Comment by jjice
4 days ago
I'm sure trading on margin is for some reason actually a positive concept for the economy at large for reasons I can't understand, but god damn does it feel like a bad idea to see huge spikes of debt to prop up what already feels like an absurdly out of balance market.
I don't know how to actually tell if the market is overvalued, but man when I see Palantir has a PE of like 500, Tesla almost 200, and Apple is like 35, I can't help but think there too much hype.
But I have literally no idea. Macroeconomics is way out of my wheelhouse, and I'm usually wrong.
Here's to an index fund...
The thing is, you can simultaneously be completely correct about the market being insane, while also entirely wrong in expecting it to behave in a sane way.
Cue the famous quote: “The market can remain irrational longer than you can remain solvent.”
I have a vague theory that as the amount of wealth inequality increases in a system along with “money printing” (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general. In such a case, an increasing majority of the money circulating has no need to be grounded in anything close to the common basic needs and values that most normal people have to live with.
Instead, most important to such wealth is to tap into the source of inflation to be on the winning side of that. This becomes a game of its own, where an investment’s connection to reality or fundamental value is mostly irrelevant compared to how it leverages or monopolizes the state-created and privately created instruments of “money printing” (sketchy lending, rehypothecation, etc.) and other such “games” that only the wealthy are allowed in on.
> Cue the famous quote: “The market can remain irrational longer than you can remain solvent.”
It's not necessarily about things being (ir)rational, but about 'psychology' and the multi-player system that is The Market™. Because it's all very well and good to buy and sell individual products (securities) on their merits, but one also has to take into account what other people's ideas on them is as well (as you are buying/selling from them).
This factor has been known about for almost a century:
> A Keynesian beauty contest is a beauty contest in which judges are rewarded for selecting the most popular faces among all judges, rather than those they may personally find the most attractive. This idea is often applied in financial markets, whereby investors could profit more by buying whichever stocks they think other investors will buy, rather than the stocks that have fundamentally the best value, because when other people buy a stock, they bid up the price, allowing an earlier investor to cash out with a profit, regardless of whether the price increases are supported by its fundamentals and theoretical arguments.
* https://en.wikipedia.org/wiki/Keynesian_beauty_contest
Of course other people know about this factor, so folks are judging others based on how they are judging others.
(Personally I'm just going with index finds (VEQT/XEQT/VBAL up here in Canada).)
Index funds won't necessarily save you. 7.5% of the S&P 500 is NVidia, 7% is Microsoft, etc. Almost 40% of the S&P 500 is in the top 10 stocks, and of the top 10, only #9 Berkshire Hathaway is not big into AI.
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there's very little psychology left in most of the market.
There's computers and computer logic.
> I have a vague theory that as the amount of wealth inequality in increases in a system along with excess money printing (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general.
If you want to make it less vague, you can read Keynes.
It's inequality that is the important one, money printing doesn't impact it (except for it impacting inequality). In simple language, people don't want to spend all their money on consumption (the "demand is infinite" you see on econ101 is an approximation), and so when only two dozen people have all the money there aren't many things you can sell and turn a profit. But those people still want to invest all the money they aren't using, there is just nothing to invest into.
At the turn of the 19th to the 20th century, explaining this was a huge open problem in economics.
I had no idea Keynes had similar ideas, so I definitely should read his work (and economics literature in general).
I probably should generalize my thoughts though to say “expectation of economic growth” (instead of just “money printing”) seems to me necessary to yield “opaque market insanity”, as opposed to “transparent evil sanity”.
As a thought experiment, consider a (practically impossible) scenario where there is universally no expectation for long-term economic growth/contraction — regardless of whether it’s “real” or just monetary. Then by definition, a long term market simply cannot exist at all. No amount of wealth inequality can cause market insanity if there is no (long-term) market at all.
Wealth inequality in such a situation can still yield hoarding, domination, conquest, control, scams, manipulations, etc. But I wouldn’t call that “market insanity” so much as “evil sanity”.
In practice, the real impact of wealth inequality on the common people would likely be the same either way. However, without long term economic growth/inflation, the “sane evil” of the greedy wealth can no longer hide behind the veil of “market insanity”.
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Money printing does directly impact inequality, via the Cantillon effect; in most cases, the printed money is put into the system in a way that disproportionately increases prices of assets that are held disproportionately by the wealthy.
