On Price Stickiness and the Plague

Opinion

Note: The Not Fake News does not give investment advice; the following is opinion only. If you come to us for advice on what to do with your money, you probably deserve what you get anyway, but it needed to be said.

It’s counterintuitive as all get-out, but it’s happening anyway. In the face of massive business closings, record unemployment due to COVID-19, and the Federal government effectively printing trillions of dollars based in nothing but faith in the future, the stock markets nevertheless are booming. So — how is this possible?

Well, it’s complicated. In point of fact, the answer to this question is so complex that there’s no chance any short article can simplify it enough for the average person to understand it while retaining any real relationship with the facts. It’s also worth mentioning that even market experts won’t know for sure until long after the fact — and perhaps not even then. There are, however, some basic factors that anyone can grasp.

First among these is, the money has got to be put somewhere. Investment portfolios can wander from stocks to bonds to notes to commodities, even into collectibles, precious metals, or real estate — given certain restrictions and depending on what’s appropriate. During a normal economic downturn, for example, one might expect stocks to drop and bonds to rise, as money moves from one market to the other. It’s rare, however, for money to leave the markets entirely; if it’s not working, it can’t grow. Besides, while an individual might choose “American Trust And Mattress” as an investment option, that’s not available for your average 401k.

However, with the collapse of retail and restaurants — long forecast, but happening now with rather more suddenness than anticipated — commercial real estate isn’t, by and large, considered a very safe place to invest. And, given the uncertain foreclosure market, even rental properties aren’t ideal; at any given moment, the supply could easily outpace demand.

Bonds and commodities are suffering as well, though from a different cause: It’s commonly understood that governments printing money leads to massive inflation, but the phenomenon described by Keynes as “price stickiness” prevents prices from immediately rising to reflect this. As a result, yields are quite low, and inflation-indexed securities have actually gone negative — significantly so in the short term.

One would expect the gold market, or even collectibles — rare art, books, stamps — to be climbing through the roof, and in a sense it is. In another, right now nobody’s selling; prices are high, but opportunities to purchase are few compared to the amount of money available.

As a result, investment funds are staying in the stock markets, and the markets are repaying the constant attention by heading for ever-increasing highs even as many retail corporations are collapsing for want of custom.

One might see this and envision parallels with the years leading up to the 1929 market crash — not entirely unfounded, mind. But it’s also true that massive market increases of late have largely been tied to those businesses that benefit greatly when local retailers collapse — Amazon and WalMart, for instance. Technology firms such as Apple and Google are also doing quite well, as are some niche startups.

It’s also true that the stock markets are forward-looking. What’s going on right now doesn’t always matter anywhere near as much as what’s about to happen in six months or a year. Massive booms are expected from the post-COVID rebound, not only from vaccine sales but also everything else people en masse are likely to pay for as soon as they once again feel safe leaving their homes.

It’s worthy of mention that business profits in some areas are up due to deregulation; Republican administrations are traditionally very friendly to production, retail, manufacturing, and so on, and this one has been so rather more than most. As well, even that uncertainty attending a presidential election is less than it might otherwise be thanks to high confidence that Uncle Joe will remain the friend to Wall Street that he has been in the past. Stocks like stability.

There’s an additional factor: Painful though it may be to consider, business profitability often increases with improved efficiency. The COVID era may well usher in an age of self-driving delivery vehicles, automated burger-flippers, and online retail that would have been bitterly opposed by the displaced workers in any other circumstances. Presumably, people will find ways to occupy themselves; the markets don’t often consider excess labor a negative factor. (It will be, of course, but presumably even if it does become a problem it’ll be someone else’s.)

Still and all, though: Even a booming stock market doesn’t mean there’s a booming economy. Price stickiness aside, we may be about to run into massive skyrocketing inflation; likewise, an underemployed labor force faced with potential eviction and starvation may well lead to unrest — and of a sort that will make Minneapolis seem a bit tame.

I do wish I had some certain answers for you, my friends, or even some advice you could bank on. All I know for sure is, This Too Shall Pass.


The Not Fake News runs on ramen noodles and copious amounts of caffeine, and we’re laying in a stockpile of canned goods — just in case. You can help;

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