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Comment by anilshanbhag | Hacker News Reader

The entire stock market feels like its in a bubble. Netflix stock gained more than 25% in the past one month. Their free cash flow (FCF) has been negative every single quarter and will be for many quarters to come. Stocks trade based on discounted cash flow(DCF). Netflix however produces no material return for investors and still majority of the analysts keep putting higher and higher price targets, its like they are collectively pushing a hidden agenda. It's as if there is this new way of valuing companies that is not based on DCF.

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A lot of sophisticated financial people share your thinking.

The problem is there's no growth to be found anywhere. People are cheering for 3% GDP growth in the US. Interest rates are at all-time historical lows, meaning discount rates are lower than they've ever been.

These macro trends have added up to an environment where people are willing to pay staggering premiums for even a remote shot at growth. It's affecting every asset class from real estate to public market equity to early-stage startups to commodities, and you aren't the only one who's worried about it (I am).

To what degree does income inequality, consumer debt, and rapidly rising barriers of entry to high-income fields contribute slowing GDP growth? Is there research and evidence on the subject?

I'm just an engineer with basic financial survival skills... but blind intuition suggests fixing those problems is necessary for a sustainable growing economy.

"Trickle-down" theory and growing inequality drains economic activity since the "1%" invest their money instead of spending it. They profit when the public consumes, unless short-sighted over-exploitation by some industries strangle general consumer activity...

It sure looks like we're being strangled. Off the top of my head: urban rent, health care, high consumer debt and student debt reduce disposable income while automation, exporting jobs, poor retraining for adult laborers, and lower small-business access to capital due to banking mergers lower actual income. When businesses close, some of their ex-employees will switch to high-skill high-demand jobs... but most will increase the labor supply in less skilled industries because they urgently need money - putting downward pressure on wages and working conditions.

If I'm wrong, I'd love to learn why, and what other systemic conditions explain our economic stagnation.

Not trying to invalidate your larger argument, but it's worth noting that there is no such thing as "trickle-down theory"https://blogs.spectator.co.uk/2015/04/sorry-but-trickle-down.... Never was, never will be. It's a strawman through and through, originating in mockery, amounting to nothing more than "screw the poor" slogan that no self-interested economist could have endorsed. Its only purpose is to ridicule the perfectly valid – and hard – question of optimal tax policy that achieves long-term budget prificit without stifling development of businesses. Hilariously enough, some less than savvy people with conservative inclinations have defended and adopted this strawman as if it was a legitimate model, but this has more to do with meme dynamics than with economic policies.

As for your larger argument, well, this is a just-so model. There are many different ones, in favour of different policies, of course. But, realistically speaking, constant growth of a developed economy was never possible. However well you reduce inequality or deal with automation-related job loss, there are limits to attainable market expansion. Stagnation or, at best, negligible growth are something we need to learn to face.

You cited an article that basically says 'Trickle down doesn't exist, plebs. But hey, trickle down totally works! Here's why!'. What he describes is the policies that people refer to when they say Trickle Down.

Not sure why your getting downvoted. The article largely tries to debunk TD exists because 'no recognised economist of any school of thought has ever had any such theory or made any such proposal'

TD has been referred plenty, not under than name. You'll find a bunch of economist views (positive and negative) under supply side theories which is often steeped in trickle down theory.

And then the article promotes TD under the logic; "the sequence of payments is directly the opposite of what is assumed by those who talk about a ‘trickle down’ theory. The workers must be paid first and then the profits flow upward later – if at all." based on a couple of examples and his loose theory without any real research.

There are plenty of proper studies to the contrary available with an easy google.

This isn't about the number of examples. It's plainly disingenious to say that "TD has been referred plenty, not under that name". Basically, in such way one demands the right to reduce supply side theories – or, in popular practice, to reduce every argument in favor of any taxation rate lower than proposed by the opponent – to a strawman of choice, as if the strawman was the original idea that's "covered up" or "dogwhistled" or whatever. Like this, in extreme:

A: We need to impose 100% tax on the top 10%, to achieve economic growth and lower inequality.

B: This isn't even wrong, this is asinine.

A: Oh, trickle-down much?

Why do this? Naturally, because genuinely debubunking the specific arguments against high tax rates is a lot harder than joking about the bourgeoise that promote TD because of their greed.

I think it's more that, when people sit down and debunk the arguments against high tax rates, the people who believe in supply side economics don't read them. Which in some cases is because they'd rather watch old cowboy movies. In others, it's because they simply don't care. It's an extreme case - but consider what happened to the last accademic economist who tried to use economic arguments against the external imposition of supply side. He was called Yanis Varofakis. They ignored him, the press called him a nut, then they just went ahead with the austerity package.

I'm not saying you're wrong. I understand where you're coming from. You raise good points. I think we need to add to this list one simple idea: regulation.

Housing costs are terrible. They're getting bad even in small towns like mine. There is no way that my house is worth 172k. For many, especially in California and states that followed their lead, housing cost are largely, not solely, due to regulation on new house starts. Environmental impact and associated costs make a new housing community in California on average 1 million dollars more expensive. For many, they don't even put shovel to sod.

Health in the US has a lot of this too. Governmental regulations and the AMA drive up the cost of doctors. All of this is well documented. Interestingly, the free market is coming to a possible rescue on the price of generics: https://www.nytimes.com/2018/01/18/health/drug-prices-hospit...

A good chunk of student debt is due to the government printing money for loans that students can't escape. School saw this bottomless supply and acted accordingly.

Job exporting has some factors due to regulation too. As do the others in your list.

