Edit: punctuation
The latest numbers i have seen is that 80% of the market shares is controlled by institutional investors.
That is a looooot of the market tied to a set of investors that cannot bet on anything else than up due to their own long term problems. At this point, the market is better viewed as a gigantic retirement fund/saving account than as a way to decide on price.
Once you look at the market that way, a lot more of the behaviours make sense.
> The latest numbers i have seen is that 80% of the market shares is controlled by institutional investors.
Institutional investor != passive investment.
As long as trades are happening, there is some sort pricing mechanism.
Declining expectations for NGDP growth/uncertainty lead to funds searching for yield in the credit markets, leading to declining yields.
Bond yields declined prior to Fed intervention [0]
Basically we moved back to a renting society.
Sure but my concern is that pricing now looks less about fundamentals and more about the meta game of what other traders are gambling at the moment. What do you think about the price discovery mechanism for Bitcoin for example?
Bitcoin is operating under a great deal of uncertainty about its future prospects/the prospects of blockchain.
https://www.themoneyillusion.com/richard-rorty-and-the-effic...
They would better reduce return than touch the principal.
This is a rent market. Not an investment one.
Rent market are more comparable to land value than to investment markets. Thibk of the use of corn as a relatively bad economic choice for profit but great for rent stability as an example.
That is what something like retirement and endowment need.
This idea would have more uncertainty for the investors, so they'd want a higher return than for a fixed bond. Taxpayers would be less likely to vote for the measure because it would have to raise their taxes even more than a standard bond.
(that being said, bond measures often take the form of "a 0.2% property/sales tax is to be levied for the next 20 years to pay off the bond", which is actually pretty close to what is being proposed by the GP. The difference is who is left holding the bag if tax revenues don't meet projections)
I looked back at gold vs stocks and the last time stocks and gold rose at approximately the same speed, was just before the 2008 crash.
I don't know anything about anything, but it seems to me this is a logical consequence of inflation? Purchasing power of $ goes down, prices (of everything) go up.
People incorrectly assume inflation means "the price of everything goes up". The problem word here being everything.
Why? Well because prices aren't merely dictated by supply, but rather supply & demand. Simply comparing inflated money supply to the good supply is naïve, as it ignores to factor in the demand for different goods.
As so, for a dumb example, it's entirely possible to have inflated stock prices but not see inflated sock prices, if all the extra money is chasing stocks, and not socks...
Because they've spent a few generations making sure people don't understand the difference between price inflation and monetary inflation by using the two interchangeably.
This whole sub-thread is a perfect example, "the Fed has been printing money like there's no tomorrow but, look, there's only 0.44% inflation".
Inflation has been "stubbornly low" for 20 years while asset prices have outperformed historical averages the entire time.
Asset prices seem to have diverged from the real economy because assets are primarily funded with debt (real estate, corporate investment) which has been artificially priced lower, while goods are paid with earned income which hasn't been manipulated.
> Asset prices seem to have diverged from the real economy because assets are primarily funded with debt
Or maybe it's because with rising productivity, capital has become more valuable over time.
In fact it would mean that the only people who can afford assets are people who already have assets.
> "Or maybe it's because with rising productivity, capital has become more valuable over time."
We have 0.1% interest rates, negative in some countries, that indicates a glut of capital, not "shortage of valuable capital"
It's incorrect to refer to monetary inflation as just "inflation." If you're talking about price inflation, we're not seeing that yet - although 5 year inflation expectations are popping back up again [0]
So far, it's looking like the Fed is doing as best as could be expected.
Only true if everything else holds constant. Also, wouldn't just apply to asset prices but all prices.
Everything else, unfortunately, is not holding constant. [0]
So much like how the S&P/NASDAQ has a bias for growth because losers are swapped out for winners, the CPI basket has a negative price bias as expensive goods are swapped out for cheaper ones.
Like if all that new money isn't being used to buy things like food or even housing that factor into the inflation index than wouldn't we see something like this where gold and the stock market inflate because that's where the cash is going?
