I don't know how to actually tell if the market is overvalued, but man when I see Palantir has a PE of like 500, Tesla almost 200, and Apple is like 35, I can't help but think there too much hype.
But I have literally no idea. Macroeconomics is way out of my wheelhouse, and I'm usually wrong.
Here's to an index fund...
Cue the famous quote: “The market can remain irrational longer than you can remain solvent.”
I have a vague theory that as the amount of wealth inequality increases in a system along with “money printing” (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general. In such a case, an increasing majority of the money circulating has no need to be grounded in anything close to the common basic needs and values that most normal people have to live with.
Instead, most important to such wealth is to tap into the source of inflation to be on the winning side of that. This becomes a game of its own, where an investment’s connection to reality or fundamental value is mostly irrelevant compared to how it leverages or monopolizes the state-created and privately created instruments of “money printing” (sketchy lending, rehypothecation, etc.) and other such “games” that only the wealthy are allowed in on.
It's not necessarily about things being (ir)rational, but about 'psychology' and the multi-player system that is The Market™. Because it's all very well and good to buy and sell individual products (securities) on their merits, but one also has to take into account what other people's ideas on them is as well (as you are buying/selling from them).
This factor has been known about for almost a century:
> A Keynesian beauty contest is a beauty contest in which judges are rewarded for selecting the most popular faces among all judges, rather than those they may personally find the most attractive. This idea is often applied in financial markets, whereby investors could profit more by buying whichever stocks they think other investors will buy, rather than the stocks that have fundamentally the best value, because when other people buy a stock, they bid up the price, allowing an earlier investor to cash out with a profit, regardless of whether the price increases are supported by its fundamentals and theoretical arguments.
* https://en.wikipedia.org/wiki/Keynesian_beauty_contest
Of course other people know about this factor, so folks are judging others based on how they are judging others.
(Personally I'm just going with index finds (VEQT/XEQT/VBAL up here in Canada).)
I'm glad to see OP's comment voted to the top, b/c it models good thinking. He knows what he doesn't know, and so he sticks to index funds.
Also -- I don't know anybody who still buys S&P 500 funds, now that there are broader funds available. None of the funds for Canadians that GP listed is limited to the S&P 500, so it's unclear why you would respond as if that's the index he's talking about.
- he's overweighted on Canada. Being Canadian themselves, that's a double risk. If Canada does poorly, the chance of his livelihood being affected is high. Investments should be anti-correlated from livelihood risks.
- despite being 30% in Canada, VEQT has 2.5% in NVDA. By itself that's fine, but once you add similar amounts for MSFT, GOOG, META, AAPL, BCOM, etc, it becomes a significant portion of the index.
The point of an index fund is to be diversified. If one sector crashes but other sectors do well you're still fine. The OP will lose significant money if either Canada or AI crashes, even if the rest of the world is doing well.
* https://www.vanguard.ca/content/dam/intl/americas/canada/en/...
* https://benderbenderbortolotti.com/home-bias-in-the-vanguard...
Vanguard/Blackrock could set the allocation to whatever they wanted, but it's a conscious choice. Absolute returns are not necessarily the only consideration (if they are, perhaps buy a NASDAQ fund).
That's what bonds are for!
https://www.rafi.com/index-strategies/rafi-fundamental-indic...
They are pretty cagey about the exact formula, but they do say that
> Security weights are determined by using fundamental measures of company size (adjusted sales, cash flow, dividends + buybacks, and book value) rather than price (market cap).
The top ten holdings in their US index are (rank - company - weight):
1 Apple 4.1
2 Microsoft 3.4
3 Alphabet 3.3
4 Berkshire Hathaway 2.3
5 Amazon 2.2
6 Meta Platforms 2.2
7 JPMorgan Chase 2.1
8 Exxon Mobil 2.0
9 Bank Of America 1.4
10 Chevron 1.3
1 Nvidia 7.1
2 Microsoft 7.0
3 Apple 5.7
4 Amazon 4.0
5 Alphabet 3.7
6 Meta Platforms 3.1
7 Broadcom 2.4
8 Tesla 1.7
9 JPMorgan Chase 1.5
10 Eli Lilly 1.3Last 10 years comparison (VTI vs FNDB): https://www.portfoliovisualizer.com/backtest-portfolio?s=y&s...
In my case, after observing the Covid-19 craziness in market, I decided to dig further on value strategies and discovered this gem from Research Affiliates in Journal of Portfolio Management circa 2012, which completely convinced me on the concept of fundamental indexation as a superior alternative to market-cap weighted total market index.
Rebalancing and the value effect (JPM 2012): https://www.researchaffiliates.com/content/dam/ra/publicatio...
I threw together a quick comparison with that tool (handy, thanks) of Vanguard Growth vs Vanguard Value and it's not too pretty. Sure, Value is less volatile, but...
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&s...
I mean I guess we'll see what happens when the music stops again, but it resembles the same issue as being "right" about a market drop -- that you can be right, but the timing is such that it nevertheless would have been more lucrative to be invested the whole time anyway
Yes, you can choose an index fund that's not cap-weighted S&P 500. However, any index fund that didn't have a substantial portion of its investments in NVDA and friends did very poorly over the last few years.
So either way, you're screwed.
- If your index has a lot of NVDA et al, you're exposed to lots of risk.
- If it doesn't, your investment values are currently a lot lower than they otherwise have been.
So ideally you would be in cap-weighted S&P now and for the last few years, and switch just before the seemingly inevitable crash.
But that's no longer "put it in an index fund and forget about it".
But it's not the case that they "did very poorly". Forgive the UK sources, but compare HMWO (an MSCI World ETF) [1] and PSRW (a RAFI All World 3000 ETF) [2]. These are world indexes, but that's 70% US or something. For the last five years:
Date HMWO PSRW
07/24-07/25 15.77 13.49
07/23-07/24 18.46 14.35
07/22-07/23 13.86 13.87
07/21-07/22 -9.06 -4.93
07/20-07/21 35.31 38.57
Funnily enough, if you go further back, the RAFI index is actually further behind. No idea what that's about.
[1] https://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Do...
[2] https://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Do...
So first off, picking individual winning stocks is hard because new information that determines pricing comes in randomly, so good luck getting information edge on your counter-party:
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
Further, <5% of stocks actually make up the vast majority of earnings:
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541122
Those winning stocks also change over time: what used to be a winning choice can become a losing choice, so it's not like you can really set and forget things.
So index funds, buying all companies (especially if you go for more total market, like US Russell 3000), allow you to sidestep all of these risks. You are basically buying companies that service the entire economy, so as long as the economy is doing reasonably well the earnings of the companies will do reasonably well.
So yes, the S&P 500 is highly concentrated, but that is not the only index. Diversification is generally not a bad idea:
* https://ofdollarsanddata.com/do-you-need-to-own-internationa...
1. Most indexes are market capitalization weighted indexes... which can lead to the high concentrations we currently see.
2. There are also equal weighted indexes. These are less popular for a multitude of reasons, not the least of which is the expense associated with keeping the fund equal weighted (the fund has to periodically - eg quarterly - buy/sell stocks to bring everything back to 'equal'
I am currently in the process of moving a portion of my allocation into an equal weight sp500 fund precisely because I want to lower my exposure to the largest ten stocks in the sp500.
Another way to accomplish that would be to buy a market capitalization weighted index consisting of mid size or small cap stocks - thus avoiding the concentration of the top 10. But that changes the overall portfolio in other ways (small cap factor). I decided to use equal weighting a portion of my large cap holdings because I feel it is a more precise way to address the very specific problem I am addressing without adding other variables.
There's computers and computer logic.
If you want to make it less vague, you can read Keynes.
It's inequality that is the important one, money printing doesn't impact it (except for it impacting inequality). In simple language, people don't want to spend all their money on consumption (the "demand is infinite" you see on econ101 is an approximation), and so when only two dozen people have all the money there aren't many things you can sell and turn a profit. But those people still want to invest all the money they aren't using, there is just nothing to invest into.
