[Samurai]

Those who are familiar with my posts in this thread, might know that I don't like the stock market. That is mainly because I believe stock market is a casino, and the stock prices simply have no connection to the true value of the company.

The concept of quantitative finance, which is the very foundation of algorithm based trading and high frequency trading, was originally invented for gambling in Casinos. When Ed Thorp started winning consistently at the Casinos, he had a close call with the Casino mob. So he looked around realised that the same techniques can be used in stock market, which is even bigger than Casinos when it came to gambling.

In fact, Casinos will throw you out if they suspect you of using the card counting techniques invented by Ed Thorp. They don't want you to have undue advantage at the casinos. But they will welcome you at the stock market.

According me, stock market is a giant vacuum cleaner, which sucks wealth from most and delivers it to the few. You don't have to invest directly to have your wealth sucked by the stock market. The 2008 financial crash proved that.

And yes, I have heard every counter argument, mostly by folks who are invested in the stock market and reaping the rewards. They keep telling that the stock market index is the real indication of the health of the economy. There is huge income inequality, so what, look at the stock market soaring, the economy must be in great shape. There is a famous quote by Upton Sinclair, who said It is difficult to get a man to understand something, when his income depends on his not understanding it.

Consider the present times. When most of the world went into lockdown in March, for once stock market behaved correctly and took a dive. And then old habit came back.

The indices around the world has come back closer to pre-covid19 times. In fact, NASDAQ has exceeded the pre-covid19 figures.



Does this mean economy is back to normal and better than pre-covid19 times?

And for people mistaking me to be a socialist, I started another company in Feb 2020, just when Covid started spreading around the world. Luckily for me, Covid19 didn't affect my line of work too much. So I created a few jobs out of business need, and the company is able to pay salaries on time too. But I am entirely aware of how many businesses and employment covid-19 has killed. Just 5% doing well is no indication of the great economy, as stock market generally tends to indicate.

True indication of good economy is how well the small businesses are doing, those who are not financed by overvalued share prices. Small businesses run on positive cashflow or they die.

Yesterday, Mohamed El-Erian made an important statement on CNBC. He is the former CEO of investment powerhouse Pimco.

• If you want capitalism to be sustained, you need buy-in from a lot of people. You cannot get buy-in if it’s all about large corporations.
• Remember what small businesses do. They’re not just large employers, they also are the main way to have inclusive capitalism, an inclusive market-based system.
• As of Aug. 11, there are about 155,000 total business closures reported on Yelp since March 1, according to data from the reviews company. About 91,000 of the closures, or 59%, are permanent.

How is this a good economy?

Source

[neerajdan]

Samurai Sir, very well put and explained!

I completely agree with all you have said but the lingering question for someone like me is then where to invest my savings?

I know the stock market someday might collapse, but till then what to do with surplus funds? Is it a 'necessary evil' for middle class job people like us? Or where to invest for the future?

Reminds me of the quote "The markets can remain irrational, longer than you can remain solvent."

[SmartCat]

Originally Posted by Samurai

Consider the present times. When most of the world went into lockdown in March, for once stock market behaved correctly and took a dive. And then old habit came back. The indices around the world has come back closer to pre-covid19 times. In fact, NASDAQ has exceeded the pre-covid19 figures.Does this mean economy is back to normal and better than pre-covid19 times?

There is a rather boring explanation for this. The size of US treasury bond market is about the same as US stock markets. Since US Fed slashed interest rates to 0%, money has fled the bond market and has moved into US/Global stocks and Gold.

Note that bonds have inverse relation with interest rates. Meaning, if somebody keeps money in treasury bonds at 0% and US Fed raises interest rates, the value of your investments will go down. These are not like fixed deposits.

Originally Posted by neerajdan

I completely agree with all you have said but the lingering question for someone like me is then where to invest my savings? I know the stock market someday might collapse, but till then what to do with surplus funds? Is it a 'necessary evil' for middle class job people like us? Or where to invest for the future?

Invest in a mix of Govt bonds, Equity mutual funds and Gold. If one goes down, other two will usually go up in value. You can ask investment queries here:
https://www.team-bhp.com/forum/shift...ds-thread.html (The Mutual Funds Thread)

[Samurai]

Originally Posted by neerajdan

I completely agree with all you have said but the lingering question for someone like me is then where to invest my savings?

Unfortunately, there is not much choice. If you want good returns on surplus savings, stock market is where you should invest.

What I am trying to say is stock market is no indicator of economy. I am not saying don't invest in stock market.

Originally Posted by SmartCat

There is rather boring explanation for this. The size of US treasury bond market is about the same as US stock markets. Since US Fed slashed interest rates to 0%, money has fled the bond market and has moved into US/Global stocks and Gold.

You are answering a question I didn't ask. Stock market is up because of quantitative easing, it is easy to see that. This is no different than companies doing stock buyback to increase stock price. How does that make the company more valuable except in market cap? In fact, it will carry more debt in the process and become more vulnerable to any decrease in revenue.

I am asking do people still believe stock market indices reflect health of the economy.

