A Theory About Stocks

A lot of people have been utterly mystified by the fact that the stock market seems to be going up and up and up, even as unemployment soars to Great Depression levels, pandemics shut down economies across the globe, American cities are in full revolt, the military is on the streets, clouds of locusts stalk Africa, hurricane season approaches, and the world just generally seems to be melting down around us.

How the f*ck can stocks still be going up???

First the obvious statement: stocks are not the economy. But I’m sure you already knew that. As Paul Krugman put it:

[W]henever you consider the economic implications of stock prices, you want to remember three rules. First, the stock market is not the economy. Second, the stock market is not the economy. Third, the stock market is not the economy. That is, the relationship between stock performance — largely driven by the oscillation between greed and fear — and real economic growth has always been somewhere between loose and nonexistent…Did I mention that the stock market is not the economy?

The stock market is simply a casino. Yes, yes, you’ll read in the economic textbooks written by very serious academic scholars using sophisticated academic terms like “capital resource allocation,” and “price discovery,” and all that, as well as about how distinguished gentlemen are doing very, very serious research and making totally rational assumptions about the future needs of society based on prospectuses and sober, realistic assessments of future earnings and capital flows and…blabbity-blabbity-blah.

Don’t believe a word of it—it’s a f*cking casino. That’s the best way to describe what’s going on when you strip away all the economic jargon designed to baffle us into thinking it’s something so sophisticated that us mere mortals with our puny brains cannot possibly understand.

News flash: Casinos aren’t rational!

Now, of course, it’s not just pure dumb luck like spinning a roulette wheel. It’s obvious that some companies have better future prospects than others. You can get information to make informed choices, just as you can count cards to do better at games of blackjack. But the future is inherently unknowable, and stocks are as much bets on the future as they are assessments of the present.

So what’s a stock worth? What someone else is willing to pay for it.

And I hope you’re smart enough not to buy in to economists’ explanation about how this is all totally rational. In fact, as anyone who has had a family member with a chronic gambling addiction in their lives knows all too well, it is precisely when one is gambling and seeking a windfall that one is at their least rational.

Furthermore, stock bubbles have been a persistent phenomenon through the entire history of capitalism, from the Tulip Bubble (where a single tulip bulb equaled a years’ wages), to the Mississippi bubble, to the South Sea Bubble, to railroad mania, the Great Depression, to 2008, and everything in between.

However, I have a theory as to why today’s stock market seems to be so awesomely divorced from the actual world as to seem like it’s on a totally different planet.

In the age of neoliberalism, with wages having been hollowed out for generations, gambling in the stock market is now the only realistic way to make money anymore. Internet gurus like Mr. Money Mustache gain fame and celebrity by telling us we can all get rich by pouring all our money into stonks and retire at 30! (seriously, this is what the guy says). Everywhere on the internet, everyone seems to have morphed overnight into little mini-J.P. Morgans, managing their oh-so complex portfolios, buying and selling their way into the one percent and ready to share their galaxy brain financial knowledge with the rest of us mortals. On Reddit, anyone not gambling in the market is a chump and deserves to starve!

Our only way to retire, we re told, is buying stocks. Even pension funds are invested in stocks. They even tried to put all our Social Security money into the stock market, for crying out loud (which totally wouldn’t have unrealistically inflated stock values at all, oh no!)

Where else is the money gonna go???

Basically neoliberalism has built everything around the edifice of the stock market. Everything is wrapped up in it. Absolutely everything is invested in these imaginary numbers, untethered from reality. It might as well be a f*cking video game score. To that end, we can all just extend and pretend forever. Why the hell not?

Stocks, stocks, stocks, stocks. Is it any wonder the market always goes up?

To be alive in America is to be assaulted by endless high-decibel blather about the critical importance of the stock market. There are entire TV channels devoted to it, new highs are always celebrated on network news, it’s on the front page of newspapers, it’s on an app that comes preinstalled on your iPhone, and the president is constantly yelling at you about it.

