A liquidity flywheel is a situation where inflows into an asset class lead to buying pressure that pushes up prices, leading to favourable apparent return and volatility characteristics in the said asset class. This favourable outcome then attracts yet more inflows, leading to yet more buying, etc. Conversely, poorly performing asset classes with significant downside volatility can lead to investor redemptions, leading to forced selling that contributes to yet further price declines, yielding even worse returns and even greater redemptions, and so on. This process can go on for years, and sometimes even for decades, and is a fundamental contributor - perhaps the most important contributor - to both major asset-class bubbles, as well as asset price busts and secular lows that lead to fire sales prices (which are 'anti-bubbles' driven by the same drivers of bubbles in reverse)Mostly but not entirely. It's also previous shorters who buy to manage risk. These people are qualitatively different from the speculators.
The alternative is a small group of well educated or armed people planning the economy by 5-year increment for the good of the people. They can be right for very long, but is it fair to prevent us to make mistakes and only allow them ?
The market maybe isnt here to maximize efficiency of outcome, but maximize fairness of access ?
That's a little too strong. It doesn't maximise efficiency of outcomes. But it does (more or less) maximise profit under free-market rules.
But there's something wrong with speculating using other people's money.
The naive valuation of a stock that gives it an infinite value at a real 0% interest rate relies on an infinite horizon. Thankfully at least for residential loans it's difficult to get an interest-only mortgage -- in practice deposits and principal payments are binding constraints on valuations. Maybe that changes with corporate landlords becoming more prevalent, though.
> employment stability
This is interesting: high job turnover is usually seen as a sign of a healthy labour market because it can represent people sorting into jobs they're better suited for. I guess it's a question of what you hold constant: maybe people are changing jobs because jobs are plentiful. If people keep changing when jobs are hard to find things could get dicey.
1) newJob pays more than oldJob
2) oldJob is becoming unstable, toxic, and will likely be firing us all in 6 months, so better to leave early and start the clock over
In a world where we remain at oldJob til the end, we risk 6 months of that extra pay differential, plus we now have to job hunt while technically not being employed
Bringing this back to shaker8's point about financial risks, I think these kinds of job changes mostly point to systemic resiliency, not fragility.
But imagine if the US job market changed to this scenario: still the pay is high, still the expenses are low, still the jobs are available, but you have to change jobs every week. That would signal two things:
1) Employers are suddenly finding it advantageous to rid themselves of workers on short notice
2) Time and money are being wasted interviewing people and onboarding them rather than letting them work for sustained periods
I think such a system, while still "healthy" because workers are still employed and paid similarly, is "less healthy" than a system where the workers can expect the duration of their work at one employer to be longer than 1 year
it can just be a plain bubble even if everyone buying it has enough money to afford it. there’s been plenty of bubbles that didn’t involve leverage or loans at all. people simply got crazy and paid ridiculous amounts for assets far above intrinsic value. and when at some point something happens to the asset, it has a far way to fall.
The tragedy is that that these crashes often increase inequality and concetrate power. The victims are innocent and the perpetrators are not held accountable.
Maybe they understood that it was an opportunity to seize, a cheap loan in a bubbling up market, and they decided against carefulness.
I face this with bitcoin for instance, trying to stay careful in an exciting rising market. If I stick to fundamentals and what I think I know of past experiments, this makes no sense. If I look at making money in my lifetime, I feel stupid resisting.
The financial market and its powerful actors have a massive collective responsibility, that they often don’t seem to be aware of.
The few that are responsible have been ignored for reasons I cannot otherwise understand but as greed.
I speak as an outsider and layman here. I understand that mistakes can be made and that things are very complex and unpredictable. What I have a problem with is that they don’t seem to get accounted for, and certainly not fixed.
The criticism of the banking system and financial markets goes way back. It has been discussed and brought to attention by the likes of Adam Smith. But somehow we just keep patching over the symptoms, if at all, rather than question the severed connection between power and responsibility.
but isn't this all modern fiat money?
PG had one of the best definitions: "a rapid increase in buying based on the expectation of soon selling to a sucker willing to pay more". It's in an old Startup School video and I doubt I am getting his wording correct.
"Minsky distinguished between three kinds of financing. The first, which he called “hedge financing”, is the safest: firms rely on their future cashflow to repay all their borrowings. For this to work, they need to have very limited borrowings and healthy profits. The second, speculative financing, is a bit riskier: firms rely on their cashflow to repay the interest on their borrowings but must roll over their debt to repay the principal. This should be manageable as long as the economy functions smoothly, but a downturn could cause distress. The third, Ponzi financing, is the most dangerous. Cashflow covers neither principal nor interest; firms are betting only that the underlying asset will appreciate by enough to cover their liabilities. If that fails to happen, they will be left exposed."
-- https://www.economist.com/schools-brief/2016/07/30/minskys-m...
The crash that occurs when people realize that an asset class is not going to keep going up is a "Minsky Moment". His conclusion was that stable growth led people to take on more debt - that stability itself was destabilizing and financial crises are inevitable.
or if they wanna keep the ability to take huge risks, there should be some way to force large financial entities to face the loses when they do risky things and fail as opposed to letting the "market" (i.e. the future taxpayer) pay the bills.
at the very least they should cut them off from "new money" (which is government emitted credit=debt-money) until they pay back in whole as opposed to just making even more "money" to dig a deeper hole for the future taxpayer to fill back up.
I'm reminded of filling up a hole by digging in other places to fill the original hole without ever realizing that you're actually in the ocean and thus you are just lowering the overall water level.
Stock investors are already generally limited to 2× leverage in brokerage accounts.
maybe there should be
It isn’t looking great.
https://www.currentmarketvaluation.com/models/buffett-indica...
But I may have left some confusion in my fourth paragraph. It's a bubble when it becomes a self-reinforcing feedback loop. People bought because it's going up, which makes it go up more, so more people buy, so it goes up even more, and so on. I didn't state that clearly enough.
It sounds like you're saying the provenance of the funds is a key indicator. People buying stuff that's going up because those people closely follow industry or sector news. The people who buy because THOSE people bought are what drive the bubble growth.
also micro-lending will be as big in west as it's in China in the next decade. borrowing 10k to margin trade the stock market is inherently more risky than borrowing 10M for a mortgage.
You have an asset (doesn't matter what it is). It's going up because the fundamentals improved, or because favorable press, or whatever. That's not a bubble. Stuff goes up all the time.
So people start buying it, because it's going up, and they want in on the action. That's still not a bubble. People buy stuff that's going up all the time.
Now there's new money flowing into that asset. So now the price goes up because of the new money flowing in, and the new money was flowing in because the price was going up. Now it's a bubble. But it's not dangerous yet. People can lose their shirts, but it won't hurt the overall economy.
It becomes a dangerous bubble when (lots of) people invest in the asset with borrowed money. Now if it crashes, it can take banks with it. If that happens at a large enough scale, you damage the economy as a whole.