I'm not saying that regulation is bad. I believe in free markets, not unfettered markets. However, a lot of the regulation is old, duplicative, and contradictory. It makes being a business far more complex than it should be. Regulation hampers innovation. We need to remove regulatory cruft at all levels. We need to adopt evidence based regulations.

I'm a strong believer in using minimal but sufficient regulations and taxes to shape market growth.

There are some absolutely unnecessary regulations, like the loopholes Tesla has to go through to sell cars because traditional dealerships don't want to lose money, or unfair taxes against green energy - protectionism must die.

There are also outdated but reasonable regulations, like Seattle's density regulations. Our housing crisis is caused by the market lagging far behind economic growth because it took years for the public to recognize the city was growing, years to change the laws, and then more years for the normal construction timeline. Density regulations as a concept make sense, but we haven't figured out how to auto-scale limits to avoid falling behind.

And then there are areas where we do need more regulations. For example, we absolutely need more regulations on credit cards and loans in addition to better finance education in highschool. Consumers are responsible for being informed, but there's still no excuse for even offering to saddle someone with a high-interest loan that they can never hope to pay off... some people are simply too dumb to understand the math.

I like the phrase "evidence-based regulations", but sometimes the evidence is stale or measuring the wrong thing, and the data doesn't guarantee we implement the right system of incentives.

The main problem with regulation is that it's too easy to capture by various corporate lobbies. Propose a good plan, and see it get shredded and repurposed to serve those it's supposed to regulate. Congress is cheep, and campaign committees wield the purse strings to keep their members in check on policy issues, so the election system doesn't respond efficiently to abuses. We won't be able to get good regulation until we can get the lobbyists and campaign financiers out of there.

Regulatory capture only really happens when your democratic system has broken down anyway, at which point you have bigger issues than regulation. Which the US absolutely does.

>The main problem with regulation is that it's too easy to capture by various corporate lobbies.

This is like saying "the main problem with laws is..."

In fact, this false dichotomy between "more regulation" and "less regulation" is mainly an artefact of corporate lobby groups (plenty of examples in their propaganda of this).

It dumbs down the issue to a childlike level and lets them play two political blocs who might have fundamentally similar interests off against one another depending upon what particular legislation they want introduced or repealed.

>>The main problem with regulation is that it's too easy to capture by various corporate lobbies.

> This is like saying "the main problem with laws is..."

Is it ? A corporation that already pays employees higher than minimum wage can drive out smaller shops that do not pay much more than minimum wage by working to raise the minimum wage. This enables them to raise prices and screw customers over if the smaller shops go out of business.

'Murder laws help murders by allowing them to capture murder laws'

Does not quite seem to work

>Is it ? A corporation that already pays employees higher than minimum wage can drive out smaller shops that do not pay much more than minimum wage by working to raise the minimum wage.

If you're talking about, say, Walmart, they lobby very hard against minimum wage raises and even go as far as to threaten what appears to be self destructive behavior to prevent it from occurring (e.g. threats to close profitable stores).

Minimum wage goes up -> Walmart profits go down. It's that simple. (see minimum wage across state borders by Dube, Lester & Reich).

They drive out smaller shops by using their buying power to beat suppliers down on price, using their size to get sweetheart land deals and sweetheart tax deals with local officials desperate to bring jobs to the area.

When you say “regulation”, I hear “market protections.”

> research and evidence

The trouble is that income/wealth inequality is often ignored in macroeconomic models. The math gets tough and an easy way to simplify the equations is to assume an equilibrium growth path. More complex models use a dynamic stochastic general equilibrium, but an equilibrium all the same.

Unfortunately, the key feature of rising inequality is that it may move the system into an unstable equilibrium. For example, if a handful of billionaires hang out together at Davos and get a bit of groupthink, they might decide to misallocate some capital (accidentally). If they make a mistake in a truly dramatic fashion, (investing heavily in Bitcoin, for example) they could evaporate a large chunk of the nation's wealth. When a handful of actors has an extreme influence on capital allocation, we've effectively become a command-economy instead of a free-market economy.

I think the “us vs them” mentality is too strong here. Don’t you think these billionaires are just as against each other (if not more so) than against the common man?

I don't think they'd need to intentionally cooperate. In fact, one of the worst motivations could be competitive status-seeking. A few billionaires trying to go to space is good. What if 10 of them do it?

Read about Fordlandia. It's hard to measure the economic impact of Ford's obsessions on Detroit.

> us vs them

I'm not sure where you got that sense. Capitalist societies tend to create log-normal distributions of wealth. There's no threshold where you can say one person is "us" and the next on the curve is "them".

Not at all - other billionaires are opponents, not enemies... they work together to continue extracting wealth from the common person.

If that is so, why are cartels a thing?

I'd like to research this some more, can you name some of those equations / macroeconomic models?

I think this is a good, probing comment, and I would invite you to consider one more factor, because it's a major one: government debt and unfunded liabilities. This amounts to trillions in the U.S., a number so large it defies comprehension. A common solution offered is to simply "tax more", but it's clear that gov spending, by and large, bonkers. I'm sure the reasons for this are the same ones that keep that fat-cats plump, but the big-picture IMO is solving the looming debt-crisis; without that, solving the issues you raised could be for naught.

(edit: removed precise amount of US debt because figure is debatable and I don't want to get caught in weeds. It's a $BIG_NUMBER.

National debt is a looming crisis, but the largest impact on the general public has been irrationally cutting government spending in the wrong areas (cutting $M from social programs to spend $B/$T on foreign wars).

Of course, the general public is screwed when the crisis hits - we don't have any off-shore bank accounts - and this administration has seriously shortened the timeline to crisis.

If we give the government the ability to appropriate funds for social programs and safety-nets, rather than merely enforcing the rights in the constitution, it is inevitable that these funds will inevitably be misappropriated and allocated in ways that benefit the politician and his buddies, primarily.