[SmartCat]

Originally Posted by Samurai

I am asking do people still believe stock market indices reflect health of the economy.

If anybody believes that, then they are wrong. For eg: in March 2020, the world economy was fine but the markets still tanked. That crash implies that the current prices of stocks reflect the future health of the economy

So now, the stock prices are back to all time high. These prices imply that future health of the world economy will be good, powered by quantitative easing. Now if global economy does not recover soon, it is quite likely that the stocks will fall again.

[Samurai]

Oh, so stock market is astrology now?

Originally Posted by SmartCat

So now, the stock prices are back to all time high. These prices imply that future health of the world economy will be good, powered by quantitative easing.

What did the stock prices indicate in say 2007? Great economy to come?

[Cessna182]

Originally Posted by Samurai

I am asking do people still believe stock market indices reflect health of the economy.

Sir, you have made a point which many reputed economists are making right now. All over the world.

I recently read an article in the Financial Times that day traders are using apps like Robinhood to buy stocks in tech companies based on the advice received on forums like reddit. It is exactly like the bitcoin surge in 2017.

Technology companies are also enjoying an unprecedented access to global markets without any regulation. Facebook has the largest user base in India but how much tax does it pay here? Does it store the user data here? Nope. Indians are happy as long as a few hundred smart kids become engineers at the company in USA or some other country.

The EU is heavily regulating the tech giants and even the current GDPR is the result of their insistence on accountability.

I don't think that the dominance of platform economies will be threatened in the short run, because almost every country is embracing them perhaps to gain acceptance into a more digital world. However, as time passes, there will be more regulation across the world as governments will realize the extent of the losses they make by allowing the centralization of data in the hands of a foreign enterprise not registered on your shores. The Chinese realized this and created their own, often state backed, giants.

As for Tesla, it sold less than 400,000 cars in 2019, while toyota sold 10 million. Tesla is concentrated in the USA, China and western Europe. Toyota serves all from USA to Africa. Now check the stock prices. Tesla is like a hockey stick. Toyota is barely where it was a few years ago. No matter what the investors say, no one is going to junk their existing cars to buy $50k electric cars in an environment where gas prices are reasonable. The world has petroleum reserves for at least the next 100 years. And more are being discovered in the Arctic.

Having been burnt by a stock market rally earlier, I am personally not going to invest anything in this market till the froth comes down. Yes, a lot of folks will say that slightly older people like me (in 30s) don't know much about tech and the future of electric vehicles etc., but I learnt earlier that bubbles are going to burst some day. When high school kids trade stocks on apps without knowing the basics of the market just based on reddit stories, there will be a bottom someday. Folks will make money, but many will lose their life savings too. I'm sure that old school prudence will pay off in the long run.

[SmartCat]

Originally Posted by Samurai

Oh, so stock market is astrology now? What did the stock prices indicate in say 2007? Great economy to come?

I think you finally got the stock market now. The accuracy of "current prices reflecting future economy" is about the same as astrology. Some hits and some misses. That's why I mentioned that if the economy does not recover soon enough, stocks and indices will fall.

It is not exact science, but more to do with faith. Those who invest at these prices believe that future of the world economy will be good.

[srini1785]

Originally Posted by SmartCat

It is not exact science, but more to do with faith.

So a ratio of 80:20 speculation:valuation is a good way to hedge for the future?.

[DigitalOne]

Originally Posted by Samurai

. They keep telling that the stock market index is the real indication of the health of the economy. There is huge income inequality, so what, look at the stock market soaring, the economy must be in great shape.

Originally Posted by SmartCat

If anybody believes that, then they are wrong. For eg: in March 2020, the world economy was fine but the markets still tanked. That crash implies that the current prices of stocks reflect the future health of the economy

So now, the stock prices are back to all time high. These prices imply that future health of the world economy will be good, powered by quantitative easing. Now if global economy does not recover soon, it is quite likely that the stocks will fall again.

Originally Posted by SmartCat

I think you finally got the stock market now. The accuracy of "current prices reflecting future economy" is about the same as astrology. .... Those who invest at these prices believe that future of the world economy will be good.

I believe that the stock/financial markets and the real economy are very weakly correlated. Stock markets grow disproportionately high even for small growth of the real economy. For 2021, even if the global economy grows 2-3% stock markets will grow a disproportionate 10-15%. Any falls or crashes are for very short periods because "quantitative easings" steps by various governments will kick-in. Governments world over also want to keep the stock markets high like a sugar rush for the aam junta.

I slightly stepped up my equity investments in March this year and already sitting on good profits. Even last years investments have recovered from the battering received in March.

[Jeroen]

Originally Posted by Samurai

Those who are familiar with my posts in this thread, might know that I don't like the stock market. That is mainly because I believe stock market is a casino, and the stock prices simply have no connection to the true value of the company.

According me, stock market is a giant vacuum cleaner, which sucks wealth from most and delivers it to the few. You don't have to invest directly to have your wealth sucked by the stock market. The 2008 financial crash proved that.

