Is any of this rational anymore?

[maizefolk]

OK, european stocks look like they're going to be trading about -10% from where they closed. These are the sort of biggest volatility days we saw in 2008/2009. Hold onto your potatoes...

We're about halfway through the trading day in most of europe now and it's looking like "only" 6-7% down.

Japan made up a percentage point from when I went to sleep and closed at -5%, Australia just kept slumping and closed down -7.3%.*

Okay, markets are closed across Europe now.

UK down -7.7%, Germany down -7.9%, Spain -8.0%, France is either down -8.4% or -12.2% (different sites show different results for the CAC 40), Italy down -11.2%. Pretty impressive for a single day, but at least not double digit drops across the board predicted this morning.

Will be interesting to see the the S&P 500 (currently at -6.4%):
-breaks downward at the end of trading to be more in line with the European results,
-breaks up to be more in line with asian stocks
-or stays right here in the middle.

[rab-bit]

So this would be hilarious if it wasn't so pathetic.

Futures have been way up since last night when Trump said he would hold a press conference today (Tuesday) announcing an economic plan in response to the Covid-19 outbreaks. He specifically mentioned a payroll tax holiday which is apparently what got the market really excited.

Then this morning we get this:

https://www.cnbc.com/2020/03/10/coronavirus-trump-plan-for-economic-response-not-ready-officials-say.html

"However, inside the administration, some officials were stunned by Trump’s claim Monday that he would hold a press conference Tuesday to announce an economic plan. “That was news to everyone on the inside,” one official said."

So it was all BS by Trump as usual. There is no plan except in his mind. It will be interesting to see if/how the futures respond to this.

[jim555]

Absolutely pathetic pump attempt. 

Isn't he forgetting it has to get through the House?

[Telecaster]

I'm sure people will go ahead and sign up for their dream cruise with the tax savings. 

[Holocene]

Well we ended up at around +5%, so it must be a pretty good plan!

Or, you know, the markets been crazy volatile the last 3 weeks and anything could happen these days.

[vand]

Looks like the bounce is arriving, but I am not at all convinced that it will be business as usual with the market taking out the old highs after a V-shaped recovery.

The odds of recession has significantly increased. Betting markets have the probability of US recession this year at 57%. If we do slide into recession there is really no way of knowing how savage it could be as the negative feedback loop exposes everyone who has been swimming naked.

[PDXTabs]

Yea, the only bounce I see is a dead cat bounce.

[Bloop Bloop]

Let me be blunt. Are not recessions quite good for your finances as long as you are not in the marginal 10% that becomes unemployed/underemployed?

Cheap goods, low inflation, bargain basement shares/property prices - it's a buyer's market.

I'm in the market for a car soon and dealers here are struggling/closing up shop, so that gives me a lot of leverage in negotiations.

[PDXTabs]

Let me be blunt. Are not recessions quite good for your finances as long as you are not in the marginal 10% that becomes unemployed/underemployed?

Cheap goods, low inflation, bargain basement shares/property prices - it's a buyer's market.

Normally I would agree with you, but if we see continued supply side hits we could actually see high inflation during this recession. We've seen that before, just not during my lifetime.

[vand]

Recessions are cleansing and a normal part of the business cycle, but of course it’s painful if you lose your job for any length of time.

However the problem is that the natural business cycle has been so extended by ever increasing central bank stimulus with so many malinvestments that have been allowed to build up that when a recession does eventually arrive it could be much deeper than what we are expecting.. that is the effect of central bank monetary stimulus.. it smooths out the economic fluctuations in short run at the cost of creating bigger instability over the longer run.

The central banks have already used up nearly all their ammunition cutting in rates. After this comes QE infinity and helicopter money.

[Leisured]

To be fair, I stole the analogy from Benjamin Graham's book The Intelligent Investor :)

Good quote

[Reynold]

I've never heard of 110% of gross income tax, even in communist countries.

