> dissuaded capital from financing the real economy and instead encouraged herding and levering up in the financial economy for returns.
i don't really agree with this - the money used to purchase financial products don't disappear, because for every product bought, there was a seller. This seller now has cash, which would be invested elsewhere.
The only concern is low interest rates, which makes the hurdle for any investment lower thus making it easy for malinvestments to occur; In hindsight is easy to make judgements on what is a malinvestment, but not so easy at the time.
> i don't really agree with this - the money used to purchase financial products don't disappear, because for every product bought, there was a seller. This seller now has cash, which would be invested elsewhere.
But just look at housing, which has exploded well beyond the rate of inflation since the Great Recession bottomed out, and especially in the past couple years.
Yes, if money is plowed into housing, the homeowner has more cash when they sell. But presumably they have to live somewhere, and with housing skyrocketing in basically any halfway desirable place, it means they're just going to spend that cash on another expensive house.
> if money is plowed into housing, the homeowner has more cash when they sell.
but it's not expensive _everywhere_. It's expensive in some of the most desirable places. And housing has some issues unrelated to the market - such as NIMBYs stopping new constructions.
>but it's not expensive _everywhere_. It's expensive in some of the most desirable places.
The fact that the median and average house prices have exploded signifies that the housing market is in a bubble. It's not relevant that house prices have not increased equally everywhere. Ultimately, after the bubble eventually bursts, it will leave a lot of people indebted to banks with their real ownings not matching the debt. This translates to a decrease in consumer consumption, meaning slower economic growth. Resources of the society will be more directed towards customers who have more wealth, meaning those who weren't part of the housing crash. Likely customers from abroad.
Obviously we're talking about percentages, but that's how economy works and that translates to very real changes in a many people's lives.
Notice you said disposable income rather than income, there is a huge difference.
But I think people recognize the housing bubble that popped in 2008 as a bubble. Saying we haven’t reached the peak of the last bubble doesn’t mean we aren’t in a bubble.
You mean artificially high interest rates. If interest rates fell negative then the money supply would shrink and there would be less unneeded money to speculatively buy houses with. Alas, we live in a world in which negative interest rates were banned and therefore the money supply and economy must constantly grow to raise interest rates above 0%.
I find it frustrating that people ignore basic market principles when it is inconvenient for them. Like, people get richer (everyone is saving incredible amounts of money), the population is no longer growing, there are fewer and fewer investment opportunities and yet for some reason, people think they have a god given right to high interest rates anyway, even when those are impossible to pay without inflation.
the inflation target was barely met (and according to arguments about service degradation) it was undershot, so no, the interest rate was not too low. (there's no non-artificial rate in a central bank managed economy)
> The fact that the median and average house prices have exploded signifies that the housing market is in a bubble.
It doesn't signify that. The US has long since switched over to a permanently low interest rate environment due to the extreme national debt that the Fed has to manage. Housing is going to stay artificially expensive on a longer-term basis accordingly. Housing only deflates on a sustained basis if interest rates go up a lot on a sustained basis, and that's not going to happen (we're coming up on 14 years into the forever low rates era).
We've been enjoying very high rates of consumer inflation and what has the Fed done? Zilch. Mostly all they've done is jabber, which is most of what they can do now: endlessly talk about how they plan to raise rates. Why? Because they can't do anything of consequence and they know it. It's a humiliating failure of their supposed mandate.
One of the many consequences of forever low rates is forever artificially inflated asset prices.
Real-estate values broadly are not a bubble, it's dollar debasement, which is why gold is going to become normal up toward $2,000 and oil is going to be normal at $65-$75+.
Mediocre economic growth will (presently is) ultimately take care of the elevated rates of inflation, rather than the Fed hiking rates by a lot. Later in the decade the Fed will be back to talking about how they'd like to spark higher rates of inflation, as typical annual real GDP growth sinks below 2%.
>It doesn't signify that. The US has long since switched over to a permanently low interest rate environment due to the extreme national debt that the Fed has to manage.
Strange, Germany did mild austerity over the 10s and the end result was even lower interest rates. The current debt to GDP is 59,8% which is perfectly "healthy". Lower interest rates mean less money is spent on interest and more money is spent on servicing the principal. The only conclusion you can derive in the EU is higher debt and more risk => higher interest rates. Yet everyone thinks we are bailing out Greece when in reality the ECB is bailing out wealthy Germans.
