It's fascinating to trace the genesis of present crash to Fed's policies post 2008 crisis. The interest rates were kept artificially low to prevent another Great Depression. 2010s saw an unprecedented rally of tech/growth stocks, fuelled by cheap capital. Growth at all cost was the mantra, hoping companies will turn profitable at some point á la Amazon. Uber's CEO hit the nail on the head when he wrote "The average employee at Uber is barely over 30, which means you've spent your career in a long and unprecedented bull run".
There were signs of rate hike in 2019 but COVID forced Fed to create trillions of $$. Which only added fuel to the fire; equities, housing, crypto saw unbelievable growth.
However the signs of inflation were clear in early-mid 2021 they were hoping it to be transitory. But when the inflation data came in late 2021 it turned out to be multi-decade high leaving Fed with no choice but to raise interest rates for the first time in more than a decade.
Which brings us back to growth companies. As Uber's CEO candidly stated "Channeling Jerry Maguire, we need to show them the money". 2020s will be all about cash flow and efficiency.
On the other hand expect to see cool innovations as it requires genuine scarcity to look for out of the box solutions. While Amazon's stock soared in 2010s their core tech was being built in 2000s while they were relentlessly driving for efficiency.
It's fascinating to trace the genesis of present crash to Fed's policies post 2008 crisis. The interest rates were kept artificially low to prevent another Great Depression.
I think 2008 and 2001 basically saw "cut some fat and reflate the bubble" as the standard approach. I expect the same approach this time though I can't predict if it will work. This is basically the method of Greenspan and Bernanke, explicitly said that the Great Depression didn't have to happen, that juggling interest rates could have solved it.
The thing about these situation is that by just killing weaker players, the Fed allows the basic imbalances to remain and increase (income inequality, monopoly positions, speculative enterprises, etc). The Great Depression was the single biggest equalizer of income, I think in US history and certainly in the 20th and 21st centuries. Not that I'd be in favor of such a thing.
"The average employee at Uber is barely over 30, which means you've spent your career in a long and unprecedented bull run" - quite an American experience this. Many across Europe and the rest of the world were in a recession until 2014-2015. It was difficult to find a job out of college even with masters degrees in comp sci from tier 1-2 unis.
Inflation metrics show that the economy post 2008 was in fact under stimulated, which is why the recovery from the financial crisis was so slow. The recent COVID-related stimuli are what went too far.
I don’t know if I disagree but we were also in a really bad position if we didn’t do it. The stimulus did a lot of good, I saw the first hand benefits of what it did for people who really needed it.
False dichotomy. It should have been done, but to a much lesser magnitude. That is plainly obvious to any rational minded person.
The Fed also should have considered velocity in employment gains. They basically waited until labor market was already overheated to do anything... which means many are likely to lose their jobs in the fight with inflation now.
Unfortunately the basic law of economics and real productivity vs nominal currency units has continued to exist, despite it being 2022.
There were 4 major bills passed, as well as many executive actions. This was not a one time piece of legislation that caused inflation.
The latest major bill, $2T dollars worth, was passed 1 full year after Covid lockdowns started... at a time where markets were reaching bubble levels, housing was appreciating at a double digit rate, unemployment rate was already dropping .5-1% per month.
Student loans are still in forbearance even today, despite being proven to be largely regressive and contributing to inflation (billions a month in spending power). Those who didn't go to college are footing the bill for this. It seems you're not a very rational minded individual... or simply misinformed of the timeline.
Many people don't seem to understand that a labor market this tight is a death knell to the downtrodden. They will be laid off when unemployment spikes after the Fed achieves their inflation fighting goals. Defeating the entire purpose of the stimulus and effectively making that money wasted, while we're left with high inflation and worse wealth inequality than ever before.
The feel good policy of spending excessively and avoiding inflation fighting has proven to fail many times in history. The 1970's in the US being the most relevant.
Also worth noting, that Larry Summers, the treasury secretary under Clinton argued exactly that the ARP would be inflationary. There were many voices calling this out that were ignored
And there were a ton of voices saying the exact opposite. That we must do everything we can to avoid another 2008.
There will always be the voices on both sides, the problem is that it's not always easy to know who to listen to at the time.
> The feel good policy of spending excessively and avoiding inflation fighting has proven to fail many times in history
There are many examples of the opposite.
