Stock Market
The stock market has been cycling up and down the last few days after the last dramatic drop off and has dropped below 20k on the DJIA index (global indexes are also off today).
Will we continue cycling up and down or we will continue to crater riding down down down to an unknown bottom?
March 18th, 2020 at 11:20 AM ^
One hell of a reset.
March 18th, 2020 at 11:22 AM ^
No kidding...the market has had a large run up over the last 10 years...I've often wondered if it is artificial due to pumping of cheap money by the Fed post 2009 recession. If the water gets turned off it could be an epic correction.
March 18th, 2020 at 11:58 AM ^
Yes.
The Federal Reserve was created in 1913 and had a balance of assets of less than $1 Trillion by September 2008.
The Fed then started buying up assets left and right via Quantitative Easing. By December 2014 the Fed had $4.5 Trillion in assets.
In other words over the course of 6 years and 3 months the Fed Balance sheet rose from less than $1 Trillion to over $4.5 Trillion. A $3,500,000,000,000 increase.
With interest rates low many investors bid up the price of stocks as bonds are less attractive with such low yields. With the Fed buying mortgage assets and low interest rates home prices also got bid up as banks could lend more and with lower rates. Is the home really more affordable with lower interest rates if real estate prices are soaring?
Many argue that this Quantative Easing policy primarily helped the upper class and hurt the lower income demographics.
March 18th, 2020 at 11:20 AM ^
We will crater. Too much debt, everywhere. Honestly, its past due for a large market correction. The airlines? Let em die.
March 18th, 2020 at 11:43 AM ^
Airlines should get the same deal GM got. We get a piece of the companies until their loans are repaid. And they should be required to reserve a large chunk of cash going forward so we don't have to bail them out again.
Ford has like 36 billion in the bank. The airlines will be bankrupt in 30-90 days.
March 18th, 2020 at 12:01 PM ^
The way our domestic airlines operate has made flying a miserable experience. I enjoyed flying when I felt that they gave a damn and even worked for Delta for a few years tossing bags on the ramp at Hartsfield when I was younger. Now though? I'm not in a position to give a damn about them since they don't give a damn about me. Just one hillbilly's thoughts.
The problem is that the American* way to do things is to buy the cheapest airline ticket you can find, bitch about how much the experience sucked, and then turn around and buy the cheapest ticket you can find again next time. So airlines are competing to provide the cheapest ticket possible, and all the nice amenities are the first thing to get cut. If customers would pay more for a better experience airlines would provide it (first class does exist), but by and large customers have shown what they want is the cheapest ticket they can find. The invisible hand of the free market is at work.
*and probably most of the rest of the world too
My wife had a great story about taking her depression era grandmother shopping.
G'ma: "I don't like Wal-mart, they are killing the mom and pop stores around. It's just sad"
later, in the car.
Wife: "Where do you want me to take you? LocalMart?
G'ma: "No, Wal-Mart, they have the best prices...."
Consumers are always going to be interested in paying the lowest possible price. It didn't mean that they have to be in a race to the bottom. Have some standards for goodness sake.
It's so bad that I don't fly anywhere in the Continental US anymore. More enjoyable to just drive. Oddly enough, when you factor in how long it takes to check in and go through security and deal with delays, there isn't that much time saved by flying unless it's a 3 hour or more flight.
Exactly, customers have commoditized airline flight (and it really mostly is a commodity) so we get what we deserve.
And honestly, it's better for the travelers. Give me the cheapest flight possible and let me decide if I want to select a seat, buy food, etc. They let you pick your experience rather than force you to subsidize an experience for other people that you might not want.
To an extent, but that has its limits. Spirit Airlines doesn't dominate the market, and likely never will.
March 18th, 2020 at 12:03 PM ^
I don't think your plan has any chance of working. As long as the airlines know that they can't die, that any serious losses will be socialized while any gains remain private, they will never behave responsibly. We are simply never going to stop bailing these companies out.
You can try to deal with this moral hazard problem by forcing responsible behavior through regulation, but this has never been very effective. Regulatory priorities change over time as the political winds change and regulators are vulnerable to industry lobbying. But even if this wasn't true, it is just very difficult to force responsible behavior through regulation. There will always be some dumb risk that the regulators haven't thought of.
The most effective way to truly enforce responsible behavior is the threat of failure. The airlines have to be allowed to fail. They'll go through the bankruptcy process just like everyone else in their position has always done and emerge stronger for it. New companies will be able to enter the market without the existing oligopolistic structure. Bailing them out now just guarantees we're going to do it again in 20 years or less.
