Dow Plummets 500 pts as market all of a sudden stops ignoring elephant in the room

[RVonse]

This whole thing is grossly overblown.

I agree.

Ever grande has almost no ties to any US company. It’s default will not impact matters globally. The US economy will not be impacted. Companies go bankrupt every day. China does have serious issues but Xi can easily handle this issue. It’s not going to tank the entire Chinese economy anyways. That’s too dependent on manufacturing exports. Not real estate investment.

Furthermore, this may actually help their housing price bubble deflate giving more opportunity for local Chinese to afford to purchase homes. It is hard to believe but I have heard that prices in most of their metros are even higher than the prices in LA and NYC. So it must be really bad.

A more important looming issue is the debt ceiling debate. Republicans are deliberately planning to crash our economy so they can blame Biden and the democrats. We have to end the filibuster.

Historically the stock market could care less about the ceiling debate. IMHO, the stock market is far smarter about the final end game of this political BS. Everyone in America should just ignored their nothing burger debate while both sides act like children.

What I do believe could be much more troubling today though is when China decides to finally take Taiwan with their Navy. It is no longer if they are going to invade ...its a matter of when. And at that point, no matter what happens shit is going to hit the fan heavily for the US stock market. I think Australia is also pretty nervous about it too, they just bought some nuclear subs from the US.

 

[Swammerdami]

To keep this in perspective, the U.S. stock market overall has recovered from the recent dip and is near its all-time high. 10-year Treasury yield is up from a year ago but is still lower than at any time in history before 2020.

IMO, the question is NOT "why are U.S. investors skittish about rising evidence of a debt bubble?" but rather "Why aren't they MORE skittish?"

The short answer I think is that the super-rich are sitting on ever-growing piles of wealth and have to invest it somewhere. If not in stocks and bonds, then where? Bitcoin?

The solution is pretty simple, just bail them out. Can't have these giants of industry held accountable for their actions when they have friends in gubmint that can get the money.

Yeah, it's hard to see why the stock market is reacting this way when such a big failure always forces a government to step in and shore things up.

Unless this IS the friends-in-high-places step? Crash the market, a little, so the governments feel threatened? They're not ASKING for a bailout, they're making their case...bail-out or we cry havoc, and let slip the dogs of debt.

I've reddened a phrase I like! Note that the Evergrande debt is denominated in U.S. dollars.

Debt in the US has soared in large part due to interest rates. Borrowing money has been so cheap... for too long. So the companies that borrowed to grow (ie consolidate the market), that might work out.

Much of the borrowing was just to finance dividends or stock buybacks. The excitement will start when inflation raises its ugly head. Corporations will be less happy with their debt if they can no longer renew it at ultra-low rates.

 

[Trausti]

https://markets.businessinsider.com...age-goxx-bitcoin-price-ether-doge-2021-9?op=1

 

[Swammerdami]

The short answer I think is that the super-rich are sitting on ever-growing piles of wealth and have to invest it somewhere. If not in stocks and bonds, then where? Bitcoin?

Yes, some of the wealth is being used to hike prices of cryptocurrencies (and related hyper-modern "asset" classes)!

This is neither an offer to sell, nor an offer to buy, nor a solicitation of any such offer. Past performance is no guarantee.

 

[TV and credit cards]

The short answer I think is that the super-rich are sitting on ever-growing piles of wealth and have to invest it somewhere. If not in stocks and bonds, then where? Bitcoin?

Yes, some of the wealth is being used to hike prices of cryptocurrencies (and related hyper-modern "asset" classes)!

This is neither an offer to sell, nor an offer to buy, nor a solicitation of any such offer. Past performance is no guarantee.

I thought the bored money was all doing SPACs now, throwing IPOs on the market left and right.

 

[Swammerdami]

I've seen quite a bit of splaining on market behavior since the pandemic and government handouts done suggesting that small retail investors have driven XYZ things in the market. Personally, I haven't found such explanations well grounded in facts. TSLA (Tesla) for example has tripled in value since the pandemic, gaining roughly $500 billion in value. A napkin analysis: 300 million people getting say $5000 in monopoly money put it into stocks, would only be $1.5 trillion. So just TSLA stock would suck up a third of that monopoly money. Now multiply that by the hundreds of stocks that have exploded, and I just don't see how this monopoly money explains very much.