At the turn of the 19th to the 20th century, explaining this was a huge open problem in economics.
I probably should generalize my thoughts though to say “expectation of economic growth” (instead of just “money printing”) seems to me necessary to yield “opaque market insanity”, as opposed to “transparent evil sanity”.
As a thought experiment, consider a (practically impossible) scenario where there is universally no expectation for long-term economic growth/contraction — regardless of whether it’s “real” or just monetary. Then by definition, a long term market simply cannot exist at all. No amount of wealth inequality can cause market insanity if there is no (long-term) market at all.
Wealth inequality in such a situation can still yield hoarding, domination, conquest, control, scams, manipulations, etc. But I wouldn’t call that “market insanity” so much as “evil sanity”.
In practice, the real impact of wealth inequality on the common people would likely be the same either way. However, without long term economic growth/inflation, the “sane evil” of the greedy wealth can no longer hide behind the veil of “market insanity”.
You probably won't get a lot to support that idea on the literature.
I don't know how the ancient civilizations handled non-metalic money, I know that on the Middle age it was a famous kingdom killer because most kings couldn't refrain from creating infinite money.
If anything, the experiments you're talking about are just the logical consequences of doing the same thing over and over.
After all, the experiments never seemed to modify the problematic element, all they did was increase the quantity according to the logic of accumulation.
In fact, isn't it remarkable that the last 2000 years have produced the exact same pattern over and over again?
The logic is always the same. Money from period A can be carried over to period B. This means there is too little money during period A and too much during period B.
Since period A is perpetually today, and period B is perpetually tomorrow, one could get the idea to at least fix period A, which isn't as stupid as the Austrian economists would like to tell you. But fixing today through quantity means there is even more money carried over to tomorrow. The problem is being fixed with more of itself. It certainly isn't being fixed by having a competing system for trade.
Abandoning gold, fractional reserve banking, QE, etc all exist due to the fundamental mistake of making it possible to carry something that is time and location bound away from the time and location it is bound to.
Reintroducing a gold standard doesn't change this logic. It just makes it slightly more visible.
When you look at Arrow-Debreu models, you see the assumption is that utility maximizing economic agents will spend their entire budget on either present utility (consumer goods) or future utility (investment goods). The concept of carrying money from one period to another doesn't exist and is inherently incompatible with equilibrium and yet you don't see economists warning us about the carrying over of past balances into the future with the exception Keynes and Wolfgang Stützel. Not even Marx thought that this was problematic. Even the Austrian economists know the problem, as they argue that the single individual with the lowest time preference should own the entire planet and that the real problem is the national central bank (which happens to be quite small in contrast to world domination).
The problem and its half baked attempts at solutions is at least as old as Christianity. Possibly all the way back to mesopotamia.
I just told you two things that changed within a human lifetime, and you didn't even read them, so the conversation ends here.
I think you have just defined gold and bitcoin to be "nothing".
Sounds about right.
I feel like I'm going to be able to tell my adult kids "Yeah, when I was younger the Republicans were the party of free trade and government non-intervention in private industry..."
As far as I'm aware, in 2020 the reserve requirement in the US was set to 0%, and it has not been changed since then.
Those private banks can print that money out of thin air because government allows them to. And the government officials (many formerly financial executives) allow them to because they “have to” to prevent “disastrous” private banking/financial collapse.
But if you or I wanted to play the same games to print our own money they way they do? No, that would be wrong and dangerous and illegal!
So it’s pretty clear that both government and private financial institutions are tightly coupled partners in a mostly corrupt, intentionally obfuscated shell game that primarily serves to keep money and power steadily flowing into the hands of the already wealthy and powerful.
Just look at who is actually held accountable for financial crimes. Some individual trader that finds and exploits some glitch that allows them to profit from the wealthy? Straight to jail. High ranking institutional powers (government and private) that implement often illegal schemes that continuously siphon wealth from common people into their hands? Slap on the wrist at most.
The reserve requirement had to be loosened because banks became too conservative, largely because their investors were skittish about ldr.
Thats the real brake on money creation by banks, not the reserve requirement.
Quick look on coin market puts the total market value at ~$3 trillion. Yet that money effectively was created from nothing. It's basically money printing.
With credit cards that accept digital coins as financial sources it's also started to affect the actual markets significantly.
From the charts shown, markets have also gotten quite a bit frothier, with larger swings and spike / drops in margin, since 2020 when coin valuations really took off.
Personal view, it probably also contributes since it's less "real" from a certain perspective. Just digital numbers to wager, that don't really mean the same as mortgaging your house. "Eh, just wager like 10 or 20 digi-coins on margin." Except that's like $1-2 million these days.
If Americans actually cut back to actual basics (a fixer upper small house in a less desirable area), shared a older used car instead of buying several new ones (or a big truck!), made homecooked stews and beans and rice instead of eating out all the time or prepackaged food, stopped buying the latest fancy phones, took care of their health instead of gastric bypasses, dialysis, etc.
Hell, even if the average American stopped taking expensive vacations!
The world economy would likely collapse overnight, no joke. And it would likely be uglier than the Great Depression domestically.
A lot of an area's desirability has to do with crime rate. Bulgaria has a homicide rate of 1.088, and the US 5.763. So what would be considered a very safe, friendly neighborhood in the US, would be average or worse in Bulgaria. In this sense, "luxury" is flipped - what Bulgarians would consider basic, would be "luxuriously safe" in the US.
They’re often not close to jobs or very interesting socially, however.
Jobs and social opportunities are why Sofia is the big draw it is in Bulgaria, for instance.
I do see Bulgaria in general as being 3.8/100k for murder? [https://en.m.wikipedia.org/wiki/Crime_in_Bulgaria].
Inner cities and specific (relatively uncommon!) rural areas (often in the Deep South) are what are dangerous in the US, and paradoxically even inner cities are often expensive to live in. Here is a map of homicide rate on a county by county basis [https://commons.m.wikimedia.org/wiki/File:Map_of_US_county_h...].
People often move to LCOL areas anyway to escape the crime and high costs of the cities when there are economic issues in the US.
Which we definitely saw with remote work - both pros and cons.
Bernays did more to end the Great Depression than Keynes, and to prevent its recurrence post-war. Sad truth.
Lmfao what world do you live in where they haven't?
Except that the Gilded Age, which had some of the highest levels of wealth concentration and inequality, was during the period of the Gold Standard where money could not be 'printed excessively'. And this was true not just in the US but most of the major countries in the world.
Further, while wealth inequality has risen in the US under the non-gold fiat system (to levels similar to the Gilded Age), other countries do not have as much wealth inequality even though they are also non-gold fiat.
That explains why we're seeing what we're seeing now. It's all about network monetization.
As an aside I feel like there's this terrible trend where folks focus so much effort and energy worrying about whether billionaires should exist, whether they should be taxed more aggressively, etc. that we've lost the plot on just how much loot even a net worth of $10+ million is. And at the risk of me writing a too-long comment (bad habit), think of the risk appetite someone has when their decamillionaire parents pass away, and they're given, sometimes overnight, millions of extra dollars. Sure, maybe they'll buy a house, but oftentimes those funds go straight into the market. With boomers starting to leave this mortal coil and their trillions of dollars being passed down you can start to understand why the market seems disconnected from historical fundamentals.
This is well understood by some schools of economics. It's called The Cantillion Effect.
https://mises.org/mises-wire/cantillon-effects-why-inflation...
Claiming that even a majority or plurality of economists overall agree with Piketty, who advocates for some wildly unpopular economic policies and is a literal socialist, is absurd, so your group of "independent economists" must be pretty homogeneous and small.
When even Adam Smith supports the regulation of capital, this can be considered a fairly mainstream position.
I can point to dozens upon dozens of independent economists (by your definition) that disagree with the use of confiscatory income tax rates and wealth taxes, so I don't know what your argument is here.
The pros of software are so OP that it hard to justify investing in anything else. Software has incredibly low cap-ex and incredibly high margins. Five humans with five laptops can create a lawn maintenance app worth tens of millions.
