The Value of Nothing: Capital versus Growth | Hacker News Reader

The Value of Nothing: Capital versus Growth

americanaffairsjournal.org

125 pointsivank93 comments

The article documents a well-known fact: Since the 1980's, returns on US financial assets have become disconnected from underlying economic performance and corporate profits. The question is, why?

No one knows for sure -- by which I mean, a lot of really shrewd, smart, knowledgeable people disagree about the reasons. At one extreme, there are those who feel nothing is wrong, because they believe we're on the cusp of a shift to much faster economic growth, driven by new technologies like AI, quantum computing, cheap sustainable energy, and space exploration. At the other extreme, there are others who think the current arrangement is a result of regulatory capture by the wealthy, at the expense of everyone else. There is no consensus as to why.

The author posits one possible explanation: Judging by trends in corporate behavior, financial market incentives, government regulations, and federal reserve policies, the US economy has become increasingly organized around maximizing asset values and returns on capital independently of growth. Decisions everywhere are now being made, or not made, based mainly on whether they impact asset prices and returns on capital.

In my view, it's not a bad explanation.

>No one knows for sure

Asset purchase programs and keeping interest rates low are a really really good guess.

There's no disagreement about the fact that the Fed is buying bonds to keep rates low. But why are they doing that? Is it the right thing to do? What's the underlying motivation? That's where a lot of smart people disagree. Please don't take phrases out of context.

He makes a pretty compelling case for this - that corporate hurdle rates are too high and disconnected from the cost of capital. The stock market rewards firms who return profits to shareholders rather than reinvesting them in (not necessarily) risky enterprises.

The mystery that remains is where does the money go? A share buyback just shifts the decision of reinvesting profits from the firm to the investor, so when Apple buys back shares where does that capital go?

(Also cheers to the author who refreshingly avoids sanctimonious moralizing about share buy backs.)

> The mystery that remains is where does the money go? A share buyback just shifts the decision of reinvesting profits from the firm to the investor, so when Apple buys back shares where does that capital go?

This was my main question from the article too. After thinking it through for a bit though, I think the answer may be related to the large and increasing US trade deficit.

In short, the money goes to the actually growing economies of East Asia and other parts of the world. If not in exports, then in ownership of future cashflows from American businesses.

American workers send their money overseas in exchange for cheap goods, which foreign powers then use to purchase control of those workers' future labor via ownership of American companies.

There's no such thing as a free lunch.

Is it as simple as foreign companies purchasing control over American labor? Surely they have other things to do with that money.

Buying parts of London through offshore shell companies?

Maybe investing in the Vancouver real estate market.

How hard is it to actually follow that money, from a data perspective? I know public companies have to publish some finances, but I assume there are ways of keeping the "secret sauce" out of the public eye.

Yeah the fact that valuations of stock prices is flexible, up to the market, and changes over time is definitely a feature and not a bug. I also see it as a good thing to organise the economy increasingly around innovation and less around growth, makes perfect sense to me, seems like a natural consequence of more automation.

P/E Ratios, DCF, Aswath "Dono"daran. These things are all a part of an ancient religion that do not work for growth tech companies anymore (which also happens to include large cap tech companies, by the way). These valuation metrics leave out everything that has to do with the potential market growth and product expansion into new verticals. People look at the S&P500 and keep parroting tired phrases such as "the P/E ratio is now higher than ever before in history", yet they don't consider that a massive part of the S&P500 is now tech growth companies rather than Exxon Mobil like it was 15-20 years ago.

Exactly! “Its different this time and the old rules no longer apply”

So, this time it's different? Like 21 years ago when Exxon Mobil and similar companies were overvalued and imploded in the dot com bust? Oh, wait...

Econ mobile profit margin is 10%, and they are selling a very fungible product that lots of competitors are also selling (they have little pricing power).

Tech company profit margins are 20%+, and they are selling products which have much higher moats, and benefit from network effects. And less liability.

Good point, and 20+% is a huge understatement. SAAS companies that are public are mostly in the 70-90% range. Also, add how easy distribution of software is compared to physical products.

22 years ago the top 5 companies in the S&P 500 were not all like Exxon Mobil and Generatel Electric. Microsoft, Cisco and Intel were there. More than one third of the index caputalization was in the IT sector.

