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Fear of Inflation Finds a Foothold in the Bond Market
There is little evidence for a big jump in prices, but some economists and bond investors fear President Biden’s policies could lead to inflation.The so-called bond vigilantes may be back, 30 years after they led a sell-off in Treasury securities over the prospect of higher government spending by a new Democratic administration.The Federal Reserve has downplayed the risk of inflation, and many experts discount the danger of a sustained rise in prices. But there is an intense debate underway on Wall Street about the prospects for higher inflation and rising interest rates.Yields on 10-year Treasury notes have risen sharply in recent weeks, a sign that traders are taking the inflation threat more seriously. If the trend continues, it will put bond investors on a collision course with the Biden administration, which recently won passage of a $1.9 trillion stimulus bill and wants to spend trillions more on infrastructure, education and other programs.The potential confrontation made some market veterans recall the 1990s, when yields on Treasury securities lurched higher as the Clinton administration considered plans to increase spending. As a result, officials soon turned to deficit reduction as a priority.Ed Yardeni, an independent economist, coined the term bond vigilante in the 1980s to describe investors who sell bonds amid signs that fiscal deficits are getting out of hand, especially if central bankers and others don’t act as a counterweight.As bond prices fall and yields rise, borrowing becomes more expensive, which can force lawmakers to spend less.“They seem to mount up and form a posse every time inflation is making a comeback,” Mr. Yardeni said. “Clearly, they’re back in the U.S. So while it’s fine for the Fed to argue inflation will be transitory, the bond vigilantes won’t believe it till they see it.”Yields on the 10-year Treasury note hit 1.75 percent last week before falling back this week, a sharp rise from less than 1 percent at the start of the year.Not all the sellers necessarily oppose more government spending — some are simply acting on a belief that yields will move higher as economic activity picks up, or jumping on a popular trade. But the effect is the same, pushing yields higher as prices for bonds fall.Yields remain incredibly low by historical standards and even recent trading. Two years ago, the 10-year Treasury paid 2.5 percent — many bond investors would happily welcome a return to those yields given that a government note bought today pays a relative pittance in interest. And during the Clinton administration, yields on 10-year Treasurys rose to 8 percent, from 5.2 percent between October 1993 and November 1994.Still, Mr. Yardeni believes the bond market is saying something policymakers today ought to pay attention to.“The ultimate goal of the bond vigilante is to be heard, and they are blowing the whistle,” he said. “It could come back to bite Biden’s plans.”Yet evidence of inflation remains elusive. Consumer prices, excluding the volatile food and energy sectors, have been tame, as have wages. And even before the pandemic, unemployment plumbed lows not seen in decades without stoking inflation.Indeed, the bond vigilantes remain outliers. Even many economists at financial firms who expect faster growth as a result of the stimulus package are not ready to predict inflation’s return.“The inflation dynamic is not the same as it was in the past,” said Carl Tannenbaum, chief economist at Northern Trust in Chicago. “Globalization, technology and e-commerce all make it harder for firms to increase prices.”What’s more, with more than nine million jobs lost in the past year and an unemployment rate of 6.2 percent, it would seem there is plenty of slack in the economy.That’s how Alan S. Blinder, a Princeton economist who was an economic adviser to President Bill Clinton and is a former top Fed official, sees it. Even if inflation goes up slightly, Mr. Blinder believes the Fed’s target for inflation, set at 2 percent, is appropriate.“Bond traders are an excitable lot, and they go to extremes,” he said. “If they are true to form, they will overreact.”Indeed, there have been rumors of the bond vigilantes’ return before, like in 2009 as the economy began to creep out of the deep hole of the last recession and rates inched higher. But in the ensuing decade, both yields and inflation remained muted. If anything, deflation was a greater concern than rising prices.It is not just bond traders who are concerned. Some of Mr. Blinder’s colleagues from the Clinton administration are warning that the conventional economic wisdom hasn’t fully accepted the possibility of higher rates or an uptick in prices..css-yoay6m{margin:0 auto 5px;font-family:nyt-franklin,helvetica,arial,sans-serif;font-weight:700;font-size:1.125rem;line-height:1.3125rem;color:#121212;}@media (min-width:740px){.css-yoay6m{font-size:1.25rem;line-height:1.4375rem;}}.css-1dg6kl4{margin-top:5px;margin-bottom:15px;}.css-k59gj9{display:-webkit-box;display:-webkit-flex;display:-ms-flexbox;display:flex;-webkit-flex-direction:column;-ms-flex-direction:column;flex-direction:column;width:100%;}.css-1e2usoh{font-family:inherit;display:-webkit-box;display:-webkit-flex;display:-ms-flexbox;display:flex;-webkit-box-pack:justify;-webkit-justify-content:space-between;-ms-flex-pack:justify;justify-content:space-between;border-top:1px solid #ccc;padding:10px 0px 10px 0px;background-color:#fff;}.css-1jz6h6z{font-family:inherit;font-weight:bold;font-size:1rem;line-height:1.5rem;text-align:left;}.css-1t412wb{box-sizing:border-box;margin:8px 15px 0px 15px;cursor:pointer;}.css-hhzar2{-webkit-transition:-webkit-transform ease 0.5s;-webkit-transition:transform ease 0.5s;transition:transform ease 0.5s;}.css-t54hv4{-webkit-transform:rotate(180deg);-ms-transform:rotate(180deg);transform:rotate(180deg);}.css-1r2j9qz{-webkit-transform:rotate(0deg);-ms-transform:rotate(0deg);transform:rotate(0deg);}.css-e1ipqs{font-size:1rem;line-height:1.5rem;padding:0px 30px 0px 0px;}.css-e1ipqs a{color:#326891;-webkit-text-decoration:underline;text-decoration:underline;}.css-e1ipqs a:hover{-webkit-text-decoration:none;text-decoration:none;}.css-1o76pdf{visibility:show;height:100%;padding-bottom:20px;}.css-1sw9s96{visibility:hidden;height:0px;}#masthead-bar-one{display:none;}#masthead-bar-one{display:none;}.css-1cz6wm{background-color:white;border:1px solid #e2e2e2;width:calc(100% – 40px);max-width:600px;margin:1.5rem auto 1.9rem;padding:15px;box-sizing:border-box;font-family:’nyt-franklin’,arial,helvetica,sans-serif;text-align:left;}@media (min-width:740px){.css-1cz6wm{padding:20px;width:100%;}}.css-1cz6wm:focus{outline:1px solid #e2e2e2;}#NYT_BELOW_MAIN_CONTENT_REGION .css-1cz6wm{border:none;padding:20px 0 0;border-top:1px solid #121212;}Frequently Asked Questions About the New Stimulus PackageThe stimulus payments would be $1,400 for most recipients. Those who are eligible would also receive an identical payment for each of their children. To qualify for the full $1,400, a single person would need an adjusted gross income of $75,000 or below. For heads of household, adjusted gross income would need to be $112,500 or below, and for married couples filing jointly that number would need to be $150,000 or below. To be eligible for a payment, a person must have a Social Security number. Read more. Buying insurance through the government program known as COBRA would temporarily become a lot cheaper. COBRA, for the Consolidated Omnibus Budget Reconciliation Act, generally lets someone who loses a job buy coverage via the former employer. But it’s expensive: Under normal circumstances, a person may have to pay at least 102 percent of the cost of the premium. Under the relief bill, the government would pay the entire COBRA premium from April 1 through Sept. 30. A person who qualified for new, employer-based health insurance someplace else before Sept. 30 would lose eligibility for the no-cost coverage. And someone who left a job voluntarily would not be eligible, either. Read moreThis credit, which helps working families offset the cost of care for children under 13 and other dependents, would be significantly expanded for a single year. More people would be eligible, and many recipients would get a bigger break. The bill would also make the credit fully refundable, which means you could collect the money as a refund even if your tax bill was zero. “That will be helpful to people at the lower end” of the income scale, said Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting. Read more.There would be a big one for people who already have debt. You wouldn’t have to pay income taxes on forgiven debt if you qualify for loan forgiveness or cancellation — for example, if you’ve been in an income-driven repayment plan for the requisite number of years, if your school defrauded you or if Congress or the president wipes away $10,000 of debt for large numbers of people. This would be the case for debt forgiven between Jan. 1, 2021, and the end of 2025. Read more.The bill would provide billions of dollars in rental and utility assistance to people who are struggling and in danger of being evicted from their homes. About $27 billion would go toward emergency rental assistance. The vast majority of it would replenish the so-called Coronavirus Relief Fund, created by the CARES Act and distributed through state, local and tribal governments, according to the National Low Income Housing Coalition. That’s on top of the $25 billion in assistance provided by the relief package passed in December. To receive financial assistance — which could be used for rent, utilities and other housing expenses — households would have to meet several conditions. Household income could not exceed 80 percent of the area median income, at least one household member must be at risk of homelessness or housing instability, and individuals would have to qualify for unemployment benefits or have experienced financial hardship (directly or indirectly) because of the pandemic. Assistance could be provided for up to 18 months, according to the National Low Income Housing Coalition. Lower-income families that have been unemployed for three months or more would be given priority for assistance. Read more.Robert E. Rubin, Mr. Clinton’s second Treasury secretary, echoed that concern but took pains to support the stimulus package.