt (younger workers in lower quality service jobs), but there isn't a systemic risk as the federal government is the insurer of last resort. These are loans in name only; they are, in actuality, taxes you can't default on (or so was traditionally thought; we're making headway in having the ability to default on these obligations and get out from underneath them [1]).
Is turning Global Financial Crisis into an acronym necessary? It certainly isn’t standard. Turning things into acronyms that are used a single time in a written statement without reference or explanation is one of the most obnoxious things in this industry. Paraphrasing grandmas everywhere, if you can’t write things properly, don’t write anything at all.
I get your objection but I don't agree with it in this case. As someone who is neither you nor OP, I see GFC as a pretty well-known acronym, especially in this context (recessions, financial troubles).
Right. Borrow $5 trillion for infrastructure and pay <$50 billion / year. That's a positive ROI for sure. Only issue is you would flood the markets and raise those rates, so you wouldn't get all of it, but still a lot. I have always though that the government should act strategically and take advantage of low rates like other market participants.
This administration has a single minded project that has been a struggle to get financed. It would be a huge coup for them to use this downturn to get it financed without borrowing from Peter to pay Paul. Then again, this is all probably just fake news.
Only if restricted to the relatively arms length levers like interest rates. There's still plenty of room for more drastic measures like buying stock directly in companies like Japan has done or huge prop ups like a new WPA.
It is not a problem with correction or even recession. Without one you cannot eliminate those weak and continue the rich as rich. You need some cycle. Desperately need it.
The Fed has as much ammo as there is wealth held in dollars. Which is to say, a lot.
First, there is negative rates. Punishing people for holding cash. The ECB and Bank of Japan have done a lot of pioneering work there, the Fed will have already extensively studied what they did, what worked, what didn't work.
Second, they have QE, monetizing debt & debasing dollar wealth, which is exactly what they'll unleash for the next recession. Inflation isn't much of a concern right now, so they'll feel free to 'print' rather wildly.
Annual budget deficits will blowout, probably up to $2 trillion or more, with the next recession, so the Fed will have to print dramatically to fund that regardless.
==First, there is negative rates. Punishing people for holding cash. The ECB and Bank of Japan have done a lot of pioneering work there, the Fed will have already extensively studied what they did, what worked, what didn't work.
Second, they have QE, monetizing debt & debasing dollar wealth, which is exactly what they'll unleash for the next recession. Inflation isn't much of a concern right now, so they'll feel free to 'print' rather wildly.==
I'm not sure I see where either of these options has worked. Can you share the successes of either of these measures?
In option 1, you have a stagnant Japan with a lost generation.
Option 2, is what we have been doing for 12 years and has led us to this point. The inflation seems to be hiding in asset prices (housing, stocks) not household items.
Since 2007, there has been one year with GDP growth [1] above the annual deficit as % of GDP [2]. That was 2015, with 2.4% deficit and 2.9% GDP growth. 2018 saw the US spending 3.8% of GDP in deficits to generate 2.9% GDP growth. Does that sound like a "strong" economy?
The purpose of Fed easing would be precisely to generate/maintain target levels of inflation. The idea that the "Fed is out of ammunition" is that its conventional policy tool (rate changes) is seen as near a limit, such that the Fed can't generate further inflation if it wants to.
But here, you "smell the inflation," so by definition the contemplated actions are in fact ammunition.
The Market is like a supercooled liquid. It's been poised to freeze for months, just waiting for a crystallization seed. COVID-19 and the Saudis gave it two.
This is widely being blamed on oil prices (edit: the virus would have been priced in last week to some extent, but the decision by Saudi Arabia to increase oil production happened over the weekend and hadn't been).
Oil prices going down is a good thing for the economy.
I think people are confusing cause with an effect/correlation. Oil going down usually indicates a recession. Bad economy -> Lower demand for Oil -> Lower oil prices. In that case it's a signal/trailing indicator.
In this case it's: Increased oil supply -> Lower oil prices -> Everything gets cheaper to make -> Increased economic activity
> Oil prices going down is a good thing for the economy.
That is no longer strictly correct. The ideal oil price for the US economy is a balance between high and low, which provides a high degree of employment for the US oil industry, oil production and export expansion remain high, and provides a reasonable price for US consumers when it comes to gasoline.
Oil in a range of perhaps $45 to $75, is ideal.
At $25-$35 you're going to eventually hammer the US oil industry and its jobs, as the hedges fall away. That will hit the US economy negatively at least as much as the low oil prices benefit consumers.
Russia is playing a bad game of chicken with Saudi Arabia and US oil, claiming they can endure ~$30 oil for a decade. It's false of course. Their personal incomes have been falling for six or seven years in a row. $30 oil will contract the Russian economy at worst, and stagnate it at best, so it would be ten more years of declining living standards in Russia (the last thing Putin wants to see, so it's a false bravado on his part, as typical).
Saudi Arabia and Iraq will be crushed fiscally by low oil prices. Saudi needs $83 oil to balance their budget. Canada will take a modest hit as well.
