I'm not one to fetishicize the past, but to be honest there has been quite a bad turn lately.
COVID, Trump's second election, Musk turning into the Bond villain he was cut out to be, Altman's good guy mask melting down slowly, the AI bubble sucking up all the money and making developers anxious about their future.
One shouldn't wonder why the mood is gloomier.
At least we have Mark Rober still out there working for the greater good, but I think it starts to transpire that things are starting to weigh on him too.
> It really is an indication that the stock market is mostly speculative and not concerned about the actual economy
Not really. Strong jobs numbers in the midst of 3+ percent inflation means rates should go up. That, in turn, dilates time on future earnings. So making a company's future earnings more-heavily discounted will be a net drag on valuations even if the jobs numbers indicate those numbers, near term and far, will be higher.
But higher inflation implying that “rates should go up” is central bank doctrine. It’s not a general law of how economies function.
Central banks intervening with interest rate adjustments is what distorts the prices of equities downward, when inflation rises.
Without central bank intervention, inflation should theoretically push equities higher (a highly-inflated economy driven by rising demand is by definition a well-performing economy!).
Central banks intervene because runaway inflation can be harmful to wage-earners (they save in dollars, not assets).
But I’m not sure if a 2–3% inflation target is ideal. It seems to me that this arbitrarily low inflation target restricts the growth of the economy in ways that might affect wage-earners, defeating the stated purpose of monetary policy, since higher rates also have the effect of curbing job growth as well as raising the cost of servicing mortgages.
Agreed about the 2-3% target. Seems like a crazy low target for a country that has been, historically, a strong exporter. Or at least seems to want to be an exporter. I wonder if one of the reasons behind this low target rate is that inflation will ultimately decide how expensive government debt is, since under normal circumstances people will want their bonds to at least pay out enough to cover inflation.
> But higher inflation implying that “rates should go up” is central bank doctrine. It’s not a general law of how economies function.
Let's put it this way then: the central bank can raise rates or it can crash the economy into a brick wall. In that sense, rates should be raised. We have the least competent regime in history right now though, so they might choose the latter option.
> higher inflation implying that “rates should go up” is central bank doctrine
Uh, no. If you have no central bank, more consumption and more employment means more demand for money. Ceteris paribus, that will raise rates. (Our own history with free banking is more complicated since the only inflationary period was driven by specie introduction from California's gold rush. The predominant problem in antebellum America was deflation and bank collapses.)
You're correct inasmuch as central banks quicken this reaction, and–when done properly–dampen it. But the fundamental engine is emergent, at least for nominal rates.
Why would it be? Non dividend stocks only have value because other people think they have value (i.e. greater fool theory).
Only dividend stocks have some base value connected to how well the company does. (Higher dividend if it does well, lower if it does poorly.) But they still also have a lot of "greater fool" value.
Beyond dividend, stocks have no intrinsic value. Nowadays you don't even get a piece of paper to wipe your ass with anymore, it's all digital.
what happens when ALL the stocks have been bought back? what is the natural conclusion? you get extra points if you mention dilution i.e. oops we turned on the ~~money~~ stock printer and your stock is now actually worth less!
> what happens when ALL the stocks have been bought back?
This can't happen in practice. It would require the company's value to fall below the buyback amount, which is itself a fraction of the company's cash and thus value. (Like, yes, I could engineer a weird failing company where this could happen. But that would just be describing a peculiarity of how the company failed. If the company is doing fine, this doesn't occur.)
If you have trouble with a public-market buyback, consider how tenders are done in private markets. You're a shareholder who has the option of selling back your shares. It's a direct way for you to tap the company's treasury as a shareholder. The company's shareholders could vote to distribute all the cash and assets in a buyback. But we have a word for that: liquidation.
Every time I try to explain this to people I feel like I'm talking to a brick wall. Even more frustrating to hear, otherwise reasonable, market analysts say that "dividends don't matter because the stock value goes down on payout". What doesn't matter is how successful a company is if they don't share their profits. You're literally buying a Pokémon card just with a lot of liquidity until the illusion of value bursts, hoping that somebody will buy you out because P/E improves or whatever.
> Only dividend stocks have some base value connected to how well the company does.
That's not how it works. If the company has profits they can distribute it in many ways. Dividends is one, but not a great one because it forces you to pay taxes on it this year. Or they can buy back shares which increases the share price, which is better because then you don't have taxable income on that until you decide to sell. Or they can reinvest that money into the business to grow it, which is the ideal option, although not always possible.
To who? There's no immediate benefit of holding a stock that doesn't pay out beyond voting rights, or a fraction of company assets. As parent said, you're just hoping to sell it to somebody down the line for more. It's speculation. The market is liquid, and a lot of people believe these stocks have value, but it's still speculation.
That's just dividend stocks with more shady. We promise to invest the dividend you would have gotten into ourselves to become more valuable bro. But that will only be reflected in "valuations" that don't directly affect your bank account. It is still the greater fool theory.