>One of the many consequences of forever low rates is forever artificially inflated asset prices.
You call it artificially inflated but lower interest rates don't make e.g. housing more expensive. Your monthly payment is still the same. Lower interest rates make it easier to build more housing which can reduce the monthly cost of housing over the long term.
the Fed has a dual mandate, there are still a lot of people who doesn't have a job due to the pandemic.
this inflation spike due to the combined effects of overspending on products in quarantine (partly fueled by unemployment checks, that should have been sent in monthly installments to discourage spending it on big items), and the energy market chaos thanks to the war in Europe. (and even though a small portion of the supply disappeared the price curve is steep, the new price point is much higher up as we see.)
should have the Fed done more about this? yes, definitely. but just as you observed, the low rates are here to stay on the long run. (mostly because aging population of the developed countries as pension funds buy bonds to get the fixed cashflow they need to pay the pensions.)
> but it's not expensive _everywhere_. It's expensive in some of the most desirable places.
I disagree with this. I think this was true for the mid 00s property bubble, but now prices are exploding not just in the usual suspects like SF, LA and NYC. Pretty much every place that's not a total shithole is experiencing huge home price appreciation.
I made a post on a different thread making this point, and I used Flint, Michigan as my example of "sure, prices in Flint are still low..." only to get a response from another commenter along the lines of "You'd be surprised - while bad areas of Flint are still depressed, many of the nearby areas have also seen huge runups in real estate values."
> i don't really agree with this - the money used to purchase financial products don't disappear, because for every product bought, there was a seller. This seller now has cash, which would be invested elsewhere.
And buying stocks is financing real projects, and you only get those returns if they manage to do something actually useful, this is helping to finance and promote economic activity, how is that taking money away from the "real" economy?
If someone buys stocks from a third party in the open market, are they financing real projects? It really feels like it’s all speculation since the value of my shares doesn’t actually entitle me to that portion of the company’s profits, unless I can sell back directly to the company.
The value of stocks is pinned to two events that you often don’t directly participate in but are absolutely connected to in a real way.
1. The IPO. While it’s true that only the people who buy at the IPO directly finance the company, if there wasn’t the promise of someone else in the future to sell the shares to, nobody would buy at the IPO. The existence of future second-hand buyers makes the direct funding at the IPO possible.
2. Dividends and buybacks. All stocks get their value from either the current existence or future promise of dividends and buybacks. While from time to time people get lost in “greater fool” trading, the reason a stock doesn’t go to zero is because there is either currently a dividend/buyback or people believe that eventually when the company matures, they will offer a dividend/buyback to shareholders and a future buyer will want to buy this shares for the cash returned by the company. (As a tangent, this is something most crypto investors don’t understand… cryto is almost exclusively “greater fool” trading with no basis in the promise of future real cash return)
Point 2 is false: shares of stock derive their value from the fact that they represent ownership in a company.
If the company is profitable or owns valuable assets beyond their liabilities, then the shares themselves are valuable.
Their value does not depend on current or future dividends, but on the company’s current assets and the market’s estimation of the value of the company’s future cash flows.
Your point about crypto still stands: there are no future cash flows to consider with crypto, only the current value of the asset, although the comparison is really apples to oranges.
If a company was somehow set up in a way that prevented it from transferring wealth back to the owners by any means (buyback, dividends, salaries, or even creative ways, such as buying assets owned by it's owners), it's stock "value" would be close to zero, regardless of how much it owned in terms of assets. (One could imagine a non-profit trust set up this way.)
In other words, the reason why a company's assets and expected future cash flow does set its valuation, is precisely the expectation that it will lead to dividends/buybacks at some point in the future.
> set up in a way that prevented it from transferring wealth back to the owners by any means
and i noticed you omitted the method of the owner selling the share (to a third party).
This is the primary way to transfer wealth generated from a company.
> expectation that it will lead to dividends/buybacks at some point in the future.
it doesn't need to be an expectation of such at all, as long as there is someone else in the market willing to purchase the share, at a price they and the owner deem acceptable.
You could have the opinion that the lack of any possible cashflow returns to the owner as a proxy for the share being valueless, but as long as everyone else disagrees with you, and continue to transact the share in the secondary market, it has value.
> and i noticed you omitted the method of the owner selling the share (to a third party).