The usual argument is that the increase in the index since then is mostly due to increase of tech stock prices (valuations, market cap, etc), not that there were no big name IT companies back then in it.

Is there a way to get the "PE ratio" excluding growth/marketing costs? My understanding is that the growth/marketing costs come under the operating expenses, so will not show as profits/earnings. If a company, has $100bn in revenue and puts it all back into growth and customer acquistion, it will look like they are not profitable, even if they could be if they decided to lower their growth investment. Is there a way to separate normal business running expenses vs "growth expenses"?

Yes, gross margin is what you're after.

Umm, but many companies just deflate like a sad balloon when they stop spending on marketing.

And it's neigh impossible to separate cost of revenue from cost of revenue growth.

Pardon my ignorance, but what is the end goal here? I feel like the end goal to hold a share today is to sell it to someone else for a higher price. It just doesn't sit right with me. Feels like a ponzi scheme to be honest.

Selling to someone else with higher price is always part of capitalism, and there's nothing wrong with that. Speculation is good for the economy.

Why I invest in tech stock? Because I believe the current tech companies might be 10x or 20x times the sizes in 20 years, and in 40 years they might be 1000x times the current size. Basically they could own governments and become world rulers. At least in metaverse.

Holy shit dude! I hope you are wrong on all accounts, especially the world rulers bit.

But more on point, what do you mean by size? Just valuation of their stock? Speculation on an asset makes sense when we don't know its inherent value. I can't figure out what is the inherent value of a stock any more. Does value not derive from utility now? Utility of a stock can be governance say (voting stocks) or a share in the profit. These companies with massive valuations don't generate any profits (see: Uber). So what are people speculating on actually?

Future profits

They don't even pay dividends on current profits. how do you expect them to pay on future ones?

It's not a zero sum game, remember that value is created by inventions and improvements. If 10 people 10 years ago would have bought stocks in amazon and kept them for 1 year each, then sold on to the next person, and the last person just holds them 1 day and cashes out at basically break even. Then all of these 10 people have made money, and that's because because amazon is more efficient at something compared to the competitors.

The losers are not the people who bought the stock "high", all stock owners won, the losers are the companies who lost business to amazon because they were less efficient.

So everyone can win except those who are doing things in a way that's not efficient or not up to the latest standard.

The end goal is progress, to eliminate unnecessary work and constantly move forward to other more valuable work.

> and the last person just holds them 1 day and cashes out at basically break even.

Cashes out how? That is what my confusion is. Shares don't have inherent value so to cash out you need to sell it to someone (sometimes the buyer is the company itself but I don't think that is sustainable beyond few percentage of their shares). Its not like an asset backed currency where you can go to a central bank and ask for consumable resources. (Although most times the asset is also useless, like gold). Its all just floating in the air from my point of view and "value" is just what someone else is willing to pay.

But shares do have an inherent value. Owning them gives you a right to a share of the profits. You own a share of the company. You can vote on who you choose to run it - i.e. the board of Directors.

Now many companies recently have chosen not to distribute profits - e.g. Amazon reinvests everything back into growth.

And there are types of share that don’t give you a vote on who runs the company (or your tiny ownership percentage makes it meaningless).

And there are companies that don’t make any profits so there’s nothing to share out!

But shares, at least classically, do have an inherent value.

Edit: Examples of these classic shares are “Dividend stocks” [0], but even with say TSLA or AMZN when you buy a share you’re buying the right to a share of the future profits.

[0] https://www.investopedia.com/dividend-stocks-4689744

Edit2: Now of course that inherent value might be zero if the company will never make a profit…

I understand what a dividend stock is I even mentioned these two concepts in my other post. But condescension aside now we are getting somewhere. So people are speculating on future earning and think profits will grow exponentially. But none of these companies are projecting profits in short or long term and I don't ever see talk of profits from people who are buying these stocks. Functionally it all seems to run on emotions.

Yeah it's strange that the market cares so little about profits, and it runs much on emotions, but that still doesn't make it "wrong" in any way, in my point of view, as a ponzi scheme would. Progress is still being made, and revenue as well.