> there is just nothing to invest into.
I think you have just defined gold and bitcoin to be "nothing".
Sounds about right.
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A post-truth environment adds to the ickyness of the feeling: on top of the bubbles, we've got RFK Jr. deciding the fate of biotechnology companies. Having a tech bubble at the same time science is being vandalized at NIH and in universities looks pretty damn dark.
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Yeah its important to decompose those two sources (among others) of "money printing". The obvious one people think most about is when our federal government does it. But a more concerning one is: Enforced banking reserve ratios. If a bank holds a trillion dollars in assets and is allowed to hold a reserve ratio of 10%, they can print $10T out of thin air, because they're allowed to issue debt up to that amount.
As far as I'm aware, in 2020 the reserve requirement in the US was set to 0%, and it has not been changed since then.
Yes, but with the “revolving door” between private financial institutions and government financial policy/regulation, there’s little real distinction anymore between the two.
Those private banks can print that money out of thin air because government allows them to. And the government officials (many formerly financial executives) allow them to because they “have to” to prevent “disastrous” private banking/financial collapse.
But if you or I wanted to play the same games to print our own money they way they do? No, that would be wrong and dangerous and illegal!
So it’s pretty clear that both government and private financial institutions are tightly coupled partners in a mostly corrupt, intentionally obfuscated shell game that primarily serves to keep money and power steadily flowing into the hands of the already wealthy and powerful.
Just look at who is actually held accountable for financial crimes. Some individual trader that finds and exploits some glitch that allows them to profit from the wealthy? Straight to jail. High ranking institutional powers (government and private) that implement often illegal schemes that continuously siphon wealth from common people into their hands? Slap on the wrist at most.
Reserve ratios have not been the major capital constraint for a very long time. Loan to deposit ratios have been. And those have stayed in normal bounds since the great financial crisis. Both bank regulators and importantly bank investors keep on top of this because they are the ones to lose the most if it gets out of wack.
The reserve requirement had to be loosened because banks became too conservative, largely because their investors were skittish about ldr.
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This is a misconception afaik, yes there is no longer a literal percent reserve requirement but banks are still required to be “adequately capitalized”, the metric is just more complicated now.
Doesn't our federal government set reserve ratios? They may not be creating money, but by setting the ratio (and other limits), they at least have a strong influence on creation.
I wish I could print 400,000€ to buy a house with 40k in my account.
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Another source in the last half a decade or so is digital coin "mints."
Quick look on coin market puts the total market value at ~$3 trillion. Yet that money effectively was created from nothing. It's basically money printing.
With credit cards that accept digital coins as financial sources it's also started to affect the actual markets significantly.
From the charts shown, markets have also gotten quite a bit frothier, with larger swings and spike / drops in margin, since 2020 when coin valuations really took off.
Personal view, it probably also contributes since it's less "real" from a certain perspective. Just digital numbers to wager, that don't really mean the same as mortgaging your house. "Eh, just wager like 10 or 20 digi-coins on margin." Except that's like $1-2 million these days.
Notably, very little of the US economy is plausibly basic needs (a roof over ones head, basic nutrition, actual basic medical care, etc.). The vast, vast majority is essentially luxury goods and services, but Americans have been conditioned to think what the rest of the world considers luxury is actually basics.
If Americans actually cut back to actual basics (a fixer upper small house in a less desirable area), shared a older used car instead of buying several new ones (or a big truck!), made homecooked stews and beans and rice instead of eating out all the time or prepackaged food, stopped buying the latest fancy phones, took care of their health instead of gastric bypasses, dialysis, etc.
Hell, even if the average American stopped taking expensive vacations!
The world economy would likely collapse overnight, no joke. And it would likely be uglier than the Great Depression domestically.
> a fixer upper small house in a less desirable area
A lot of an area's desirability has to do with crime rate. Bulgaria has a homicide rate of 1.088, and the US 5.763. So what would be considered a very safe, friendly neighborhood in the US, would be average or worse in Bulgaria. In this sense, "luxury" is flipped - what Bulgarians would consider basic, would be "luxuriously safe" in the US.
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This is true.
Bernays did more to end the Great Depression than Keynes, and to prevent its recurrence post-war. Sad truth.
> Hell, even if the average American stopped taking expensive vacations!
Lmfao what world do you live in where they haven't?