“There is a deep uncertainty,” Mr. Rubin said in an interview. “We needed this relief bill, and it served a lot of useful purposes. But we now have an enormous amount of stimulus, and the risks of inflation have increased materially.”Mr. Rubin acknowledged that predicting inflation was very difficult, but he said policymakers ought to be ready to fight it. “If inflationary pressures do take off, it’s important to get ahead of them quickly before they take on a life of their own.”The Federal Reserve has plenty of options. Not only is it buying up debt, which keeps yields down, but the Fed chair, Jerome H. Powell, has called for keeping monetary policy relatively loose for the foreseeable future. If higher prices do materialize, the Fed could halt asset purchases and raise rates sooner.“We’re committed to giving the economy the support that it needs to return as quickly as possible to a state of maximum employment and price stability,” Mr. Powell said at a news conference last week. That help will continue “for as long as it takes.”While most policymakers expect faster growth, falling unemployment and a rise in inflation to above 2 percent, they nonetheless expect short-term rates to stay near zero through 2023.But the Fed’s ability to control longer-term rates is more limited, said Steven Rattner, a veteran Wall Street banker and former New York Times reporter who served in the Obama administration.“At some point, if this economy takes off bigger than any one of us expect, the Fed will have to raise rates, but it’s not this year’s issue and probably not next year’s issue,” he said. “But we are in uncharted waters, and we are to some extent playing with fire.”The concerns about inflation expressed by Mr. Rattner, Mr. Rubin and others has at least a little to do with a generational angst, Mr. Rattner, 68, points out. They all vividly remember the soaring inflation of the 1970s and early 1980s that prompted the Fed to raise rates into the double digits under the leadership of Paul Volcker.The tightening brought inflation under control but caused a deep economic downturn.“People my age remember well the late 1970s and 1980s,” Mr. Rattner said. “I was there, I covered it for The Times, and lived through it. Younger people treat it like it was the Civil War.”Some younger economists, like Gregory Daco of Oxford Economics, who is 36, think these veterans of past inflation scares are indeed fighting old wars. Any rise in inflation above 2 percent is likely to be transitory, Mr. Daco said. Bond yields are up, but they are only returning to normal after the distortions caused by the pandemic.“If you have memories of high inflation and low growth in the 1970s, you may be more concerned with it popping up now,” he said. “But these are very different circumstances today.” More
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Bernadette Bartels Murphy, Pioneering Wall Street Trader, Dies at 86
Starting out as a secretary, she became a sought-after financial adviser in a male world and found a national platform for her views on public television.Bernadette Bartels Murphy, a rare woman on Wall Street in the 1950s whose work as a trader helped legitimize a once-derided approach to anticipating market trends, making her a respected voice in the financial world and giving her a platform on television, died on March 3 in Nyack, N.Y. She was 86.Her death was confirmed by her niece Mary Ann Bartels. Ms. Murphy died at her niece’s home.Ms. Murphy began her career at the investment bank Ladenburg Thalmann & Co. as a secretary — one of the few roles then available to women in the financial industry. But over time she became a trader and analyst who found a national audience as a regular panelist on Louis Rukeyser’s long-running “Wall Street Week,” a public television side gig of hers for 25 years.Toiling as a secretary, Ms. Murphy found that it was the work of the traders on her desk that interested her more. She began studying the movements of stocks and the overall market as a way to anticipate future trends, an approach known as technical analysis.At the time, that method of anticipating market movements was looked down on by traditionalists, who favored an approach called fundamental analysis: forecasting a shift in a stock price by gleaning the intrinsic value of a company and its shares. They referred, often derisively, to technical analysts as “chartists,” for the graphs and data tables they pored over to make their forecasts.“I had to keep my charts in the bottom drawer of my desk,” Ms. Murphy recalled in a 1992 interview with an industry magazine. “In those days, technical analysis was not considered an acceptable discipline, not in a conservative firm.”To learn more, she took classes at the New York Institute of Finance and began creating her own charts. She used the trading floor around her as her training ground, soaking up information on the interactions between the various markets her firm worked in, like corporate and municipal bonds, equities and trade orders from overseas. (After Ladenburg she went on to work for two more Wall Street firms.)She also started sharing her ideas with co-workers and industry contacts in a newsletter, “This Is What I Think,” which became her calling card, prompting clients of her firm to ask her bosses for her views on trades they were considering. By the early 1970s, she was monitoring stock portfolios for customers and sharing her forecasts with them.Her breakout moment came in 1973, when a market crash and global economic crisis sent stocks tumbling in a 21-month-long swoon.“My readings were very accurate,” Ms. Murphy said in the book “Women of the Street: Making it on Wall Street — The World’s Toughest Business” (1998), by Sue Herera. She anticipated, for example, a sharp plunge in a popular group of stocks known as the “nifty 50,” which included household names like Coca-Cola and Polaroid.“My timing was right, my anticipation of what was going to happen to stocks was on the money, so I started getting phone calls from institutions and invitations to lunch,” Ms. Murphy said in the book. “And that’s how my business began to build.”Ms. Murphy, who encouraged women to pursue Wall Street careers, appeared on the cover of a business publication for women in 1994. via Murphy familyShe started appearing on “Wall Street Week,” which aired on Friday evenings, in 1979.Within the industry, Ms. Murphy was known for her contributions to trade groups and civic organizations. She was, at various times, the president of the Chartered Market Technicians Association, the New York Society of Security Analysts and the Financial Women’s Association. She was a founding member and governor of the Chartered Financial Analyst Institute, a trustee of Pace University and a board member of the American Lung Association of New York City.“Everyone who belonged to an organization always tried to get Bernadette to join, which she often did, being a social bee,” said Sheila Baird, a founding partner of the investment firm Kimelman & Baird, where Ms. Murphy worked as the chief market analyst for many years.Bernadette Bartels was born on April 9, 1934, on City Island in the Bronx to Joseph Francis Bartels, a stationary engineer (maintaining industrial machinery and systems), and Julia (Flynn) Bartels, a nurse. She was the youngest of four children. She is survived by her sister, Julia Campbell. She earned a bachelor’s degree in history from Our Lady of Good Counsel (now part of Pace University) in White Plains, N.Y. She credited her father with urging her to use her education to pursue a career.“I certainly knew that before I married I was going to accomplish something. That was my driving force,” she told Ms. Herera. “I wanted to be a fulfilled person, confident in myself.”In 1982 she married Eugene Francis Murphy, whom she had met on Tiana Beach in Hampton Bays, N.Y., after he rescued her from a riptide. Dr. Murphy, an orthodontist, died in 1997.Ms. Murphy, who retired from Kimelman & Baird in 2015, encouraged women to pursue Wall Street careers, whether she was speaking at high schools or colleges or informally among friends and family. One of them was her niece, Mary Ann Bartels, who became a managing director at Bank of America.Ms. Bartels recalled a story Ms. Murphy often told. As a child, she said, she stopped at a waterside arcade on City Island and put a coin in a vending machine to get her horoscope. “It said her element was fire, her color was red and that, ‘You are an Aries, the ram — a trailblazer and pioneer,’” Ms. Bartels said. “She told us that story so many times, and she really lived by that every day.”Sheelagh McNeill contributed research. More
