I'm sure trading on margin is for some reason actually a positive concept for the economy at large for reasons I can't understand, but god damn does it feel like a bad idea to see huge spikes of debt to prop up what already feels like an absurdly out of balance market.
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...
The thing is, you can simultaneously be completely correct about the market being insane, while also entirely wrong in expecting it to behave in a sane way.
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.
> Cue the famous quote: “The market can remain irrational longer than you can remain solvent.”
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.
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).)
Index funds won't necessarily save you. 7.5% of the S&P 500 is NVidia, 7% is Microsoft, etc. Almost 40% of the S&P 500 is in the top 10 stocks, and of the top 10, only #9 Berkshire Hathaway is not big into AI.
Index funds aren't supposed to save you from a market setback. In a correction or crash, you will lose money. They merely save you from the total ruin that can come with leverage, or from thinking you can outplay the stocks or options market as an amateur.
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.
The OP still has the same basic problem.
- 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.
The Canadian funds like VEQT/XBAL/etc are overly concentrated in Canada on purpose because it reduces volatility:
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).
>> Index funds aren't supposed to save you from a market setback
That's what bonds are for!
Depends on the index. The usual ones are indeed market cap weighted, and so adopt the overvaluation of bubble stocks, but there are indexes which are weighted otherwise, in an attempt to avoid that. One example is the RAFI fundamental family of indexes:
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
Whereas those of their benchmark, the Solactive GBS United States Large & Mid Cap Index, whatever that is, are:
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 1.3
Glad to see a fellow fundamental indexer on HN! As a US based investor, I personally invest in the RAFI US broad market fundamental index (FNDB ETF) which does keep up with the Vanguard US total market over the past 10 years except the bubbly years of 2020/2021 & 2024/2025, even with a higher expense ratio.
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.
2012 was a long time ago. I'm more inclined to Value myself, but has it held up?
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...
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
My comment was originally much larger, but I trimmed it because it was muddying my original point.
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".
You're certainly right that indexes like these don't benefit from the bubble!
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:
HMWO is 5.5% NVDA. It's not significantly different from the S&P 500. Any world cap-weighted index is going to have the same issue.
Exactly, yes. HMWO is the "normal" cap-weighted fund here, PSRW is the RAFI fund.
> Index funds won't necessarily save you.
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:
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:
The concentration isn't the 'fault' of indexing per se. There are two styles of indexes used by funds/etfs.
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.
Check out RSP as an alternative to IVV.
there's very little psychology left in most of the market.
There's computers and computer logic.
> I have a vague theory that as the amount of wealth inequality in increases in a system along with excess money printing (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general.
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 had no idea Keynes had similar ideas, so I definitely should read his work (and economics literature in general).
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”.
Humanity have always had markets, investment has been a thing for thousands of years, while economy growth wasn't something people expected until something around the middle ages.
You probably won't get a lot to support that idea on the literature.
Financial markets and capitalism has only existed for ~300 years, even if trade did happen since the start of recorded history.
The Romans had private ownership of land, mines and early industrial concerns (e.g., steelmaking) 2000 y ago. They had a legal system to protect the interests of investors. Also, professionals specialized in providing various financial services.
And capitalism with unlimited ability to print money has only existed for 53 years. And capitalism with actual unlimited money printing has only existed for 17 years. These aren't ancient systems or part of fundamental human nature; they're modern experiments.
The restriction on how much money banks can print has only some 200 years. A while before that, banks invented unlimited money printing, and a while before that banks were completely reinvented as regulated entities because money was coming and going without control...
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.
Calling these things modern experiments even though nothing fundamental has changed since the Roman age seems pretty foolish.
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.
> Calling these things modern experiments even though nothing fundamental has changed since the Roman age seems pretty foolish.
I just told you two things that changed within a human lifetime, and you didn't even read them, so the conversation ends here.
Money printing does directly impact inequality, via the Cantillon effect; in most cases, the printed money is put into the system in a way that disproportionately increases prices of assets that are held disproportionately by the wealthy.
> there is just nothing to invest into.
I think you have just defined gold and bitcoin to be "nothing".
Sounds about right.
True investment is when you put capital into a project or endeavor that is expected to earn rewards beyond its future sale price. You open a restaurant, and sell meals for more than the cost to make them. If your only hope is that 3 years from now you can sell the restaurant for more than you bought it for, it's no investment. Even if gold will be worth more, it won't make more of itself.
A post-truth environment adds to the ickyness of the feeling: on top of the bubbles, we've got RFK Jr. deciding the fate of biotechnology companies. Having a tech bubble at the same time science is being vandalized at NIH and in universities looks pretty damn dark.
Not just RFK Jr. The rest of the government requiring a 15% kickback from Nvidia and AMD to approve GPU sales to China, and the CEO of Intel being told to resign.
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..."
Conservatives have never been that party. They've always been the part of making the rich richer and the powerful more powerful by whatever means seem to work today. In the past free trade seemed to do that. Now arbitrary trade restrictions seem to do that. Or at least they feel so.
Yeah its important to decompose those two sources (among others) of "money printing". The obvious one people think most about is when our federal government does it. But a more concerning one is: Enforced banking reserve ratios. If a bank holds a trillion dollars in assets and is allowed to hold a reserve ratio of 10%, they can print $10T out of thin air, because they're allowed to issue debt up to that amount.
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.
Yes, but with the “revolving door” between private financial institutions and government financial policy/regulation, there’s little real distinction anymore between the two.
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.
Reserve ratios have not been the major capital constraint for a very long time. Loan to deposit ratios have been. And those have stayed in normal bounds since the great financial crisis. Both bank regulators and importantly bank investors keep on top of this because they are the ones to lose the most if it gets out of wack.
The reserve requirement had to be loosened because banks became too conservative, largely because their investors were skittish about ldr.
You think that there might be a "quality to the quantity" wrt deposit levels after years in an ultra-low interest rate environment? IIRC, deposits in SVB, FRB, and Signature combined outsized WaMu, with the difference being that WaMu was one of the largest banks in the country, while the average person had not heard of Silicon Valley Bank et al. until the day "Silicon Valley Bank Fails," lit up headlines.
At least in the svb and frb case high ldr contributed to the bank runs that ended them. But note in this context frb at .96 was seen as bad and svb at 1.6 was disastrous(.7 is good).
Thats the real brake on money creation by banks, not the reserve requirement.
This is a misconception afaik, yes there is no longer a literal percent reserve requirement but banks are still required to be “adequately capitalized”, the metric is just more complicated now.
Doesn't our federal government set reserve ratios? They may not be creating money, but by setting the ratio (and other limits), they at least have a strong influence on creation.
Another source in the last half a decade or so is digital coin "mints."
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.
I wish I could print 400,000€ to buy a house with 40k in my account.
Isn't that a mortgage?
All you need is some deposits
> I have a vague theory that as the amount of wealth inequality in increases in a system along with excess money printing (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general.
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.
You are right - it's about the inequality of holding the money, not the rate at which it's printed. Money printing is relevant to the extent it mostly flows towards the already rich. If money was printed and distributed to everyone evenly it would have the opposite effect.
That can easily be explained away in that the wealth concentration was a symptom of vertically integrated hard network based implementations (railroads, logistics, shipping, extraction), and the Gold Standard may have braked some level of wealth inequality acceleration and centralization to a degree, but that the trusts and business structuring were the cause moreso than any inherent tendency toward gold as basis to full fiat.
That explains why we're seeing what we're seeing now. It's all about network monetization.
If the very most you need to live on is 10 million. You can gamble the rest. Buy apartments, jack up the rents like crazy worst thing to happen to you is that people may move out. Buy stocks on margin, win some loose some. The real economy your play toy.
Not sure why you're being downvoted. Word "gamble" too inciting? Maybe if you'd used "much more risky investments" instead, but I'm not here to quibble about your language but to agree with you and extend what you're saying. I actually think the $10 million number is also relative to age because someone who's 30 and "merely" a millionaire can and will invest up the risk ladder as if they're a 50-year-old risking their above-$10 million capital. And the population of people who are millionaires vs decamillionaires is of course a healthy multiple so there's a lot more risk appetite than the relatively small number of decamillionaires would suggest.
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.
>I have a vague theory that as the amount of wealth inequality increases in a system along with “money printing”...
This is well understood by some schools of economics. It's called The Cantillion Effect.
Notably, very little of the US economy is plausibly basic needs (a roof over ones head, basic nutrition, actual basic medical care, etc.). The vast, vast majority is essentially luxury goods and services, but Americans have been conditioned to think what the rest of the world considers luxury is actually basics.
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 fixer upper small house in a less desirable area
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.
What I’m referring to is random suburb and/or middle of Kansas type areas, which generally have middling to low crime rates 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.
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.
"Cost of living" correlates fairly well with the available jobs and incomes in a region. You generally can't move to a LCOL region while also having a high paying job. Which is why the possibility of full remote work was so exciting for so many people.
True, though COL tends to lag the actual jobs (both up and down) for various reasons.
Which we definitely saw with remote work - both pros and cons.
[flagged]
Having in group/out group dynamics where the outgroup is systematically stomped on does cause problems eh?
Or do you think the reason why the Deep South (and these inner city areas) is such a consistent problem has nothing to do with history?
This is true.
Bernays did more to end the Great Depression than Keynes, and to prevent its recurrence post-war. Sad truth.
> Hell, even if the average American stopped taking expensive vacations!
Lmfao what world do you live in where they haven't?
This is a very sad yet resoundingly plausible take. Scary.
I’ve seen nobody talking about this, so it’s probably wrong, but I can’t shake the feeling that a lot of the seemingly-nuts things we’ve seen the last 20ish years, from house prices going to the moon to LOLWTF P/E ratios sustained for years on end, and even the magnitude of VC activity, are an outcome of having way too large a proportion of our money in capital, desperately seeking investments to buy, with an underlying economy (ignore stock prices and net-drag economic activity like over-paying for healthcare, I mean actual productivity) that hasn’t grown anywhere near fast enough to give that money anything useful to do.
Every independent economist has been saying this for the last 10 years- see for example "Capital in the Twenty-First Century", a book written by French economist Thomas Piketty.
Time flies, and he’s been on my to-read list for… a while. Need to finally get around to it I guess.
It's very good, to be fair. Even if you disagree with his politics, the data he collected is very illuminating.
He recently released a book that's kind of an abridged version. Capital in the 21st Century is 800 pages, so I don't blame you!
What's it called?
What is your definition of "independent economist"?
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.
Independant economist: one tenured by an independent university as opposed to being employed by a lobby group or think tank to promote a specific agenda.
When even Adam Smith supports the regulation of capital, this can be considered a fairly mainstream position.
Summarizing Piketty's recommendations as "the regulation of capital" is absurd.
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.
