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Old 05-19-2020, 05:31 PM   #1
Wittgenheiny
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Economic Impact of Coronavirus

To move the conversation from the Stock Trading Thread
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Old 05-20-2020, 06:26 AM   #2
chytry
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Re: Economic Impact of Coronavirus

The ripples and knock on effects are quite a challenge for human senses but they are widespread.
As an example, here is a good podcast about the impact on US universities:
https://freakonomics.com/podcast/covid-19-college/
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Old 05-20-2020, 08:38 AM   #3
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Re: Economic Impact of Coronavirus

Great article from yesterday from The Economist on restaurant bookings:



The flows on from this are huge. This flows into Google and FB, with lower ad revenue, payment processing companies, food systems set up for the restaurant industry who can't quickly or easily retool/redistribute to other sources (or don't even have the same demand because people at home tend to eat different things to what they eat at restaurants), software companies who supply this industry, workers in this industry (1 in 12 jobs) who used their paycheck to buy other goods and sevices from other industries and now need time to reskill.

This is what economic damage looks like (which candybar doesn't get), and it's going to happen in lesser forms across all industries. Vast amounts of capital will lie underutilized. Systems set up to service a particular demand efficiently will have much less demand. This large fall from peak output, the years to retool and relearn, represents trillions in real economic losses, probably more than $10 trillion worldwide at this point in lost previously-expected economic output. That comes out of somewhere, and good portion of which is corporate profits.
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Old 05-20-2020, 12:11 PM   #4
Wittgenheiny
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Re: Economic Impact of Coronavirus

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Originally Posted by candybar View Post
Then what are you talking about? Who cares about efficiency? You're not being precise enough with words for that to mean anything.
I'm talking about the real economy.



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I have no idea what you mean by "real economic efficiency" but it seems to have no relation to anything tangible.
Here is a good place to start.



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You're having a lot of trouble distinguishing between basic equations and the real economy.
Oh the irony.

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Of course the real economy can grow and is not a zero sum game. That doesn't mean anything here.
It means everything.

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Keep in mind, you're the one trying to extrapolate something like a one-time GDP drop of 5%-ish to a substantially large drop - I am arguing against a 50% drop being the expected result based on history.
I have no idea what your triple use of the word 'drop' here is supposed to mean.


Quote:
This requires S&P 500 is to be an extreme loser way out of proportion with the rest of the economy. If you're going to claim that, show your work. know from history that something like that only really happens with a massive deleveraging event and/or a rush to an alternative asset class. But this requires a huge amount of leverage in the first place - we weren't that levered to start with and deficit spending of this magnitude (keep in mind, this never happened in 2001 or 2008) delevers private sector balance sheets on average. This is all basic stuff. Again, you don't seem to understand any of the terms we're using precisely enough to understand what I'm saying.
This is a red herring. You're talking about purely theoretical happenings that might directly affect the S&P in a totally different crisis that have absolutely nothing to do with the current one.

45-55% of the US economy is small business, and it represents ~50% of the jobs. This sector is the hardest hit, is the least solvent, and is not listed on the markets. However, claiming that a mass failure here won't eventually and indirectly affect businesses on the S&P, in terms of both profits and investment, is simply blind to reality. The initial drop was mostly fear. The real drop coming is going to be a real effect of the damage currently taking place.

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Again, we went over all of this - like if you're saying economy bad, so S&P 500 bad, then show your work in terms of corporate profits.
Don't make me laugh. The one who hasn't done his work here is you.

Let's just take one example from the S&P, Amazon. Sales on Amazon jumped 26% in the first quarter, but earnings fell by 30%. Why? Because they transitioned from non-essential, profitable business to essential business with lower and sometimes negative margins. Yet their stock price rose by 34%. Explain that one, genius.

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If you're going to talk about insolvency and balance sheets, "economy bad" doesn't matter - people go bankrupt in strong economies all the time.
This is idiotic.

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This isn't about the size of the economy - this is about cashflow problems.
This is almost a pure contradiction in one sentence.


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I don't know what this has to do with anything.
Clearly, you don't.



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If you had a 20% increase in sales, by definition, from a cash balance perspective, the rest of the world is poor by that exact amount.
In the instant only. Value has been added by the company, which is why someone is willing to pay more for the G or S than the company did to provide it. That is an increase in GDP. That value eventually shows up in the cash balance, just like how on the corporate side selling something for a profit increases net income, which increases shareholder equity, which entails a necessary increase to assets and liabilities.

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Again, it seems to be that you have trouble distinguishing between the money flow and the real economy. We don't know if the transaction increased or decreased the overall pie (what if you sell opioids to addicts?) but we know for sure that the rest of the economy has that much less money.
Again, ironic because it is you that doesn't understand this simple concept. Selling opioids to addicts is an enormously profitable business model. The generation of profit is, by definition, an increase in GDP. Transactions with value added always add to GDP. That's what GDP is. The fact it's not taken into account in the calculation of GDP is irrelevant--it still exists. All this means is that GDP is underestimated (by $111 billion, if you account for all crime).



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I don't understand where you're going with any of this. Corporate profits are going to drop. Everyone knows this. What does that have to do with anything?
No, massive small business failures and loss of economic efficiency will eventually show up in the S&P. That is the argument. Get on board with it.



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No, you're the one not getting it. Without knowing the specifics, we don't know where that money came from. Let's say the company just increased prices for existing services. The world is exactly the same as before, the company is $200 richer, the rest of the world is $200 poorer. Or let's say the US government contracted the company to do absolutely nothing and paid them $200. They are $200 richer, the rest of the world is $200 poorer. In short, you're confusing transaction with value creation.
Wow.

When I take a product that cost me x to produce, and I add value to it and sell it to you at y (you value it higher), I have created GDP. That is what GDP is. The difference in values didn't exist before the transaction, but does after. Similarly, when I offer you labor and energy that is (economically) worth nothing, and you pay me w for it, our transaction has created w, which didn't exist before.

If people are willing to pay increases in prices for existing services, then real GDP is created, because profits go up. Your latter example proves you don't understand this concept. Contracting someone to do nothing and paying them for it (which doesn't even happen in reality) creates nothing. That's just a transfer of money, a neutral trade, and has nothing to do with GDP.



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The point isn't that the market has it all figured out - the point is that everything you've said that's not wrong is something that practically every major market participant already understands fairly well and certainly better than you do. I mean, you should know that you don't really understand even basic macro and have no familiarity with some of the basic concepts required to understand the broader economy. I really don't understand how you could proclaim that you have it all figured.
This is false, for the many reasons I've mentioned before which you refuse to address. Economic efficiency has been eroded, which means loss. Forecasts for big S&P companies are in chaos, precisely because the invisible part of the iceberg, small business, is in chaos. The market can't calculate the effects of that, because they are invisible. Similarly, the market can't take into account, in its valuation, incalculable factors. Regardless, even S&P earnings are hugely down, yet their shares are going up.

When that bubble pops is unpredictable, but it's coming.

