Feb

3

What causes inflation? Suppose we define inflation simply as the rise in prices of commodities, stocks, real estate etc. What causes it?

1) A generic explanation people offer (acolytes of Milton Friedman & Margaret Thatcher for example) is to blame monetary policy. Simplified as, inflation is caused by "too much money chasing too few goods."

Many people blamed President Trump's COVID stimulus packages for the rise of prices during that period. It seems specs in this list agree upon this when it comes to stock prices, i.e., lower interest rates (higher money supply) -> Higher stock prices (inflated stock prices).

2) An alternative explanation is that higher prices are caused by supply chain issues.

So they would claim that higher commodity prices were so because it was extremely difficult to move them around during lockdowns, let alone processing them in factories. A member also described that egg prices may be going up because of disease (a chink in the supply chain) not necessarily monetary policy. I am thinking that supply chain issues are more important to look at, than monetary policy.

Larry Williams predicts:

Inflation is very, very cyclical so maybe the real cause resides in the human condition and emotions. It will continue to edge lower until 2026.

Yelena Sennett asks:

Larry, can you please elaborate? Do you mean that when people are optimistic about the future, they spend more, demand increases, and prices go up? And then the reverse happens when they’re pessimistic?

Larry Williams responds:

Just that it is very cyclical— as to what drives the cycles I am not wise enough to know…though I suspect…some emotional pattern dwells in the heart and souls of as all that creates human activity—along the lines of Edgar Lawrence Smiths work.

Read the complete thread.

Jun

15

Lots going around about how NVDA dominates; and MSFT, NVDA and AAPL now account for about 20% of the S&P 500. I was curious to see what happened in a toy index and so did an experiment (using R):

1. Create an index of 500 stocks, each with a starting value of $100.

2. Each year, for 40 years, each stock's value is multiplied by 1 + a value randomly drawn from a normal distribution with mean 8% and sd 15%, roughly what you might see with the S&P 500.

3. The starting value of the index was $50,000. The final value after 40 years was $1,152,446.

4. The final summed value of the largest 10 out of 500 stocks was $142,320, or 12.35% of the 500-stock index.

I was curious to see if megacaps would emerge from a simple toy model. I ran it only once, and they did. For me, this is a comment on the perennial alarm stories about "Only X% of stocks account for Y% of the market!" Even with a simple model, you wind up with something like that.

Adam Grimes agrees:

Can confirm. Have done variations of this test with more sophisticated rules, distribution assumptions, index rebalancing, etc. Get similar results.

Peter Ringel responds:

so we can take this ~12% of the index as a base value, that develops naturally or by chance? Then a clustering of being 20% of a total index (only greater by 8%) does not look so outrageous.

William Huggins is more concerned:

keep in mind it's 10 companies making up 12% (~1.2% each) vs 3 companies making up 20% (8.3% each) - in that sense, the concentration DOES look pretty high. am reminded of when NT was 1/5 of the entire CDN index in 99/00.

Peter Ringel replies:

You are right, I failed to catch this difference of only 3 stocks. In general, I am not so much surprised about the concentration. Money always clusters. Always clusters into the perceived winners of the day. Should they blow up, money flows into the next winner. To me, the base for this is herd mentality.

Adam Grimes comments:

It's Pareto principle at work imo. I'm not making any claims about exact numbers or percents, but as you use more realistic distribution assumptions (e.g., mixture of normals) the clustering becomes more severe. There's nothing in the real data that is a radical departure from what you can tease out of some random walk examples. Winners keep on winning. Wealth concentrates. (As Peter correctly points out.)

Asindu Drileba offers:

Maybe you try replacing the normal distribution of multiples with a distribution of multiples constructed with those historically present in the S&P 500? It may reflect the extreme dominance in the market today.

To me, the base for this is herd mentality.

It is also referred to as preferential attachment:

A preferential attachment process is any of a class of processes in which some quantity, typically some form of wealth or credit, is distributed among a number of individuals or objects according to how much they already have, so that those who are already wealthy receive more than those who are not. "Preferential attachment" is only the most recent of many names that have been given to such processes. They are also referred to under the names Yule process, cumulative advantage, the rich get richer, and the Matthew effect. They are also related to Gibrat's law. The principal reason for scientific interest in preferential attachment is that it can, under suitable circumstances, generate power law distributions.

Zubin Al Genubi writes:

Compounding of winners is also at work and returns will geometrically outdistance other stocks. No magic, just martini glass math.

