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How This Ends

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Re: How This Ends

#391

Post by abirch »

atq2119 wrote: post #289
abirch wrote: post #251

Earlier quoted context omitted.

The Fed can buy mortgage backed securities like they have done since they've started quantitative easing. The Fed has purchased Apple bonds. This is in addition to US Treasuries. My original comment was a mechanics related comment in which liquidity (credit + cash) pushes up asset prices and not rates (although there's high correlation especially in the past 20 years in the US). This is based on my understanding of R…

The volume of mortgage backed securities is based on the volume of loans that people take. At higher interest rates, people take out fewer and smaller loans. The Fed buying up more MBS would put downwards pressure on interest rates, which would be diametrically opposed to their goal (in your scenario) of maintaining high interest rates. There is a correlation between liquidity and rates, but it's an inverse correlati…

Our disagreement appears to be this. You believe that zero interest rates lead to bubbles. I believe that excess liquidity is responsible for bubbles. They frequently both happen together because that's how the Fed tries to stimulate growth and spending.

My example of the Fed with high interest rates and a lot of QE was a way to see where our disagreement would appear. It's similar to the great recession where there were interest rates lower than they are now, but because the private sector wasn't extending credit (less Cash + Credit); there didn't appear to be any asset bubbles.

The volume of mortgage backed securities is based on who can and want to get loans. During the great recession it was hard to qualify for a mortgage even though many people wanted to do so.

Re: How This Ends

#392

Post by plonk »

lvl102 wrote: post #366
fny wrote: post #24

I'm going to explain what has happened so far. What happens next entirely depends on how inflation continues and the feds reaction. 1. We had zero percent interest rates. This causes the value of assets with cash flows out into the future (think speculative tech, Tesla) to accelerate. 2. We had massive herding in megacap tech. These valuations are high in part because for a decade you would not have beat the index wi…

Speaking as someone who experienced both the dot-com crash and the financial crisis from ground zero, this feels nothing like them. I did not see widespread risk taking across the board. A lot of Gen Xers, such as myself, almost instinctively recognized current bubbles and either steered away from them or played them as such. People are also a lot more financially savvy. Even if people made leveraged bets, they lever…

Cryptocurrencies have huge market caps though. If they crash (like the Luna disaster last week), that has to have some kind of impact, right?

Re: How This Ends

#393

Post by ineedasername »

kache_ wrote: post #325
jeffbee wrote: post #136

Earlier quoted context omitted.

How could there be a whole generation of CEOs who never saw a recession? Are there 13-year-old CEOs?

during the 2008 recession I was too busy playing Runescape

What was wrong with you? Weren't you aware that a D&D MMO was available? Shame on you. It's free now, so stop what you're doing, roll an Artificer & grab a rune arm, take some initiative and go find yourself a Beholder to kill.

If you want to be traditional a then a fighter, thief or wizard is fine too, but roll something.

Re: How This Ends

#394

Post by deepsun »

vintagedave wrote: post #171
fny wrote: post #24

I'm going to explain what has happened so far. What happens next entirely depends on how inflation continues and the feds reaction. 1. We had zero percent interest rates. This causes the value of assets with cash flows out into the future (think speculative tech, Tesla) to accelerate. 2. We had massive herding in megacap tech. These valuations are high in part because for a decade you would not have beat the index wi…

So for non-finance-experts, what should we be doing with our money? Investing in what? Keeping in the bank? It sounds from your comment like there is _nothing_ that won't be devalued, even gold. Is real estate worthwhile? (Note: I am in the EU not US.)

I've lived through hyper-inflation -- spend your money on anything or take loans/mortgage.

Re: How This Ends

#395

Post by mister_tee »

lamontcg wrote: post #334
fny wrote: post #24

I'm going to explain what has happened so far. What happens next entirely depends on how inflation continues and the feds reaction. 1. We had zero percent interest rates. This causes the value of assets with cash flows out into the future (think speculative tech, Tesla) to accelerate. 2. We had massive herding in megacap tech. These valuations are high in part because for a decade you would not have beat the index wi…

This has all happened before. In 1998 Greenspan cut rates due to the Asian financial crisis and worries over Y2K which blew up the dot com bubble. Then they slashed rates down to nearly ZIRP and held them low which blew up the housing and finance bubbles that deflated in 2008. None of this started in 2008. What is different this time is the wage inflation and the unionization drives that we're seeing. The Fed is like…

Not a direct response to the parent post but it had the most keywords in common with my question:

>The Fed is likely to hike rates much more aggressively [...]

I agree, and they're about to start letting the balance sheet run off too, though at half the rate they accumulated.

My question for the wonks here: will it be difficult or expensive to hold rates above, even say, 5% for very long if needed? US national debt is over $30T. Assuming inflation persists and rates are raised to 5%, the approximate steady-state cost of servicing the debt is $1.5T/year, more than pre-pandemic US discretionary spending, and more than 33% of federal revenues. I asked a friend about this and they said not to worry, it takes a while for the national debt to roll over, but looking this up it seems most US debt is in instruments with a horizon of less than a few years.

also, I imagine Debt:GDP is not the most appropriate stat here but in the 1970s it was 30-35% and now we're over 120%. Some other countries are over 200%. And in a recession, by definition the denominator gets bigger. Or maybe the broader question is at what point does national debt matter?

I sort of feel the Fed is playing everyone's expectations, talking to cool things off and even name-dropping Volcker while hoping to keep interest rates more at 4% than his 20%. I'm not crying conspiracy or complaining -- if it works they could get their soft (now "soft-ish") landing.