As we continue on, we discover that, lo and behold, the programs need even more money, time for a tax increase!

Further down the line, we discover that further tax-increases are not politically-viable... no problem, let's just add to the entitlement-burden and let's re-visit the issue.

Later still, it's time to start paying for those unfunded liabilities but, damn it, there's no money in the vault. No problem: let's just print more money, and while we're at it, let's loan it to ourselves and charge "ourselves" interest (the second "ourselves" of course means "taxpayers, LMAFO).

Repeat until your currency, economy, and society collapses.

Other nations have no problem funding social programs, because they maintain a reasonable tax rate for high-income/high-wealth entities and avoid expensive indefinite foreign wars.

Keep in mind that a lot, if not all, of those countries exist under the umbrella of protection that the United States military provides, and thus do not have the same budgetary requirements for their own forces. Otherwise, time to start learning how to say "Please don't shoot" in Russian.

(edit: don't take the above as the complete-picture, by any means, it's just another rarely-mentioned factor that I wanted to bring up. I believe there's a sweet-spot to be found for taxation & social-programs that has a net-gain for society.)

> To what degree does income inequality, consumer debt, and rapidly rising barriers of entry to high-income fields contribute slowing GDP growth? Is there research and evidence on the subject?

I would say that a huge factor contributing to low growth in developed countries is the fact that, on a global scale, they're just very rich and for most businesses it makes more sense to develop in countries with much lower costs. I.e. the next 50 years will be about poor countries slowly catching up with the developed ones, not about developed ones getting even more ahead.

Printing money for the past decade and giving it to large banks will have that effect. It's the same as giving $100 to every person at the market and then wondering why an Apple costs $100.50. The large investment banks are consumers of public equities.

With the bank bailout in 2008, our dollar was effectively halved. Probably what we are seeing now.

By what measure has the dollar lost half it's value?

I saw a graph showing the bailout doubled the number of existing dollars.

But that doesn't mean it lost half it's value. If I printed an extra 100 trillion dollars and launched it into space that wouldn't affect the value of the dollar.

And the same thing was true during the bailout. 99% of that money was never spent so it didn't have any affect on the economy.

My original point was that that money entered the system via large investment banks, whom use it to invest in publicly traded securities. Most of that money doesn't make it to circulation, it just inflates the price of those assets instead of all goods in the wider economy.

> 99% of that money was never spent

Then where did it go?

In the UK, at least, the Bank of England used QE money to buy government bonds. This meant that the bond-holders could exchange their illiquid bonds for cash, which they then needed to do something with.

The BoE then collected and destroyed government payments on the bonds, so the net amount of money doesn't change in the long-term.

One side-effect of this is that the cost of bonds went up -- demand had increased -- so the profitability of buying them went down, meaning the banks were naturally incentivised to do something else with that money.

It's not a panacea, but it is quite a neat lever to have when you want to increase the supply of money without actually spending any. Unfortunately it still looks like the banks are being given lots of free cash, but it's not actually free.

A lot of it was a backstop in case it was needed, but those reserves were not tapped.

Basically the Fed made lines of credit (with strings attached) open to banks to guarantee liquidity, increasing trust in markets. Banks didn't withdraw the money, and some that did (or were forced to take it to dissuade bank runs on the others) paid it back quickly to get out from under the strings.

Here's [1] a decent source on the finances of the bailout (which were actually loans).

[1] https://projects.propublica.org/bailout/

Assets can appreciate for two reasons, inflation which will increase future cash flow, or interests rates dropping which will decrease the discount rate.

Judging from low and stable inflation it's obviously the second as opposed to the first.

Sustained 3% US GDP growth is overly optimistic. We have 0.7% population growth, and no obvious major investments.

The computer boom is mostly over with the low hanging fruit taken. Prior to that we had IC engines and electricity, but nothing on the horizon seems to have that kind of potential to radically reshape society. And to double the economy every 25 years you need regular dramatic shits.

PS: Look at the past generation (20 years) and 3% are unusually good years.

The only things I can think of are:

1) AI. Somehow, we finally get the AI working, and it somehow produces a lot more jobs. I really think the opposite will happen, but who knows.

2) Climate Change. The ever rising waters and the ever worsening storms will cause nations to re/build large infrastructure projects. Think seawalls and repairing the NYC subway. I don't think that will be good, as it'll mostly just be debt spending, but who knows.

3) Biotech. With CRISPR and optogenetics combined, the ability to safely edit in vivo will explode. Change your eye color to pink in a week. New fruits and veggies. Everyone has a really skinny body-type. Etc. The FDA and other nation's agencies will be hesitant, but it'll happen either way. I think this has the biggest chance, though the time horizons are much longer than we are used to, maybe centuries.

> it somehow produces a lot more jobs.

Recall a few days ago some people were trying to reconstruct the genome of the first black man in Iceland. There's no way anyone could have a job doing that in anything but a very wealthy society.

In other words, AI won't create jobs in manufacturing, but it will enable unexpected jobs to be created that would otherwise not be cost-effective.

> Recall a few days ago some people were trying to reconstruct the genome of the first black man in Iceland.

Recall who funded that work.

Nobody would have funded or volunteered for that work if they were concerned with getting enough food put away to survive the winter.

Automation reduces costs. As long as those costs savings are passed on to the consumer that's a good thing.

Maybe. But the issue is growth percentages. Others point out that 3% is now high. The question is if the fractalization of the economy (that AI may allow) will increase the growth rate to 5% or something.

#1 Seems more likely to destroy jobs than create them. It could be an engine for growth, but self driving for example have taken a long time and vast investment. It's useful, but seems to have limited direct benefits.

