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Ask HN: Why is the stock market up 30%+ from pre-Covid levels?
25 points by bko 4 days ago | hide | past | favorite | 27 comments
I've been thinking about this for a while, and wrote about it in my blog (in profile) as I've been trying to hedge what I see as the inevitable market blow up.

Does anyone have any explanation as to why asset prices are up so much across the board apart from fed easy money policy? Is there any way this could end well, or continue trucking on indefinitely (3-5 year time-frame)? And what are some effective ways to mitigate downside risk?

The strange thing is its across the board. Stocks, all sectors, commodities, bitcoin, home prices, obviously treasuries. There's nowhere to put your money that's safe.

Even if you pull out completely, if we have inflation and a subsequent market crash, this will eat away your capital. Taking your chips off the table isn't an option.

Gold isn't really behaving normally as a large chunk of it is controlled by central banks around the world. If there were a flight to gold, regulators could also restrict access to gold as they did during the Great Depression through executive order [0]

TIPs (treasury inflation protected securities) is an option but that doesn't work if you think inflation numbers are not accurately reflecting cost of living. Not to be a conspiracy theorist, but you have to consider that trillions of dollars are at stake in terms of social security alone, so there's an incentive to under-report inflation.

I'm just trying to understand what can be done.

[0] https://en.wikipedia.org/wiki/Executive_Order_6102

>There's nowhere to put your money that's safe.

Sure there is; physical assets. Doesn't matter what happens to the market, people still need (for example) houses.

Homes have been pumped up, partly due to low rates. If rates go up, home valuations would drop considerably as mortgage payments become more expensive. I suppose if you get productive land or something away from high cost metro areas

Housing prices are based on huge demand due to 2% mortgages. They could easily take a big hit.

that is not true in the event of war or major political movements

This is my reasoning - there's political instability at the moment, and I'd like the option to change countries as necessary. Stable countries like the US have violent riots, less stable ones are facing coups and spiraling debt.

that is my guess too. It certainly feels like "there is no good place to keep money". There is so much instability around the world at the moment, it feels even the traditionally more stable ones like real estate and gold are at jeopardy. People are fusing money into anywhere that's seemingly more safe than cash just to make the most out of it in the event that any major political shift happens.

  I'm just trying to understand what can be done.

That's not bad advice, but as we've seen during 2008, during turmoil everything is correlated. You saw all historical relationships between asset classes break down as everything plummeted.

It’s (the start of hyper)inflation, plain and simple. Almost a fifth of all circulating dollars were created in 2020. And they keep printing money.. The dollar lost a lot of value and we see it first in asset prices, soon the real economy will follow. So don’t see it as stocks rising 30 % but the dollar losing 30 % of its value.

The US is not at risk of hyperinflation due to structural reasons related to international trade. I listen to hours os economics podcasts a week from brilliant people with viewpoints across the political spectrum , many of whom love nothing more than to trash Fed actions and US economic policy and I have never once heard any of these let's say 50+ speakers say they feel hyper inflation is a risk. It really isn't on the table.

I would be more worried about a solvency crisis or sector specific inflation, or broader changes in the global role of the dollar.

What is your take on the Ray Dalio view? The way I understand it: 1. Lending to the US government (buying treasuries) at low interest rates is not profitable, as you will be paid back in devalued currency. As is, real rates are negative.

2. Investors demand higher interest rates to make it worth their while.

3. US government has to roll over its debt or borrow more, but has to do it at higher interest rates that it cannot afford (what rate would that be?). Fed comes to the rescue by buying treasuries with new money, creating more demand and driving interest rates down.

4. That makes points 1 and 2 even more valid, so fewer 'real' investors turn up to buy treasuries, and those that hold treasuries try to sell them (you don't want to be getting fixed returns in currency that is losing value). That increases supply of treasuries even more.

5. Recognizing this dynamic, people rush to 'cash in' their dollars - buy anything tangible they can. US stocks sell off relative to 'hard' assets, as companies reporting in dollars are not be able to operate effectively.

6. This results in hyperinflation. The above unfolds relatively quickly with no advance warning (you don't want to alert others as you are trying to offload your dollars), turning low inflation into hyperinflation.

So i would say you are qualitatively correct but not quantitatively correct regarding what Dalio believes regarding inflation.

I think Dalio would go as far as saying "Cash is trash" but not as far as saying "the dollar will hyperinflate". He believes strong inflation is coming but that is very different than hyperinflation.

Hyper inflation would generally be defined as a quarter of 50% per month inflation. That means the dollar would have to lose 3/4 or more of it's value over a quarter to be said to have hyperinflated. Supply factors have to totally outstrip demand factors where there is essentially no bid to reach this kind of growth. But 90% of the world has debt denominated in dollars that creates a constant bid for dollars. This simply cannot unwind overnight without ending in a major global solvency event and if that happens every currency on the planet is going to be revalued instantaneously anyway.