I've had the exact same thoughts, so if you're wrong you aren't alone. I personally believe this is due to the imbalance of wealth. Where money isn't circulating properly and we end up with these massive funds that move from one investment type to another destroying everything in their wake
Haven't we been talking about that for a long time? Even the whole "go to college to make more money" was premised on the idea of people leveraging college research facilities to create new opportunities for money in recognition of the walls closing in. The game of telephone saw that turn into "go to college to get a job" with few compelling creations to come from it and, thus, stagnant incomes, but you can only lead the horse to water...
I know we are at ground zero here on HN, and ironically HN is pretty good evidence of this, but
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).
>Five humans with five laptops can create a lawn maintenance app worth tens of millions.
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).
My bet is that there is a hardware Hacker News, but it's in Mandarin.
I agree with this to some extent, but I honestly believe the capital markets would look VASTLY different had the Fed not rescued them with unprecedented money printing in 2002-3, 2008-15 and 2020-1. Yes, software is important and changing the economy, but it doesn't rewrite the basic rules of finance and valuation. The Fed did that.
The hardware HN is also HN. There's just nowhere near as much stuff, and as you say the capex barrier to entry makes that a much smaller business.
Note that while five humans with five laptops may create an app about lawn maintenance, the app won't actually maintain your lawn. We'd expect apps to have less value than they do.
It seems like this would be a pretty good argument for increasing taxes on the high end and having large public works projects to drive forward particular useful goals on a national level (ignoring whether or not a particular governmental organization is currently capable of this, more just focusing on that as a backstop that allows prioritization of economic goals).
I think you're on the right track there. Stock markets used to be a place for developers of Things (initially, railways) to acquire money for investments too large and/or too risky for a single bank, for companies to acquire money for growth, and for farmers / their customers to get reasonable pricing for their goods.
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.
Nvidia has current market cap equivalent to ~8 times ExxonMobil. If tomorrow ExxonMobil disappears from existence, you'd get half of the world paralysed. If Nvidia tomorrow gets replaced by a massive hole in the ground, you'd just shrug, go down the road a bit and buy AMD. Sure, they can't make cards as fast as Nvidia does, but they still work, the old cards won't suddenly stop working, and they don't even manufacture their own hardware.
The AI stocks nowadays are pumped up by pure hype, and it's inevitable that the market will recalibrate sooner or later
I'm not sure that's a fair comparison. The difference in the product lifecycle is too big. A GPU has a 3 year depreciation cycle and continues working for well over a decade after that, if I buy gas today I need new gas tomorrow. The market can react in the timespan of years, it can't react in the timespan of weeks, and having a product that isn't used up makes timelines more elastic.
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
"everything depending on GPUs would quickly grind to a halt." is there any one thing essential depending on the existence of GPU processors ?
The word "essential" is lifting your entire argument for you. If "essential" means whatever bdauvergne on Hacker News decides humans deserve to have in their lives, and nothing else, then sure, GPUs are non-essential. But that's not up to you. You don't get to pick and choose what other humans deserve, what they want, and what they are allowed to have. That's all "essential" has ever meant: whatever I, the author, whose Word is obviously Divine, think Other People deserve to have. Why even bother using that word when talking about the economy? It's meaningless. Get rid of it and your argument collapses. People want GPUs.
> If "essential" means whatever bdauvergne on Hacker News decides humans deserve to have in their lives, and nothing else, then sure, GPUs are non-essential.
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.
The category of "food" in economics is vast and absolutely includes things that humans don't need to live. Nobody dies if they can't buy clothing, except in very extreme cases, yet clothing is generally considered "essential". Meanwhile, people do die because they can't get jobs and become homeless, and you need an internet connection to get a job, but internet access is very rarely considered "essential" (although I suspect this is changing).
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.
> I do not have any definition of it
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.
You're right that I have a general issue with how people use words versus how they think they use words. Yes, there are plenty of words that have this problem. People reach for definitions as some sort of argument-ender, without realizing how much those definitions rely on what are essentially arbitrary categorizations by an arbitrary authority. Those are two other peeves of mine: bad categorization and arbitrary authority.
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.
> The category of "food" in economics is vast and absolutely includes things that humans don't need to live
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?
Imagine for a second that the year was 1880. You would say that telephones aren't essential, wouldn't you? In the previous 25 centuries of recorded history we have lived without them. Nobody's going to die if they were to stop working.
And thus that the valuation of the Bell System must be based on pure hype. Right?
If they have stopped working today it would be disaster. If it stopped at that time, life would go on. It is not about technology but how society adapted around it.
"Disaster" is a very subjective term. One man's disaster is another's normality.
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?
Or you could recognize that "essential" has a meaning in economic/financial terms, but that would entirely deflate the ad hominem attack you launched to avoid acknowledging that the answer to his question is: "Not really, with a few possible exceptions in some edge cases."
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)?
> Or you could recognize that "essential" has a meaning in economic/financial terms
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.
> Ask four mathematicians whether something is a Commutative Ring or not and they'll all agree.
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.
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.)
The moral of the story is: "be careful with simile and analogy". Otherwise you get your arse handed to you on a plate and your very reasonable argument gets lost in the weeds 8)
In these circles is is generally safer to stick with car analogies.
> I do not recognize that. That is the point of my argument.
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.
> Which of these is more essential for human life? ... So you do acknowledge the actual definition ...
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.
> 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.
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.
Probably not, but it would still absolutely crash the economy.
All we “need” is food + water, shelter, and medicine (kind of). I’d guess people’s economic output doesn’t directly contribute to those.
I think you're missing part of the story with stocks like NVDA. The value of a stock is also based on expectations, so it could be that all of NVDA's growth for the next decade has already been frontrun by the market, and it's essentially partly a prediction market on how valuable the infrastructure will be for AI, given that the chip requirements will only increase as AI systems are implemented in more and more hardware (robots / appliances / transportation / medicine, etc.). While the growth potential of carbon fuels really remains as it is with modest growths aligned with demand/population, but tempered by alternate energy taking greater and greater marketshare.
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.
> Nvidia has current market cap equivalent to ~8 times ExxonMobil.
$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.
> 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
> If tomorrow ExxonMobil disappears from existence, you'd get half of the world paralysed. If Nvidia tomorrow gets replaced by a massive hole in the ground, you'd just shrug, go down the road a bit and buy AMD.
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 steam engines stopped working suddenly in 1900, we would have fallen back to ooga booga cavemen in months.
You should probably think of it with a different perspective. The long term outlook for oil majors is stagnating at best. They provide great logistics for fuel globally but haven't expanded past that.
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.
All you're really highlighting is the difference (from an economic perspective) between needs and wants. The world needs petroleum. But once that need is met, extra petroleum production is pointless.
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...)
That's because businesses are valued by how much money they make, not how essential they are.
ExxonMobil has a market cap essentially infinitely larger than my local water supply and the farms that grow my food.
I wouldn't be so quick to pick on AI hype. Investors are always desperately looking for where to put their money. That it is AI suggests, perhaps, that all the alternatives look less promising right now? (And that is a bit tragic.)
you're right, but it brings up an even bigger question in my mind -
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
I hope this doesn't come across as pedantic and negative, but there is a good reason Why a resource extraction company in a market that topped out a few years ago has got a lower than average PE ratio.
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.
> Sure, they can't make cards as fast as Nvidia does
They both use TSMC. If Nvidia disappeared, TSMC would have more capacity available.
I think the comment wasn't about production speed, but speed of the product in terms of performance
The way it's written in English it has to refer to production speed. The context is also about economics.
"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".
Of course, if TSMC were to disappear, now we're talking Exxon-Mobil levels of disruption.
Data shows that retail participation has been near all-time highs, which does tend to correlate with bubbly market activity.
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).
When you say retail participation being at a high correlates with bubbly market activity, is that based on recent data? I'm concerned it doesn't take into account the increase in access to the market app based trading has proliferated.
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.
> as long as capital flows to US financial markets don't reverse
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.
The April meltdown was a great example of how markets react to net capital outflows from global investors. Interestingly enough, since the foreign buyer strike, money has been roaring back into US financial markets. I'll zip my mouth when it comes to judging their decision on that front, but I'll at least say that I suspect that the AI narrative has a strong pull, and much of the world really has no good option to participate in this apparently extremely intoxicating investing narrative other than to buy US tech. To be fair, the US has these sorts of narratives running more often than not, so we'll see how it plays out long term. As of now, talk of foreign money being pulled from the US was a flash in the pan.
You may of course be right. The reason I think you're probably (possibly?) not right is that it's nice to participate in this or that boom, but there's no point if you don't get to keep the profits.
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.
If a company has strong growth in real dollars or inflation is high then a higher P/E is approximately valuation neutral. P/E ratios don't exist in a vacuum and low isn't always better. The price-to-sales ratio is often more indicative of whether something is overvalued than P/E in high-growth cases because earnings are used to finance growth.
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.
I do trade using margin account, but I don't borrow. The primary reason I use margin account is to be able to trade with unsettled funds. Probably don't need it now that the settlement times are T+1, but when it was T+2, it was kinda annoying.
These high PE's imply an expectation of further profit growth - by rational investors. There's a strong element of less rational investors with FOMO jumping on as well.
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.
> Macroeconomics is way out of my wheelhouse
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".
The index fund itself is mostly Tesla, FB, Google etc..at this point. 35% +/- in my quick check
I assume you mean an S&P500 tied index fund?
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 assume you mean an S&P500 tied index fund?
I would assume VT and/or BNDW. Most sane index fund fans aren’t all in on s&p 500.
On a P/E basis neither Meta nor Alphabet seem overvalued.
Not when compared to the likes of Tesla and Palantir. But once upon a time a P/E of 35 was insane. For meta I still feel like its too much. Apple.. Well less so.
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.
Does P/E ratio (example you gave: 35) actually equate to years of profitability (also example you gave: 35 years)?
It means you’d need 35 years of earnings to equal the price paid today.
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.
Thanks!
Meta makes 95%+ of its revenue on their ads. Whats crazy is that they own the platforms that most of their ads run on. Instagram, Facebook, WhatsApp, etc. How do we know they're not fudging the stats on the ads? They're already known not to be trusted. How has a third party Ad Verification system not popped up by now. Not for just Meta but for all Ad networks.
Game out your theory that they are overstating stats. It wouldn't matter if they were. Individual advertisers are getting enough value in downstream effects (actual sales) that they are paying what they are paying.
The advertisers can see the traffic coming in from clicks, I would think. There would remain some opportunity for fraud by FB if some of the ad money is just for impressions but it seems like it would be difficult to keep click rate up while shorting the buyer on impressions.
Presumably the revenue is something that ends up in a bank account. So an audit would make sure that number is accurate.
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.
I think problem with both is that they get money from advertising. Once companies really have to start tightening belt that might largely go away...
Assume a market weighted index fund, not an equal weighted index fund.
Sure, the above was for Vanguard (VOO or VFIAX).