Now I'll buy the idea that isn't necessarily going to cause shortages and price rises in consumer goods, but the idea that it doesn't cause changes in asset prices is too much. Are these rich people supposed to be idiots? There is no return on cash and new money is being created at a fast clip.
Increasing money supply without any change in velocity or other exogenous factors is inflationary for asset prices, etc.
Real-life, however, is not a vacuum [0]
Foreign demand for the dollar is at all time highs. People forget this and don't think about the impact that this has on currency prices.
Also, the "inflation is actually happening they just don't measure it right" crowd are delusional. Maybe they were right before covid, but they're extremely wrong now.
Was reading just the other day that inflation is actually underestimated right now.
People are buying basics, like food, at far higher rates than normal, prices for those basics are rising, but the CPI hasn't adjusted the ratios. Ergo prices are higher where it counts but the index doesn't see it.
In my opinion, continued inflation in financial assets will / is already partly causing inequality. It's not good for society if the middle class has trouble buying houses or real estate - it tends to lead to a lot of anger and political polarization, as we've seen.
Somethings are lost opportunities, eg: _today's_ lunch being provided by safeway + my kitchen vs a restaurant.
Just because you don't understand why the market is priced a certain way doesn't mean the market is irrational.
Perhaps stocks went up because of the expectations generated by past Fed policy stances post-2008.
And no, this is not due to inflation (Which is near-zero). This is due to QE, and easy credit.
It makes a lot of sense that investors would want to put their cash in the market and/or take advantage of low interest rates to lever up.
If you're willing to bet the dollar's going to crash in the next few years due to Fed policy, it makes sense to write dollar-valued IOU's today and use them to buy stocks and gold, knowing you'll be able to pay them back with cheaper-valued future dollars.
> [...] knowing [...]
These things are not the same.
And crash against what? Other currencies are faring far worse.
It'll crash one day. The world will change. Statistically speaking when it does it will likely be for the worse too.
You can read about how inflation is calculated, it makes sense: https://www.bls.gov/cpi/questions-and-answers.htm
https://www.bloomberg.com/news/articles/2020-08-12/russia-di...
Don't know well about how US Feds and govt are incentivised
Interest rates are insanely low, which means putting your money in the bank, or in bonds, has a near-zero return. There are tons of massive funds (vanguard, etc) that have promised a return to their investors, and they're moving money from interest-based investments to other investments. This has caused a ton of money to be put into the stock market, which drives multiples up.
Why gold is going up:
The government is printing a ton of money to deal with the pandemic. This causes USD's value to drop compared to other currencies. There's a small (but real) possibility that the US dollar stops being the world's reserve currency. This causes people to seek value stores other than USD. This includes gold, bitcoin, euro, yen, renminbi, which are all up vs USD since the pandemic started.
These two things happening at the same time doesn't necessarily mean the stock market will crash.
https://quoteinvestigator.com/2011/08/09/remain-solvent/
"Addendum: A small number of libraries apparently hold a transcript from a 1983 seminar during which Shilling reportedly employed the adage."
But how do you know a bubble ahead of time?
exactly
Well, no shit. It said so right in the introduction. I think this is what’s called “theory induced blindness”
If everyone thinks stocks will go up, then the efficient market hypothesis would support a bubble.
P=NP -> Markets are efficient.
But the scientific consensus so far is heavily biased towards the presumption that P!=NP.
To prove an "iff" you have to prove that Markets are efficient -> P = NP and P=NP -> Markets are efficient . I buy the first claim entirely, but not the second.
Let's assume P really does = NP, but as you've said "nobody has done that yet." Then, markets today must be inefficient, but that is T -> F which is impossible if P=NP -> Markets are efficient □
In lay words, how can it be true that `markets are efficient if and only if P=NP`, if it is possible that `P=NP but markets aren't efficient`.
Let me try an analogy for the if True case. Gravity (P=NP) exists, and always has. But we didn't understand it a few hundreds of years ago. Before we understood it, we didn't have interplanetary rockets (Efficient Markets). But we do now, and they were never outright impossible before our understanding of delta-v and other aspects. But before we had that understanding, we just straight up didn't have rockets.
