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Interpreting a market plunge

economist.com

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Re: Interpreting a market plunge

#11

Post by EGreg »

oculusthrift wrote: post #9
EGreg wrote: post #4

Guys, here is my analysis (which, after reading this article, may shed more light on the matters). We have had an asset bubble due to low interest rates. Because people don't want to keep money in banks. So we have had a bubble in crypto and stocks etc. As interest rates rise - and they will, because the government will need to reload for the next QA or whatever - asset markets will keep taking hits. The question is…

because inflation will start and we need to fight it with high interest rates

Why do we need to fight inflation? Prices rise because people can afford to buy things at higher prices. So what's the problem?

Re: Interpreting a market plunge

#12

Post by fwdpropaganda »

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.

Re: Interpreting a market plunge

#13

Post by krrrh »

EGreg wrote: post #10
aceinaday wrote: post #5

Earlier quoted context omitted.

I think you answered your question in the sentence above. If the fed keeps interest rates low, and we still hit another recession, they won't have the ability to react by lowering rates again.

But if reacting and lowering them will ease the recession, why not just keep them low in the first place? That way the recession doesn't materialize. Maybe raising interest rates is what causes the recession in the first place!

Because they tried that and it ended up in inflation and slow growth. The Phillips curve broke.

Re: Interpreting a market plunge

#14

Post by paganel »

EGreg wrote: post #11
oculusthrift wrote: post #9

Earlier quoted context omitted.

because inflation will start and we need to fight it with high interest rates

Why do we need to fight inflation? Prices rise because people can afford to buy things at higher prices. So what's the problem?

Inflation is a very regressive economic phenomenon, so to speak. When it rises it tends to affect poorer people the hardest because they don’t have the negociating power towards their employers to keep their salaries’ increases above the inflation rate and second, and equally important, a larger portion of their incomes goes towards base purchases (food, gas for their cars or public transport passes etc), so if the prices of those items increase more than said poor people can afford that means that those people would have to give up on some of those said base products (only drive if strictly necessary, give up on some food altogether etc). That is bad.

Re: Interpreting a market plunge

#15

Post by fwdpropaganda »

EGreg wrote: post #10
aceinaday wrote: post #5

Earlier quoted context omitted.

I think you answered your question in the sentence above. If the fed keeps interest rates low, and we still hit another recession, they won't have the ability to react by lowering rates again.

But if reacting and lowering them will ease the recession, why not just keep them low in the first place? That way the recession doesn't materialize. Maybe raising interest rates is what causes the recession in the first place!

Raising interest rates is what causes a recession. But if you don't lower two bad things eventually happen: large inflation and associated of purchasing power, and debt keeps on ballooning. Regarding the second point, you always have to deleverage sooner or later. The current view is that sooner and smoothly is better than later and abruptly.

Re: Interpreting a market plunge

#16

Post by guiriduro »

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.

I think context is important - think power laws, faultline stress in plate tectonics, or as in this case magnitude of movement when the move actually comes.

As to what triggers the move itself - my feeling is that some kind of crowd effect occurs, i.e. once we get over some resistance level, then the movement implied in the imbalances described by the context takes over; the crowd creates its own impetus. But it is very difficult or even impossible to determine ahead of time what minor movement will become the catalyst, in much the same way that determining which butterfly flap vortex will become a hurricane.

Re: Interpreting a market plunge

#17

Post by fnordsensei »

EGreg wrote: post #11
oculusthrift wrote: post #9

Earlier quoted context omitted.

because inflation will start and we need to fight it with high interest rates

Why do we need to fight inflation? Prices rise because people can afford to buy things at higher prices. So what's the problem?

If the salary/pricing spiral goes out of control, the currency quickly becomes worthless.

If your $10 today is the value of $1 yesterday, it's very hard to store wealth in such a currency. So people move their assets to a less volatile currency.

Re: Interpreting a market plunge

#18

Post by thisisit »

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.

Why today(and Friday)? People track government data to form opinions. and first Friday of the month is very important because of a data point called Non-Farm Payroll or NFP. It is known to cause a lot of movement in the markets. Lot of brokers will tell you not trade during the announcement. You can see a lot of opinions on what was expected to happen on Monday by googling for NFP. Case in point:

https://www.cnbc.com/2018/02/02/best-wage-growth-since-2009-...

Second, it seems you think these decisions are binary - to be or not to be or rather sell or not sell. It's not that simple. Lower markets doesn't mean everyone has sold off all their shares. They just reduce probabilities of their losses by reducing exposure. Then people go back to their drawing boards and see if the hypothesis holds up. If not, they come back and market moves higher.

Re: Interpreting a market plunge

#20

Post by akhatri_aus »

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…

> Too fast increase in interest rates will cause their debt obligations to balloon and lower profitability

Its not so bad for companies that export with a weaker dollar. Also for primarily domestic businesses where higher inflation correlates to a higher top line. In fact is advantageous to be in such a situation.

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