Last edited by Wittgenheiny; 05-20-2020 at 12:39 PM.
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Old 05-20-2020, 06:08 PM   #5
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Re: Economic Impact of Coronavirus

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Originally Posted by ToothSayer View Post
The flows on from this are huge. This flows into Google and FB, with lower ad revenue, payment processing companies, food systems set up for the restaurant industry who can't quickly or easily retool/redistribute to other sources (or don't even have the same demand because people at home tend to eat different things to what they eat at restaurants), software companies who supply this industry, workers in this industry (1 in 12 jobs) who used their paycheck to buy other goods and sevices from other industries and now need time to reskill.
The flows from this are huge? Software companies that supply this industry, totally struggling:

https://www.grubstreet.com/2020/05/g...d-revenue.html

"Orders in April increased by 20 percent over last year, and the company is experiencing growth of over 100 percent in many markets."

In case you were wondering, "full-service restaurants" is not a big industry:

https://www.statista.com/statistics/...d-drink-sales/

~300B in sales. Low margin, most of this revenue is going to rent, staff and ingredients. Not a lot of value add here. How much of this goes to S&P 500 do you think? Not much at all, as far as I can tell. LOL at this being an issue for software companies. And LOL at this group of small businesses not spending $$$ on marketing given high fixed costs. And marketing spend will disproportionately be spent online, since that's where people are. People being forced out of physical spaces only accelerates the current secular trend, which helps dominant incumbents. The US economy, from the perspective of small businesses like this, has been struggling for decades - this wasn't a problem for large corporations then, and it's not a problem for them now.

And it's not like lower-income folks spending $$$ on essentials was a big driver of economic growth (it's not) or is going to stop (they'll have to spend, whether they pay for it or not). This is a political distribution problem more than anything else - obviously economic equality helps, but it's not a necessary ingredient for stock market returns.

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This is what economic damage looks like (which candybar doesn't get), and it's going to happen in lesser forms across all industries. Vast amounts of capital will lie underutilized. Systems set up to service a particular demand efficiently will have much less demand. This large fall from peak output, the years to retool and relearn, represents trillions in real economic losses, probably more than $10 trillion worldwide at this point in lost previously-expected economic output. That comes out of somewhere, and good portion of which is corporate profits.
Sure, then, why not take a wild guess as to the S&P 500 corporate profit drop for this year and next?
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Old 05-20-2020, 08:13 PM   #6
rivercitybirdie
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Re: Economic Impact of Coronavirus

OP, great idea. thank you

i've seen reference to 2nd quarter GDP down more than 40% on annualized basis.. but i can't figure out if that means year/year or quarter/quarter times approx. 4.

10% down seems way too light....... 40% down seems way too much. although i've been pretty bearish and ahead of the average person economically.

if i look at my own extended family, all 8 people i thought of either kept working or were paid by company/government not to work (but paid by government as they work for government)

i can't believe all the physical stuff that's closed or been slaughtered (airlines) represents 40% of the economy........

if you look at top 30 stocks on S&P 500, youd think most of them did ok during this time period. apple might be one exception. home depot another.....

it really is small business that is getting slaughtered....... we need to support them. us as consumers and government.
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Old 05-20-2020, 08:17 PM   #7
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Re: Economic Impact of Coronavirus

it seems like there are 3 categories of companies and effects:

1) business shut down or was completely killed during this shut down. hotels and airlines might have been open but at really low capacity ute.

2) businesses that benefitted on a partial basis from changes in how we do things. this episode will very much accelerate trends that were already in play.. amazon, netflix, zoom etc..

3) everyone is going to hit as this works its way through the economy....... the average consumer is going to be much more careful about discretionary spending in the foreseeable future, whether by choice or necessity.

4) i'll add a 4th category....... whether the business will recover in 18 months to previous level of activity. unfortunately, i can't see that for almost all businesses in category #1. many people won't want to fly, hotel, casino or cruise after this. for sure some won't care but these businesses need access to the whole population (in theory)
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Old 05-20-2020, 08:19 PM   #8
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Re: Economic Impact of Coronavirus

i may go through the s&p 100 (maybe top 30 companies) and give score as to how badly they've been hit.
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Old 05-20-2020, 08:42 PM   #9
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Re: Economic Impact of Coronavirus

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Originally Posted by Wittgenheiny View Post
45-55% of the US economy is small business, and it represents ~50% of the jobs. This sector is the hardest hit, is the least solvent, and is not listed on the markets. However, claiming that a mass failure here won't eventually and indirectly affect businesses on the S&P, in terms of both profits and investment, is simply blind to reality.
Again, this has been explained many times over. No one is saying S&P 500 is unaffected, just that a run-of-the-mill drop in corporate profits isn't a big deal in terms of overall valuation and is entirely swamped by the effects of the change in yield and risk premium. Unless the drop in profit is large enough to meaningfully drag a significant % of these companies towards insolvency (weighted by market cap of course), it's not a big factor as long as investors can agree that this does not meaningfully change their long-term prospects. Whereas doubling the discount rate would effectively lead to a 50% decrease in value. That's why the latter is a significantly more important factor in aggregate market movements, even if individual stocks move on earnings. Individual companies' fortunes can shift dramatically, S&P 500 as a whole won't. Unless there's a financial crisis requiring many of them to recapitalize. Thus large drops in indices are about large shifts in valuation (discount rate) or a financial crisis.

No one is saying there won't be a short-term profit drop - but S&P 500's sensitivity to short-term drop in corporate earnings is low. It can seem large when you analyze individual companies, because the future of individual companies is uncertain and you have nothing else but recent history to extrapolate on, missing targets badly is a sign that your relative position in the market isn't as strong as previously thought and this has long-term implications. But when you have an exogenous shock like this, people aren't going to go: you've been growing 20% year over year, so we've been valuing the company like you can keep growing for a while, but you didn't grow at all the last two quarters, so your growth story must be over, let's massively slash your valuation to reflect the end of growth. Instead, almost every analyst will think, your growth story is the same as before, your competitors had lower revenue due to COVID-19, so you're still growing your market share, who cares if COVID-19 ate your growth for the year, you're still a growth stock, this is a one-time blip we'll adjust for, but the bulk of your future potential is still there. We see this all the time with one-time expenses and other non-recurring items. This isn't to say COVID-19 isn't a substantial long-term drag at least for some sectors and some companies, but it's simply not that for all sectors and all companies. And it will definitely strengthen some moats.

And the market is substantially off the ATH, despite an unprecedented combination of fiscal and monetary stimulus and extremely low bond yields. So the market is not valued as though things are going to be just fine - the implied risk premium is high, though not historically so.

Quote:
Let's just take one example from the S&P, Amazon. Sales on Amazon jumped 26% in the first quarter, but earnings fell by 30%. Why? Because they transitioned from non-essential, profitable business to essential business with lower and sometimes negative margins. Yet their stock price rose by 34%. Explain that one, genius.
This is investors looking to the future and understanding that an accelerated B&M -> online transition, not to mention increased cloud adoption and less competition (both other cloud providers and private datacenters) help the dominant incumbent. If you've been trying to value Amazon on past earnings, you would've been thinking it's one of the most overvalued comapnies for the last 20+ years. Also, I also doubt the drop in earnings is primarily about non-essential to essential shift - it's likely more about straight up COVID-19 related costs, increased expenses related to building up capacity in certain areas to meet additional demand, plus supply-side disruption earlier in the year from China causing lots of things to be simply unavailable. And even if it was, you do realize that much was this voluntary, right? They didn't have to, but literally tried to shift their fulfillment capacity away from non-essentials to essentials, for long-term good will. That's once again, Amazon investing in the future, as they know it's not about maximizing things here and now. On the whole, the positives here are about the long term, while the negatives are about the short term. This is one of the biggest stories of our time, not some small business trying to survive each month. This is how well-run big businesses operate - if you're thinking from the perspective of trying to maximize profits, what most of the best companies in the world do don't make any sense whatsoever - they are consistently leaving billions of easy money on the table because they're thinking long-term. This is why it shouldn't be hard for them to survive even some of the harshest downturns - it wouldn't be hard for them to optimize for short-term cashflow, if that became necessary.