Anyway that's a lot of words to say, I dont think Ray Dalio believes hyperinflation is coming. I think he thinks inflation is coming, maybe even a lot of it.

A second unrelated point is that every historical instance of hyperinflation I'm aware of involved a sovereign owing debts in some other sovereigns currency. No one has ever hyperinlfated when their debts were denominated in their own currency. This also is a situation which does not apply to the US.

How do you think a foreign country X focused, US-denominated, ETF would perform during something like this, if the target country had a stable balance sheet? I've thought this would be a decent hedge (though difficult now that everything is global/intertwined), but love to hear the downside risk.

Yeah, its not like the same entity that pumps dollars into the economy to boost employment and prevent deflation when it slows down also might take dollars out to restrain inflation as the economy speeds back up.

Higher rates come w/ a lot of political pain. You saw the prior administration talking about keeping rates low and tying that to low cost of borrowing for the US. It means higher mortgage rates for homebuyers as well.

The Fed has spoken about keeping rates zero until 2023 [0]. Unemployment came down considerably (~6%). Last time it was this level was mid-2014. We started raising rates at ~5% unemployment in early-2016. I think theres a good chance you'll hit 5% unemployment well before 2023, especially considering that the economy isn't fully open yet and we're still vaccinating.

I don't see the political will to raise rates and slow this thing down.

[0] https://www.forbes.com/sites/sergeiklebnikov/2020/09/16/fede...

Came here to say exactly this. Adding to the money supply increases the nominal cost of assets because more dollars are available.

A lot of people had started investing because they don't know what to do with the money. When you stop spending money on restaurants or vacation or other stuff which is no longer available, you end up surplus. So why not invest it in the stock market?

Which might imply a reversal when we all get back to normal next year.

If the shutdown was 3 months, I would agree. I think this is the first time in recent history that way of life was completely changed in such short notice and for such a long time. I think some of the behaviors will be staying with us.

Covid pulled back the curtain on the mechanics of society. Everyone’s realized it’s all a facade and we’re playing with funny money, so may as well keep dancing until the music stops. It also helps that the US Fed printed a bunch of money and gave it to unsophisticated investors to speculate with.

I've wondered about this myself. The best I have come up with is that the global wealth inequality is increasing. There is more demand for investments, across the board, and the demand is growing at a linear or greater rate. Therefore, the price for everything is going up.

This is the thing that makes the most sense to me. Through COVID a lot of businesses lost money but many more made money. A lot of it. The Fed has been propping up the market buying debt. The hedge funds have been shorting things at exponential rates. Home sales are at insane levels as well making money through mortgage backed securities once again. The rich are getting richer and therefor have more money to buy the stock at cheaper prices thus continuing to inflate the market.

None of these vehicles however are available to the retail investor and so while we see everything around us growing it feels like we are stuck watching the world rise around us when its really just the major players realizing those 30% returns.

Pretty much every GenX, GenY and GenZ has been told to put their savings in the stock market, "it's a sure bet", "it will be up by the time you retire", "just put it and forget it". I am not saying this advice is wrong. But considering that everyone literally does the same thing, it is not surprising that we see such behavior.

I could think of it this way. Covid hit, and it did a lot of damage to economic activity. The various authorities responded by pouring a bunch of money into the system, trying to avert catastrophe. They overshot a bit, and that money wound up in places like the stock market. (Note that it's better that they overshoot by a bit and create a bit of a market bubble, rather than undershoot a bit and let the real economy suffer some damage.)

Note well: I am not sure that this is the correct explanation.

In general, Hacker News has an atrocious understanding of finance. You see some absolutely swivel-eyed nonsense being given the time of day here by people who should really know better.

I'd recommend looking for a few "What's the economic outlook?" articles somewhere like the Financial Times for a more reasonable and better qualified view. I think the FT Alphaville blog is still free to read once you register. That's generally good.

Nevertheless I will go ahead and answer the question with no sense of shame or irony.

> Does anyone have any explanation as to why asset prices are up so much across the board apart from fed easy money policy?

You mentioned a huge part of it already. Another big part is the spillover effect of the monetary policy of every other major central bank in the world. It means governments can borrow extremely cheaply to prop up businesses and provide extra social protection to their citizens, without the spectre of brutal austerity budgets in the next couple of years.

The flipside of this protection is that bond yields are on the floor (and yes, the recent uptick from "on the floor" is still basically "on the floor"), so a lot of the money that needs a home ends up in the stock market, pushing up prices. This is kind of by design, for better or for worse. A lot of money ends up in property too, which is arguably why housing crises are getting more and more common around the world.