Yet the stock market has little direct relevance for regular people. By some estimates, the richest 10 percent of U.S. households account for over 80 percent of American stock ownership. The richest 1 percent by themselves own half of that, or 40 percent of stock. Half of Americans own no stock at all.

Once you understand this, the media’s stock market mania is maddeningly hilarious. It’s as though half of the national news was yammering about the weather in Greenwich, Connecticut. (“Our top story on ABC World News Tonight: This afternoon Greenwich was unseasonably warm.”) And no one notices how bizarre this is.

By contrast, think about economic facts with concrete relevance to the lives of normal people: the unemployment rate, whether the middle class is getting raises, if the minimum wage is going up, strikes, health care, workplace safety. There’s no cable TV ticker about that.

Coronavirus Matters, the Stock Market Doesn’t, and Thinking It Does May Literally Kill Us (The Intercept)

Paul Krugman also points to the lack of alternatives for actual productive investment:

Investors are buying stocks in part because they have nowhere else to go. In fact, there’s a sense in which stocks are strong precisely because the economy as a whole is so weak. What, after all, is the main alternative to investing in stocks? Buying bonds. Yet these days bonds offer incredibly low returns. The interest rate on 10-year U.S. government bonds is only 0.6 percent, down from more than 3 percent in late 2018. If you want bonds that are protected against future inflation, their yield is minus half a percent. So buying stock in companies that are still profitable despite the Covid-19 recession looks pretty attractive.

And why are interest rates so low? Because the bond market expects the economy to be depressed for years to come, and believes that the Federal Reserve will continue pursuing easy-money policies for the foreseeable future. As I said, there’s a sense in which stocks are strong precisely because the real economy is weak.

Crashing Economy, Rising Stocks: What’s Going On? (New York Times via Reddit)

And, of course, the Federal reserve is pumping staggering amounts money into the stock market, buying up assets all over the place. By some measures, several trillion have been spent buying up assets such as stocks, bonds and other securities. Strangely, neither Joe Biden nor Donald Trump ever once asked howyagunnapayforit—they only do that for policies that benefit anyone outside the investor class.

Now, to the point: Nearly all financial trading nowadays is done by bots. That is, computers trading with each other to get the best deal. The technical tern for this is fintech (financial tech).

I tried to find out how long the average stock is held today. I couldn’t find it. I’ve heard everything from four months to 22 seconds. The only point of agreement is that they are being held for shorter and shorter time periods over the years, and trading volume has increased by a big amount (just how big is also hard to discern). But just how short is a mystery. Michael Hudson apparently buys the 22 seconds figure:

Michael Hudson, a former Wall Street economist at Chase Manhattan Bank who also helped establish the world’s first sovereign debt fund recently said: “Take any stock in the United States. The average time in which you hold a stock is – it’s gone up from 20 seconds to 22 seconds in the last year. “Most trades are computerised. Most trades are short-term. The average foreign currency investment lasts – it’s up now to 30 seconds, up from 28 seconds last month. The financial sector is short term, yet they talk as if they’re long term.”

Computerised high-frequency trading, which makes up about 70pc of all trades, is the subject of the book, The Fear Index, published late last year.

https://www.telegraph.co.uk/finance/personalfinance/investing/9021946/How-long-does-the-average-share-holding-last-Just-22-seconds.html

However, this Business Insider article disputes some of those figures, citing the original source, but it doesn’t give any alternative figures. I would imagine BI doesn’t want people to start questioning the stock market, and Hudson is very plugged in to the finance and economic worlds, so I think his figures can be trusted. Most financial reporting that us “ordinary people” can find via Google is designed to prop up the legitimacy of the casino by pulling the wool over our eyes.

