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Total Posts: 103
Joined: Apr 2018
Posted: 2020-06-04 04:26
@EL: I had a similar, maybe more naive, thought process. If PE ratio was 18, subtracting 2 years of earnings should decrease the price by 2/18=11%. So 30% drop looked excessive.

My concern is the long term fundamentals, especially debt. Debt-to-GDP ratio has only increased in the last two decades. We hadn't paid off the stimulus for 2008, and now covid sends the debt through the roof. I wonder what will happen when we start deleveraging. Also, what will trigger the deleveraging phase?


Total Posts: 432
Joined: Jan 2015
Posted: 2020-06-04 21:11

That's probably my biggest bearish risk as well. That being said, if we're specifically talking about the impact of Covid, I don't think the debt picture changes that much.

CBO projections say that COVID adds $5 trillion to US public debt by 2025 (with most of that occurring in 2020). So public debt to GDP goes from ~90% to ~105%. That's a big one-time jump, but doesn't change the long-term picture that much. Even before Covid, the CBO projected that number to be 180% by 2050.

What I'm saying is there are two separate questions. One is should the market be trading at a more significant discount relative to February highs? Two is was the price in February too high irrespective of Covid?

I don't really know the answer to the latter question. There are a lot of arguments on both sides. But I don't see many compelling reasons why the Covid discount to the fair price (whatever that may be) should be more than 10-15%.Maybe, maybe, maybe, if one thinks there's underlying rot in the system and Covid will catalyze a crisis that otherwise would stay dormant for a long time.

To tangent off on the debt/GDP question in general, the most compelling reason not to worry is Japan. At least in terms of forced deleveraging Despite having more than double our debt levels for several decades, interest rates are still zero, inflation is de minims, the currency is stable, and there's no fiscal or monetary crisis in sight. There's pretty good macroeconomic evidence that the decline in real interest rates is primarily driven by aging demographics.

The demographic picture isn't changing anytime this century. That augurs that real rates will stay zero-ish for a very long time. What really matters in determining the debt burden isn't the nominal value but the coverage ratio. Permanent zero rates would imply that the economically sustainable debt burdens is much higher than the historical 100-150% upper bound that we've seen in earlier eras.

Good questions outrank easy answers. -Paul Samuelson


Total Posts: 121
Joined: Dec 2007
Posted: 2020-06-12 06:52
>I am not sure it is a good thing Wall Street quants (assuming Kolanovic is considered >a quant by the community) are turning to Covid-19:


>The tweet is amusing, the chart is not even wrong.

And here we are 3 weeks later: number of infections and hospitalizations in the US are on the rise.

No vanna, no cry
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