But stock market values can be amplified hugely with little money involved. If a small group of traders push the value of GameStop from $50 to $100, all the stockholders who did NOT trade see their shares also double in value. The rise in total "value" can be far greater than incoming money. You write "monopoly money" as though stimulus money was unreal, but it was made up of portraits of Benjamin Franklin magnetic traces in a bank's computer and is "realer" than stock values. If you think $1 billion must "come from somewhere" to push the stock market up a billion, then where does that billion go, when stocks fall by that same billion?

The short answer I think is that the super-rich are sitting on ever-growing piles of wealth and have to invest it somewhere. If not in stocks and bonds, then where? Bitcoin?

Yes, some of the wealth is being used to hike prices of cryptocurrencies (and related hyper-modern "asset" classes)!

I thought the bored money was all doing SPACs now, throwing IPOs on the market left and right.

I tried to cover such with the "hyper-modern asset classes."

 

[Harry Bosch]

The short answer I think is that the super-rich are sitting on ever-growing piles of wealth and have to invest it somewhere. If not in stocks and bonds, then where? Bitcoin?

Yes, some of the wealth is being used to hike prices of cryptocurrencies (and related hyper-modern "asset" classes)!

This is neither an offer to sell, nor an offer to buy, nor a solicitation of any such offer. Past performance is no guarantee.

I haven't invested in crypto at all yet. China is going to hurt that asset class. Regarding the stock market, many workers today rely on their 401ks for their retirement. There aren't as many pensions for non government workers anymore. And if you're going to retire on your 401 you need a long term rate of return between 8 to 10 percent. Where can you get that outside of the stock market?

 

[funinspace]

I've seen quite a bit of splaining on market behavior since the pandemic and government handouts done suggesting that small retail investors have driven XYZ things in the market. Personally, I haven't found such explanations well grounded in facts. TSLA (Tesla) for example has tripled in value since the pandemic, gaining roughly $500 billion in value. A napkin analysis: 300 million people getting say $5000 in monopoly money put it into stocks, would only be $1.5 trillion. So just TSLA stock would suck up a third of that monopoly money. Now multiply that by the hundreds of stocks that have exploded, and I just don't see how this monopoly money explains very much.

But stock market values can be amplified hugely with little money involved. If a small group of traders push the value of GameStop from $50 to $100, all the stockholders who did NOT trade see their shares also double in value. The rise in total "value" can be far greater than incoming money.

I get the idea of amplifying valuations due to a little extra money. Again, it was only a back of a napkin analysis. However, my back of a napkin analysis, is more significant than what I've seen from various journalists who I have read wax on about this implied story line. They mostly stick to hand waving, so someone needs to come back with some real analysis and data, also including other infusions of money. For example, the BoJ has been creating money and then buying about $60 billion in stock a year for a while. The Swiss central bank has been doing similar things. This is just one component... Then there were big tax cuts a couple years ago; and stock buy backs had been on a tear; etc....

And FWIW, GME's total capitalization is less than $15 billion, 100th of TSLA.

You write "monopoly money" as though stimulus money was unreal, but it was made up of portraits of Benjamin Franklin magnetic traces in a bank's computer and is "realer" than stock values. If you think $1 billion must "come from somewhere" to push the stock market up a billion, then where does that billion go, when stocks fall by that same billion?

I wrote 'monopoly money' being snarky towards all that 'splaining' that I was talking about. I think that you far over thought my comment...

 

[T.G.G. Moogly]

China is on record telling Evergrande to meet its payments and liabilities. To me that sounds like they're telling them to liquidate as necessary. Will be interesting to see how that pans out as lots of Chinese buy homes unseen as investments. They just want their money.

 

[funinspace]

I get the idea of amplifying valuations due to a little extra money. Again, it was only a back of a napkin analysis. However, my back of a napkin analysis, is more significant than what I've seen from various journalists who I have read wax on about this implied story line. They mostly stick to hand waving, so someone needs to come back with some real analysis and data, also including other infusions of money. For example, the BoJ has been creating money and then buying about $60 billion in stock a year for a while. The Swiss central bank has been doing similar things. This is just one component... Then there were big tax cuts a couple years ago; and stock buy backs had been on a tear; etc....

And FWIW, GME's total capitalization is less than $15 billion, 100th of TSLA.

First to fix a math fail, GME is 1/50th of TSLA in total capitalization. Also, the GME show was quite an interesting event, and something kind of new. Now whether it had any influence from government stimulus checks is an open question. But that a bunch of small investors on chat boards took on a big fund betting on the fall of GME was down right entertaining.

