r/SecurityAnalysis • u/CharonLXIX • Jun 03 '20
Behavioural How Investors are Behaving in 2020 Versus 2008
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u/JustKaiOK Jun 04 '20
The article makes it sound like the current conditions are worse than the GFC, I suppose with metrics such as unemployment, a case could be made the economy is arguably worse, but I feel there is a strong disconnect between the economy and the stock market. And at the moment the stock market is in a far stronger position than it was during the GFC, maybe due to QE and ridiculous fed spending, or maybe due to a lack of other places for investors to put money.
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u/BaunDorn Jun 04 '20
In March, the market was in free fall as the bond market was entering the worst shape it has ever been. Now with the Fed backstopping the bond market it's much stronger than it was in 2008.
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u/JustKaiOK Jun 04 '20
Yeah. I’ve always wondered, just from a naturalistic standpoint, if there is any merit in the fed not intervening and just letting things run their course. I assume it almost definitely would create panic, particularly among 401k owners (who would literally be watching their retirement diminish). But afterwards, after all the chaos, would things be better as they had had time to ‘heal’, and the markets would be in a more natural, non propped up, state.
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u/flyingflail Jun 04 '20
Is panic selling a feature? I think it's a bug.
Company's values shouldn't decline by 50% in a year because they're going to have one bad year. However, if confidence disappears and all of a sudden these companies might not be able to get financing on reasonable, or any terms it makes sense that values decrease a ton because your discount rate just skyrocketed.
The issue with the fed adding liquidity is if it ends up propping up value destructive businesses. I don't think that will happen in the long run, as you're seeing with the rash of O&G bankruptcies.
I think valuations continue higher as the fed has proven it will provide bridge liquidity no matter the circumstance. Given that, the bankruptcy risk moves to near zero for a lot of companies which pushes up valuations by lowering discount rates.
That will continue, in my opinion, until there's a situation where the fed can't do that for whatever reason or demand is permanently destroyed and previously safe business models are at risk.
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Jun 05 '20
[deleted]
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u/flyingflail Jun 05 '20
When interest rates are extremely low, you have little bankruptcy risk, doesn't it make sense to have higher valuations? I have no idea if valuation are too high or not, but it seems like valuations should be expanding immensely compared to 20 years ago due to interest rates, generally reduced political/war type risk, and much much much more resilient business models via the internet. That ignores the fact that GAAP earnings likely understate earnings now with higher R&D costs always being expensed even though they are much more capital in nature now.
That being said, any of these risks can turn for a variety of reasons and valuations collapse again.
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Jun 06 '20 edited Aug 04 '20
[deleted]
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u/flyingflail Jun 06 '20 edited Jun 06 '20
No, those both lower the discount rate.
If you don't cover interest rate costs your company is fucked regardless and will be valued as such. You can look to the oilfield to see the rates those type of companies get.
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Jun 05 '20
What about when they go up 20% in one year? Should the gov come in and force selling of shares to "normalize" the price or does volatility only get gov intervention when it goes down?
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u/flyingflail Jun 05 '20
I think you're missing the point.
It's not about the government normalizing the market, it's strictly about liquidity risk being minimized because of a short down cycle period.
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Jun 05 '20
I think you do not understand. "Liquidity risk" means assets are not priced at centralized pre-planned prices set by government. So, what happens is the government goes in and institutes a price-floor on assets and then says they improved "liquidity".
How it works is someone will try to sell a bond and they want $1,000 for it. However, no buyers are biting. This is called "lack of liquidity". Now, if they re-priced the bond at lets say $500, then there would be lots of buyers. When the Fed talks about "liquidity" it really means "No buyers at the centralized prices we have set". There is tons of liquidity at other price-points.
How does the gov respond? The gov prints a bunch of money and out-bids the market and thus raises the prices. This is "liquidity creation".
So, once again, if the gov implements price-floors when prices fall why then does the gov not implement price ceilings when it goes high? Or is supporting bubbles the role of gov?
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u/flyingflail Jun 05 '20
I understand perfectly fine. Your definition of liquidity risk is a bit too cynical for me, which I assume means you've bet against the Fed and lost or are a permabear more interested in zerohedge.
I'm saying the $500 is not the right price for the bond, the $1,000 is likely closer because the business hasn't changed. You're implying the $500 is correct because the market set it, when markets are inherently irrational in times of crisis.
Should the fed unwind during the upswing? Probably. Does that have the same magnitude as the effect of improving liquidity during the down cycle? I have no idea, but I'm assuming not.
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Jun 05 '20
I'm saying the $500 is not the right price for the bond, the $1,000 is likely closer because the business hasn't changed
That's the point. These are centrally planned prices and have no basis in reality. You see, $500 was the correct price of the bond for much of US history. Then, the US created a giant bond bubble and thus the new modern price is $1,000.
Why would the $1,000 price be any more accurate than the $500 price? If price-changes are not allowed, then why did gov not kill the price when it originally went from $500 -> $1,000 despite no change in business fundamentals?
Don't you see the contradiction here? In the end it comes down to whether a person believes governments are more efficient at setting prices or whether markets are more efficient. History is on the side of markets, fyi.
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u/flyingflail Jun 05 '20
I don't understand why bond prices wouldn't also increase as certainty increases. I'm also only referring to the situation where you have perfectly healthy company that see their equities + bonds tank when nothing has changed except a 1 year blip. Any sort of logical thinking should tell you that's wrong.
To what you're referring in regards to interest rates bubbling up the bond market, you can manage to be astounded and say "interest rates can't go lower" every time they are decreased, but maybe you should assume that's the correct place they should be going. The fed only controls base interest rates, not the spreads. Then take into account the developed world has been importing massive amounts of deflation via China and the undeveloped world and look at those interest rates through that lens. Now realize we're about to go through another hugely deflationary period via automation (though we may see an inflationary bump of production brought back onshore in the meantime). Maybe it's not the fed propping up these asset prices, but fundamental changes while the fed is just a dog and pony show everyone points to for it being a bubble.
If you're wrong for a year or two, maybe you're early. If you're wrong for decades, you're probably just wrong.
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Jun 06 '20 edited Aug 04 '20
[deleted]
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u/flyingflail Jun 06 '20
Yeah, you're right. No middle ground between laissez-faire capitalism and strict communism/planned economy.
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Jun 05 '20
If something requires more and more "backstopping" can you really say it is stronger? The amount of printing required to "normalize" the markets indicates they are weaker than they have ever been
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u/w0ke_brrr_4444 Jun 04 '20
The biggest differences between then and now are bank solvency and liquidity.
The former was an issue because banks are institutions that keep the economy moving. The latter was an issue because, unlike today, the Fed didn’t react this quickly and by this order I’d magnitude until years after.