I haven't done any detailed analysis on AMZN, so this isn't any sort of endorsement - it does seem awfully expensive - but given the change in yield and the change in their relative market position, AMZN is certainly a more attractive investment now than it was before at the same price. Which is probably why it's up.

Quote:
In the instant only. Value has been added by the company, which is why someone is willing to pay more for the G or S than the company did to provide it. That is an increase in GDP. That value eventually shows up in the cash balance, just like how on the corporate side selling something for a profit increases net income, which increases shareholder equity, which entails a necessary increase to assets and liabilities.
Value creation doesn't just "show up in the cash balance" - for it to show up, someone else has to have a cash deficit. You're still confusing economic concepts that are independent of money with actual accounting, which follows strict rules.

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Again, ironic because it is you that doesn't understand this simple concept. Selling opioids to addicts is an enormously profitable business model. The generation of profit is, by definition, an increase in GDP. Transactions with value added always add to GDP. That's what GDP is. The fact it's not taken into account in the calculation of GDP is irrelevant--it still exists. All this means is that GDP is underestimated (by $111 billion, if you account for all crime).
The entire point here is that the transaction itself isn't what creates value and depending what the transaction was, it can help destroy or create value. The opioids are almost certainly not worth what the addicts are paying for and even they are, whatever fleeting joy/escape it provides disappear more or less instantaneously, while the negative effects remain for everyone to deal with. Yet this is part of GDP (I think you misunderstood what I was saying and thought I was saying it's not). The point here is that this transaction doesn't help the economy at all - the society isn't better off as a result of this transaction. As an another example, if I went to a chiropractor, the thing he can do to increase the GDP most is to completely mess up by back so that it will cost me lots of money in the future to rehabiitate. That would add the most to GDP. But that doesn't add wealth - it's just a broken window. Likewise, natural disasters are often neutral to GDP even though they clearly destroy lots of wealth and even disrupt production - but the disruption in production is often compensated by additional spending from having to rebuild.

And nearly all value creation is consumed and doesn't have long-term positive consequences. This is what value creation looks like - I buy a slice of pizza for $5. It was actually worth $6 to me. Thus I booked $1 of consumer surplus. The pizzeria spent $4 to make the pizza. So they booked $1 of.profit But the pizzeria and I combined are $4 poorer after this transaction + consumption - we booked $2 of profit together, but I consumed $6 worth of pizza. And it's gone. My fleeting moment of joyous consumption won't help anyone in the future and the world is now poorer. The bulk of GDP that's gone this year looks like this - a lot of it is frivolous, non-essential consumption. Sure it sucks for the providers, but the world isn't poorer purely as a result of this. Keep in mind, a lot of luxury consumption is about social competition and has negative externalities.

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Economic efficiency has been eroded, which means loss.
Again, I don't know what you mean here but as I mentioned, economic efficiency is not what brings about corporate profit. Consistent corporate profit is about creating a defensible moat and using it to sustain and exploit systematic inefficiencies. You need to stop handwaving and think through the implications. Like come up with specific examples of inefficiencies and come up with a list of winners and a list of losers.

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Forecasts for big S&P companies are in chaos, precisely because the invisible part of the iceberg, small business, is in chaos.
How about no? They are in chaos because they don't even know what will open when. Do you not agree that there's considerable uncertainty in terms of how things will play out? I mean some slightly optimistic news on vaccines is moving the market significantly. There's much we don't know about the trajectory of the virus and the extent of social distancing that will be needed, prescribed or even voluntarily undertaken. That's before we get to policy responses, not just in the US, but around the world. I wrote a whole post about all the uncertainties that will haunt the world econmomy back in March. None of that is resolved. It's not about the damage fromt he past, it's about the damage in the future.

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The market can't calculate the effects of that, because they are invisible. Similarly, the market can't take into account, in its valuation, incalculable factors. Regardless, even S&P earnings are hugely down, yet their shares are going up.
By this standard, everything is incalculable and nothing is knowable. The world is always uncertain - we don't know that much about the future and everything we think we know may turn out to be completely wrong. But that doesn't mean the market is automatically wrong in the direction you imagine - it's entirely amateurish to think that because the market can't calculate the exact damage of something, it won't take that into account at all or that it will consistently underreact. Generally speaking, when there's something the market can't take into account that everyone knows is bad and is coming, the market will tend to overreact - the market hates uncertainty, this is why government bonds are so expensive and vol is higher in bear markets. I can't think of the last time it underreacted. Massive small business failures are also hardly invisible - if it was invisible, how do you know about it? - and entirely calculable. Again, you need some self-awareness here - every single internet forum on investing is full of people talking about the exact same stuff you are and you don't think there's anyway the market can take this into account because the damage is unknowable?
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Old 05-20-2020, 08:47 PM   #10
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Re: Economic Impact of Coronavirus

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Originally Posted by rivercitybirdie View Post
OP, great idea. thank you

i've seen reference to 2nd quarter GDP down more than 40% on annualized basis.. but i can't figure out if that means year/year or quarter/quarter times approx. 4.

10% down seems way too light....... 40% down seems way too much. although i've been pretty bearish and ahead of the average person economically.
40% drop Q/Q annualized is roughly 12% drop Q/Q - the math is 1 - (0.6 ^ 1/4).
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Old 05-20-2020, 09:15 PM   #11
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Re: Economic Impact of Coronavirus

candybar, you think the risk premium should have gone down since before the coronavirus hit? VIX is way higher than before crisis, although way off its high too

interest rates have definitely helped.

that's the beauty of DDM or DCF models......... really only 3 or 4 inputs depending on how you look at it. and risk premium is usually the plug (meaning it often explains differences in the market)
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Old 05-20-2020, 09:37 PM   #12
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Re: Economic Impact of Coronavirus

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Originally Posted by candybar View Post
Quote:
Let's just take one example from the S&P, Amazon. Sales on Amazon jumped 26% in the first quarter, but earnings fell by 30%. Why? Because they transitioned from non-essential, profitable business to essential business with lower and sometimes negative margins. Yet their stock price rose by 34%. Explain that one, genius.
This is investors looking to the future and understanding that an accelerated B&M -> online transition, not to mention increased cloud adoption and less competition (both other cloud providers and private datacenters) help the dominant incumbent. If you've been trying to value Amazon on past earnings, you would've been thinking it's one of the most overvalued comapnies for the last 20+ years. Also, I also doubt the drop in earnings is primarily about non-essential to essential shift - it's likely more about straight up COVID-19 related costs, increased expenses related to building up capacity in certain areas to meet additional demand, plus supply-side disruption earlier in the year from China causing lots of things to be simply unavailable. And even if it was, you do realize that much was this voluntary, right? They didn't have to, but literally tried to shift their fulfillment capacity away from non-essentials to essentials, for long-term good will. That's once again, Amazon investing in the future, as they know it's not about maximizing things here and now. On the whole, the positives here are about the long term, while the negatives are about the short term. This is one of the biggest stories of our time, not some small business trying to survive each month. This is how well-run big businesses operate - if you're thinking from the perspective of trying to maximize profits, what most of the best companies in the world do don't make any sense whatsoever - they are consistently leaving billions of easy money on the table because they're thinking long-term. This is why it shouldn't be hard for them to survive even some of the harshest downturns - it wouldn't be hard for them to optimize for short-term cashflow, if that became necessary.
My mouth went increasingly open as I read this, then I started laughing. Good lord man. Let me make this plain for you, since you clearly know nothing about how the market works or what its participants do or think:

Amazon bought up because investors thought: "Amazon revenue is going up from covid and it will stay up during covid. They're having a temporary surge in their business. Therefore, it is a safe place to bet on stocks during covid as other things crash, and ride out the uncertainty".