To get that same value from, say, building lawn mowers, you need a factory...annnd already the value prop is "nope".
Take note that there is no hardware version of Hackernews. There is no hardware/manufacturing VC scene. Hell even the hardware that is produced today is just a vessel to sell a $19.99/mo software subscription to use the product. Look at what Tesla did, they are getting a reality check on their cars, but Ah!, Tesla is now a software company developing a software package that turns hardware (their cars) into reoccurring profit machines!
Software has eaten the first world, and this is what is looks like. A hyper inflated tech scene where all innovation is happening, and a totally anemic everything-else scene (except finance, that's huge too).
And
>totally anemic everything-else scene
A lot of the 'growth' we've seen seems to be consolidation and bilking of the consumer by rents. If we look at other countries with actual competition in manufacturing like China we see tons of brands with quality everywhere from use once and throw away to actually really good products. The profit chasing will eventually kill us as we have nothing that will produce actual value.
(Also I love how you're getting voted down for pointing out the obvious).
The problem is, once the gold standard fell and the rise of fiat money began, the financial markets became self-serving, with hordes of middlemen extracting the tiniest amounts of profits along the path, speculative trading driving up food prices, and people's care in old age no longer backed by the government in the form of a "societal contract" but by, essentially, betting on the economy ever growing and growing.
The gamble went on decent for a few decades, partially powered by ruthless exploitation of natural resources, but in the end the fundamental and long ignored issue of infinite growth being impossible (as anyone who ever played Paperclip should know) is now coming home to roost. The domestic resources of many countries are effectively exhausted (coal, gas and oil in Western Europe), leading to unhealthy dependencies on those countries that still do have these resources, and the consumer markets are either already saturated with cheap foreign-made goods or simply don't have enough money any more because rents are extracting too much money out of the people.
The AI stocks nowadays are pumped up by pure hype, and it's inevitable that the market will recalibrate sooner or later
If we eliminate both factors by imagining a world where GPUs just stop working every three years and where AMD doesn't have time to ramp up production we'd be pretty screwed without Nvidia, and everything depending on GPUs would quickly grind to a halt. AMD sells a tiny number of dedicated GPUs compared to Nvidia, and right now they have no spare capacity
You sure have a weird definition of it.
To make a quantitative claim, I'm not sure anyone would die immediately if Nvidia disappeared overnight, except maybe for a few traders. The potential long term casualties would likely be related to it possibly triggering a stock market crash, rather than first-order consequences of the company no longer delivering products.
Obviously, the disappearance of a company intimately related to logistics would be harder to mitigate.
> You don't get to pick and choose what other humans deserve
The crux of your confusion seems to be that you don't make a distinction between "deserve" and "need". Food and entertainment are both things everyone deserves, but only food is required for everyone to make it to the end of the month.
Besides, the usual definition of "essential" in economics is more about price elasticity, how consistent demand is, how spending on the category changes as income changes, etc. But whatever your parameters for that definition are, if you actually measure these things you'll see things that surprise you, and most of your results are going to be artifacts of how you categorize things. Lots of entertainment shows low price elasticity. Should dried beans and rice be in the same "food" category as foie gras? Is a Disney+ subscription essential to a working single mother of young children? Is heroin essential to a heroin addict? Are opiates essential to someone in chronic pain? Is alcohol essential to an alcoholic? Some would literally die if it were suddenly unavailable!
The category is murky, nobody can agree on what is or is not essential, nor even what its definition is: low price elasticity? necessary for life? necessary for a fulfilling life? able to be temporarily deferred in a crisis? All of these result in different lists.
> You sure have a weird definition of it.
As I feel like I've made quite clear: I do not have any definition of it, and neither do any of you. So let's not make policy decisions and economic predictions based on what is or is not "essential", please. People want GPUs, and you'll find lots of people who are more willing to give up their clothing and restaurant food than their GPUs.
Fair enough.
> and neither do any of you
Is this a kind of linguistical scorched-earth policy? I would like to know, because if we're going to be dishonest, there's plenty of other words we could start claiming have no meaning, until no meaningful conversation can happen.
There is actually a theory behind all this, based largely on the critically important fact that all models are wrong, but some models are useful. But yes, I recognize the futility of trying to fight this war in comment-sized battles in tangentially related Hacker News threads.
> until no meaningful conversation can happen
I believe accepting "all models are wrong, but some models are useful" is in fact a prerequisite for meaningful conversation, because otherwise people simply aren't even arguing about the same thing. What appears to you as a "linguistical scorched-earth policy" is something I can trace logically from that statement. Most arguments are actually arguments about definitions and categories, and therefore useless. I am trying to get people to abandon the category of "essential vs. non-essential" because it, like so many others, is arbitrary.
Yeah, but if the whole category goes away, not many of us survive. Isn't that what makes it essential?
> Nobody dies if they can't buy clothing
Huh? How do you figure?
And thus that the valuation of the Bell System must be based on pure hype. Right?
How many people died between 1812 and 1815 because there were no Trans-Atlantic telephone lines? About 30 thousand soldiers, wasn't it? Probably quite a few civilians as well.
I'd call the preventable death of 30 thousand men a disaster, wouldn't you? But in 1812 it was business as usual.
Would you say penicillin isn't essential, just because it's 1928 and people are accustomed to deaths from bacterial infections?
There's absolutely a reason to differentiate between essential and non-essential goods when talking about the economy. Why do you think the US runs a huge food production surplus? Why do you think publicly traded stock sectors include consumer staples (essential goods) and consumer discretionary (non-essential goods and services)?
I do not recognize that. That is the point of my argument. A large portion of economics is rich people trying to justify their own greed as being moral. Classifying goods as "essential" vs. "non-essential" is a way of telling poor people what they're allowed to have, and always has been. A good goes from "non-essential" to "essential" only when rich people are worried they'll get guillotined if the poor don't have access to it.
I'm aware that it has a definition in terms of what people are able to stop purchasing when their income goes down, or how consumption relates to income levels in general, but the former is a problematic definition for many reasons, and the latter does not actually coincide particularly well with the categories of goods people list off when they think of "essential goods". Humans in real life just don't respond to changing conditions the same way the little econs in your head do; they way you've decided they "should".
Ever heard that humans don't "behave logically"? Yeah, that's economists with overly simplified models being annoyed that (mostly) poor people don't act the way that they've decided poor people should act. See the trend?
Ask four economists write out a list of "essential goods" and you'll get five different lists. That is not how definitions work. Ask four mathematicians whether something is a Commutative Ring or not and they'll all agree. That's a definition. "Essential" does not have a definition. Its meaning shifts depending on which group the author of the Wall Street Journal op-ed you're reading wants to villainize this time.
Amusingly, there are at least 3 different definitions of commutative ring.
The principal issue is whether it must have a 1 (unity, ie a multiplicative inverse). Wikipedia https://en.wikipedia.org/wiki/Commutative_ring as well as most modern sources insist on this.
Britannica https://www.britannica.com/science/ring-mathematics#ref89421... as well as many older sources (such as Noether's original definition and van der Waerden) do not insist that the ring have a 1. Even first-edition Bourbaki didn't have 1!
Finally, if you do have a 1, then sometimes people include the condition that 0 != 1, ie the trivial/zero ring is deemed not a [commutative] ring. This is somewhat hard to find, but is relatively common among people who specifically define the concept of "ring with identity" (eg Zariski+Samuel). I have also found it unqualified (ie, just in the definition of "commutative ring") in the wild, eg in "Handbook of Mathematical Logic" by Barwise or "The Math You Need" by Mack.
(I agree with people like Conrad and Poonen that rings should have a 1. And I guess that the zero ring is in fact a [commutative] ring.)
In these circles is is generally safer to stick with car analogies.
And my point is that you're going to continue to be frustrated and disappointed by refusing to use the same terminology for a topic as everyone else.
> A large portion of economics is rich people trying to justify their own greed as being moral.
Nope, but that view explains most of your reasoning.