Anna Korenina asks:

So what are the practical implications of this? Buy or sell them? Anybody in the list still owns nvda here? If you don’t sell it now, when?

Zubin Al Genubi replies:

Agree about indexing. Hold the winners, like Buffet, Amazon, Microsoft, NVDIA. Or hold the index. Compounding takes time. Holding avoids cap gains tax which really drags compounding. (per Rocky) Do I? No, but should. It also works on geometric returns. Avoid big losses.

Humbert H. wonders:

But what about the Nifty Fifty?

Feb

29

Nvidia Hits $2 Trillion Valuation on Insatiable AI Chip Demand

The chips are so valuable that they are delivered to the networking company Cisco Systems by armored car, said Fletcher Previn, Cisco’s chief information officer, at The Wall Street Journal’s CIO Network Summit this month.

H. Humbert is skeptical:

This won't end well, but I have no idea about the timing. I have a mixed record on predicting the future, so my prediction is worth what you paid for it, but this is what's likely to happen: due to the chip shortage (the TSMC bottlenecks described aren't easily solved in the short term) and their high prices, NVIDIA's hold on the software stack will be punctured. Someone will say "Hey, we need a second source, it's not good to just have one supplier". Once that happens their monopoly will be over, and it will deflate. Are there any signs of this today? No, none.

Asindu Drileba writes:

Nvidia's edge will evaporate if there is a breakthrough in a new AI paradigm that is not as computationally intensive as deep learning. Herding exists in research just as it does in markets. As of today, researchers are herding on deep learning because it is what has shown a great track record so far. But it is clearly known that there are better (but unarticulated) ways to build systems that exhibit the properties of Artificial Intelligence that industry wants to use to solve problems. As long as these techniques are not yet developed. I still see a growing market for someone like Nvidia in the long term.

H. Humbert adds:

Nvidia will see a growing market for a long time to come, the point is they're not levitating due to durable hardware advantages but because nobody wants to abandon their CUDA toolkit. Not yet, but some day someone will diversify for any number of reasons. They will still remain king of the hill, but cracks will develop.

Humbert H. comments:

Von Neumann latency and huge power consumption are issues and will eventually be a big enough problem. It is a know problem. If not solving the problem organically, I am sure they are looking out to buy the solutions if there are viable solutions. Don't know when it happens but will happen.

Jensen Huang's speech in 2011 about failure and changing course quickly. Sounds like a trader mindset.

Some alternate techniques are being developed but most of the average Joes don't know that yet. Speaking from my observation of what are happening, not just sheer speculations. This conference ISSCC - International Solid-State Circuits Conference on solid state device held this week at SF definitely covered areas related to high speed solid state device advances, limitations and solutions. The published papers and abstracts should have the most updated information.

Yelena Sennett is skeptical, too:

As long as Nvidia are buying their own chips, their sales will keep growing, especially if they keep recording it as revenue before delivery, lol. Scott McNealy's famous 'What were you thinking?' rant to investors for bidding Sun Microsystems' stock price up to 10x sales during the DotCom bubble:

At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don't need any transparency. You don't need any footnotes. What were you thinking?

It’s not different this time - trading around ~ 30 times sales! The only question is if the market is different this time and NVDA is just one stock that will not affect the general market when it goes down back to reality of $200 - $300.

Sep

6

Do markets lead recessions or do recessions cause markets to drop? I think Larry had a chart on this. Consumer is going to be spending less on discretionary spending. Retailers have already warned us of this.

- Student loan payments are due starting September
- Savings rates are down
- Employment situation is weakening a bit
- Consumer credit is slowing
- Interest payments rates are up on credit cards, cars, homes, etc.

Jeffrey Hirsch responds:

We had our U.S. recession on 2022 with back to back negative quarters of GDP Q1-Q2 2022. "They" changes the rules during Covid. Generally, markets lead recessions. This last time they ran concurrently.

Larry Williams comments:

No recession in sight with the indicators I keep…

Yelena Sennett asks:

thank you Larry, in sight means a few months or so? or a few quarters?

Larry Williams answers:

A year or so I would say.

Hernan Avella writes:

When was the last time the yield curve inversion (with the specific configuration by Campbell Harvey at Duke) didn't precede a recession in the out of sample period? It's a 8 out of 8 record I believe. While one would be foolish to act solely on this, this might be the best of all the bad recession indicators we have. Especially because it was conceived in 1986, has some rationale and we are experiencing the out of sample, Unlike Larry's drawings that are constantly overfitted to the data.

