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Interpreting a market plunge

economist.com

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Re: Interpreting a market plunge

#101

Post by patricius »

fwdpropaganda wrote: post #12
thisisit wrote: post #8

The bigger concern is on the interest rate hikes. Low rates were expected to help kickstart the economy and prices and wages to increase. What has happened instead is that all the cheap money has caused asset inflation. US companies now have record amount of debt. Too fast increase in interest rates will cause their debt obligations to balloon and lower profitability. Though this will take couple of quarters to fully…

You see, the problem that I have with these kind of "explanations", is that those facts have been around for a long time. Why is it that precisely today (well, yesterday) was the day that everyone decided "right guys, we're selling equities"? The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it.

Perhaps because Jerome Powell took office February 5th as new Fed chairman

Re: Interpreting a market plunge

#102

Post by mannykannot »

fro0116 wrote: post #80
fwdpropaganda wrote: post #12

Earlier quoted context omitted.

You see, the problem that I have with these kind of "explanations", is that those facts have been around for a long time. Why is it that precisely today (well, yesterday) was the day that everyone decided "right guys, we're selling equities"? The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it.

Indeed. All I see from this and similar threads here and articles all over the internet on topics like these is: "blah blah hindsight bias blah blah rationalization blah blah" At the end of the day, the only useful theories for the stock market are the ones that have predictive power. I'd be interested in reading articles by people who are consistently willing to put their money where their mouths are and consistentl…

All the theories are probabilistic, and it could not be any other way, because if there was a deterministic theory, people would react in ways that would invalidate the data and assumptions on which that theory's predictions are based.

Re: Interpreting a market plunge

#103

Post by gbacon »

Economics4u wrote: post #90
jnsaff2 wrote: post #78

"But because everyone worries and saves a little more, and invests and spends a little less, the economy gets stuck in a downturn. Recessions are an outbreak of collective madness." Or maybe "Recessions are an outbreak of collective sanity."

Perhaps you can explain how everyone can save in aggregate? Where do people get this idea that "saving" is somehow virtuous?

The notion that savers hoard their money in mattresses is a caricature, not serious economics.

Re: Interpreting a market plunge

#104

Post by ChicagoBoy11 »

Apocryphon wrote: post #42

Here's a question - people often refer to the 2008 recession as a once in a lifetime event. On what basis do they make that statement- because mortgages can't possibly pop as massively twice? What's to prevent another industry (in recent years often rumored to be student loans) from doing the same? Who's to say not another sector is as rotten as real estate was?

Mostly on the basis that it is the only way they can justify to clients/viewers/etc to "not have seen it." One would very reasonably conclude that the failure of banks/regulators/analysts to see any of this would likely be a good sign that they prob. don't really know what they are talking about, and predicting the market is actually kinda impossible, and consequently the value they add to their clients is minimal/none. So, in order to not give that impression, it is much easier to say that your models are in fact correct, but it just so happens that the financial crises was a "once in a lifetime" event.

Re: Interpreting a market plunge

#105

Post by taneq »

Economics4u wrote: post #90
jnsaff2 wrote: post #78

"But because everyone worries and saves a little more, and invests and spends a little less, the economy gets stuck in a downturn. Recessions are an outbreak of collective madness." Or maybe "Recessions are an outbreak of collective sanity."

Perhaps you can explain how everyone can save in aggregate? Where do people get this idea that "saving" is somehow virtuous?

> Where do people get this idea that "saving" is somehow virtuous?

Savings are a form of safety net, since individuals don't have access to unlimited funds or unlimited credit. The higher the perceived risk of financial trouble (loss of job, a surge in cost of living, etc.) the more savings you need in order to mitigate that risk. Do you really need this explained to you?

Re: Interpreting a market plunge

#106

Post by rmrm »

fwdpropaganda wrote: post #97
rmrm wrote: post #92

Earlier quoted context omitted.

Taking that line of thought further, that means if bonds and stocks are both down, then cash is a good place to be...when inflation is up? Investing is hard.