> Classifying goods as "essential" vs. "non-essential" is a way of telling poor people what they're allowed to have, and always has been. A good goes from "non-essential" to "essential" only when rich people are worried they'll get guillotined if the poor don't have access to it.
Good lord. Which of these is more essential for human life? Food, or a luxury car? Basic medicine, or a trip to a casino? No one is stopping "poor people" from buying things from either category, but people clearly prioritize one over the other when funds are limited.
> I'm aware that it has a definition in terms of what people are able to stop purchasing when their income goes down, or how consumption relates to income levels in general, but the former is a problematic definition for many reasons, and the latter does not actually coincide particularly well with the categories of goods people list off when they think of "essential goods". Humans in real life just don't respond to changing conditions the same way the little econs in your head do; they way you've decided they "should".
So you do acknowledge the actual definition, you just refuse to accept it because you'd rather rage against the machine? Have fun with that.
> Ever heard that humans don't "behave logically"? Yeah, that's economists with overly simplified models being annoyed that (mostly) poor people don't act the way that they've decided poor people should act. See the trend?
Rich people also don't behave logically, for the record. It's almost like this class war you're describing is a figment of your imagination.
> Ask four economists write out a list of "essential goods" and you'll get five different lists. That is not how definitions work. Ask four mathematicians whether something is a Commutative Ring or not and they'll all agree. That's a definition. "Essential" does not have a definition. Its meaning shifts depending on which group the author of the Wall Street Journal op-ed you're reading wants to villainize this time.
Congratulations on your discovery that economics is not a hard science.
You already said that essential does have a widely agreed upon definition above, so the rest of this rant seems odd.
And you don't acknowledge the actual definition, or you would have been asking about price elasticity, not what is or is not essential for human life. Plenty of people will give up Chinese takeout before they give up GPUs.
> Food, or a luxury car?
The luxury car, because it's grandma's old classic that Tom has kept in good enough shape to drive to his job, and he doesn't know how he'll get there when it finally breaks down, but he doesn't really have a penchant for fancy food and gets by with some cheap staples he prepares at home.
> Basic medicine, or a trip to a casino?
The trip to the casino, because Judy is getting evicted, and doesn't have any friends or family she can stay with, and won't survive the winter on the street, and hitting it big at Blackjack is unlikely, but desperate times call for desperate measures. And although she does sometimes take Tylenol for headaches, she's otherwise in good health and doesn't have any ongoing medicinal needs.
What are we doing? You're deciding what other people need for their lives?
> Rich people also don't behave logically, for the record.
Of course they do, because however they behave, they have an army of op-ed writers, sycophants, and apologists who spew out post-hoc justification for their behavior, and viola, their behavior turns out to have been rational all along.
Meanwhile, if the poor (and we are always talking about the poor when we are talking about "essential") stubbornly show an unwillingness to stop purchasing some good that some economist has decided is "non-essential", they're villainized and called irrational. Many of them even have refrigerators!
> It's almost like this class war you're describing is a figment of your imagination.
You choose now, in 2025, to deny that there's a class war? That's certainly a take.
You just listed two examples of discretionary items (prepared food is generally not considered a consumer staple).
> The luxury car, because it's grandma's old classic that Tom has kept in good enough shape to drive to his job, and he doesn't know how he'll get there when it finally breaks down, but he doesn't really have a penchant for fancy food and gets by with some cheap staples he prepares at home.
You're 0 for 2. That's not a luxury car, unless Grandma had a love of rare exotics that he should probably sell to buy food and a reliable car.
> The trip to the casino, because Judy is getting evicted, and doesn't have any friends or family she can stay with, and won't survive the winter on the street, and hitting it big at Blackjack is unlikely, but desperate times call for desperate measures. And although she does sometimes take Tylenol for headaches, she's otherwise in good health and doesn't have any ongoing medicinal needs.
And now you're 0 for 3. Your earlier comments are making more sense.
> What are we doing? You're deciding what other people need for their lives?
Most humans understand what is essential to sustain human life and what is not. In fact, every functioning adult I've ever met does.
The implications of the fact that you don't can be left for you or other readers to decuce.
> Of course they do, because however they behave, they have an army of op-ed writers, sycophants, and apologists who spew out post-hoc justification for their behavior, and viola, their behavior turns out to have been rational all along.
> Meanwhile, if the poor (and we are always talking about the poor when we are talking about "essential") stubbornly show an unwillingness to stop purchasing some good that some economist has decided is "non-essential", they're villainized and called irrational. Many of them even have refrigerators!
Not remotely true.
> You choose now, in 2025, to deny that there's a class war? That's certainly a take.
Whether there is or isn't a class war is debatable, but the one you've concocted that is led by economists is certainly not happening.
So an "old classic" (I was thinking a Mercedes) stops being a luxury car as soon as a poor person inherits it? Do you see how nebulous these categories are? How easy it is to just move the line whenever it suits your argument?
> Whether there is or isn't a class war is debatable, but the one you've concocted that is led by economists is certainly not happening.
I'll give you an economist who led the charge: Donald Regan, Ronald Reagan's secretary of the treasury and chief of staff. This was back in a time when people felt they needed to come up with a plausible-sounding excuse to strip poor people of their rights and keep them stuck in a cycle poverty. The banner was "Reaganomics", or "Trickle-Down Economics". You're so incredulous that the discipline of economics has anything to do with a class war that was largely started and still fought under the name "Trickle-Down Economics"?
All we “need” is food + water, shelter, and medicine (kind of). I’d guess people’s economic output doesn’t directly contribute to those.
So it could simultaneously be hype (very optimistic predictions) and yet still valued appropriatey by the market with future expectations priced in, just with some additional premium due to that demand/hype.
$XOM's current revenues are known and no one will suddenly be throwing billions at them for CapEx purposes. People are throwing billions at the general direction of $NVDA. That's the difference: which company has a better change of (growing) more revenues and profits in the future?
> The AI stocks nowadays are pumped up by pure hype, and it's inevitable that the market will recalibrate sooner or later
And until that recalibration happens you can buy now and see your holdings go up; then, once you're happy with the ROI (10%? 20%? More?), you can sell and realize your capital gains and have a large number in your account. Or you can not buy now and potentially miss the ride up.
Just because The Market™ is (allegedly) irrational does not preclude the possibility you can make money.
yeah, of course, that's how the whole deal works. I was just pointing out how most of it looked a bit crazy to me
That's the wrong way to think about it, because the stock price is about all future profit over time, not the current moment. Over the next 50 years, which one do you think will have made more profit?
Imagine you're in the year 1900, and you're comparing a light bulb company with a steam engine company. Industry needs steam engines, you say! Half the world would paralyze if they stopped working! Meanwhile, who cares about a light bulb company?
But you can understand why light bulbs actually turned out to make much more money moving forwards.
If we continue to go to electricity and go via solar, energy storage, wind and nuclear - you end up in a spot where oil and gas are limited.
NVIDIA has blue sky ahead of it -- are valuations totally out of line? Most likely. That said it has a highly desirable product globally. Oil is a valuable commodity but there are many other providers that could snatch up exxonmobil share.
Also if you want a better example -- good look at any critical supplier in the food space. Thats way more important - we lose that we get in a world of hurt.
Whereas the world (or, perhaps, a specific class of investors within a specific segment of the world) WANTS generative AI. The amount someone wants something (and, by extension, is willing to pay for it) is potentially unbounded, and can even be uncorrelated with real utility. (See: gemstones, trading cards, cryptocurrency...)
ExxonMobil has a market cap essentially infinitely larger than my local water supply and the farms that grow my food.
If farms where wiped out we a huge percentage of the population would no longer exist, yet they 100% are a commodity with low margins.
We don't value things based on long term risk/need
On the other hand, Nvidia is a result of the AI bubble. Oddly, though, there's a case to be made that Nvidia could come out of this, even after a correction, looking pretty good.
But what I really can't grok is how Tesla keeps an insane P/E ratio after several consecutive quarters of bad news. Or how Grok gets a high valuation without even anything close to OpenAI's money-losing revenue levels, while swallowing a decrepit old social media site. Or how that big rocket can keep blowing up without dinging the valuation.
