As an outside observer, I used to believe the stock market was solid and mostly rational, and that obviously it could not be influenced by a single actor or a subreddit community, contrary to a "playground" like the Bitcoin market. I get the feeling everyone says they see the emperor's clothes in the stock market reliability, anticipating everything, but in reality it's just short term gambling and post rationalization.
Part of that is due to the fact that most of the market is now passive investment. Being pension funds, endowment, etc etc.
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.
I'd guess there is there is too much money in it due to the fact that central banks killed interest rates and started buying government bonds as needed - where pension funds would hold those they now need to search positivie returns and there's just not enough good bets there - would explain why the valuations are sky high
Because their goals are not price discovery. Price discovery needs taking risk. All of them are not allowed to reduce the principal.
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.
> As long as trades are happening, there is some sort pricing mechanism.
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?
Government should embark on major public infrastructure projects and issue bonds tied to some collateral or benchmarks like for example a portion of property or sales tax in some area, for some limited period.
That's a great idea, let the private markets front the cash for infrastructure projects and let local gov bodies set the rate of return over a set period (using the tax fund). This means a small portion of tax money can go towards repayment and states/counties get their infrastructure upgraded faster. Can anyone weigh in on why this is a bad idea? I have no idea why this isn't already the case.
A lot of infrastructure is funded via bonds already, but the interest rate is fixed instead of tied to a percentage of property tax revenue.
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)
Most of those bonds would be bought up by banks as usual, inflationary pressure would be caused by those bonds because of the temptation to print money to make up for the inevitable shortfall
God, this has been so true for me. I was trading puts on the massive increase in US Covid cases, but stocks just kept going up. And now we're hitting ATHs while economists are predicting the worst GDP decline ever. Gold and Stocks are both rapidly rising, which isn't really logical, since Gold is a save haven, usually.
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.
Interest rates are super low. The Fed's printing money like there's no tomorrow.
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.
There was a post by an economist that low rates is a tool in the hand of politicians and once the get a taste of it, they never let it go.
At least I see this happening in India. Central bank is influenced by govts to keep rates low.
Don't know well about how US Feds and govt are incentivised
US dollar will never crash. It is defacto the currency that runs the world.
It's a bit like saying the lake will overflow because millions of people are pissing in it.
And crash against what? Other currencies are faring far worse.
It doesn’t have to crash per se. The value can go down. As in inflation. This is already happening in some sense. It’s just accelerated when the real value you get back is lesser for dollar by the day. A few years back can you imagine buying a $1000 phone? The measured inflation is really convoluted. I doubt it measures the true value of a dollar. The good thing is other currencies will just get devalued equally considering dollar is the world currency for the most part.
>which isn't really logical, since Gold is a save haven, usually.
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.
Inflation is on track for 0.44% annualized in 2020, about 1/4 of an average year due to the reduced velocity of money caused by the downturn more than offsetting the new money being printed.
Is there a way in which finical assets can inflate more the basic of goods that make up inflation metrics? Is gold even part of the index?
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?
Maybe all the new money ends up in the hands of the rich elite, who just funnel it into the stock market, so it never really ends up inflating real assets. I could totally buy that these are the types that care the most about making the slider go to the right, and don't necessarily spend much of their money (or have so much of it that they already spent it on everything they possibly could).
Lets assume the inflation remains contained in the financial sector. What does this mean e.g. for a young family with no inherited wealth, with average income and savings rate? How should they invest their savings? Isn't it more difficult for them to "break even" (in the sense that their capital income offsets their share of contributing to others capital incomes) than before the asset price inflation?
At a given instant in time, each unit of currency has to be owned by someone. So if the money supply increases by 10%, by the pigeonhole principle, there is at least one entity with 10% more money in one of their accounts.
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.
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.
The CPI does include rent. And if you check the listings, you won’t find that the money supply multiplying has led to prices multiplying. It seems like it’s just supporting current prices. If prices do start to rise too quickly they can gradually pull back that support.
The inflation in asset values (e.g. equities / real estate / gold).
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...
> People incorrectly assume inflation means "the price of everything goes up".
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".
CPI is inherently flawed due to basket of goods methodology and consumer substitution for cheaper/different alternatives than in the past when prices to their current basket changes. For example average housing spend could be steady while people get smaller homes and CPI would not reflect that. Likewise with lower quality food by some metric or other.
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.
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.
Sure. But we are talking about inflated asset prices. Printing more money just makes the truly valuable things take more units of an inflated currency pool
Now this is just my conspiracy theorist side coming out, but I think the only reason the government cares about frequency of exchange is that they get a cut on each event. The more frequent the exchange, the sooner they get 100% of it back.
Not only is inflation extremely low, but we were at serious risk of a deflationary spiral without all the funny-money that the feds are pumping into the economy. Central banks introduced liqudity to make sure deflation did not happen.
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.
> Not only is inflation extremely low, but we were at serious risk of a deflationary spiral without all the funny-money that the feds are pumping into the economy.
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.
Inflation is low as measured by the CPI. Inflation in financial assets (higher PE ratios for stocks, lower yields on bonds, significantly increased real estate prices in attractive cities, etc) are significantly higher.
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.
IMO the fed pumps money to reduce the risk of collapse of tbtf entities. It can't do much to reflate the economy as it depends on the banks to lend them out.
That is what some people think, but the only thing we know for sure about the price of gold is that you have to pay its price in ounces to get one ounce of it.
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.