By the way, I hope you didn't find my tone condescending because I made such simplistic examples, just trying to be helpful, but probably mostly helping myself understand by typing it out :)

Maybe Ponzi scheme is too loaded a term but both have the same failure mode. At some point people will wise up and demand some real returns. It might not collapse but it will stop growing and there will be a knock on effect as so much of it is taken on leverage.

"Wising up" is just the stock price going down. Happens all the time. Dividends are also paid regularly, which is real money in the investors pocket.

Both Tesla and Amazon have never payed out a dividend even though they have had profitable quarters. Plenty other companies have never even had a profitable quarter. Yet the stock price keeps going up.

For most tech companies the value is in the number of users rather than profits. High numbers of repeat users, coupled with growth in the number of users, suggests that the company is on to something.

There is demand for these stocks in part due to the possibility of future profits through the monetization of these users. As well as the possibility of the company being acquired by a larger company (whereby exiting shareholders can sell their shares at high values or acquire shares in the purchasing company via share swaps).

Nowadays there is also a lot of pure speculation going on without any fundamental value considerations. This is akin to gambling, and in a bubble market it can look like the casino keeps paying out as everyone keeps converting their winnings into chips and bets it all again. But the market isn't a casino, and bubble stock values are held up by the demand to keep playing. This is great for everyone until everyone tries to sell at the same time.

I think maybe you don't follow the companies closely enough. The poster you are replying to mentioned AMZN and TSLA.

Amzn's core businesses are very profitable, but they are constantly reinvesting those profits into new areas where they are growing. It's like a conglomeration of start ups, each aiming at future profit. It's like you've invested in one profitable company, and instead of dividends, you are getting shares of new start ups.

TSLA has now been profitable for 9 quarters, recently massively profitable with billions in free cash flow. Analysts are projecting even more to come, with profit margins approaching that of Apple and a total addressable market 10x the size. (I feel like TSLA is one of the few exceptions to the problems the author identifies in the article.). The TSLA bulls that I follow are all talking about future profits and how to discount those to net present value.

I agree those are profitable. Because they are actually selling something. That's a normal company. Talking more about companies which are mostly relying on increasing user count. I get that they may eventually turn a profit. But nobody talk about the profit.

I mean, the companies that are talking about increasing user counts... the users generally are the product, or ads for those users are the product.

Both Tesla and Amazon have never payed out a dividend. If profitable companies are not giving any money how can I expect unprofitable ones to give me money in the future?

When companies generate cash flow from profits, three major things they do with that cash are 1) pay dividends, 2) stock buybacks, 3) reinvest in the company. Shareholder's prefer the company to engage in number 3 if the company can reinvest with high ROI. If they pay the shareholders a dividend, and the shareholder can only invest that at 10%, it's ok but not as good as if the company thinks it can invest and do better.

The "plan" with these growth companies is to reinvest in themselves and keep growing as big as possible until the cost to grow is too much, or the ROI from growing is less than is generally available elsewhere. Only then will they pay dividends or do stock buybacks (which are functionally equivilant, but with favorable tax ramifications). The "plan" is that you hold for 10 or 20 years or more and then get your dividends then. Or sell at a profit sooner, because the stock will be worth more because it will be closer to that future pay day.

You can expect unprofitable companies to give you money in the future if you believe in their business plan and believe that they can execute.

Yeah the company can buy back their own shares, or it can get acquired and taken off the stock exchange. The stock can also become illiquid and you can't sell. But as long as the company keeps doing well, it could also just continue indefinitely. The only way it could go through a downwards spiral of plummeting stock price is if they are doing something inefficient or becoming worse. So people that invest in inefficient or bad companies are the ones who will lose, again the goal is to move money from the inefficient to the more efficient. I mean you try to avoid stagnation and luddism, there's always casualties whenever things change, even if it is change for the better overall, and these are the ones who will lose in the stock exchange.

You can also just have really bad luck, invest your whole life savings in a farrier business just before the car was invented, so bad luck can also make you lose but the idea is that the change is for the better overall.

I think we are talking past each other. I'm trying to understand what is the value of one stock apart from speculative valuation. It seems to me you agree that there is none beyond what someone else is willing to pay for it.

Apart from speculative valuation, it's the value of the goods and services produced by the company + it's assets etc.