#2 is a broken window fallacy. It may create some up months, but you need increased productivity for sustained growth.

#3 Biotech has been around for a long time. It's a world of hard problems, and again you need increased effecency not novelty to drive sustained growth.

4) Unmanned mining in space - as automation and machine learning progress capturing the right asteroid could bring in a few Billion or Trillion worth of nickle or whatever.

Honestly, I'm bearish on space mining. The Earth has a lot of unexplored volume left. The oceans' floors are relatively unexplored in terms of mineral wealth, even just 100 miles offshore. Antarctica is also a giant mystery, with many potentially rich mountain ranges sitting under 1/2 mile of ice. Heck, in Australia people will buy land, walk around, and just find nuggets of gold sitting on the dirt, it's something of a 'thing' there [0] So, 10k/lbs flight costs aren't cheap enough yet to justify the very hazardous environment and delta-V costs. Maybe in a century, but for now it's a ways off.

[0] http://www.mining.com/this-australian-man-just-found-a-massi...

Well, there is significant investment in this space (har har), with timelines much closer than a century making investors open their wallets today. And costs aren't really relevant in isolation, it's the ROI that matters.

Space mining is not the answer to things we can find otherwise on the ground. It is the answer to how we build things in space, and get things we can't get in bulk down here. The right rock could reshape our relationship to some of the rare earth metals, for example. Mining en masse in remote regions is no picnic, so if hundreds of millions invested in going up can bring many billions down on demand, the economics will make sense. Mining Antarctica for hundreds of millions of tonnes for a not-so-interesting minerals offers an upside that pales in comparison to the amazing nuggets we have floating around the solar system...

And if the economics are sound, technologically: if you combine a UAV and a brain about as good as we get in a Tesla you're just a few rockets away from some insane riches and the power to crush terrestrial markets on a whim... No soup for you <mineral producer>... that's the kind of thing Billionaires dream of.

The promises of low and micro g manufacturing, the decreasing weight requirements and increase intelligence systems, and holding the economic 'high ground' for humanities next step offer the potential to move the needle more than a little. Launch tech is the big bottleneck, so keep an eye on SpaceX :)

> it's the ROI that matters.

So true!

Your points about some unknown material/process in space being the key are correct. However, I don't think there is anything up there that we can't figure out how to make down here. There are some long, single grain, high weight elemental crystals that we can't make here, but they also takes millions of years to cool down in a vacuum. Space is really empty, and there really aren't any magic rocks up there. It's mostly just feldspar.

> he computer boom is mostly over with the low hanging fruit taken. Prior to that we had IC engines and electricity, but nothing on the horizon seems to have that kind of potential to radically reshape society. And to double the economy every 25 years you need regular dramatic shits.

Then the next revolution happens. I'm sure people were pessimistic during periods of lesser innovation before electricity, telephone, phonograph, movie camera, consumer appliances, radio, television, PCs, internet, smartphones... there's always something new. There may be many reasons to believe there won't be 3% growth — "the computer boom is mostly over" is not one of them.

That's where Peter Thiel screwed up in his pessimistic premise about flying cars vs tweets (used as an illustractive example of course).

At the same time Thiel was making that claim, CRISPR, AI, robotics, VR/AR, blockchain/crypto-currencies and a massive general leap in automation were working their way into the economy. We're also about to take a leap forward when it comes to space tech and transportation improvements (from electric vehicles, electric planes, to hyper-loop and subterranean tunnel transport, those are all likely only the beginning of a new generation of transport tech; the power of combining electric vehicles + radically better software + lower cost, will be vast and will remake every nation). To add to all of that, China throws a big X factor into the global economy, they'll add additional spark to invention/innovation, accelerating competition and improvement between the US-Europe-Asia (Thiel's observations apply primarily to a time range when China was dirt poor, as recently as 1994 they had a mere $500b in GDP).

What's more important, flying cars (which are wildly impractical even if you can do it well), or curing Hepatitis C? We did the latter at the same time Thiel was expressing his pessimism. At least 70 million people have Hepatitis C world-wide. Flying cars are a joke by comparison to the extraordinary scientific accomplishment of wiping out HepC over the next two decades. Thiel set up his bold premise at exactly the wrong time.

Most of those innovations however seem to be playing "catch-up" though and there's a huge question mark as to whether most (not necessarily all) of the benefit goes to capital holders. Even the innovations that do benefit as a percentage how much do they lift living standards by compared to innovations of old? Electricity meant I had light at night; think of your local neighborhood without sewerage, etc.

They are also "costing a lot more" in terms of training and intelligence so there's a question mark of how much the average person without capital or privilege can access them. For me there's also a question of whether they are just playing catch up for increase in human population that's happened since the WW2 era - how many are not required if we just reduce population? Per capita are we really better of? There's a reason a lot of people are "nostalgic" for the period before the 1990's. There's also the negative things to consider of all this "innovation" such as environmental degradation, the massive increase in CO2 emissions, etc.

The "stagnant" economy (e.g food, land, health care) - the things most people need to survive comfortably have been increasing in cost significantly for most world economies. The innovations you state most of the world's population (who are mostly poor btw) would happily trade away for cheap more nutrient rich food, house, cheaper energy, etc.

Not saying hyperloops, blockchains and such aren't cool; I'm just questioning whether technology alone is what improves our quality of life. And all technology requires energy which is generally increasing in cost.

There's quite a bit on the horizon with potential to reshape society. Self-driving cars is perhaps the most obvious example, and the underlying technologies of computer vision and deep learning seem likely cause automation revolutions in a number of other fields.