This is not a method for the company to transfer wealth to the owner. This is a way for a third party to exchange wealth with the owner. It doesn't affect the value of the shares.
And for virtually any normal share in a company (that I know of) that either generates income or is expected to do so in the future, the share owners has the ability to extract that revenue directly through dividends, buybacks or even by liquidating the company and selling the assets directly.
This means that they discussion is hypothetical for all such companies.
If you could name one company that is being traded at a significant valuation that has been set up in a way that makes it impossible to extract value from it to its owners, I would be interested to know about it, as it might prove me wrong.
But if there is no mechanism for giving cash to the shareholder, ownership is essentially worthless (from a money perspective) except for the possibility of amassing enough ownership to take a controlling stake in the company. But even a controlling stake is just a hobby unless somehow that stake returns cash to you at some point.
I agree about assets though. Book value of assets does need to be added to the value of shares, though usually that’s the smallest part of a share’s valuation.
You can sell stock to another person. The sale price will be higher, ceteris paribus, because the company is more valuable. This is how you make money investing in companies that don’t pay dividends. Google retained earnings for a more in depth explanation.
Buying shares of stock in a company that doesn’t pay a dividend isn’t investing, it’s the textbook definition of speculation. You are buying something that you hope to sell at a higher price. Investing is when you put money into something, and it gives you more money back over a period of time. Buying and selling crypto is speculation.
> Buying shares of stock in a company that doesn’t pay a dividend isn’t investing, it’s the textbook definition of speculation.
Yeah but this reflects the fact that starting and growing a company in itself is a type of speculative activity. Any optimism about the future is a type of speculation.
If you have a proven profitable business model, that you see no way to scale, there's no reason to list the company in the first place.
The main reason to even list a company is to take it through a growth phase, and companies get taken off the stock exchange all the time when they don't see any forthcoming growth, because then it's only annoying for them to compromise with the power/ownership for no reason.
The stock market is an accelerator for companies, not a central bank that makes absolute valuations.
It's speculation on the future development of the company's performance, you aren't entitled to a share in the profit, but you often get one anyway in the form of dividends.
If you buy a stock on the open market you don't actually fund starting a real project, but you fund the continuing development and improvement of that project, it's driven by the fact that they have shareholders to answer to, and you are entitled to voting rights.
It has to have some amount of speculation, that's the driving force behind it, otherwise the whole thing would just stagnate and you have no incentive to improve a company and it will just get looted by its employees. In the big picture it just help collectively push for more efficient ways of working, and stop inefficient work.
It's not pure speculation in the sense that you are not betting on a random event like tomorrows weather in a zero sum game.
> i don't really agree with this - the money used to purchase financial products don't disappear, because for every product bought, there was a seller. This seller now has cash, which would be invested elsewhere.
Make no confusion, please. Quantitative easing was intended to give credit institutions greater ability to lend money to entrepreneurs, so as to boost real economy. When capitals are invested in financial products the entities closing their positions (e.g., selling stocks) and, in turn, getting the cash are not necessarily credit institutions (i.e., they are typically fund managers and private investors) – which is to say they pocket the money.
Couldn’t there be an issue if the buyer is paying with margin that’s backed by an overvalued asset? Maybe not for the seller, but eventually someone will be left holding the bag.
I've had this same thought, but everyone seems to be sitting in cash? No one wants to invest unless everyone else invests. Seems the emperor is suddenly naked.
> curve inverted and interest rates have begun to go up. Risk on?
Yes, we’re still seeing billions of dollars being deployed into start-ups [1], crypto and the like. We are less risk on than we were. But within America, there is no flight to safety. (Internationally, it’s more complicated.)
Yeah, they did, and within a month or two it was reinvested elsewhere. Whether it was pulling out of American Airlines in favor of more shares of Chevron, or doubling down on tech stocks. BRK doesn’t just sit on 150bn in cash for longer than they have to. Not saying they don’t sit on cash but they definitely don’t sit on it for a year or more.
i don't really agree with this - the money used to purchase financial products don't disappear, because for every product bought, there was a seller. This seller now has cash, which would be invested elsewhere.
The only concern is low interest rates, which makes the hurdle for any investment lower thus making it easy for malinvestments to occur; In hindsight is easy to make judgements on what is a malinvestment, but not so easy at the time.