> I have a vague theory that as the amount of wealth inequality in increases in a system along with excess money printing (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general.
Except that the Gilded Age, which had some of the highest levels of wealth concentration and inequality, was during the period of the Gold Standard where money could not be 'printed excessively'. And this was true not just in the US but most of the major countries in the world.
Further, while wealth inequality has risen in the US under the non-gold fiat system (to levels similar to the Gilded Age), other countries do not have as much wealth inequality even though they are also non-gold fiat.
You are right - it's about the inequality of holding the money, not the rate at which it's printed. Money printing is relevant to the extent it mostly flows towards the already rich. If money was printed and distributed to everyone evenly it would have the opposite effect.
That can easily be explained away in that the wealth concentration was a symptom of vertically integrated hard network based implementations (railroads, logistics, shipping, extraction), and the Gold Standard may have braked some level of wealth inequality acceleration and centralization to a degree, but that the trusts and business structuring were the cause moreso than any inherent tendency toward gold as basis to full fiat.
That explains why we're seeing what we're seeing now. It's all about network monetization.
If the very most you need to live on is 10 million. You can gamble the rest. Buy apartments, jack up the rents like crazy worst thing to happen to you is that people may move out. Buy stocks on margin, win some loose some. The real economy your play toy.
Not sure why you're being downvoted. Word "gamble" too inciting? Maybe if you'd used "much more risky investments" instead, but I'm not here to quibble about your language but to agree with you and extend what you're saying. I actually think the $10 million number is also relative to age because someone who's 30 and "merely" a millionaire can and will invest up the risk ladder as if they're a 50-year-old risking their above-$10 million capital. And the population of people who are millionaires vs decamillionaires is of course a healthy multiple so there's a lot more risk appetite than the relatively small number of decamillionaires would suggest.
As an aside I feel like there's this terrible trend where folks focus so much effort and energy worrying about whether billionaires should exist, whether they should be taxed more aggressively, etc. that we've lost the plot on just how much loot even a net worth of $10+ million is. And at the risk of me writing a too-long comment (bad habit), think of the risk appetite someone has when their decamillionaire parents pass away, and they're given, sometimes overnight, millions of extra dollars. Sure, maybe they'll buy a house, but oftentimes those funds go straight into the market. With boomers starting to leave this mortal coil and their trillions of dollars being passed down you can start to understand why the market seems disconnected from historical fundamentals.
>I have a vague theory that as the amount of wealth inequality increases in a system along with “money printing”...
This is well understood by some schools of economics. It's called The Cantillion Effect.
https://mises.org/mises-wire/cantillon-effects-why-inflation...
This is a very sad yet resoundingly plausible take. Scary.
I’ve seen nobody talking about this, so it’s probably wrong, but I can’t shake the feeling that a lot of the seemingly-nuts things we’ve seen the last 20ish years, from house prices going to the moon to LOLWTF P/E ratios sustained for years on end, and even the magnitude of VC activity, are an outcome of having way too large a proportion of our money in capital, desperately seeking investments to buy, with an underlying economy (ignore stock prices and net-drag economic activity like over-paying for healthcare, I mean actual productivity) that hasn’t grown anywhere near fast enough to give that money anything useful to do.
Every independent economist has been saying this for the last 10 years- see for example "Capital in the Twenty-First Century", a book written by French economist Thomas Piketty.
Time flies, and he’s been on my to-read list for… a while. Need to finally get around to it I guess.
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What is your definition of "independent economist"?
Claiming that even a majority or plurality of economists overall agree with Piketty, who advocates for some wildly unpopular economic policies and is a literal socialist, is absurd, so your group of "independent economists" must be pretty homogeneous and small.
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I've had the exact same thoughts, so if you're wrong you aren't alone. I personally believe this is due to the imbalance of wealth. Where money isn't circulating properly and we end up with these massive funds that move from one investment type to another destroying everything in their wake
Haven't we been talking about that for a long time? Even the whole "go to college to make more money" was premised on the idea of people leveraging college research facilities to create new opportunities for money in recognition of the walls closing in. The game of telephone saw that turn into "go to college to get a job" with few compelling creations to come from it and, thus, stagnant incomes, but you can only lead the horse to water...