AI should bring growth to GDP, but it will also most likely bring about even further concentration of wealth and income. The long-term results could depend a lot on public policy.

Seeking alpha is nearly impossible today, as you noted. Yield curves are flat. I'm not sure what that says exactly - obviously it's multivariate - but combined with the rise of cryptocurrency and the current government, we definitely have a unique situation on our hands.

Honestly, though, it's a great time to be young and taking chances. Resources to become an entrepreneur have never been more plentiful/cheap, and the current business environment is incredibly favorable. For now, anyway.

I think one of the big problems is that most people's retirement money gets pumped into the stock market to purchase shares on the SECONDARY market. When people buy shares on the secondary market, companies never see any of that money. But when companies sell shares directly to the public through the primary capital markets, that money can be invested to produce NEW goods and services which create economic GROWTH. The whole point of a stock market is for companies to raise money from the public to produce new goods and services and generate economic growth, but in reality companies are doing very little of this. In fact, they often do the OPPOSITE! Instead of raising capital by issuing new shares, companies burn their earnings buying back existing shares from the public. It's insane! Economists in the future will look back in amazement and wonder how we could have possibly been so stupid.

> Instead of raising capital by issuing new shares, companies burn their earnings buying back existing shares from the public. It's insane!

You're ignoring all the ways that companies use their stock as a currency. From employee compensation to non-cash acquisitions, companies absolutely benefit from the secondary market. Especially in an era of low interest rates, it makes more sense for companies to borrow capital when they need it rather than raising money by issuing new equity, especially when other ways of issuing equity come with tax advantages.

Having too much money in the company is just as bad as having too little. Companies that have something worth spending money on raise money (whether as rights issues, debt or something else) and spend it. Companies that have nothing profitable to do with their money give it to their shareholders (the fact that they tend to do buybacks rather than dividends is mainly an artefact of the tax system rather than a real difference). That's as it should be.

Real estate is doing well. It's still coming on strong after the '08 ditch. Interest rates are low and demand is still strong. When the stock market tops out, people will take their money out and buy real estate causing another rise. Eventually it will fall again. It seems that there is an 8-10 year market cycle, so it should be topping out soon. A rise in interest rates will be the leading indicator.

>When the stock market tops out, people will take their money out and buy real estate causing another rise.

If I understand correctly, you are saying that market sentiment that the stock market has reached its peak will result is real estate prices increasing. That’s a very optimistic take. When market sentiment thinks the peak has been reached, people start selling and you get a crash. Everyone can’t sell at the top.

I don’t think most people buy homes based on a guess of the stock market cycle. I think a more realistic model is: people sell stock and buy a house when it makes sense for their life and they can qualify. They take money out of the stock market (often a 401k) for the down payment and use it to meet reserve requirements. If the market crashes, people won’t be able to afford as much house and prices will drop.

If the stock market keeps going up, that will continue to be one of the factors supporting home prices.

Just to give a different perspective on the 'real estate is doing well', while still supporting your final point: the total mortgage debt in the US is $13 trillion, which is a quarter of the total US bond market,

Forgive my ignorance but how does the stock market as a whole keep growing if the GDP isn't growing at a similar rate? where is all the attributed value coming from?

Or am I thinking about it the wrong way ?

Equities are only one sector. As a very simplistic model, imagine that companies were growing at the same time that property was getting less valuable, then we might see flat GDP but a growth in stocks and a fall in real-estate values. (Of course some real-estate holders are equity-funded, but many aren't; since returns are predictable and consistent, real-estate tends to be mostly funded by debt, whereas equity funding is more appropriate for more volatile things like research- or consumption-driven companies). The stock market correlates decently with "the economy" generally, but it's not the whole thing, and many would consider a portfolio that included both stocks and bonds, and perhaps property or other assets as well, to be more reflective of the overall economy.

Probably hidden inflation... There is only so much stuff someone needs to buy before starting to sink the rest into index funds/stocks/speculative things.

> The problem is there's no growth to be found anywhere.

Cryptocurrencies and ICOs.

Applied neural networks.

Automation.

Good electric cars. To the point where people are prepaying for something that might be built in a few years.

Good cheap batteries.

>Cryptocurrencies and ICOs.

What value is being created here, exactly? There's plenty of idealistic notions being thrown around, but I've yet to see a single, real, useful product or service materialize

>Applied neural networks.

Same.

>Automation.

This is way too broad to be invested in. Of course the world is automating at a greater rate, but is this a cause for growth? Will automated factories produce more goods for the same consumers?

>Good electric cars. To the point where people are prepaying for something that might be built in a few years.

Again, how is this growth? People will simply replace their existing cars at a known rate with electric cars as they become available/affordable

>Good cheap batteries.

Granted this one would be a technological revolution greater than the internet, but it's just a fantasy for now. I think the grandparent is dead on here. Real inflation is 10 times the official rate since the mid 2000s. We are all playing with funny money these days, and this won't end well.

> What value is being created here, exactly?

It's the greatest advance in money laundering ever invented. For that to work the proles need to be conned into participating so there is plenty of transaction volume to hide in.

It's really not a great way to launder money. To keep it off the books, you will need armies of individuals going out and buying it with cash through forums or whatever. Same to convert it back to cash. Otherwise, you are just buying and selling it through exchanged who, in the US, are going to report it on your 1099k.

Otherwise, you have to have a seemingly legitimate Enterprise that is accepting Bitcoin on a large scale. Which would cause you to stand out like a sore thumb to the authorities because no one in their right mind is using Bitcoin with $40 transaction fees.