Meanwhile if hypothetically gravity was, perhaps stronger or more pervasive over longer distances (P!=NP), it could have stopped interplanetary travel altogether and we would have never have achieved it.
We are just in an equivalent time period to that time in the 1600s before we understood, one way or another, what was ahead of us. If markets can be efficient in the future, they could always have been now and in the past. We just didn't have the tools to figure it out.
But I think what's more interesting is that
"Markets (present-day) are efficient -> P=NP" could plausibly be true, suggesting that the contrapositive is true: "P!=NP -> Markets (present-day) aren't efficient." Given current state of thought around plausibility of P=NP, that seems pretty powerful nonetheless.
With the slightly stronger statement "Nobody currently possess a polynomial time algorithm to solve a problem in NP -> Markets (present-day) aren't efficient" it starts to become quite likely markets aren't fully efficient.
It’s important to understand that efficiency is something that markets approximate. The EMH may be more “true” for you than for someone with a dedicated fiber line between the NYSE and the CME.
Here’s Burton Malkiel in more depth about what the EMH actually means: https://www.forbes.com/sites/quora/2014/06/13/what-does-the-...
"Bubbles" is not one.
If you just go with the trend most of the time, you take part in a self-amplifying hype cycle that pushes all participants' equities higher. Whereas if you try to "outsmart" the group, you will fail most of the time, even if you might be right in your skepticism, because stock prices aren't strictly based on actual objective reality, but more on the perception of reality by most market participants.
Every attempt at seriously measuring this, and there haven’t been many I’ve found that can be publicly shared [1], found close to negligible levels of broader-market effects.
$4bn in options buying, on the other hand, will do it.
I remember seeing a post on r/options this week about exactly this - large volume OTM calls causing MMs to buy stock and inflate price. This news has been very interesting in light of that.
Yeah, the problem here is that irrational picks by these people working from home are just opportunities for arbitrage by the institutional investors, who stabilize the price.
I’m a former options market maker. Seeing large volumes of retail flow is very different from seeing a giant institutional order. It affects what goes into the market versus gets internally crossed and what gets hedged and to what degree and how.
Individual investors have a moderately bad track record day trading. They have an abysmal one with options. I’m a decade out of the business, but we almost always defaulted to taking retail flow at risk.
So basically, the individual investor is screwed because they can’t figure out institutional orders, but market makers can that allows them to hedge?
Consequently, as a market maker who wants to limit their risk if a trade goes sideways, optimal hedging for each looks different.
(Part of this is probably related to the distribution of orders. I've heard large enough individual flow tends to mostly self-average.)
If we wanted a stock market based on fundamentals, it should not be a free market. Instead, the power to set prices should be left to qualified experts in each stock's industry, and stocks should be allowed to change hands only at those prices. The experts should come from both scientific and business backgrounds and not analysts who spend their lives on Wall St. and are so incredibly out of touch with technology. Unfortunately the reality of the system we have created is that the more knowledgeable you are about something, typically the less money you have, and the more money you have, the less knowledge you have. We need to reverse that.
https://www.newyorker.com/magazine/2005/12/05/everybodys-an-...
> Human beings who spend their lives studying the state of the world, in other words, are poorer forecasters than dart-throwing monkeys, who would have distributed their picks evenly over the three choices.
This is a little different from what I was suggesting. Predicting the future is an inherently difficult task for experts and I'll give you that.
Rather I'm suggesting that experts set a valuation based on known facts about the company and the state of the industry.
Here's an example. I work in the self driving industry. I always knew based on state of the art tech that Tesla couldn't possibly meet their aggressive timelines of full self driving. I think it's realistic one day, but not on the timeline they claimed a couple years ago. However, the reality is that the public is duped into thinking they'll be on time, and so what happens? I have to base my investment based on what the public thinks of Tesla, rather than what I think of Tesla.
Here's another example. Uber car crashes. NVIDIA stock crashes the next day because the public thought it had something to do with NVIDIA GPUs. I, and all other ML experts should have been able to call this out and freeze the price of NVDA and say "we have it on good authority that NVDA did not do anything to cause that car crash".