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The Financial Crisis the World Forgot
#masthead-section-label, #masthead-bar-one { display: none }The Coronavirus OutbreakliveLatest UpdatesMaps and CasesRisk Near YouVaccine RolloutGuidelines After VaccinationCredit…Jasper RietmanSkip to contentSkip to site indexThe Financial Crisis the World ForgotThe Federal Reserve crossed red lines to rescue markets in March 2020. Is there enough momentum to fix the weaknesses the episode exposed?Credit…Jasper RietmanSupported byContinue reading the main storyMarch 16, 2021, 5:00 a.m. ETBy the middle of March 2020 a sense of anxiety pervaded the Federal Reserve. The fast-unfolding coronavirus pandemic was rippling through global markets in dangerous ways.Trading in Treasurys — the government securities that are considered among the safest assets in the world, and the bedrock of the entire bond market — had become disjointed as panicked investors tried to sell everything they owned to raise cash. Buyers were scarce. The Treasury market had never broken down so badly, even in the depths of the 2008 financial crisis.The Fed called an emergency meeting on March 15, a Sunday. Lorie Logan, who oversees the Federal Reserve Bank of New York’s asset portfolio, summarized the brewing crisis. She and her colleagues dialed into a conference from the fortresslike New York Fed headquarters, unable to travel to Washington given the meeting’s impromptu nature and the spreading virus. Regional bank presidents assembled across America stared back from the monitor. Washington-based governors were arrayed in a socially distanced ring around the Fed Board’s mahogany table.Ms. Logan delivered a blunt assessment: While the Fed had been buying government-backed bonds the week before to soothe the volatile Treasury market, market contacts said it hadn’t been enough. To fix things, the Fed might need to buy much more. And fast.Fed officials are an argumentative bunch, and they fiercely debated the other issue before them that day, whether to cut interest rates to near-zero.But, in a testament to the gravity of the breakdown in the government bond market, there was no dissent about whether the central bank needed to stem what was happening by stepping in as a buyer. That afternoon, the Fed announced an enormous purchase program, promising to make $500 billion in government bond purchases and to buy $200 billion in mortgage-backed debt.It wasn’t the central bank’s first effort to stop the unfolding disaster, nor would it be the last. But it was a clear signal that the 2020 meltdown echoed the 2008 crisis in seriousness and complexity. Where the housing crisis and ensuing crash took years to unfold, the coronavirus panic had struck in weeks.As March wore on, each hour incubating a new calamity, policymakers were forced to cross boundaries, break precedents and make new uses of the U.S. government’s vast powers to save domestic markets, keep cash flowing abroad and prevent a full-blown financial crisis from compounding a public health tragedy.The rescue worked, so it is easy to forget the peril America’s investors and businesses faced a year ago. But the systemwide weaknesses that were exposed last March remain, and are now under the microscope of Washington policymakers.How It StartedThe Fed began to roll out measure after measure in a bid to soothe markets.Credit…John Taggart for The New York TimesFinancial markets began to wobble on Feb. 21, 2020, when Italian authorities announced localized lockdowns.At first, the sell-off in risky investments was normal — a rational “flight to safety” while the global economic outlook was rapidly darkening. Stocks plummeted, demand for many corporate bonds disappeared, and people poured into super-secure investments, like U.S. Treasury bonds.On March 3, as market jitters intensified, the Fed cut interest rates to about 1 percent — its first emergency move since the 2008 financial crisis. Some analysts chided the Fed for overreacting, and others asked an obvious question: What could the Fed realistically do in the face of a public health threat?“We do recognize that a rate cut will not reduce the rate of infection, it won’t fix a broken supply chain,” Chair Jerome H. Powell said at a news conference, explaining that the Fed was doing what it could to keep credit cheap and available. But the health disaster was quickly metastasizing into a market crisis.Lockdowns in Italy deepened during the second week of March, and oil prices plummeted as a price war raged, sending tremors across stock, currency and commodity markets. Then, something weird started to happen: Instead of snapping up Treasury bonds, arguably the world’s safest investment, investors began trying to sell them.The yield on 10-year Treasury debt — which usually drops when investors seek safe harbor — started to rise on March 10, suggesting investors didn’t want safe assets. They wanted cold, hard cash, and they were trying to sell anything and everything to get it.How It WorsenedNearly every corner of the financial markets began breaking down, including the market for normally steadfast Treasury securities.Credit…Ashley Gilbertson for The New York TimesReligion works through churches. Democracy through congresses and parliaments. Capitalism is an idea made real through a series of relationships between debtors and creditors, risk and reward. And by last March 11, those equations were no longer adding up.The Coronavirus Outbreak More
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Inflation Fear Lurks, Even as Officials Say Not to Worry
#masthead-section-label, #masthead-bar-one { display: none }Biden’s Stimulus PlanWhat to Know About the BillSenate PassageWhat the Senate Changed$15 Minimum WageChild Tax CreditAdvertisementContinue reading the main storySupported byContinue reading the main storyInflation Fear Lurks, Even as Officials Say Not to WorryPrices have yet to show much movement, but the prospect of an unbridled economy’s surging back from the pandemic has unsettled the markets.Shoppers in Southaven, Miss. Higher spending seems almost certain in the months ahead as vaccinations prompt Americans to get out and about, deploying savings.Credit…Rory Doyle for The New York TimesNelson D. Schwartz and March 10, 2021Updated 5:46 p.m. ETWhile the Biden administration’s ambitious effort to salve the pandemic’s deep economic wounds made its way through Congress, proponents insisted that funneling $1.9 trillion to American households and businesses wouldn’t unshackle a long-vanquished monster: inflation.Officials at the Federal Reserve, responsible for balancing the job needs of Americans with price pressures that could erode their buying power, have said there is little cause for worry.Yet as the legislation moved toward the finish line, inflation prospects increasingly influenced political commentary and Wall Street trading.The worries reflect expectations of a rapid economic expansion as businesses reopen and the pandemic recedes. Millions are still unemployed, and layoffs remain high. But for workers with secure jobs, higher spending seems almost certain in the months ahead as vaccinations prompt Americans to get out and about, deploying savings built up over the last year.Jamie Dimon, chief executive of JPMorgan Chase, is among those tracking the inflation threat. “There’s a very good chance you’re going to have a gangbuster economy for the rest of this year and easily into 2022, and the question is: Does that overheat everything?” he said in an interview with Bloomberg Television last week.In addition to the $1.9 trillion about to pour forth, Mr. Dimon said, $1 trillion in savings that piled up during the pandemic remain unspent.The inflation fixation has been one driver behind a sharp sell-off in government bonds since the start of the year, pairing with a stronger growth outlook to push yields on 10-year notes up to about 1.5 percent, from below 1 percent. Bonds, like stocks, tend to lose value when inflation expectations grow, eroding asset values.“I would not buy 10-year Treasurys,” Mr. Dimon said.The volatile bond trading prompted several unnerving days on Wall Street last week. High-flying tech stocks — previously seen as a haven for those chasing market-beating yields — were particularly upended, though broad share indexes remain near record highs.