A few data points, but still certainly incomplete regarding the flows of money into US stocks:
The 3 stimulus disbursements were $3,200 per qualified persons (not counting kids). The below link suggests the portion from all people that was invested was 9%. Just assuming 10% of $3,200 times 300 million people would be about $100 billion dollars over the 12 month period.
https://www.pymnts.com/news/investm...ors-get-stimulus-checks-look-to-stock-market/

Retail investors are gearing up to use their $1,400 stimulus checks on the stock market, the Financial Times (FT) reported, and will likely invest around 37 percent of their checks in stocks.
<snip>
A Bank of America survey found that 36 percent of respondents would spend it, 30 percent would pay off debt, 25 percent would save, and 9 percent would invest. Bank of America lumped all three of the latter categories into one “savings” category since they all constituted the money remaining within the financial system sphere. Spending on consumer goods is a low priority.

Stock buy backs for 2020 were just a mere $520 billion (5 times the amount estimated injected from the stimulus checks). And so far this year, companies have publicly authorized another $504 billion more just thru this last May.
https://www.forbes.com/sites/palash...acks-will-accelerate-in-2021/?sh=11fd9ca32999

S&P 500 buybacks fell by 29% last year to $519.7 billion, driven almost entirely by the smallest companies in the index, Pence said.

But year-to-date through May 7 of this year, S&P 500 companies have authorized $504 billion in share repurchases – more than twice the amount authorized by this point last year and the highest total through May in at least 22 years, Pence indicated.

Central Bank money creation and buying seems to be fuzzy, but here is just one example from the Swiss central Bank US equity purchases growing by $56 billion:
https://www.eurasiareview.com/15052...anks-us-stocks-150-billion-and-counting-oped/

This time last year, the Swiss National Bank (SNB) had US stock holdings of $94 billion. The portfolio of Switzerland’s central bank has grown by $56 billion since, reporting ownership of $150 billion worth of US listed stocks as at Q1 2021.

 

[Loren Pechtel]

But stock market values can be amplified hugely with little money involved. If a small group of traders push the value of GameStop from $50 to $100, all the stockholders who did NOT trade see their shares also double in value. The rise in total "value" can be far greater than incoming money. You write "monopoly money" as though stimulus money was unreal, but it was made up of portraits of Benjamin Franklin magnetic traces in a bank's computer and is "realer" than stock values. If you think $1 billion must "come from somewhere" to push the stock market up a billion, then where does that billion go, when stocks fall by that same billion?

But so what if people made $1 billion in paper gains? A temporary swing only is of value if you sell during the swing. In the long run the market will revert to where it should be and the gains will vanish unless you sold to lock them in. The money has to come from somewhere--and it comes from the fools jumping on the bandwagon.

 

[Swammerdami]

But stock market values can be amplified hugely with little money involved. If a small group of traders push the value of GameStop from $50 to $100, all the stockholders who did NOT trade see their shares also double in value. The rise in total "value" can be far greater than incoming money. You write "monopoly money" as though stimulus money was unreal, but it was made up of portraits of Benjamin Franklin magnetic traces in a bank's computer and is "realer" than stock values. If you think $1 billion must "come from somewhere" to push the stock market up a billion, then where does that billion go, when stocks fall by that same billion?

But so what if people made $1 billion in paper gains? A temporary swing only is of value if you sell during the swing. In the long run the market will revert to where it should be and the gains will vanish unless you sold to lock them in. The money has to come from somewhere--and it comes from the fools jumping on the bandwagon.

But where "should" the market be? Maybe super-low interest rates are here to stay. Maybe Facebook and Tesla really are taking over the world. Even if there is some "reversion to the mean", it may not happen for decades.

I think speaking of "money" adds confusion, cf. "The money has to come from somewhere." It would confuse me less to speak of "wealth" or "paper wealth."

It's been centuries since anyone, fool or not, purchased the Mona Lisa painting. Yet its estimated value is many millions more than it was even recently. That "money" didn't "come from" anywhere.

 

[Swammerdami]

I think speaking of "money" adds confusion, cf. "The money has to come from somewhere." It would confuse me less to speak of "wealth" or "paper wealth."

It's been centuries since anyone, fool or not, purchased the Mona Lisa painting. Yet its estimated value is many millions more than it was even recently. That "money" didn't "come from" anywhere.

I've clicked Reply rather than Edit to focus on what I consider a key point in discussion of economics, especially valuations.