China is the prime beneficiary as a massive importer with modest production, they're in the position the US was in previously.
I think you're the only person in this thread presenting arguments based on facts. I would just like to say that I really appreciate that, especially when everyone else is running around like chickens with their heads cut off like the sky is falling.
"Increased oil supply -> Lower oil prices -> Everything gets cheaper to make -> Increased economic activity"
There would be increased economic activity if businesses don't close left and right because of a combination of decreased demand and supply as both consumers and workers self-isolate and live in quarantine, and the knock-on effects of China's reduced manufacturing capability (soon to be followed by reduced manufacturing capability of much of the rest of the world).
This stock market crash is just the tip of the iceberg.
The tops of political, administrative, business, and military hierarchies tend to be overwhelmingly old, and most susceptible to succumbing to this outbreak. As many of them die, as the bodies they govern are plunged in to chaos and societies around the world go in to crisis mode, the markets will respond even more adversely than they have already, as the markets don't like uncertainty, and there's no end in sight to such uncertainty for the foreseeable future.
There is little economic upside from this pandemic. Few ways of profiting from it except by shorting nearly everything and buying gold. The bond markets and treasuries are also likely to suffer as governments default.
There's also decreased demand - look at airlines, jet fuel uses 1.7 million barrels per day normally, and COVID-19 is causing fewer people to want to get on planes.
The fraction of the price drop that can be attributed to large producers flexing market power versus the decreased demand is a tricky thing to determine.
Its easy to play connect-the-dots. Rarely is that the whole story. There are many other dot-to-dot paths that result in very different effects. The sum total of all the chains is what makes the economy so hard to predict.
Most of those who work in drilling will be laid off in the next six months. Been there done that. But it doesn't change the fact that it will be over all beneficial to the economy.
I do believe you are correct that the money the average consumer will have in their pocket will be good. But can’t help but think there are other economic implications in this huge oil drop. The drop was not initially put in place by breakdowns in opec talks. But COVID-19. So what I am getting at is a drop in manufacturing, consumer spending, and travel. I’m just scratching the surface but I hope you understand what I’m getting at.
Maybe it's because the US is now a massive oil producer, but there are a lot of oil companies in a lot of debt, so depressed oil prices will force them to go into bankruptcy. Next step will be US government propping up the industry somehow, IMO, either with a bailout or by buying oil at above market prices and increasing strategic reserves.
Good for short/medium term economy, terrible for the environment though unfortunately. So probably bad for the long term economy when carbon/environmental risks take effect.
You are not fully correct with "Oil prices going down is a good thing for the economy."
This is true only as long as oil prices are high enough for producers to keep producing.
Heard of shale-oil margins?
Do you have a reference for the claims about the repo market? I see so much FUD posted, and so few references to primary sources. Reader beware of grand proclamations and doomsday predictions, especially from new accounts, especially when they don't provide reputable sources.
You are correct. Equities have been propped up by free money for too long. I thought we would have to wait until the election to trigger this correction but better sooner than later. However, the Fed needs to raise rates and we need fiscal policy to fix this, not monetary. There is still too much money out there with nowhere to go. A ton of that money is going to come right back in and run it back up some. At least they are buying the dip even if earnings will crater.
Your everyday investor probably shouldn't be shorting in ultra high volatility periods like this. Markets spike for one day in the course of leading to a recession leads to a margin call and you can't post collateral, then you're done. Doesn't matter if it goes to zero a week after.
I started getting defensive right after the election of 2016.
Modern history does not have an example of you know which party going on a tax cutting, over-spending, self-dealing, deregulation binge that did not end in a catastrophe. Add to that complete lack of competency when it comes to dealing with a not self-made crisis (a matter of time), and only a chump would think the good times would keep on rolling.
The market so far has absorbed the dumb trade war by pure optimism, and we only narrowly avoided a war with Iran. It all has been blind luck so far, and it just ran out.
Buying puts on SPY. Realized gains (so far) are $30k from an initial "investment" of $1k about three weeks ago. Currently have about $10k riding with expirations in April and May. If the market shoots up because the Fed announces stimulus, I'll buy more. It's pretty clear that the virus is going to decimate the world economy for many months, maybe years. And watching the complete mismanagement by the US only increases my confidence.
I also moved $600k to cash, about 80% of it a month ago. Never done that in 20 years of investing, and probably wouldn't advise it to anyone now either. But when China locked down the whole country, I knew it was time to stand on the sidelines. Worst case, I'd lose out on a few percentage points of growth and jump back in once the threat had passed. I also still have significant indirect exposure through unvested employer stock.
To be clear, this is all fairly risky and ill-advised.
I kind of think that the Fed will not let this go too far in the middle of an election year, particularly given Trump. But yeah, the market was clearly overextended, and stock price growth was accelerating.
The multi-trillion dollar question, though, is whether the Fed actually has much ability to help much with the current situation. Flooding the economy with cash probably isn't going to make people want to book a cruise anytime soon.