I started a X business that only sells widget Y for bitcoins. You shuffle all the coins through intermediary wallets that use small payments. The current transaction fee is $20 but regardless of what it is you just scale how much you transfer based on that. Also, if you set up many dummy coinbase accounts, you can use GDAX to exchange it for fiat without fees so you really just need to funnel it into a lot of coinbase accounts that then progressively funnel it to you over time. You can set up a lot of coinbase accounts in a week if you task 50 employees for a week. The rest can probably be automated if you cared enough.

Might as well turn yourself in to the FBI.

Creating tons of coinbase accounts is no easy task. You have to validate the accounts with multiple forms of ID and this pattern would eventually be found out and get flagged big time.

Then, you need different bank accounts for every single coinbase account you create and those require multiple forms of ID as well as valid SSN numbers which will be checked.

If you are referring to GDAX allowing you to transfer to USD, looks like it is FDIC insured, which means it is a US bank account, which means it is subject to KYC patriot act stuff and will be the same as opening any other us bank account.

How many people do you think crime syndicates employ? Also, maybe coinbase has changed its policies but when I signed up I just needed a bank account #. Also, if you don't intend to transfer to/from fiat, Coinbase doesn't need any ID AFAICT. So you transfer your several thousand bitcoin from your private wallet into the coinbase accounts you control. You then use coinbase's free exchange to send those coins to your laundered wallet that is set up for a legitimate cut-out business with all the right paperwork & whatnot for converting it to USD.

You do this so that each individual account can make small purchases over a long time horizon so it looks valid. Looking at coinbase's site, you only need a bank account if you're using fiat currencies. You'd probably also want to make it harder to detect all your laundering accounts by having them make purchases to other "legitimate" accounts too (e.g overstock) Obviously I'm not a criminal mastermind so this plan could very well fail, but I find it hard to believe that a digital cash currency couldn't be used to effectively launder money considering laundering is most effective for all-cash businesses (combined with good accountants/bankers like illegal organization employ these days to avoid all these problems).

Coinbase is required by law to verify after you reach a certain threshold (not a very high one either). So they will let you sign up with a bank account, but once you start using the account a bit, they will freeze your account and want all kinds of ID.

You're kidding on the "Applied neural networks" bit right? A good subset of the features you see on Facebook and Google have neural networks contributing to their functionality.

Adding value to our society may be the part the parent comment questions.

Translation? Image search?

> Again, how is this growth? People will simply replace their existing cars at a known rate with electric cars as they become available/affordable

Since driverless vehicles and fleets are arriving roughly concurrent to electric vehicles, they're actually more likely to _reduce_ the volume of cars produced, after accounting for any increased, accelerated "fleet churn" buyers exert via aggregate demand to reach a faster critical mass on increasingly or perfectly safe cars.

Disagree. This is hotly debated, but, i think that the growth in demand for transportation will be so staggering (when AV's are introduced) it will more than offset efficiency for a long while.

> Since driverless vehicles and fleets are arriving roughly concurrent

I have said multiple times, and did sign again, that I do not believe driverless vehicles will automatically lead mass adoption of fleet/on-demand vehicles. I don't think they will be as much of a savings over human-piloted vehicles as the optimists think.

> Again, how is this growth? People will simply replace their existing cars at a known rate with electric cars as they become available/affordable

From investor pov you can short dinos and ride disruptors. ez $$. Not saying tsla isn't overvalued though.

>From investor pov you can short dinos and ride disruptors. ez $$. Not saying tsla isn't overvalued though.

Except the "dinos" of GM, Nissan, BMW, Ford, and Hyundai are outproducing Tesla in the EV market, with a clear lead in affordability. Nissan Leaf is far and away the most popular EV ever built, having sold thousands more than all Tesla models combined (discounting unfulfilled preorders).

>> Real inflation is 10 times the official rate.

ELI5 please?

Baumol predicted this 50 years ago; it's called the "cost disease".

The inflation rate for a computer with a fixed set of specs is massively negative -- it gets cheaper every year. So it is for many technological devices.

But our whole economy is a mixture of technological stuff (that drops in cost over time, i.e. negative inflation) and non-technological stuff (burritos and health care).

The overall inflation rate is an average across the entire economy. Even if you believe the reporting is not distorted (which is dubious), then the fact that there are so many goods whose prices drop quickly over time, implies that there have to be many goods and services whose prices go up much faster than "inflation" would predict. Because something has to balance that average!

Baumol calls the technological stuff the "progressive sector" and the non-technological stuff the "stagnant sector". As time goes on, prices in the stagnant sector continue to rise until they consume almost all spending.

Baumol made specific predictions based on this model in 1960 that have turned out to be consistently true for 50 years ("the cost of healthcare will continue to rise to degrees that will seem scary" and so forth).

Furthermore, it's not like it is some weird complicated or hard-to-substantiate theory. It is just math, not much more complicated than the definition of the average. Given how big the consequences are, and how hard to argue with, it surprises me that this idea occupies so little of the public conversation.

http://www.shadowstats.com/alternate_data/inflation-charts and links from that page explain further. (The difference has been ~5% understated inflation rather than 10 or 5 times as much, but whatever.)

http://www.businessinsider.com/if-people-knew-the-actual-inf...

Perhaps it's more like 5x, but the point stands

What choice do we have? Keep your money in cash? Invest in bonds for 4% return? No thanks, I'll take my chances, especially with true inflation being higher than people think...

Right now I'm gradually liquidating my crypto stash and buying stocks instead.

Please guide me to the 4% bonds.

You can find several high yield bond funds in that range. Here's a 5% bond fund: FIHBX https://finance.yahoo.com/quote/FIHBX/performance?p=FIHBX

Here's another at 6% : PHYSX https://finance.yahoo.com/quote/PHYSX?p=PHYSX

Less risky (municipal) at 4%: MMHYX https://finance.yahoo.com/quote/MMHYX/profile?p=MMHYX

T-bills are headed that way...