The current way the markets work shifts the paradigm from "invest in what you believe in" (which I is the way the world should work) to "invest in what you don't believe in but what everyone else is fooled into believing in".
I mean, the incentive structure is such that I've even bought stocks in many companies I hate, and sold or put stocks in companies I believe in from my scientific background on first principles. Somehow that isn't the way things should work.
See, but you don't actually know that's why the price of nvidia fell, nor do you know that it is an irrational reason for the nvidia stock to fall. Just because you work in the industry doesn't make you an expert on pricing.
There's lots of problems with this idea (it's incoherent wrt supply&demand, why should people closely affiliated with an industry be the one's setting prices, prices should reflect future expectations not current valuations).
> Predicting the future is an inherently difficult task for experts and I'll give you that.
But that's exactly what prices do. Why would I buy any stock at all unless I'm making a forward prediction about what is happening?
That's exactly what I'm proposing we should change. We should be trading on a company's ability to make the world a better place. That would align incentives across people in a much better way than earnings reports. It also, incidentally, ensure that a company's profit structure is designed to align with its mission rather than align with some arbitrary earnings report deadlines.
I realize that metrics for this are hard to design, but we're in the 2nd millenium A.D. and it's okay for us to revise how we think about money.
I believe in a future of clean energy electric power, and it's f*ed up that I can't always invest in it because there are times when investing in oil gets me more $ that I can use to improve my own personal clean energy efforts while investing in electric would cause me to be at high risk of losing money, and therefore depend on oil because it's cheaper. That's a really messed up, convoluted system right there.
It's not just that the metrics are "hard" to design. It's a question of why would I buy stocks based on a company's ability to make the world a better place. What makes the "stock" piece of paper worth more when the company does more to make the world a better place. For real-life stocks, it's the expectation of future buybacks/dividends. For your metric, it's unclear why anyone would participate.
I'm precisely proposing that we change the incentive structure in a future version of the economy such that it would benefit you to invest in a company's ability to make the world a better place.
That would eliminate OP's problem, among lots of other things.
I'm proposing that the role of investors should be fully aligned with the role of scientists and engineers, and the incentives should be designed such that that is the case.
Captialism 2.0, if you will. It's a quarter-baked idea, and there are lots of questions to answer, but I'd like to kickstart and encourage more thought and discussion about a future revamped economic system that aligns incentives better than what we have today.
This is unlikely. More likely the stock crashes because the event can be expected to decrease public trust in and enthusiasm for ML in general.
Blame for a one-off-event in a specific market usually isn’t a big deal. Adverse consumer sentiment with long-lasting impact on your entire bottom line is.
Trusting the public to set valuations on a per-trade basis directly results in the heavy hands at the likes of SoftBank scooping up full control.
What you believe about Tesla evaluation based on Self Driving might not matter because even if they miss that timeline, maybe they execute on their scaling or batteries or whatever.
A huge company has many, many different things going and different analysts think different things matter far more.
So you would need a whole group of these 'experts' working together evaluating each aspect.
Now even worse is that expert don't just have hard time predicting the future, but are actually the worst at doing it in many ways. Tesla and electric cars being a perfect example. The amount of car insider that believed electric cars were absolutely not viable as a buissness was tiny.
Even worse is that even if assume you know that some technology X will not hold up to the companies claims, their should maybe still go up based on competitors. I don't believe that Tesla can do Self Driving in the time-frame they claim, but the news about the competitors is even more worrying.
Literally everything is connected in extremely complex way that no experts can understand. The temptation for smart people and expert to think they can is a deceit.
We were talking about banks 'making money' by giving out loans the other day. The banks actually have collateral and the fractional reserve. The only 'money' in the stock market is during active trading. Every penny of it leaves after the last trade is settled. At night the Dow is only worth the liquidation value of the companies (and that's if there are only common shares, otherwise forget it), and that's a smaller fraction than either the collateral or the fractional reserve banks maintain. Let alone both together.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...