“I would suspect there’s a pretty good chance you’re going to see rates going up,” Mr. Dimon said. “And people are starting to worry about that.”Rising bond yields have also caused an uptick in mortgage rates, threatening one of the brightest spots in the coronavirus economy, the housing market. Home prices have been surging, especially in the suburbs, but a sustained rise in borrowing costs would almost certainly undermine that trend.Jerome H. Powell, the Fed chair, and other central bank officials have made clear that they are not worried about the expected bounce in inflation. “There’s a difference between a one-time surge in prices and ongoing inflation,” Mr. Powell said this month, making it clear that he expected the coming increase to be transitory.The Fed earned an inflation-fighting reputation in the 1970s and 1980s, when it eventually contained runaway prices with double-digit interest rates that caused a recession. But price gains have been slow for decades, and Mr. Powell and his colleagues have been working to ensure that consumers and businesses don’t start to expect ever-lower inflation.Healthy economies tend to have gentle price increases, which give businesses room to raise wages and leave the central bank with more room to cut interest rates during times of trouble. If inflation drops too low, it risks price declines that are especially painful for debtors, whose debts stay the same even as prices and wages fall.Fed officials revised their framework for setting monetary policy last summer, saying that instead of shooting exactly for 2 percent inflation, they would aim for 2 percent on average — welcoming inflation that runs faster some of the time.Inflation is expected to increase in the coming months as prices are measured against weak readings from last year. Analysts surveyed by Bloomberg expect the Consumer Price Index to hit an annual rate of 2.9 percent from April through June, easing to 2.5 percent in the three months after that before easing gradually to year-over-year gains of 2.2 percent in 2022, based on the median projection.But those numbers are nothing like the staggering price increases of the 1970s, and evidence of renewed inflation is paltry so far.Gasoline prices rose 6.4 percent in February, the Labor Department said on Wednesday.Credit…Benjamin Rasmussen for The New York TimesOn Wednesday, the Labor Department reported that prices rose modestly in February, nudged by an increase in gasoline prices that lifted the Consumer Price Index by 0.4 percent.Excluding the volatile food and energy categories, the index rose 0.1 percent.Gasoline prices alone were up 6.4 percent in February. But over all, the data matched projections, suggesting that inflation remains under control, despite a recent rise in prices for commodities like oil and copper. Stock markets rose on the news, with the Dow Jones industrial average reaching a new high.“Outside of another buoyant advance in energy prices in February, consumer price inflation remains very tame,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.The inflation concerns among some investors are a turnaround from the aftermath of the 2007-9 recession, which was followed by a decade of frustratingly slow growth in the United States and Europe. For much of that time, deflation, or falling prices, was a leading cause of anxiety among investors and economic experts..css-yoay6m{margin:0 auto 5px;font-family:nyt-franklin,helvetica,arial,sans-serif;font-weight:700;font-size:1.125rem;line-height:1.3125rem;color:#121212;}@media (min-width:740px){.css-yoay6m{font-size:1.25rem;line-height:1.4375rem;}}.css-1dg6kl4{margin-top:5px;margin-bottom:15px;}.css-k59gj9{display:-webkit-box;display:-webkit-flex;display:-ms-flexbox;display:flex;-webkit-flex-direction:column;-ms-flex-direction:column;flex-direction:column;width:100%;}.css-1e2usoh{font-family:inherit;display:-webkit-box;display:-webkit-flex;display:-ms-flexbox;display:flex;-webkit-box-pack:justify;-webkit-justify-content:space-between;-ms-flex-pack:justify;justify-content:space-between;border-top:1px solid #ccc;padding:10px 0px 10px 0px;background-color:#fff;}.css-1jz6h6z{font-family:inherit;font-weight:bold;font-size:1rem;line-height:1.5rem;text-align:left;}.css-1t412wb{box-sizing:border-box;margin:8px 15px 0px 15px;cursor:pointer;}.css-hhzar2{-webkit-transition:-webkit-transform ease 0.5s;-webkit-transition:transform ease 0.5s;transition:transform ease 0.5s;}.css-t54hv4{-webkit-transform:rotate(180deg);-ms-transform:rotate(180deg);transform:rotate(180deg);}.css-1r2j9qz{-webkit-transform:rotate(0deg);-ms-transform:rotate(0deg);transform:rotate(0deg);}.css-e1ipqs{font-size:1rem;line-height:1.5rem;padding:0px 30px 0px 0px;}.css-e1ipqs a{color:#326891;-webkit-text-decoration:underline;text-decoration:underline;}.css-e1ipqs a:hover{-webkit-text-decoration:none;text-decoration:none;}.css-1o76pdf{visibility:show;height:100%;padding-bottom:20px;}.css-1sw9s96{visibility:hidden;height:0px;}#masthead-bar-one{display:none;}#masthead-bar-one{display:none;}.css-1cz6wm{background-color:white;border:1px solid #e2e2e2;width:calc(100% – 40px);max-width:600px;margin:1.5rem auto 1.9rem;padding:15px;box-sizing:border-box;font-family:’nyt-franklin’,arial,helvetica,sans-serif;text-align:left;}@media (min-width:740px){.css-1cz6wm{padding:20px;width:100%;}}.css-1cz6wm:focus{outline:1px solid #e2e2e2;}#NYT_BELOW_MAIN_CONTENT_REGION .css-1cz6wm{border:none;padding:20px 0 0;border-top:1px solid #121212;}Frequently Asked Questions About the New Stimulus PackageThe stimulus payments would be $1,400 for most recipients. Those who are eligible would also receive an identical payment for each of their children. To qualify for the full $1,400, a single person would need an adjusted gross income of $75,000 or below. For heads of household, adjusted gross income would need to be $112,500 or below, and for married couples filing jointly that number would need to be $150,000 or below. To be eligible for a payment, a person must have a Social Security number. Read more. Buying insurance through the government program known as COBRA would temporarily become a lot cheaper. COBRA, for the Consolidated Omnibus Budget Reconciliation Act, generally lets someone who loses a job buy coverage via the former employer. But it’s expensive: Under normal circumstances, a person may have to pay at least 102 percent of the cost of the premium. Under the relief bill, the government would pay the entire COBRA premium from April 1 through Sept. 30. A person who qualified for new, employer-based health insurance someplace else before Sept. 30 would lose eligibility for the no-cost coverage. And someone who left a job voluntarily would not be eligible, either. Read moreThis credit, which helps working families offset the cost of care for children under 13 and other dependents, would be significantly expanded for a single year. More people would be eligible, and many recipients would get a bigger break. The bill would also make the credit fully refundable, which means you could collect the money as a refund even if your tax bill was zero. “That will be helpful to people at the lower end” of the income scale, said Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting. Read more.There would be a big one for people who already have debt. You wouldn’t have to pay income taxes on forgiven debt if you qualify for loan forgiveness or cancellation — for example, if you’ve been in an income-driven repayment plan for the requisite number of years, if your school defrauded you or if Congress or the president wipes away $10,000 of debt for large numbers of people. This would be the case for debt forgiven between Jan. 1, 2021, and the end of 2025. Read more.The bill would provide billions of dollars in rental and utility assistance to people who are struggling and in danger of being evicted from their homes. About $27 billion would go toward emergency rental assistance. The vast majority of it would replenish the so-called Coronavirus Relief Fund, created by the CARES Act and distributed through state, local and tribal governments, according to the National Low Income Housing Coalition. That’s on top of the $25 billion in assistance provided by the relief package passed in December. To receive financial assistance — which could be used for rent, utilities and other housing expenses — households would have to meet several conditions. Household income could not exceed 80 percent of the area median income, at least one household member must be at risk of homelessness or housing instability, and individuals would have to qualify for unemployment benefits or have experienced financial hardship (directly or indirectly) because of the pandemic. Assistance could be provided for up to 18 months, according to the National Low Income Housing Coalition. Lower-income families that have been unemployed for three months or more would be given priority for assistance. Read more.Now there is a belief that economic growth will ramp up at least temporarily, thanks to relief from Capitol Hill and increased vaccinations across the country.The about-face was noted Wednesday by the economist Bernard Baumohl in a letter to clients. “If you suddenly feel the ground shaking beneath you, it’s not because an earthquake struck,” he wrote. “What you’re experiencing is a wild stampede of Wall Street bulls trampling over their previous softer economic forecasts and now charging ahead with near frothy upward revisions to G.D.P. growth and inflation projections for 2021.”Mr. Powell, the Fed chair, has made it clear that officials will need to see the economy at full employment, inflation above 2 percent and evidence that it will stay higher for some time before they will raise their key interest rate from rock bottom.