7 ms·

The stock market can remain irrational longer than you can remain solvent.

by a13n 6y ago

donkeyd 6y ago
God, this has been so true for me. I was trading puts on the massive increase in US Covid cases, but stocks just kept going up. And now we're hitting ATHs while economists are predicting the worst GDP decline ever. Gold and Stocks are both rapidly rising, which isn't really logical, since Gold is a save haven, usually. I looked back at gold vs stocks and the last time stocks and gold rose at approximately the same speed, was just before the 2008 crash.
- JBiserkov 6y ago
  >which isn't really logical, since Gold is a save haven, usually. I don't know anything about anything, but it seems to me this is a logical consequence of inflation? Purchasing power of $ goes down, prices (of everything) go up.
  - dlp211 6y ago
    What inflation?
    - Rury 6y ago
      The inflation in asset values (e.g. equities / real estate / gold). People incorrectly assume inflation means "the price of everything goes up". The problem word here being everything. Why? Well because prices aren't merely dictated by supply, but rather supply & demand. Simply comparing inflated money supply to the good supply is naïve, as it ignores to factor in the demand for different goods. As so, for a dumb example, it's entirely possible to have inflated stock prices but not see inflated sock prices, if all the extra money is chasing stocks, and not socks...
      - layoric 6y ago
        This makes a lot of sense, thanks for the explanation!
      - UncleEntity 6y ago
        > People incorrectly assume inflation means "the price of everything goes up". Because they've spent a few generations making sure people don't understand the difference between price inflation and monetary inflation by using the two interchangeably. This whole sub-thread is a perfect example, "the Fed has been printing money like there's no tomorrow but, look, there's only 0.44% inflation".
    - onlyrealcuzzo 6y ago
      CPI conveniently doesn't measure asset prices. Inflation has been "stubbornly low" for 20 years while asset prices have outperformed historical averages the entire time. Asset prices seem to have diverged from the real economy because assets are primarily funded with debt (real estate, corporate investment) which has been artificially priced lower, while goods are paid with earned income which hasn't been manipulated.
      - MiroF 6y ago
        But why is general asset inflation problematic? There's a pretty clear reason consumer good inflation is bad. > Asset prices seem to have diverged from the real economy because assets are primarily funded with debt Or maybe it's because with rising productivity, capital has become more valuable over time.
        ClumsyPilot 6y ago
        Asset prices going up ad infinitum means you can no longer afford a place to live. In fact it would mean that the only people who can afford assets are people who already have assets. > "Or maybe it's because with rising productivity, capital has become more valuable over time." We have 0.1% interest rates, negative in some countries, that indicates a glut of capital, not "shortage of valuable capital"
        shajznnckfke 6y ago
        The CPI does include rent. And if you check the listings, you won’t find that the money supply multiplying has led to prices multiplying. It seems like it’s just supporting current prices. If prices do start to rise too quickly they can gradually pull back that support.
    - maerF0x0 6y ago
      Monetary inflation leading to shifts in trading rates for other assets. USD is down against many other currencies lately (ie I checked CAD, EURO, GBP)
      - MiroF 6y ago
        > Monetary inflation It's incorrect to refer to monetary inflation as just "inflation." If you're talking about price inflation, we're not seeing that yet - although 5 year inflation expectations are popping back up again [0] So far, it's looking like the Fed is doing as best as could be expected. [0]: https://fred.stlouisfed.org/series/T5YIE https://fred.stlouisfed.org/series/T5YIE
        maerF0x0 6y ago
        Sure. But we are talking about inflated asset prices. Printing more money just makes the truly valuable things take more units of an inflated currency pool
        MiroF 6y ago
        > Printing more money just makes the truly valuable things take more units of an inflated currency poo Only true if everything else holds constant. Also, wouldn't just apply to asset prices but all prices. Everything else, unfortunately, is not holding constant. [0] [0]: https://fred.stlouisfed.org/series/M2V https://fred.stlouisfed.org/series/M2V
        maerF0x0 6y ago
        Now this is just my conspiracy theorist side coming out, but I think the only reason the government cares about frequency of exchange is that they get a cut on each event. The more frequent the exchange, the sooner they get 100% of it back.