A lot of people that replied to you seem to be quite sure in their explanation (i.e. fiat currency is losing value due to QE etc.) I think all we know is that we actually have little idea of what's happening and what will happen in the near future, since this situation is quite unprecedented. During the great depression the fed had a tightening instead of easing and the market crashed hard, sure, but what happens when there's a crazy amount of easing instead? Guess people can only look back in 20 years or so and draw some conclusion. Being too sure of anything at the present moment would be quite overconfident IMO.
FWIW the GDP decline may have been overblown, and it seems at least plausible that it will be followed by GDP spike, as production fills in unmet demand at higher prices.
Great quote. Aside: I thought it originated from John Keynes, but it looks like that earliest written record goes back to 1983 to a financial analyst named Gary Shilling:
Because if P=NP the vast array of the majority of known "hard" problem becomes trivial to solve, not just market information. That's the reason P=NP is considered so consequential to society in many ways if it does happen to be true and implementable.
So then it appears it is possible that P = NP and markets are not efficient, so it is not true that "Markets are efficient if and only if P=NP" because P = NP !-> Markets are efficient
For the markets to be efficient today they must calculate P=NP to achieve the solution. Nobody has done that yet. Markets today are inefficient as nobody has implemented P=NP to do the required calculation. Markets in the future could be efficient, but today's ones are not as we have to gauge market value the traditional way with incomplete information and guesstimation and modelling.
But the scientific consensus so far is heavily biased towards the presumption that P!=NP.
I think I understand the sketch of the proof and pretty familiar with the P=NP debate. Perhaps my point is pedantic, and I've also looked at the paper and seen that it doesn't try to prove an "iff" claim, but:
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`.
I think we're on the same page, just different paragraphs. I think I get the gist of your line of reasoning.
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.
Analogy seems roughly right, if it was a statement like "P=NP -> Markets could possibly be efficient" then I'd buy it.
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.
I’m reminded of some research I tried to get published a while back. One editor comment came back with a suggestion to reject simply with “this appears to contradict the EMH.” No further explanation.
Well, no shit. It said so right in the introduction. I think this is what’s called “theory induced blindness”
This is a misunderstanding of the EMH. “Efficient” does not mean “rational” or “always right”. It simply means that, at any time, the difference between actual prices and “rational” prices is random.
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.
That actually reinforces my point. For bubbles to occur, the delta between the price and the “rational” price must not be random. In bubbles prices exhibit strong temporal autocorrelation.
The (strong form) efficient market hypothesis (EMH) doesn't state or require that there be no bubbles. The EMH means that bubbles are extremely hard to predict/see, largely because of the market's feedback loop.
Is there a distinction between an efficient market and a efficient market subject to propagation delays? It would seem that there is a limit to how fast information can be disseminated and the resulting reaction time. The market may always tend towards efficiency at some time scales and not at others.
Interacting with traders would have broken you of that illusion too. Professional traders are much more prone to group think than they’ll ever admit to, which occasionally causes the market to do sub-optimal things.
I am more and more coming to the conclusion that a huge portion of susceptibility to groupthink even seems to be a central requirement to be a "good" trader (as in: one who outperforms the market).
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.
Exactly. If it eventually turns out you were right, but most people didn't realize that at the time you traded according to your eventually-proven theory, you will have incurred huge losses at the point in time you finally are proven right. The icing on the cake is that you might even have given up on your idea and eventually decided to just go with the flow regardless of how stupid you think it is, and that might just be the time the market eventually concludes you were right all the time. Then you lost twice.
If one is a true contrarian then one would certainly stick to their position until the end, or at least wait for chances along the way while unyielding in their underlying belief. Otherwise the only conclusion is that they are not firm enough in carrying out what they believe in. Of course if they have a bad timing in their execution, they would still end up losing, but lose twice they won't.
I don't know how much or how little influence things like Robinhood and WSB have but it sure is entertaining to read about. I'm just hoping my conservative retirement investments don't get tanked for the lols
> how much or how little influence things like Robinhood and WSB
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.
With the way the market moved last few weeks (especially AAPL and TSLA), you could be forgiven to think the Robinhood effect was real. Especially when people like Matt Levine and even WSJ starts talking about it. People working from home, nowhere to spend money, seeing market news everyday and then jumping on to the most popular app to trade - all very believable for an unsophisticated "investor" like me.
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.
> large volume OTM calls causing MMs to buy stock and inflate 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.
> all very believable for an unsophisticated "investor" like me.
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.
It's important to note that even a system composed of rational actors influencing a common stock need not be stable in itself, nor are the rational actors guaranteed to collectively settle on the equilibrium that maximizes their collective utility.
I always saw the stock market as governed by heavy hands and hype, and always assumed that investors need to MOSTLY base their financial models on a simulation of heavy hand agents and hype rather than fundamentals.
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.
> 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.
"He picked two hundred and eighty-four people who made their living “commenting or offering advice on political and economic trends,” and he started asking them to assess the probability that various things would or would not come to pass, both in the areas of the world in which they specialized and in areas about which they were not expert"
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.
> 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".
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?
> 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.
> 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.
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.
> why would I buy stocks based on a company's ability to make the world a better place
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.
You might have some advantages, but you have 10x more blind-spots.
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.
> Uber car crashes. NVIDIA stock crashes the next day because the public thought it had something to do with NVIDIA GPUs.
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.
That too is a problem. The public shouldn't be the ones to decide whether or not we trust self-driving cars as a society. Science and hard data should decide that. Valuations should be determined accordingly, based on that science. In this particular case, the valuations of the entire self-driving industry should have been pegged by experts in the industry while the valuation of Uber should have been knocked down for negligence.
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.
You can find plenty of people who will argue vehemently that it isn't legalized gambling on top of a pyramid scheme. One that can collapse faster than you can say "bank run".
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.
Edit: punctuation