It's crazy to me that these companies are essentially holding up the stock market, but are hemorrhaging money on buying GPUs. The magnificent 7 have spent $560 billion of capital expenditures between 2024 and 2025 leading to $35 billion of revenue, and zero profit. It feels like a complete house of cards to me. No one has made any profit on AI.
High capital expenditure like this is viewed favorably. Investors are investing in AI, and high cap-ex is a strong signal that the companies are going after AI i.e. doing what investors want them to do.
It's only favorable, because there's no better alternative for the money. In a sense, interest rates are still low, for this risky of a bet to be the better alternative.
Google and the like aren't borrowing money to light on fire with their misguided attempts at new products, they're supplying it themselves from their highly profitable core business lines. Therefore their failure to produce returns aren't an indictment of current interest rates.
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.
Very interesting, thank you. I'm not in business so I don't have a good understanding of these expectations.
There can be a lot of mundane reasons to use margin. Making purchases while cash is in movement as an example. This type of debt is one of the safest as you are borrowing against assets with an up to date valuation.
Disclaimer that if you own any of the popular market-cap-weighted index funds (VOO, VGT, VTI) you are exposed to this risk and, conversely, have benefited from this ballooning in valuations.
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%.
High amounts of margin debt indicate that a crash is coming. When a lot of the investments fail, the whole house of cards unwinds: A lot of the debts go bad, and then there isn't enough lending to create investments which are then used to create jobs.
Also margin calls will force selling of equities, driving the prices down.
> I'm sure trading on margin is for some reason actually a positive concept for the economy at large for reasons I can't understand.
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.
With margin trading you don't need to worry about your cash balance. It can be in something like COST or TLT and you can still trade.
Stop worrying about P/E.
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.
One of the two major worldviews (ideologies) says the market is fully valued. One says it's severely undervalued. Nobody is capable of considering that their world view is wrong and they're living in a fantasy. The next 12 months will be fascinating and (for some) extremely satisfying.
Palantir is closer to an East India Company
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.
> "money returned to shareholders"
> 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.
shares exist as conduits to return money to shareholders via dividends
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
No, all shareholders are essentially getting money returned.
"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.
“some” was actually included predicting you would just as be pedantic if I didn't mention the people that sold their shares during the buyback by just happenstance of selling at the same time
you are trying to make a point about me but provided none, while agreeing with what I said
that was…. predictable
Ah, okay. I understand where the "some" was coming from now. Leaving my earlier comment as-is to keep the chain coherent, but I now see that it wasn't conspiratorial.
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.
okay, lets reset
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.
Okay, I find this much more reasonable than what you wrote initially.
when people are botroing like crazy, it means that interest rates are too low.
> On the flip side, trading with margin debt can also exacerbate losses because if a stock's value were to depreciate, the investor may face a margin call and would need to come up with additional cash to reach the minimum requirement.
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.
The main issue are not household investors, the main systemic risks are in overleveraged hedge funds and banks (and a completely corrupted SEC and FINRA, with essentially 0 policing).
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.
Hedge Fund net exposure readings are available in Prime Broker reports. Currently, institutional net exposure isn't that high on a historical lookback. They've essentially been forced to chase since April (the market movement since then has essentially been a large front-run until recently). They are at high gross exposures though, so their contribution to the risk landscape has been, well, what we've seen in the past few days with a huge rotation/unwind under the hood, with mild net selling but large amounts of reshuffling.
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).
Those collapses were great buying opportunities.
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.
> energy companies sub-10 PE with conservative balance sheet management
Hmm ... so for us inattentive investors, buy VDE?
Normally I would say stock picking is a fool's errand, but in this specific example, the appeal really is in the dramatic shift in management in some (but not all) of the energy sector post 2020. For a long time, all of the money went to holes in the ground. They also raised massive amount of debt, which again, went to holes in the ground. Now it's in vogue to focus on shareholder returns, which may seem "normal" for US corporations, but these guys and gals loved drilling holes with reckless abandon.
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...
Hahhh... I did exactly that in 2020 near peak COVID.
>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.
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.
This article is from a month ago and based on June numbers. July numbers are now available from FINRA. Total margin debt continued to increase from June to July, but by a much smaller percentage than the May to June:
The lines on the graph seem to be too close in lockstep for me to see anything causal or predictive in them.
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."
Money doesn't get invested in the market; when you put money into the market, someone else takes it out, because you're trading assets. What can happen is that the price of those assets goes up when more people have money that they want to invest, because the price has to rise to the point where there are as many sellers as buyers. So the market price can grow up, but there's no vault of money tied up in the market.
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.)
You would have to look at that graph starting before 1971 when Nixon took us off the gold standard. when he did that it allowed the US to boroow more money based on nothing. The myth is that "More money has been invested in the market over time", when in fact more debt has been invested in the market.
I'm not sure that's exactly accurate.
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.
Debt is money. Literally - the same contract that's a debt to one party is an asset to the other. And money is just any sufficiently liquid asset.
Somewhat misleading to use a percentage in the article headline when only the absolute amount reached an all-time high.
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.
I had the same thought, with what looks like a ZIRP bump pre-2021 finally normalizing to where it tracks the stock market much more closely.
As an absolute number, yes. Remember though that a lot of money was printed in the last few years. Comparing against GDP[1] or Currency in Circulation[2] the levels are still elevated but not at records, yet.
We are having an emperor's clothes moment with regards to the value of the dollar. Not that fiat money is arbitrary and therefore without value (I think this is a bad argument), but because the US government is not paying its debts in real terms. It always pays in nominal terms (and probably always will), but it doesn't pay in real terms. Dollar holders cover the gap.
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.
How is inflation an emperor's clothes moment?
Inflation is felt immediately as change in price of things that one frequently buys. Everyone can empirically determine if they are experiencing inflation without consulting the news or any authority. And the basket that an authority uses to determine the "official" inflation numbers is less representative of its impact on an individual than their personal basket.
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.
My Michael Burry senses are 'go to cash and don't come back' at this point.
Many people (including Michael Burry) have had this feeling over and over since 2008, and were basically always wrong! Markets are tricky beasts to predict.
To plagiarize Howard Marks, when you try to time the market, you have to be right twice: both on when to get out and when to get back in. Even being right once is incredibly hard.
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."
I always wonder if they somewhat right. Using the chart from the article we have large spikes in margin debt at a bunch of years that initially were followed by a crash but now are possibly followed by money printing preventing the crash. So although Burry has the right idea the rules/market has changed and his analysis no longer holds.
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
So what else can you do as a rational investor than to invest most of your cash into an S&P500 or World fund?
Instead of cash, I hold treasuries. The rest is spread out among low holding cost index funds (watch out for fees... they will kill your profits) and use dividend re-investment. Split things between tax advantaged and non tax advantaged depending on your short and long term goals (ask a certified financial advisor with fiduciary duty for strategies that work for you. It's worth the small fee)
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.
Interesting.
So US Treasury securities instead of cash right?
And then every time there is a dip, sell the treasuries and buy ETFs?
Sure. Dollar cost averaging across a broad spectrum works well for a (very) conservative investor. I try never to have more than 10% of my liquid assets in speculative deals (straight up gambling stuff... individual stock picks, day trading, options, etc). The rest I try to keep as long term investing and/or cash or near cash.
Give it to entrepeneurs/researchers doing intrinsicly cool things like cancer research, without knowing how you will get any of it back right at the start. The problem is NOT lack of productive investments, its that Uber rich people think its not fair if they ever lose.
Invest in a fund which underweights bubble stocks by tracking a suitable alternative index:
So, too late now, you're saying. I read overvalued, soon to crash…
Perhaps we should be buying up Yuan…
Chinese equities have actually been great performers recently (off of a base of ultra-pessimism), but that's mostly the onshore market, not the ADR paper you can buy in the west.
Buying the yuan on the other hand is directly taking a stance against CCP state controlled currency policy. A less advisable and knowable bet.
Then invest in Chinese airlines, banks...
Yes I know, same with Bitcoin.
I mean it’s a dead asset class since it doesn’t fund any economic activity. It’s just a store of wealth
Yeah, frankly I think there is no truly safe place for investments at this point.
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.
Well isn't that the whole point? At a fundamental level, investment profits are a payment for the risk you take. No risk equals no profit. There are "safe" investments currently. You can get paid 4% a year roughly to hold treasuries right now. Considered a "risk free" investment (Which sure, maybe the merits can be argued).
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.
Military manufacturers are a reasonably safe haven these days as Europe is desperately trying to re-arm itself following the Russian invasion of Ukraine, the Middle East is in flames once again and there's a ton of uncertainty and small scale hostilities around China/India/Pakistan.
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.
> Gold? Dead asset
What? Gold is at a record high, and with inflation it will only go higher.
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.
And what was happening in the 80s?
Inflation.
And what’s happening now?
> And what was happening in the 80s? Inflation.
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:
Gold didn't start going up until September 2023 and has been rising. Gold and inflation are currently inversely related.
Dead in the sense that it is not useful for society.
How is it not useful for society if it’s worth $3300 an ounce? It’s a metal prized physical properties and it’s also used in industry.
My favorite LLM tells me that roughly 85% of the world’s gold is simply “lying around” in the sense of being held as jewelry, bars, coins, or reserves. In contrast, only about 15% of the gold is actively utilized in production or technological applications.
So I'd say it's the same as having cash under your pillow.
If it’s the same thing as cash under your pillow, and it’s useless, then give me all the cash under your pillow.
Yes, exactly. That’s the idea!
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.
Ya I listen to this space a lot. 2015, 2016, 2018 and 2020 were a blur of “I’m cashing out and moving my 401k to money market” on several podcasts because of impending doom
It sucks because eventually they're right (and the rest of us were still laughing at the earlier podcasts).
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The market can be irrational longer then you can be solvent.
Sure, if you bet against the crowd with leverage or a tight funding leash.
Global equity index ETF have reliably yielded 5% returns over 12-15 year periods for ~75 years.
It is not that the markets are tricky. Predicting what the Fed will do with interest rates is tricky. By lowering rates they feed more money into the market. Take a look at the last 15 years and you will realize the only thing that gave us a minor recession was COVID, adn that was becasue intrest rates were zero.
> But they can't do this for much longer, inflation is the first sign, which is why Trump is raising tariffs.
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.”
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).
Trump was talking about free trade in the 80s, not in increasing tarrifs, which is not free trade. In fact, it’s the complete opposite.
Trump is saying that nobody is doing free trade except America, and so we should stop being free. He’s had a tariff fixation for decades.
> which is why Trump is raising tariffs.
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?
Who knows if this is the reason that Trump is putting in place this trade war and increasing tariffs, but this paper is a very interesting perspective on why someone in the position the US is in, in regards to the global economy is extremely thought provoking [1].
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...
or a target date fund (which increases bonds as you approach your retirement date).
I am all in cash outside of startup shares. I think it makes sense to be in the market, but compared to 2008, there is way more government fiscal issues, way more concentration of profit growth (e.g. only the top 10 companies have had profit growth in the last 3 years). Way more risk is in the system.
