Why Stocks Haven’t Crashed…Yet

Debt Defaults and Bankruptcies Take Time

I write this May 10th, 2020. Why isn’t the stock market crashing while 30+ million people lose their jobs?

The quick answer is that neither the stock market nor business are joined at the hip. Although 8 weeks of global wealth have been destroyed, those losses will take months to be realized.

For now, everyone will keep gambling in the stock market until the Fed runs out of money.

Business runs 24/7 around the globe. The value of debt changes slowly. Defaults begin after 3 months. If you lose your job on the 1st, and your credit card bill is due the 31st, nothing happens until then. Indeed, except for more communications from the creditor, little changes for any debtor until legal action is taken.

That takes time.

Assets have already been destroyed. That’s a fact; they won’t be coming back. The economy can open, but businesses won’t get back to “normal” until their debts are brought up to-date or written off.

There’s a saying, In the Short-Run, the Market Is a Voting Machine, But in the Long-Run, the Market Is a Weighing Machine. For now, market participants have voted that the virus is going away. Be that as it may, there are losses waiting to be weighed. They continue to pile up. Once they are weighed, the market will re-price.

The central banks putting money into the banking system only delays the inevitable. When a business fails, or can’t generate the income necessary to pay off the debt, who takes the loss?

That question will keep the courts busy for years and economic growth pinned down.

The future is scary. The Fed should be pristine, but now it’s just another bank with too much bad debt on their books.

Refinancing debt means no growth in the future. Paying off old investments takes money away from what you might invest in new business. We’re in an economic death spiral.

The stock market will eventually catch up.