That's it. That's the sum of the market action on Amazon to the first order. Nothing you wrote is in any way relevant to why Amazon went up. It's completely irrelevant bullshit from a guy with a theoretical education and no clue. People weren't thinking about the long term and the "accelerated transition", they literally found a safe place to park money for the short term and put it there. That's it.
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Old 05-20-2020, 09:51 PM   #13
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Re: Economic Impact of Coronavirus

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Originally Posted by candybar View Post
Again, this has been explained many times over. No one is saying S&P 500 is unaffected, just that a run-of-the-mill drop in corporate profits isn't a big deal in terms of overall valuation and is entirely swamped by the effects of the change in yield and risk premium.
You consistently mischaracterize this as a 'runofthemill' drop or a standard that has somehow been seen before. It hasn't been seen before, and this is not run of the mill.

Quote:
Unless the drop in profit is large enough to meaningfully drag a significant % of these companies towards insolvency (weighted by market cap of course), it's not a big factor as long as investors can agree that this does not meaningfully change their long-term prospects. Whereas doubling the discount rate would effectively lead to a 50% decrease in value. That's why the latter is a significantly more important factor in aggregate market movements, even if individual stocks move on earnings. Individual companies' fortunes can shift dramatically, S&P 500 as a whole won't. Unless there's a financial crisis requiring many of them to recapitalize. Thus large drops in indices are about large shifts in valuation (discount rate) or a financial crisis.
Yes, and my postulation is that this precise effect is coming. S&P, after losing a huge percentage of their customer base, will have no choice but to restructure due to lost earnings. The lost earnings have already happened (Amazon 30% drop) or are happening.

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No one is saying there won't be a short-term profit drop - but S&P 500's sensitivity to short-term drop in corporate earnings is low.
It's not a profit drop, it's a loss in income, or will be. I agree with the latter part of this sentence though.

Quote:
It can seem large when you analyze individual companies, because the future of individual companies is uncertain and you have nothing else but recent history to extrapolate on, missing targets badly is a sign that your relative position in the market isn't as strong as previously thought and this has long-term implications.
The S&P is literally just a collection of individual companies, which is a subset of the economy, which is the total collection of all individual companies, consumers, and government.

Quote:
But when you have an exogenous shock like this, people aren't going to go: you've been growing 20% year over year, so we've been valuing the company like you can keep growing for a while, but you didn't grow at all the last two quarters, so your growth story must be over, let's massively slash your valuation to reflect the end of growth.
Nor is anyone making that claim. Conversely, are you claiming that the massive selloff that happened in February and March was precisely because people re-evaluated the long term potential of public offerings? Why do you think selloffs happen at all?

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Instead, almost every analyst will think, your growth story is the same as before, your competitors had lower revenue due to COVID-19, so you're still growing your market share, who cares if COVID-19 ate your growth for the year, you're still a growth stock, this is a one-time blip we'll adjust for, but the bulk of your future potential is still there. We see this all the time with one-time expenses and other non-recurring items. This isn't to say COVID-19 isn't a substantial long-term drag at least for some sectors and some companies, but it's simply not that for all sectors and all companies. And it will definitely strengthen some moats.
This is, again, a misrepresentation of the claim.

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And the market is substantially off the ATH, despite an unprecedented combination of fiscal and monetary stimulus and extremely low bond yields. So the market is not valued as though things are going to be just fine - the implied risk premium is high, though not historically so.
The market is at May 2019 ATHs, despite a massive loss in revenue for 50%+ of the economy. With that in mind, is the market index under, over, or fairly valued to you?



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This is investors looking to the future and understanding that an accelerated B&M -> online transition, not to mention increased cloud adoption and less competition (both other cloud providers and private datacenters) help the dominant incumbent. If you've been trying to value Amazon on past earnings, you would've been thinking it's one of the most overvalued comapnies for the last 20+ years.
Amazon has a virtual monopoly in the ecommerce space. That kind of competitive advantage can outweigh even earnings, but it doesn't make earnings irrelevant.

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Also, I also doubt the drop in earnings is primarily about non-essential to essential shift - it's likely more about straight up COVID-19 related costs, increased expenses related to building up capacity in certain areas to meet additional demand, plus supply-side disruption earlier in the year from China causing lots of things to be simply unavailable.
Increased costs and expenses reduce margins....

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And even if it was, you do realize that much was this voluntary, right? They didn't have to, but literally tried to shift their fulfillment capacity away from non-essentials to essentials, for long-term good will. That's once again, Amazon investing in the future, as they know it's not about maximizing things here and now. On the whole, the positives here are about the long term, while the negatives are about the short term. This is one of the biggest stories of our time, not some small business trying to survive each month. This is how well-run big businesses operate - if you're thinking from the perspective of trying to maximize profits, what most of the best companies in the world do don't make any sense whatsoever - they are consistently leaving billions of easy money on the table because they're thinking long-term. This is why it shouldn't be hard for them to survive even some of the harshest downturns - it wouldn't be hard for them to optimize for short-term cashflow, if that became necessary.

I haven't done any detailed analysis on AMZN, so this isn't any sort of endorsement - it does seem awfully expensive - but given the change in yield and the change in their relative market position, AMZN is certainly a more attractive investment now than it was before at the same price. Which is probably why it's up.
It's up because it has a monopoly in the ecommerce space and a massive competitive advantage that most businesses don't have---the ability to operate remotely. Investors saw this and parked their money there. That's it.



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Value creation doesn't just "show up in the cash balance" - for it to show up, someone else has to have a cash deficit. You're still confusing economic concepts that are independent of money with actual accounting, which follows strict rules.
No, you just don't get it. The overall balance sheet of a growing company grows every year.

Year 1:
Assets = Liabilities + Equity
$100 = $50 + $50
Year 2:
$120 = $55 + $65
Year 3:
$150 = $75 + $75

See this ^^? There is an overall trend increase in the values on the balance sheet, despite the internal accounting balance, and it represents real economic growth. Do you think that because this company shows growth, that other companies or households that interact with them must show an equivalent loss? Because that's wrong. When a company values a product at $40, and provides it to someone who values (and is willing to pay) $100 for it, that $60 difference is created. The company has literally created $60 in economic value that didn't exist before. They do this through along their value chain. They are creating things of value that didn't exist before.