They both use TSMC. If Nvidia disappeared, TSMC would have more capacity available.
"Make thing as fast as" = "make" is fast. Versus "Make thing that is as fast as" = now the thing is fast. Or use a word like performant which is less ambiguous and would obviously refer to the chips.
Can rephrase slightly and it's even more obvious: "I make chips faster than you". Or, "I make chips that are faster than yours".
The market in general is fairly highly valued when looking at the standard valuation metrics, but corporate earnings have been strong as well. That said, the most obvious grey swan would be the market concentration in the top names, which market cap weighted index funds do not avoid and indeed contribute to on a mechanical level. That said, the names will eventually swap around within the index, and as long as capital flows to US financial markets don't reverse (see the back to back 7% down days for market cap weighted indexes during the tariff scare) these rotations won't ultimately be a problem.
Beyond that though, it's not as bad as it looks at first glance. Other areas of the market have pretty large pockets of value, or at least more average valuations. Some names in consumer discretionary are still at the bombed out post tariff scare valuations (ex: LULU which is a good example of a name that had optimism and now has extreme pessimism and low valuation, ANF which has good earnings despite tariffs and is cranking buybacks sub-10 PE) and sectors like healthcare (you have to be a real contrarian to get in here, but when Buffett is buying the value proposition is usually pretty extreme), and energy (quality energy names like FANG trading near single digit PE with management that is showing extreme capital restraint in the face of uncertainty, for once). Smallcaps in general aren't that expensive, since they are on the back-end of the huge, crowded long/short trade (that has been unwinding for a few days now).
Even in megacaps it isn't all bubbly. Google has a lot of pessimism and isn't that expensive, which may or may not be warranted but it is a counterexample. The ridiculous valuations are quite concentrated in the AI related space, specifically in specific names which retail is obsessed with (ex: PLTR( or hedge funds are obsessed with (ex: GEV).
Luckily we have the lockdown era as a benchmark, when everyone was locked inside and Robinhood style option and stock trading, the SPAC craze, etc, was at mania levels. App proliferation today is close enough to the same as the 2020-2022 period, but it's a good point and sure, a portion of the increase probably does come from further online trading market penetration.
A rather large and probably counterfactual assumption, if the US continues, or even looks like it might continue, on the path it's been on.
I don't think "the market" has internalized how risky the US is becoming, and I think it'll take somewhere between a few more months and a few years for that to happen.
It's not just about chaotic dumbassness like tariffs. It's not just about disrupting the labor force for stupid reasons. It's not just about attempts to undermine the independent management of the monetary system. Those are bad, but worse is that the whole underlying system of institutions is being trashed. Random shakedowns are being normalized. Government (including courts!) is being deliberately packed with partisans and cronies.
For a really, really long time, the US has been a place where you could expect your counterparty to perform on a contract, and if they didn't you could expect the government to come to your aid, no matter who they were and even if you were a foreigner. You definitely didn't expect a "personal tax" on your company if you didn't suck up to the right people (or just because you happened to be handy). Oh, and you also didn't expect to be dealing with the kind of people a system like that selects for.
People just assume the US isn't run by gangsters, like they assume there'll be air the next time they breathe in. They're so used to that high trust that they don't even consciously factor the question into their decisions. It takes a long time for that kind of mental habit to change. It doesn't happen in a few weeks or a few months. But if US trustworthiness goes away (which it seems to be doing), and people figure it out (which they eventually will if it keeps up), then they're going to start assessing risk accordingly.
Admittedly some of the random stupidity and even more of the outright gangsterism seem to come from Trump personally. He's 79 and in theory he only gets 4 years regardless. But that doesn't mean that it all comes from him, and he and those around him are trashing institutions and norms really fast, in ways that are really hard to repair. It's a big gamble to assume that can or will be reversed by a successor, especially since the systems that are supposed to choose that successor seem to be being rigged to favor candidates with similar approaches. And it won't help you if you're out of business before then.
P/E ratios tend to be small only if revenue growth in nominal dollars is flat, which tacitly treats the stock more like a bond.
If you had only invested in companies with sane P/E in the 2010s you would have probably missed some of the biggest runs for companies that today are some of the most valued in the world.
Worrying about P/E is more for really big institutional sized investors who are very conservative because the loss of principal is far more difficult to recover for even small % of loss.
You are an individual investor who can probably recover losses with a year or two of salary.
Index funds offer some defense against crazy PE's through diversification, but keep in mind that when an asset bubbles, it also takes up a greater percentage of the index fund. The big tech stocks make up a significant % of the SP500.
Many of us consider macroeconomics to be out of humanity's wheelhouse. The divide between micro and macro economics is where the real science ends and the bullshit starts. Many of the findings in macroeconomics are politically motivated, tenuous, and haven't reproduced well, just like in the other social "sciences".
I asked "a friend":
• Meta (META) ~3.1 %
• Alphabet (GOOGL + GOOG) ~3.8 %
• Tesla (TSLA) ~1.6 %
So just under 9%. Significant, I suppose, for just 3 of 500 stocks.
EDIT: since "etc." was mentioned, I thought I'd toss in some of the other top stocks in the S&P500:
• Apple Inc. (AAPL) ~6.7 %
• Microsoft Corp. (MSFT). ~6.6 %
• NVIDIA Corp. (NVDA) ~6.0 %
Amazon.com Inc. (AMZN) ~3.8 %
Another 20% or so. So the above seven stocks comprise about 30% of the S&P500 (Apple, Microsoft and NVIDIA are the "Big 3" at about 20% when combined).
I would assume VT and/or BNDW. Most sane index fund fans aren’t all in on s&p 500.
The question is do you think you can get 35 years of this level of earnings out of a company. If yes or more then it makes sense. But a whole hell of a lot can happen in 35 years.
But I agree with the general problem of auditing advertising and performance. I've tried advertising on FB and my metrics never showed half of the engagement that they claimed.
So, yeah it’s sort of like using that logic. Not exact as a dollar 35 years from now isn’t now, but you get the gist.
What they probably should start doing is paying a meaningful dividend to shareholders because they've repeatedly demonstrated they aren't capable of producing additional shareholder value with new product/business lines, but I don't see that as very likely in the near to medium term.
That's because it's more risky for the careers of the decision makers to hand cash back to shareholders and say they don't know what to do with it than it is to lay claim to some moonshot with a < 1% chance of success.
NVDA, AAPL, TSLA and PLTR are together ~16% of VOO at the moment. NVDA alone is ~8%. Berkshire Hathaway is about the same % as TSLA, 1.61%.
Don't underestimate yourself! A lot of times when something seems stupid and socially corrosive, it is. I don't think there is any reason for margin trading other than it makes a few people a lot of money.
Perhaps there is a different valuation metric relevant for a nearly sovereign entity. Nobody is buying shares for "money returned to shareholders", because nobody is using shares as a conduit, the corporation relies on a low-float to pump their own stocks and delete the shares in buybacks that squeeze the price.
> buybacks
I'm not sure you understand what a buyback is, and given that display of ignorance, I don't see why anyone would care about your (entirely unrelated) observation about Palantir.
buybacks are more efficient but only pump the shares on the open market, by nature, some shareholders are essentially getting money returned, but primarily its to reduce scarcity so all shareholders just have higher value shares for utility at their own discretion
"Higher value shares for utility at their own discretion" = negotiable securities = money.
This conspiratorial "some" is...not a good sign that you're well calibrated enough to tell me what long-dead companies Palantir is or is not like. I'll take my critiques of Palantir from people who understand what they're talking about.
you are trying to make a point about me but provided none, while agreeing with what I said
that was…. predictable
Let me see if I can put my point a little more politely. There is basically no economic difference between dividends and buybacks, apart from some tax technicalities. When people talk as if dividends are good and pure whereas buybacks are somehow evil and decoupled from reality, it is almost always drivel.
You seem to have a notion that shares, in their untampered state, should be "conduits to return money to shareholders via dividends". But it really makes ~no economic difference whether the shareholders get direct returns via dividends, versus indirect returns via buybacks.