“Those are the conditions,” he said this month. “When they arrive, we will consider raising interest rates. We’re not intending to raise interest rates until we see those conditions fulfilled.”Fed officials have been less concrete about what might prod them into slowing their vast bond purchases, which they have been using to make many types of borrowing cheaper and bolster demand. Officials have said they would like to see “substantial” progress before tapering off their buying, and have repeatedly said they will signal any change far in advance.The Fed will meet in Washington next week and release a fresh set of policymakers’ economic projections next Wednesday. Although the Fed looks at the Consumer Price Index, it bases its policy on a different gauge of price trends, which tends to run slightly lower.“It is possible that participants will project higher 2021 inflation, especially if the Fed staff forecast incorporates policy effects on inflation or a reopening demand surge in select categories,” Goldman Sachs economists wrote last week. “Signaling awareness of these transient boosts to inflation in advance might make it easier for Fed officials to credibly downplay them later.”The Goldman analysts expect the Fed’s projections to suggest that it might make one rate increase in 2023. Previously, Fed officials had not penciled in any rate increases through the end of that year.Over the long term, inflation can be a concern because it hurts the value of many financial assets, especially stocks and bonds. It makes everything from milk and bread to gasoline more expensive for consumers, leaving them unable to keep up if salaries stall. And once inflation becomes entrenched, it can be hard to subdue.But most mainstream economists doubt that a sustained bout of troublesome inflation is on its way.“The inflation narrative has switched to concerns about rising prices,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “For the Fed, price response to the economy reopening is seen as transitory and is unlikely to cause too much angst, given inflation pressures are not expected to be sustained.”And Mr. Dimon, the JPMorgan Chase chief, signaled that inflation fears needed to be put in perspective. “I would put that on the things to worry about,” he said, but “I wouldn’t worry too much about it” — certainly not compared with taming the pandemic itself.AdvertisementContinue reading the main story More
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Investors Are Focused on Treasurys. Here’s What the Fed Could Do.
AdvertisementContinue reading the main storySupported byContinue reading the main storyInvestors Are Focused on Treasurys. Here’s What the Fed Could Do.Central bankers have said they aren’t worried about a pop in longer-term bond yields. If they do become concerned, they have some options.The Federal Reserve chair, Jerome H. Powell, may be asked about higher bond yields during a scheduled event on Thursday.Credit…Al Drago for The New York TimesMarch 4, 2021, 5:00 a.m. ETLonger-term interest rates have jumped in recent weeks, a move that has been broadly interpreted as a sign that investors are betting higher growth and slightly faster inflation may be right around the corner.Federal Reserve officials have mostly brushed off the increase to date, saying it is a signal of economic optimism. But many investors have wondered whether the central bank might feel a need to intervene. The adjustment has at times roiled stock markets, which tend to sink when interest rates increase, and it could weigh on consumer spending and growth if it is sustained and borrowing becomes more expensive.Jerome H. Powell, the Fed’s chair, is set to speak at noon on Thursday at a Wall Street Journal event, where he may be asked to address the recent bond activity.Many on or adjacent to Wall Street have begun to put forward a two-part question: They are curious whether the Fed will step in to keep rates low and, if so, how. Below, we run through a few of the most likely options, along with plain-English explainers of what they mean and how they work.First, a little background.The yield on a 10-year Treasury note, a reference point for the cost of many types of borrowing, has popped since the start of the year. After dropping as low as about 0.5 percent in 2020, the yield jumped to 1.6 percent during the day last Thursday. It hovered around 1.5 percent by Wednesday.That is still very low by historical standards: The 10-year yield was above 3 percent as recently as 2018, and in the 1980s it was double digits. But a rapid adjustment in longer-term rates around the world has drawn attention. Global officials like Christine Lagarde, head of the European Central Bank, have voiced concern about the increases.U.S. officials have generally painted the adjustment as a sign that investors are growing more optimistic about growth as millions of Americans begin receiving Covid-19 vaccines and the government supports the economy with spending. And while markets appear to be penciling in slightly higher inflation, Fed officials had been hoping to push price expectations — which had been slipping — a little bit higher.“If you look at why they’re moving up, it’s to do with expectations of a return to more normal levels, more mandate-consistent levels of inflation, higher growth, an opening economy,” Mr. Powell said of rates during a hearing on Feb. 23.But last week’s gyrations prompted U.S. officials to make clear they’re watching to make sure that market moves don’t counteract the Fed’s policies, which make borrowing inexpensive to encourage spending and help the economy recover more quickly.“I am paying close attention to market developments — some of those moves last week and the speed of those moves caught my eye,” Lael Brainard, a Fed governor, said at a Council on Foreign Relations webcast on Tuesday. “I would be concerned if I saw disorderly conditions or persistent tightening in financial conditions that could slow progress toward our goal.”The question is what the Fed could do if rates get too high.Lael Brainard, a Fed governor, said she was monitoring market developments. Credit…Brian Snyder/ReutersBuying longer-term bonds is one option.The Fed’s most obvious choice to push back on a surge in longer-term bond yields is to just buy more of the bonds in question: If the central banks snaps up five-year, 10-year or 30-year securities, the added demand will push up prices, forcing yields — which move in the opposite direction — lower.The Fed is already buying $120 billion in mortgage-backed securities and Treasury bonds each month, a program it started last year both to soothe markets and to make many types of credit cheaper. Right now, it’s purchasing many types of bonds, but it could shake up that approach to focus on longer-term debt.There’s precedent for such a maneuver. The Fed bought long-term bonds to push down interest rates and bolster the economy in 2011. A similar policy was used in the 1960s. Economists and business networks often call such policies either “maturity extension” — shifting future purchases toward longer-dated debt — or “Operation Twist,” which tends to refer to selling short-term notes while buying longer-term bonds.Promising to ‘cap’ certain yields is another.The Fed’s more drastic option is called “yield curve control.” While it sounds nerdy, the approach is simple. The central bank could just pledge to keep a certain rate — say the five-year Treasury yield — below a certain level and buy as many bonds as necessary to keep that cap in place.Other central banks around the world, including the Bank of Japan and the Reserve Bank of Australia, have used yield curve control. But the tool carries risks: For example, it could force the Fed to buy huge sums of bonds and vastly expand its balance sheet in a worst-case scenario. That could matter for perceptions, since politicians sometimes criticize the Fed’s growing holdings, and it might have implications for market functioning.Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, told reporters on Tuesday that she was not worried about the yield curve yet. But she suggested that if the Fed did need to do something, shifting to long-term purchases would probably be preferable.“Right now I don’t think of yield curve control as something we would implement, myself, right away,” she said.The Fed can take several steps to deal with rockiness in the bond markets.Credit…Jim Lo Scalzo/EPA, via ShutterstockAdvertisementContinue reading the main story More
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Do Fed Policies Fuel Bubbles? Some See GameStop as a Red Flag