> I am all in cash outside of startup shares.
Completely (retirement and 'regular' brokerage)? What criteria (if any) will you use to get out of cash and start buying again?
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Michael Burry is selection bias. Everyone who predicted a massive crash when a crash didn't happen did not become famous.
Yeah, and it's the worst dealing with these people. My dad is like this, he's heavily in bonds because "a recession is coming" for the last 5 years.
When it does happen, he will be "right" even though the opportunity cost for holding this belief is huge.
There are a number of "Chief Analysts" who are saying "A Correction is Coming" in ~2-3 years.
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 according to the chart there could be 500 or more S&P points before the top. you're leaving money on the table!
The question is how deep will the crash be. If the S&P goes up those 500 points and then crashes by 300 you are better off staying in. OTOH, if the S&P goes up those 500 points and then crashes by 5000 (I didn't bother looking up the value, so I don't know if that is possible) you are not out much by getting out today.
What in particular about margin makes you want to go into cash?
Thank god there is no inflation or, you know, your cash would start to wither as well.
Perhaps investments in undeveloped real estate....
A risk free rate of 4% really isn't that bad for cash (which is why there are trillions sitting in money market funds right now). If you have Tbills with a bit of duration you're also long economic weakness due to having locked in yields, which offsets the inflation spike risk to some degree (or more than compensates for it from another perspective).
> you're also long economic weakness due to having locked in yield
You’re more precisely short rates.
Or the old adage "If your grandma is asking how to setup a margin account, you've already missed the bubble, get out".
Grandma wants AI stocks, taxi drivers rave about crypto, and Warren Buffett has been selling more than ever.
But “this time it’s different” because… AGI…?
The Federal Reserve will lower interest rates to keep that big, beautiful bubble. Donald Trump thinks interests should be 1%. There are 2 FRB governors (jockeying for a new chair) that have publicly called for lower interest rates. One FRB member (Adriana Kugler) unexpectedly resigned a couple weeks ago and will be replaced by the WH economist.
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.
Though maybe avoid USD or USD bonds while the gov is trying to get rid of Fed independence.
At this point I have no idea what would be proper hedge bet... Certainly not crypto. Maybe gold is least insane, but I somewhat doubt even that.
What if we just stopped being so greedy and just bought/invested in what we actually need instead of playing silly games ? Find a plot of land, build a house, &c. a safe space for your kids and their kids.
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 $$$. They're loaded like never before but I've never seen them so tired and miserable, I bet they don't even know why they want more money, hairless apes seem to like when numbers are getting bigger
And on top of that if shit truly hits the fan the vast majority of these will be completely useless.
> Find a plot of land, build a house
So we’re back to 2007 now.
Because unless you are very lucky you simply will not be able to retire, or at worst just run out of money with no healthcare or shelter.
If everyone you know stressing about money would actually be fine if they stopped stressing they are all very privileged. That's not reality for most people. This is not a silly game, and it's frankly ridiculous for your advice to be "find plot of land, build a house."
> That's not reality for most people
Most people shouldn’t be managing their investments. The difference in return even if correct on smaller sums is often less than one’s labour is worth. If, on the other hand, it’s material to you whether your portfolio goes up or down by single digits, real estate is and should be part of that mix.
Dude we're talking about getting safe from an "ai" bubble pop by diversifying in gold and cryptos. If any of these words make sense to you, you obviously already are privileged.
I'm just sharing my experience, I know a bunch of relatively poor people (household with 2 min wage) who have kids and are paying their mortgage. I also know a shit ton of tech workers making $$$ 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.
But I can't even afford 1 single house unless I buy it on margin (and my bank won't give me margin). The minimum quantity is too high. It's like the problem with options trading but worse. (A single options contract can be worth $X,XXX to $XX,XXX and the ones on the lower end of that range are the ones most likely to expire worthless)
There are many options to hedge the known market risks today (as for hedging black swans, tail hedging is also an option, although more explicitly negative value adding long-term).
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).
Chinese Yuan. Have a better idea?
Yuan is a pegged currency. This is a widowmaker trade even for a hedge fund. The average investor would be far, far better off taking actual positions in Chinese stocks rather than getting into the global macro hedge fund style position on pegged currency unwinds (where metrics such as carry and convexity dominate the trade considerations, not the actual binary directional view).
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".
I should look for an ETF or index fund tied to Chinese state-owned markets (banks and airlines for example).
That often comes with restrictions and risks.
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.
gold is overvalued too!
At IB you can get margin interest rates of like 6% I think? SP500 total return is like 9.5% already this year, 25 and 26% in 2024/2023. You get paid to borrow like crazy. Exactly why Dave Ramsey is the worst financial youtuber of the 10s: When rates are close to 0, you only need a 1% return to pay the carry. You should be borrowing like crazy.
Yeah back when margin rates were close to 1% it made a ton of sense to use margin. I was pretty cautious with it but bought a bunch of blue chip dividend stocks- altria, vz, etc at 1% rates and collected 5% dividends. For awhile I could even deduct the margin interest from my income.
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.
>You should be borrowing like crazy.
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.
Have fun when the AI bubble pops and SP500 has a negative 20% return and you are `borrowing like crazy' at 6% interest if you dont get margin called.
And if it doesn't pop? I mean I don't even disagree with there being massive bubble risks, but like my comment was more aimed at the fact that high margin debt doesn't mean anything without knowing the return of the asset you buy with debt and the debt cost.
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.
The best investment advice that I believe I ever had is to take a basket of goods and rebalance them. My father uses a collection of bonds and stocks and if the valuation shifts he sells high and buys low once a quarter to rebalance the percentage risk he wants in the overall market.
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?
The problem with your strategy is that alternatives are often very underperforming
So you manage your risk profile as a percentage of risk on and risk off more heavily in favor of risk. It's not that hard.
The fact that these logarithmic makes it hard to make meaningful comparisons to past cycles.
There's no question that economies are cyclical. The only question is where we are in the cycle.
There's a reason someone wants the Fed to drop rates: we're now in the stage where the only way the rich stay rich is if we just pile more cheap debt on top of the debt we already have.
A lot of margin is people borrowing against holdings instead of selling to generate cash (and tax liability). These Securities-backed lines of credit appear as margin on these kinds of reports...
What was the margin debt that cause black Tuesday and was the genesis to the great depression? It was at record highs as well, 10% of the total market cap of all stocks.
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These raw numbers are meaningless to compare. If anything it should show margin debt as a fraction of total assets (or total market size as a proxy).
The other thing is that whenever I see graphs like that spanning decades but not using a logarithmic scale, I can't help but roll my eyes a bit.
We may well be approaching a dotcom moment, but this kind of graph automatically exaggerates what's happening more recently.
It would be interesting to see the portion on Nvidia. How many calls on next weeks earnings?
What an exceptionally well written/structured article.
I mean it looks bad™ but looking at graphs I can't divine a reliable signal
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.
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Is anyone here wondering like me why we did not have a recession in 2021?
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.
> Might be a good thing to do in the next recession...
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
> The magic money we sent out is the cause of a lot of the problem we're facing now though
So, inflation.
The banks and corporations have been getting the "magic money" since 1971. The moment we give it directly to the people evryone is concerned about inflation. This mindset is sad.
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?
We're talking about the same magic money... people got almost non of it even during covid, it mostly went to companies
The first thing to understand is that middle-lower and lower class people don't matter much to the economy, but they make up a large contingent of the population, so they matter a lot to media orgs. They love news stories about their struggle and the media is happy to oblige them with ad-ridden news stories. Hence the endless pandemic economic doomerism and "I lost my cashier job" stories.
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.
You are completely incorrect. Middle and lower (economic) class people very much matter to the economy.
I don't know how to explain something that is plainly true but plainly insensitive.
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.
People are paid at different rates, but the thing to understand is that there are lot more people not getting paid professional athlete salaries. They matter in aggregate. Hypothetical hits to 20-50% of labor are significant and cannot be compensated for by any amount of white collar productivity.
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).
For some people the pandemic was very traumatic and resulted in a severe loss of income (eg. worst case scenario, a theatrical performer) but for other people, (eg. tech workers) they experienced the opposite, an increased demand for their services alongside a reduction in their costs (nil commute). The latter was the greater amount of people and so you had a lot of people with increased disposable income, alongside ultra low interest rates, and that caused the economy to surge as people spent money, took on debt and acquired assets.
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.
We have been kicking the can down the road since 2008, and made it worse with all those covid checks.
The irrational/solvent saying has never been more true, and it has been irrational for almost 20 years because we never paid the piper.
>Is anyone here wondering like me why we did not have a recession in 2021?
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.
There is a pretty concrete recession definition (two consecutive quarters of GDP contraction). Maybe we did?
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).
'22-'23 was a return to the norm from the overheating economy of the pandemic years.
Am I confused here? The implication of the headline is that the market is over-leveraged (and thus presumably unstable).
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!
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Honestly, if you don't cash in right now, you are playing with fire. We are on our way for a big correction.
>Honestly, if you don't cash in right now, you are playing with fire. We are on our way for a big correction.
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.
Cash parked in money markets (which is just a click away) hasn't done that badly. Getting 4-5% has kept pace with inflation for the most part. Especially now, with economic risks to the downside/slower growth arguably growing, cash doesn't look that bad (until rates are lowered, which will put investors in a pickle, and probably force them modestly out the bond duration curve). Obviously inflation (or more specifically stagflation) risks are clear grey swans as well though, so some exposure to gold (or CTA trend following, which performs well in stagflation) is probably a prudent addition to a diversified asset mix looking to protect against the known risks. And as a benefit, gold and CTA are fairly decent black swan hedges as well (but it's a bit pointless to try and protect against black swans, which are unpredictable by definition).
>Cash parked in money markets (which is just a click away) hasn't done that badly. Getting 4-5% has kept pace with inflation for the most part.
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.
Was true during the zero interest rate era, but over the past few years since rate hikes started, the money market rate has kept up with housing. Shelter (used in the CPI readings) +5% yearly, and real median home prices ~2% compounded since rates rose.
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.
As long as the government can infinitely print money with zero consequences stonks will perpetually go up.
I'm sure trading on margin is for some reason actually a positive concept for the economy at large for reasons I can't understand, but god damn does it feel like a bad idea to see huge spikes of debt to prop up what already feels like an absurdly out of balance market.
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...
The thing is, you can simultaneously be completely correct about the market being insane, while also entirely wrong in expecting it to behave in a sane way.
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.
> Cue the famous quote: “The market can remain irrational longer than you can remain solvent.”
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).)
Index funds won't necessarily save you. 7.5% of the S&P 500 is NVidia, 7% is Microsoft, etc. Almost 40% of the S&P 500 is in the top 10 stocks, and of the top 10, only #9 Berkshire Hathaway is not big into AI.