Obviously I don't deny the relevance of Money, which in today's developed world is largely controlled by central banks. But any linkage between money and asset valuations is non-trivial. If the stock market were to crash tomorrow, several trillions of dollars of "Value" would disappear despite the Fed doing nothing with Money. The number of Benjamins would remain the same (or rather increase by whatever Treasury's daily printing is). For similar reasons, values can increase with or without governments printing or injecting new Benjamins^*.
* - Yes, I'm aware that money printed on paper (or linen!) is largely irrelevant in this electronic age.

So ... discussions of economics and finance will be much more focused if we use words like "wealth" or "value" when referring to wealth or value. ("Paper wealth" may be an even better term if we feel a bubble is temporary.) Sure, stimulus checks helped push up stock prices. But phrasings like "money came from somewhere" imply a relationship much stricter than it is.

I'll try to get off my high-horse now.


ETA: I did not intend this as criticism of any post or poster. But on other message boards some people treat "wealth" and "money" as interchangeable synonyms. This causes confusion when trying to speak precisely on economics; so I wanted to nip that confusion "in the bud."

 

[Loren Pechtel]

But stock market values can be amplified hugely with little money involved. If a small group of traders push the value of GameStop from $50 to $100, all the stockholders who did NOT trade see their shares also double in value. The rise in total "value" can be far greater than incoming money. You write "monopoly money" as though stimulus money was unreal, but it was made up of portraits of Benjamin Franklin magnetic traces in a bank's computer and is "realer" than stock values. If you think $1 billion must "come from somewhere" to push the stock market up a billion, then where does that billion go, when stocks fall by that same billion?

But so what if people made $1 billion in paper gains? A temporary swing only is of value if you sell during the swing. In the long run the market will revert to where it should be and the gains will vanish unless you sold to lock them in. The money has to come from somewhere--and it comes from the fools jumping on the bandwagon.

But where "should" the market be? Maybe super-low interest rates are here to stay. Maybe Facebook and Tesla really are taking over the world. Even if there is some "reversion to the mean", it may not happen for decades.

I think speaking of "money" adds confusion, cf. "The money has to come from somewhere." It would confuse me less to speak of "wealth" or "paper wealth."

It's been centuries since anyone, fool or not, purchased the Mona Lisa painting. Yet its estimated value is many millions more than it was even recently. That "money" didn't "come from" anywhere.

I posted this in response to a post about the GameStop situation. That's not a fundamental market shift, that's a short-term excursion away from the market value of the company.

And note that companies do have a proper value--the net present value of all future net earnings divided by the number of shares outstanding. The reason we have a stock market at all is that equation has a shitload of imperfectly-known values. That doesn't mean completely unknown, though.

 

[funinspace]

Meanwhile, it appears that Evergrande has been papered over like a pretty piñata, so all is good.

As most of the indices have managed to churn out new highs in the last month, I thought I'd post an interesting chart, from this article about market valuations:

https://www.advisorperspectives.com/dshort/updates/2021/11/08/is-the-market-still-overvalued

 

[RVonse]

So what does that graph tell us funinspace? That we should liquidate all our stock and lock everything down for the storm? Where do we put all our cash while we are waiting for the storm? Bank of America? They will not pay a lot of interest on our cash savings. Certainly not the 6% inflation our fed is even admitting to.

Gold? Crypto? Warren Buffet says bitcoin is going to end very badly.

Personally, I actually like Tesla stock. It sure is overpriced right now but at least it is a company I believe will be the future. So after the bubble breaks Tesla will go way down with the rest, but I'm betting it will still be worth something in the future.

 

[Loren Pechtel]

Meanwhile, it appears that Evergrande has been papered over like a pretty piñata, so all is good.

As most of the indices have managed to churn out new highs in the last month, I thought I'd post an interesting chart, from this article about market valuations:

https://www.advisorperspectives.com/dshort/updates/2021/11/08/is-the-market-still-overvalued

View attachment 36042

China has been aggressively trying to isolate the Evergrande failure from the rest of the economy.

 

[funinspace]

So what does that graph tell us funinspace? That we should liquidate all our stock and lock everything down for the storm? Where do we put all our cash while we are waiting for the storm? Bank of America? They will not pay a lot of interest on our cash savings. Certainly not the 6% inflation our fed is even admitting to.

Gold? Crypto? Warren Buffet says bitcoin is going to end very badly.

Personally, I actually like Tesla stock. It sure is overpriced right now but at least it is a company I believe will be the future. So after the bubble breaks Tesla will go way down with the rest, but I'm betting it will still be worth something in the future.