I know we are at ground zero here on HN, and ironically HN is pretty good evidence of this, but
The pros of software are so OP that it hard to justify investing in anything else. Software has incredibly low cap-ex and incredibly high margins. Five humans with five laptops can create a lawn maintenance app worth tens of millions.
To get that same value from, say, building lawn mowers, you need a factory...annnd already the value prop is "nope".
Take note that there is no hardware version of Hackernews. There is no hardware/manufacturing VC scene. Hell even the hardware that is produced today is just a vessel to sell a $19.99/mo software subscription to use the product. Look at what Tesla did, they are getting a reality check on their cars, but Ah!, Tesla is now a software company developing a software package that turns hardware (their cars) into reoccurring profit machines!
Software has eaten the first world, and this is what is looks like. A hyper inflated tech scene where all innovation is happening, and a totally anemic everything-else scene (except finance, that's huge too).
>Five humans with five laptops can create a lawn maintenance app worth tens of millions.
And
>totally anemic everything-else scene
A lot of the 'growth' we've seen seems to be consolidation and bilking of the consumer by rents. If we look at other countries with actual competition in manufacturing like China we see tons of brands with quality everywhere from use once and throw away to actually really good products. The profit chasing will eventually kill us as we have nothing that will produce actual value.
(Also I love how you're getting voted down for pointing out the obvious).
My bet is that there is a hardware Hacker News, but it's in Mandarin.
Note that while five humans with five laptops may create an app about lawn maintenance, the app won't actually maintain your lawn. We'd expect apps to have less value than they do.
I agree with this to some extent, but I honestly believe the capital markets would look VASTLY different had the Fed not rescued them with unprecedented money printing in 2002-3, 2008-15 and 2020-1. Yes, software is important and changing the economy, but it doesn't rewrite the basic rules of finance and valuation. The Fed did that.
The hardware HN is also HN. There's just nowhere near as much stuff, and as you say the capex barrier to entry makes that a much smaller business.
It seems like this would be a pretty good argument for increasing taxes on the high end and having large public works projects to drive forward particular useful goals on a national level (ignoring whether or not a particular governmental organization is currently capable of this, more just focusing on that as a backstop that allows prioritization of economic goals).
I think you're on the right track there. Stock markets used to be a place for developers of Things (initially, railways) to acquire money for investments too large and/or too risky for a single bank, for companies to acquire money for growth, and for farmers / their customers to get reasonable pricing for their goods.
The problem is, once the gold standard fell and the rise of fiat money began, the financial markets became self-serving, with hordes of middlemen extracting the tiniest amounts of profits along the path, speculative trading driving up food prices, and people's care in old age no longer backed by the government in the form of a "societal contract" but by, essentially, betting on the economy ever growing and growing.
The gamble went on decent for a few decades, partially powered by ruthless exploitation of natural resources, but in the end the fundamental and long ignored issue of infinite growth being impossible (as anyone who ever played Paperclip should know) is now coming home to roost. The domestic resources of many countries are effectively exhausted (coal, gas and oil in Western Europe), leading to unhealthy dependencies on those countries that still do have these resources, and the consumer markets are either already saturated with cheap foreign-made goods or simply don't have enough money any more because rents are extracting too much money out of the people.
Nvidia has current market cap equivalent to ~8 times ExxonMobil. If tomorrow ExxonMobil disappears from existence, you'd get half of the world paralysed. If Nvidia tomorrow gets replaced by a massive hole in the ground, you'd just shrug, go down the road a bit and buy AMD. Sure, they can't make cards as fast as Nvidia does, but they still work, the old cards won't suddenly stop working, and they don't even manufacture their own hardware.
The AI stocks nowadays are pumped up by pure hype, and it's inevitable that the market will recalibrate sooner or later
I'm not sure that's a fair comparison. The difference in the product lifecycle is too big. A GPU has a 3 year depreciation cycle and continues working for well over a decade after that, if I buy gas today I need new gas tomorrow. The market can react in the timespan of years, it can't react in the timespan of weeks, and having a product that isn't used up makes timelines more elastic.
If we eliminate both factors by imagining a world where GPUs just stop working every three years and where AMD doesn't have time to ramp up production we'd be pretty screwed without Nvidia, and everything depending on GPUs would quickly grind to a halt. AMD sells a tiny number of dedicated GPUs compared to Nvidia, and right now they have no spare capacity
"everything depending on GPUs would quickly grind to a halt." is there any one thing essential depending on the existence of GPU processors ?