And I really don't understand what connection you see between this minute distinction, and your point about Palantir being a "nearly sovereign entity". Perhaps you could spell that out.
I don’t find buybacks to be controversial, I find the Price to Equity metric to be controversial and its relevance up for review because it is based on the idea that there will be future yield in the form of dividends, and people muse about or lament how many years it would take for a shareholder to ROI from dividends at a certain share price.
But since that is not a market reality the PE ratio can be ignored as its not about the time horizon or tolerance of shareholders.
Palantir specifically has government contracts, very large ones, and is in a position to create and be selected for more contracts. Tightly coupled with this administration and the domestic and geopolitical environment.
That's just the flip side for individual investor. There is also collective risk.
The worst comes when there are too many investors with margin debt and they start to get margin calls at the same time. This causes prices to drop and it triggers even more margin calls, starting an avalanche where stock prices drop just from forced sells.
See Archegos Capital, Evergrande in China, 2008 financial crisis, Citadel (the hedge fund) with assets almost equal to "securities sold not yet purchased", etc.
Then there's just tons of crime like JP Morgan making 10 billy by spoofing gold prices and then paying a 1 billion fee to pay off the complicit regulator and be able to "keep playing".
It'll pop, the question of course is when? Ponzi's can go on for decades before something breaks.
Bank balance sheets are conservative currently.
>It'll pop, the question of course is when? Ponzi's can go on for decades before something breaks.
Tautological. Broken clock right twice a day, etc etc. We had a massive collapse in March 2020, and in 2022 when the banking system was pseudo-nationalized/backstopped. If you're still waiting for "the collapse", it begs the question about how one was positioned for those events. Frankly, I saw many people cruise right through 2022 without ever switching to bullish, even when Meta was single digit forward PE and such. As someone who was managing a portfolio that heavily deployed after the Fed backstopped the banking system, I clearly remember that this moment (which was one of the best moments to buy in the last decade, and offered a long list of ludicrously low valuations, especially on the fringes ex: I was buying Chinese companies for less than half of the valuation of the cash on their balance sheet, with the actual business with PE under 5 included for free), retail and institutional sentiment readings were the most pessimistic since the Great Depression. Likewise, stepping away from the AI bubble there is a long list of extremely low valuations in the current market (companies with PE under 8, buying back 15% of its shares every year, for example, or energy companies sub-10 PE with conservative balance sheet management, which has been a huge positive shift in the industry, yet everyone wants AI stocks at 300x forward earnings).
During the pandemic, I bought energy stocks near the bottom. Remember when the price of oil went negative? I was watching CNBC at the time. I felt either the world was ending and none of this mattered anyway, or it was a great time to buy. The fund I bought (VDE) is now up almost 150%. And I'm getting a great dividend, relative to my initial investment.
I got good deals on AMZN, GOOG in 2022. Bought them all under $100. I got a good deal on AAPL, too.
The banking problems in 2023 was a good time to get into bank stocks. I started averaging into a regional bank fund and it's done quite well.
My advice to the average retail investor is simple: don't panic.
Hmm ... so for us inattentive investors, buy VDE?
To do it the easy way, maybe a quant factor overlay with Quality factor? I'm sure there are ETFs doing that for low fees. But the juice is really from the smaller and midsized companies which still trade at a discount because of the expectation that geopolitical risks and lower oil prices will cause havoc in the sector, and then you drill into the earnings call and the CEO is going "we've frozen over half of our planned investment, have redirected some of the cash to increase efficiency of older sites to boost efficiency at the expense of growth, and all cashflow is being split between paying down debt and buybacks."
Suddenly the outlook becomes considerably brighter. I just have a small basket that passed all of the screens, and check in every earning's call to make sure they aren't drilling too many holes or doing obscene M&A from boredom. It's a complex industry, but it's also a simple one. Mostly comes down to drilling holes...
Yep, liquidity matters so much in the short run, and people getting margin calls will get disproportionately hurt. It's the same reason why GME shot up in price even though it was just marginally profitable, all the liquidity dried up, and there was still pressure on the buy side. I'm a big fan of Taleb when it comes to finance: the #1 rule should always be "don't blow up." Trading on margin is a good way of allowing that to be a possibility.
Jul-25 $1,022,548
Jun-25 $1,007,961
May-25 $920,960
The graph simply says to me: "More money has been invested in the market over time, the market has generally been worth more over time."
However, there can be money created by the market, because people and companies can borrow money while using the value of the assets they own as collateral. This borrowing does cause new money to appear from thin air, which means that the market is a source of money, not a sink. As this borrowed money increases the money supply just like physical money-printing would, the price of assets tends to rise along with it, as much of that borrowed money gets put towards buying those assets, increasing the number of buyers, and someone has to be convinced to sell.
This creates an unstable feedback loop of rising borrowing against rising asset prices causing higher asset prices, and it can of course operate in the reverse mode as well, where falling asset prices result in loans being called in, causing the money supply to shrink, pushing asset prices down even further.
(This crash is not a necessary outcome; if the assets correspond to productive investments and real growth, this results in abundance which can in various ways allow those debts to be held or paid off without falling asset prices.)
The US was borrowing based on nothing and eventually people figured that out and wanted to trade the nothing for gold which prompted the US to "fix the glitch" and stop gold redemption.
It's not like leaving the gold standard caused us to borrow based on nothing; we already decided to do that.
While the absolute dollar value of margin debt is at an all time high, margin debt as a percent of total stock market value is still significantly below historic levels.
[1]: https://www.gurufocus.com/economic_indicators/4266/finra-inv... [2]: https://en.macromicro.me/collections/34/us-stock-relative/89...
If the dollar inflates away, then you need to grow just to break even. And it's advantageous to have debt denominated in a devaluing thing (in this case dollars).
Now every retail investor, and really everyone with an internet connection knows what's going on and are trying to take action accordingly.
Then there is the outlook on inflation, which most lay people were not thinking about until recently. Most people think of longer term inflation as "economy good" or "economy bad", and often falsify their true outlook, instead signaling a political allegiance. In 2025, Trump is in office, so Democrats might signal "inflation go up, economy bad", and they would have signaled "inflation go down, economy good" when Biden was in Office a year ago. The reverse is true of Republicans.
Now, everyone expects inflation to continue and even accelerate in the long term. And people are worried enough to take action in the form of more loans, more investments on margin, holding less dollars, etc. And now everyone knows that everyone else is doing this, which is the "emperors clothes moment".
People are much less likely to be taken seriously if they express that inflation will mostly be a function of who is in office, rather than an inevitability of the American political system. If someone you cared about expected there to be no inflation, you might become concerned for their ability to financially plan.
So now we all know, and we know that everyone else knows, and we aren't trying to hide our outlook on inflation in conversation because it's now worse to look stupid on this topic than miss a signalling opportunity.
TLDR: what was once a low consequence signalling opportunity, is now part of serious financial planning.
Or, to quote Peter Lynch: "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves."
That said, I think 2025 is too early for the AI bubble to pop. Even Burry was buying CDS in 2005 [1] so if you're seeing something your convinced is a crack right now it's going to take a few years to actually fracture.
- 2000 -- Followed by a crash
- 2007 -- Followed by a crash
- 2011 -- (ish) USG added a bunch of money into the system
- 2015 -- Counter example?
- 2018 -- Counter example?
- 2021 -- Large crash, USG added a bunch of money into the system
- 2025q1 -- Tariff crash
- 2025q3 -- Too early to tell
There Is No Alternative
- Gold? Dead asset
- Cash? Good luck with inflation
- Bitcoin? My ass…
So what else can you do as a rational investor than to invest most of your cash into an S&P500 or World fund?
Every time the market takes a crap, I buy. I rarely sell. Keep enough cash or near cash assets in a no penalty account(s) to cover unexpected costs so aren't forced to sell.
A luxurious set up for sure (which took about a decade to get set up) but it's repeatable and fairly stable.
