Is the risk to the stock market the full opening and employment of the economy?

[TomTX]

If you substitute tesla with 2.5 steel ball and accord/g50/comparable size vehicle with tennis ball you would have two things of generally equal size.
Somebody says that the steel ball is safer for whatever reason.  And I say let me throw both at you and tell me which one hurts more. One weighs more than the other.  That's it.   

Of course, feel free to make it about the structural design of the steel ball vs the tennis ball.

Mmkay, you seem to be super focused on your isolated "spherical cow" - I'm of a more practical bent.

Even if the two balls were of identical mass (both hollow, of course) and thrown with equal force, the steel ball would still hurt more. The tennis ball will deform far more as it hits you, spreading out the time of acceleration and force transfer.

Materials and structure matter.

[Sid Hoffman]

All the Lockdown darlings, Ubereats, amazon, may have some disappointing results in a couple quarters. Will Mr. market care? I don't know.

One of the things I've seen pointed out is that it's mainly small and medium sized businesses which have contracted the most or gone bankrupt. The big companies - the ones most likely to be listed on the stock markets - are the ones that are winning all that business which has been lost from small businesses. This is potentially one of those situations where it's made clear that the stock market isn't the economy. This can be a situation where the economy is floundering, but if it's a transfer of wealth away from small businesses and onto the balance sheet of big, publicly listed companies, that still means stocks can go up while the economy overall goes down. The classic K-shaped divergence we've been hearing about for a year or so now.

Now is that what's going to continue into 2021, 2022 and beyond? I have no idea, but I suspect so. Big companies are the ones best able to benefit from the all-digital world, where small businesses still rely so heavily on classic business practices like having physical shop or office space and attracting customers to physically visit. It's a fast changing world and I'm actually not sure how well small businesses can compete, at least in this climate.

Related though, I watched an interesting Economics Explained video on youtube about New Zealand. They have one of the highest rates of self-employment in the world due to streamlining the process of starting businesses rather than having a congress that caters to the big businesses with the most lobbying dollars. I feel like it's still debatable if there's simply certain things that it's easier to get away with on a remote island of 5 million than the massive 500 million population NAFTA zone and all it's mega businesses and cheap global trade but if things need to change in the US to help rebalance the gap between rich and poor, perhaps changing the laws to favor small businesses over big businesses would help. It feels really unfair that in the US, small businesses seem to pay far higher taxes than the biggest businesses which have armies of accountants and global networks of subsidies to conceal their wealth with.

[ender]

One of the things I've seen pointed out is that it's mainly small and medium sized businesses which have contracted the most or gone bankrupt. The big companies - the ones most likely to be listed on the stock markets - are the ones that are winning all that business which has been lost from small businesses. This is potentially one of those situations where it's made clear that the stock market isn't the economy. This can be a situation where the economy is floundering, but if it's a transfer of wealth away from small businesses and onto the balance sheet of big, publicly listed companies, that still means stocks can go up while the economy overall goes down. The classic K-shaped divergence we've been hearing about for a year or so now.

Then again, this trend for supply types of companies (target, home depot, etc) has been already happening pre covid as larger companies can have better and cheaper supply chains than smaller brick/mortar stores.

[maizefolk]

Part of why big companies can out compete small businesses is that they tend to be much more labor efficient.* Small businesses account for about half of all private sector jobs, but significantly less than half of total private sector economic output. So the model Sid Hoffman is talking about (which makes a lot of sense) could also explain part of why it is easier for total economic output to recover after a recession like 2008, or whatever we want to call the last year, than for total jobs to get back to where they were before the economic shock.

*Obviously not the only reason, being able to negotiate better pricing with suppliers, have better supply chains, more economies of scale etc

[roomtempmayo]

- Was Friedman right that inflation is always a monetary phenomenon, or are the leftists at least partly right that inflation has a labor side?

Look at this recession and especially the last one.  The printing presses almost melted down yet inflation has remained the lowest in decades.

The jury is still out on the current one.  But for the last one, significant productivity gains and stricter credit requirements leads to 7 million fewer jobs, stagnant wages, and and as a result low inflation.   But because rates were zero inequality continued to increase.

I ran across this interesting take the other day from Michael McCarthy at Marquette on the relationship between labor's bargaining power and monetary policy during the inflation of the late 70s and early 80s: https://www.jacobinmag.com/2016/08/paul-volcker-ronald-reagan-fed-shock-inflation-unions/

It makes me think that without something really changing to give labor vastly more bargaining power, we're not going to see sustained inflation of consumer goods.