> single, real, useful product or service materialize

The ASX is implementing blockchain for its ledger, via the digitalassets company. Right now.

HST voting dapp is being used at the world economic forum, this week.

Thats two I know of, off the top of my head.

As well as the obvious btc and eth being used to purchase stuff everyday, all over the world.

Its actually happening if you bother to look.

So this actually points to a big problem with how we measure growth.

If you start from the assumption that well-being or some other desirable policy goal can be measured by income (profits, wages, etc), I'd argue most of the things in this list aren't likely to increase either wages or profits of companies.

But they are likely to create economic surplus - that thing that makes us want to trade/transact in the first place. Economic surplus is why you'd rather buy a Netflix package for $10 than rent a $3 video from the video store. You're massively better off with Netflix even though Netflix's profits and your wages haven't moved.

The problem is, we don't have a good way to measure this. Economists are aware of the problem, and it's something that makes comparison of GDP across decades difficult. There are many things that are better or flat-out new compared to what existed 50 years ago. How do you compare the experience of driving a modern, safe, smooth-driving car to an older one? Or the experience of talking cross-continent for practically nothing on Skype?

I agree that these technologies are going to reshape our world, I just don't think those gains are necessarily going to show up in GDP, at least not how we measure it today. And I also think this whole "real wages have stagnated" argument is a bit of a red herring. Maybe they have...so what. People are much, much better off today than they were even 20 years ago. We have more things, they're better in almost every way, less disease, the world is just 100% a better place, and anyone who says otherwise is just trying to push some redistributionist political agenda. I'm not saying inequality isn't a problem, but it's borderline lying to suggest our lives haven't gotten any better over the last 30 years because "real wages have stagnated".

Don't know why this is down voted so much.

I agree cryptocurrencies are mostly a fad, but AI, automation, electric (self-driving) cars, and good cheap batteries are definitely capable of driving productivity & growth. Lithium batteries are the IC of the 21st century. They've driven a lot of innovation already (smartphones, better laptops, tablets, smartwatches, EVs, consumer drones, etc), but there's a lot more to come in terms of mass market self-driving EVs, mass grid storage, electric aircraft (both robotic and not), etc.

> Automation

It seems like this is the opposite of growth - as more jobs are automated, fewer people will be able to buy the products that are created by the automation.

Instead of thinking in money you should think in widgets.

Do you want more money but the same amount of widgets or do you want the same money but more widgets?

I want more money and the same amount of widgets, because then after I buy my widget, I have more money leftover to buy thingamabobs.

But if I earn less money, even if widgets drop in price, I don't have enough money to buy a thingamabob.

And really, how many widgets do I need? My garage is already stacked full of them and I can't even fit my car inside.

But these products will be way cheaper :)

Wall Street is now comfortable with the idea of very long-term tech investing and multiple consecutive years of no profit generation...

This is what Amazon has been doing for 20 years. People don't buy Netflix stock because they think it's gonna be profitable tomorrow, but rather because they expect it to be so dominant that when they start generating profits, they would be massive.

Amazon is generating plenty of profit for investors. And the best kind of profit too, capital gains.

Why pay out dividends to your investors with after tax money that will be taxed again at a higher rate when you can just stash it overseas and buy more capital assets and let the stock grow in perpetuity. Same with apple.

As an investor, you don't need dividends, you just sell a few shares each quarter.

Apple does pay a dividend. And gives even more money to shareholders in the form of buybacks. The total shareholder yield (dividends plus buybacks, divided by market cap) looks quite different for Amazon and Apple:

https://advisortools.zacks.com/Research/Stocks/AAPL/Sharehol... https://advisortools.zacks.com/Research/Stocks/AMZN/Sharehol...

That's only recent. Post Jobs.

> It's as if there is this new way of valuing companies that is not based on DCF.

Growth. Netflix is after a giant global market and investors would rather growth and investing in new content than a dividend. Yes, the stock has been on a tear, but they've also grown subscribers 25% YoY while also raising their prices. That's an impressive feat for a company already as large as Netflix.

I don't know why you are being downvoted. At some point you have to generate cash to justify your valuation. However if you look at amazon they have never generated cash relative to their valuation and its been like 20 something years.

It has returned 10x in the last 10 years so I don't think their investors are complaining.

If you look at google, facebook, and apple they are generating cash that would justify their valuations.

Amazon has had positive free cash flow every year since 2001.

Netflix has had free cash flow of -$53 million, -$840 million, -$1.6 billion, and -$2 billion in the last 4 years respectively, and their debt has grown to $5 billion.

Exactly, Amazon also has lot of assets. They have logistics networks across multiple countries, warehouses, data centers, etc. May not be commensurate to their market cap but it does give them a solid moat.

Netflix has assets too. They own a whole bunch of original shows and movies. For comparison, The Big Bang Theory has been worth a couple billion to CBS just in syndication.

They also have a worldwide CDN capable of delivering high definition video around the world.

And lastly, they have 20 years of movie viewing history. Their prediction models alone are probably worth many billions to the movie studios.

Netflix doesn't even own a studio, they pay others to produce their content.

They don't syndicate their shows, they don't sell much merchandise, and they don't sell their "prediction models" or user data.

Don't get me wrong, Netflix does a lot of things right but the way they manage their entertainment divisions is extremely odd. We have over a 100 years of lessons from Hollywood and paying others to produce your content will always be more expensive than making your own.

> Netflix doesn't even own a studio, they pay others to produce their content.

They have a very large studio actually:

http://www.latimes.com/business/la-fi-netflix-bronson-201701...

http://variety.com/2017/digital/news/netflix-expands-lease-h...