    - andromeduck 6y ago
      CPI is inherently flawed due to basket of goods methodology and consumer substitution for cheaper/different alternatives than in the past when prices to their current basket changes. For example average housing spend could be steady while people get smaller homes and CPI would not reflect that. Likewise with lower quality food by some metric or other. So much like how the S&P/NASDAQ has a bias for growth because losers are swapped out for winners, the CPI basket has a negative price bias as expensive goods are swapped out for cheaper ones.
  - arcticbull 6y ago
    Inflation is on track for 0.44% annualized in 2020, about 1/4 of an average year due to the reduced velocity of money caused by the downturn more than offsetting the new money being printed.
    - deleted 6y ago
      [deleted]
    - space_fountain 6y ago
      Is there a way in which finical assets can inflate more the basic of goods that make up inflation metrics? Is gold even part of the index? Like if all that new money isn't being used to buy things like food or even housing that factor into the inflation index than wouldn't we see something like this where gold and the stock market inflate because that's where the cash is going?
      - foobarian 6y ago
        Maybe all the new money ends up in the hands of the rich elite, who just funnel it into the stock market, so it never really ends up inflating real assets. I could totally buy that these are the types that care the most about making the slider go to the right, and don't necessarily spend much of their money (or have so much of it that they already spent it on everything they possibly could).
        solaxun 6y ago
        Ding ding ding!
      - d10r 6y ago
        Lets assume the inflation remains contained in the financial sector. What does this mean e.g. for a young family with no inherited wealth, with average income and savings rate? How should they invest their savings? Isn't it more difficult for them to "break even" (in the sense that their capital income offsets their share of contributing to others capital incomes) than before the asset price inflation?
    - 6y ago
  - Der_Einzige 6y ago
    Not only is inflation extremely low, but we were at serious risk of a deflationary spiral without all the funny-money that the feds are pumping into the economy. Central banks introduced liqudity to make sure deflation did not happen. Foreign demand for the dollar is at all time highs. People forget this and don't think about the impact that this has on currency prices. Also, the "inflation is actually happening they just don't measure it right" crowd are delusional. Maybe they were right before covid, but they're extremely wrong now.
    - quintushoratius 6y ago
      > Not only is inflation extremely low, but we were at serious risk of a deflationary spiral without all the funny-money that the feds are pumping into the economy. Was reading just the other day that inflation is actually underestimated right now. People are buying basics, like food, at far higher rates than normal, prices for those basics are rising, but the CPI hasn't adjusted the ratios. Ergo prices are higher where it counts but the index doesn't see it.
    - markus_zhang 6y ago
      IMO the fed pumps money to reduce the risk of collapse of tbtf entities. It can't do much to reflate the economy as it depends on the banks to lend them out.
    - davidkw 6y ago
      Inflation is low as measured by the CPI. Inflation in financial assets (higher PE ratios for stocks, lower yields on bonds, significantly increased real estate prices in attractive cities, etc) are significantly higher. In my opinion, continued inflation in financial assets will / is already partly causing inequality. It's not good for society if the middle class has trouble buying houses or real estate - it tends to lead to a lot of anger and political polarization, as we've seen.
  - markus_zhang 6y ago
    My understanding is that gold measures the (dis)trust in fiat currencies, with the USD the biggest part of it.
    - asdfasgasdgasdg 6y ago
      That is what some people think, but the only thing we know for sure about the price of gold is that you have to pay its price in ounces to get one ounce of it.
- microcolonel 6y ago
  FWIW the GDP decline may have been overblown, and it seems at least plausible that it will be followed by GDP spike, as production fills in unmet demand at higher prices.
  - maerF0x0 6y ago
    Somethings will get filled later, eg: a rush on wedding venues when folks catch up with delayed plans... Somethings are lost opportunities, eg: _today's_ lunch being provided by safeway + my kitchen vs a restaurant.
- MiroF 6y ago