[ChpBstrd]

- Was Friedman right that inflation is always a monetary phenomenon, or are the leftists at least partly right that inflation has a labor side?

Look at this recession and especially the last one.  The printing presses almost melted down yet inflation has remained the lowest in decades.

The jury is still out on the current one.  But for the last one, significant productivity gains and stricter credit requirements leads to 7 million fewer jobs, stagnant wages, and and as a result low inflation.   But because rates were zero inequality continued to increase.

I ran across this interesting take the other day from Michael McCarthy at Marquette on the relationship between labor's bargaining power and monetary policy during the inflation of the late 70s and early 80s: https://www.jacobinmag.com/2016/08/paul-volcker-ronald-reagan-fed-shock-inflation-unions/

It makes me think that without something really changing to give labor vastly more bargaining power, we're not going to see sustained inflation of consumer goods.

That's an interesting read, and offers another side to the usual story of Volker as the hero who beat inflation. High interest rates and a highly appreciated dollar explain why the heavy manufacturing industries and union jobs of the mid-20th century left the U.S, and why IT and finance came to dominate the US economy. It also explains why manufacturing isn't taking off in places like India or most of Latin America, where interest rates and inflation are higher.

It also makes me wonder... why didn't finance and IT whither compared to more capital-intensive industries as interest rates fell? Did rising health care costs replace inflation as the incentive to use IT and leverage to improve returns? Is China looking at the example of the US and realizing they can never raise interest rates as Volker did, which means they can never float their currency for fear of inflation and the risk of losing manufacturing dominance?

[roomtempmayo]

It also makes me wonder... why didn't finance and IT whither compared to more capital-intensive industries as interest rates fell? Did rising health care costs replace inflation as the incentive to use IT and leverage to improve returns?

That's a really interesting question.  But if health care costs drove deindustrialization and offshoring in the US where employers provide health insurance, wouldn't we expect other advanced democracies with national health care to have remained more industrial?

I'm also really curious how long the investor class continues to be enthusiastic about asset price appreciation driven by monetary policy.  I know very little about crypto, but could it (or something like it) become a USD alternative and serve as the world's reserve currency?  If so, that would seem to fundamentally change/undermine monetary policy.

[maizefolk]

Don't countries like Germany retain a lot more high value manufacturing than the USA?

...having typed this question I decided to actually check, and yes, Germany's manufacturing sector is 23% of total GDP, which is modestly lower than China's 27% but substantially higher than the US's 12%. Japan and South Korea also come in high (19% and 29% respectively)

[ChpBstrd]

It also makes me wonder... why didn't finance and IT whither compared to more capital-intensive industries as interest rates fell? Did rising health care costs replace inflation as the incentive to use IT and leverage to improve returns?

That's a really interesting question.  But if health care costs drove deindustrialization and offshoring in the US where employers provide health insurance, wouldn't we expect other advanced democracies with national health care to have remained more industrial?

I'm also really curious how long the investor class continues to be enthusiastic about asset price appreciation driven by monetary policy.  I know very little about crypto, but could it (or something like it) become a USD alternative and serve as the world's reserve currency?  If so, that would seem to fundamentally change/undermine monetary policy.

If high interest rates boosted the value of the dollar in the late 80's / early 90's, and this made it less economical to export manufactured goods and more economical to import stuff, then we should expect any other country that also had to raise rates would have suffered similarly, unless their currencies fell in value compared to their foreign customers.

Don't countries like Germany retain a lot more high value manufacturing than the USA?

...having typed this question I decided to actually check, and yes, Germany's manufacturing sector is 23% of total GDP, which is modestly lower than China's 27% but substantially higher than the US's 12%. Japan and South Korea also come in high (19% and 29% respectively)

If interest rates and relative currency values dictate the location of capital-intensive low-ROI industries like manufacturing, then in theory those industries would go where low interest rates and low currency values coincide. It looks like West Germany experienced a similar spike in interest rates in the 1970's/80's...

https://fred.stlouisfed.org/series/IRLTLT01DEM156N

...but perhaps the temporary devaluation of the Deutch Mark vs the USD in the mid-80s allowed them to keep their exporting competitiveness.

https://fred.stlouisfed.org/series/EXGEUS