Market has been divorced from fundamentals since COVID IMO. Too much money with nowhere else to go and too many index fund investors really inhibit price discovery. If folks start having to cash out their 401ks, we might start seeing a decline, but even then that's a tiny % ownership of the market.
What do market models say about what happens as more and more of the "pie" shifts toward people and entities whose only demand is investments, not (a meaningful amount, proportionately, of) consumer goods or non-financial services for ordinary human wants and needs?
It's gotta be... bad, right? It seems like it'd be bad.
This would be happening even as the proportion of the "pie" going toward actual consumer demand shrinks, though, so there are two sides to the (maybe? I dunno) problem.
Investment is a form of demand though. When you invest in a startup, the money is spent on wages, rent, equipment, supplies, etc., all of which circulates into the economy. Investment is a transfer of wealth to doers, in exchange for a chance at getting a return for yourself.
Sometimes yes, sometimes no. Investment in real estate doesn't necessarily "transfer wealth to doers". Investment in crypto doesn't. Investment in buying existing stock doesn't (until and unless value is realized by e.g. issuing new stock—and it can be, and is, but isn't necessarily). Investment in government bonds that ultimately just pay interest on existing debt doesn't.
Investment in anything that may move certain indicators a good direction (some of the money pays workers; GDP perhaps even goes up as a result of the activity) but worsens the economic position of "doers" across the overall population doesn't just fail to transfer money downward and stimulate consumer demand, but does the opposite. Investment in ways to more efficiently and effectively deny people healthcare coverage they're supposed to have, for instance. Lots of activity in weakly-competitive markets falls under this heading, and since we all but entirely stopped enforcing anti-trust in the '70s, that describes an increasingly large proportion of the economy with each passing year.
Sure it does! Investment in all those things creates demand.
Real estate: demand for houses means demand for house building and maintenance.
Crypto: demand for chips and electricity (yes, this is super-dumb demand for dubious benefit, but demand nonetheless, just like paying people to dig holes and fill them in is also demand).
Stock: I almost agree with you, but 1) stockbroking is a whole industry funded by taking a percentage on stock purchases, 2) if you buy some stock for some cash, the counterparty now has cash, which they are either going to keep, spend, or invest in something else, so the transaction is neutral-to-positive in terms of demand generation.
Bonds: why do governments issue bonds? To get money to spend on stuff! Every penny of your bond purchase gets spent on government activities. Some of that is paying interest, but that interest is income for other bondholders (who then typically spend it)
With taxes and transaction fees skimming a little bit off the top of everything, it’s actually almost impossible to engage in any financial transaction without that transaction stimulating all kinds of additional activity. Not all of it is valuable or even ethical activity, but the point is that the scenario posited (“everyone is just investing and there’s no real demand underpinning it”) is very unlikely to happen.
Yeah, it's a dynamic system, I get it, but it does seem like the beneficial effect of adding another dollar to the investment-side versus the demand-side ought to differ as balance of the overall money-supply shifts between the two, and it seems to me that if the rate of accumulation to one side is excessive it could outpace the ability of the system to "naturally" redistribute that balance.
I'd expect "more investment dollars chasing smaller returns" (because the demand-side doesn't have enough cash) to show up as a declining velocity of money, and from what I can tell that has been trending downward from a peak in the late '90s (M2) or around '08 (M1). I'd also expect this to cause some apparently-goofy valuations in the stock market, and... ditto. Increasing reliance on investments that rely on the price of the investment simply going up for returns, not on returns from productive activity, and... yep (real estate sure appears to be caught in a nasty trap of this sort, in particular). Or an enthusiastic boom in "investment vehicles" that permit near-zero-actual-economic-value speedrunning of the entire history of financial scams, and... yep, again.
It feels like a weird backdoor to socialism. Look, we're capitalists, we trade stock on open markets ... but really most stock market gains come from a tiny fraction of companies with incredible performance, so everyone just invests in index funds to make sure they own all of the stocks, including the ones that will go up a lot ... and since we all own all of the companies, we start making sure our government works to prevent the companies we own from going out of business ...