Has there ever been any case where people were actually able to cash out in that way? Companies to my knowledge tend to fail catastrophically and in that scenario nobody really gets anything. And there isn't a way to "cash out" apart from selling it to someone else.

I owned shares in a company that was suddenly acquired and all shareholders cashed out with a nice profit. This company didn't fail, it just succeeded and disappeared.

This scenario makes perfect sense to me, it's essentially the company buying back all the shares, I don't think it is really significant that another company bought them up instead. You issue shares to raise capital, you invest the capital, you buy back the shares distributing the gains or losses. But what if you never buy back the shares?

I agree that it's not significant, it can also just transfer to being privately owned. Companies go in and out of the stock exchange all the time. The point of an IPO really is that you have some kind of growth or development phase that needs funding, so it's always a kind of "negative balance" and selling a promise for the future. If a company was rock solid with constant profits and no use for additional funding, it would probably be traded below it's cash assets, because there's no use of owning such a stock.

The main point is that invested money is actually used to do things, even if you lose you have contributed to progress and development in some way, it's not like a casino where money just moves around.

Isn't it reasonable to assume that the value of every company will eventually go to zero? In that case - and for simplicity assuming that a share is just a share of the company assets, no dividends, no voting rights, no whatever - wouldn't the shares just transfer money from later shareholders to earlier shareholders until the share reaches it maximum value and starts its decline towards zero after which everyone just loses money? That seems zero sum to me, from the perspective of all the shareholders, the company can of course provide value to its customers and employees. Things would change if you could exchange your shares for the corresponding company assets. In case it's not obvious, I have no clue about financial markets.

It wouldn't transfer money strictly from later shareholders to earlier ones, because that's not fixed as in a pyramid scheme. The people from the failing company should theoretically be doing something even more worthwhile with their time and energy, unless there has been some actual unforseen damage. I mean it's zero sum from the point of view of all the shareholders as a single entity, if they can invest only in one single company, but not the market overall.

Does owning 100% of a good company have economic value, even if literally no one else wants to buy it from you?

If it does, why wouldn’t a fractional share of that company have the same quality?

If you owned all of Coca-Cola, Amex, Disney, or Tesla, anyone would think you were spectacularly well-resourced, even if stock markets didn’t exist or if selling portions of companies were outlawed.

In this case do I get all the profits and have all the governing power?

What else would owning the company mean, if not that? You would have to agree proportionally with the other owners (of which there are none) on who to put in place to run the company.

Then it doesn't map with the present scenario. Because none of these companies have ever payed out a dividend and voting power is almost non existent too.

If you have a great idea but no resources to realise it, you create a limited liability company, issue stock to the market to raise money to create your business. It's just a way to raise money to create products, inventions etc. Like crowdsourcing except you get a share in the company instead of giving it as a donation for a sticker or a t-shirt.

Edit: a ponzi scheme would be if the company is constantly issuing more and more stock at an ever increasing price, and do not have any other actual revenue but somehow is faking this for the market to believe.

It's supposed to be "the NPV of the dividend annuity." In the event that there is no Greater Fool, the shareholders as a body have some recourse to generate income from the company. So it's not just a Pokemon card.

But I agree no one seems to be calculating this.

I think no one wants dividends because of how they're taxed relative to capital gains

You mean how qualified dividends* are taxed like long-term capital gains already?

* - which is almost all of them

Yeah at this point the only difference is timing of the tax liability, but timing can count for a lot.

Buybacks.

The problem is that this gets us in an undesirable local optimum. Because if all investors put money in a pile to outcompete the rest, at some point the company can throw its weight around against other companies and consumers too.

DCF is still perfectly applicable, nothing fundamental has changed. You can easily include growth into a DCF valuation.

The non-fundamental factors which have changed are: the neutral interest rate has dropped perhaps because of demographics and change in consumer behavior.

> DCF is still perfectly applicable, nothing fundamental has changed. You can easily include growth into a DCF valuation.

You know what makes the price of an asset? Whatever is going on in market participants brains who are bidding/asking it.

DCF works somewhat because there is a certain % of market participants which uses it to determine whether to buy or sell.

It doesn't work per se, it's a signal, like a sunny day NYC or the Yankees winning the night before.

I'm talking about valuation, not market price. The longer your time horizon is, the less you are dependent on the rationality of other market participants (which is quite high on average). You can just sit back and collect the cash flows, no need to sell.

