7 ms·

Hypothesis: the face-ripping rally in stocks and total disconnect from the real economy is the result of trading bots that have mistaken the flood of central ba

by aazaa 6y ago

Hypothesis: the face-ripping rally in stocks and total disconnect from the real economy is the result of trading bots that have mistaken the flood of central bank liquidity as a demand spike. The algos haven't yet been updated to reflect the fact that there's a man behind the curtain with an infinite supply of liquidity pumping, pumping as fast as he can. And it's far from clear that the distinction matters anymore. Assets have become a kind of video game. When you strip stocks and bonds from their anchors to valuation (P/E multiple or inflation), you're left essentially with something very similar to gold and cryptocurrencies - assets that are difficult to value by any conventional means, but which become sensitive to central bank shenanigans. This could explain why all asset classes are now moving in unison.

ThePowerOfDirge 6y ago
Alternative hypothesis: bailouts are a temporary smoke screen for the pension and hedge funds, other financial institutions and the super rich to cash out, once they have liquidated their positions, the real crash happens.
- rileymat2 6y ago
  Alternate hypothesis: The next year to 18 months of earnings reductions due to covid is not enough to justify a 30% drop in net present value of the market at large.
  - rayiner 6y ago
    To the top with you!
  - scrimps 6y ago
    The the companies were accurately priced prior to COVID then that would be the case. If companies were in an overvalued bubble before COVID then that would not be the case.
  - amf12 6y ago
    Another alternative also is investors fleeing from emerging markets. With Fed's backing the US stock market is a better bet than some others as compared with moving to cash, bonds, Gold, etc.
- jdhn 6y ago
  My tinfoil hat hypothesis is that the drop in equity prices will be used as an excuse for bailing out pension funds.
parhamn 6y ago
You'd be surprised how unsophisticated most of these trading bots are, very doubtful enough trading volume happens over this sort of macro trend (less their impact on intraday trends) to cause this. Further if those strategies existed, they would have been already turned off -- most shops have strategy engines with easy switching various smaller strategies, there isn't a mega-algo. Nevertheless, You are correct that some of the first principles they trade on are no longer valid.
wcoenen 6y ago
> This could explain why all asset classes are now moving in unison I think this happens just because of portfolio balancing. If stocks in a balanced portfolio do better than other asset types (e.g. government bonds, corporate bonds, gold, commodities, ...) then some stocks will be sold and more of the other assets will be bought. Vice versa if stocks do worse. This behavior increases correlation between all asset types.
dharma1 6y ago
I think all it is the market is pricing in a relatively fast recovery, and looking 12 months ahead of today's crisis. Whether that's correct or not, time will tell. Also, I think recovery will be highly sector and company dependent.
- benjaminjackman 6y ago
  > Also, I think recovery will be highly sector and company dependent. If that’s your hypothesis it sounds like there is supporting evidence, as not all sectors have shared in the recent post crash recovery. Eg a lot of retail still trading near lows.
leonroy 6y ago
I too had been scratching my head at the recent stock market performance which seems to be defying gravity. These two sources helped me understand more about what is happening and why: 1. * Sectors of the economy are down, such as energy (-50%), consumer discretionary (-27%) and financials (-22%). * A few are up, such as health care (+5%), consumer staples (+6.5%), information technology (+8.5%). * Market cap of the S&P500 hasn't changed dramatically, but the distribution of that money has switched to tech some which are up 50% or more. Source: https://twitter.com/calvinfo/status/1254635755671969793 https://twitter.com/calvinfo/status/1254635755671969793 2. * The stock market is not the economy. * It is a forward looking pricing machine. * It incorporates expectations about the future into stock prices today. * Economic news looks at what has already happened, often way after it has happened. * Hence stock prices shift if economic news does not match what investors already expect ie. more positive news than investors expected means stocks go up, more negative news than investors expected means stocks go down. Source: https://youtu.be/0ECqDaPjjV0 https://youtu.be/0ECqDaPjjV0
- camelite 6y ago
  I get the pandemic being priced in now, but surely that implies a pas point in time in the past when the pricing in happened? Ie at some point or over some period, somebody looks at the looming global pandemic and goes "fuck! Sell everything!"
  - ls612 6y ago
    Yeah that happened in March when markets fell 30% or more in a couple weeks

by aazaa 6y ago

ThePowerOfDirge 6y ago

Alternative hypothesis: bailouts are a temporary smoke screen for the pension and hedge funds, other financial institutions and the super rich to cash out, once they have liquidated their positions, the real crash happens.

rileymat2 6y ago
Alternate hypothesis: The next year to 18 months of earnings reductions due to covid is not enough to justify a 30% drop in net present value of the market at large.
- rayiner 6y ago
  To the top with you!
- scrimps 6y ago
  The the companies were accurately priced prior to COVID then that would be the case. If companies were in an overvalued bubble before COVID then that would not be the case.
- amf12 6y ago
  Another alternative also is investors fleeing from emerging markets. With Fed's backing the US stock market is a better bet than some others as compared with moving to cash, bonds, Gold, etc.
jdhn 6y ago
My tinfoil hat hypothesis is that the drop in equity prices will be used as an excuse for bailing out pension funds.

parhamn 6y ago

You'd be surprised how unsophisticated most of these trading bots are, very doubtful enough trading volume happens over this sort of macro trend (less their impact on intraday trends) to cause this. Further if those strategies existed, they would have been already turned off -- most shops have strategy engines with easy switching various smaller strategies, there isn't a mega-algo. Nevertheless, You are correct that some of the first principles they trade on are no longer valid.

wcoenen 6y ago

> This could explain why all asset classes are now moving in unison I think this happens just because of portfolio balancing. If stocks in a balanced portfolio do better than other asset types (e.g. government bonds, corporate bonds, gold, commodities, ...) then some stocks will be sold and more of the other assets will be bought. Vice versa if stocks do worse. This behavior increases correlation between all asset types.

dharma1 6y ago

I think all it is the market is pricing in a relatively fast recovery, and looking 12 months ahead of today's crisis. Whether that's correct or not, time will tell. Also, I think recovery will be highly sector and company dependent.

benjaminjackman 6y ago
> Also, I think recovery will be highly sector and company dependent. If that’s your hypothesis it sounds like there is supporting evidence, as not all sectors have shared in the recent post crash recovery. Eg a lot of retail still trading near lows.

leonroy 6y ago

I too had been scratching my head at the recent stock market performance which seems to be defying gravity. These two sources helped me understand more about what is happening and why: 1. * Sectors of the economy are down, such as energy (-50%), consumer discretionary (-27%) and financials (-22%). * A few are up, such as health care (+5%), consumer staples (+6.5%), information technology (+8.5%). * Market cap of the S&P500 hasn't changed dramatically, but the distribution of that money has switched to tech some which are up 50% or more. Source: https://twitter.com/calvinfo/status/1254635755671969793 https://twitter.com/calvinfo/status/1254635755671969793 2. * The stock market is not the economy. * It is a forward looking pricing machine. * It incorporates expectations about the future into stock prices today. * Economic news looks at what has already happened, often way after it has happened. * Hence stock prices shift if economic news does not match what investors already expect ie. more positive news than investors expected means stocks go up, more negative news than investors expected means stocks go down. Source: https://youtu.be/0ECqDaPjjV0 https://youtu.be/0ECqDaPjjV0

camelite 6y ago
I get the pandemic being priced in now, but surely that implies a pas point in time in the past when the pricing in happened? Ie at some point or over some period, somebody looks at the looming global pandemic and goes "fuck! Sell everything!"
- ls612 6y ago
  Yeah that happened in March when markets fell 30% or more in a couple weeks