I have a work colleague who was living in Greece during their financial crisis a few years ago, he was from England, and until the crisis he paid no income tax, because Greece didn't charge income tax to people who worked for foreign companies (US company in this case).  During the crisis, they passed a 50% income tax for everyone, and made it retroactive so he owed 50% of his income from the previous year as well.  He was also in the process of moving back to England, which would have had a 60% income tax, so he had the potential to owe 110% of his income that year in tax.  He moved to Albania instead, which had a 10% income tax.  Communist countries and just plain dictatorships have seized private retirement accounts (see Argentina, 2008, Hungary, 2011, Russia 2014), but they've also seized money from bank accounts (Cypress, 2013) land, and entire companies by nationalizing them, so that is no protection either.   

There is a reason, though, that a lot of people in places with totalitarian or just poorly functioning governments try to invest in the Western developed countries, especially the U.S., they consider the risk here lower than where they live.  While the U.S. risk isn't zero, there doesn't seem to be anywhere else that it is lower. 

Our messy, usually paralyzed government actually helps here to some extent.  In the U.K., from what I was told by a native, the Secretary of the Treasury equivalent can decide to double tax rates unilaterally.  Here, it is a huge congressional fight to change them by a few percent.  While it is often frustrating to see so little progress on Important Issues, it also means you don't tend to have whiplash changes in government policy, like imposing a 50% retroactive income tax, say. 

[PDXTabs]

He was also in the process of moving back to England, which would have had a 60% income tax, so he had the potential to owe 110% of his income that year in tax.

Except that the UK has a foreign income tax credit and a double taxation treaty in place with Greece, both of which I found in less than one minute of googling.

[MustacheAndaHalf]

I've never heard of 110% of gross income tax, even in communist countries.

I have a work colleague who was living in Greece during their financial crisis a few years ago, he was from England, and until the crisis he paid no income tax, because Greece didn't charge income tax to people who worked for foreign companies (US company in this case).  During the crisis, they passed a 50% income tax for everyone, and made it retroactive so he owed 50% of his income from the previous year as well.  He was also in the process of moving back to England, which would have had a 60% income tax, so he had the potential to owe 110% of his income that year in tax.
...

England doesn't tax income earned in Greece, and Greece doesn't tax income earned in England.  He would have paid 50% on Greece source income, and 60% on England source income.  There's no 110% tax in that situation.

[Reynold]

I've never heard of 110% of gross income tax, even in communist countries.

I have a work colleague who was living in Greece during their financial crisis a few years ago, he was from England, and until the crisis he paid no income tax, because Greece didn't charge income tax to people who worked for foreign companies (US company in this case).  During the crisis, they passed a 50% income tax for everyone, and made it retroactive so he owed 50% of his income from the previous year as well.  He was also in the process of moving back to England, which would have had a 60% income tax, so he had the potential to owe 110% of his income that year in tax.
...

England doesn't tax income earned in Greece, and Greece doesn't tax income earned in England.  He would have paid 50% on Greece source income, and 60% on England source income.  There's no 110% tax in that situation.

My understanding of it from talking to him, is that Greece made their tax retroactive to the previous year when they first added the "foreigner" tax, since they were in a financial crisis around then.  Thus, if he earned $100,000 in each of 2007 and 2008, for example, he would owe $50,000 in 2008 for his 2007 taxes in Greece (under the previous tax system he owed nothing for 2007, since he was paid by a U.S. company in Greece), and if he moved to England in 2008, would owe them $60,000 for taxes for his 2008 income.  I don't know if the normal offsets would cover that, since the taxes were due for different taxable years, but did not check it, since it wasn't my problem.  It was enough to get him to move to Albania, anyway, and leave his Greek home with a caretaker. 

[YoungInvestor]

The market has always been gambling. The main difference between the stock market and a casino is that the house has a slight edge in a casino while you have a slight edge in the stock market.

The market is only a casino if you treat it as such. Use it to build a portfolio of passive ownership in quality businesses and you will have much more peace of mind.