Valuation for valuation's sake is kinda pointless, at the end of the day you cannot spend valuation. You spend money.

Even in the long term the money you earn from your investment is dependant upon the opinion of other people.

You don't know what parameter they'd use to justify to themselves their position when they decide to go long or short a particular stock or index.

By the same token you don't know what parameter will people use to justify purchasing/not purchasing that particular item or service.

Markets are not about companies, they are about people, because they place the bets, whether they are financial bets or betting that a good or a service will improve their quality of life.

Stock prices gravitate towards valuations in the long-term. This is an empirical fact, markets are fairly rational. And even if this wasn't the case, I can just collect the dividends and ignore what the market thinks.

A valuation is basically the total value of all future expected payments to investors. Each expected payment is discounted to account for time and risk, but let's use a discount rate of 0% for simplicity.

Let's say you have a farm, which is expected to pay $1B to investors over the next 10 years and then cease operation. The valuation is $10B. What if the market thinks this company is worth just $2B, is it such a big problem? No, if my valuation is correct, I can just wait 10 years and collect the $10B.

> Let's say you have a farm, which is expected to pay $1B to investors over the next 10 years and then cease operation

Expected by whom?

Who gives you the certanety that they'd pay 1B/yr ?

The CEO projections? That's just like marketing material

Let's say you come up with your own projections and indeed it points at a 1B/yr profit. At the end of the day you are still looking at the past/present and trying to predict the future thoughts and actions of people other than yourself.

You are making a prediction/bet that people other than yourself will buy some X billions dollar worth of the farm products and that the difference between revenues and cost of good sold is going to come out at 1B per year which is the profit which at the end of the 10 years it totals 10B

By the person doing the valuation. There's no certainty, it's an expected value of the assumed probability distribution, which is why each cash flow is discounted - because it's not certain.

Yes, valuation is about predicting future profits which depends on what people will buy etc. For example, I predict that people will continue to buy Coca-Cola in roughly the same volumes as they do today.

> For example, I predict that people will continue to buy Coca-Cola in roughly the same volumes as they do today.

And people before us swore by the fact that people would keep buying cigarettes in the same quantities.

I know nothing about that but in general, prediction and therefore valuation is not easy.

This time is different?

I don't mean to say this as a snarky and meaningless rebuttal. A large part of the book that coined this phrase indeed had the subtext that something _was_ different, each and every time. When people quote it with the assumption that the other party is a fool, they miss the point.

So I agree with all your points, just pointing out that historically, market turbulence has followed some time after structural changes like the one you're pointing out here. I don't have a better answer than anyone else -- the stock market is the best bet I can see for taking part in technological advancement and economic growth, and I don't see a good way to hedge. But I'm sure we'll get a nasty surprise at some point.

Growth companies all haven't shown that they can actually be profitable.

Indeed, with the exception of the immediate aftermath of the 2008–9 crash, valuations have remained at elevated levels since 2000 (relative to previous history), despite the fact that this period has been characterized by a financial crisis, weak productivity gains, and ongoing narratives of “secular stagnation.”

Whch goes to show how useless this metric is.

I think such high valuations can be explained by companies having more dominance and less uncertainty, such as through moats, network effects, scalability, and reliable automated recurring revenues, so the uncertainty of competition is lifted, hence higher valuations for big, dominant companies. Also, the end of business cycles. Post-2009 has been a perpetual boom, the longest ever.

Wouldn't the moats, scalability, reliable revenues all contribute to increased earnings and thus (perhaps) lower PE ratios?

Anecdotally, many companies have grown their earnings per share by buying back their stock. That causes an interesting feedback effect as these purchased shares become more valuable as the stock price rises (i.e., the company's book value increases as its stock price rises because they own the shares they purchased.)

I didn't realize that Japan had its central bank buying equities and flooding the market with cheap yen, with only minor effect on the Nippon Index.

I had assumed that the main reason for the U.S. stock market rise since 2008 was both due to low interest rates driving investors to higher returns in the stock market (a self-fulfilling effect) and due to the Fed pumping cash into the economy, which also needed to go somewhere better than banks.

But if that didn't work for Japan, then I have no idea what is going on.