Similarly, inflation of the money supply eventually grows the overall cash balance to account for increases in GDP.




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The entire point here is that the transaction itself isn't what creates value and depending what the transaction was, it can help destroy or create value.
Sorry do you believe there is an increase in value if there is no transaction? Because that's also wrong. Finished goods and services (GDP) do not count unsold inventory. A transaction must take place for finished goods and services to be counted.

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The opioids are almost certainly not worth what the addicts are paying for and even they are
Your opinion on the value of something is 100% irrelevant. It only matters what someone is willing to pay for it. If I acquire opioids at $20 per pill and sell them to someone who is willing to pay $100, the opioids I purchased and sold for a profit legitimately contributed to the growth of GDP by $80. That's how it works.

Similarly, stock prices are high right now precisely because of false recovery and low-damage sentiment, not because of any special ability financial managers have to navigate this unprecedented crisis. No one is arguing that the market values aren't where they are. Market values are market values. Stock prices reflect whatever people are willing to pay for them. But the difference in stock market transactions that are not a direct result of real economic growth represent a bubble. Bubbles pop.

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whatever fleeting joy/escape it provides disappear more or less instantaneously, while the negative effects remain for everyone to deal with. Yet this is part of GDP (I think you misunderstood what I was saying and thought I was saying it's not). The point here is that this transaction doesn't help the economy at all - the society isn't better off as a result of this transaction.
Yes, it does. Because I sold a $20 pill to someone who valued them at $100. He considered an $80 markup worth getting the product from me. Now he is satisfied and I have $80 more than I did. This is the building block of economic efficiency. If you multiply this transaction by billions you get the total GDP. The more value added transactions take place, the higher the value of the economy, regardless of your subjective opinion on the value of the transaction.

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As an another example, if I went to a chiropractor, the thing he can do to increase the GDP most is to completely mess up by back so that it will cost me lots of money in the future to rehabiitate. That would add the most to GDP. But that doesn't add wealth - it's just a broken window.
It doesn't add wealth because it's a neutral trade, and totally disjointed from the opioid example. If I break a table leg on your dining set and then offer to make you a new one for $x, there has been no created value. I simply have removed a table leg from the equation and you have paid for one. It's a money transfer, and money transfers are not an aspect of GDP.


Quote:
And nearly all value creation is consumed and doesn't have long-term positive consequences. This is what value creation looks like - I buy a slice of pizza for $5. It was actually worth $6 to me. Thus I booked $1 of consumer surplus. The pizzeria spent $4 to make the pizza. So they booked $1 of.profit But the pizzeria and I combined are $4 poorer after this transaction + consumption - we booked $2 of profit together, but I consumed $6 worth of pizza. And it's gone. My fleeting moment of joyous consumption won't help anyone in the future and the world is now poorer.
100% false. That pizza supplied you with needed energy to be productive, and that productiveness shows itself in the end calcluation of GDP, which includes value added by labor. You are really out of your element here.




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Again, I don't know what you mean here but as I mentioned, economic efficiency is not what brings about corporate profit.
At the base level, this is exactly what it does. Economic efficiency is about putting the produced objects of value in the hands of consumers that want them the most. Businesses exist to do this, and businesses that do this effectively make profit. Profit generates wealth, which grows the economy. It's as simple as that.


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Consistent corporate profit is about creating a defensible moat and using it to sustain and exploit systematic inefficiencies.
Protecting your competitive advantage simply allows you to put produced objects of value into the hands of consumers most efficiently. See above.

You are clearly showing yourself to have very little rudimentary knowledge on these subjects and teaching basic concepts is not what I'm here to do, so I will probably not engage with you anymore until you learn a bit more.

Last edited by Wittgenheiny; 05-20-2020 at 09:58 PM.
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Old 05-20-2020, 10:31 PM   #14
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Re: Economic Impact of Coronavirus

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Originally Posted by rivercitybirdie View Post
candybar, you think the risk premium should have gone down since before the coronavirus hit? VIX is way higher than before crisis, although way off its high too
The risk premium should be higher and it is higher. It's currently high-ish, but not that high. Not sure how accurate this is, but it's in line with my estimates as well:

https://www.yardeni.com/pub/stockmktequityrisk.pdf
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Old 05-20-2020, 10:40 PM   #15
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Re: Economic Impact of Coronavirus

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Originally Posted by ToothSayer View Post
My mouth went increasingly open as I read this, then I started laughing. Good lord man. Let me make this plain for you, since you clearly know nothing about how the market works or what its participants do or think:

Amazon bought up because investors thought: "Amazon revenue is going up from covid and it will stay up during covid. They're having a temporary surge in their business. Therefore, it is a safe place to bet on stocks during covid as other things crash, and ride out the uncertainty".

That's it. That's the sum of the market action on Amazon to the first order. Nothing you wrote is in any way relevant to why Amazon went up. It's completely irrelevant bullshit from a guy with a theoretical education and no clue. People weren't thinking about the long term and the "accelerated transition", they literally found a safe place to park money for the short term and put it there. That's it.
This is mind-boggling - what I wrote is a simple off-the-cuff version, far more sophisticated analysis is being done for portfolio managers to make allocation decisions. Just because you're simple-minded doesn't mean the world is just as simple-minded. You may trade your small fortune with that level of sophistication, but large amounts of capital in this world are allocated with far more care. I'm quite familiar with how these kinds of decisions are made at different types of institutions.
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Old 05-20-2020, 10:52 PM   #16
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Re: Economic Impact of Coronavirus

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Originally Posted by rivercitybirdie View Post
candybar, you think the risk premium should have gone down since before the coronavirus hit? VIX is way higher than before crisis, although way off its high too

interest rates have definitely helped.

that's the beauty of DDM or DCF models......... really only 3 or 4 inputs depending on how you look at it. and risk premium is usually the plug (meaning it often explains differences in the market)
Good place to comment.

SPY market cap weighted is down 7.78% ytd as equal weighted RSP is down 17.17% ytd. Seems to be making candybar’s point(s). And that is just for the largest 500 companies market cap wise. EQAL is down 15% ytd which is a Russell 1000 equal weight ETF. When you look at the broad market equally weighted a lot of equity has declined substantially and is still way down. Which to me supports that large cap companies are not affected that much.
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Old 05-21-2020, 12:00 AM   #17
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Re: Economic Impact of Coronavirus

^Retail is piling disproportionately and with huge volume into tech and consumer products while hugely underweight the rest of the market, it's that simple.
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Originally Posted by candybar View Post
This is mind-boggling - what I wrote is a simple off-the-cuff version, far more sophisticated analysis is being done for portfolio managers to make allocation decisions. Just because you're simple-minded doesn't mean the world is just as simple-minded. You may trade your small fortune with that level of sophistication, but large amounts of capital in this world are allocated with far more care. I'm quite familiar with how these kinds of decisions are made at different types of institutions.
I'm sure you are, and you see the market through the narrow window of what you know. None of this has anything to do with the first-order reasons for why Amazon went up which is exactly what I said it is: investors saw it as a short term safe haven and even possibly appreciation during covid, and nothing more. There are multiple data points for this, the strongest of which is that all perceived covid safe havens of all sizes and types ripped in similar ways to Amazon, and none of your reasons applied to many of them.