Re: How This Ends

#396

Post by lvl102 »

plonk wrote: post #392
lvl102 wrote: post #366

Earlier quoted context omitted.

Speaking as someone who experienced both the dot-com crash and the financial crisis from ground zero, this feels nothing like them. I did not see widespread risk taking across the board. A lot of Gen Xers, such as myself, almost instinctively recognized current bubbles and either steered away from them or played them as such. People are also a lot more financially savvy. Even if people made leveraged bets, they lever…

Cryptocurrencies have huge market caps though. If they crash (like the Luna disaster last week), that has to have some kind of impact, right?

I really think it’s insulated especially compared to the housing market collapse. This is because most banks will not take your crypto as 1:1 collateral whereas housing was perceived to be nearly risk-free. A big difference. I am not saying we are not in an asset bubble. But it would be a mistake to draw simplistic comparisons.

Re: How This Ends

#397

Post by atq2119 »

abirch wrote: post #391
atq2119 wrote: post #289

Earlier quoted context omitted.

The volume of mortgage backed securities is based on the volume of loans that people take. At higher interest rates, people take out fewer and smaller loans. The Fed buying up more MBS would put downwards pressure on interest rates, which would be diametrically opposed to their goal (in your scenario) of maintaining high interest rates. There is a correlation between liquidity and rates, but it's an inverse correlati…

Our disagreement appears to be this. You believe that zero interest rates lead to bubbles. I believe that excess liquidity is responsible for bubbles. They frequently both happen together because that's how the Fed tries to stimulate growth and spending. My example of the Fed with high interest rates and a lot of QE was a way to see where our disagreement would appear. It's similar to the great recession where there…

I appreciate you trying to get to a shared understanding. I don't have too much time, so just the short version:

> The volume of mortgage backed securities is based on who can and want to get loans. During the great recession it was hard to qualify for a mortgage even though many people wanted to do so.

"Want" is a difficult word. I want a private island, but I can't afford one. So my contribution to effective demand for private islands is zero. In the same sense, I don't think the effective demand for mortgages was particularly high during the great recession. But anyway, we agree on the observation that low interest rates and low mortgage volumes can go hand-in-hand.

One point where I think we differ is the direction of causalities in central bank behavior. My point is that central bank QE causes low interest rates (but low interest rates don't necessarily cause QE). The upshot is that while "low interest rate policy, no QE policy" is possible, "high interest rate policy + QE policy" is not possible. The two policies would be in logical conflict with each other.

Re: How This Ends

#398

Post by jbay808 »

shrimpx wrote: post #372
jbay808 wrote: post #227

Earlier quoted context omitted.

Zero percent interest rates cause a bubble because valuations have to increase to the point where their forward-looking returns are a risk premium above bonds. When rates are zero for a long time, that means valuations go very very high. When rates come back up, valuations drop. Speculation can add further overshoot in both directions.

> When rates are zero for a long time, that means valuations go very very high. When rates come back up, valuations drop. And yet people keep saying that nobody can time the market…

I'm not saying that you can time the market. It's a lot more nuanced than that.

* You don't know the long term path of interest rates. Even the Fed Chair doesn't, because they don't know what will happen with inflation. (They do know the short term timing though, which is why they're not supposed to trade.)

* Even if you're expecting a correction, you don't know when the correction will occur or by how much. It could stay aloft like Wile-E-Coyote after the fundamentals drop out, or crash early in anticipation of the fundamentals changing.

* And when it does fall, you don't know where it will land, nor how many times it will bounce along the way down.

Re: How This Ends

#399

Post by jbay808 »

abirch wrote: post #385
jbay808 wrote: post #304

Earlier quoted context omitted.

> Are their countries with negative nominal rates without asset bubbles? That's very hard to know, but to be clear it's negative real rates that drive the bubbles. There's much more incentive to speculate when cash is a hot potato. For example Japan is much less bubbly these days than in the 1980s, even though nominal interest rates are lower now. > Have their been high interest rate countries with asset bubbles? E.g…

> That's very hard to know, but to be clear it's negative real rates that drive the bubbles. Real rates are usually negative. Real interest rates defined as the Nominal Rate - Inflation. Japan has a negative nominal rate right now.

> Real rates are usually negative.

Let me put that a bit more precisely:

https://www.longtermtrends.net/real-interest-rate/

Re: How This Ends

#400

Post by rsanek »

88913527 wrote: post #389
rsanek wrote: post #349

Earlier quoted context omitted.

>there's an entire generation of folks; many running companies, that have never seen a real bear market If anything, this is a problem that is much less bad than it was in previous down markets. "7% of CEOs were younger than 50 years old at the end of 2018, compared with about 16% at the end of 2009." [0] "Data on S&P 500 companies measured over the last two decades by executive recruiter Spencer Stuart shows a small…

S&P 500 CEO's. That's a very select subset of CEOs. Many large companies aren't public today and this leaves out CEOs of small-to-mid sized businesses.

The number of private companies that are comparable to the size of the ones in the S&P 500 is quite low. [0] If we're talking about macro trends, public co's are much more important than private ones.

Do you have a source for small-to-mid sized businesses having a decreasing average age of CEOs?

[0] Compare the implied ranking based on revenue for https://en.wikipedia.org/wiki/List_of_largest_private_non-go... vs. https://companiesmarketcap.com/usa/largest-american-companie.... There are only 14 private companies with more revenue than Visa, the 100th-largest public co by revenue. Cargill, the largest US private co, wouldn't even break the top 20 when compared to publics.

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