Apologies for talking about markets on HN. But this place is a good one for reasoned discourse, so I hope an exception can be made.

Revenue growth is financed by earnings, so you would expect P/E ratio to be higher for companies that are still scaling regardless of their size. A high P/E does not indicate an over-valued company prima facie, which is accounted for by investors. P/E ratios are more indicative of value when revenue growth is hovering around 0%.

>> the company's book value increases as its stock price rises because they own the shares they purchased.

You might refer to the company's intrinsec value.

On the book value, repurchased shares are accounted for at the original purchase price as treasury stock ( https://www.investopedia.com/articles/fundamental-analysis/0... ).

Just look at bloated money supply that central banks have been printing since then. It alone provides plenty of reason why the valuations are very high.

Interest rates continuing to fall can only push valuations higher. Investors expect less in return in terms of a dividend (actual or theoretical) since bond returns are lowered. The price of risk gets higher.

irrationality is the sign of free and healthy market. ascribing the subjective theory of value I believe value is determined by the individual. so what seems like an irrational move to an outsider looking at the fundamentals is meaningless because what looks irrational to one set of people could be the completely correct decision long term. specifically, the possibility of profit is the immediate value. can this be speculation, yes, but speculation is what drives innovation imo. that's the beauty of healthy market different people trying different endeavors and the cream rising to the top. the reality is irrationality can only last for so long because if a company is an impostor or playing accounting tricks they will crumble(unless government bails them out with taxpayer dollars). so even when the market is overvalued or irrational there are corrections. and this a good thing. there is no such thing as risk free universe.

The problem with that view is subjective value based on financial engineering isn't sustainable, for business investments.

Financial engineering is not sustainable because it cannot compound.

Financial engineering also increases asset risk, as it doesn't reflect real returns. It can take a long time for inflated prices to deflate to the mean PE, but they will. Then someone pays for that.

In the meantime, the misallocation of capital to financially engineered assets slows growth.

Art has subjective value that may, in some cases, compound indefinitely due to the fact that the greater the wealth in an economy, the greater the most rare subjectively valued things will be worth.

slows growth comparable to what? how do you know the slower growth isn't actually an appropriate correction? slower growth without innovation is probably bad. slower growth with innovation is probably good. but i generally agree that there are potential negative outcomes but I accept the risk I don't pretend that I or anyone would be better at the allocation of others capital.

There is a difference between allocating capital for long term economic growth, vs. allocating capital to get a return on financial engineering.

Experts at making money are happy and very good at both, and will do whichever gets them the best return - and they don't have to care about the long term with any liquid asset.

But financial engineering isn't a compounding improvement, like improved manufacturing, or more efficient distribution, or faster and more reliable data systems, or developing a team of very creative problem solvers in some difficult area, ...

So allocating capital to financial engineering is legitimately attractive for an individual investor, but is a chimera as far as the overall economy goes - since the value of financial engineering doesn't compound and often doesn't last. PE's are unlikely to keep going up due to financial engineering no matter how you "package" (essentially market) the assets they are related to.

You may not see this comment - coming so late as it is.

Maybe I am just thinking aloud to myself, but this may communicate better than my other response.

There are two ways of increasing value of a money machine. It can make more money (sales, rents, etc.), or you can convince people the machine is in a trendy category (AI startup!).

While in the short run, the way you market the money machine (stock) can have huge impact. In the long run its worth will come from how much money the machine actually prints.

People will never keep paying a higher and higher price for a stock just because you keep slapping on better logos and giving the company better stories.

It might take a while, but any value growth due to externals hits a limit. And anything overvalued that has a limit will fall back inline with competing products. I.e. a mean price/earning ratio.

That kind of "value growth" doesn't compound, and the entire point of stocks is to compound value.

Alternatively, actually growing the business does compound. The more sales, the more resources to add employees, create more products, pay for more marketing (of actual products), etc. There is no ceiling at all.

That doesn't mean people don't play games with valuation, or that you can't make money off of assets getting temporarily over valued at the right time.

But it does mean the economy won't get more valued due to these games, as someone will lose every dollar that was won through gaming the market.

Every unearned increase in stock price now reduces the return for someone else buying the stock after that increase.

When people realize earnings are not really growing commensurate with stock prices for a whole class of stocks, we get worse than just lost future earnings, we get a crash.