[vand]

The market is effectively a casino, but one where the house is generous enough to offer the players a tiny positive expectancy on any random day, which can be exploited if you keep playing for long enough and couple with it with sensible bankroll management to flatten out short term variance.

[ChpBstrd]

I'm starting to think that sometimes the market can ONLY do the irrational thing.

E.g. 1:  Say for some reason a crisis occurs that will cut corporate earnings in half and lead to a large number of defaults and bankruptcies. Most investors will see this as a bearish sign and try to sell their stocks at prices higher than the forecast would warrant. After the last bear has sold, the next day the only people trading are bulls. Therefore, the market can only go up because the bulls don't want to sell, they want to buy, and they're the only people still trading in the market.

E.g. 2: Say for some reason the market zooms up in an unsustainable expansion of PE ratios and any other valuation metric. Anyone who is analyzing their investments in a rational way, with spreadsheets showing cashflow projections and expected ROI, will sell. After the last person who cares about fundamentals has sold, the next day the only people trading are the momentum traders and technical analysts. Therefore, the market can only go up because fundamentals don't matter to the only people still trading in the market.

E.g. 3: Say a crash occurs and the landscape is cleared and ready for several years of growth. Weak companies are going bankrupt, defaults are at their peak because new debts are not being taken on, consumers are reducing their debts, unemployment is a few months from its peak, and there is a lot of deferred spending waiting to happen because people are holding off on business investments, cars, homes, appliances, etc. Overall, it's a great time to invest! By this time, the bulls have lost their asses and tied up everything they own in stocks. The bears are still scared, perhaps at their peak of being scared. Therefore, even though investing conditions are ideal right at this instant, the only thing that can happen is a very slow recovery as the bulls slowly invest their earnings from work/business. The bulls have no cash on the sidelines and the bears are too scared to go all in (being bears and all). This is why the market crashes quickly, but takes years to recover, even though rationally it has the best prospects at the bottom.

IDK how to operationalize this because reliable real-time investor polling is not a thing. Also, it seems like example 1 would lead to a dead-cat bounce that you would NOT want to buy into, and example 2 would lead to a market peak that you would NOT want to buy into. Maybe both of those are shorting opportunities, or opportunities to exit long positions. Example 3 is the most problematic. How far down is the bottom? At what point do you know the bulls ran out of money?

Perhaps the algorithm is as follows:

Pattern 1 or 2 detected: Switch from long exposure to a hedged limited-downside position such as a protected put or long call before the bulls and pattern traders run out of money.
Pattern 3 detected: Now that you saved some money by limited your downside, plow that cash into long stock positions before the bulls run up the price.

[ChpBstrd]

I'm still thinking on this topic... bear with me.

If rationality is useless for predicting market outcomes, we can throw out fundamentals analysis, valuation models, and even historically based mantras like "time in the market is more important than timing the market" or "just buy stocks, they go up in the long term*". We can also throw out anything that begins with "the market tends to..." because there is no repeating pattern to detect. We can even throw out some of the more questionable attempts at market timing like momentum or technical analysis strategies. Every one of the above strategies is an attempt to apply reason to something that is often unreasonable.

If there was no rational reason to expect stocks to appreciate at a pace faster than inflation/bonds, and we truly can't predict with confidence that the market will be higher in the future, then there would be no rational reason to be invested in stocks. It would be a gamble with unknowable odds.


*untrue for many Ex-US markets, also historically untrue for declining empires like the British, Dutch, Japanese, etc.

[waltworks]

Nah, even shitty markets have trended up over their tracked history (ie, 150ish years). Humans keep getting better at doing stuff/making stuff/consuming stuff (and having more kids).

So there's a long term pattern. It might not be the best idea to keep doing it for environmental reasons, but it's pretty clear that living in 2020 is better materially than living in 1820, or 1020, or 3000 BC for basically everyone on earth. Stocks, in the time they have existed, have tended to track that progress.