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I think you're missing part of the story with stocks like NVDA. The value of a stock is also based on expectations, so it could be that all of NVDA's growth for the next decade has already been frontrun by the market, and it's essentially partly a prediction market on how valuable the infrastructure will be for AI, given that the chip requirements will only increase as AI systems are implemented in more and more hardware (robots / appliances / transportation / medicine, etc.). While the growth potential of carbon fuels really remains as it is with modest growths aligned with demand/population, but tempered by alternate energy taking greater and greater marketshare.
So it could simultaneously be hype (very optimistic predictions) and yet still valued appropriatey by the market with future expectations priced in, just with some additional premium due to that demand/hype.
> Nvidia has current market cap equivalent to ~8 times ExxonMobil.
$XOM's current revenues are known and no one will suddenly be throwing billions at them for CapEx purposes. People are throwing billions at the general direction of $NVDA. That's the difference: which company has a better change of (growing) more revenues and profits in the future?
> The AI stocks nowadays are pumped up by pure hype, and it's inevitable that the market will recalibrate sooner or later
And until that recalibration happens you can buy now and see your holdings go up; then, once you're happy with the ROI (10%? 20%? More?), you can sell and realize your capital gains and have a large number in your account. Or you can not buy now and potentially miss the ride up.
Just because The Market™ is (allegedly) irrational does not preclude the possibility you can make money.
> Just because The Market™ is (allegedly) irrational does not preclude the possibility you can make money.
yeah, of course, that's how the whole deal works. I was just pointing out how most of it looked a bit crazy to me
> If tomorrow ExxonMobil disappears from existence, you'd get half of the world paralysed. If Nvidia tomorrow gets replaced by a massive hole in the ground, you'd just shrug, go down the road a bit and buy AMD.
That's the wrong way to think about it, because the stock price is about all future profit over time, not the current moment. Over the next 50 years, which one do you think will have made more profit?
Imagine you're in the year 1900, and you're comparing a light bulb company with a steam engine company. Industry needs steam engines, you say! Half the world would paralyze if they stopped working! Meanwhile, who cares about a light bulb company?
But you can understand why light bulbs actually turned out to make much more money moving forwards.
If steam engines stopped working suddenly in 1900, we would have fallen back to ooga booga cavemen in months.
You should probably think of it with a different perspective. The long term outlook for oil majors is stagnating at best. They provide great logistics for fuel globally but haven't expanded past that.
If we continue to go to electricity and go via solar, energy storage, wind and nuclear - you end up in a spot where oil and gas are limited.
NVIDIA has blue sky ahead of it -- are valuations totally out of line? Most likely. That said it has a highly desirable product globally. Oil is a valuable commodity but there are many other providers that could snatch up exxonmobil share.
Also if you want a better example -- good look at any critical supplier in the food space. Thats way more important - we lose that we get in a world of hurt.
All you're really highlighting is the difference (from an economic perspective) between needs and wants. The world needs petroleum. But once that need is met, extra petroleum production is pointless.
Whereas the world (or, perhaps, a specific class of investors within a specific segment of the world) WANTS generative AI. The amount someone wants something (and, by extension, is willing to pay for it) is potentially unbounded, and can even be uncorrelated with real utility. (See: gemstones, trading cards, cryptocurrency...)
I wouldn't be so quick to pick on AI hype. Investors are always desperately looking for where to put their money. That it is AI suggests, perhaps, that all the alternatives look less promising right now? (And that is a bit tragic.)
That's because businesses are valued by how much money they make, not how essential they are.
ExxonMobil has a market cap essentially infinitely larger than my local water supply and the farms that grow my food.
you're right, but it brings up an even bigger question in my mind -
If farms where wiped out we a huge percentage of the population would no longer exist, yet they 100% are a commodity with low margins.
We don't value things based on long term risk/need
I hope this doesn't come across as pedantic and negative, but there is a good reason Why a resource extraction company in a market that topped out a few years ago has got a lower than average PE ratio.
On the other hand, Nvidia is a result of the AI bubble. Oddly, though, there's a case to be made that Nvidia could come out of this, even after a correction, looking pretty good.