It's really not up to the Fed; they had an emergency rate cut last week and it was just a minor blip on the overall downward slide. This is a demand-driven crisis, not a liquidity crisis or credit crunch like 2008. Monetary policy isn't going to get you very far this time.
Good. Because I don't buy for a moment that without COVID-19 the situation would be what it is now. Hindsight is 2020 and predictions of doom and stock market collapse is a dime a dozen.
Well... that might not be true. Were in a weird spot right now where banks handed out billions in loans to oil companies. And now it looks like a lot of these companies are going to be insolvent well before they can even start drilling. So were talking about big banks being hit hard with billions in loans not being paid.
Agreed, let's not discount COVID-19. You're going to get a steady drip of ugly news for months. There is reality to the COVID-19 news too. I'm expecting heavy hits to airlines, cruises, theme parks, sporting events, etc... Profits will decline.
If you're not needing the money soon, you'll probably be fine with riding it out like you may have with the great recession. I'm pained by the stories of boomers and others who sold low during the great recession and didn't catch any of the gains when things started turning back around. This too shall pass.
The markets may have "priced in" the impact of COVID-19 based on a couple of scenarios. But they may also have priced in other factors, such as the plateauing impact of US corp tax cuts, share buybacks and cheap capital.
It's likely however that those scenarios didn't attach a high weight to the probability like 20 million Italians living in a state of quarantine, or that 8,000 plus patients in China would die and industrial production levels would plummet.
They didn't (and still don't) know the true financial impact of the virus (even epidemiologists don't know what it's going to take to get it under control), so the true effect of the virus wasn't priced into the market, plus now many investors are trading on fear.
There were lay investors that reported betting on a covid related drop and profiting significantly by buying options (eg Wei Dai on LessWrong, will find direct link when I get to desktop).
[Usual caveat about reading too much into plays like this.]
Edit: Here's the thread, and sincere apologies for the flaketastic LW interface now, they don't even have a parent button and it took several seconds for the thread to render after the page loaded:
I also knew about it a month ago, I was more optimistic then. If no new information ever comes into play or if views and outlooks never changes then markets would be static. People knew about viruses for decades now also ... does not mean all possible consequences of viruses are already priced in.
> Is what we are seeing now primarily a consequence of of COVID-19 or not?
"is the 2008 crisis primarily a consequence of mortgages or not?"
In the grand scheme of things, no, it's a consequence of a bubbled economy that has been goosed with tax cuts, extremely low interest rates, and deregulation for too long and is overdue for a correction. The proximate cause is Covid but it just was the spark that lit the fire, there was lots of fuel building up.
This is why you don't cut tax rates and keep interest rates super low when the economy is already roaring. Now we're out of options for dealing with a real financial crisis.
Trump of course understands none of this since he's a narcissistic con man who just understands "tax cuts = economy more better!". Insofar as he can be said to understand anything - he's not a man that can be described as intellectually curious.
Well, while he doesn't seem to have much understanding of economics or how to run a government properly, let's give credit where credit is due: he certainly seemed to understand how to get people to vote for him a lot better than his political competitors did.
Are you seriously bringing that up again? He won the election. The number of votes is irrelevant. Maybe that's why he won: he actually understands this simple fact about how the Constitution works, and people like you either don't, or simply refuse to.
> he certainly seemed to understand how to get people to vote for him a lot better than his political competitors did
This is false. The fact that he won the election is completely irrelevant to this point. The election isn't won by the candidate who understands how to get people to vote for him. If it was, he'd have lost.
Obviously, you are completely unwilling to accept the fact that Trump won the election, and somehow you're creating utterly insane logic to continue the fantasy in your head.
So you're saying that getting less votes in an election makes one better at getting the most votes? Fascinating the logic, or rather lack thereof, of Trump supporters. Then instead of admitting you are wrong, you double down on your illogical premise and accuse those who point it out of being illogical. I can see why you like the man so much. Illogical, nonsensical ideas must attract each other especially when coupled with fear of criticism and anger towards those that disagree with said ideas.
>So you're saying that getting less votes in an election makes one better at getting the most votes? Fascinating the logic, or rather lack thereof, of Trump supporters.
Wow, this is an incredibly stupid post. I'm not a Trump supporter; that should have been obvious from my posts. And you think that getting more votes equals winning an election, in a place where the electoral system makes this not the case? And then you fire back at me with this idiotic post? You're beyond help. It's no wonder Trump won with people like you on the other side.
no no,,, COVID-19 is not the trigger its just one of the steps leading to the trigger...you had to have the fed manipulation of money to account for the 2008 losses on mortgages combined with the firm's stock performance via profits etc.
I'll add certain "tech companies" making no money doubling and tripling in a matter of months. The blow-off top was obvious, Covid19 was a mere catalyst.
Speculators have been trained over the course of 10+ years to buy the dip. The Fed has your back.
What we're seeing is the beginning of the end of that resolve.
The last time this happened was during the GFC. It's not normal, and it's probably not a one-time event, either.