A Bull Run on an Influx of Cash
By Tshepo Magagane
I truly understand why people capitulate
1. Perpetual motion of free money – governments / economies cant stand any normalisation of the cost of money
2. Price discovery is truly dead – ETFs buy at any price
Brilliant read – with a heavy quants background, I always detested how much emphasis people place on Mathematics in Economics – was made worse by seeing how dealing making in M&A is done, how price setting is done – you always have to approach it with an excessive dose of curiosity and humility and always leaning to the “most obvious answers” – FLOWS DETERMINE PRICE! Https://archive.is/rEUEW
Investors who put money at risk truly understand this – even professionally – MPs in PE/HFs ask 1 or 2 questions around drivers
a. Ken Talbot – doing a 17pg WACC calc and he went “do a sensitivity table, I will pick a number”
b. Distressed and HY investors – who would say “discard all probability theory you have learned, at best you get a 50/50”
[Bouchaud is both baffled and frustrated by how economics has fallen in thrall to theorists — mathematical, social or political — and become bereft of the rigour of proper sciences, where real-world experiments and experiences actually matter.
Nowhere is that clearer than when it comes to the belief that markets are somehow efficient. “It’s all wrong. It’s not weakly wrong — it’s badly wrong,”
inflows and outflows are wildly more impactful on the stock market than previously thought.
Bouchaud thought the famed Black-Scholes model was badly flawed, as it rested on an assumption of random, Brownian stock market movements
dangerous feedback loops are a recurring theme in Bouchaud’s work as a physicist, which specialised in complex systems and their fragilities. He is convinced that money flows carry the same sort of risk in financial markets today.
a $1 investment in the stock market increases its overall value by $5 — and that this is a permanent effect
if flows can have such an enormous impact on the way in, just imagine what can happen if it ever goes out again
But they might create these long-term — I don’t know if we should call them bubbles — upward trends that persist and give people a sense that it is going to last for ever.”
“I think they have mathematics envy, rather than physics envy. They just want to prove theorems,” he argues. “That’s my main peeve about economists. They seem more interested in solving logical problems and aesthetic puzzles rather than a deep desire to understand what the real driving forces are.”