I actually think you're a troll at this point, like that OOT guy. No one who's a real person who trades talks, acts or thinks like you do.

My favorite thing of all is how you harp on how the market is rational and prices things better than any of us could, as some kind of half assed theoretical rule, right after that same market made a comical error by buying up all time highs with a very high probably completely foreseeable pandemic well underway and certain to lead to large economic impact and large drops in the stock market.
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Old 05-21-2020, 12:18 AM   #18
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Re: Economic Impact of Coronavirus

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Originally Posted by Wittgenheiny View Post
You consistently mischaracterize this as a 'runofthemill' drop or a standard that has somehow been seen before. It hasn't been seen before, and this is not run of the mill.
To be clear, you're predicting an unprecedented % drop in S&P 500 earnings? Do you have a ballpark figure in mind?

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Yes, and my postulation is that this precise effect is coming. S&P, after losing a huge percentage of their customer base, will have no choice but to restructure due to lost earnings. The lost earnings have already happened (Amazon 30% drop) or are happening.
Which companies are losing a huge percentage of their customer base and will have no choice but to restructure? What % of earnings drop do you think is required to trigger this event? Have you even looked at the balance sheet of a single company in the top 30?

Quote:
Nor is anyone making that claim. Conversely, are you claiming that the massive selloff that happened in February and March was precisely because people re-evaluated the long term potential of public offerings? Why do you think selloffs happen at all?
There was a rush to cash amid all the uncertainty (the liquidity situation wasn't as great earlier in the process) and there were substantially greater levels of uncertainty with respect to both how the virus would spread and policy responses. On the virus front, based on Wuhan and Italy, people were worried that this could entirely overwhelm health care systems multiple states, etc - things were bad, the worst did not come to pass. Remember the whole flatten the curve? We managed and there weren't a lot of excess deaths due to people not being able to get treatment, no crazy rationing of care, and so on.

On the policy front, we've had unprecedented stimulus, both monetary and fiscal and some early fears that politics would prevent a large stimulus from being enacted quickly were assuaged. Liquidity concerns were also raised, but quickly eased.

And as I mentioned, the drop to about that level isn't particularly unreasonable and could certainly happen again. Fo example, if we find that the financials are substantially more trouble than anyone is currently estimating (exposure to riskier portions of commercial real estate for instance), we could probably get there. My point was always that a substantially larger drop than what had already been seen is not preordained or nor is the average expected outcome based on a careful examination of history. You seem to be disagreeing with this, so it's incumbent on you to explain why we should see a much greater drop than what we saw in March.

And doesn't this contradict your point here? If the market is all about reacting to damage after it becomes visible, why did the market drop precipitously before there was even damage, let alone visible?

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The S&P is literally just a collection of individual companies, which is a subset of the economy, which is the total collection of all individual companies, consumers, and government.
And isn't it clear that some subset of the economy will do well? So to predict further drops in S&P 500 specifically, you need to see why this subset would drop, not handwave away everything and just talk about everyone does poorly in a recession.

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Nor is anyone making that claim. Conversely, are you claiming that the massive selloff that happened in February and March was precisely because people re-evaluated the long term potential of public offerings? Why do you think selloffs happen at all?
How many times do I have to explain this? At the index level, large movements are about valuation (risk free rate and risk premium) and liquidity. The big drop hapepned while there was considerably more uncertainty around the virus driving up the risk premium and substantially less liquidity and a substantially greater fear of lack of liquidity, given the uncertainty in policiy responses. Much of the uncertainty has been eliminated.

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The market is at May 2019 ATHs, despite a massive loss in revenue for 50%+ of the economy. With that in mind, is the market index under, over, or fairly valued to you?
Is the risk premium higher than May 2019 or lower? There's no such thing as fair valuation, only what the market is willing to accept as risk premium, which should mean-revert over time.

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Amazon has a virtual monopoly in the ecommerce space. That kind of competitive advantage can outweigh even earnings, but it doesn't make earnings irrelevant.

Increased costs and expenses reduce margins....

It's up because it has a monopoly in the ecommerce space and a massive competitive advantage that most businesses don't have---the ability to operate remotely. Investors saw this and parked their money there. That's it.
What was your point? Weren't you just asking to explain how a smart person could justify Amazon going up? I literally just wrote off-the-cuff thoughts, having not looked at any of their financials or market share or anything, purely based on my understanding of how sophisticated investors think about businesses at that scale in general. They are trying to win wars, they are not trying to win skirmishes. Literally no sane investor cares about short-term COVID-19 related expenses at that scale for a company of this size - people care about expenses because margins matter in the long run, but Amazon's operational excellence is proven at this point, their additinoal expenses, if they are one-time, are irrelevant, if they are recurring, that should apply to all their competitors and be irrelevant given their overall pricing power.

You're saying a company valued at over a trillion should take a large haircut because it spent a billion or whatever more than expected to protect their employees during an unprecedented crisis and to expand capacity to make sure people ordering essential goods can get them on time in a crisis even the margin on those isn't high? Does that make any sense at all? Amazon is fighting for monopoly-like position in several markets - their valuation is entirely about the growth potential (how big are these markets) and their likelihood of success. Short-term expenses are mostly irrelevant except mostly an opportunity cost - it's just less ammunition.

Quote:
No, you just don't get it. The overall balance sheet of a growing company grows every year.

Year 1:
Assets = Liabilities + Equity
$100 = $50 + $50
Year 2:
$120 = $55 + $65
Year 3:
$150 = $75 + $75

See this ^^? There is an overall trend increase in the values on the balance sheet, despite the internal accounting balance, and it represents real economic growth. Do you think that because this company shows growth, that other companies or households that interact with them must show an equivalent loss?
Assuming their "assets" don't include any cash, bonds or receivables, their liabilities are greater year over year, so the rest of the world has more cash in Year 3 than in Year 1. But again, you keep confusing the issue here. When I'm talking about net cash balances, I'm talking about the liquidity risk. Given this assumption, the company may be more vulnerable in Year 3 if they have to roll over their debt - book value doesn't pay debt. And if, going from Year 1 to Year 3, the government's been running a massive surplus due to a strong economy and the Fed has been tightening, the household balance sheet has been strong, then every big company in the world having substantially more debt in Year 3 than Year 1 is going to be a problem, since the corporate sector has less cash, far more debt and companies have only been able to expand their balance sheet because the same money has been lent too many times over. So when that turns, and suddenly there's a demand for cash, all businesses are suddenly going to find that cash is hard to come by, debt is impossible to service. Without prompt intervention, companies fail, banks fail, GDP goes down, etc.

So it's important to understand the financial situation here - regardless of how great the companies are doing individually and how the great the economy, if the government/fed soak up the liquidity, eventually there won't be enough cash in the private sector, which will lead to a deflationary spiral. For all companies to keep doing this, the money supply has to increase and assuming reasonable limits to lending, this means the fed/governemnt has to print.

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Because that's wrong. When a company values a product at $40, and provides it to someone who values (and is willing to pay) $100 for it, that $60 difference is created. The company has literally created $60 in economic value that didn't exist before. They do this through along their value chain. They are creating things of value that didn't exist before.
If I'm willing to pay $100, but actually pay $50, has the company created $10 in value or $60?