#masthead-section-label, #masthead-bar-one { display: none }GameStop vs. Wall StreetGameStop Stock FallsYoung, Fearless and Shaking Up Wall StreetHow to Win the Stock MarketGameStop and Your TaxesAdvertisementContinue reading the main storySupported byContinue reading the main storyDo Fed Policies Fuel Bubbles? Some See GameStop as a Red FlagAnalysts warn that low-interest rates are promoting speculative bubbles. The Fed itself has downplayed the possibility that it’s behind asset prices.GameStop’s share price last month when a rush of retail traders coordinated to push up the company’s stock value.Credit…Tony Cenicola/The New York TimesJeanna Smialek and Feb. 9, 2021Updated 5:33 p.m. ETBefore it fueled the run-up in GameStop’s stock, WallStreetBets, the Reddit message board, had another claim to fame: It helped popularize a series of memes centered on the Federal Reserve chair, Jerome H. Powell, and his central bank’s policy of keeping interest rates near rock bottom while buying government bonds to bolster the economy.“Money printer go brrrrr,” many of them read, suggesting that the Fed chair was essentially printing money and propping up markets by pumping cash into them through its program to buy government-backed bonds.Reddit and Twitter made images playing on Mr. Powell’s persona — he’s referred to almost exclusively as “JPOW” on WallStreetBets — so ubiquitous that they’ve become paraphernalia. Amazon now sells sweatshirts (Prime eligible!) printed with an image of the Fed chair as a Christ figure ringed in a halo of golden light. In place of the Bible, the gospel he holds declares, “Recession canceled, stocks only go up.”The blind optimism embodied in that statement — one might call it irrational exuberance — runs the risk of inflating bubbles in markets. Some experts see the saga of GameStop as a cautionary example of problems that can develop when investors get swept up in market momentum, driven to some extent by the Fed’s attempts to keep the economy humming along with low rates and bond purchases.“We’re observing a market mania, and the cost of money has something to do with this,” said Peter Fisher, who teaches finance at Dartmouth’s Tuck School of Business and once served in the Treasury Department and Federal Reserve. “It’s just not credible to suggest that the momentum in equity markets has nothing to do with the Fed’s efforts to keep interest rates so low for so long.”To be clear, GameStop has been an unusual situation.Hedge funds had been betting against the retailer’s stock, or “shorting” it, assuming its share price would fall. A rush of retail traders coordinated to make that bet go bad by pushing up GameStop’s price. Because of the way short selling works, the hedge funds were forced to buy GameStop themselves to limit their losses. The stock price skyrocketed, jumping more than 600 percent in days.A mass of newly minted retail investors has poured into the stock market over the last year, thanks to a confluence of factors including fewer social opportunities and work-from-home arrangements, temporary disruption of sports betting and the rise of trading that is billed as “commission free.” Retail trading of individual stocks now represents roughly 25 percent of overall stock market volume compared with just 10 percent in 2019, according to Goldman Sachs.But a shared belief that this is a good time to buy stocks is also fueling that trend.Leaving aside the surge — and then the crash — in so-called meme stocks, the market appears to be flirting with euphoria. Price-to-earnings ratios and other market barometers are at heights not seen in two decades, since the tail end of the dot-com boom.Much as they did in the tech stock frenzy of the 1990s, individuals are pushing levels of trading activity sharply higher, traders are borrowing on margin to buy stock, and investors are snapping up public offerings from unprofitable or unproven companies.Analysts across Wall Street say the traditional drivers of stock price movements — changing expectations for corporate profits and revenues — have in many cases become less relevant.In fact, the surge has come when the American economy remains damaged by the coronavirus pandemic. Fresh data released on Friday showed the economy in January was still nearly 10 million jobs short of employment levels that prevailed before the virus struck.Some of the bump has come because investors are placing their bets based on expectations about corporate prospects once demand has snapped back and the job market has healed. But analysts said a combination of fiscal stimulus — including checks that put money into consumers’ pockets — and the Fed’s cheap money policies have also helped bolster stock prices.The timing checks out. When the Covid-19 crisis first gripped the United States last February and March, the market plunged. The S&P 500 — which had been at record highs — collapsed by nearly 34 percent in a matter of weeks. Conditions became so volatile that even typically stable markets, such as that for Treasury bonds, began to malfunction under the strain.To keep the panic from freezing the financial system and worsening the economic damage, the Fed cut interest rates nearly to zero on March 15 and announced a series of major actions on March 23. The central bank said that it was willing to buy unlimited quantities of government-backed debt, and that it would tiptoe into the corporate bond market for the first time ever to prevent the pandemic’s market fallout from turning into a full-blown financial crisis.Jerome H. Powell, the Federal Reserve chair, said in late January that monetary policy should not be the first line of defense in containing financial risks.Credit…Al Drago for The New York TimesMarkets rejoiced. Stocks bottomed out and then ricocheted higher, climbing a 9.4 percent the next day and ultimately staging the best three-day performance for the index since 1933.“When essentially your central bank has drawn a line in the sand, as they did last March, then people understand that it’s a one-way bet,” said Paul McCulley, former chief economist of Pimco, a giant asset management shop.The S&P 500 stock index has jumped more than 70 percent since then. To put the breakneck speed of that run-up into context, the S&P 500 has climbed about as much over the past 10 months than it had in the four years leading up to the pandemic.When it comes to the Fed’s influence on stock prices, some of it is purely mechanical. When companies can borrow for less, it allows for bigger profits and cheaper business expansion opportunities, which could elevate their worth in the eyes of stockholders. Some of the increase probably reflects the reality that super-low rates push investors out of bonds and into riskier assets like stocks as they seek better returns.But analysts warn that part of the run-up simply owes to sentiment: Investors believe stocks will go up, in some cases because they believe in the Fed, and so they keep buying.The downside is that people can lose faith in an ever-rising stock market. And when the music stops, an optimism-fueled bubble can become a pessimism-pricked burst.GameStop in particular “does illustrate some of the financial vulnerabilities that can stem from ultra-loose monetary and fiscal policies,” Neil Shearing at Capital Economics wrote in a research note last week, noting that super-low interest rates, government stimulus payments, lockdowns and platforms that democratize trading have all come against a backdrop of “longstanding societal strains and the perception of a widening schism between Wall Street and Main Street.”Still, Mr. Shearing said in an interview, the stock market as a whole does not yet look dramatically overextended, and the Fed needs to focus on righting a pandemic-damaged economy — which is the goal of its low-rate and bond buying policies.The Fed argues that it is not driving asset prices to the degree that many believe. While Mr. Powell, the Fed chair, declined to discuss GameStop specifically at a news conference in late January, he painted financial risks over all as “moderate.” “If you look at where it’s really been driving asset prices, really in the last couple of months, it isn’t monetary policy: It’s been expectations about vaccines, and it’s also fiscal policy,” Mr. Powell said. “I think that the connection between low interest rates and asset values is probably something that’s not as tight as people think because a lot of different factors are driving asset prices at any given time.”But if, as many believe, the Fed’s low rates are a substantial part of the story, it’s unclear that raising them slightly would stop a run-up in stock prices. While slowing bond purchases probably could take the shine off investors’ enthusiasm, that could come at a cost to the real economy.Regardless, Fed officials are unlikely to try to cool things off in the market any time soon.“If one group of speculators wants to have a battle of wills with another group of speculators over an individual stock, God bless them,” Neel Kashkari, the Minneapolis Fed president, said at a virtual town hall event last week. He added that he was not “at all thinking about modifying my views on monetary policy because of speculators in these individual stocks.”AdvertisementContinue reading the main story More
