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The Casinofication of Markets

Over the weekend Warren Buffett remarked that markets were increasingly resembling a casino. He came up with several different plausible reasons for why this is happening, but he assiduously avoided the real one i.e. total Japanification of monetary policy. On the looming anniversary of the Y2K bubble collapse, I thought it would be timely to visit this topic.







“For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young”


"Buffett fears that too many modern investors have become entranced by speculative investing"


"Part of the reason the stock market is becoming increasingly “casino-like,” according to Buffett, is simply that buying and selling stock has never been easier—or more fun—due to the rise of online trading applications"


FR: Social media, gamification of markets, zero commission trading, rampant greed, these are all reasons for why speculation has increased over time. However, there are far larger structural issues at play that Warren Buffett likes to ignore.


First and foremost is the fact that historically people did not manage their own retirement money. That job was left to professionals. Over the past thirty years we've seen the advent of the "401k" self-managed retirement plan. Which means that everyone is now a money manager whether they are trained for it or not. Most people managing their own retirement money are not trained in portfolio theory.


The second and related reason is because as I showed recently we are now living in stimulus-dependent markets, similar to what the Japanese have experienced for the past 34 years. And now for the past decade what Chinese investors have been enduring as well. The markets only really go up when they are directly induced by monetary injection or the prospect of imminent monetary stimulus. This is the roller coaster ride that investors in Japan have "enjoyed" for decades.


But there is a third and related reason to stimulus-dependency which legendary investor Jeremy Grantham discusses from time to time which is that this monetary stimulus is causing the advent of what he calls "Super bubbles". A super bubble is an asset bubble that reaches 3 standard deviation (sigma) overvaluation.


Jeremy Grantham, January 2022:


"All 2-sigma equity bubbles in developed countries have broken back to trend. But before they did, a handful went on to become superbubbles of 3-sigma or greater: in the U.S. in 1929 and 2000 and in Japan in 1989. There were also superbubbles in housing in the U.S. in 2006 and Japan in 1989. All five of these superbubbles corrected all the way back to trend with much greater and longer pain than average. Today in the U.S. we are in the fourth superbubble of the last hundred years"



FR: Fantastic. Who wouldn't want to gamble in the fourth superbubble of the past century?


"In a bubble, no one wants to hear the bear case. It is the worst kind of party-pooping. For bubbles, especially superbubbles where we are now, are often the most exhilarating financial experiences of a lifetime"


"One of the main reasons I deplore superbubbles – and resent the Fed and other financial authorities for allowing and facilitating them – is the underrecognized damage that bubbles cause as they deflate and mark down our wealth. As bubbles form, they give us a ludicrously overstated view of our real wealth, which encourages us to spend accordingly. Then, as bubbles break, they crush most of those dreams and accelerate the negative economic forces on the way down"



Here is the thing that many of today's commenters who focus solely on markets don't want to admit, which is that our economy is now totally stimulus dependent. Which is also the case in Japan, China, Europe, Canada, Australia/NZ. Everywhere. As soon as this bubble pops, the cries for more stimulus will begin and rates will sink inexorably back to 0%. The world is awash in global poverty and that means cheap money. Cheap money means ever-increasing debt. Increasing debt means a boom and bust cycle of increasing severity and dislocation.


Moreover, if history's greatest investor can't acknowledge this stimulus dependency then it's a fool's errand to believe it will magically end. We are in an indefinite boom and bust cycle.


By the way, if you take the four U.S. superbubbles and graph them chronologically, here's what you get.








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