This is just anecdote, but I was talking with a friend who works in IT. He was talking about someone he knew who worked in tech in the financial sector. He told me that this person moved one of the computers from one office to another office closer to the fiber optic line to shave off 15 femtoseconds from trading speed. Yes, femotoseconds, that’s what he said. To save you the search, a femtosecond is one quadrillionth of a second (10-15)

Now, bots are obviously unaware that the world is melting down around them. How could they? They have only one goal: buy and sell stocks to maximize value—almost like the mythical Paperclip Maximizer of AI paranoia.

What’s the cardinal rule of stock buying? Buy low and sell high.

We humans tend to do the opposite thanks to cognitive biases such as loss aversion and the Bandwagon Effect. We see stocks going up and we want to buy. We see stocks going down and we get spooked, so we sell. That is, we do the opposite of what we should rationally be doing—we tend to buy high and sell low.

So that’s why the financial industry turned to computers.

Computers do not have the irrational biases that fallible humans do. That’s why they are considered better. And that’s why trading is increasingly done by these computers, often fortified with some sort of AI to game the system using algorithms developed by “quants”. I’ve repeatedly heard that the trading pits where you see all those angry, overweight white dudes in ties screaming at each other like a troop of rabid baboons until they’re beet-red in the face, is kept open only as a sort of performance theater for the masses—there’s no actual trading going on there anymore. It’s all run by computers.

It’s hard to get good data on this; there seems to be a lot of secrecy surrounding it. Presumably they need to prop up the legitimacy of the “democratic” stock market for us average rubes.

But if you’re a bot and you’re designed to buy low, what happens when stocks start dropping in price? When the price is dropping, that means stocks are cheaper. When this happens to fairly good (esp. blue-chip) stocks, that means that they are undervalued. So what do you do? You buy!

Of course, you don’t know the real world of actual people and things “out there” is melting down, because you’re just a brain in a box.

So the computer brain in the box just sees “undervalued stocks” and thinks “buy”. And then other bots see this and they buy too. They follow their instructions. And then they sell the stocks to each other. Wash, rinse repeat. Almost like a simulation.

And, voilà, the stock market goes up. Trading goes on as normal. Paradoxically, the lower the prices go, the more undervalued the stocks appear to the bots, and so the more they buy expecting to get a bargain. So buying activity actually increases! And then the bots buy and sell the stocks to each other, until they go back up to more-or-less where they were before, which they read as the “correct” price, because they are just brains in boxes, with no knowledge that meatspace is quickly sliding into the depths of hell.

A video game score is the appropriate analogy here. What “real world” thing is your video game score tied to? Does it care whether you’re sick or unemployed? No, it only cares whether you’re playing, and the number is just a made up number based on the whim of a bunch of computer programmers somewhere.

So, the reason stocks are still so high, in my theory, aside from just the Fed money bazooka, is because trading is done by machines with simple mandates based on number crunching, blissfully unaware of the real world going on outside the box, which is riddled with pandemic disease, increasing violence, insurrection, social breakdown, economic depression, and environmental collapse.

I imagine a time in the far future where, after the oceans have risen and coastal cities drowned, when the Amazon rain forest has been slashed and burned and billions flee parts of the globe too hot for human metabolism, after 70 percent of terrestrial animals have gone extinct and we’re scraping the ocean floor for methane hydrates to run our remaining power stations, the computers will still be happily swapping stocks between each other, trading away in the darkness, unmonitored, sending the Dow to 100,000,000, or whatever imaginary nonsense number it will be in the future.

That’s my theory, anyway. However, I have no specialist knowledge in either trading or fintech, so I might be way off on this. If by some unlikely circumstance, someone with actual inside knowledge of either computerized trading or the stock market happens to read this, please let me know if this theory holds any water or is total bullsh!t. Thanks.