So what should be done instead? I pile everything into index funds because actively-managed funds charge higher fees for worse performance, and telling me I must invest with them instead of indexes seems much more straightforwardly socialist than whatever you're fretting about.
Of course you do, that's the reasonable thing to do. It's just interesting to think about what broader shifts will accompany the transition from pension to 401(k) style retirement. My parents and grandparents owned little to no stock AFAIK. They didn't care directly how Wall Street did, they just cared about their pensions (which admittedly, I'm sure was opaquely tied to how well some companies were doing). With a sizeable 401(k) I absolutely care about how Wall Street does, and so does a much higher percentage of the population these days.
You used to occasionally see bailouts of too-big-to-fail companies or industries, now the White House holds buy-a-Tesla day, presumably to boost TSLA. Just today the US Commerce Secretary announced that a UK airline would buy at least $10 billion of Boeing airplanes (Boeing stock is up ~4%).
Maybe it's just me paying more attention to stock market news these days, but my impression is that politicians have recently begun to care a lot more about the overall stock market going up because a lot more voters care about the overall stock market going up.
It's not really socialism because you don't own or have any say in the company you work for. And not everybody owns stocks.
It's more like feudalism where those kings cut in the people below them so that they have a stake in the system and don't get any ideas about revolting.
Since Covid? Since the 1990s when P/E ratios in tech started to hit the high 20s and 30s. What was “crazy” back then is de rigeur now, and even paltry.
IMO the 2008 financial crisis was the beginning. Stock market has been following the monetary pump since then. The crisis was never solved. Now we are going to suffer a much larger one.
I hear this from MAGAs and I don't buy it. It seems to be their go to reason for the coming collapse of the economy from instead of the real reason of self induced stagflation caused by unhinged economic policy from a clown. I just don't buy it. Trump is deliberately attempting to bring on the 2nd Great Depression and he doesn't care because he has cash stored away enough to last several life times. He just likes playing God with the economy because cowardly republican congress members quiver in fear he might give them a thumb's down.
Markets have been divorced from fundamentals for years before COVID. Wealth is just too concentrated in a few hands and people don't seem to understand the affect this is having on the market.
The Efficient Market Hypothesis is that securities prices represent the best available information in the market, because if they didn't, smart investors would take advantage of the unincorporated information to make money by buying the underpriced securities and/or selling the overpriced ones.
Index fund investors do not do that; they just buy the securities that are listed in the index, which are selected typically because they have large market capitalization or are old, not because they are underpriced. So, to whatever extent the market conforms to the Efficient Market Hypothesis, it's not doing so because of the index fund investors.
> So, to whatever extent the market conforms to the Efficient Market Hypothesis, it's not doing so because of the index fund investors.
I don't disagree. I also don't believe this observation in isolation supports the assertion "too many index fund investors really inhibit price discovery." Remember, that statement was made in the context of today, not in a hypothetical world where only a few lone traders at home trade individual shares and high frequency traders, hedge funds, and pension plans are for some reason no longer willing to place their own bets.
I'd rather not let some of the anti-index investing tropes gain traction, since they're insanely stupid and, to the extent that index investing is good for people who aren't very skilled at investing, quite damaging.
I'm skeptical of the thesis myself, and even if it is correct, I don't think it makes a good argument for sacrificing your own wealth in the service of improving price discovery.
One slight quibble, though: high frequency traders make their money by providing liquidity, not (as far as possible) betting on the future profits of companies.
Oh, that's an interesting point about high frequency trading.
I think the question of what percentage of the market could be invested in index funds before things got weird is an interesting one. It really is hypothetical, though. Independent investors have more sway, not less, as an increasing number of people put money in index funds. There will always be a lot of people who are very rationally (and also depending on the investor... less rationally) unwilling to give that up.
The price of a stock like Tesla is supported due to its inclusion in the S&P 500 index funds. If you asked every person who owns SPY if they'd want to own TSLA, I imagine it would not add up to 100%. If State Street decided tomorrow that they were removing TSLA from SPY, it would crater the stock.