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How to Win at the Stock Market by Being Lazy
#masthead-section-label, #masthead-bar-one { display: none }GameStop vs. Wall StreetRobinhood’s C.E.O. Under the GunGameStop Investors Are TestedYour TaxesReader’s GuideAdvertisementContinue reading the main storyUpshotSupported byContinue reading the main storyHow to Win at the Stock Market by Being LazyThe drama of GameStop is misleading; the surer path to wealth is extremely boring.Feb. 4, 2021, 5:00 a.m. ETMany parts of the GameStop story — the wild swings over the last couple of weeks in shares of the video-game retailer and a few dozen other out-of-favor stocks — are not exactly new.Long before Reddit, the Yahoo message boards of the late 1990s democratized the expression of strong opinions about stocks (they didn’t call them “stonks” in those days).Short squeezes and market-cornering were maneuvers well before Randolph and Mortimer Duke — the fictional securities-fraud-committing villains of the 1983 comedy “Trading Places” — were greedy little boys.What has been weird to watch, if you’ve spent your life plodding away at building a retirement fund, reading books about personal finance, weighing fee structures and tax implications of various investment vehicles, is the mix of righteous anger and gleeful anarchism driving it all. Many of the traders driving the GameStop mania in recent days want to strike it rich and bring down what they view as a corrupt, rigged system along the way.Yes, there is abundant greed and venality on Wall Street. But the reality is that the stock market has also offered a path for ordinary people to build wealth — and more so in the last generation than ever before. You haven’t needed to burn down the system. All you’ve had to do is take the laziest, simplest approach to stock investing imaginable, and have a little patience.Ever since Vanguard introduced its S&P 500 index fund 45 years ago, ordinary investors have been able to invest in broad stock indexes in a tax-efficient manner, with extremely low fees. Any schlub on the street can put money to work harvesting a small share of the earnings of hundreds of leading companies, led by some of the sharpest corporate executives on earth and their millions of employees. You haven’t had to do much of anything![embedded content]Your returns would have been strong even if you had terrible timing. Suppose you had received a $10,000 windfall in March 2000, the peak of the dot-com bubble and a moment at which we can all agree stocks were overpriced. Yet even with such unfortunate timing, if you invested that money in a low-fee S&P 500 index fund and reinvested dividends for the last 20 years, your $10,000 would have turned into nearly $28,000 by the end of this past month — a 5 percent annual return when adjusted for inflation.And that was the single worst month in decades to begin investing. On average, if you were to select a month between 1990 and 2019 to begin investing, your annualized return through January 2021 would have been 9.8 percent after inflation. Simply for having the patience to sit on your hands.(Those returns would have been reduced by a few hundredths of a percentage point by mutual fund fees, and more by taxes if the money was not in a tax-advantaged account.)It gets better. Most people don’t receive and invest a single windfall, but rather chip in savings gradually.So suppose you had begun saving $100 a month at the start of the year 2000 — again, near the peak of a bubble — and had continued doing so ever since, increasing your savings along with inflation, putting the money into an S&P 500 index fund and reinvesting dividends. Over the last 21 years, you would have contributed about $32,500, yet your portfolio at the end of January would be worth more than $103,000.You achieved a 10.5 percent annualized rate of return, because while some of your savings was invested at market peaks, your slow-but-steady approach ensured you were also buying shares during periods when the market was depressed, as in 2002 and 2009.As recently as the 1970s, this strategy would have been hard to carry out. Modern index funds didn’t exist until John C. Bogle invented the concept for Vanguard in 1976. Mutual funds in the past had much higher fees than they do today. Buying lots of different individual stocks would have required high brokerage fees as well, making it all but impossible for people with modest savings.Moreover, the advantages of a “buy the index” approach were not as well understood until recent decades. Academic finance research in the second half of the 20th century had a series of findings about the efficiency of markets that, taken together, imply that the best long-term investing strategy for most people is simply to put money into the market as a whole and minimize fees and taxes. Personal finance advisers and commentators widely embraced this finding, with adjustments that depend on the investor’s risk preferences, particularly investing some slice of the portfolio in safer bonds.The result: In recent decades, following the most obvious conventional wisdom of how to invest has been possible even for small investors.If the market is rigged, it is rigged in a way that allows people to achieve a substantial return on their money by watching television or playing golf or taking a nap, rather than by spending their hours scouring message boards or developing elaborate theories of how to enact revenge on perfidious hedge funds or learning what the gamma of an option is.Think of Corporate America — the hundreds of large companies in which you are investing if you put your money into index funds — as a sports franchise.There are people who try to make money by betting for or against the franchise. They may put in lots of effort calculating proper odds, and once in a while may win big, turning a small wager into a big score. The very best at this — the sharps, in sports betting terminology — will even win more than they lose and be able to make a living out of it.But over all, the system is a zero-sum game, and most people who play are going to lose money once the sports books’ cut is accounted for. If you decide to try to make a fortune by betting on professional sports, you might even conclude that the system is rigged against you, because in a sense it is. The consistent winners are going to be highly skilled sports bettors who have been doing this a long time; and the casino, which takes a share of every pot.In this analogy, those fortune-hunting newcomers are the people who have taken to trading options on GameStop and other stocks in recent months.Then there are people who work hard to make that franchise operate: the team executives, the coaches, the players. They put in long hours to make the franchise a success, and while part of their pay is linked to the franchise’s success, the bulk of their compensation is cash in exchange for their labor. They can be well compensated, but theirs are rare talents and they have to work really hard.They are the equivalent of the executives and employees of the companies whose stock shares trade on public exchanges.Then there are the passive owners of the sports franchise. For instance, the owner of a minority share who doesn’t even have to help hire and fire team presidents. Other people do all the work of running the team. These owners just enjoy the benefits of earnings, year after year.It is not without risk: The franchise might sign an overpriced free agent, or ticket sales might collapse because of a pandemic. But if they are patient, they can expect that their investment will eventually pay off. And that is true even though they spend their time doing something other than examining point spreads and drawing up plays.There are no guarantees in life. Some people who are aggressively trading meme stocks will presumably walk away with significant profits. Index funds won’t generate the kind of overnight payoffs that buyers of GameStop options are evidently looking for. And the decades ahead may offer lower returns to stock investors than the decades just past.But the extraordinary payoffs of being a passive stock market investor are not something to overlook. When you are offered a free lunch — a reasonable expectation of good returns with zero effort and only moderate risk — it makes sense to eat it.Successful investing is not nearly as exciting and potentially painful as trading options on GameStop or sliding down the steps of Federal Hall on Wall Street. But then, it isn’t trying to be.Credit…Kena Betancur/Agence France-Presse — Getty ImagesAdvertisementContinue reading the main story More
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Robinhood's C.E.O., Vlad Tenev, Is in the Hot Seat