Index funds aren't supposed to save you from a market setback. In a correction or crash, you will lose money. They merely save you from the total ruin that can come with leverage, or from thinking you can outplay the stocks or options market as an amateur.
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.
The OP still has the same basic problem.
- 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.
The Canadian funds like VEQT/XBAL/etc are overly concentrated in Canada on purpose because it reduces volatility:
* 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).
>> Index funds aren't supposed to save you from a market setback
That's what bonds are for!
Depends on the index. The usual ones are indeed market cap weighted, and so adopt the overvaluation of bubble stocks, but there are indexes which are weighted otherwise, in an attempt to avoid that. One example is the RAFI fundamental family of indexes:
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):
Whereas those of their benchmark, the Solactive GBS United States Large & Mid Cap Index, whatever that is, are:Glad to see a fellow fundamental indexer on HN! As a US based investor, I personally invest in the RAFI US broad market fundamental index (FNDB ETF) which does keep up with the Vanguard US total market over the past 10 years except the bubbly years of 2020/2021 & 2024/2025, even with a higher expense ratio.
Last 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...
2012 was a long time ago. I'm more inclined to Value myself, but has it held up?
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
My comment was originally much larger, but I trimmed it because it was muddying my original point.
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".
You're certainly right that indexes like these don't benefit from the bubble!
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:
It's a small difference. For a set-and-forget investment that insulates you from an AI bubble collapse, it's absolutely fine.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...
HMWO is 5.5% NVDA. It's not significantly different from the S&P 500. Any world cap-weighted index is going to have the same issue.
Exactly, yes. HMWO is the "normal" cap-weighted fund here, PSRW is the RAFI fund.
> Index funds won't necessarily save you.
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...
* https://www.youtube.com/watch?v=1FXuMs6YRCY
The concentration isn't the 'fault' of indexing per se. There are two styles of indexes used by funds/etfs.
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.
Check out RSP as an alternative to IVV.
there's very little psychology left in most of the market.
There's computers and computer logic.
> I have a vague theory that as the amount of wealth inequality in increases in a system along with excess money printing (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general.
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 had no idea Keynes had similar ideas, so I definitely should read his work (and economics literature in general).
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”.
Humanity have always had markets, investment has been a thing for thousands of years, while economy growth wasn't something people expected until something around the middle ages.
You probably won't get a lot to support that idea on the literature.
Financial markets and capitalism has only existed for ~300 years, even if trade did happen since the start of recorded history.
The Romans had private ownership of land, mines and early industrial concerns (e.g., steelmaking) 2000 y ago. They had a legal system to protect the interests of investors. Also, professionals specialized in providing various financial services.
And capitalism with unlimited ability to print money has only existed for 53 years. And capitalism with actual unlimited money printing has only existed for 17 years. These aren't ancient systems or part of fundamental human nature; they're modern experiments.
The restriction on how much money banks can print has only some 200 years. A while before that, banks invented unlimited money printing, and a while before that banks were completely reinvented as regulated entities because money was coming and going without control...
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.
Calling these things modern experiments even though nothing fundamental has changed since the Roman age seems pretty foolish.
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.
> Calling these things modern experiments even though nothing fundamental has changed since the Roman age seems pretty foolish.
I just told you two things that changed within a human lifetime, and you didn't even read them, so the conversation ends here.
Money printing does directly impact inequality, via the Cantillon effect; in most cases, the printed money is put into the system in a way that disproportionately increases prices of assets that are held disproportionately by the wealthy.
> there is just nothing to invest into.
I think you have just defined gold and bitcoin to be "nothing".
Sounds about right.
True investment is when you put capital into a project or endeavor that is expected to earn rewards beyond its future sale price. You open a restaurant, and sell meals for more than the cost to make them. If your only hope is that 3 years from now you can sell the restaurant for more than you bought it for, it's no investment. Even if gold will be worth more, it won't make more of itself.
A post-truth environment adds to the ickyness of the feeling: on top of the bubbles, we've got RFK Jr. deciding the fate of biotechnology companies. Having a tech bubble at the same time science is being vandalized at NIH and in universities looks pretty damn dark.
Not just RFK Jr. The rest of the government requiring a 15% kickback from Nvidia and AMD to approve GPU sales to China, and the CEO of Intel being told to resign.
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..."
Conservatives have never been that party. They've always been the part of making the rich richer and the powerful more powerful by whatever means seem to work today. In the past free trade seemed to do that. Now arbitrary trade restrictions seem to do that. Or at least they feel so.
Yeah its important to decompose those two sources (among others) of "money printing". The obvious one people think most about is when our federal government does it. But a more concerning one is: Enforced banking reserve ratios. If a bank holds a trillion dollars in assets and is allowed to hold a reserve ratio of 10%, they can print $10T out of thin air, because they're allowed to issue debt up to that amount.
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.
Yes, but with the “revolving door” between private financial institutions and government financial policy/regulation, there’s little real distinction anymore between the two.
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.
Reserve ratios have not been the major capital constraint for a very long time. Loan to deposit ratios have been. And those have stayed in normal bounds since the great financial crisis. Both bank regulators and importantly bank investors keep on top of this because they are the ones to lose the most if it gets out of wack.
The reserve requirement had to be loosened because banks became too conservative, largely because their investors were skittish about ldr.
You think that there might be a "quality to the quantity" wrt deposit levels after years in an ultra-low interest rate environment? IIRC, deposits in SVB, FRB, and Signature combined outsized WaMu, with the difference being that WaMu was one of the largest banks in the country, while the average person had not heard of Silicon Valley Bank et al. until the day "Silicon Valley Bank Fails," lit up headlines.
At least in the svb and frb case high ldr contributed to the bank runs that ended them. But note in this context frb at .96 was seen as bad and svb at 1.6 was disastrous(.7 is good).
Thats the real brake on money creation by banks, not the reserve requirement.
This is a misconception afaik, yes there is no longer a literal percent reserve requirement but banks are still required to be “adequately capitalized”, the metric is just more complicated now.
Doesn't our federal government set reserve ratios? They may not be creating money, but by setting the ratio (and other limits), they at least have a strong influence on creation.
Another source in the last half a decade or so is digital coin "mints."
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.
I wish I could print 400,000€ to buy a house with 40k in my account.
Isn't that a mortgage?
All you need is some deposits
> I have a vague theory that as the amount of wealth inequality in increases in a system along with excess money printing (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general.
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.
You are right - it's about the inequality of holding the money, not the rate at which it's printed. Money printing is relevant to the extent it mostly flows towards the already rich. If money was printed and distributed to everyone evenly it would have the opposite effect.
That can easily be explained away in that the wealth concentration was a symptom of vertically integrated hard network based implementations (railroads, logistics, shipping, extraction), and the Gold Standard may have braked some level of wealth inequality acceleration and centralization to a degree, but that the trusts and business structuring were the cause moreso than any inherent tendency toward gold as basis to full fiat.
That explains why we're seeing what we're seeing now. It's all about network monetization.
If the very most you need to live on is 10 million. You can gamble the rest. Buy apartments, jack up the rents like crazy worst thing to happen to you is that people may move out. Buy stocks on margin, win some loose some. The real economy your play toy.
Not sure why you're being downvoted. Word "gamble" too inciting? Maybe if you'd used "much more risky investments" instead, but I'm not here to quibble about your language but to agree with you and extend what you're saying. I actually think the $10 million number is also relative to age because someone who's 30 and "merely" a millionaire can and will invest up the risk ladder as if they're a 50-year-old risking their above-$10 million capital. And the population of people who are millionaires vs decamillionaires is of course a healthy multiple so there's a lot more risk appetite than the relatively small number of decamillionaires would suggest.
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.
>I have a vague theory that as the amount of wealth inequality increases in a system along with “money printing”...
This is well understood by some schools of economics. It's called The Cantillion Effect.
https://mises.org/mises-wire/cantillon-effects-why-inflation...
Notably, very little of the US economy is plausibly basic needs (a roof over ones head, basic nutrition, actual basic medical care, etc.). The vast, vast majority is essentially luxury goods and services, but Americans have been conditioned to think what the rest of the world considers luxury is actually basics.
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 fixer upper small house in a less desirable area
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.
What I’m referring to is random suburb and/or middle of Kansas type areas, which generally have middling to low crime rates 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.
"Cost of living" correlates fairly well with the available jobs and incomes in a region. You generally can't move to a LCOL region while also having a high paying job. Which is why the possibility of full remote work was so exciting for so many people.
True, though COL tends to lag the actual jobs (both up and down) for various reasons.
Which we definitely saw with remote work - both pros and cons.
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Having in group/out group dynamics where the outgroup is systematically stomped on does cause problems eh?
Or do you think the reason why the Deep South (and these inner city areas) is such a consistent problem has nothing to do with history?
This is true.
Bernays did more to end the Great Depression than Keynes, and to prevent its recurrence post-war. Sad truth.
> Hell, even if the average American stopped taking expensive vacations!
Lmfao what world do you live in where they haven't?
This is a very sad yet resoundingly plausible take. Scary.
I’ve seen nobody talking about this, so it’s probably wrong, but I can’t shake the feeling that a lot of the seemingly-nuts things we’ve seen the last 20ish years, from house prices going to the moon to LOLWTF P/E ratios sustained for years on end, and even the magnitude of VC activity, are an outcome of having way too large a proportion of our money in capital, desperately seeking investments to buy, with an underlying economy (ignore stock prices and net-drag economic activity like over-paying for healthcare, I mean actual productivity) that hasn’t grown anywhere near fast enough to give that money anything useful to do.
Every independent economist has been saying this for the last 10 years- see for example "Capital in the Twenty-First Century", a book written by French economist Thomas Piketty.
Time flies, and he’s been on my to-read list for… a while. Need to finally get around to it I guess.
It's very good, to be fair. Even if you disagree with his politics, the data he collected is very illuminating.
He recently released a book that's kind of an abridged version. Capital in the 21st Century is 800 pages, so I don't blame you!
What's it called?
What is your definition of "independent economist"?
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.
Independant economist: one tenured by an independent university as opposed to being employed by a lobby group or think tank to promote a specific agenda.
When even Adam Smith supports the regulation of capital, this can be considered a fairly mainstream position.
Summarizing Piketty's recommendations as "the regulation of capital" is absurd.
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.
I've had the exact same thoughts, so if you're wrong you aren't alone. I personally believe this is due to the imbalance of wealth. Where money isn't circulating properly and we end up with these massive funds that move from one investment type to another destroying everything in their wake
Haven't we been talking about that for a long time? Even the whole "go to college to make more money" was premised on the idea of people leveraging college research facilities to create new opportunities for money in recognition of the walls closing in. The game of telephone saw that turn into "go to college to get a job" with few compelling creations to come from it and, thus, stagnant incomes, but you can only lead the horse to water...
I know we are at ground zero here on HN, and ironically HN is pretty good evidence of this, but
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).