Now, if you have real wealth (like $10s of millions of liquid assets) then look to setting up a MFO or SFO and focus on tax efficiency, etc. That's a whole different set of strategies.
So US Treasury securities instead of cash right?
And then every time there is a dip, sell the treasuries and buy ETFs?
Urban residential real estate is also a safe haven assuming you still are allowed to invest there. Demand is not going to shrink any time soon (as most Western governments are running rural areas to the ground for them being too expensive to bring on modern standards and expectations in infrastructure), and supply is so scarce that even large developments and re-zoning will hardly make a dent in demand.
https://www.bogleheads.org/wiki/Alternative_indices
Dividend weighted indexes are the classic option, and fundamental weighted index are a newer one.
Perhaps we should be buying up Yuan…
Buying the yuan on the other hand is directly taking a stance against CCP state controlled currency policy. A less advisable and knowable bet.
I mean it’s a dead asset class since it doesn’t fund any economic activity. It’s just a store of wealth
We might as well just enjoy the ride knowing at least when it hits the bottom, we'll all of us be in the same tough spot.
But at the end of the day the only way to profit from an investment is taking some risk. It all comes down to pricing that risk.
What? Gold is at a record high, and with inflation it will only go higher.
https://www.macrotrends.net/1333/historical-gold-prices-100-...
In nominal terms perhaps, but in inflation adjust terms it's roughly what it hit in 1980:
* https://www.investopedia.com/gold-price-history-highs-and-lo...
https://graphics.thomsonreuters.com/11/07/CMD_GLDNFLT0711_VF...
And there have been long (10y) stretches where it's remained flat: it takes a lot of patience to HODL through something like that. Even if equities (e.g., holding an index fund) are flat at least you get some yield.
With a pure commodity play like gold (or BTC) your only way of returns in price appreciation.
Inflation.
And what’s happening now?
Gold was high in 1980 specifically and dropped after 1980 even when inflation was still high.
Gold also had a peak in 2012: was there inflation then?
> And what’s happening now?
Nothing. Inflation peaked in February 2023 and has been dropping ever since:
* https://fred.stlouisfed.org/series/CORESTICKM159SFRBATL
Gold didn't start going up until September 2023 and has been rising. Gold and inflation are currently inversely related.
So I'd say it's the same as having cash under your pillow.
I give my cash to you, and, as exchange, I will own a (usually small) share of your company.
Then you’ll hopefully be successful and my shares will raise.
Good for you. Good for me. Good for society since you created jobs.
https://fred.stlouisfed.org/series/FEDFUNDS
But they can't do this for much longer, inflation is the first sign, which is why Trump is raising tariffs.
You can see Bond prices going up. Trumps tarrifs are aimed and lowering T Bill rates:
Trump is raising tariffs because he thinks they are a good idea and has since the 1980s:
> “The fact is, you don’t have free trade. We think of it as free trade, but you right now don’t have free trade,” Trump said in a 1987 episode of Larry King Live that’s excerpted in Trump’s Trade War. “A lot of people are tired of watching the other countries ripping off the United States. This is a great country.”
* https://www.pbs.org/wgbh/frontline/article/trumps-tariff-str...
Trump's mindset is a 1980s NYC real estate guy (zero-sum, one-off games), which when applied to global trade, is basically mercantilist:
* https://en.wikipedia.org/wiki/Mercantilism
Meanwhile, in the real world, commerce is often non-zero-sum (both parties get something of value, i.e., "win-win"), and you play multiple rounds with each trading partner and reputation matters (rather than one-off, where burning your bridges could be an actual strategy).
I question this bit. (That may be why he's raising tariffs; I question whether it will work.)
When tariffs go up, prices go up (delusions that "other countries will pay" notwithstanding). That shows up in inflation statistics, which in turn will (probably) show up in T Bill rates, but as a higher rate, not a lower one.
Except... tariffs might be a one-off increase. They may not compound the way "regular" inflation does. So maybe it will work in the medium term?
Seeing as how Trump appointed the author into his political circle though could be evidence this is the ultimate goal.
The paper is quite lengthy, however, in the beginning Stephen explains this idea of the Triffin Dilemma. A country that acts as the worlds reserve currency and thus creates enormous demand for their currency for things outside of goods are at a disadvantage that exasperate their trade deficit. This is implicit for a countries currency where most global trade is settled in their dollars, not to mention the benefits of holding the world reserve currency as a value store or investment.
I've wondered since the tarifs were announced how much impact they can actually have, but besides that point what is a reserve currency country to do? Give up their reserve currency status? There are significant downsides to that as well...
[1] https://www.hudsonbaycapital.com/documents/FG/hudsonbay/rese...
Global equity index ETF have reliably yielded 5% returns over 12-15 year periods for ~75 years.
And when do you get back in?
Sitting in cash, waiting for the dip, is a losing strategy (even if you knew when the dip will occur, which you don't):
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
Simply put in a little from every pay cheque.
If you think things are too wild, invest in an ("all-in-one") asset allocation fund that is not 100% stocks (e.g., fixed 80/20, 60/40):
* https://investor.vanguard.com/investment-products/mutual-fun...
* https://www.ishares.com/us/products/239729/ishares-aggressiv...
* https://investor.vanguard.com/investment-products/mutual-fun...
* https://www.vanguardinvestor.co.uk/investments/vanguard-life...
* https://www.vanguard.ca/en/product/etf/asset-allocation/9579...
* https://www.blackrock.com/ca/investors/en/products/239447/is...
or a target date fund (which increases bonds as you approach your retirement date).
Completely (retirement and 'regular' brokerage)? What criteria (if any) will you use to get out of cash and start buying again?
When it does happen, he will be "right" even though the opportunity cost for holding this belief is huge.
Soooo, yes there will always be future recessions, annnnd "professional experts" are saying it's coming sooner rather than later based upon the amount of over-inflated investments in less-well-run companies as they chase the profitability of the more-well-run companies.
But “this time it’s different” because… AGI…?
Just yesterday, the guy who was found liable in court for financial fraud demanded an FRB (Lisa Cook) resign after being accused of mortgage fraud. Do you suppose somebody in the WH is digging up dirt?
And of course, weekly rants, accusations of fraud, and musings of firing JPo.
Perhaps investments in undeveloped real estate....
You’re more precisely short rates.
I know people stressing 24/7 about their money, diversifying their crypto shitcoins into pokemon card collections, buying watches or old apple computers in the hope they'll be able to sell them for more to the next sucker, buying and selling defense company stocks secretly hoping more poor souls will get annihilated in Ukraine or Gaza because it's good for their $$$. They're loaded like never before but I've never seen them so tired and miserable, I bet they don't even know why they want more money, hairless apes seem to like when numbers are getting bigger
And on top of that if shit truly hits the fan the vast majority of these will be completely useless.
So we’re back to 2007 now.
If everyone you know stressing about money would actually be fine if they stopped stressing they are all very privileged. That's not reality for most people. This is not a silly game, and it's frankly ridiculous for your advice to be "find plot of land, build a house."
Most people shouldn’t be managing their investments. The difference in return even if correct on smaller sums is often less than one’s labour is worth. If, on the other hand, it’s material to you whether your portfolio goes up or down by single digits, real estate is and should be part of that mix.
I'm just sharing my experience, I know a bunch of relatively poor people (household with 2 min wage) who have kids and are paying their mortgage. I also know a shit ton of tech workers making $$$ who spend more than the combined income of the former households on pokemon cards and crypto coins every single month
> If everyone you know stressing about money would actually be fine if they stopped stressing they are all very privileged.
Well yes, that's my point, stop buying bullshit and start building a future, it's way less stressful to spend all of your money on a plan rather than spending it on future hypothetical gains that might or might not materialise depending on variables you don't even know about.
I'm assuming you are talking longer term.
A permanent allocation to gold is one option. These days it can also be done via overlays so that equity exposure can stay the same.
TIPS work as inflation protection. Move some bond exposure to TIPS.
CTA/trend following is a great addition to a portfolio when it comes to protecting against stagflationary scenarios. Again, this is fairly easy to access via ETFs these days.