#masthead-section-label, #masthead-bar-one { display: none }GameStop vs. Wall StreetCharting the Wild Stock SwingsWhat’s GameStop Really Worth?Your TaxesReader’s GuideAdvertisementContinue reading the main storySupported byContinue reading the main storyRobinhood’s C.E.O. Is in the Hot SeatVlad Tenev has incited the fury of the trading app’s fans amid a stock market frenzy. His lack of preparedness on nuts-and-bolts issues was part of a pattern, former employees and analysts said.Vlad Tenev, co-founder of Robinhood, at the company’s Silicon Valley headquarters in 2015.Credit…Winni Wintermeyer/ReduxNathaniel Popper, Kellen Browning and Feb. 2, 2021Updated 3:06 p.m. ETSAN FRANCISCO — Vlad Tenev, the chief executive of the online brokerage Robinhood, has had practice doing damage control.Last March, he told customers that “we owe it to you to do better” after Robinhood’s app suffered lengthy outages, leaving many people unable to trade.In June, he wrote in a blog post that he was “personally devastated” and wanted to improve the “customer experience” after a 20-year-old who had a negative $730,000 balance on the app killed himself.And in December, when federal regulators fined his company $65 million for misleading users about how it made money, he said the accusations “don’t reflect Robinhood today.”Mr. Tenev, 33, is now in the hot seat again after Robinhood abruptly curtailed its customers’ trading last week amid a frenzy in stocks such as GameStop, which were driven sky high by an army of online investors. The limits infuriated Robinhood’s users, who were locked out of the action, and the seven-year-old start-up was blasted by lawmakers and others, accused of acting unfairly toward ordinary investors.For days, Robinhood was slow to fully explain why it had curbed people from trading the stocks. Only later did Mr. Tenev disclose that Robinhood had put in restrictions because it did not have enough of a cash cushion to hedge against the risky trades. To increase that cushion and avoid further problems, Robinhood raised an emergency $1 billion last week, followed by an additional $2.4 billion this week.On Sunday, Mr. Tenev told Elon Musk in an impromptu interview on the online conversation app Clubhouse that he knew that Robinhood’s trading curbs were “a bad outcome for customers.” He said the entire experience had been challenging, “but we had no choice in this case.”It was no surprise that Robinhood got caught unawares over the past week, current and former Robinhood employees and analysts said. While Mr. Tenev has helped revolutionize online trading for a younger generation with an app that makes investing easy and fun, his start-up has repeatedly been ill prepared to deal with issues as commonplace as technology glitches and trading hiccups, they said.Many start-ups go through growing pains. But “there’s a consistent pattern which makes one question whether he knows what is going on inside his company,” Vijay Raghavan, an analyst at Forrester Research who covers Robinhood and other brokers, said of Mr. Tenev. Lawmakers and some of Robinhood’s users have been even harsher on the chief executive. Representative Alexandria Ocasio-Cortez, Democrat of New York, and Senator Ted Cruz, Republican of Texas, have slammed Robinhood for freezing users’ ability to buy GameStop stock. Mr. Tenev has agreed to testify about the issue in Congress on Feb. 18.Even some of Robinhood’s biggest promoters have turned against Mr. Tenev. Dave Portnoy, the founder of Barstool Sports and a high-profile Robinhood supporter, wrote over a picture of Mr. Tenev on Twitter last week: “Fraud, liar, Scumbag.”Robinhood, a privately held company in Menlo Park, Calif., declined to make Mr. Tenev available for an interview. But Jason Warnick, the chief financial officer, said Mr. Tenev had widespread support internally.“When I watched Vlad, there is absolutely no one else I would want to be with,” Mr. Warnick said about the events of the last week. “He mobilized us in an incredibly effective way.”Venture capitalists who have backed Robinhood, which is valued at nearly $12 billion and is likely to go public this year, also said they had confidence in Mr. Tenev. Rahul Mehta, a partner at the venture firm DST Global, said the speed with which Mr. Tenev had raised the emergency $3.4 billion over the past few days “shows you the support around the table and the belief people have, in particular, for Vlad.”Mr. Tenev, who moved to the United States from Bulgaria when he was 5 and grew up in the Washington, D.C., area, founded Robinhood with Baiju Bhatt in 2013. The two met while studying math at Stanford University.After graduating from Stanford in 2008, Mr. Tenev attended the University of California, Los Angeles, to pursue a Ph.D. in math but dropped out to work with Mr. Bhatt. The pair initially had two other business ventures, including a Wall Street trading firm.But those were short-lived. Instead, inspired by the Occupy Wall Street movement in 2011 — which took aim at the power of the big banks — they began talking about how to “democratize finance” for everyone by ending the fees that most brokerages charged to trade stocks. They named Robinhood after the English outlaw of legend who stole from the rich and gave to the poor.In particular, Mr. Tenev and Mr. Bhatt wanted an app that a younger generation could easily use. “People in my age group, the millennials, weren’t getting into the markets and were openly distrustful of the institutions that were providing financial services,” Mr. Tenev said on CNBC in 2015.Mr. Tenev with his Robinhood co-founder, Baiju Bhatt.Credit…Aaron Wojack for The New York TimesMr. Tenev and Mr. Bhatt, who were co-chief executives, made Robinhood simple. Users were able to begin trading stocks with nothing more than an iPhone app and with no fees. The app also made trading feel like a game. New customers were given a free share of stock after scratching off what looked like a digital version of a lottery ticket.The men sought out celebrity investors like the actor Jared Leto and the rapper Snoop Dogg. The co-C.E.O.s often showed up at the office with matching Tesla sport utility vehicles, one black and one white, two former employees said.Inside Robinhood, Mr. Tenev was known as the cerebral coder in charge of operations, said six current and former employees, who spoke on the condition of anonymity. He was known for sitting down at lunch with employees to talk about books or his latest theories from science fiction. Mr. Bhatt was more fun-loving and handled design, they said.Both were active on social media, with Mr. Tenev tweeting emoji-filled, jokey replies to Mr. Musk. Mr. Bhatt broadcast pictures of themselves from floor seats at Golden State Warriors basketball games.As Robinhood grew quickly, though, so did the blunders. In 2018, the company announced that it would begin offering bank accounts. But it had not secured approval from financial regulators, which is standard practice, earning the start-up a swift rebuke.That same week, Robinhood released software that erroneously reversed the direction of customer trades, which meant that a bet on a stock going up was turned into a bet that it would go down. Mr. Tenev oversaw technology.Technological issues continued piling up. In 2019, customers discovered that Robinhood’s software accidentally allowed them to borrow almost infinite amounts of money to multiply their stock bets. Last March, as the pandemic hit the United States and the stock market gyrated wildly, Robinhood’s app seized up for almost two days, leading some customers to lose more than $1 million.That was when Mr. Tenev said in a blog post that “we owe it to you to do better.” By then, Robinhood had more than 13 million customers.Mr. Warnick and other employees said Mr. Tenev had a knack for staying calm during difficult situations. “He doesn’t get emotional,” Mr. Warnick said.But five current and former Robinhood employees said Mr. Tenev moved quickly to new projects without fixing the previous problems. After the March outages, they said, Mr. Tenev told the company that it would significantly ramp up its infrastructure and customer support. Yet almost a year later, the start-up does not offer a customer service phone number, unlike its competitors.Robinhood did not respond to a request for comment on the customer service issues.Last year, Mr. Bhatt stepped down as co-chief executive after returning from paternity leave, leaving Mr. Tenev in charge. Mr. Bhatt remains an executive and is on the company’s board of directors.Robinhood’s technical outages have continued. Last month, the site went down 19 times, more than twice as often as Charles Schwab or Fidelity, according to data from the web tracking company DownDetector. Mr. Tenev has recently kept a low profile. Last year, he said in a podcast interview that he keeps his phone out of his bedroom at night to avoid being tempted to check social media.But over the last week, as the mania over GameStop stock grew and Robinhood was forced to react, Mr. Tenev had little choice but to step out more. He has appeared on television at least eight times from the sparsely decorated living room of the home where he lives with his wife and children.In most of the appearances, Mr. Tenev used technical language and shifted quickly to talk about Robinhood’s moving forward to another stage of expansion.“This is just a standard part of practices in the brokerage industry,” he told Yahoo Finance last Friday, referring to the decision to temporarily halt some purchases. “We’re very confident about our future.”Kitty Bennett contributed research.AdvertisementContinue reading the main story More
