God, this has been so true for me. I was trading puts on the massive increase in US Covid cases, but stocks just kept going up. And now we're hitting ATHs while economists are predicting the worst GDP decline ever. Gold and Stocks are both rapidly rising, which isn't really logical, since Gold is a save haven, usually.
I looked back at gold vs stocks and the last time stocks and gold rose at approximately the same speed, was just before the 2008 crash.
Interest rates are super low. The Fed's printing money like there's no tomorrow.
It makes a lot of sense that investors would want to put their cash in the market and/or take advantage of low interest rates to lever up.
If you're willing to bet the dollar's going to crash in the next few years due to Fed policy, it makes sense to write dollar-valued IOU's today and use them to buy stocks and gold, knowing you'll be able to pay them back with cheaper-valued future dollars.
There was a post by an economist that low rates is a tool in the hand of politicians and once the get a taste of it, they never let it go.
At least I see this happening in India. Central bank is influenced by govts to keep rates low.
Don't know well about how US Feds and govt are incentivised
US dollar will never crash. It is defacto the currency that runs the world.
It's a bit like saying the lake will overflow because millions of people are pissing in it.
And crash against what? Other currencies are faring far worse.
It doesn’t have to crash per se. The value can go down. As in inflation. This is already happening in some sense. It’s just accelerated when the real value you get back is lesser for dollar by the day. A few years back can you imagine buying a $1000 phone? The measured inflation is really convoluted. I doubt it measures the true value of a dollar. The good thing is other currencies will just get devalued equally considering dollar is the world currency for the most part.
>which isn't really logical, since Gold is a save haven, usually.
I don't know anything about anything, but it seems to me this is a logical consequence of inflation? Purchasing power of $ goes down, prices (of everything) go up.
Inflation is on track for 0.44% annualized in 2020, about 1/4 of an average year due to the reduced velocity of money caused by the downturn more than offsetting the new money being printed.
Is there a way in which finical assets can inflate more the basic of goods that make up inflation metrics? Is gold even part of the index?
Like if all that new money isn't being used to buy things like food or even housing that factor into the inflation index than wouldn't we see something like this where gold and the stock market inflate because that's where the cash is going?
Maybe all the new money ends up in the hands of the rich elite, who just funnel it into the stock market, so it never really ends up inflating real assets. I could totally buy that these are the types that care the most about making the slider go to the right, and don't necessarily spend much of their money (or have so much of it that they already spent it on everything they possibly could).
Lets assume the inflation remains contained in the financial sector. What does this mean e.g. for a young family with no inherited wealth, with average income and savings rate? How should they invest their savings? Isn't it more difficult for them to "break even" (in the sense that their capital income offsets their share of contributing to others capital incomes) than before the asset price inflation?
At a given instant in time, each unit of currency has to be owned by someone. So if the money supply increases by 10%, by the pigeonhole principle, there is at least one entity with 10% more money in one of their accounts.
Now I'll buy the idea that isn't necessarily going to cause shortages and price rises in consumer goods, but the idea that it doesn't cause changes in asset prices is too much. Are these rich people supposed to be idiots? There is no return on cash and new money is being created at a fast clip.
Inflation has been "stubbornly low" for 20 years while asset prices have outperformed historical averages the entire time.
Asset prices seem to have diverged from the real economy because assets are primarily funded with debt (real estate, corporate investment) which has been artificially priced lower, while goods are paid with earned income which hasn't been manipulated.
The CPI does include rent. And if you check the listings, you won’t find that the money supply multiplying has led to prices multiplying. It seems like it’s just supporting current prices. If prices do start to rise too quickly they can gradually pull back that support.
The inflation in asset values (e.g. equities / real estate / gold).
People incorrectly assume inflation means "the price of everything goes up". The problem word here being everything.
Why? Well because prices aren't merely dictated by supply, but rather supply & demand. Simply comparing inflated money supply to the good supply is naïve, as it ignores to factor in the demand for different goods.
As so, for a dumb example, it's entirely possible to have inflated stock prices but not see inflated sock prices, if all the extra money is chasing stocks, and not socks...