There's definitely no short term pattern. Medium term (ie, business cycle) you could have a long argument but there's not much evidence that you could predict it well enough to profit.

-W

[BicycleB]

I think it's hard to be certain, but there's rationally understandable factors underneath the "noise", the many variances.

In other words, if you become dogmatic about some specific rule ("CAPE over 20, must reduce stock %"), you might be making a mistake. But assuming that reason will never have value in this arena is probably wrong too. We should be humble about our certainties but still use reason.

There are genuinely hard cases we should be thinking about. Like whether a 10 year CAPE over 25 means we should own less stock, or how confident we should be re the 4% "rule." There are non-crazy arguments on both sides. Yet we must decide and act. Rationally so, I guess!

[MustacheAndaHalf]

I'm starting to think that sometimes the market can ONLY do the irrational thing.

E.g. 1:  Say for some reason a crisis occurs that will cut corporate earnings in half and lead to a large number of defaults and bankruptcies. Most investors will see this as a bearish sign and try to sell their stocks at prices higher than the forecast would warrant. After the last bear has sold, the next day the only people trading are bulls. Therefore, the market can only go up because the bulls don't want to sell, they want to buy, and they're the only people still trading in the market.

This sounds like a description of COVID-19 rather than a hypothetical.  It's important not to take a chain of events for granted with 100% certainty, and instead break them into separate events:
(1) corporate earnings are cut in half
and there's some chance that
(2) a huge number of defaults occur
which is expected to lead to
(3) a huge number of bankruptcies

I don't think (2) or (3) have happened, right?  Macy's was downgraded to a small cap stock, and then issued junk bonds.  If nobody bought those bonds normally, Macy's would default and go bankrupt.  But the Fed has said it will buy this type of bond (junk bond of a company that was formerly in good standing).  The Fed acted to prevent (2), which in turn prevents (3).

The Fed is backstopping debt during COVID-19.  For companies which benefit from COVID-19 (Amazon, Netflix, etc), their profits are reflected in stock prices.  For companies unable to reopen (or reopen fully), rising cases and chances of treatments/vaccines drive their stock price.  Each company fits to some extent in one or both groups: profiting during COVID-19, and unable to open fully during COVID-19.  I think the market is applying different criteria to different situations.

[vand]

There's this Star Trek episode when Spock, McCoy & a few others have crash landed on a planet and are desperately trying to fend off attacks from the savage cannibalistic natives.  After they manage to fend off one wave of attack and kill one of their attackers, Spock rationalizes that, now the crew have demonstrated their technical superiority with the more advanced weaponary, they should not fear further attack as the savages know they are outmatched.

However, the natives return in full force in a rage and manage a retalitory strike. Spock expresses his complete surprise at the turn of events, saying that they acted totally illogically.  McCoy completely castigates him and angrily asks him "Wasn't it logical to you that they would respond emotionally?!?"

In times of stress people do what their chimp (or savage canaibalistic native) brain tell them, not what their higher functioning human brain tells them. You should not be surprised when this manifests itself in their investment behaviour, nor that psychology drives prices to extreme price movements - it's only by exploring and exceeding the boundaries of what is considered normal that can know what is too cheap or too expensive and then adjust back accordingly. That is why markets always tend to extremes.

[ChpBstrd]

I'm starting to think that sometimes the market can ONLY do the irrational thing.

E.g. 1:  Say for some reason a crisis occurs that will cut corporate earnings in half and lead to a large number of defaults and bankruptcies. Most investors will see this as a bearish sign and try to sell their stocks at prices higher than the forecast would warrant. After the last bear has sold, the next day the only people trading are bulls. Therefore, the market can only go up because the bulls don't want to sell, they want to buy, and they're the only people still trading in the market.