March 18th, 2020 at 12:11 PM ^
Massive entry fees into the market is the primary problem for new airlines. You have to spend hundreds of billions before you make a single dollar in profit. Some markets need regulation even if it isn't 100 percent efficient
March 18th, 2020 at 12:27 PM ^
It's true that this particular industry features significant barriers to entry, but they're not as problematic as you think. It wasn't that long ago where we had fierce competition in this industry and service was a hell of a lot better. Then we basically decided to stop applying antitrust laws to the airlines and we ended up in this era of extraordinary consolidation, high prices, huge profits for the companies, and frequently enraged passengers. Part of the problem is that the existing oligopoly has too much influence over their regulators. Breaking up the existing carriers would likely encourage better regulation, which could make space for new entrants over the long term.
But if you don't want to break up the existing carriers, there is an even easier way to create new market entrants. Simply lift the ban on foreign airlines flying purely domestic routes. The Europeans have been trying to get us to do this for years. They've proposed allowing American air carriers to fly routes inside the EU in exchange for us allowing European carriers to do it here. More competition would be better for both employees and passengers, but it would hurt industry profits, and so it can't happen.
March 18th, 2020 at 12:52 PM ^
Oh I completely agree with allowing foreign carriers to operate point to point in the US and we fucked up by allowing too many mergers. I'm just saying it would be really hard for a brand new airline to just launch so its not a solution to letting airlines fail right now. The US needs a functional airline industry to function in a modern economy, if all 3 of United, Delta, American went bankrupt we wouldn't have that for years so we can't let that happen. Just need to put actual restrictions and regulations in place along with the bailout.
That's assuming the foreign airlines aren't subsidized by their respective governments. If they are then the playing field wouldn't be level...no clue if they are or aren't.
I agree with allowing the EU in, but air fares are as low as they have been in history.
Airlines aren't very profitable (and they've only recently gotten there after going bankrupt 10-20 years ago to shed massive retiree welfare costs and merging). They're far more like utilities. It's an extremely capital intensive business with very low returns on assets. They haven't been doing anything wrong (like the banks did), and their operation is vital to a recovery so you have to prop them up at a time like this.
It's not like they're banks that could take huge risks to make money in the short term and then just get bailed out when those risks didn't pay off and hurt the economy.
yes, this is a very different scenario than with the banking crisis, where they were culpable because of unsound and predatory lending practices. Do we really think we should let the airlines go bankrupt because they should have set enough money aside to weather a pandemic? Just because we've had lousy flying experiences which is a separate issue?
They took a windfall of billions and used it to buy back their own stocks instead of shoring up their balance sheets. Fuck the airlines, they become public airlines as far as I'm concerned if they fail.
And, fuck every other company that did the same thing, if you bought back ANY of your stock post 2016 trump tax bonanza, you die. You had choices, you made choices, you get to live with those choices. Oh wait, we're talking about corporations here, not lowly humans. Nevermind. They will get the socialism.
By definition they will not get socialism. They will get crony capitalism.
Socialism is where the means of production and distribution are owned collectively or by the government. These bailed out companies will still be private in the long run.
I would strongly disagree with all three of your main points.
1) Airlines may not have been very profitable in the past when competition in the industry was fierce, but lax antitrust implementation has led to record profits in the last decade.
2) The airlines absolutely have done quite a lot wrong. They could easily have used the record profits to prepare for a downturn or invest in the future. Instead, they wasted them in the form of stock buybacks and dividends and decided to make all their new investments by taking on massive debt that they now cannot afford to pay. That is plain mismanagement.
3) Airlines may very well be vital to a recovery, but that does not mean we need to bail out these shareholders and executives. Plenty of businesses go through bankruptcy and emerge from it very quickly and much stronger than they were before. I would not even have a problem with the government implementing a special bankruptcy procedure here, as long as it does not create the terrible incentives that are generated by a bailout.
Between the past bailouts, the light antitrust regulation and various other subsidies, the fact is that the government has done a lot for this industry. The result has been a disaster for passengers, employees, and basically everyone except shareholders and executives. Companies in other industries go into bankruptcy all the time. Stop bailing out these awful, irresponsible organizations and let them play by the same rules as everyone else.
"The airlines absolutely have done quite a lot wrong. They could easily have used the record profits to prepare for a downturn....."