Larry Williams responds:

Me overfit data? Try my best not to but you Y-curvers refuse to acknowledge times of negative curve and massive stock rallies. Here is just one DJIA in red:

Hernan Avella replies:

But Larry, kindly stop straw-manning. The gist of the yc indicator, is the out of sample track record of preceding 8 out of the last 8 recessions. There's no controversy about this. Nobody serious has related this to stock returns. So you are trying to disprove a point that nobody is making.

Larry Williams writes:

Two points: (1) To say the curve has accurately predicted recessions you have to acknowledge it as often lead by 2 years. Wowsa!! Now there’s a real helpful tool. Gee those negative readings are not so precise. but maybe you are happy with that I am not. especially when there are so many better tools. (2) And if the YC and recessions don’t mean much to stocks, why would I care?

Hernan Avella responds:

Who said “predicted”. You keep making stuff up!. I can’t find the source, but the lag for the indicator is 12 or 18 months after 2 consecutive quarters of inversion of 3m-10y. Ignore it if you want. Just don’t straw-man the thing.

Larry Williams responds:

No straw man here—just look a the data its very poor indication recession is coming. now what did I make up???????

Hernan Avella states:

I don’t get it. 8 out of 8 within 18 months after 2 consecutive quarters of inversion….it could be luck, but let it at least fail once. Go to the source: Harvey’s 86’ dissertation.

Larry Williams says:

Curve went negative last April. you are the end of the time zone…better get ready for the sky to fall!

Michael Brush writes:

Yardeni charts yield curve inversion against stock returns. It has a good record but not quite as good as forecasting recessions. Agree no recession in sight.

Gary Phillips writes:

Not every yield curve inversion has been followed by a recession; however, every recession has been preceded by a yield curve inversion.

Larry Williams replies:

Agree but with a massive lead time. I want/need more precise timing and then—its not always market relevant.

Gary Phillips responds:

The clock doesn’t start ticking from the inception of the inversion, rather than when the curve begins to re-steepen.

Larry Williams offers:

Sure just like this:

Yelena Sennett writes:

Thank you for sharing your graphs and your concise points. “And if the YC and recessions don’t mean much to stocks why would I care?” Indeed, YC and recessions don’t seem to be very helpful or timely tools.

Peter Ringel comments:

highly subjective: the last break since July did not felt overly bearish. Low volume , a little deeper than I would like yes, but no gusto. Maybe a big range is developing, but more likely the drift kicks in and carries us higher. The AI - story is alive.

H. Humbert adds:

I agree with Larry that this time the YC inversion will not have forecasted a recession. It usually sparks a credit crisis which then causes recession, the normal procession of events. This time it seems to have only sparked the mini bank crisis which seems to have wound down. Of course we do not know if there will be another crisis that gets sparked. But so far, no, and to Larry’s point it has been quite some time now.

Oct

25

A pullback before the rally into the year end for S&P 500 and crypto? 2021/10/22

Yelena Sennett and Andy Aiken: Bitcoin and Ethereum sell off after the ETFs launch, is the top in? Can S&P 500 trade 1000 points lower next year? Tesla is on the way to a trillion dollar company…

Oct

17

After a bull week, S&P500 & crypto ready for the new highs? Coinbase and Galaxy 2021/10/15

Yelena Sennett and Andy Aiken: A pause, small pullback and range trading for S&P 500 next week is likely. Bitcoin ETF, Coinbase NFT trading, lots of other headline news contribute to bitcoin rally, is it too much too fast?

Oct

9

Is the market ready to rally to new highs as bonds sell off? Part 1 2021/10/08

Yelena Sennett and Andy Aiken: Everything being woke is good for the markets as well as the sell off in bonds. Lower volatility is likely for next week as we close above the vol trigger level.

Part 2

Best DeFi project to buy now. Shibu? Ethereum & Bitcoin update. Part 2 2011/10/08

Yelena Sennett and Andy Aiken: Will the Ethereum killers succeed this time or will history repeat itself? Curve CRV has one of the best valuations in DeFi now.

Oct

3

Is the market correction over? S&P 500 new highs coming up or 200 day MA? 2021/10/01

Yelena Sennett and Andy Aiken: Crypto breaks out as Fed loses the hawks and Powell goes woke. Crypto rally was not confirming the risk-off selloff.

Sep

29

S&P 500 test of all time highs coming up? Fed, Tesla, Inflation. Part 1, 2021/09/24

Yelena Sennett & Andy Aiken: Tesla breaks out. Nasdaq tests and holds 15K. Evergrande and China update.