That's right, because cash is money now, bonds is money later. If inflation is high I'd rather have $100 now than $100 later. Of course, real decisions are made on figures. The actual way of making this decision would be to compare the bond yield with the expected inflation. If expected inflation is higher than the bonds yields I'm going to sell my bonds for cash and so will a lot of people, so the bonds price will d…

Projecting bonds being down/increasing yields isnt surprising in any way in inflationary environment. The harder thing to get around is stocks, which should outperform cash in an inflationary environment. To me it just shows that there are many dependencies, and it is not always simple to project an outcome or response for a given class to an event.

Re: Interpreting a market plunge

#107

Post by maaaats »

TekMol wrote: post #69
maaaats wrote: post #64

Earlier quoted context omitted.

Up. If you hope for a crash so that you can invest your other money in a dip, you are foolish to try to time the market and would probably be better of to invest it earlier and just spend more time in the market.

Would you argue the same way if I was holding 99.9% of my assets in money and 0.1% in shares? Would you still say I should hope for the stock market to go up? Or is it related to the percentages? If so, where is the threshold?

My answer was under the assumption that you were interested in changing your allocation.

Re: Interpreting a market plunge

#108

Post by gerbilly »

Apocryphon wrote: post #42

Here's a question - people often refer to the 2008 recession as a once in a lifetime event. On what basis do they make that statement- because mortgages can't possibly pop as massively twice? What's to prevent another industry (in recent years often rumored to be student loans) from doing the same? Who's to say not another sector is as rotten as real estate was?

>Who's to say not another sector is as rotten as real estate was?

Sometimes I suspect it's all rotten.

Re: Interpreting a market plunge

#109

Post by srgseg »

Economics4u wrote: post #90
jnsaff2 wrote: post #78

"But because everyone worries and saves a little more, and invests and spends a little less, the economy gets stuck in a downturn. Recessions are an outbreak of collective madness." Or maybe "Recessions are an outbreak of collective sanity."

Perhaps you can explain how everyone can save in aggregate? Where do people get this idea that "saving" is somehow virtuous?

The situation is confusing, because of the difference between physical and financial assets. It's possible for everyone to simultaneously save physical assets, but mathematically impossible for everyone to simultaneously save financial assets.

Imagine two people alone on a desert island. Both can save up firewood (a physical asset) during their entire working lives. They can then both retire and enjoy their savings (firewood) during their retirement. So it is possible for everyone to simultaneously save physical assets.

However, financial assets are reciprocal. One person's financial asset is another person's liability. That liability can be thought of as an 'obligation to perform'. In the desert island example, they both cannot save up obligations from each other and then retire, because there would be no one working to perform the obligations.

If everyone has 'saved' as many obligations owed to them as they've accumulated obligations they owe to others, then that's the equivalent of no one having saved at all.

So it's mathematically impossible for everyone to accumulate savings in the form of financial assets. Either everyone has net zero savings, or some people have financial savings and other people have financial debt.

Therefore the healthy approach is for people to work while they can to accumulate financial obligations owed to them by the next generation, so that when they retire there is someone around to fulfil those obligations.

Therefore everyone saving prior to retirement is certainly virtuous, because it means you've done work for others so that when you retire, they're not just forced to provide for you for free. It would have been a fair deal where you did something for others and now they're doing something for you.

So just because not everyone can save, that doesn't mean it's not virtuous to save during your working life.

Re: Interpreting a market plunge

#110

Post by eurticket »

Economics4u wrote: post #90
jnsaff2 wrote: post #78

"But because everyone worries and saves a little more, and invests and spends a little less, the economy gets stuck in a downturn. Recessions are an outbreak of collective madness." Or maybe "Recessions are an outbreak of collective sanity."

Perhaps you can explain how everyone can save in aggregate? Where do people get this idea that "saving" is somehow virtuous?

Well perhaps if you associate planning ahead for the well being of people that depend on you virtuous, then...
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