[epistasis]

I think the best interpretation of the overall stock market valuation is as a barometer of the wealthy's feelings, i.e. expectations of future returns rather than true future returns... but doesn't it seem like feelings have completely unmoored from the baked-in damage to the global economy from the current shortage?

Or has GDP growth become so decoupled from energy use that I'm wrong and stock market valuations are completely OK, even as airlines brace for fewer flights due to energy shocks?

[nostrademons]

I wonder if some of this is because of the "prices are set on the margins" effect of markets. The price of anything is set by the folks who are actively transacting at any given time; if you're not buying and selling, your opinion doesn't matter.

Oftentimes, near a market top, the people who are value investors and actually care about price end up selling off all their holdings. But because they have already sold, and are not buying, they drop out of the market entirely. Prices get set by the people who are price insensitive, because they're the only ones willing to participate. As a result, you often get the "blow off top" right before a market crash, where the stock market moves sharply upwards even though fundamentals say it should crash. All the folks who believe it will crash have already left and no longer participate in price-setting.

[jjav]

> But because they have already sold, and are not buying, they drop out of the market entirely. Prices get set by the people who are price insensitive, because they're the only ones willing to participate.

The buy & hold value investor is also not participating in price discovery since they are just passively holding.

[Rury]

That makes sense, but something I've been wondering as of late... what if markets are just being... cornered? Surely, it can difficult to assess genuine market activity from not, no?

I mean I know it sounds absurd for something like the size of the stock market, but all you really need to do is have enough capital to consume floating demand, and you can control prices. Even easier with options, as they give leverage to do this. And arguably this essentially explains the behavior behind stocks like GME, AMC, AVIS, BIRD... heck even Tesla. If you look at Tesla, most of its stock price appreciation happened in 2020-2021, when SoftBank was allegedly controlling their options chain. And since its peak in 2021, when SoftBank stopped, Tesla has underperformed the S&P 500, and would probably would have fallen by now if it wasn't for all the passive inflows from being in the Mag 7. I mean, it could just be coincidence or genuine market activity, but how can we be certain that markets aren't just being cornered by coordinated groups?

Also, the oil market right now doesn't make a whole lot of sense if you compare futures and spot and what analyst estimates are giving even in the best case scenario. But Japan mentioned considering shorting over $1.4 trillion in oil futures, and if they actually are, then suddenly things make a bit more sense...

[A_D_E_P_T]

The stock market has stopped making sense since the 2008 financial meltdown. Many reasons for this. In part, ZIRP is to blame -- a ton of money flowed into stocks simply because they were the only way to tread water and get a return. In part, you can blame Bitcoin (which demonstrated at scale that you can have an "asset" with zero underlying value and net-negative social utility that still functions as an appreciating value token,) and the meme-stock.

The stock market is basically detached from the industrial manufacturing/production economy -- and even to some extent the services/insurance economy -- and is now vibes/feels based.

[OgsyedIE]

Regardless of individual stock performance, present-day total stock market liquidity is a proxy for expectations of future total stock market liquidity.

If people are keeping their money in the market (regardless of allocation inside the market) they are expecting that any other asset class will perform worse in the near future. If they expect that commodities are too volatile, spending won't pay off, monies and bonds will inflate away and land may face legal risks from populist, technocratic or extrajudiciary changes to the legal system then their least worst options are to go all in on stocks. Furthermore, the energy sector is going to have a windfall from filling up the VLCCs of the world and look for anywhere to dump the cash that helps escape taxes, driving future liquidity expectations even higher.

[A_D_E_P_T]

Right, and "monies and bonds will inflate away" is related to what I said re ZIRPs -- you can't expect a decent return by parking your money with the bank, either, as interest rates are low to nonexistent. The stock market's the only good option. This was no accident, it was an intentional policy move... And now, "the DOW's over 50,000!"

What's even more troubling is that there was once the pretense that valuations had something to do with fundamentals, but this has gone entirely out the window since about 2013.

So basically none of it makes any sense and you've just got to ride the tiger.

[verteu]

Yeah, stock valuations seem pretty high, eg: https://www.multpl.com/shiller-pe , https://www.currentmarketvaluation.com/models/buffett-indica... , https://www.multpl.com/s-p-500-earnings-yield

[redwood]

Thanks the second chart is more concerning than the first. The first has a variety of potential distortions at play first of all portion of industrial activity that's done by public vs private companies shifts over time and second of all a lot of these companies do 40 to 50% of their business overseas.