In the end the games do decrease growth of stock prices total, even though some investors will come out ahead for all the gaming.

I found this article difficult to read. There seems to be a slightly disorganised approach of jumping between specific companies and macroeconomic ideas, then sweeping generalisations about what "American capitalism" means - a topic which rarely comes with consensus.

It is unclear what the thesis of the article's author is, and why he thinks this evidence is linked to it. Although just personally - if the US does suffers a massive stock market crash then nobody has the right to be surprised.

I'm just a layman but this sounds like a thesis to me:

> A more comprehensive explanation would simply state that the U.S. economy is, to a unique extent, organized around maximizing asset values and returns on capital independently of growth

My layman's translation of that would be "U.S. financial markets are driven by speculation/gambling, not well-researched long-term investment".

I guess what makes that a weird thesis is that it's... so obvious. I would assume anyone who deals with this knows that there are many different participants in the market, many of which are only selling liquidity, i.e. speculating.

I don't think that the main point of the article is the behavior of the financial markets but of the companies - instead of actually growing in some real sense which in turn would raise valuation, companies are increasingly trying to just maximize valuation without corresponding fundamentals. This seems a typical example of the metric becoming the goal.

Right, yes, upon reading further I realise the article is more of an exploration into potential causes and consequences of the central point I quoted.

It isn't just about the participants. It is also about the policies and regulations. "Keep the stock market juiced" has become the new "keep the housing market juiced" because so many Americans have no alternative mechanism for surviving once they stop working without money invested in housing and stocks. So policymakers have an enormous problem on their hands if markets crash.

I think the point is that the economy has become more-oriented towards financial outcomes. Companies are doing things which boost their stock price but don't actually result in a greater level of overall economic activity beyond higher profits.

This criticism is always going to be scattergun because there isn't any one thing you can point to. I expected the article to be terrible but the conclusion/main points are basically sound (I actually assumed the guy wasn't a financial professional but appears to have been, it is a bit scattergun but actually covers a lot of ground well).

You are seeing things today that make zero sense. Companies that have profitable businesses trading on 5x earnings and other companies that are never likely to be profitable are trading on 30x or 50x sales.

I think people view the stock market as semi-relevant because it often isn't new capital being raised but it has a huge signalling effect for private sector activities. I remember five years ago when people said the stock market was dead. Well, it turned out those people need your money now. The tail is wagging the dog. And, unfortunately, one of the side-effects has been that it is impossible to raise money for anything profitable (the problem with profit is that they are never large enough, losses are fantastic because you can always say...but wait until we are profitable, the profits will be huge). The companies on 5x earnings are buying back, the companies on 50x sales are issuing stock (largely for employees and insiders to cash out).

I am not sure if it is a huge issue because it will correct. But I think there will need to be a re-examination (once again) of the role of monetary policy, it has made everything significantly worse. Huge impact on inequality, created a fake shortage of safe assets which caused a bump in prices that led more money out of risky assets (this is the opposite of the intended effect of QE), etc. A total car crash.

One thing that is perhaps understated is the extent to which the US market has globalized. A lot of stocks today are overvalued but GOOG was trading at 12x earnings ten years ago. And what people then under-estimated was the global growth potential. YouTube and Netflix are watched more than linear TV in some countries amongst young people, and live TV is still a very big business. That is why it is difficult to talk about the connection between growth in US equities and US economic growth, they are detached.

Another things that is understated is the extent to which most institutional investors have totally checked out of...well, investing. Not just ETFs but in Japan, they just buy CLOs...in Taiwan, they just buy CLOs...in Germany, CLOs (and private loan funds). All this money is flowing into private equity but not lending to the real economy (and it is fair to point out, that lending to private equity is just transferring money from X to Y...it creates nothing). QE has facilitated this, it made investing in risk-free assets very profitable, the drop in interest rates since the early 80s did the same, these flows of foreign money haven't improved investment, they have just siphoned wealth out of the US (totally counter-intuitive but economic models operate under the assumption that supply of savings creates demand for investment, unf the supply of investable ideas is quite fixed but private equity will create the securities if there is enough capital...it can't go on forever). This is the irony of saying the US should copy the "Asian Growth Model"...that model only works because exporters can invest the dollars and create the overseas investment income.