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Similarly, inflation of the money supply eventually grows the overall cash balance to account for increases in GDP.
This isn't something that automatically happens - this not happening literally causes financial crises and stock market crashes, so this is what you should pay attention to, again, at the whole market level. That's my entire point. Economic growth through productivity increases, technology, capital accumulation or whatever is something that's happening regardless, and will work around whatever COVID-19 damage. Stock market returns are also not particularly closely tied to GDP growth - literaly look at the price history of various stock markets all around the world.

Quote:
Sorry do you believe there is an increase in value if there is no transaction? Because that's also wrong. Finished goods and services (GDP) do not count unsold inventory. A transaction must take place for finished goods and services to be counted.
You're wrong here - unsold inventory just counts towards investment and is part of GDP. However, value creation that isn't intended for transactions do not count and that's my entire point. GDP doesn't count things it should, from a wealth standpoint. If I watch a great movie on netflix, so good that I would've paid an extra $10, that generated more net wealth than if I went to a movie theater and paid $10 for it (since the cost of providing the entertainment was not $0). But only the latter counts as GDP.

Quote:
Your opinion on the value of something is 100% irrelevant. It only matters what someone is willing to pay for it. If I acquire opioids at $20 per pill and sell them to someone who is willing to pay $100, the opioids I purchased and sold for a profit legitimately contributed to the growth of GDP by $80. That's how it works.
Of course that's how GDP works, that's my point. GDP is a fairly crude measure of (mostly) transactions (you may be surprised to know that some non-transactions are added however). It works kind of well enough because in aggregate, all kinds of random stuff evens out, but it's silly to pretend that an increase in GDP is an increase in wealth creation or vice versa.

Quote:
Yes, it does. Because I sold a $20 pill to someone who valued them at $100. He considered an $80 markup worth getting the product from me. Now he is satisfied and I have $80 more than I did. This is the building block of economic efficiency. If you multiply this transaction by billions you get the total GDP. The more value added transactions take place, the higher the value of the economy, regardless of your subjective opinion on the value of the transaction.
No, this is not the building block of economic efficiency. And most markets are quite competitive, which means consumers don't pay what things are worth to them, but what the lowest cost providers are willing to provide, resulting in substantial consumer surplus.

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It doesn't add wealth because it's a neutral trade, and totally disjointed from the opioid example.
It's not a neutral trade - let's say I paid $100 for this, this increased GDP by $100 and every time I go pay someone to help with the back, the GDP increases by that amount each time. But I'd rather actually just have a healthy back. In other words, the transaction decreased the wealth of the society, despite massive increasing the GDP.

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If I break a table leg on your dining set and then offer to make you a new one for $x, there has been no created value. I simply have removed a table leg from the equation and you have paid for one. It's a money transfer, and money transfers are not an aspect of GDP.
If you break a tabel leg and sell me a new one, there has absolutely been an increase in GDP. The GDP doesn't care about the broken table, but it cares about the production of a new one.

Quote:
100% false. That pizza supplied you with needed energy to be productive, and that productiveness shows itself in the end calcluation of GDP, which includes value added by labor. You are really out of your element here.
Are you really this dense and not able to interpret the analogy? What if I had a perfectly adequate leftover homemade sandwich (valued at $0) I would throw away as a result of buying the slice of pizza? What if I'm on a diet and was actually supposed to skip that meal? Again, the world is poorer, despite the value being created. Do you understand the idea of consumption? Not everything is an input to further production - most consumption isn't essential and does not last. Almost all COVID-19 related decreases in consumption fall under this bucket.

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At the base level, this is exactly what it does. Economic efficiency is about putting the produced objects of value in the hands of consumers that want them the most. Businesses exist to do this, and businesses that do this effectively make profit. Profit generates wealth, which grows the economy. It's as simple as that.
This isn't how the economy grows - the economy grows because the capacity to produce (whether through progress in technology, accumulation of capital or increases in education or other inputs) increases, not because businesses meet consumer demand. Businesses have been meeting consumer demand for a long long time, regardless of whether the economy is growing or shrinking. Small businesses that do not contribute at all to the progress in technology or anything else I mentioned "contributing" to economic growth is mostly political fiction.

Quote:
You are clearly showing yourself to have very little rudimentary knowledge on these subjects and teaching basic concepts is not what I'm here to do, so I will probably not engage with you anymore until you learn a bit more.
Oh lol wow. I do not need you to engage me at all - I'm learning absolutely nothing from you and it's starting to get annoying to correct really simple errors over and over.
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Old 05-21-2020, 01:09 AM   #19
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Re: Economic Impact of Coronavirus

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Originally Posted by ToothSayer View Post
^Retail is piling disproportionately and with huge volume into tech and consumer products while hugely underweight the rest of the market, it's that simple.
This doesn't match your earlier thinking. Flight to AMZN as a safe haven is not how retail thinks - for retail, safety is just cash, the relative risks of various investments aren't something that's apparent when you're not managing lots of money and are only relevant to how institutional investors think, even if retail investors may mimic the talk without understanding the meaning, as they often consume the same media written from the perspective of institutional investors. More specifically, flight to safety in terms of going from certain stocks to others is something investment managers that are implicitly or explicitly measured against certain benchmarks would consider as they cannot afford to risk missing the benchmark by too much and it generally doesn't look great to be in cash and charging fees.

Quote:
None of this has anything to do with the first-order reasons for why Amazon went up which is exactly what I said it is: investors saw it as a short term safe haven and even possibly appreciation during covid, and nothing more. There are multiple data points for this, the strongest of which is that all perceived covid safe havens of all sizes and types ripped in similar ways to Amazon, and none of your reasons applied to many of them.
I don't understand what you're talking about - on most days, a bunch of stocks will go up and a bunch of them will go down. Are you saying that the reason any given stock goes up isn't valid if it doesn't apply to the others that went up that day? Also, you do understand things like stat arb right?

Quote:
I actually think you're a troll at this point, like that OOT guy. No one who's a real person who trades talks, acts or thinks like you do.
Do you even know anyone that actually trades significant amounts of money (like book > 100MM+) and gets paid for it? I mean if all you know are small-time prop traders that trade small amounts of their own money as a full time job to grind out a living, while pretending to be big shots and misusing wall street jargons, yeah that's not me and I don't know these people either.

Quote:
My favorite thing of all is how you harp on how the market is rational and prices things better than any of us could, as some kind of half assed theoretical rule, right after that same market made a comical error by buying up all time highs with a very high probably completely foreseeable pandemic well underway and certain to lead to large economic impact and large drops in the stock market.
How does the market "buy up" all time highs? What does that even mean? Also I addressed this - even in the broader market, actual competence doesn't exist in unlimited amounts across all sectors and needs to be allocated - by the market! - to important problems. I don't know if you're familiar with who gets paid what in finance, but there's tons of money to be made, so obviously smart people get allocated to problems that on average are more important and they have to focus on the things that are relevant. And how the market works is effectively by people trusting other markets to be at least relatively correct, so if no other market is picking up the problem, often it's going to get missed.

COVID-19 simply wasn't one of the relevant topics - I mean, when's the last time a pandemic had a meaningful impact on the market? - so the highly paid, busy people focused on the topics that are typically more important, while internet randos on the reddit and 2p2 were screaming, omg, this is so bad, how is it that no one is paying attention?

