General Question

crazyguy's avatar

Which administration and Fed Reserve policies are causing a stock market bubble?

Asked by crazyguy (1086points) 1 month ago

The stock market has been on a tear since March 23. On March 23, the DJIA was at 18,592 and the NASDAQ was at 6,861. The peak was reached on Sep 2. At that time, the DOW was at 29,100 and the NASDAQ was at 12,056. Since then, the market has retreated. The DOW is currently trading at about 27,800 and the NASDAQ at about 10,800. The unemployment rate peaked in April (March numbers) at 14,3% and has since been trending down. The latest number (for August) is 8.2%. Some of the economic improvement can be traced to government and Fed actions. Do you think those short-term actions have created a bubble similar to the sub-prime crisis in 2007? Do you think the bubble is likely to burst soon?

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11 Answers

stanleybmanly's avatar

The market is being artificially sustained by the massive infusion of money into unemployment benefits and other covid relief programs. Recipients of those benefits have the good fortune of this pandemic occurring in an election year. Politicians, particularly Republican politicians dole out the bucks prior to the election, but you can expect an abrupt halt to all the largesse come 4 November.

crazyguy's avatar

@stanleybmanly Hi Stan, let me remind you why the $600 federal subsidy to the unemployed was passed. In fact I’ll let you watch for yourself. The CARES package as written in a hurry had a glaring omission. It did not cap unemployment compensation at actual wages. The Republicans caught the error before final passage of the bill and proposed an amendment to fix the error. Watch what happened: https://www.c-span.org/video/?470652-18/senate-debate-sasse-amendment-economic-stimulus-bill

The debate was long. But if you wish to learn who exactly was responsible for the “massive infusion of money into unemployment benefits”, you have to invest the time.

By the way the subsidy ended at the end of July. In spite of Pelosi’s desperate attempt to extend the benefit, the Republicans have so far been steadfastly opposing it.

zenvelo's avatar

It wasn’t the $600 unemployment extensions and increases that are fueling the market, it’s the 2.5 trillion in stimulus paid to corporations and banks signed by Trump, and the additional 4 trillion spent by the Federal Reserve. Much of that has had no where to go except into the stock market.

Meanwhile, there are still millions unemployed, and more employed each week. 2nd quarter saw the worst decline in GDP in history. The third quarter numbers come out in a few weeks, but don’t look to show any recovery at all.

This isn’t about getting restaurants, bars, hair salons, and manicure parlors open, (although that would help). There are some major industries that may shrink by 50% while restructuring in a new paradigm: oil and gas, auto makers, airlines.

LuckyGuy's avatar

@zenvelo hit it on the head. The Fed printed money and gave it to corporations and banks. The interest rates are virtually zero so there is no alternative, TINA, so investors put the money into the stock market. Stocks are selling at many times earning.
Also adding to the mess is the fact that taxes were lowered putting the country further into debt. For all the talk of fiscal conservatism touted during the last election this administration has spent more wildly than any previous one.
There are a couple of ways this balloon can burst – and it will burst.
The market can drop back down to reasonable levels or, (and this is the one that scares me most) the value of the dollar will drop and be devalued. The market can stay high but 30000 or 40000 will only be worth 15000, in 2019 dollars. Anyone who saved and put their money in “safe” places will find it is worth half of what it was. Social Security payments will lokk the same but will be worth half in real dollars.
Of course this will be blamed on the Democrats. The playbook script is already written.

zenvelo's avatar

A lot of what @LuckyGuy describes can be avoided if we as a nation invest in new ways of doing things. That is why the Green New Deal, as a package, is important. Spend money on things that are sustainable, such as new renewable energy, and quit pissing money down a hole like the oil, gas, and coal industries.

crazyguy's avatar

@zenvelo My comment was in response to Stan’s comment. In response to yurs I have the following comment:

1. The total size of the CARES Act was $2.2 trillion (see https://en.wikipedia.org/wiki/CARES_Act). So I am confused by your math.
2. Of the total, about $500 billion in aid for large corporations, much lower than the eventual size of the PPP (payroll protection program) for small businesses.
3. Fed spending to date is apparently hard to separate from the US’s burgeoning debt. I caouls not find any serious examination of how much the asset purchase programs have added to the Fed’s balance sheet. I would welcome your link to your number of $4 trillion.

I think the economy will recovers when restaurants, bars, nail salons, etc. are allowed to reopen. And even more when airlines, cruise lines, movie theaters and live sporting events resume. Unlike you, I do not anticipate major permanent damage to the economy. Thanksfully, the US economy is extremely resilient.

crazyguy's avatar

@LuckyGuy “Stocks are selling at many times earnings”. They always do. As shown in https://www.multpl.com/s-p-500-pe-ratio, the pe ratio has been higher on two prior occasions, both of which were followed by a stock market crash, and a major recession. Irrational exuberance does normally lead to a mini-disaster. By the way, the current pe ratio of about 28.5 is dwarfed by the number reached in 2007, and is significantly lower than 2002.

Extreme crises demand extreme responses. The only real difference between the subprime crisis of 2007–2010 and the current covid-19 crisis is one of causation. The 2007–2009 crisis was avoidable, the current one was kinda forced down our collective throats. I do not see massive inflation which typically leads to currency devaluation.

crazyguy's avatar

@zenvelo I know from my personal experience that government as a rule has no idea which horse to back. I don’t know if you were around in the late 70s and early 80s. That was when we had government throw $20 billion at energy security. The technologies they backed (shale oil, coal gasification and liquefaction) are no longer around. What we have now is primarily fracking. I think the GND is the most stupid idea I have seen in a long time, well, since 1980.

zenvelo's avatar

@crazyguy “The technologies they backed (shale oil, coal gasification and liquefaction) are no longer around. What we have now is primarily fracking…”

Um, this wasn’t the “government” choosing as much as it was what the oil and gas industry asked for. Don’t blame the government for poor choices by Exxon (now Exxon Mobil) Chevron, and other oil and gas firms that can’t manage their way out of a paper bag.

The three extraction methods you describe didn’t fail, they just depleted what could be extracted.

By the way, here is the Fed’s description of 2.3 Trillion in Loans in a press release in April. There has been another 2 trillion in corporate bond purchases since then.

crazyguy's avatar

@zenvelo It was the government that decided to back the technologies. Sure, the tile companies had been pursuing those same technologies with their own hard-earned dollars. When the government threw free money at those same technologies, the incentive to prove them or exit them disappeared. So the technologies were pursued until government money ran out and then they were abandoned.

Tropical_Willie's avatar

@crazyguy Sources and company names would be good !

Other than that it is make believe from your mouth.

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