  > US Covid cases, but stocks just kept going up Just because you don't understand why the market is priced a certain way doesn't mean the market is irrational. Perhaps stocks went up because of the expectations generated by past Fed policy stances post-2008.
- vkou 6y ago
  The explanation for your conundrum is that the value of fiat currencies is dropping. It's why gold and stocks can both be going up. And no, this is not due to inflation (Which is near-zero). This is due to QE, and easy credit.
- csense 6y ago
  Interest rates are super low. The Fed's printing money like there's no tomorrow. It makes a lot of sense that investors would want to put their cash in the market and/or take advantage of low interest rates to lever up. If you're willing to bet the dollar's going to crash in the next few years due to Fed policy, it makes sense to write dollar-valued IOU's today and use them to buy stocks and gold, knowing you'll be able to pay them back with cheaper-valued future dollars.
  - dragonwriter 6y ago
    > If you're willing to bet [...] > [...] knowing [...] These things are not the same.
  - ganeshkrishnan 6y ago
    US dollar will never crash. It is defacto the currency that runs the world. It's a bit like saying the lake will overflow because millions of people are pissing in it. And crash against what? Other currencies are faring far worse.
    - bootcampwhere 6y ago
      This is such and interesting point of view. For example, what if China, Switzerland or even the UK declared they were going to make a conceded effort to back their currency with a basket of precious metals or other commodity, hell, maybe even blockchain based with a private key on very bill. If the us doesn't or can't follow suit how long before bad money starts chasing good out if the country?
    - yabai_yatsu 6y ago
      So like in say 1000 years the world will still be the same? It'll crash one day. The world will change. Statistically speaking when it does it will likely be for the worse too.
    - jusonchan81 6y ago
      It doesn’t have to crash per se. The value can go down. As in inflation. This is already happening in some sense. It’s just accelerated when the real value you get back is lesser for dollar by the day. A few years back can you imagine buying a $1000 phone? The measured inflation is really convoluted. I doubt it measures the true value of a dollar. The good thing is other currencies will just get devalued equally considering dollar is the world currency for the most part.
- overtonwhy 6y ago
  Gold has been dropping for a month...
- SZJX 6y ago
  A lot of people that replied to you seem to be quite sure in their explanation (i.e. fiat currency is losing value due to QE etc.) I think all we know is that we actually have little idea of what's happening and what will happen in the near future, since this situation is quite unprecedented. During the great depression the fed had a tightening instead of easing and the market crashed hard, sure, but what happens when there's a crazy amount of easing instead? Guess people can only look back in 20 years or so and draw some conclusion. Being too sure of anything at the present moment would be quite overconfident IMO.
- garmaine 6y ago
  Well, NOTHING about the price of gold is rational. There is no reason it should be a safe haven. That’s pure investment fiction.
- a13n 6y ago
  Why stocks are going up: Interest rates are insanely low, which means putting your money in the bank, or in bonds, has a near-zero return. There are tons of massive funds (vanguard, etc) that have promised a return to their investors, and they're moving money from interest-based investments to other investments. This has caused a ton of money to be put into the stock market, which drives multiples up. Why gold is going up: The government is printing a ton of money to deal with the pandemic. This causes USD's value to drop compared to other currencies. There's a small (but real) possibility that the US dollar stops being the world's reserve currency. This causes people to seek value stores other than USD. This includes gold, bitcoin, euro, yen, renminbi, which are all up vs USD since the pandemic started. These two things happening at the same time doesn't necessarily mean the stock market will crash.
bxparks 6y ago
Great quote. Aside: I thought it originated from John Keynes, but it looks like that earliest written record goes back to 1983 to a financial analyst named Gary Shilling: https://quoteinvestigator.com/2011/08/09/remain-solvent/ https://quoteinvestigator.com/2011/08/09/remain-solvent/ "Addendum: A small number of libraries apparently hold a transcript from a 1983 seminar during which Shilling reportedly employed the adage."
nickik 6y ago
This is what all the people who are continually wrong say to excuse their failure.