But what I really can't grok is how Tesla keeps an insane P/E ratio after several consecutive quarters of bad news. Or how Grok gets a high valuation without even anything close to OpenAI's money-losing revenue levels, while swallowing a decrepit old social media site. Or how that big rocket can keep blowing up without dinging the valuation.
> Sure, they can't make cards as fast as Nvidia does
They both use TSMC. If Nvidia disappeared, TSMC would have more capacity available.
Of course, if TSMC were to disappear, now we're talking Exxon-Mobil levels of disruption.
I think the comment wasn't about production speed, but speed of the product in terms of performance
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Data shows that retail participation has been near all-time highs, which does tend to correlate with bubbly market activity.
The market in general is fairly highly valued when looking at the standard valuation metrics, but corporate earnings have been strong as well. That said, the most obvious grey swan would be the market concentration in the top names, which market cap weighted index funds do not avoid and indeed contribute to on a mechanical level. That said, the names will eventually swap around within the index, and as long as capital flows to US financial markets don't reverse (see the back to back 7% down days for market cap weighted indexes during the tariff scare) these rotations won't ultimately be a problem.
Beyond that though, it's not as bad as it looks at first glance. Other areas of the market have pretty large pockets of value, or at least more average valuations. Some names in consumer discretionary are still at the bombed out post tariff scare valuations (ex: LULU which is a good example of a name that had optimism and now has extreme pessimism and low valuation, ANF which has good earnings despite tariffs and is cranking buybacks sub-10 PE) and sectors like healthcare (you have to be a real contrarian to get in here, but when Buffett is buying the value proposition is usually pretty extreme), and energy (quality energy names like FANG trading near single digit PE with management that is showing extreme capital restraint in the face of uncertainty, for once). Smallcaps in general aren't that expensive, since they are on the back-end of the huge, crowded long/short trade (that has been unwinding for a few days now).
Even in megacaps it isn't all bubbly. Google has a lot of pessimism and isn't that expensive, which may or may not be warranted but it is a counterexample. The ridiculous valuations are quite concentrated in the AI related space, specifically in specific names which retail is obsessed with (ex: PLTR( or hedge funds are obsessed with (ex: GEV).
When you say retail participation being at a high correlates with bubbly market activity, is that based on recent data? I'm concerned it doesn't take into account the increase in access to the market app based trading has proliferated.
Yes. https://i.ibb.co/8gFNPcwX/temprp.png - Goldman chart.
Luckily we have the lockdown era as a benchmark, when everyone was locked inside and Robinhood style option and stock trading, the SPAC craze, etc, was at mania levels. App proliferation today is close enough to the same as the 2020-2022 period, but it's a good point and sure, a portion of the increase probably does come from further online trading market penetration.
> as long as capital flows to US financial markets don't reverse
A rather large and probably counterfactual assumption, if the US continues, or even looks like it might continue, on the path it's been on.
The April meltdown was a great example of how markets react to net capital outflows from global investors. Interestingly enough, since the foreign buyer strike, money has been roaring back into US financial markets. I'll zip my mouth when it comes to judging their decision on that front, but I'll at least say that I suspect that the AI narrative has a strong pull, and much of the world really has no good option to participate in this apparently extremely intoxicating investing narrative other than to buy US tech. To be fair, the US has these sorts of narratives running more often than not, so we'll see how it plays out long term. As of now, talk of foreign money being pulled from the US was a flash in the pan.
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If a company has strong growth in real dollars or inflation is high then a higher P/E is approximately valuation neutral. P/E ratios don't exist in a vacuum and low isn't always better. The price-to-sales ratio is often more indicative of whether something is overvalued than P/E in high-growth cases because earnings are used to finance growth.
P/E ratios tend to be small only if revenue growth in nominal dollars is flat, which tacitly treats the stock more like a bond.
I do trade using margin account, but I don't borrow. The primary reason I use margin account is to be able to trade with unsettled funds. Probably don't need it now that the settlement times are T+1, but when it was T+2, it was kinda annoying.
Stop worrying about P/E.
If you had only invested in companies with sane P/E in the 2010s you would have probably missed some of the biggest runs for companies that today are some of the most valued in the world.
Worrying about P/E is more for really big institutional sized investors who are very conservative because the loss of principal is far more difficult to recover for even small % of loss.
You are an individual investor who can probably recover losses with a year or two of salary.
These high PE's imply an expectation of further profit growth - by rational investors. There's a strong element of less rational investors with FOMO jumping on as well.
