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People are forced to trade, here is how: When the government needs a loan to cover its budget, they get it from the Federal Reserve. The Federal Reserve are cha

People are forced to trade, here is how: When the government needs a loan to cover its budget, they get it from the Federal Reserve. The Federal Reserve are charged to coin new money to provide the government (see wikipedia Federal Reserve, subheadings: 'Elastic Currency', 'Lender of Last Resort' & 'Central bank'). As the Federal Reserve increases the money supply, the value of the dollars in your pocket/matress/bank account go down. Since the value of currency evaporates, the only way to maintain your savings is to have it in a non-currency form. Stocks are a pretty liquid asset. This pushes people away from savings and into speculation (the stock market), where many lose their shirts.

cynicalkane 16y ago
Here's the non sequitur: 1) inflation makes it costly to hold money 2) inflation forces you to make stupid speculative investments and frequent trades The second doesn't follow from the first.
- mynameishere 16y ago
  Most people buy mutual funds, which take a nice fee for doing work a dart-throwing monkey could do (no exaggeration). It would make more sense for people to buy a random sample of the S&P 500, but try telling them that.
  - vecter 16y ago
    Do you invest your money in a random sample of the S&P 500?
    - mynameishere 16y ago
      If I wanted long-term exposure to the S&P 500 then I would indeed do that. I have bought and shorted SPY (which has a fee attached) as a part of short-term pairs trades. My point is simply that for years, fund managers such John Bogle have made a big deal about the fact that an efficient market doesn't allow stock picking funds to beat the cheaper index funds, etc, etc. True enough, but the next logical step is to drop the index funds and manually reproduce their trivial work. Someday, a smart brokerage is going to offer a service to do this automatically, with cut-rate commissions. This would save people billions and billions of dollars.
      - MrMan 16y ago
        I think you are referring to an ETF?
        mynameishere 16y ago
        SPY is the largest ETF, and follows the S&P 500, which is why I mentioned it. I trade lots of ETFs. Short term, they allow individuals to use hedge fund-style strategies. Long-term, they are essentially the same as mutual funds. Very-short-term, they allow quants to make money on arbitrage. There is no good reason for their existence, honestly.
        yummyfajitas 16y ago
        If you don't derive value from them, why do you trade them? You are absolutely right. ETFs are basically mutual funds, but with greater liquidity and lower fees. That's the reason for their existence - mutual funds, but better.
        vecter 16y ago
        When you say things like "Very-short-term, they allow quants to make money on arbitrage.", it makes me think you really don't understand the role of market makers, proprietary traders, or quants. Let me ask you a very basic question: why do market makers (the people you trade against when you buy or sell SPY) make money? They aren't stealing from you. They are providing you the service of liquidity. Market makers connect people who want to buy/sell now with people who want to buy/sell in the future. In the interim, they take on the risk of holding that position that you didn't want. On average, they are compensated for that risk. The way you say "they allow quants to make money on arbitrage" implies that the quants are just "extracting money" from the markets without doing any good at all. This is the complete opposite of the truth, and more people need to understand this.
- warrenwilkinson 16y ago
  I only said 'many' lose their shirts, but that might have been harsh. Many investors are just looking to store their savings. They're not Warren Buffets, they don't study markets to make educated decisions, they just go into index funds and hope for the best. But it's like having your bank in the lobby of a casino. You don't have to play --- but you're already there, and look at the flashing lights...

cynicalkane 16y ago

Here's the non sequitur: 1) inflation makes it costly to hold money 2) inflation forces you to make stupid speculative investments and frequent trades The second doesn't follow from the first.

mynameishere 16y ago
Most people buy mutual funds, which take a nice fee for doing work a dart-throwing monkey could do (no exaggeration). It would make more sense for people to buy a random sample of the S&P 500, but try telling them that.
- vecter 16y ago
  Do you invest your money in a random sample of the S&P 500?
  - mynameishere 16y ago
    If I wanted long-term exposure to the S&P 500 then I would indeed do that. I have bought and shorted SPY (which has a fee attached) as a part of short-term pairs trades. My point is simply that for years, fund managers such John Bogle have made a big deal about the fact that an efficient market doesn't allow stock picking funds to beat the cheaper index funds, etc, etc. True enough, but the next logical step is to drop the index funds and manually reproduce their trivial work. Someday, a smart brokerage is going to offer a service to do this automatically, with cut-rate commissions. This would save people billions and billions of dollars.
    - MrMan 16y ago
      I think you are referring to an ETF?
      - mynameishere 16y ago
        SPY is the largest ETF, and follows the S&P 500, which is why I mentioned it. I trade lots of ETFs. Short term, they allow individuals to use hedge fund-style strategies. Long-term, they are essentially the same as mutual funds. Very-short-term, they allow quants to make money on arbitrage. There is no good reason for their existence, honestly.
        yummyfajitas 16y ago
        If you don't derive value from them, why do you trade them? You are absolutely right. ETFs are basically mutual funds, but with greater liquidity and lower fees. That's the reason for their existence - mutual funds, but better.
        vecter 16y ago
        When you say things like "Very-short-term, they allow quants to make money on arbitrage.", it makes me think you really don't understand the role of market makers, proprietary traders, or quants. Let me ask you a very basic question: why do market makers (the people you trade against when you buy or sell SPY) make money? They aren't stealing from you. They are providing you the service of liquidity. Market makers connect people who want to buy/sell now with people who want to buy/sell in the future. In the interim, they take on the risk of holding that position that you didn't want. On average, they are compensated for that risk. The way you say "they allow quants to make money on arbitrage" implies that the quants are just "extracting money" from the markets without doing any good at all. This is the complete opposite of the truth, and more people need to understand this.
warrenwilkinson 16y ago
I only said 'many' lose their shirts, but that might have been harsh. Many investors are just looking to store their savings. They're not Warren Buffets, they don't study markets to make educated decisions, they just go into index funds and hope for the best. But it's like having your bank in the lobby of a casino. You don't have to play --- but you're already there, and look at the flashing lights...