Since I'm not a professional analyst, I've sunk many hours of research in the past week to understand the recent move in the market on a deeper level. Here are my findings. I hope you find this informative.
I've been hearing different analysts' opinions about the recent move in the stock market. I heard the money is moving from tech stocks to banks, or from growth stocks to value stocks. I'm here to say that neither is true. NASDAQ:GOOG is a tech stock and it's been rising. NASDAQ:COST is a value stock and it's been falling. Observe different stocks and you'll find numerous examples. The recent move is rather about companies in debt vs companies with free cash flow. It turns out that when interest rates are raised, it can be predicted with certainty that more money is going to flow into servicing existing debt rather than into productivity. Watch this talk with Brent Johnson to understand this concept, minute 50 to 60. Banks, who recently had their debts quantitatively eased, have more room to buy corporate bonds from companies like GM and Ford. This debt is used to service older debt. The big money, which understands this debt-based economy well, knows precisely where value is going when interest rates rise. Big money used their tried-and-tested calculations and decided to move their investments from free-cash-flow companies, to debt-generating companies. That's what's been happening, and that's the reasoning behind it.
However, there is a point the smart money is missing and they keep missing it and never learn. There is much more value to reap from technology and innovation than there is in loan interests. This value of tech is not priced into their tried-and-tested calculations. It's probably too uncertain for them. But realize that when companies like Amazon, Apple, Google, Facebook, and Tesla create value through technology, they are carrying the rest of the useless debt-generating economy on their backs and creating prosperity for the entire nation and for the world. Real value is in productivity. The United States has moved slowly after WW2 from an industrial exporter to a liquidity and debt exporter of sorts, which also reflected on the US's internal economy. And that weakened the industrial sector over the decades and bubbled the financial sector to an overwhelming extent that it's sucking more and more money from productive businesses and pouring it into existing debts with the purpose of buying more time. The retail investor should learn and understand this in order to position themselves with high conviction on the side of technology and simply hold stocks like Tesla for a decade. You are already benefiting the economy by saving money aside and putting it in the right place and of course the reward is high.
Let me know your thoughts. I probably made mistakes and left some statements in need of more elaboration.
1. "There is much more value to reap from technology and innovation than there is in loan interests."
You seem to be forgetting the time frame and risk for these investments. (a) Technology investments are generally more risky and take much longer to complete, whereas loan interests are usually secured and a continuous cash inflow that can be re-invested.
2. "The retail investor should ... hold stocks like Tesla for a decade. "
- Unless you have a substantial account in excess of $ 1M, that is a very poor investment. You could make 10 times that money by not "sitting" on any one stock for that time.
1. Even with that factor of risk taken into account, I would still argue that technology investments provide more value than loans, and that includes both failed tech investments and defaulted loans. Watch this video (youtube.com/watch?v=3Re8utN9zLg) to hear the argument of why technology is deflationary.
2. I don't understand this point. How could you make 10 times that money? And how is risking your savings by converting them to shares in a company "sitting"? And why is that bad?
EAML
⋅
@TechNerdOmar,
Thanks for the feedback!
1. I will have a better look at that video, but seem interesting.
2. Well, you said "retail" investor, so surely they should not invest all their savings in the stock market. Then it's probably better and safer to invest in liquefiable assets like property and art etc. That said, yes, I was waving my hands a bit too much and the number "10x" was just a point that it is quite feasible to multiply your money in a much shorter timespan. (Which is probably why most of us are here at TV anyway.)
TechNerdOmar
⋅
@EAML, OK I feel like there is a valid point there but I still don't get it. How is real estate more profitable than the stock market? I don't think that has ever been the case. Also, real estate and art are definitely less liquid than stocks. Perhaps you means bonds because they are indeed more liquid and also less risky than stocks. That's true. Is that the point you're making?
1. "There is much more value to reap from technology and innovation than there is in loan interests."
You seem to be forgetting the time frame and risk for these investments. (a) Technology investments are generally more risky and take much longer to complete, whereas loan interests are usually secured and a continuous cash inflow that can be re-invested.
2. "The retail investor should ... hold stocks like Tesla for a decade. "
- Unless you have a substantial account in excess of $ 1M, that is a very poor investment. You could make 10 times that money by not "sitting" on any one stock for that time.