Whereas a historically low ratio of earnings to index value is a deeper concern to me

[brewdad]

I’ve never looked at the numbers to see exactly how large of a pool it is but millions of Americans are effectively forced to buy into the market to fund our 401ks and future retirements. That’s billions of dollars of inflow every month that has to go somewhere, usually index funds.

[bdangubic]

it is exactly this. I am self-employed and have been managing my solo 401k for 15+ years now. while I am fully aware of market being overvalued I will still max out my 401k this year ($80k, I am over 50 :) ) and that money needs to go somewhere. I could theoretically sell and sit on the cash and wait on "crash" but I could have technically done that a year ago (this were similarly not very rosy) or even earlier and that obviously would have been a terrible financial decision. no one can time the market and therein lies the core issue, money will always be flowing in...

[dboreham]

Another explanation is that their expectation of the future value of money is very low. If money turns out to devalue 10X then owning stocks (call on the future income stream of companies selling presumably useful things/services in the future) that seem to be 10X overvalued makes sense.

[jcranmer]

One of the explanations I've heard is that a lot of traders were caught out by how quickly the economy rebounded from COVID-19, so they're overcompensating by underreacting to the current situation.

[johnvanommen]

> One of the explanations I've heard is that a lot of traders were caught out by how quickly the economy rebounded from COVID-19, so they're overcompensating by underreacting to the current situation.

Yikes.

The reason Covid wasn’t as bad as it could be was WFH.

There’s no equivalent for oil. You can’t grow food at scale without fertilizer.

[dboreham]

WFH and a big dollop of "socialism" in the US. Supposedly the reason many voters felt that their lives were better under Trump 1.0 was due to the various subsidy and rent freeze measures taken by the US government during the pandemic.

[verteu]

Probably markets expect the situation to be resolved soon.

You can check the term structure of oil to confirm: https://www.cmegroup.com/markets/energy/crude-oil/light-swee...

Equities are (in theory) priced on net-present-value of future cash flows, so a temporary <1 year disruption is important but not massively so.

[staticman2]

Is it possible that a lot of people are hoping for a dot-com bubble 2.0 so they can sell at the market peak before it pops?

That would explain why they're ignoring fundamentals.

They could think that OpenAI and Anthropic IPOs will drive prices higher, and it still isn't time to sell.

[redwood]

It's a multi-layered question. On the one hand if energy is more expensive and you still consume roughly the same amount but actually that raises gdp. However you're assuming that there's demand destruction with the rise of energy was your reasonable assumption... but that's uneven and there's going to be an increase in demand for certain things that actually benefit from higher energy prices like anything in electric tech or green energy.

Probably most importantly the economy at this point is largely a digital economy rather than one centered on goods.. in other words GDP growth is no longer coupled to energy consumption. The fact that we're able to transition to a largely remote workforce around covid is a testament to this.

The implication is that in the event that these high prices sustain and there is some demand destruction a lot of fundamental parts of the economy will continue to function in an evolved way for example online.

And then of course there's AI which could be considered sort of an extension of this digital economy which is driving so much of the underlying growth.

That doesn't mean there won't be hot spots like this article is pointing out perhaps the UK is particularly exposed. On the other hand the fact that so much of the UK's economy is financial services and hence in a way benefits from all this volatility ... means it is not all so clear.

It would be easier to say that the real impact will be on the manufacturing powerhouses but even they will benefit from the transition to a solar and battery based energy system.

Now if you believe that it's inevitable that this bubble will have a slowdown and you speculate that the bubble might be partially punctured by these high energy prices that seems like a reasonable hypothesis... but it could also be the opposite.. In other words the demand destruction for energy could actually mean capital is looking for a place to invest fruitful elsewhere.

Counterintuitive as it all may seem, this system is simply not one anyone can reasonably expect to make predictions around at least any more reliably than walking into a casino and expecting to beat the house.

Similarly the experts and talking heads telling you the implications of this war or the Ukraine war are making one dimensional predictions that are simply not honest enough about how chaotic and reflexive these systems are

[bawolff]

Probably people are betting that the situation resolves itself before shit hits the fan.

And there is a bunch of plausible reasons that this belief is not crazy (of course nobody really knows).

- trump literally is called TACO

- the war is really unpopular in usa and midterms are getting closer. There is domestic usa pressure to wrap this up.

- Iran's ecconomy was a mess before all this and is now a disaster. The blockade goes both ways and it seems unlikely iran can keep it up long term

- As shortages approach international pressure from uninvolved parties to resolve the situation one way or another will mount.