
Economist Mohamed El-Erian warns about the risk of 'zombie markets' - hhs
https://www.cnbc.com/2020/06/16/economist-mohamed-el-erian-warns-about-the-risk-of-zombie-markets.html
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seven4
Unprecedented levels of stimulus around the whole world. If that isn't the
precursor for some airpockets/bubbles of mispricing to emerge.. I don't know
what is.

I was reading Sapiens by Yuval Harari today and he had an explanation of easy
credit that i liked. You are basically betting that enough innovation and
progress happens to underpin the money you've "borrowed" from the future -
when that doesn't happen...the bubble bursts. I wonder what sort of progress
would smooth over the extraordinary credit injection we've seen in 2020.

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smaddox
Giving money directly to businesses (especially hedge funds and banks) is a
mistake which will have terrible consequences. If we need stimulus to stave
off a debt deflation spirals we should give money directly to people. It could
be structured as a modern debt jubilee, as suggested by Steve Keen, or as UBI,
as suggested by many including Andrew Yang.

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SpicyLemonZest
The argument for giving money directly to businesses is that it makes the
recovery easier. Many argue that we needed to give _more_ money directly to
businesses, that it was wrong to let unemployment get so high when we could
just pay businesses to keep people on.

~~~
mindslight
Giving money to businesses to keep people employed is a non-starter in the US
as there is no political will to ensure those businesses don't just furlough
employees anyway and pocket the bonus - will for both writing effective
regulations and post-hoc enforcement against businesses that skirt them.

It also directly creates zombie companies if applied to industries that can't
possibly bounce back, like travel etc.

IMO the appropriate business-saving economic response would have been to
statutorily suspend all rent/mortgage/loan payments denominated in USD. That's
the bulk of most small businesses' fixed burn rate. Needing to service the
debt black hole is our primary source of inflexibility.

Of course given that we're still "debating" whether the pandemic is even real
or not, figuring out what is appropriate is purely academic. Enjoy your token
$1200 while the looters loot billions.

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jacknews
“We’re not there yet, but we’re starting to get close.”

I'd say we're clearly already there yet. How can stock markets possibly be
rallying with half the world economy closed? Of course it's due to government
zombie money. There's already a disconnect between real value creation and
valuation (even more than usual).

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SpicyLemonZest
The extent of the closures was always overstated in popular accounts - you say
"half", and people often talk as though it was even more, but the highest
concrete estimate I've seen is 30%. And in most places the closures have
ended.

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jacknews
No doubt, but even so, the markets are barely even down. How so?

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SpicyLemonZest
I think "barely even down" is a good reflection of the likely impact to the
companies that comprise market indexes. In almost all places economic activity
has mostly resumed; fears that nobody would be willing to do anything until
the virus was gone have largely been disconfirmed. There will certainly
continue to be human and economic costs of the coronavirus, but the costs seem
unlikely to affect the financial situations of most companies.

~~~
jacknews
Sorry I don't agree.

Not only have whole sectors such as travel, entertainment, retail been
directly affected (ie closed), it seems they will continue to be affected by
the changes (investments/costs) they need to make to comply with the post-
covid world.

The markets have remained levitated by govt. stimulus - the Cantillon effect.

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gpsx
All the money coming from the fed must be paid back, I believe. It seems like
this will be difficult to repay. Usually with a loan a business would invest
in capital or something similar and there is no value lost. Then there is the
hope of return so they can pay off the loan. In this case, what return will
people get on the money that comes in for the crisis? I think in this case it
is covering lost value. That swill be tough to repay. Or is the fed
anticipating losing money? Will this allow the losses to be put on the feds
balance sheet rather than some other lender?

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candiodari
No it doesn't. The fed is the only source of dollars in existence, and it only
ever loans out dollars. Therefore, if every dollar were to be paid back, how
many dollars exist ?

Zero.

Since that is clearly not what people want, you're right about it never
happening.

In a modern fiat money system paying back central bank loans changes the money
supply. You might be confused because the US did at one point pay back all the
government debt (which isn't the Fed's money, that's a separate thing),
however looking a bit more closely you might notice that that did not take
place in a fiat money system, but in the gold standard (for one thing the Fed
didn't even exist when that happened).

Analysing yet a bit further you will quickly find out that, if you had the
choice, you want to live during a time where the government debt increases,
and the number economists vehemently deny is a wild guess on page 5 of every
economy book out there (but really, it is a wild guess), is 2% per year, or at
this point 330 billion per year.

The real US number is about 3.8% per year, and calculating it for many years
might make you notice that it seems to follow big mac inflation. That's not a
coincidence.

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saint_abroad
You know you're in serious zombie market territory when bankrupt companies are
raising $1b on equity markets: [https://www.marketwatch.com/story/hertz-seeks-
bankruptcy-cou...](https://www.marketwatch.com/story/hertz-seeks-bankruptcy-
court-approval-to-offer-1-billion-in-stock-but-experts-expect-equity-to-be-
wiped-out-2020-06-12)

~~~
icedchai
It's no worse than startups that went public during the dot com era. At least
these bankrupt companies have some operating history and physical assets.

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saint_abroad
Dot-com paper companies that had no assets and no revenue also had no debts.

Here, we're talking about the vastly different proposition of raising equity
in a company where debts outstrip assets.

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icedchai
I understand. If you don't like it, buy puts.

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shams93
It's not going to stop a financial crisis since the system refuses to help
regular people past this July in August you can easily anticipate serious
problems for the banks that could easily overwhelm the entire system. Trump
doesn't get that basically 80% of jobs are gone you cut off unemployment and
80% of loans go into default by August.

~~~
icedchai
They'll just extend the unemployment benefits. Like I said before, it's an
election year. If politicians know one thing, it's how to keep their jobs.