This sounds like a description of COVID-19 rather than a hypothetical.  It's important not to take a chain of events for granted with 100% certainty, and instead break them into separate events:
(1) corporate earnings are cut in half
and there's some chance that
(2) a huge number of defaults occur
which is expected to lead to
(3) a huge number of bankruptcies

I don't think (2) or (3) have happened, right?  Macy's was downgraded to a small cap stock, and then issued junk bonds.  If nobody bought those bonds normally, Macy's would default and go bankrupt.  But the Fed has said it will buy this type of bond (junk bond of a company that was formerly in good standing).  The Fed acted to prevent (2), which in turn prevents (3).

The Fed is backstopping debt during COVID-19.  For companies which benefit from COVID-19 (Amazon, Netflix, etc), their profits are reflected in stock prices.  For companies unable to reopen (or reopen fully), rising cases and chances of treatments/vaccines drive their stock price.  Each company fits to some extent in one or both groups: profiting during COVID-19, and unable to open fully during COVID-19.  I think the market is applying different criteria to different situations.

Careful there! You have a narrative based on evidence and cause-effect relationships, with reasonable connections between ideas. You might persuade yourself to go all-in on this explanation and put everything in bull spreads on volatile brick and mortar retailers, airlines, cruise lines, etc. You could be a multi-millionaire by the end of this summer, if correct.

I’ve lost thousands of dollars to reason this way.

[MustacheAndaHalf]

I'm starting to think that sometimes the market can ONLY do the irrational thing.

E.g. 1:  Say for some reason a crisis occurs that will cut corporate earnings in half and lead to a large number of defaults and bankruptcies. Most investors will see this as a bearish sign and try to sell their stocks at prices higher than the forecast would warrant. After the last bear has sold, the next day the only people trading are bulls. Therefore, the market can only go up because the bulls don't want to sell, they want to buy, and they're the only people still trading in the market.

This sounds like a description of COVID-19 rather than a hypothetical.  It's important not to take a chain of events for granted with 100% certainty, and instead break them into separate events:
(1) corporate earnings are cut in half
and there's some chance that
(2) a huge number of defaults occur
which is expected to lead to
(3) a huge number of bankruptcies

I don't think (2) or (3) have happened, right?  Macy's was downgraded to a small cap stock, and then issued junk bonds.  If nobody bought those bonds normally, Macy's would default and go bankrupt.  But the Fed has said it will buy this type of bond (junk bond of a company that was formerly in good standing).  The Fed acted to prevent (2), which in turn prevents (3).

The Fed is backstopping debt during COVID-19.  For companies which benefit from COVID-19 (Amazon, Netflix, etc), their profits are reflected in stock prices.  For companies unable to reopen (or reopen fully), rising cases and chances of treatments/vaccines drive their stock price.  Each company fits to some extent in one or both groups: profiting during COVID-19, and unable to open fully during COVID-19.  I think the market is applying different criteria to different situations.

Careful there! You have a narrative based on evidence and cause-effect relationships, with reasonable connections between ideas. You might persuade yourself to go all-in on this explanation and put everything in bull spreads on volatile brick and mortar retailers, airlines, cruise lines, etc. You could be a multi-millionaire by the end of this summer, if correct.

I’ve lost thousands of dollars to reason this way.

Fortunately I don't go all in with predictions... but retailers aren't ready to recover 100% anyways.  They need COVID-19 to be over so everyone can browse their stores normally again.  In the meantime, the lock down put Amazon far ahead of retailers until it ended.  And maybe now, too.  So I don't know how far retailers would recover after COVID-19, nor how much of their market has been lost to Amazon.

Really, retailers and Amazon are operating in two different worlds.  Retailers are mostly unable to reopen, since people can't pack their stores.  They need government relief to keep operating, and if the Fed cuts that relief or demands repayments they can't afford, they go bankrupt.  Compare that world to Amazon, which Morningstar reports gained +40% in the past 12 months.  Amazon doesn't need loans or government help - and they're probably hiring some of the laid off retail workers as they grow rapidly.

Over the past 12 months, Macy's is down -64% while Amazon is up +40%.  Instead of being irrational, I think they're just in two different economic realities - two different economic worlds.