Would you not distinguish a "downturn" as a result of a normal business cycle, from a dramatic and sudden reduction in business as a result of a pandemic and government mandated restrictions or cessation of travel?
I'm not crazy about defending the airlines and I am no longer a frequent user of them, but many people are, some from necessity. It is a critical industry and I can see some consideration given to proactive steps to preserve the industry. Strings attached? Sure I see the wisdom in that.
March 18th, 2020 at 12:50 PM ^
Ford has over $155 Billion in debt. They are rated 1 step above junk if you would like to buy their bonds.
They are a zombie corporation that would die if interest rates rose to what had been considered normal levels.
Moreover, they have a pension that wasn't well funded that they are on the hook for. A decade ago Ford had to spend about $2,000 of every new car sold to pay a retired worker due to the poor performing pension. Toyota's number is $0. They have a 401K and retired workers are on their own. With the recent market collapse Ford's pension is back in trouble.
I like the company, but they have serious problems.
To pile on more... Ford just suspended their dividend payments and per the source I looked at gives Ford basically a 50-50 chance of defaulting this year.
Ford has a ton of debt and is trading below $5. Most large funds are not allowed to own stocks under $5.
Airlines should get jack fucking shit.
Boeing too... heard they asked for $60 B this morning.
Airlines have been rolling in dough for ten years now... they make BILLIONS on baggage fees alone. Not to mention favorable fuel prices too -- which is one of their top expenses.
If someone didn't set aside money for a rainy day fuck them. That's their fault and not the taxpayer's.
March 18th, 2020 at 11:55 AM ^
The economy wouldn't exist without the airline industry but any bailout needs to come with a fuck ton of strings attached. Like fuck American for engaging in stock buy backs while their debt load increased during years of record profits. Any bailout should come with heavy restrictions on bull shit fees, stock buy backs, debt, etc.
March 18th, 2020 at 12:08 PM ^
Precisely. I don't agree with letting them die necessarily but they sure as hell don't deserve a bailout. They've seen massive, record profits for years and wasted it on short term shit like bonuses and buybacks to please the shareholders. With a market as touchy as commercial air travel, its shocking that they were so unprepared for a slowdown. They should have had a plan in place for something like this (didn't the U.S. government bailout a few airlines after 9/11?). I agree - attach a ton of strings. And make it loans, no grants.
Edit: Oh and I forgot to mention that because they are major corporations they also got humongous tax cuts the last few years. BOOOOOOOOO them.
March 18th, 2020 at 12:13 PM ^
That's what I'm saying. Had they saved some of their record profits over the past decade, maybe they could survive on their own.
Personally I'd like to see share buybacks be made illegal again for all companies. And maybe we need to look at minimum capital requirements for all companies of strategic importance, not just banks.
March 18th, 2020 at 12:21 PM ^
My hot take is the stock market is bad for the long term health of the economy. The complete and total focus on short term performance and growth is what leads to efforts like stock buy back. Companies are basing decisions on stoke holder portfolios rather than healthy sustainable growth of business and given the stock market gains only benefit 10% of the population that trade-off just isn't worth it. Obviously other structural changes would have to happen in concert but I could pretty easily be convinced to eliminate the stock market as it currently functions. It just rewards bad behavior that hurts thousands because it benefits a few hundred activist investors.
March 18th, 2020 at 12:23 PM ^
There is little functional difference between a stock buyback and paying a dividend. Companies exist to make money, and the board of a publicly traded company has a fiduciary responsibility to their shareholders to try to maximize the return on investment.
I completely agree. But that also means when the shareholders elect bad leaders, they deal with the consequences. That is the way the market is supposed to work.
If a company puts all its money into dividends without planning for the future and takes on a lot of debt, then the company goes bankrupt if the bill comes due and they can't pay it back. The shareholders get wiped out.
The problem is when we let shareholders keep the gains from the risks their companies take while the government (and therefore the taxpayers) takes on all the losses. That is not how you run a functioning market.
There is all the difference in the world between dividends and stock buy backs.
If I’m a board and our stock is $100 and I want to yield 3%, I write everyone a check for $3.
If I want everyone to get $3 on paper I have to buy enough stock to drive the price to $103. It’s got to be vastly more expensive to do that.
Like fuck American for engaging in stock buy backs while their debt load increased during years of record profits.
GM did the same thing.
Then they whined about government oversight.