>Five humans with five laptops can create a lawn maintenance app worth tens of millions.
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).
My bet is that there is a hardware Hacker News, but it's in Mandarin.
I agree with this to some extent, but I honestly believe the capital markets would look VASTLY different had the Fed not rescued them with unprecedented money printing in 2002-3, 2008-15 and 2020-1. Yes, software is important and changing the economy, but it doesn't rewrite the basic rules of finance and valuation. The Fed did that.
The hardware HN is also HN. There's just nowhere near as much stuff, and as you say the capex barrier to entry makes that a much smaller business.
Note that while five humans with five laptops may create an app about lawn maintenance, the app won't actually maintain your lawn. We'd expect apps to have less value than they do.
It seems like this would be a pretty good argument for increasing taxes on the high end and having large public works projects to drive forward particular useful goals on a national level (ignoring whether or not a particular governmental organization is currently capable of this, more just focusing on that as a backstop that allows prioritization of economic goals).
I think you're on the right track there. Stock markets used to be a place for developers of Things (initially, railways) to acquire money for investments too large and/or too risky for a single bank, for companies to acquire money for growth, and for farmers / their customers to get reasonable pricing for their goods.
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.
Nvidia has current market cap equivalent to ~8 times ExxonMobil. If tomorrow ExxonMobil disappears from existence, you'd get half of the world paralysed. If Nvidia tomorrow gets replaced by a massive hole in the ground, you'd just shrug, go down the road a bit and buy AMD. Sure, they can't make cards as fast as Nvidia does, but they still work, the old cards won't suddenly stop working, and they don't even manufacture their own hardware.
The AI stocks nowadays are pumped up by pure hype, and it's inevitable that the market will recalibrate sooner or later
I'm not sure that's a fair comparison. The difference in the product lifecycle is too big. A GPU has a 3 year depreciation cycle and continues working for well over a decade after that, if I buy gas today I need new gas tomorrow. The market can react in the timespan of years, it can't react in the timespan of weeks, and having a product that isn't used up makes timelines more elastic.
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
"everything depending on GPUs would quickly grind to a halt." is there any one thing essential depending on the existence of GPU processors ?
The word "essential" is lifting your entire argument for you. If "essential" means whatever bdauvergne on Hacker News decides humans deserve to have in their lives, and nothing else, then sure, GPUs are non-essential. But that's not up to you. You don't get to pick and choose what other humans deserve, what they want, and what they are allowed to have. That's all "essential" has ever meant: whatever I, the author, whose Word is obviously Divine, think Other People deserve to have. Why even bother using that word when talking about the economy? It's meaningless. Get rid of it and your argument collapses. People want GPUs.
> If "essential" means whatever bdauvergne on Hacker News decides humans deserve to have in their lives, and nothing else, then sure, GPUs are non-essential.
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.
The category of "food" in economics is vast and absolutely includes things that humans don't need to live. Nobody dies if they can't buy clothing, except in very extreme cases, yet clothing is generally considered "essential". Meanwhile, people do die because they can't get jobs and become homeless, and you need an internet connection to get a job, but internet access is very rarely considered "essential" (although I suspect this is changing).
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.
> I do not have any definition of it
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.
You're right that I have a general issue with how people use words versus how they think they use words. Yes, there are plenty of words that have this problem. People reach for definitions as some sort of argument-ender, without realizing how much those definitions rely on what are essentially arbitrary categorizations by an arbitrary authority. Those are two other peeves of mine: bad categorization and arbitrary authority.
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.
> The category of "food" in economics is vast and absolutely includes things that humans don't need to live
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?
Imagine for a second that the year was 1880. You would say that telephones aren't essential, wouldn't you? In the previous 25 centuries of recorded history we have lived without them. Nobody's going to die if they were to stop working.
And thus that the valuation of the Bell System must be based on pure hype. Right?
If they have stopped working today it would be disaster. If it stopped at that time, life would go on. It is not about technology but how society adapted around it.
"Disaster" is a very subjective term. One man's disaster is another's normality.
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?
Or you could recognize that "essential" has a meaning in economic/financial terms, but that would entirely deflate the ad hominem attack you launched to avoid acknowledging that the answer to his question is: "Not really, with a few possible exceptions in some edge cases."
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)?
> Or you could recognize that "essential" has a meaning in economic/financial terms
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.
> Ask four mathematicians whether something is a Commutative Ring or not and they'll all agree.
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.)
The moral of the story is: "be careful with simile and analogy". Otherwise you get your arse handed to you on a plate and your very reasonable argument gets lost in the weeds 8)
In these circles is is generally safer to stick with car analogies.
> I do not recognize that. That is the point of my argument.
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.
> Which of these is more essential for human life? ... So you do acknowledge the actual definition ...
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.
> 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.
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.
Probably not, but it would still absolutely crash the economy.
All we “need” is food + water, shelter, and medicine (kind of). I’d guess people’s economic output doesn’t directly contribute to those.
Weather forecasting thus farming, fishing, logistics.
I think you're missing part of the story with stocks like NVDA. The value of a stock is also based on expectations, so it could be that all of NVDA's growth for the next decade has already been frontrun by the market, and it's essentially partly a prediction market on how valuable the infrastructure will be for AI, given that the chip requirements will only increase as AI systems are implemented in more and more hardware (robots / appliances / transportation / medicine, etc.). While the growth potential of carbon fuels really remains as it is with modest growths aligned with demand/population, but tempered by alternate energy taking greater and greater marketshare.
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.
> Nvidia has current market cap equivalent to ~8 times ExxonMobil.
$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.
> 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
> If tomorrow ExxonMobil disappears from existence, you'd get half of the world paralysed. If Nvidia tomorrow gets replaced by a massive hole in the ground, you'd just shrug, go down the road a bit and buy AMD.
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 steam engines stopped working suddenly in 1900, we would have fallen back to ooga booga cavemen in months.
You should probably think of it with a different perspective. The long term outlook for oil majors is stagnating at best. They provide great logistics for fuel globally but haven't expanded past that.
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.
All you're really highlighting is the difference (from an economic perspective) between needs and wants. The world needs petroleum. But once that need is met, extra petroleum production is pointless.
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...)
That's because businesses are valued by how much money they make, not how essential they are.
ExxonMobil has a market cap essentially infinitely larger than my local water supply and the farms that grow my food.
I wouldn't be so quick to pick on AI hype. Investors are always desperately looking for where to put their money. That it is AI suggests, perhaps, that all the alternatives look less promising right now? (And that is a bit tragic.)
you're right, but it brings up an even bigger question in my mind -
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
I hope this doesn't come across as pedantic and negative, but there is a good reason Why a resource extraction company in a market that topped out a few years ago has got a lower than average PE ratio.
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.
> Sure, they can't make cards as fast as Nvidia does
They both use TSMC. If Nvidia disappeared, TSMC would have more capacity available.
I think the comment wasn't about production speed, but speed of the product in terms of performance
The way it's written in English it has to refer to production speed. The context is also about economics.
"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".
Of course, if TSMC were to disappear, now we're talking Exxon-Mobil levels of disruption.
Data shows that retail participation has been near all-time highs, which does tend to correlate with bubbly market activity.
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).
When you say retail participation being at a high correlates with bubbly market activity, is that based on recent data? I'm concerned it doesn't take into account the increase in access to the market app based trading has proliferated.
Yes. https://i.ibb.co/8gFNPcwX/temprp.png - Goldman chart.
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.
> as long as capital flows to US financial markets don't reverse
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.
The April meltdown was a great example of how markets react to net capital outflows from global investors. Interestingly enough, since the foreign buyer strike, money has been roaring back into US financial markets. I'll zip my mouth when it comes to judging their decision on that front, but I'll at least say that I suspect that the AI narrative has a strong pull, and much of the world really has no good option to participate in this apparently extremely intoxicating investing narrative other than to buy US tech. To be fair, the US has these sorts of narratives running more often than not, so we'll see how it plays out long term. As of now, talk of foreign money being pulled from the US was a flash in the pan.
You may of course be right. The reason I think you're probably (possibly?) not right is that it's nice to participate in this or that boom, but there's no point if you don't get to keep the profits.
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.
If a company has strong growth in real dollars or inflation is high then a higher P/E is approximately valuation neutral. P/E ratios don't exist in a vacuum and low isn't always better. The price-to-sales ratio is often more indicative of whether something is overvalued than P/E in high-growth cases because earnings are used to finance growth.
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.
I do trade using margin account, but I don't borrow. The primary reason I use margin account is to be able to trade with unsettled funds. Probably don't need it now that the settlement times are T+1, but when it was T+2, it was kinda annoying.
These high PE's imply an expectation of further profit growth - by rational investors. There's a strong element of less rational investors with FOMO jumping on as well.
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.
> Macroeconomics is way out of my wheelhouse
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".
The index fund itself is mostly Tesla, FB, Google etc..at this point. 35% +/- in my quick check
I assume you mean an S&P500 tied index fund?
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 assume you mean an S&P500 tied index fund?
I would assume VT and/or BNDW. Most sane index fund fans aren’t all in on s&p 500.
On a P/E basis neither Meta nor Alphabet seem overvalued.
Not when compared to the likes of Tesla and Palantir. But once upon a time a P/E of 35 was insane. For meta I still feel like its too much. Apple.. Well less so.
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.
Does P/E ratio (example you gave: 35) actually equate to years of profitability (also example you gave: 35 years)?
It means you’d need 35 years of earnings to equal the price paid today.
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.
Thanks!
Meta makes 95%+ of its revenue on their ads. Whats crazy is that they own the platforms that most of their ads run on. Instagram, Facebook, WhatsApp, etc. How do we know they're not fudging the stats on the ads? They're already known not to be trusted. How has a third party Ad Verification system not popped up by now. Not for just Meta but for all Ad networks.
Game out your theory that they are overstating stats. It wouldn't matter if they were. Individual advertisers are getting enough value in downstream effects (actual sales) that they are paying what they are paying.
The advertisers can see the traffic coming in from clicks, I would think. There would remain some opportunity for fraud by FB if some of the ad money is just for impressions but it seems like it would be difficult to keep click rate up while shorting the buyer on impressions.
Presumably the revenue is something that ends up in a bank account. So an audit would make sure that number is accurate.
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.
I think problem with both is that they get money from advertising. Once companies really have to start tightening belt that might largely go away...
Assume a market weighted index fund, not an equal weighted index fund.
Sure, the above was for Vanguard (VOO or VFIAX).
It's crazy to me that these companies are essentially holding up the stock market, but are hemorrhaging money on buying GPUs. The magnificent 7 have spent $560 billion of capital expenditures between 2024 and 2025 leading to $35 billion of revenue, and zero profit. It feels like a complete house of cards to me. No one has made any profit on AI.
High capital expenditure like this is viewed favorably. Investors are investing in AI, and high cap-ex is a strong signal that the companies are going after AI i.e. doing what investors want them to do.