The worst is growth stocks that are a wrapper around actual dividend stocks. Beyond number going up, what actual concrete utility are you getting? Beyond waiting for the line to go up to eventually sell it to a greater fool, what can you _actually_ do with it? It's not real.
It is only real because enough people believe it is real. And they believe it because they want to believe it, because they are greedy and want easy money.
Once the market tanks and the greed turns into fear, there will be bagholders and the brokers will be laughing. The people who skim fees and percentages will be cozy.
"Now is the time to invest" they will say, because from here the line can only go up! And it will, eventually, because people want to believe, because they are greedy.
The only thing the stock market makes money on is greed. That is the thing that drives stock value. Not the economy.
This take makes sense but isn't really accurate. A lot of companies have stock buy back programs in lieu of dividends; essentially, using their cash flow to manipulate their stock price instead of returning money to every investor. Now this doesn't guarantee a particular price usually, but does help push the price up when they are buying a significant amount from the market.
Strong job numbers with rising inflation means potential hikes to the federal funds rate which increases borrowing costs which reduces profitability which means stock prices go down. Strange causality chain, but that’s how Mr. Market thinks.
These companies are capex heavy and need to reach into the capital markets to sustain their growth. The cost of capital is correlated with inflation. Why is this the fault of the stock market? Maybe blame the government for diluting the money supply?
It’s important to note that index funds will eventually get in, so it’s not like 401k will never be holding these stocks. It would be silly to assume that the stock is going to tank that much on day 1, on the asumption that there are not enough investors to buy the big three IPOs that are coming out this year. There is plenty of money in the market, and everyone knows index funds will buy these stocks when the companies get in, so everyone will be able to dump them if needed in a year or so.
Btw I don’t really know how index funds work, but if they need to track the index as closely as possible, they will all have to buy those stocks on a certain day, no? There will be a crazy price hike when they do so. Or maybe they have terms that let them smoothen their trading around entry and exit?
To a first approximation, yes, the index funds all need to buy the stock on the same day.
An unexpected surge of buying like this should lead to a big price hike. But everyone knows it's happening, so you'd expect every hedge fund and proprietary firm in the world to buy the day before the index funds buy, and sell into the price hike. So in fact the price hike will be a day earlier than expected. But wait, anyone smart enough to see that should buy the previous day...
In this way the "smoothing" of the trading at entry and exit gets passed on to intermediaries: other market participants who are expert at this.
This all costs the index funds, because every dollar of profit for the other firms is a dollar out of the pocket of the end investor. And huge index events like this are a particular bonanza for these traders. But it probably costs less than you think. Ultimately it's a highly competitive market: the slippage from this approaches the extent to which the prop traders have a higher cost of capital, plus a small risk premium. And remember that they don't have to find "extra" money to fund this trade. When they buy SpaceX they will sell 499 other stocks, doing the same trade there in reverse. Here's a study that approximates the effect at 0.86%[0]. By comparison, the banks underwriting the IPO typically take around 6% [1]. Though this will be smaller for a huge IPO like SpaceX, while the index arb trade will be bigger.
0.8% of drag is a lot when you can do basically the same thing by not strictly following the index.
There are funds from Dimensional and Avantis that are basically just index funds but with a bit more leeway to avoid these obvious pitfalls, and from what I saw they do perform approximately 0.5% better per year.
0.8% is substantial indeed, but if i understand correctly, it’s 0.8% on that one stock, so much less on the index itself.
Those funds that perform better probably take a higher management fee that might cancel out the gain. May be worth it to have a smoother return though.
As in, current indexes perform that much worse. Frontrunners around index rebalancing etc. SpaceX is the same idea, just way more obvious. People knows what the index funds are going to do, and so they exploit that.
The alternative funds are a little pricier, but not so much so as to negate the inherent performance advantage. Typical cost ratio is 0.1-0.5% depending on the niche (wide indexes are cheaper, more niche things like small cap value cost more)
>This all costs the index funds, because every dollar of profit for the other firms is a dollar out of the pocket of the end investor.
This is so wrong I'm not sure you understand common sense economics and by economics I don't mean anything you can find in a text book. If I invest nothing, the other investors or traders can still make a profit without costing me anything.
Opportunity costs are never real costs. If I have $10, and the traders do weird things with the prices and I don't spend the $10 on anything, I still have $10. The traders failed to cost me.
You're also ignoring the underlying issue which is that the valuation of SpaceX on the open market is different than the valuation it could get from forcing index funds to buy in early. If the stock is worthless then short sellers will make money, but short selling only works if the short sellers don't get squeezed. If the passive funds buy two weeks in, then early traders know that they can sell to a greater fool at inflated prices. Any short seller who is trying to discover the true price will stay back and short directly after the indexes have bought. That's the perfect moment for them. They want the post IPO hype and bull market, only for the stock to collapse within a year.
There's a real desire out there to tell a narrative where SpaceX is a massively fraudulent piece of financial engineering, a pump and dump scam where the stock will "collapse within a year" and retail investors will be left holding the bag.
