Wednesday, October 13, 2021

Individual Folly

 Global equity markets… well, basically it all boils down to the US stock market.. have exploded upwards during the pandemic as the Treasury and Fed unleashed a torrent of fresh cash (ie debt), upwards of $5 trillion in less than 2 years. 

Where did the money go? Stocks, real estate, cryptos and loony-price NFTs.

Who did the buying? Individuals, many of them young first timers who “know better” and scorn all professionals.

Here are two eye-popping charts from the Financial Times.

First observation: all this money came in during the first half of 2021. Since then, equity markets made new highs, but then reversed and are now back neat the levels reached at the end of the first half.

What does this mean, in my opinion? There is likely a “rotation” going on, typical of all late stage bull markets: stocks are being increasingly sold by “smart” money holders and being bought by retail investors/speculators.

Second observation: on the S&P chart above, what does the price pattern look like to you? All comments encouraged. 

Third observation: the majority of investing in stocks these days has almost nothing to do with individual stock picking;  instead, it is almost entirely ruled by passive indexing.  Apart from meme stocks (which aren't many, anyway), retail investors buy broad index funds and then "forget" everything else. It's like using a "smart" weapon in FAF mode: fire and forget, trust the electronics to find the target.

I'm not sure how successful this strategy will be during a prolonged bear market or, even worse, if it could precipitate or accelerate a crash.  If an investor ONLY looks at a single number all the time (eg S&P 500) to the exclusion of EVERYTHING else like earnings, dividends, corporate news, valuation metrics, balance sheet data... wouldn't that make him/her more likely to jump when the trend changes instead of being patient? And what would happen when/if everyone wants to jump at the same time?



    I think the Dems miss the mark in their appeal to the working class workers. The working class want dignity more than money. No one wants to vote for a person who thinks of them as pitiful beings in need of help.

    Call on the working class to fight with you; not ask for more benefits..... It saves money too. =)

    1. I have to agree with you. That’s why MAGA was so popular with white working class Americans.

  2. Interesting...

    1. Thanks for the link C. I’ve also been noticing that VIX is getting “sticky”. Makes sense, too: with the increased probability of a US technical default due to politics, a very volatile tail event is statistically more possible. Thus, I don’t want to be short vol.