It's only favorable, because there's no better alternative for the money. In a sense, interest rates are still low, for this risky of a bet to be the better alternative.
Google and the like aren't borrowing money to light on fire with their misguided attempts at new products, they're supplying it themselves from their highly profitable core business lines. Therefore their failure to produce returns aren't an indictment of current interest rates.
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.
Very interesting, thank you. I'm not in business so I don't have a good understanding of these expectations.
There can be a lot of mundane reasons to use margin. Making purchases while cash is in movement as an example. This type of debt is one of the safest as you are borrowing against assets with an up to date valuation.
Disclaimer that if you own any of the popular market-cap-weighted index funds (VOO, VGT, VTI) you are exposed to this risk and, conversely, have benefited from this ballooning in valuations.
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%.
High amounts of margin debt indicate that a crash is coming. When a lot of the investments fail, the whole house of cards unwinds: A lot of the debts go bad, and then there isn't enough lending to create investments which are then used to create jobs.
Also margin calls will force selling of equities, driving the prices down.
> I'm sure trading on margin is for some reason actually a positive concept for the economy at large for reasons I can't understand.
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.
With margin trading you don't need to worry about your cash balance. It can be in something like COST or TLT and you can still trade.
Stop worrying about P/E.
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.
One of the two major worldviews (ideologies) says the market is fully valued. One says it's severely undervalued. Nobody is capable of considering that their world view is wrong and they're living in a fantasy. The next 12 months will be fascinating and (for some) extremely satisfying.
Palantir is closer to an East India Company
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.
> "money returned to shareholders"
> 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.
shares exist as conduits to return money to shareholders via dividends
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
No, all shareholders are essentially getting money returned.
"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.
“some” was actually included predicting you would just as be pedantic if I didn't mention the people that sold their shares during the buyback by just happenstance of selling at the same time
you are trying to make a point about me but provided none, while agreeing with what I said
that was…. predictable
Ah, okay. I understand where the "some" was coming from now. Leaving my earlier comment as-is to keep the chain coherent, but I now see that it wasn't conspiratorial.
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.
okay, lets reset
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.
Okay, I find this much more reasonable than what you wrote initially.
when people are botroing like crazy, it means that interest rates are too low.
> On the flip side, trading with margin debt can also exacerbate losses because if a stock's value were to depreciate, the investor may face a margin call and would need to come up with additional cash to reach the minimum requirement.
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.
The main issue are not household investors, the main systemic risks are in overleveraged hedge funds and banks (and a completely corrupted SEC and FINRA, with essentially 0 policing).
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.
Hedge Fund net exposure readings are available in Prime Broker reports. Currently, institutional net exposure isn't that high on a historical lookback. They've essentially been forced to chase since April (the market movement since then has essentially been a large front-run until recently). They are at high gross exposures though, so their contribution to the risk landscape has been, well, what we've seen in the past few days with a huge rotation/unwind under the hood, with mild net selling but large amounts of reshuffling.
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).
Those collapses were great buying opportunities.
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.
> energy companies sub-10 PE with conservative balance sheet management
Hmm ... so for us inattentive investors, buy VDE?
Normally I would say stock picking is a fool's errand, but in this specific example, the appeal really is in the dramatic shift in management in some (but not all) of the energy sector post 2020. For a long time, all of the money went to holes in the ground. They also raised massive amount of debt, which again, went to holes in the ground. Now it's in vogue to focus on shareholder returns, which may seem "normal" for US corporations, but these guys and gals loved drilling holes with reckless abandon.
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...
Hahhh... I did exactly that in 2020 near peak COVID.
>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.
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.
This article is from a month ago and based on June numbers. July numbers are now available from FINRA. Total margin debt continued to increase from June to July, but by a much smaller percentage than the May to June:
https://www.finra.org/rules-guidance/key-topics/margin-accou...The lines on the graph seem to be too close in lockstep for me to see anything causal or predictive in them.
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."
Money doesn't get invested in the market; when you put money into the market, someone else takes it out, because you're trading assets. What can happen is that the price of those assets goes up when more people have money that they want to invest, because the price has to rise to the point where there are as many sellers as buyers. So the market price can grow up, but there's no vault of money tied up in the market.
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.)
You would have to look at that graph starting before 1971 when Nixon took us off the gold standard. when he did that it allowed the US to boroow more money based on nothing. The myth is that "More money has been invested in the market over time", when in fact more debt has been invested in the market.
I'm not sure that's exactly accurate.
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.
Debt is money. Literally - the same contract that's a debt to one party is an asset to the other. And money is just any sufficiently liquid asset.
Somewhat misleading to use a percentage in the article headline when only the absolute amount reached an all-time high.
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.
I had the same thought, with what looks like a ZIRP bump pre-2021 finally normalizing to where it tracks the stock market much more closely.
As an absolute number, yes. Remember though that a lot of money was printed in the last few years. Comparing against GDP[1] or Currency in Circulation[2] the levels are still elevated but not at records, yet.
[1]: https://www.gurufocus.com/economic_indicators/4266/finra-inv... [2]: https://en.macromicro.me/collections/34/us-stock-relative/89...
We are having an emperor's clothes moment with regards to the value of the dollar. Not that fiat money is arbitrary and therefore without value (I think this is a bad argument), but because the US government is not paying its debts in real terms. It always pays in nominal terms (and probably always will), but it doesn't pay in real terms. Dollar holders cover the gap.
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.
How is inflation an emperor's clothes moment?
Inflation is felt immediately as change in price of things that one frequently buys. Everyone can empirically determine if they are experiencing inflation without consulting the news or any authority. And the basket that an authority uses to determine the "official" inflation numbers is less representative of its impact on an individual than their personal basket.
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.
My Michael Burry senses are 'go to cash and don't come back' at this point.
Many people (including Michael Burry) have had this feeling over and over since 2008, and were basically always wrong! Markets are tricky beasts to predict.
To plagiarize Howard Marks, when you try to time the market, you have to be right twice: both on when to get out and when to get back in. Even being right once is incredibly hard.
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."
I always wonder if they somewhat right. Using the chart from the article we have large spikes in margin debt at a bunch of years that initially were followed by a crash but now are possibly followed by money printing preventing the crash. So although Burry has the right idea the rules/market has changed and his analysis no longer holds.
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
[1]: https://en.wikipedia.org/wiki/Scion_Asset_Management
The problem is Tina!
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?
Instead of cash, I hold treasuries. The rest is spread out among low holding cost index funds (watch out for fees... they will kill your profits) and use dividend re-investment. Split things between tax advantaged and non tax advantaged depending on your short and long term goals (ask a certified financial advisor with fiduciary duty for strategies that work for you. It's worth the small fee)
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.
Interesting.
So US Treasury securities instead of cash right?
And then every time there is a dip, sell the treasuries and buy ETFs?
Sure. Dollar cost averaging across a broad spectrum works well for a (very) conservative investor. I try never to have more than 10% of my liquid assets in speculative deals (straight up gambling stuff... individual stock picks, day trading, options, etc). The rest I try to keep as long term investing and/or cash or near cash.
Give it to entrepeneurs/researchers doing intrinsicly cool things like cancer research, without knowing how you will get any of it back right at the start. The problem is NOT lack of productive investments, its that Uber rich people think its not fair if they ever lose.
Invest in a fund which underweights bubble stocks by tracking a suitable alternative index:
https://www.bogleheads.org/wiki/Alternative_indices
Dividend weighted indexes are the classic option, and fundamental weighted index are a newer one.
Maybe unfashionable equities? Utility stocks, Japan/S Korea, BRKB etc?
Golds been rallying really aggressively recently
So, too late now, you're saying. I read overvalued, soon to crash…
Perhaps we should be buying up Yuan…
Chinese equities have actually been great performers recently (off of a base of ultra-pessimism), but that's mostly the onshore market, not the ADR paper you can buy in the west.
Buying the yuan on the other hand is directly taking a stance against CCP state controlled currency policy. A less advisable and knowable bet.
Then invest in Chinese airlines, banks...
Yes I know, same with Bitcoin.
I mean it’s a dead asset class since it doesn’t fund any economic activity. It’s just a store of wealth
Yeah, frankly I think there is no truly safe place for investments at this point.
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.
Well isn't that the whole point? At a fundamental level, investment profits are a payment for the risk you take. No risk equals no profit. There are "safe" investments currently. You can get paid 4% a year roughly to hold treasuries right now. Considered a "risk free" investment (Which sure, maybe the merits can be argued).
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.
Military manufacturers are a reasonably safe haven these days as Europe is desperately trying to re-arm itself following the Russian invasion of Ukraine, the Middle East is in flames once again and there's a ton of uncertainty and small scale hostilities around China/India/Pakistan.
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.
> Gold? Dead asset
What? Gold is at a record high, and with inflation it will only go higher.
https://www.macrotrends.net/1333/historical-gold-prices-100-...
> 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.
And what was happening in the 80s?
Inflation.
And what’s happening now?
> And what was happening in the 80s? Inflation.
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.
Dead in the sense that it is not useful for society.
How is it not useful for society if it’s worth $3300 an ounce? It’s a metal prized physical properties and it’s also used in industry.
My favorite LLM tells me that roughly 85% of the world’s gold is simply “lying around” in the sense of being held as jewelry, bars, coins, or reserves. In contrast, only about 15% of the gold is actively utilized in production or technological applications.
So I'd say it's the same as having cash under your pillow.
If it’s the same thing as cash under your pillow, and it’s useless, then give me all the cash under your pillow.
Yes, exactly. That’s the idea!
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.
Ya I listen to this space a lot. 2015, 2016, 2018 and 2020 were a blur of “I’m cashing out and moving my 401k to money market” on several podcasts because of impending doom
It sucks because eventually they're right (and the rest of us were still laughing at the earlier podcasts).
The market can be irrational longer then you can be solvent.
Sure, if you bet against the crowd with leverage or a tight funding leash.
Global equity index ETF have reliably yielded 5% returns over 12-15 year periods for ~75 years.
It is not that the markets are tricky. Predicting what the Fed will do with interest rates is tricky. By lowering rates they feed more money into the market. Take a look at the last 15 years and you will realize the only thing that gave us a minor recession was COVID, adn that was becasue intrest rates were zero.
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:
https://fred.stlouisfed.org/series/DGS10
> But they can't do this for much longer, inflation is the first sign, which is why Trump is raising tariffs.
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).
Trump was talking about free trade in the 80s, not in increasing tarrifs, which is not free trade. In fact, it’s the complete opposite.
Trump is saying that nobody is doing free trade except America, and so we should stop being free. He’s had a tariff fixation for decades.
> which is why Trump is raising tariffs.
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?
Who knows if this is the reason that Trump is putting in place this trade war and increasing tariffs, but this paper is a very interesting perspective on why someone in the position the US is in, in regards to the global economy is extremely thought provoking [1].
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...