Index funds offer some defense against crazy PE's through diversification, but keep in mind that when an asset bubbles, it also takes up a greater percentage of the index fund. The big tech stocks make up a significant % of the SP500.
> Macroeconomics is way out of my wheelhouse
Many of us consider macroeconomics to be out of humanity's wheelhouse. The divide between micro and macro economics is where the real science ends and the bullshit starts. Many of the findings in macroeconomics are politically motivated, tenuous, and haven't reproduced well, just like in the other social "sciences".
The index fund itself is mostly Tesla, FB, Google etc..at this point. 35% +/- in my quick check
I assume you mean an S&P500 tied index fund?
I asked "a friend":
• Meta (META) ~3.1 %
• Alphabet (GOOGL + GOOG) ~3.8 %
• Tesla (TSLA) ~1.6 %
So just under 9%. Significant, I suppose, for just 3 of 500 stocks.
EDIT: since "etc." was mentioned, I thought I'd toss in some of the other top stocks in the S&P500:
• Apple Inc. (AAPL) ~6.7 %
• Microsoft Corp. (MSFT). ~6.6 %
• NVIDIA Corp. (NVDA) ~6.0 %
Amazon.com Inc. (AMZN) ~3.8 %
Another 20% or so. So the above seven stocks comprise about 30% of the S&P500 (Apple, Microsoft and NVIDIA are the "Big 3" at about 20% when combined).
Assume a market weighted index fund, not an equal weighted index fund.
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> I assume you mean an S&P500 tied index fund?
I would assume VT and/or BNDW. Most sane index fund fans aren’t all in on s&p 500.
On a P/E basis neither Meta nor Alphabet seem overvalued.
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It's crazy to me that these companies are essentially holding up the stock market, but are hemorrhaging money on buying GPUs. The magnificent 7 have spent $560 billion of capital expenditures between 2024 and 2025 leading to $35 billion of revenue, and zero profit. It feels like a complete house of cards to me. No one has made any profit on AI.
High capital expenditure like this is viewed favorably. Investors are investing in AI, and high cap-ex is a strong signal that the companies are going after AI i.e. doing what investors want them to do.
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There can be a lot of mundane reasons to use margin. Making purchases while cash is in movement as an example. This type of debt is one of the safest as you are borrowing against assets with an up to date valuation.
Disclaimer that if you own any of the popular market-cap-weighted index funds (VOO, VGT, VTI) you are exposed to this risk and, conversely, have benefited from this ballooning in valuations.
NVDA, AAPL, TSLA and PLTR are together ~16% of VOO at the moment. NVDA alone is ~8%. Berkshire Hathaway is about the same % as TSLA, 1.61%.
One of the two major worldviews (ideologies) says the market is fully valued. One says it's severely undervalued. Nobody is capable of considering that their world view is wrong and they're living in a fantasy. The next 12 months will be fascinating and (for some) extremely satisfying.
High amounts of margin debt indicate that a crash is coming. When a lot of the investments fail, the whole house of cards unwinds: A lot of the debts go bad, and then there isn't enough lending to create investments which are then used to create jobs.
Also margin calls will force selling of equities, driving the prices down.
> I'm sure trading on margin is for some reason actually a positive concept for the economy at large for reasons I can't understand.
Don't underestimate yourself! A lot of times when something seems stupid and socially corrosive, it is. I don't think there is any reason for margin trading other than it makes a few people a lot of money.
With margin trading you don't need to worry about your cash balance. It can be in something like COST or TLT and you can still trade.
when people are botroing like crazy, it means that interest rates are too low.
Palantir is closer to an East India Company
Perhaps there is a different valuation metric relevant for a nearly sovereign entity. Nobody is buying shares for "money returned to shareholders", because nobody is using shares as a conduit, the corporation relies on a low-float to pump their own stocks and delete the shares in buybacks that squeeze the price.
> "money returned to shareholders"
> buybacks
I'm not sure you understand what a buyback is, and given that display of ignorance, I don't see why anyone would care about your (entirely unrelated) observation about Palantir.
shares exist as conduits to return money to shareholders via dividends
buybacks are more efficient but only pump the shares on the open market, by nature, some shareholders are essentially getting money returned, but primarily its to reduce scarcity so all shareholders just have higher value shares for utility at their own discretion
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