This kind of thing happens all the time - not everyone can look at everything and everyone is trying to focus on the most important things, often these things converge and they end up looking at the same things. That's where the herd mentality comes from - it's not so much everyone agrees, but often a lot of people just happen to be working on the same thing. I used this analogy before but this is like someone who discovered bitcoin at when it was under $1 and made millions thinking they must be way better than anyone in the market because if the market is so smart, how did they all miss bitcoin?

But now, a lot of the smartest people in finance are analyzing this and you aren't even remotely close to competent enough to compete with them. You literally cannot write a single research report that people wouldn't laugh at and try to fire you for at any reputable investment firm. You're now in the herd, but you're also the weakling.
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Old 05-21-2020, 03:56 AM   #20
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Re: Economic Impact of Coronavirus

I'm done with the conversation. What seemed like a pretty good understanding of finance from you has come out in the wash as a jumbled mess of falsity and misconception.

Here is a particularly salient one:

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Originally Posted by candybar View Post
Stock market returns are also not particularly closely tied to GDP growth
You heard it here first, folks! Stock market valuations and returns aren't tied to GDP!

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Old 05-21-2020, 04:20 AM   #21
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Re: Economic Impact of Coronavirus

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Originally Posted by Wittgenheiny View Post
I'm done with the conversation. What seemed like a pretty good understanding of finance from you has come out in the wash as a jumbled mess of falsity and misconception.

Here is a particularly salient one:



You heard it here first, folks! Stock market valuations and returns aren't tied to GDP!

LOL at this graph proving candybar wrong. He obviously meant looking in the rear view mirror. Also he has basically claimed that the large cap company earnings aren’t impacted that much as compared to overall universe of business earnings. The equal weighted price indices obviously reflect his contention. Also, the NASDAQ 100 is up ytd. Russell 2000 down 19%+ for the year. This further backs candybar’s points.

Btw market valuations are down as measured by the Wilshire Index. You’re claiming they should be down more. That is pretty much what price discovery is all about. Short SPY then cover when it meets your price target as it’s a decent proxy for overall market capitalization. See ya.

Last edited by adios; 05-21-2020 at 04:35 AM.
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Old 05-21-2020, 04:57 AM   #22
chytry
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Re: Economic Impact of Coronavirus

candybar is still not clear whether he is talking about the stock markets or the economy.

From the walls of theory, I assume he's never run a business and never had been close to top or middle management of any.

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Originally Posted by adios View Post
LOL at this graph proving candybar wrong. He obviously meant looking in the rear view mirror. Also he has basically claimed that the large cap company earnings aren’t impacted that much as compared to overall universe of business earnings. The equal weighted price indices obviously reflect his contention. Also, the NASDAQ 100 is up ytd. Russell 2000 down 19%+ for the year. This further backs candybar’s points.
The big/small business discrepancy mainly comes from the big businesses being able to load up on debt and lobby to have their business subsidized.
In a lot of cases it's not because they are more 'essential' or better managed.

Last edited by chytry; 05-21-2020 at 05:15 AM.
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Old 05-21-2020, 05:22 AM   #23
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Re: Economic Impact of Coronavirus

One large problem a consumer economy has is the velocity of money going down. Already pressured by demographics and stagnant incomes, increased savings will make it even worse.



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Old 05-21-2020, 12:04 PM   #24
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Re: Economic Impact of Coronavirus

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Originally Posted by chytry View Post
candybar is still not clear whether he is talking about the stock markets or the economy.
I've been extremely specific about each thing. To recap:

Stock market - I'm a little bearish, but comparing expected GDP drop and unemployment rates to past recessions (larger than most) and automatically expecting a much larger drop than what we've seen (smaller than many) is silly, as this recession isn't being caused by adjustments in capital markets, which typically cause large market drops and recessions. Furthermore, S&P 500 composition is historically underweight in cyclical components and the market leaders are growing companies with unusually healthy balance sheets.

Economy - will be extremely bad, likely worse than anything most people in the US have ever lived through, as felt by businesses and many individuals. Lots of small businesses will fail, poverty rates will rise, unemployment rates will be historically high and it will take a long time to get to full employment, etc.

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From the walls of theory,
By theory, do you mean like looking at the actual stocks instead of automatically assuming, deep recession -> large stock market crash? To me, the latter is "theory" - the former is looking at the current situation. You have to look at the businesses and see how they will do, instead of talking hypothetically about how it's bad if you're leveraged, have lots of fixed costs and 80% of your revenue goes away. Yes, that's bad, we all know that, but which S&P 500 component does that describe?

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I assume he's never run a business and never had been close to top or middle management of any.
Also not true.

Quote:
The big/small business discrepancy mainly comes from the big businesses being able to load up on debt and lobby to have their business subsidized.
The biggest companies in the world barely have any debt at all. It's about market positions - lots of small businesses usually suffer from some combination of 1) core business is commoditized and low-margin, 2) highly cyclical, 3) high fixed costs, 4) little pricing power on either end. To turn this around, the biggest companies in the world (by market cap) often have 1) significant moat/market power allowing them to sustain high margin, 2) substantial resistance to cyclicality, 3) substantial cost flexibility, 4) substantial pricing power on both ends. Not all of these are true in all cases, but presently, there's a fairly huge divide even between the largest of large caps and even mere large caps. Large companies that don't enjoy these advantages haven't been doing well for decades and are a substantially smaller part of the index despite being household names.

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Originally Posted by chytry View Post
One large problem a consumer economy has is the velocity of money going down. Already pressured by demographics and stagnant incomes, increased savings will make it even worse.
This isn't an additional thing - this is just an economist's way of thinking about things you already know about. Velocity of money is basically GDP / money supply. We know GDP is going down (bad bad economy) and money supply has gone up (hello fed), so obviously the velocity is going down.

Last edited by candybar; 05-21-2020 at 12:19 PM.
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Old 05-21-2020, 12:19 PM   #25
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Re: Economic Impact of Coronavirus

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I'm done with the conversation. What seemed like a pretty good understanding of finance from you has come out in the wash as a jumbled mess of falsity and misconception.
You do your thing, I don't care. You'd be well-advised to read and understand what I wrote however. Ideally, for your own good, you should forget what you think you know in these areas (economic growth, gdp, anything macro related, stock market movements, etc) and just go back and read all my posts to learn. There's a lot of good stuff you glossed over because you weren't in the right mindset to learn. I know you're trying to fight and defend but I'm mostly just trying to educate.

Quote:
You heard it here first, folks! Stock market valuations and returns aren't tied to GDP!

Oh wow. Do you think this is showing a strong correlation? You could've put any two things that tend to go up over time.

https://rstudio-pubs-static.s3.amazo...7e7199d.html#1

And of course no one said there's no relationship between the two either, just that it's not closely tied. I already posted some time series earlier on this btw. And it's pretty clearly not. One thing people forget is that a long-term decrease in global growth expectations effectively lowers the overall discount rate (risk free rate + risk premium). It's also common to see third world countries grow at a significantly higher rate than the US, but have the local stock market lag the US index significantly, because poor corporate governance letting insiders keep much of the increase in value for themselves.

Last edited by candybar; 05-21-2020 at 12:32 PM.
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