Oh, I don’t think it’s going to work at all. For some reason, he doesn’t think it’s gonna raise inflation enough to matter.
> My Michael Burry senses are 'go to cash and don't come back' at this point.
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).
I am all in cash outside of startup shares. I think it makes sense to be in the market, but compared to 2008, there is way more government fiscal issues, way more concentration of profit growth (e.g. only the top 10 companies have had profit growth in the last 3 years). Way more risk is in the system.
> I am all in cash outside of startup shares.
Completely (retirement and 'regular' brokerage)? What criteria (if any) will you use to get out of cash and start buying again?
Michael Burry is selection bias. Everyone who predicted a massive crash when a crash didn't happen did not become famous.
Yeah, and it's the worst dealing with these people. My dad is like this, he's heavily in bonds because "a recession is coming" for the last 5 years.
When it does happen, he will be "right" even though the opportunity cost for holding this belief is huge.
There are a number of "Chief Analysts" who are saying "A Correction is Coming" in ~2-3 years.
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 according to the chart there could be 500 or more S&P points before the top. you're leaving money on the table!
The question is how deep will the crash be. If the S&P goes up those 500 points and then crashes by 300 you are better off staying in. OTOH, if the S&P goes up those 500 points and then crashes by 5000 (I didn't bother looking up the value, so I don't know if that is possible) you are not out much by getting out today.
What in particular about margin makes you want to go into cash?
Thank god there is no inflation or, you know, your cash would start to wither as well.
Perhaps investments in undeveloped real estate....
A risk free rate of 4% really isn't that bad for cash (which is why there are trillions sitting in money market funds right now). If you have Tbills with a bit of duration you're also long economic weakness due to having locked in yields, which offsets the inflation spike risk to some degree (or more than compensates for it from another perspective).
> you're also long economic weakness due to having locked in yield
You’re more precisely short rates.
Or the old adage "If your grandma is asking how to setup a margin account, you've already missed the bubble, get out".
Grandma wants AI stocks, taxi drivers rave about crypto, and Warren Buffett has been selling more than ever.
But “this time it’s different” because… AGI…?
The Federal Reserve will lower interest rates to keep that big, beautiful bubble. Donald Trump thinks interests should be 1%. There are 2 FRB governors (jockeying for a new chair) that have publicly called for lower interest rates. One FRB member (Adriana Kugler) unexpectedly resigned a couple weeks ago and will be replaced by the WH economist.
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.
Though maybe avoid USD or USD bonds while the gov is trying to get rid of Fed independence.
At this point I have no idea what would be proper hedge bet... Certainly not crypto. Maybe gold is least insane, but I somewhat doubt even that.
What if we just stopped being so greedy and just bought/invested in what we actually need instead of playing silly games ? Find a plot of land, build a house, &c. a safe space for your kids and their kids.
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 $$$. They're loaded like never before but I've never seen them so tired and miserable, I bet they don't even know why they want more money, hairless apes seem to like when numbers are getting bigger
And on top of that if shit truly hits the fan the vast majority of these will be completely useless.
> Find a plot of land, build a house
So we’re back to 2007 now.
Because unless you are very lucky you simply will not be able to retire, or at worst just run out of money with no healthcare or shelter.
If everyone you know stressing about money would actually be fine if they stopped stressing they are all very privileged. That's not reality for most people. This is not a silly game, and it's frankly ridiculous for your advice to be "find plot of land, build a house."
> That's not reality for most people
Most people shouldn’t be managing their investments. The difference in return even if correct on smaller sums is often less than one’s labour is worth. If, on the other hand, it’s material to you whether your portfolio goes up or down by single digits, real estate is and should be part of that mix.
Dude we're talking about getting safe from an "ai" bubble pop by diversifying in gold and cryptos. If any of these words make sense to you, you obviously already are privileged.
I'm just sharing my experience, I know a bunch of relatively poor people (household with 2 min wage) who have kids and are paying their mortgage. I also know a shit ton of tech workers making $$$ 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.
But I can't even afford 1 single house unless I buy it on margin (and my bank won't give me margin). The minimum quantity is too high. It's like the problem with options trading but worse. (A single options contract can be worth $X,XXX to $XX,XXX and the ones on the lower end of that range are the ones most likely to expire worthless)
There are many options to hedge the known market risks today (as for hedging black swans, tail hedging is also an option, although more explicitly negative value adding long-term).
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).
Chinese Yuan. Have a better idea?
Yuan is a pegged currency. This is a widowmaker trade even for a hedge fund. The average investor would be far, far better off taking actual positions in Chinese stocks rather than getting into the global macro hedge fund style position on pegged currency unwinds (where metrics such as carry and convexity dominate the trade considerations, not the actual binary directional view).
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".
I should look for an ETF or index fund tied to Chinese state-owned markets (banks and airlines for example).
That often comes with restrictions and risks.
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.
gold is overvalued too!
At IB you can get margin interest rates of like 6% I think? SP500 total return is like 9.5% already this year, 25 and 26% in 2024/2023. You get paid to borrow like crazy. Exactly why Dave Ramsey is the worst financial youtuber of the 10s: When rates are close to 0, you only need a 1% return to pay the carry. You should be borrowing like crazy.
Yeah back when margin rates were close to 1% it made a ton of sense to use margin. I was pretty cautious with it but bought a bunch of blue chip dividend stocks- altria, vz, etc at 1% rates and collected 5% dividends. For awhile I could even deduct the margin interest from my income.
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.
>You should be borrowing like crazy.
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.
Have fun when the AI bubble pops and SP500 has a negative 20% return and you are `borrowing like crazy' at 6% interest if you dont get margin called.
And if it doesn't pop? I mean I don't even disagree with there being massive bubble risks, but like my comment was more aimed at the fact that high margin debt doesn't mean anything without knowing the return of the asset you buy with debt and the debt cost.
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.
The best investment advice that I believe I ever had is to take a basket of goods and rebalance them. My father uses a collection of bonds and stocks and if the valuation shifts he sells high and buys low once a quarter to rebalance the percentage risk he wants in the overall market.
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?
The problem with your strategy is that alternatives are often very underperforming
So you manage your risk profile as a percentage of risk on and risk off more heavily in favor of risk. It's not that hard.
The fact that these logarithmic makes it hard to make meaningful comparisons to past cycles.
There's no question that economies are cyclical. The only question is where we are in the cycle.
There's a reason someone wants the Fed to drop rates: we're now in the stage where the only way the rich stay rich is if we just pile more cheap debt on top of the debt we already have.
A lot of margin is people borrowing against holdings instead of selling to generate cash (and tax liability). These Securities-backed lines of credit appear as margin on these kinds of reports...
Everyone is trying to be Huge Stinnes: https://www.wealthplaybook.ca/post/who-was-hugo-the-inflatio...
What was the margin debt that cause black Tuesday and was the genesis to the great depression? It was at record highs as well, 10% of the total market cap of all stocks.
These raw numbers are meaningless to compare. If anything it should show margin debt as a fraction of total assets (or total market size as a proxy).
From our library - expressed as percentages of gdp or market cap: https://x.com/augurinfinity/status/1958564629040251267?s=46
The divergence is very interesting!
The other thing is that whenever I see graphs like that spanning decades but not using a logarithmic scale, I can't help but roll my eyes a bit.
We may well be approaching a dotcom moment, but this kind of graph automatically exaggerates what's happening more recently.
It would be interesting to see the portion on Nvidia. How many calls on next weeks earnings?
What an exceptionally well written/structured article.
I mean it looks bad™ but looking at graphs I can't divine a reliable signal
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.
Is anyone here wondering like me why we did not have a recession in 2021?
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.
> Might be a good thing to do in the next recession...
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
> The magic money we sent out is the cause of a lot of the problem we're facing now though
So, inflation.
The banks and corporations have been getting the "magic money" since 1971. The moment we give it directly to the people evryone is concerned about inflation. This mindset is sad.
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?
We're talking about the same magic money... people got almost non of it even during covid, it mostly went to companies
The first thing to understand is that middle-lower and lower class people don't matter much to the economy, but they make up a large contingent of the population, so they matter a lot to media orgs. They love news stories about their struggle and the media is happy to oblige them with ad-ridden news stories. Hence the endless pandemic economic doomerism and "I lost my cashier job" stories.
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.
You are completely incorrect. Middle and lower (economic) class people very much matter to the economy.
I don't know how to explain something that is plainly true but plainly insensitive.
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.
People are paid at different rates, but the thing to understand is that there are lot more people not getting paid professional athlete salaries. They matter in aggregate. Hypothetical hits to 20-50% of labor are significant and cannot be compensated for by any amount of white collar productivity.
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).
For some people the pandemic was very traumatic and resulted in a severe loss of income (eg. worst case scenario, a theatrical performer) but for other people, (eg. tech workers) they experienced the opposite, an increased demand for their services alongside a reduction in their costs (nil commute). The latter was the greater amount of people and so you had a lot of people with increased disposable income, alongside ultra low interest rates, and that caused the economy to surge as people spent money, took on debt and acquired assets.
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.
We have been kicking the can down the road since 2008, and made it worse with all those covid checks.
The irrational/solvent saying has never been more true, and it has been irrational for almost 20 years because we never paid the piper.
>Is anyone here wondering like me why we did not have a recession in 2021?
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.
There is a pretty concrete recession definition (two consecutive quarters of GDP contraction). Maybe we did?
https://www.dallasfed.org/research/economics/2022/0802
If we did, it was seemingly mild in hindsight.
>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).
'22-'23 was a return to the norm from the overheating economy of the pandemic years.
Am I confused here? The implication of the headline is that the market is over-leveraged (and thus presumably unstable).
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!
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Honestly, if you don't cash in right now, you are playing with fire. We are on our way for a big correction.
>Honestly, if you don't cash in right now, you are playing with fire. We are on our way for a big correction.
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.
Cash parked in money markets (which is just a click away) hasn't done that badly. Getting 4-5% has kept pace with inflation for the most part. Especially now, with economic risks to the downside/slower growth arguably growing, cash doesn't look that bad (until rates are lowered, which will put investors in a pickle, and probably force them modestly out the bond duration curve). Obviously inflation (or more specifically stagflation) risks are clear grey swans as well though, so some exposure to gold (or CTA trend following, which performs well in stagflation) is probably a prudent addition to a diversified asset mix looking to protect against the known risks. And as a benefit, gold and CTA are fairly decent black swan hedges as well (but it's a bit pointless to try and protect against black swans, which are unpredictable by definition).
>Cash parked in money markets (which is just a click away) hasn't done that badly. Getting 4-5% has kept pace with inflation for the most part.
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.
Was true during the zero interest rate era, but over the past few years since rate hikes started, the money market rate has kept up with housing. Shelter (used in the CPI readings) +5% yearly, and real median home prices ~2% compounded since rates rose.
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.
As long as the government can infinitely print money with zero consequences stonks will perpetually go up.