Part 2

Full blown attack on crypto last week. But is it too late? Part 2, 2021/09/24

Yelena Sennett & Andy Aiken: Are the powers to be threatened by DeFi and Crypto? But price action is very resilient, given the amount of negative news. Is Evergrande paper behind Tether?

Part 3

Bitcoin and crypto valuation metrics, security. Bitcoin, Ethereum. Part 3, 2021/09/24

Yelena Sennett & Andy Aiken: How to value the crypto space, given that traditional metrics don't work in a new decentralized structure. Bitcoin price vs its security vs the number of users

Part 4

Dogecoin popularity, DOGE AMC adoption coming? Part 4, 2021/09/24

Yelena Sennett & Andy Aiken: Is it a broken coin? A publicity stunt for AMC? Dogecoin popularity continues, despite the lack of use or any new development.

Sep

19

Time to buy S&P 500? Levels to watch. Tesla breakout? 09/18/2021

Sep

13

S&P pullback, Apple lawsuit & Crypto selloff explained

Yelena Sennett and Andy Aiken: S&P 500 2% pullback, what next? Crypto's sharp reversal this week, cause and levels, weekly close is important. Inflation and hawkish Fed is likely.

Sep

6

Blow off top or a small pullback? NFTs craze fuels Ethereum? 2021/09/03

Yelena Sennett and Andy Aiken: S&P 500 statistics on all time highs bring up the ghosts of 1987 & 1929. Crypto Punk is worth more then Picasso as NFTs become the new status symbols.

Aug

28

Is this market as good as it gets? Cardano vs Ethereum? 2021/08/27

Yelena Sennett and Andy Aiken: The less freedom, the more the market rallies, but it can continue longer than anybody expects, like during the great financial crisis in 2007. ADA Cardano Coin outperformance.

Aug

21

While 4500 is still a possibility, large correction is likely. 2020/08/20

Yelena Sennett and Andy Aiken: Odds of a 10-15% correction in S&P 500 & Nasdaq are increasing with the continued loss of confidence in the US military and government.

Aug

18

S&P 500 pullback probabilities. Afghanistan effect. 2021/08/17

Aug

14

Will the market pullback next week after disappointing consumer sentiment data? 2021/08/13

Aug

12

Will S&P 500 pullback this week? Buy Coinbase? 2021/08/10

Aug

8

Is Nasdaq pullback coming? Crypto regulation? 08/06/2021

Aug

5

S&P is range bound, as vaccine stocks run up. Novavax NVAX? 08/03/2021

Aug

1

Is crypto pullback coming? S&P 4450 next? 07/30/2021

Jul

28

Market pullback, Covid and Fed. BTFD? BABA buy? 07/27/2021

Jul

25

Risk of another market pullback is high. 2021/07/23

Jul

22

Bitcoin breaks 30k, what's next? Markets rebound. 2021/07/20

Jul

18

Is stock market pullback over? Crypto? 2021/07/16

Jul

14

Has the market run up too high on optimism? 07/13/2021

Jul

12

S&P levels and Monday prediction. 2021/07/09

Jul

9

After 8 days of new highs, a pullback in S&P 500. Is inflation trade over? Crypto, DeFi. 2021/07/06

Jul

2

S&P 500 new highs over 4300, 6 up days, bullish? Employment report trade. Crypto chopping 2021/07/01

Jun

30

S&P 500 made another new high, as breadth deteriorates. Crypto and Coinbase COIN rally. 2021/06/28

Jun

28

S&P500 finally made new highs, as inflation PCE highest since 1991, but everything's woke 2021/06/25

Jun

28

Vic's twitter feed

"A nation need not be a mob of slaves, clinging to one another through fear, and for the most part incapable of self-government, and begging to be led; but it might consist of vigorous self-reliant men, knit to one another by innumerable ties, into a strong, tense, and elastic organisation."
- Francis Galton
 
one can agree with the thought that energy is the most salient characteristic of eminent persons, and that sports provides a useful model of what energy can accomplish, and how the incentive to work changes but as to how that affects markets, it must be tested.
 
near the beginning of racket games one often allows the opponent to win a point with a drop shot. invariably this leads to the opponent losing 5 times as many points when they try the drop shot later in the game. How can a  political party be so naive as to accept a deal on infrastructure that is sure to be followed by a request and exhortation for 6 times as much infrastructure in the more important later stages of the match. it requires the blessing of useful and envious idiots.

Jun

24

Opportunities in De-Fi tokens explained. Uniswap, Curve, Synthetix, PolkaDot, Yearn?

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