BONUS:

Presented without comment:

https://twitter.com/yashar/status/1269048818739212288?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1269051241306263553&ref_url=https%3A%2F%2Fboingboing.net%2F2020%2F06%2F06%2Ffox-news-graphic-police-killi.html

5 thoughts on “A Theory About Stocks

  1. My initial conjecture was that investors were short-sightedly bidding up the price of stonks because unemployment was, at least in the short term, driving down payroll expenses and improving profitability.

    https://buzz.money.cnn.com/2013/10/01/layoffs-stocks/

    At a certain point, of course, the cumulative effects on aggregate demand from all those unemployed people, without cash to buy widgets, will start to drive down revenue and destroy a lot of those companies. But we should never doubt the wisdom of the market!

    1. Yeah, I agree, that’s probably true. When wages go down, profits go up, and stocks prices reflect expectations of future profits.

      I also think that the investor class is anticipating a “to the victor go the spoils” effect, whereby all the economic activity from all the failing small businesses will be hoovered up by a small number of big winner companies, and they want to be the owners of winning firms that end up controlling the economy. They see things like delivery services and streaming entertainment as the winners in the post-pandemic world, and are bidding those things up. And I think they are expecting capitalism to become even more monopolistic in the future, and they are vying to be the owners of those dominant monopolies, Amazon being the most obvious example. When entire sectors of the economy consist of just a handful of companies, you want to be the person who has equity in those companies, and the monopolistic firms appear to be the ones driving up share prices overall.

      1. That makes a lot of sense.

        I appreciated your post about billionaires and your characterization of them as owners of toll booths–it was a particularly useful frame of reference for understanding how they became so wealthy, but also the general issue of “access control” in the market. When the current backlash against landlords started, for example, it clicked for me that “property ownership” is essentially just a toll booth, requiring every renter to pay a toll every time they want to live in their home. (Since people would revolt immediately if there were an actual toll booth, we abstract it to rents and mortgages, but it’s still there all the same.)

        So yes, in our drive towards neofeudalism, I’m sure that the investor class is eager to consolidate by acquiring as many toll booths as possible.

        1. It seems that, of all people, Jim Cramer agrees with me!

          The coronavirus pandemic and corresponding lockdown made way for “one of the greatest wealth transfers in history,” CNBC’s Jim Cramer said Thursday.

          The stock market is rising as big business rebounds from state-ordered stoppage of nonessential activity, while small businesses drop like flies, the “Mad Money” host said.

          “The bigger the business, the more it moves the major averages, and that matters because this is the first recession where big business … is coming through virtually unscathed, if not going for the gold,” he added…“The companies that took the money just got a big break: they only need to spend 60% on their employees to get the loans forgiven, down from the original 75%. That’s important, as most small businesses fail because they can’t afford to pay the rent,” Cramer said.

          https://www.cnbc.com/2020/06/04/cramer-the-pandemic-led-to-a-great-wealth-transfer.html

          Except he probably thinks that’s a good thing. And then there’s this:

          At 12% as of the fourth quarter of 2019, the bottom 90%’s share of stocks held outright or in mutual funds, has never been so low in Fed data going back more than three decades. That share was as high as 22% (so, double the current level) in 2003. The average over time is more than 16%.

          https://heisenbergreport.com/2020/06/06/there-can-be-no-change/

          1. I find this really dispiriting. Your reviews of The Great Leveler made me hopeful that this pandemic, if it were to have a silver lining, would help drive down inequality. It seemed like there was the tiniest moment when that might happen when the government started printing money and handing it out to people, however clunky, in the form of unemployment and stimulus checks. But that moment faded pretty quickly, and what you’re saying is that inequality is getting worse, not better.

            So what do we do now? You’ve developed such an incredible critique of neoliberalism and introduced me to so many news ways of looking at the world, I feel like I took an ideological vaccine. I might have been a left-ish critic of capitalism before, but I didn’t even realize how much of my thinking was hemmed in by unconsciously internalizing neoliberalism. (So thank you for that.) How can we turn that into a positive project for fixing things?

Leave a Reply

Your email address will not be published.