Thanks Samurai, as always a very interesting enlightening post. I can’t say I have a huge amount of investment experience. But I would agree that the stock market does not reflect the real economy in any sense. I would think most would actually agree to that. It is at best an expectation of things to come.

Even so, for most investors who invest for long term goals, (e.g. at least an horizon of 8-10 years) investing wisely with an appropriate spread/portfolio seems to work. Those folks that hold on to their portfolio in 2008 are probably a whole lot better of now!

I must admit I lost about 20-25% of my portfolio value in those weeks in March too. Currently back to where it was more or less.

My portfolio is based on a strategy around funds that are heavily into sustainability. By and large, this took a relative smaller hits and recovered quicker then some of the more traditional funds (e.g. oil, travel, tourism). These took a much deeper dive and some have not even begun to recover (or went belly up and ceased to exist)

Again, it is all about the future and what the market thinks the future would look like. I was the MD of a private investment company in the 80-90s. Very different times. A lot simpler. Anybody in the Netherlands investing in that era would have a solid position in Royal Shell. Not so anymore. .

Apart from the obvious economic / geopolitical issues around oil, more and more investors are shying away from these “traditional” old economy stocks. Even some of our pension funds are pulling out of Shell. Simply not acceptable anymore to invest in oil

So maybe the build up of the stock market is some indicator also on some of the underlying principles of the economy. Again, you could argue it is partly chrystal ball / believing etc. But it does coincide with many ongoing debates in society at large on sustainability, fairer society etc.

So it is probably partly wishful thinking, but I am also sure it does provide some directional push as well. In the end the stock market does provide funding for all kinds of new initiatives.

So no connection with the real economy, but perhaps some underlying trends on what the economy might look like in the years to come.

Jeroen

[SmartCat]

Originally Posted by srini1785

So a ratio of 80:20 speculation:valuation is a good way to hedge for the future?.

I prefer 100% valuation and zero speculation. You can achieve this by picking up stocks that offer fixed deposit-like dividend yield, and not chase Teslas and Reliance (Jio). If you prefer casino-like action, you have to do opposite of what the crowd is doing. You should ideally be selling stocks (that you bought during the crash) now, in bits and pieces.

Originally Posted by DigitalOne

I believe that the stock/financial markets and the real economy are very weakly correlated. Stock markets grow disproportionately high even for small growth of the real economy. For 2021, even if the global economy grows 2-3% stock markets will grow a disproportionate 10-15%.

There is no monthly/quarterly/annual correlation. But over very long period of time, as a thumb rule:

Stock market returns = GDP Growth + Inflation rate.
Fixed deposit returns = Inflation rate
Gold returns = Inflation rate + currency depreciation against USD
Real estate returns = inflation rate + local GDP growth (if Mumbai real estate has risen 15% pa over the past 20 years, just look up Mumbai's GDP growth if available).

If you are wondering why Indian stock markets have returned around 12 to 15% pa over 30 years, its because (avg inflation + avg GDP growth) adds up to that number (well, almost).

- S&P 500 has returned only 6 to 7% pa (US inflation + US GDP growth) over the past 100 years.
- Japanese stock market has returned close to zero percent over the past 30 years (no inflation, no growth)
- Venezuelan stock market has returned 100000% (add more zeroes if you like) ever since it has been hit by hyperinflation

[Jeroen]

Originally Posted by Jeroen

Apart from the obvious economic / geopolitical issues around oil, more and more investors are shying away from these “traditional” old economy stocks. Even some of our pension funds are pulling out of Shell. Simply not acceptable anymore to invest in oil

To add to my earlier thoughts around oil companies:

Exxon will be leaving from the Dow index, just one energy company left in the Dow index, Chevron.

https://www.ft.com/content/76ecd406-...3-cd23acb7cf2c

Jeroen

[msdivy]

Originally Posted by Samurai

According me, stock market is a giant vacuum cleaner, which sucks wealth from most and delivers it to the few.

To put in other words, the stock market takes wealth from small investors and gives it to big investors. For instance, losing Rs 1000 for a small investor may not matter much. But losing Rs 1000 for 1000 small investors, which is Rs 10,00,000 is big money to be made by a big investor.

There are exceptions. A big investor might go bankrupt or a small investor may make it big. But in the long run, these exceptions will iron out.

They keep telling that the stock market index is the real indication of the health of the economy.

The stock market index is a selection of best-performing stocks. Poor performers are dropped from the list. New good performers are added to the list.

It is like selecting 3 best students in every class and then assessing the school quality based on the marks scored by those best students.

If those selected students are getting excellent marks, then school is excellent health

[Samurai]

Originally Posted by msdivy

The stock market index is a selection of best-performing stocks. Poor performers are dropped from the list. New good performers are added to the list.

It is like selecting 3 best students in every class and then assessing the school quality based on the marks scored by those best students.

That's an excellent way of explaining it, I couldn't have said it better. That is why stock market index doesn't even indicate the future of the economy, it merely indicates the future of the companies in the list.

Meanwhile, the real state of the economy is the state of the company/individual at the median point.