Overall, the numbers vary by source but GM took approx. ~$54 B total in bailouts.
GM repaid $9 B before the debt was forgiven.
That means GM technically still OWES the American TAXPAYER ~$45 B to this day.
And for getting fucked in the ass totally dry, two thirds of what GM did repay can be sourced to additional government funds... so they used our tax dollars to repay their bailout.
GM fanboys/liberals can neg me all they want but fuck GM.
Not exactly right. GM did repay the loans with interest in full, but the loans were only a minority of the total taxpayer financial aid package. You and I owned about 61 percent of the company at, I think a price of about $50 a share. Those shares were eventually all sold and the estimate I recall is that we lost about $11 or 12 billion on the bailout when all was said and done. Not $45 billion but still a very big number. This was concluded under the prior administration.
March 19th, 2020 at 12:24 AM ^
Not exactly right.
You're dead wrong on this.
GM did repay the loans with interest in full,
No, GM did not. It went down exactly as I posted. They paid a fraction of it back and then outstanding balance was forgiven.
Additionally, a fraction of what GM did pay back came from taxpayer money as well. Just as I posted too.
Not $45 billion but
Come on... even the Staee math department can do the math... 54 - 9 = 45.
This was concluded under the prior administration.
Since you brought politics into it. GM got their first dump truck of cash under Bush. The balance wiped off the books was under Obama.
Anyone that takes the time to independently research this can reach their own conclusion as to which of us has correctly stated the facts. Apparently you are unclear as to the meaning of the verb concluded which I used accurately.
https://www.autoblog.com/2018/11/28/trump-says-gm-should-repay-u-s-taxpayers-for-bailout/
https://money.cnn.com/2014/05/29/news/companies/gm-profit-bailout/index.html
https://www.politifact.com/factchecks/2010/apr/27/ed-whitacre/ceo-says-gm-has-repaid-government-loans-full/
Ironic that you are chiding me for not doing my research when you haven't dug deep enough yourself.
I won't dispute your links per se...
...I'm disputing you that you haven't done all of the research.
There are a shit ton of dots to connect. For example, the link you provided about the $11 B number (versus the $54 B number) does NOT tell the whole story.
Actually... it doesn't tell any story becuase the $11 B in the article was a stock write off. I'm talking about the difference between what money the gov't gave and what money GM gave back... apples and oranges to stock write off.
You act like there was only one transfer of money to GM. There wasn't. They got several lines of money from the gov't. Which when you add all of it up, it's around ~$54 B.
Quite frankly I didn't even know Trump chimed in on this. I would have thought holding GM accountable had died on the vine after all these years. Thanks for that link.
It's a nice start. But you're still not there yet. Keep trying.
The loss is the stock write-off. I'm willing to look at any sources that support your conclusions and final numbers. Post them here. My $11 billion figure has been posted by many, many more sources, I just didn't post them all.
The loss is the stock write-off.
The "write-off" is still the taxpayers out out $11B.
Again, and get this through your fucking, thick, daft, skull... I am NOT talking about the ledger. I am talking about the money American taxpayers gave GM versus the money the American taxpayers are out.
March 18th, 2020 at 11:26 AM ^
Will we continue cycling up and down or we will continue to crater riding down down down to an unknown bottom?
--- Check back in a year or a decade. Will tell you conclusively.
March 18th, 2020 at 11:26 AM ^
My 401k weeps. Though, I'm saving a shit ton of money by refinancing my mortgage, so there's that.
March 18th, 2020 at 11:29 AM ^
Two things. Don't look at your 401k and do look at Josh Christopher highlights.
March 18th, 2020 at 11:31 AM ^
The good news is your 401k purchases this month will be "on sale"...in 10 or 30 years (whatever your timeline is) you won't even remember these dips.
March 18th, 2020 at 11:33 AM ^
Definitely. It'll recover. If it doesn't, well, I'll have bigger problems (as will the rest of us). It's still hard not to think I should've sold everything in my IRA when the virus started spreading and saved thousands of dollars. Now it's too late.
March 18th, 2020 at 11:43 AM ^
I've definitely daydreamed about what it would have been like if I parked all my 401K money in cash when it was apparent the virus was spreading past China then buying, say, today.
March 18th, 2020 at 11:55 AM ^
I did that last Wednesday.
March 18th, 2020 at 12:07 PM ^
Bastard (jk)
March 18th, 2020 at 12:07 PM ^
Show off