The Stock Market Isn't for Suckers and the Markets Aren't Really Broken
Booms, busts, bubbles, and collapses are elements of market, capitalistic cycles; they serve the meaningful purpose of redirecting capital toward productive value.
Many of the macro facts Kirby raises regarding market and economic history are well worth consideration. In this piece, however, they are used mainly to support the “markets are broken” thesis which, in my opinion, is interpreted in a “backward integrated” way to support a conclusion probably formed prior to writing the piece rather than to objectively investigate such matters before putting pen to paper. On the face of it, there’s nothing wrong with that -- that’s Kirby’s mindset and he’s entitled to his point of view -- but those are hardly the only conclusions that could be drawn.
As an example, Kirby makes a point of the extents to which American households are invested in stocks (that is, percentage of households with some level of investment in stocks). Although he doesn’t even mention it himself, that level is about where it was in the Roaring Twenties, and it is a legitimate conclusion to characterize this as a “toppy and all-in” environmental characteristic, but not the only conclusion reachable. He does not, for example, point out the percentage of household assets in stocks as opposed to confining himself to the percentage of households. Many managers and economists point out that while the percentage of households is at historic highs, weight in the markets is not so high. Kirby doesn’t mention this. Did it occur to him to mention that back in the pre-Mayday (pre-1975) days, trading stocks was a pretty laborious affair? You needed a phone, a broker, and paid $0.50 a share in commissions or more? Today everybody trades online at $0.07 a share or less, and the big money have built their own platforms. So why should we be surprised that widespread ownership of stocks is observable? The two eras are not comparable in background conditions. This point was not addressed in the article. I find it hard to believe the author is unaware of it.
All of Kirby’s points about “short-term earnings performance pressures at the expense of long-term quality” are arguments that have been made for decades and find their earliest modern roots in the 1980s when the American news media was beating the drums about the “Japanese buying out America.” I don’t buy into the hysteria. I do, however, accept what he says and the figures he cites as accurate regarding the fact that many factors including flash trading have contributed to a compression of time perspectives. But that’s the nature of life -- wagons and buggy whips give way to motorcars and that’s that. Also, both investors and market mechanisms are fully capable of adapting to the inescapable condition that life speeds up as civilizations evolve.
Will we have a crash? Of course we will, at some point. But that’s no more profound a prospect than saying we will also have wars, famine, rainy days, and slips on the bathroom floor. It’s just one of those things that markets do from time to time, inevitably. Booms and busts, bubbles and collapses, etc. are all elements of market and capitalistic cycles, and they serve a meaningful purpose -- even in bringing great hardship to those who get caught with their pants down -- to the greater good of redirecting capital toward productive value. Joseph Schumpeter called this “creative destruction.” Sure, it’s ugly for some, but on the whole, it’s good for human progress and rising living standards and prosperity -- the very issues Kirby claims to be the motivation in writing this piece. The irony here is that what I’m talking about is a long-term view, while Kirby is condemning what makes it possible, while also offering “arguments” allegedly against the short-term orientation of markets and describing these phenomena as evidence of a “new thing” when they are not. They’re short-term components of overall systems that in large part promote the long-term good.
While Kirby (or others) may cite changes in market characters he can deride, it also shows that investors and managers and issuing enterprisers who want to be successful would rather adapt to and meet these challenges than sit around complaining about “how it used to be.” It’s a story as old as the hills: Move the cheese and guess what? The mouse finds a new route through the maze. People like the opportunity created by problems, and they go out and solve the problems so they can get rich.
Conclusion: Don’t curse the darkness, light a candle. This is precisely the candle I created to light in The RLH Volatility Model.
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