The stock market can remain irrational longer than you can remain solvent.

by a13n 6y ago

The stock market can remain irrational longer than you can remain solvent.

God, this has been so true for me. I was trading puts on the massive increase in US Covid cases, but stocks just kept going up. And now we're hitting ATHs while economists are predicting the worst GDP decline ever. Gold and Stocks are both rapidly rising, which isn't really logical, since Gold is a save haven, usually. I looked back at gold vs stocks and the last time stocks and gold rose at approximately the same speed, was just before the 2008 crash.

JBiserkov 6y ago
>which isn't really logical, since Gold is a save haven, usually. I don't know anything about anything, but it seems to me this is a logical consequence of inflation? Purchasing power of $ goes down, prices (of everything) go up.
- dlp211 6y ago
  What inflation?
  - Rury 6y ago
    The inflation in asset values (e.g. equities / real estate / gold). People incorrectly assume inflation means "the price of everything goes up". The problem word here being everything. Why? Well because prices aren't merely dictated by supply, but rather supply & demand. Simply comparing inflated money supply to the good supply is naïve, as it ignores to factor in the demand for different goods. As so, for a dumb example, it's entirely possible to have inflated stock prices but not see inflated sock prices, if all the extra money is chasing stocks, and not socks...
    - layoric 6y ago
      This makes a lot of sense, thanks for the explanation!
    - UncleEntity 6y ago
      > People incorrectly assume inflation means "the price of everything goes up". Because they've spent a few generations making sure people don't understand the difference between price inflation and monetary inflation by using the two interchangeably. This whole sub-thread is a perfect example, "the Fed has been printing money like there's no tomorrow but, look, there's only 0.44% inflation".
  - onlyrealcuzzo 6y ago
    CPI conveniently doesn't measure asset prices. Inflation has been "stubbornly low" for 20 years while asset prices have outperformed historical averages the entire time. Asset prices seem to have diverged from the real economy because assets are primarily funded with debt (real estate, corporate investment) which has been artificially priced lower, while goods are paid with earned income which hasn't been manipulated.
    - MiroF 6y ago
      But why is general asset inflation problematic? There's a pretty clear reason consumer good inflation is bad. > Asset prices seem to have diverged from the real economy because assets are primarily funded with debt Or maybe it's because with rising productivity, capital has become more valuable over time.
      - ClumsyPilot 6y ago
        Asset prices going up ad infinitum means you can no longer afford a place to live. In fact it would mean that the only people who can afford assets are people who already have assets. > "Or maybe it's because with rising productivity, capital has become more valuable over time." We have 0.1% interest rates, negative in some countries, that indicates a glut of capital, not "shortage of valuable capital"
        shajznnckfke 6y ago
        The CPI does include rent. And if you check the listings, you won’t find that the money supply multiplying has led to prices multiplying. It seems like it’s just supporting current prices. If prices do start to rise too quickly they can gradually pull back that support.
  - maerF0x0 6y ago
    Monetary inflation leading to shifts in trading rates for other assets. USD is down against many other currencies lately (ie I checked CAD, EURO, GBP)
    - MiroF 6y ago
      > Monetary inflation It's incorrect to refer to monetary inflation as just "inflation." If you're talking about price inflation, we're not seeing that yet - although 5 year inflation expectations are popping back up again [0] So far, it's looking like the Fed is doing as best as could be expected. [0]: https://fred.stlouisfed.org/series/T5YIE https://fred.stlouisfed.org/series/T5YIE
      - maerF0x0 6y ago
        Sure. But we are talking about inflated asset prices. Printing more money just makes the truly valuable things take more units of an inflated currency pool
        MiroF 6y ago
        > Printing more money just makes the truly valuable things take more units of an inflated currency poo Only true if everything else holds constant. Also, wouldn't just apply to asset prices but all prices. Everything else, unfortunately, is not holding constant. [0] [0]: https://fred.stlouisfed.org/series/M2V https://fred.stlouisfed.org/series/M2V
        maerF0x0 6y ago
        Now this is just my conspiracy theorist side coming out, but I think the only reason the government cares about frequency of exchange is that they get a cut on each event. The more frequent the exchange, the sooner they get 100% of it back.
  - andromeduck 6y ago
    CPI is inherently flawed due to basket of goods methodology and consumer substitution for cheaper/different alternatives than in the past when prices to their current basket changes. For example average housing spend could be steady while people get smaller homes and CPI would not reflect that. Likewise with lower quality food by some metric or other. So much like how the S&P/NASDAQ has a bias for growth because losers are swapped out for winners, the CPI basket has a negative price bias as expensive goods are swapped out for cheaper ones.
- arcticbull 6y ago
  Inflation is on track for 0.44% annualized in 2020, about 1/4 of an average year due to the reduced velocity of money caused by the downturn more than offsetting the new money being printed.
  - deleted 6y ago
    [deleted]
  - space_fountain 6y ago
    Is there a way in which finical assets can inflate more the basic of goods that make up inflation metrics? Is gold even part of the index? Like if all that new money isn't being used to buy things like food or even housing that factor into the inflation index than wouldn't we see something like this where gold and the stock market inflate because that's where the cash is going?
    - foobarian 6y ago
      Maybe all the new money ends up in the hands of the rich elite, who just funnel it into the stock market, so it never really ends up inflating real assets. I could totally buy that these are the types that care the most about making the slider go to the right, and don't necessarily spend much of their money (or have so much of it that they already spent it on everything they possibly could).
      - solaxun 6y ago
        Ding ding ding!
    - d10r 6y ago
      Lets assume the inflation remains contained in the financial sector. What does this mean e.g. for a young family with no inherited wealth, with average income and savings rate? How should they invest their savings? Isn't it more difficult for them to "break even" (in the sense that their capital income offsets their share of contributing to others capital incomes) than before the asset price inflation?
  - 6y ago
- Der_Einzige 6y ago
  Not only is inflation extremely low, but we were at serious risk of a deflationary spiral without all the funny-money that the feds are pumping into the economy. Central banks introduced liqudity to make sure deflation did not happen. Foreign demand for the dollar is at all time highs. People forget this and don't think about the impact that this has on currency prices. Also, the "inflation is actually happening they just don't measure it right" crowd are delusional. Maybe they were right before covid, but they're extremely wrong now.
  - quintushoratius 6y ago
    > Not only is inflation extremely low, but we were at serious risk of a deflationary spiral without all the funny-money that the feds are pumping into the economy. Was reading just the other day that inflation is actually underestimated right now. People are buying basics, like food, at far higher rates than normal, prices for those basics are rising, but the CPI hasn't adjusted the ratios. Ergo prices are higher where it counts but the index doesn't see it.
  - markus_zhang 6y ago
    IMO the fed pumps money to reduce the risk of collapse of tbtf entities. It can't do much to reflate the economy as it depends on the banks to lend them out.
  - davidkw 6y ago
    Inflation is low as measured by the CPI. Inflation in financial assets (higher PE ratios for stocks, lower yields on bonds, significantly increased real estate prices in attractive cities, etc) are significantly higher. In my opinion, continued inflation in financial assets will / is already partly causing inequality. It's not good for society if the middle class has trouble buying houses or real estate - it tends to lead to a lot of anger and political polarization, as we've seen.
- markus_zhang 6y ago
  My understanding is that gold measures the (dis)trust in fiat currencies, with the USD the biggest part of it.
  - asdfasgasdgasdg 6y ago
    That is what some people think, but the only thing we know for sure about the price of gold is that you have to pay its price in ounces to get one ounce of it.
microcolonel 6y ago
FWIW the GDP decline may have been overblown, and it seems at least plausible that it will be followed by GDP spike, as production fills in unmet demand at higher prices.
- maerF0x0 6y ago
  Somethings will get filled later, eg: a rush on wedding venues when folks catch up with delayed plans... Somethings are lost opportunities, eg: _today's_ lunch being provided by safeway + my kitchen vs a restaurant.
