‘Dangerous Ideas’ And Plunging Stocks

‘Dangerous Ideas’ And Plunging Stocks

January 24, 2022, was a banner day for the financial media. Nothing generates reader interest like a selloff, and Bloomberg (among others) seized the opportunity. "The Market Has Never Plunged 10% This Fast To Start A Year," one headline screamed, in something like 80-point font. Stocks ultimately reversed course in the final hour. A manic rally off the lows helped equities close higher, but it was nevertheless a foreboding start to a critical week. When the S&P dipped into correction te
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6 thoughts on “‘Dangerous Ideas’ And Plunging Stocks

  1. H, did you read the article in WSJ about Marc Andreessen?
    His reference to Sturgeon’s Revelation, which basically says that 90% of everything is crap, applies to the US media.
    Of course, present company excepted.

  2. The Fed put exists because when risk assets sell off versus risk free assets- that is basically the definition of tightening financial conditions. Conditions are clearly tightening. What i cannot understand is the commentariat and peanut gallery (I’m talking about the talking heads) being arrogant enough to suggest how far the Fed is behind neutral. NOBODY KNOWS. That is why central bankers (rightly) tend to make iterative policy changes. So the peanut gallery starts saying 4 hikes, balance sheet run-off and then GS ups the ante. You know, the Fed should stop increasing the size of the balance sheet and then get one rate increase. After that look around and see what is going on. With this economy 2 months is a lifetime. The Fed would be smart to get rid of the (stupid) dot plots, and start making policy with a private guess on amounts and timing and a healthy dose of humility. Then they can have a meeting and voila make a decision and do that each meeting for the next year. Its ok for them to clue in the public and peanut gallery after the decision(s). But don’t project out more than 2-3 months. Let the peanut gallery make their punts. They are mostly going to be wrong anyway. And not because they are foolish, arrogant or whatever. Its just that it is almost impossible to forecast these days more than a few months out.

    1. Spot on, the arrogance is palpable and smacks of group think. It leads me to “yell” at my TV multiple times a day though I can’t stomach CNBC anymore, Bloomberg still has the taking idiots on all the time.

    2. @RIA, I agree – seems to me the Fed has gotten itself into a straitjacket of promising to communicate policy moves well in advance, when it needs maximum flexibility to deal with events that no-one understands well (other than in hind-sight).

      What an intraday reversal, but I’m skeptical that it holds.

  3. The thing is, the system is working EXACTLY the way it should. Faced with a global pandemic, the Fed and other CBs flooded the global financial system with liquidity, thereby averting the worst financial slowdown since the 1930s. Once the advent of truly miraculous vaccines, in consort with a truly heroic public health response (and shame on the idiot anti-vaxxers who have made this way harder and more deadly than it needed to be), stabilized the system, it was inevitable that the absolutely necessary monetary and fiscal supports would be withdrawn. Gradually. Which is only now beginning to happen. For those who are looking at a 10% drop in the S&P — and a much steeper drop in highly speculatlive money-losing growth stocks — as the end of the world, get real. Markets go up, markets go down. You made a shit ton on the way up, you’ll lose some on the way down. That’s the nature of “investing.” Suck it up and look on the bright side: you get to gamble in the most liquid, transparent casino ever invented.

  4. A “rebound” to what? A rebound, to introduce those that remain in the top of a TINA market to the new upper-bound, now that they ‘think’ they know what the new lower-bound is? The SP500 spelled out “V” today as pointed out in a pretty “V”acuous Bloomberg.com computer generated article featuring a table of recent dates with similar price moves. The Financial ‘journalist’ then cherry-picked data points to serve up a pattern and accompanying half-baked narrative. Guess which other periods since the dot.com bubble have a tendency to exhibit volatile “V” shaped days?

    New game, new rules. Diversity dangerously deludes devotees dustbin destined. To late for rebalancing/reallocation tweaks, options hedging (to late/expensive? IDK, not my thing really since inflation was never high enough to make the ‘costs’ associated with cash painful before :^( ), for easy/cheap tail risk hedging. Not to late, by a long shot, for so-called “dumb” retail investors, to reach for the ancient tail risk hedging standby: cash. With the experienced retail investors bailing out with the dregs of their ‘fun’ money, and their less experienced brethren soon to follow, or be slaughtered in a range-bound (best hope for a soft-landing?) sideways-thresher soon enuff, it may be entertaining to watch the professionals try to make meals of each other.

    Back in Sept 2020 Jesse Livermore 😉 wrote (read at osam.com or http://www.philosophicaleconomics.com/ ),

    “In the end, TINA markets are guaranteed to be difficult and frustrating for large numbers of people. The problem of how to properly invest in them has no easy solution. Chasing ultra-expensive assets, nervously supervising them in the hopes that you haven’t top-ticked them, is stressful and unpleasant. But so is waiting on the sidelines earning negative real returns while everyone else makes money. Time is not on your side in that effort.

    Returning to the subject of the current equity market, on the assumption that investors display zero sensitivity to valuation and invest entirely based on a pre-determined asset allocation preference, we can quantify the exact impact that the COVID-19 deficits would be expected to have on prices, if they found their way into markets [mostly they do, as he points out, injected money/liquidity flows ‘up’ to accumulate with those with a high propensity to save/invest (i.e., ‘rich’ owners)]. We simply assume that investors would bid up on the price of equity until their pre-pandemic allocation to equity was restored. To restore that allocation amid the COVID-19 debt issuance, the market would have to rise by roughly 18%, from its price at the time of the writing of this piece, roughly 3327, to a final price of roughly 3900, a forward 2-yr GAAP price-earnings ratio of 26 times.”

    “3900”, why not? Could anyone here have come up with a better number back in 2020? Anyway, if you liked those words then you are in luck. There are another 40k of them at https://osam.com/Commentary/upside-down-markets Note the link to a podcast discussing the article, probably sparing listeners some of Jesse’s excruciating detail that readers will enjoy. JL does not have exact answers, but, ‘he’ sure as heck considered most of the relevant scenarios back in 2020.

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