    The European Central Bank has also maintained low
    rates, and many European sovereign yields are lower
    than U.S. Treasury yields, but European equity
    valuations are not as high

The reason could be cultural. When I talk to Europeans, they often see investing as "gambling". Which has a negative, scary connotation.

some people will pump something up just to make money while other won't because they know that their name is important at least to them. when people are cautious about telling you what they do or about their idea, sometimes they are just filtering the money hungry people from the actual believers, people who aren't just there for a quick buck, but are there fir change. if a real startup person, someone who didn't ask for things but still put themself out there or at least presented them self in such a way but seemed "inconsistent" or over explaining something but not in the traditional word throwing brand keyword way, then those people may open up enough to let you in, if that is the case then you may have found a unicorn. but, if you are afraid and which you should be cautious for good reason, than the real individuals may hold back and look for someone who trust them enough to invest. it's tricky but lions sometimes lay low before they feast. if you can find them before they gorilla it on their own, then you may have found something really really rare. but be careful because, they are use to arrows, doubt and people investigating/trying to pry to see if they are "the right fit" and just may be annoyed enough to throw you a false signal out of annoyance and for more fuel to their hungry; which resides not purely in money, but something deeper that few see clearly. but i am just some dude on ycom

if it looks like a duck, is something they may know, but who wants to be used, so i get it

> For capitalism to remain oriented toward growth and live up to its “Smithian” justifications, the private sector must be subordinate to and take direction from the state. In liberal capitalism or plutocracy, on the other hand, the oligarchs will use their power to resist development.

There’s some depth and valid points in this article, but the above sentence was my confirmation that the author is starting from a fixed ideological position.

The Value of Everything by Mariana Mazzucato may be of some interest:

> In modern capitalism, value-extraction is rewarded more highly than value-creation: the productive process that drives a healthy economy and society. From companies driven solely to maximise shareholder value to astronomically high prices of medicines justified through big pharma’s ‘value pricing’, we misidentify taking with making, and have lost sight of what value really means. Once a central plank of economic thought, this concept of value – what it is, why it matters to us – is simply no longer discussed.

* https://marianamazzucato.com/books/the-value-of-everything

> In this scathing indictment of our current global financial system, The Value of Everything rigorously scrutinizes the way in which economic value has been determined and reveals how the difference between value creation and value extraction has become increasingly blurry. Mariana Mazzucato argues that this blurriness allowed certain actors in the economy to portray themselves as value creators, while in reality they were just moving existing value around or, even worse, destroying it.

> The book uses case studies - from Silicon Valley to the financial sector to big pharma - to show how the foggy notions of value create confusion between rents and profits, a difference that distorts the measurements of growth and GDP.

* https://www.goodreads.com/book/show/29502362-the-value-of-ev...

One interesting anecdote she brings up: the US government gave a $456M guaranteed loan to Tesla, which Tesla paid back. But now that Tesla is "successful" and Musk is super-rich, does the US government get any credit for helping its success? How much 'value' did the folks at Tesla create versus the US government in helping to fund it?

Her previous book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths, also has an interesting thesis:

> This book debunks the myth of the State as a large bureaucratic organization that can at best facilitate the creative innovation which happens in the dynamic private sector. Analysing various case studies of innovation-led growth, it describes the opposite situation, whereby the private sector only becomes bold enough to invest after the courageous State has made the high-risk investments.

* https://www.goodreads.com/book/show/17987621-the-entrepreneu...

* https://marianamazzucato.com/books/the-entrepreneurial-state

The Tesla anecdote is a poor example. Of course the US government benefits from its loan to Tesla - Tesla is an American company. By virtue of that fact, all benefit created by Tesla in advancing the state of the electric car industry is, vicariously, experienced by the US government and anyone who identifies as American.

She has entire chapter called "Extracting Value through the Innovation Economy":

* https://cms.marianamazzucato.com/wp-content/uploads/2018/04/...

I'm not going to try to summarized forty pages of text in an HN comment.

In hindsight, it looks like the parent article "The Value of Nothing" might have been written in response to "The Value of Everything".

Thanks for this, I've long thought that value creation, monetary extraction, and resource consumption are too disconnected in our economy.

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