The question isn't whether we spend or not, it's how much. That's the difficult part to get, especially in a democracy (doubly so in the US political system where you try to get as much done in the half a year that you can actually govern).
It's basic math. Society lost x in purchasing power through lost wages via unemployment, and you inject 10x in stimulus, what do you think is going to happen?
This was Larry Summers' argument, backed with real numbers. Nobody passing these bills ever considered whether it was too much. You have the two top economists for both Clinton and Obama saying it was too much and being outspoken about the issues with how the bill was constructed. I don't know where current politicians lost all economic sense along the way, but it was the zeitgeist of the moment to spend as recklessly as possible
All they had to do was replace lost income for unemployed, and leave pretty much everything else untouched and things would have been fine. No need for debt forbearance, because you've supported income for those who lost their jobs. But needs to be structured such that incentive to return to work.
Now most of the impact of the stimulus will be destroyed by inflation
You've made some really great points in all your comments thus far that I 100% agree with, especially with current politicians losing all economic sense. Even the once budget stubborn Republicans signed away. I have no citations, but my theory about this is that the American society as a whole is foaming at the mouth for instant gratification. It feels as though we're thinking of the weekend instead of years ahead... That, combined with a high percentage of economically uneducated politicians that seem more like social media influencers than actual lawmakers = not well thought out economic decisions.
The market is having issues now not because of inflation being kept low but because people panic when everything isn't going smoothly. The supply chain and WW3 have investors scared, and now they're panicking and leaving the markets and taking their profits with them. Others panick and get what cash they can. Some will buy low and it'll level off soon probably. I think this is more of a pull back than a recession. Generally the economy is in good shape it's just the speculators are bailing from the market.
By effectively guaranteeing the market, the Fed made stock and bond markets more "money like" and so it didn't even have to overtly print money to create a money -printing-like effect ("the wealth effect") even though they also did print money to prove they were serious. So effectively we've had inflation for a while but most of it was inflation of asset values.
If the Fed talks the market down and people sell, it will have destroyed money without other harsh measures. That doesn't mean there won't be more pain other ways also.
It's almost entirely because of inflation. Persistent inflation raises the discount rate (10y treasury yield), and devalues all other assets.
Why would you buy a 100x PE company (1% yield) when you can get 3% guaranteed today? Even growing at double digit rates, how many years just to match that return? Except many tech companies were 100x PS not even 100x PE. DDOG and NET are two examples.
If the 10y runs to even 3.5-4%, and stays there, we're likely to see a 40-50% haircut in markets.
2010s saw an unprecedented rally of tech/growth stocks, fueled by cheap capital.
Correlation does not mean causation, as it's commonly said. Interest rates were high in the 80s and 90s yet tech stocks boomed. Tech stocks did so well because they make so much money. Facebook earned $40 billion in profits for 2021, 3x Walmart. Google makes even more. Also, market dominance and moat factors working to big tech's favor.
You implied the tech stock boom wasn't due to a low discount rate, yet the valuations today are far higher than tech stocks in the 80s, even at comparable growth rates.
Which makes it plainly obvious that a lot of the valuation gains are, in fact, due to the discount rate, and not organic growth.
3x of Apple's market cap growth since 2018 is a change in valuation multiple, and nothing to do with actual growth of its revenue/profits, for example. Is it a boom if a majority of your gains are due to changing the valuation peg and leaving the rest the same? Sounds more like a bubble to me
Though my point is more directed towards the 100x PS companies, which are a far more egregious example of overvaluation
There were signs of rate hike in 2019 but COVID forced Fed to create trillions of $$. Which only added fuel to the fire; equities, housing, crypto saw unbelievable growth.
However the signs of inflation were clear in early-mid 2021 they were hoping it to be transitory. But when the inflation data came in late 2021 it turned out to be multi-decade high leaving Fed with no choice but to raise interest rates for the first time in more than a decade.
Which brings us back to growth companies. As Uber's CEO candidly stated "Channeling Jerry Maguire, we need to show them the money". 2020s will be all about cash flow and efficiency.
On the other hand expect to see cool innovations as it requires genuine scarcity to look for out of the box solutions. While Amazon's stock soared in 2010s their core tech was being built in 2000s while they were relentlessly driving for efficiency.