There's definitely some financial engineering at the margins, but as I see it the facts are:
- Musk is still going to own 40% of the company. If he's selling 4% of it, his incentives are aligned with keeping the rest of it high
- the index funds ultimately are fast tracking the big IPOs because their customers, in aggregate, want that. And the market structure really has changed since the days when the index inclusion rules were first written and companies went public smaller.
- People have been banging the same drum about short sellers with Tesla since at least 2017 - AFAIK it's still one of the most shorted stocks - and it's up 20x since then.
- Institutional investors with more sophisticated strategies than "buy the index" or "pump and dump lol sell to the index funds" will be participating in the IPO and in fact will be the main drivers of price. Everything I've seen suggests that if this is a "retail heavy" IPO, that means 20 or 30% of the shares ending up with retail instead of a more typical 10. These other institutions could be wrong, but they're not mechanical price takers.
I've shown above how one of the effects people make the most noise about - the index balancing arbitrage - is likely an effect of order of magnitude 1%. It's on the noisemakers to show how any of the other effects you mention can be massively more impactful.
Their float will be very small so yes, the value of their shares that anyone could buy at even the most optimistic valuations would be tiny compared to most public megacaps.
> Btw I don’t really know how index funds work, but if they need to track the index as closely as possible, they will all have to buy those stocks on a certain day, no?
S&P wouldn't include them until they became profitable and even if they did they wouldn't even be in the top 20.
I wasn't familiar with the Center for Research in Security Prices (CRSP). Apparently they were acquired by Morningstar in February 2026. I also found this press release from Vanguard announcing they will be updating fund names (including VTI) to reflect the acquisition
https://corporate.vanguard.com/content/corporatesite/us/en/c... but nothing on the fund composition or rule changes.
Oh, SpaceX already has that covered: thanks to the TX legislature, SpaceX shareholders cannot file shareholder lawsuits, you can only complain to the "Texas Business Court" or get binding arbitration [0].
Regular people want to invest so they can make money and companies want people to invest so that they can raise money. So pretty much everybody wants the 401k money to be invested in the stock market.
But the issue is that investing in the stock market is very technical, so some smart asses invented the index funds to make it easy for daddy and mummy to put their retirement accounts to work.
The index has safeguards in place to try and reduce its volatilty. So people are happy, cause they are investing in stock without having to look closely at what it is they bought.
But if suddenly some people change the safeguard rule, so that their buddy can dump their overvalued stock over people who think they are investing relatively safely, then it can be argued that there is foul play.
People are not finance specialists and they are heavily incentivized to buy index funds, so they need to trust that the people who are telling them to invest are not hiding things from them. If that trust is broken, lawsuits will follow.
It’s like: imagine you own a Toyota and have a maintenance contract with Toyota, and one day you have your car serviced and they tell you they changed the brakes. They tell you the brand of the new brakes and they tell you it’s fine while in fact, they put some cheap garbage that fail after 100 km of driving.
When the brakes fail and your car falls off a cliff, you go and see them and they tell you: “yeah those brakes were bad, but we told you we put them in, you could have looked up that these were bad, it’s all over the internet, so that’s on you”.
> People are not finance specialists and they are heavily incentivized to buy index funds, so they need to trust that the people who are telling them to invest are not hiding things from them. If that trust is broken, lawsuits will follow.
A "lawsuit" isn't a concern for the likes of Musk.
He's got the money to pay lawyers, politicians, and influencers. He's spread this risk around to the right people; if he goes down, they're going down with him, too.
At a certain point you have to start jailing people for long periods of time. I don't mean the Milken, Belfort, or Skilling treatment. I mean being placed away for 30+ years in medium-security facilities at the least.
> At a certain point you have to start jailing people for long periods of time. I don't mean the Milken, Belfort, or Skilling treatment. I mean being placed away for 30+ years in medium-security facilities at the least.
Bernie Madoff was sentenced to 150 years in prison, if that counts. But then he had committed a crime, which is the usual "certain point" we wait for.
Indeed. Everyone should be moving their funds out of target date funds right now and into medium and small cap stock funds.
It's quite sad that the pillar of American life that is the 401k is given to shady fund managers. The law should be that if you manage a 401k you must be a fiduciary. If that were the case then no one would be bag holding these fake valuations because they'd be liable for negligence. Right now they're just in on the scam.
If it's actually your 401k, sure you can. Just today I rebalanced my retirement funds away from large cap stocks to avoid this steaming turd that Elon is dumping on the public.
For what it's worth, I think anything selling energy or fertilizer which is not sourced from the Middle East is a pretty good bet right now. Depends on how the US/Iran conflict plays out, of course, but I'm not optimistic.
If you're truly convinced there's nefarious reasons for including megacap IPOs in passive index, you can always short the stock (or use derivatives) by the same amount.
I'm not sure you'll come out ahead. (Personally I don't get the outcry, except for nasdaq which has fairly stupid rules, delaying the inclusion of megacaps won't make the problem go away, but probably increase since the float will be massively larger). It's inherent to being a passive index.
As long as these models require a lot of computing power, the best models open source or not will be served by corporations who can afford the infra.
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