How about international diversification? This is something even super conservative voices like Bogle would recommend. Again, easy to access via ETFs.
Another good idea if hedging is on the mind is stepping away from the market cap weighted indexes to some degree. Add some small-cap value for example.
There are other options as well that can be done on a portfolio level, but it can get more advanced from there.
The most important thing is to have a consistent framework that one can stick with for decades. Especially when it comes to having a truly diversified portfolio, it tends to be that unfortunately some people have a hard time handling it. If you are truly diversified you should always have assets in a portfolio that are performing poorly, and performance may be bad for entire decade-long market cycle or two. Ex: if trend is performing badly during a strong equity boom, it was protecting against lines that didn't happen to play out, but that doesn't mean that the realized situation nullifies the holistic diversification benefits.
Also, it gets more difficult if part of the equation is matching or exceeding S&P returns on an absolute basis. S&P has high returns but sees high drawdowns up to 50%, well more diversified approaches maybe less volatile and see more mild drawdowns. Because of that, usually most people would be better off with some mild leverage if they take a more diversified approach that switches out equity for less volatile assets like gold. Ex: 60/30/20/20/10 (equity/bonds/CTA/Gold/TIPS).
And it's also worth noting that there has been strong divergence between the ADR Chinese market and the onshore Chinese market that westerners don't generally have access to, so tread lightly there as well because there is no guarantee the ADR paper trades as it "should".
For example, I was invested in China Mobile, but it was delisted from western exchanges after an executive order from the US added it to a blacklist due to Chinese military connections (which Chinese SOEs tend to have...)
I also wouldn't recommend investing in Chinese banks in particular without understanding their credit landscape and the regional/central balance of power related topics. Know what you own and all that. I often have China positions on in the portfolios I manage, but imo it's mandatory to keep track of the communist party meetings and statements and such. It's not a free market, so investing decisions are anchored off of the chinese communist party political machinations to a large degree. When China decides on a new initiative like reigning in the tech space and making an example of the tech magnates (which literally erased some hot public growth sectors to near zero overnight), or engineering the controlled explosion of the housing bubble, you can't be ignorant of the active narratives. Especially difficult is that non-Chinese language news and analysis is often radically off the mark from intra-Chinese messaging.
If you want a fire and forget it approach, this may be one of the few examples of a market where conservative active management with a focus on giving Chinese exposure to western participants may be prudent, as they can sidestep the long and esoteric list of known risks. But even then it's tough if one is in a jurisdiction exposed to, say, US blacklists which can wipe out an investment overnight and wreak havoc in a portfolio.
At a 6% rate though, this is very risky. Your hurdle rate is just below the average market return rate. There are better ways to gamble on the market if that's what you want to do-UPRO and TQQQ come to mind, as well as options.
Right up until the moment you shouldn't. And for utlra-wealthy people, corporations, and VC firms they can weather that storm. You can't.
Let's not even get into the fact that in jurisdictions with wealth taxes and interest deductions from income levering up actually "cuts" your tax bill.
Ideally the best markets to get into now are probably healthcare which is about to have a raft of medicines, energy which is going to be the shovels that everyone needs to power the AI. Transportation is always a good bet and shorting palantir to go long Exxon might be worthwhile so long as you don't do so on margin.
Margin is generally bad. Having a basket of commodities tided inversley to margin would probably be a good idea. Buying currencies and holding as an inverse proportion of the margin in their stock markets?
There's no question that economies are cyclical. The only question is where we are in the cycle.
Was it the COVID checks they sent out? Might be a good thing to do in the next recession...
But this current state of margin debt, I do not like at all. That with the reduction of new home construction.
The magic money we sent out is the cause of a lot of the problem we're facing now though, it's not like you can print magic money every 5-10 years to extinguish systemic problems
So, inflation.
Do you know that banks in the last 15 years have been getting free money and then lending to people at rates from 5 to 29%? Does that not make you mad?
Who does matter are the white collar upper-middle, upper class people. They generate the most value and spend the most money. These advanced sectors are the american economy. And what happened to them during the pandemic? They just stayed home and kept working, thanks modern tech.
However the government responded like it was still 2005, where there was no tech to keep things moving, and created an incredibly stimulative environment for an economy that was largely still doing fine. By the end of 2020 GDP had recovered.
Despite this we still got:
- 0% interest rates, this is the crack-cocaine of the upper class, especially when the actual economy was doing fine.
- Pause on student loan payments, this was massive, most of these people were employed making more money than ever
- Pause on rent, another massive boon, again people who didn't lose their job now are not paying loans or rent
- PPP loans, pretty much a straight handout to business owners, who again, were still in business anyway.
- Child tax credit, the child tax credit was almost doubled for anyone who had a kid(s).
- Unemployment benefits, this is getting away from upper class territory, but lots of lower class workers were getting 2x pay while not paying rent or working, which they took right to spending.
- Stimulus checks, the most visible but least impactful, everyone got a few thousand dollars.
The guys who clean the stadium and sweep the court are needed for the games to happen. They are called the backbone of the stadium because they provide support. But the economic backbone of the stadium, the ones making the whole thing worthwhile, are the players, and unsurprisingly they are paid the most. It's not nice to say that, but I doubt you ever paid $80 to buy overpriced beer and snacks to sit in a seat to watch someone mop a basketball court.
The bedrock of the US economy are high skilled high compensated workers. The US is an advanced economy. Hits to it's cashier, shelf stocker, screw turner, or retail worker are not really meaningful hits. If they were, the economy would have collapsed in 2020. Instead it became clear that the "players" weren't taking a hit, they were just working at home, and the economy ripped as uneeded stimulus for them poured in.
2020 was hugely disruptive and the stock market did tank for a while. But the actual impact on labor was relatively modest? Cashiers and retail workers largely continued to do the same jobs, which are necessary for a functioning economy. Hospitality and travel are what got hit (and covered by PPP).
Covid cheques which in some countries only went to persons in the former niche category I think had less remarkable impact than the broader factors.
The irrational/solvent saying has never been more true, and it has been irrational for almost 20 years because we never paid the piper.
We didn't? '21-'23 was a bloodbath on the market. How that was spun as not being a recession is mind boggling to me.
https://www.dallasfed.org/research/economics/2022/0802
If we did, it was seemingly mild in hindsight.
That's pretty much the consensus.
Also, remember that markets are most responsive to rates of change, which is an important angle to consider beyond the hard recession definition. It may have technically been a mild recession, but the rates of change in many areas were extreme and had some fairly catastrophic consequences (for example, fixed income/rate volatility getting so high that systemic risk skyrocketed and Fed intervention was required).
We may well be approaching a dotcom moment, but this kind of graph automatically exaggerates what's happening more recently.
The only thing thats almost clear is that as you get closer to now, margin debt is more closely correlated to S&P growth.
In terms of lead/lag, its not that reliable.
The numbers in the chart show the opposite: the debt-to-market-value ratio is very clearly below its long term trend.
I mean, yes, the debt is at a "record high". But so is the market's value!
Says everyone always. I've watched my cash savings inflate away like crazy over the last few years. Basically anyone who doesn't hold real assets is screwed at this point.
This sounds good on paper until you realize that inflation numbers like core CPI are tied almost entirely to consumptive costs. For anyone saving cash with the hope of buying assets like a home at some point, you're watching that move further and further away every day. So you're left to either deal with the stress of taking part in the madness of this market, or watch your chances of ever owning anything slip away.
Housing affordability is at extreme historical levels, housing sales have fallen through the floor. Looks toppy. Everyone knows interest rate cuts are coming sooner or later, but historically, cutting cycles often coincide with economic slowdown and weakness that has a bigger impact than the cuts themselves. I don't think getting over 4% per year compounding is a bad place to be at all, even when looking at housing prices. Or looking at longer duration, you can get 5% for decades now. Will shelter continue rising for 5% per annum every year from here? Maybe, but it wouldn't surprise me to actually see further deceleration or even (god forbid) a tick down in some of these readings if we see some modest layoffs.