> People incorrectly assume inflation means "the price of everything goes up".
Because they've spent a few generations making sure people don't understand the difference between price inflation and monetary inflation by using the two interchangeably.
This whole sub-thread is a perfect example, "the Fed has been printing money like there's no tomorrow but, look, there's only 0.44% inflation".
CPI is inherently flawed due to basket of goods methodology and consumer substitution for cheaper/different alternatives than in the past when prices to their current basket changes. For example average housing spend could be steady while people get smaller homes and CPI would not reflect that. Likewise with lower quality food by some metric or other.
So much like how the S&P/NASDAQ has a bias for growth because losers are swapped out for winners, the CPI basket has a negative price bias as expensive goods are swapped out for cheaper ones.
It's incorrect to refer to monetary inflation as just "inflation." If you're talking about price inflation, we're not seeing that yet - although 5 year inflation expectations are popping back up again [0]
So far, it's looking like the Fed is doing as best as could be expected.
Sure. But we are talking about inflated asset prices. Printing more money just makes the truly valuable things take more units of an inflated currency pool
Now this is just my conspiracy theorist side coming out, but I think the only reason the government cares about frequency of exchange is that they get a cut on each event. The more frequent the exchange, the sooner they get 100% of it back.
Not only is inflation extremely low, but we were at serious risk of a deflationary spiral without all the funny-money that the feds are pumping into the economy. Central banks introduced liqudity to make sure deflation did not happen.
Foreign demand for the dollar is at all time highs. People forget this and don't think about the impact that this has on currency prices.
Also, the "inflation is actually happening they just don't measure it right" crowd are delusional. Maybe they were right before covid, but they're extremely wrong now.
> Not only is inflation extremely low, but we were at serious risk of a deflationary spiral without all the funny-money that the feds are pumping into the economy.
Was reading just the other day that inflation is actually underestimated right now.
People are buying basics, like food, at far higher rates than normal, prices for those basics are rising, but the CPI hasn't adjusted the ratios. Ergo prices are higher where it counts but the index doesn't see it.
Inflation is low as measured by the CPI. Inflation in financial assets (higher PE ratios for stocks, lower yields on bonds, significantly increased real estate prices in attractive cities, etc) are significantly higher.
In my opinion, continued inflation in financial assets will / is already partly causing inequality. It's not good for society if the middle class has trouble buying houses or real estate - it tends to lead to a lot of anger and political polarization, as we've seen.
IMO the fed pumps money to reduce the risk of collapse of tbtf entities. It can't do much to reflate the economy as it depends on the banks to lend them out.
That is what some people think, but the only thing we know for sure about the price of gold is that you have to pay its price in ounces to get one ounce of it.
Interest rates are insanely low, which means putting your money in the bank, or in bonds, has a near-zero return. There are tons of massive funds (vanguard, etc) that have promised a return to their investors, and they're moving money from interest-based investments to other investments. This has caused a ton of money to be put into the stock market, which drives multiples up.
Why gold is going up:
The government is printing a ton of money to deal with the pandemic. This causes USD's value to drop compared to other currencies. There's a small (but real) possibility that the US dollar stops being the world's reserve currency. This causes people to seek value stores other than USD. This includes gold, bitcoin, euro, yen, renminbi, which are all up vs USD since the pandemic started.
These two things happening at the same time doesn't necessarily mean the stock market will crash.
A lot of people that replied to you seem to be quite sure in their explanation (i.e. fiat currency is losing value due to QE etc.) I think all we know is that we actually have little idea of what's happening and what will happen in the near future, since this situation is quite unprecedented. During the great depression the fed had a tightening instead of easing and the market crashed hard, sure, but what happens when there's a crazy amount of easing instead? Guess people can only look back in 20 years or so and draw some conclusion. Being too sure of anything at the present moment would be quite overconfident IMO.
FWIW the GDP decline may have been overblown, and it seems at least plausible that it will be followed by GDP spike, as production fills in unmet demand at higher prices.
Great quote. Aside: I thought it originated from John Keynes, but it looks like that earliest written record goes back to 1983 to a financial analyst named Gary Shilling:
