4 ms·

>markets are not faith-based. They are evidence-based. Which is why we are seeing close to record highs in the middle of the worst pandemic in 100 years? Marke

>markets are not faith-based. They are evidence-based. Which is why we are seeing close to record highs in the middle of the worst pandemic in 100 years? Markets are irrational as far as I can see.

mjburgess 6y ago
The markets always track the future. At the moment, the market expects a boom. (It is probably incorrect; it might not be). That expectation, however, is being exaggerated by other people who likewise expect it. Sure. But we shouldn't characterise the market as irrationally faith-based, if it were, it would never go bust. It doesn't go bust because, for some random reason, people loose faith. Rather, their beliefs are revised with updated evidence, which propagates thru the market. This "correction towards reality" is always at work, but people attend to the evidence at different rates: when the whole market looks, then you go bust. There is a deeply tyrannical and propagandistic undercurrent to the view that human action is simply a matter of our "faith about the world", and not evidence. It encourages people to act as-if false things were true; and requires others to do so; to cause great catastrophes precisely because the false things arent true.
- pjc50 6y ago
  Not a believer in Keynes "animal spirits", then? > encourages people to act as-if false things were true Your last paragraph, which I broadly agree with, is at odds with the rest of it, which is classic naive efficient-market-hypothesis stuff. It's complicated to discuss what "evidence" means for events in the future, because it rapidly heads into deep waters of philosophy, but like the 538 election prediction the best we can do about the future is have a probability distribution of outcomes. And as a result there are three big effects: one is low-probability events turning out to actually happen sometimes ("black swan"), another is events you wanted to be uncorrelated turn out to be correlated (which blew up mortgage "tranches"), and the third is that other people's action is market-driving information even if it's irrational; panic selling causes more panic selling, bank runs are real, etc.
  - darawk 6y ago
    > It's complicated to discuss what "evidence" means for events in the future, because it rapidly heads into deep waters of philosophy, but like the 538 election prediction the best we can do about the future is have a probability distribution of outcomes. And as a result there are three big effects: one is low-probability events turning out to actually happen sometimes ("black swan"), another is events you wanted to be uncorrelated turn out to be correlated (which blew up mortgage "tranches"), and the third is that other people's action is market-driving information even if it's irrational; panic selling causes more panic selling, bank runs are real, etc. Markets make point estimates. Derivatives markets make distributional estimates. The information is all there, and if you disagree with it, you can make bets to that effect. But most people won't do that, because they don't actually believe that the market is inefficient. There's very good justification for the present stock market rally, especially if you pay attention to the market's internal structure. The pandemic is driving consolidation, and changing habits. Changes that primarily benefit high scale businesses. The disconnect between the state of the economy and the state of the S&P 500 is driven primarily by this distinction. The market is correct to price in a boom. You are also correct to fear a recession. These things are only mutually exclusive if you mistake the stock market for the broader economy. It's also true that there are major tail risks present. The market is not ignoring them. The market is saying that the expected value, inclusive of those tail risks, is positive. You can see the market pricing those tail risks in if you look at the implied volatility surface of options right now. It's there. It's really important to understand that the fact that a price turns out to be wrong does not make markets inefficient, or even incorrect. Gamblers making statistically correct bets are wrong all the time. That's just the way uncertainty works in the world. There are people arbitraging uncertainty at all points of the distribution, from the tail on up. It's true that markets are less efficient around low probability events. But it's also true that they quickly learn from their mistakes
dasudasu 6y ago
Consider that trillions in new money were created out of thin air and that bond yields crashed. The discount rate for equities just got massively re-evaluated. Also, only select sectors that were already overweighted by indices are up significantly from pre-pandemic levels.
- iaw 6y ago
  Any thoughts on whether this is actually going to represent a wave of inflation?
  - dasudasu 6y ago
    Asset inflation, probably, which is what many people agreed happened in the last decade.

>markets are not faith-based. They are evidence-based. Which is why we are seeing close to record highs in the middle of the worst pandemic in 100 years? Markets are irrational as far as I can see.

mjburgess 6y ago

The markets always track the future. At the moment, the market expects a boom. (It is probably incorrect; it might not be). That expectation, however, is being exaggerated by other people who likewise expect it. Sure. But we shouldn't characterise the market as irrationally faith-based, if it were, it would never go bust. It doesn't go bust because, for some random reason, people loose faith. Rather, their beliefs are revised with updated evidence, which propagates thru the market. This "correction towards reality" is always at work, but people attend to the evidence at different rates: when the whole market looks, then you go bust. There is a deeply tyrannical and propagandistic undercurrent to the view that human action is simply a matter of our "faith about the world", and not evidence. It encourages people to act as-if false things were true; and requires others to do so; to cause great catastrophes precisely because the false things arent true.

pjc50 6y ago
Not a believer in Keynes "animal spirits", then? > encourages people to act as-if false things were true Your last paragraph, which I broadly agree with, is at odds with the rest of it, which is classic naive efficient-market-hypothesis stuff. It's complicated to discuss what "evidence" means for events in the future, because it rapidly heads into deep waters of philosophy, but like the 538 election prediction the best we can do about the future is have a probability distribution of outcomes. And as a result there are three big effects: one is low-probability events turning out to actually happen sometimes ("black swan"), another is events you wanted to be uncorrelated turn out to be correlated (which blew up mortgage "tranches"), and the third is that other people's action is market-driving information even if it's irrational; panic selling causes more panic selling, bank runs are real, etc.
- darawk 6y ago
  > It's complicated to discuss what "evidence" means for events in the future, because it rapidly heads into deep waters of philosophy, but like the 538 election prediction the best we can do about the future is have a probability distribution of outcomes. And as a result there are three big effects: one is low-probability events turning out to actually happen sometimes ("black swan"), another is events you wanted to be uncorrelated turn out to be correlated (which blew up mortgage "tranches"), and the third is that other people's action is market-driving information even if it's irrational; panic selling causes more panic selling, bank runs are real, etc. Markets make point estimates. Derivatives markets make distributional estimates. The information is all there, and if you disagree with it, you can make bets to that effect. But most people won't do that, because they don't actually believe that the market is inefficient. There's very good justification for the present stock market rally, especially if you pay attention to the market's internal structure. The pandemic is driving consolidation, and changing habits. Changes that primarily benefit high scale businesses. The disconnect between the state of the economy and the state of the S&P 500 is driven primarily by this distinction. The market is correct to price in a boom. You are also correct to fear a recession. These things are only mutually exclusive if you mistake the stock market for the broader economy. It's also true that there are major tail risks present. The market is not ignoring them. The market is saying that the expected value, inclusive of those tail risks, is positive. You can see the market pricing those tail risks in if you look at the implied volatility surface of options right now. It's there. It's really important to understand that the fact that a price turns out to be wrong does not make markets inefficient, or even incorrect. Gamblers making statistically correct bets are wrong all the time. That's just the way uncertainty works in the world. There are people arbitraging uncertainty at all points of the distribution, from the tail on up. It's true that markets are less efficient around low probability events. But it's also true that they quickly learn from their mistakes

dasudasu 6y ago

Consider that trillions in new money were created out of thin air and that bond yields crashed. The discount rate for equities just got massively re-evaluated. Also, only select sectors that were already overweighted by indices are up significantly from pre-pandemic levels.

iaw 6y ago
Any thoughts on whether this is actually going to represent a wave of inflation?
- dasudasu 6y ago
  Asset inflation, probably, which is what many people agreed happened in the last decade.