The graph suggests that current stock prices are at the very high end of normal by several measures. How long this will continue is the big unknown. Any correction, will most likely be just that, a correction that should rebound within a few years. Though there have been exceptions that took a decade or so to come back. Though I think there is more inflation, I also think the general media is going overboard with some of the stories. The pandemic broke a lot of stuff, so the rebound is of course going to spike prices. Auto pricing is tied back in many ways to the shortages of IC's. That will get resolved eventually.

Cryptocurrencies, are even far more risky and speculative than gold, so no matter what it should only be no more than something like 5% of savings.

Personally, I think Tesla is insanely over valued (and yes I missed that boat, other than minorly within a lithium focused ETF). Yeah, it might have a long and good future, but I just don't see how it will grow into current valuations anytime soon. If one looks at the top corporations in capitalization from 20 or even 10 years ago, one will find that very few are still there today. Heck GE was #2 in 1999, now they are being split apart after years of flailing. Microsoft on the other hand, is one of the few that survived well.

Ref for top capitalizations:

A Visual History of the Largest Companies by Market Cap (1999-Today)

See how the world's largest companies have changed over time, and how this helps tell a broader story about what the market is thinking.

www.visualcapitalist.com

Things like healthcare and utilities tend to weather the financial storms better. One can find many ETF's that cover a broad set of companies, instead of trying to pick on your own. Other niche areas could rebound better than others. Cybersecurity isn't going away. Robotics will continue no matter what. It is hard to imagine that the demand for lithium is going to flatten any time soon. Not that a sharp correction won't hit them as well...

 

[funinspace]

Meanwhile, it appears that Evergrande has been papered over like a pretty piñata, so all is good.

As most of the indices have managed to churn out new highs in the last month, I thought I'd post an interesting chart, from this article about market valuations:

https://www.advisorperspectives.com/dshort/updates/2021/11/08/is-the-market-still-overvalued

View attachment 36042

China has been aggressively trying to isolate the Evergrande failure from the rest of the economy.

Quite true. Between that and their autocratic tendency to obfuscate anything/everything that doesn't support their political narrative, it is always a challenge to know what is really going on in any detail in their economy/companies. There have certainly been many fun financial rides there, but their leadership has become a tad too forceful for my tastes in the last year.

And to think that some Americans think the Federal Reserve hides a few things/details and it is a big bad-scary deal, but somehow think that China's methods are superior...and see no contradiction in their thinking...

 

[funinspace]

More on China’s real estate potential Evergrande contagion from a long commentary. The author is kind of a broken record, on 'the sky is going to fall...someday', but he does do a lot of interesting news summarization and data analytics. It appears that China's effort to isolate the Evergrande issue is facing leakages.

Weekly Commentary: Accident-Prone Endgame Dynamic

Bloomberg Television’s Jonathan Ferro (November 12, 2021): “You wrote a scathing piece in the Financial Times this week. I want to start wit...

creditbubblebulletin.blogspot.com

November 8 – Bloomberg (Richard Frost): “Kaisa is showing that Evergrande was just the tip of the iceberg when it comes to the challenges facing China’s real estate industry. Kaisa is putting up 18 projects in Shenzhen for sale, with a total value estimated at about 82 billion yuan ($13bn), according to reports… That’s after the company said it was facing ‘unprecedented pressure on its liquidity’ and missed payments on high-yield consumer products it had guaranteed. With more than $11 billion of dollar bonds outstanding, Kaisa is the nation’s third-largest dollar debt borrower among developers.”

November 11 – Financial Times (Thomas Hale and Hudson Lockett): “A bout of selling this week in junk bonds issued by riskier Chinese property developers has sent their borrowing costs soaring to the highest level in a decade and imperilled companies’ ability to access an important funding source… ‘The downward spiral for Chinese developers is the result of a massive liquidity squeeze,’ said Paul Lukaszewski, head of corporate debt for Asia-Pacific at Abrdn. ‘Few companies can survive for long in environments where they cannot access their internal cash or external financing.’”

Beijing is no doubt becoming increasingly nervous. The developer bond collapse turned disorderly, eliciting supportive comments from China’s state media and PBOC officials. There was a spectacular short squeeze in developer shares and bonds, but it’s difficult to believe the situation won't continue to deteriorate. China is very early in its real estate bust. I doubt Chinese citizens understand the seriousness of the situation. Published apartment prices have remained stable, despite the acute liquidity squeeze, which will force heavy discounting of unsold units.