MiroF 6y ago
> US Covid cases, but stocks just kept going up Just because you don't understand why the market is priced a certain way doesn't mean the market is irrational. Perhaps stocks went up because of the expectations generated by past Fed policy stances post-2008.
vkou 6y ago
The explanation for your conundrum is that the value of fiat currencies is dropping. It's why gold and stocks can both be going up. And no, this is not due to inflation (Which is near-zero). This is due to QE, and easy credit.
csense 6y ago
Interest rates are super low. The Fed's printing money like there's no tomorrow. It makes a lot of sense that investors would want to put their cash in the market and/or take advantage of low interest rates to lever up. If you're willing to bet the dollar's going to crash in the next few years due to Fed policy, it makes sense to write dollar-valued IOU's today and use them to buy stocks and gold, knowing you'll be able to pay them back with cheaper-valued future dollars.
- dragonwriter 6y ago
  > If you're willing to bet [...] > [...] knowing [...] These things are not the same.
- ganeshkrishnan 6y ago
  US dollar will never crash. It is defacto the currency that runs the world. It's a bit like saying the lake will overflow because millions of people are pissing in it. And crash against what? Other currencies are faring far worse.
  - bootcampwhere 6y ago
    This is such and interesting point of view. For example, what if China, Switzerland or even the UK declared they were going to make a conceded effort to back their currency with a basket of precious metals or other commodity, hell, maybe even blockchain based with a private key on very bill. If the us doesn't or can't follow suit how long before bad money starts chasing good out if the country?
  - yabai_yatsu 6y ago
    So like in say 1000 years the world will still be the same? It'll crash one day. The world will change. Statistically speaking when it does it will likely be for the worse too.
  - jusonchan81 6y ago
    It doesn’t have to crash per se. The value can go down. As in inflation. This is already happening in some sense. It’s just accelerated when the real value you get back is lesser for dollar by the day. A few years back can you imagine buying a $1000 phone? The measured inflation is really convoluted. I doubt it measures the true value of a dollar. The good thing is other currencies will just get devalued equally considering dollar is the world currency for the most part.
overtonwhy 6y ago
Gold has been dropping for a month...
SZJX 6y ago
A lot of people that replied to you seem to be quite sure in their explanation (i.e. fiat currency is losing value due to QE etc.) I think all we know is that we actually have little idea of what's happening and what will happen in the near future, since this situation is quite unprecedented. During the great depression the fed had a tightening instead of easing and the market crashed hard, sure, but what happens when there's a crazy amount of easing instead? Guess people can only look back in 20 years or so and draw some conclusion. Being too sure of anything at the present moment would be quite overconfident IMO.
garmaine 6y ago
Well, NOTHING about the price of gold is rational. There is no reason it should be a safe haven. That’s pure investment fiction.
a13n 6y ago
Why stocks are going up: Interest rates are insanely low, which means putting your money in the bank, or in bonds, has a near-zero return. There are tons of massive funds (vanguard, etc) that have promised a return to their investors, and they're moving money from interest-based investments to other investments. This has caused a ton of money to be put into the stock market, which drives multiples up. Why gold is going up: The government is printing a ton of money to deal with the pandemic. This causes USD's value to drop compared to other currencies. There's a small (but real) possibility that the US dollar stops being the world's reserve currency. This causes people to seek value stores other than USD. This includes gold, bitcoin, euro, yen, renminbi, which are all up vs USD since the pandemic started. These two things happening at the same time doesn't necessarily mean the stock market will crash.

bxparks 6y ago

Great quote. Aside: I thought it originated from John Keynes, but it looks like that earliest written record goes back to 1983 to a financial analyst named Gary Shilling: https://quoteinvestigator.com/2011/08/09/remain-solvent/ https://quoteinvestigator.com/2011/08/09/remain-solvent/ "Addendum: A small number of libraries apparently hold a transcript from a 1983 seminar during which Shilling reportedly employed the adage."

nickik 6y ago

This is what all the people who are continually wrong say to excuse their failure.