In the USA there's also anticipation of Joe Biden's stimulus plan, which is really very big indeed. It's argued (gently, by only some economists) that it will boost consumer demand in many areas that don't need any extra boosting. Some of this anticipation is manifesting itself in stock prices.

> Is there any way this could end well?

Depends what you mean by "end well", but basically yes, I think so. It's not likely to be a rerun of 1929 or 2008, for Keynesian contra-cyclical spending reasons that I'm not qualified to get into. There could well be a correction/mean-reversion/crash, but that's true of any time period. There might be a kind of Japanese-style slow/no growth eventually. There might be a major war or a natural disaster that upends everything again. It's hard to know.

I would also say that your "indefinitely" timeframe of 3 to 5 years is way too short. Especially for investing as opposed to day-trading, you need to be able to take the rough with the smooth over many years. If the stock market risk seems too high at the moment, just put your money in cash and eat the negligible or mildly negative real returns.

I can't speak for the whole market, but in the sectors I casually follow (electric vehicles, tech, airlines), there were legitimate reasons for the rally:

ELECTRIC VEHICLES: A LOT of new electric cars have finally entered their production runs this year. It just so happened that 2020 was the year in which many manufacturers planned to drop their answers to the Model S/Model 3. Remember: big auto usually plans in 2-3 year increments, so all of the options you're seeing now were potentially drafted up back in 2017-2018 when the Model 3 entered production.

(The Model 3 was really what lit a fire under everyone's ass. Big auto saw that Tesla could produce a car that is mainstream-affordable without compromising on mileage, battery tech, or safety. That + Tesla making most of the car's core features built into software (which kills the whola idea of options and packages, a HUGE moneymaker) and their world-class driver assistance tech meant that automakers had to do _something_. People love to hate on Tesla, but the Model 3 is really what started Tesla's share price rocketing to the moon.)

There have also been significant advancements in the fast-charging networks available for these cars. Electrify America has grown a lot in 2020, likely due to COVID and businesses preparing for re-opening in 2021. Tesla has significantly expanded their network as well. The theory is that businesses that add fast-charging stations to their parking lots (and actually _enforce_ them) instantly gain access to a small, but growing, set of affluent consumers with time to kill. No better time to build these chargers than when everything is closed, assuming that you had the spare cash to do it. (Tesla pays for everything if they select your site as a supercharging location; it's an awesome incentive to bolster the network.)

AIRLINES: A rally was pretty much inevitable. COVID absolutely killed demand for travel, but "everyone" agreed that flying was going to happen again once we got the virus under control and a vaccine was made available. Additionally, COVID fast-tracked several aircraft retirements that were going to happen years down the line. American retired the B767 last year, Delta the MD80/MD90, Emirates the A380. COVID also forced airlines to rethink their digital strategies (to respond to fast-changing CDC standards) and think outside the box for other revenue streams (American's wine subscription comes to mind). All of these things made airlines more efficient, which is usually rewarded through their EPS.

Additionally, Boeing was finally able to get the 737MAX recertified by the FAA after. The 737MAX brings great fuel efficiencies and longer range over the 737NG models. Pretty much every airline is going to add several of these to their fleet. There's also the 777 replacement that's on the way that promises similar fuel efficiency gains and potentially longer range. (I'm hoping that it can do DFW-DEL, but I'm not holding my breath on that one.)

TECH: First of all, holy shit, like, A BILLION companies IPOed in 2020. It was like COVID didn't happen. Also, think of how many companies saw absolutely maniacal growth due to the world instantly going remote: food/grocery delivery (Instacart and DoorDash especially, doubly so in regions were delivery wasn't normally popular), any company that did videoconferencing (remember last March when basically EVERY cloud provider was short on hardware because of the sudden demand for VC?), EdTech, etc. The only tech companies that were directly affected by COVID were ones that were in the industries that were directly affected by COVID (travel, hospitality); to everyone else, it was basically turbulence.

In fact, I remember companies were going on hiring sprees during the first and second wave. Anecdotally, my inbox was ON FIRE during this period. This made me feel bad: in a world in which millions were losing their jobs, I had more choice than ever before...

GENERAL NOTES: The other thing to consider is that special-purpose acquisition companies (SPACs) and direct listing became really popular in 2020. This made it possible for companies to get access to capital much more quickly. So many companies are going public through SPACs: WeWork, SoFi, Lucid, hell, even fucking TOPPS (yes, the baseball card company) is in this game now. It's great for retail investors (they can get in at pre-IPO prices without having to be accredited investors or a having private bank account with lower risk than going through secondary markets), great for businesses (since they can go public more quickly), and great for the SPACs (since they take shares off the top and make insane money once the merger completes)

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