> They don't syndicate their shows, they don't sell much merchandise, and they don't sell their "prediction models" or user data.

The OP said "Amazon has assets". But using your argument, Amazon doesn't use any of their assets either, except for themselves.

The point is they have things they could sell that have value if they had to, just like every other public company's assets.

Their original shows and movies depreciate far faster than most other assets and do so much more unpredictably than most assets. That 39M non-cash charge was almost certainly because of an unexpected depreciation of House of Cards post Kevin Spacey.

Netflix has a lot of assets as well, though they are not physical like Amazon's. Original content can be sold again and again for decades.

> if you look at amazon they have never generated cash relative

Isn't this one of those big Amazon myths?

I thought the truth was that the income has always been there but it's the constant reinvestment that has kept profits low?

That's how people justify investing in Amazon. But I don't know how they think Amazon can just stop reinvesting one day and make money. Every business line Amazon has is hyper competitive. Can Amazon actually raise prices in any of their businesses?

>> Every business line Amazon has is hyper competitive. Can Amazon actually raise prices in any of their businesses?

They have been for some time. Prime memberships, AWS pricing, etc. The lines are "competitive" but Amazon is so far ahead in most that it doesn't matter.

When was the last time AWS prices went up?

Worked in many AWS shops, I bet almost none of them switch to alternatives if the price rose 10%.

Aren’t their costs going up at least 25-30% because of Meltdown/Spectre mitigation performance penalties? Would they weather another 10-20% price hike on top of that?

25-30% is pretty pessimistic. Maybe on certain services, like a Redis box. On others, like your average web service, it probably won't move the needle much.

I'd ballpark around 5%. And that's for people who weren't overprovisioned in the first place, which is most people.

> Amazon can just stop reinvesting one day and make money

Does the money disappear if they stop reinvesting?

If you are a tech company... Yes.

Why would you ever need to generate cash flow? Just sell off a few of your ever appreciating shares each quarter.

Everything feels like a bubble to me, from property prices to crypto.

I'm doing fairly well in my career but I'll have to earn literally 3x my current income to afford the mortgage on a decent apartment in my area.

Something feels very wrong about all of this

I came here to say this as well. The entire market is in a feeding frenzy. Theres simply no way this can continue. I've made 10% returns this year on my whole-market mutual fund since Jan 1.

It's tough to go back to the stock market after bitcoin's daily 10% increase this fall. Might be wise to take 10% and invest in some coin.

Lol, you can’t be serious.

There is a very large difference between investing and speculation, and blockchain currencies are a supreme example of a pump and dump speculation scam.

Putting aside 10% towards high risk / high reward investments can help balance a portfolio. Stocks are less risky but still a gamble, bonds are safer depending on who is backing them.

They're trading at 12X revenue. That's not so outlandish for a firm that nobody unsubscribes from, and that can raise prices without taking a revenue hit. (If they raise prices 15% a year for 5 years, that puts them at 6X revenue, and they're stickier than a lot of SaaS companies)

But what do I know? I thought Facebook was overvalued at $30 billion.

I think that it’s important to keep in mind that posts consisting of feelings like these can be described as memetic. Posting opinions like this can be a way for nations to try and influence the independent actors that make up other nations. Economic or political attacks can occur with fake news type meme opinion spreading.

Much of Netflix's valuation seems to be based on their ability to own the gate between people and all of Hollywood. That puts them in a position to take profits away from the people like Murdoch and bank it. The dirty tricks that the studios play on theatres don't work on Netflix or Amazon prime.

I figure the Trump corporate tax cuts are good for about 20% growth in the stock market.

(35% to 21% means that profits after taxes jumps about 20% even if nothing else changes. This means the value of the company goes up 20%.)

Of course, the market has gone up much more than that.

The 12 month forward earnings yield of S&P 500 was 5.4% as of last Friday, with a minority of analysts having updated their earnings estimate to incorporate recent tax rate changes. That yield means there's still an equity premium, even if earnings stay flat after 2018.

How do you reconcile with the fact that P/E ratio is still just 56. In 2000, just before the dotcom bubble burst, Nasdaq stocks traded at a staggering price-earnings ratio of 175.

Also, Netflix revenues have been growing at staggering rate too: https://ycharts.com/companies/NFLX/revenues. Remember market responds to change in revenue over time, not the absolute value of revenue. I think it wouldn't be fair to say that stock prices are completely out of sync with revenue growth.

I find it unnerving that more traditional businesses are still valued on DCF, whereas it seems that if you become a tech giant, than you can get around it by saying: We're the 800 pound gorilla in this market and we're going to gobble it up. Don't worry about our cash situation. Both NFLX and AMZN fit this bill.

Do stocks really trade based on DCF? That sounds like a fiction taught in schools. I thought in the real world they traded based on whatever the hell criteria the people trading them felt like.

They definitely don't trade based on DCF, and just one look at the stock market confirms this. DCF is just one method to put a valuation on a company. There are plenty other ways. The parameters chosen allow enough freedom to basically come up with any valuation you want anyway, so there's definitely no one "correct valuation" even if restricted to DCF.

Buy high, sell higher. Some stocks trade purely on growth and momentum.

> Netflix however produces no material return for investors

Speak for yourself. My brokerage account looks much greener since I bought it.

>Stocks trade based on discounted cash flow(DCF)

You forgot the part where quantum mechanics higgs boson yada yada long story short efficient market.

People didn't understand my comment. Parent had written "Stocks trade based on discounted cash flow(DCF): while giving ample evidence to the contrary. So they should have bolstered their absurd claim with reference to another magical fact, the efficient market. Which ensures stocks trade at DCF.

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