EC The Difference Between Good Economics And Bad

Stocks that do not benefit are those not in passive ETF/indexes. Those are stocks that enjoy none of the indiscriminate flows of capital and frequently become undervalued.

Blame Game

The Fed is responsible for market inefficiencies in the same way a parent is responsible for the demeanor of an entitled child. If policymakers repeatedly rush to the care of markets anytime difficulties arise, then investors never see problems. Prudence and risk management are put aside and neglected.  The buy-the-dip mentality goes beyond a humorous meme, it becomes a doctrine.

Over time and with plenty of Fed parenting, passive investors outperform the prudence and diligence of discretionary value managers. When the pattern repeats for a decade, then the chart above of net flows is the result. The concentration of passive investing becomes acute, and its effects on valuations extreme.

As Bregman pointed out in 2014, a proliferation of the ETF divide had, even then, begun to reveal itself in unhealthy ways. Those circumstances persist. The strong correlation of large S&P 500 components to the S&P 500 is now stark. The table below adds recent data from 2020 to Bregman’s original table.

Good bad economics, The Difference Between Good Economics And Bad

The dramatic rise in correlation means there is less benefit to diversification than historically has been the case. Owning a variety of stocks and being well-diversified makes sense unless the benefits of that strategy no longer exist. Based on current data, diversification using index funds is futile.


Central bankers are prone to applying a convenient narrative to justify their actions. Their dialogue is usually laced with contempt for those who cast doubt. That is not a sign of confidence; it is a sign of deep insecurity. A sign of confidence would be humility, a characteristic one never sees out of Fed leadership.

Markets are more fragile today because of a hovering Fed parent, shielding investors from every hazard. The second and third-order effects continue to evolve, but the volatility in the first quarter offered a glimpse of disturbing possibilities.

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Edward Simon 2 months ago Member's comment

Lately, there has been an increase in chatter on the net about returning to value investing, or at least that "value" stocks are currently presenting themselves as good investing opportunities because of their relatively low prices. Do you think this is a trend that will gain traction?

Bruce Wilds 2 months ago Contributor's comment

It is only massive and unsustainable deficit spending that continues driving our economy forward. The bottom-line is that we are in the midst of a "false economy" and it is only by the grace of this huge deficit spending that we are not languishing at the bottom of a deep economic pit.

Today late cycle indicators are on the rise, moderating growth, tightening credit, declining earnings, the peak of consumer confidence, rising inflation and more. Deficit spending is not a silver bullet without consequences and with each step forward we get closer to the end of the road.

This is why investors would be wise not to accept America's recent GDP as verification the economy is hitting on all cylinders. The article below argues government spending is a poor substitute for the free market in allocating capital to where it is most effective and it is not economic growth but simply a method of borrowing from the future.

Beating Buffett 2 months ago Member's comment


Moon Kil Woong 2 months ago Contributor's comment

However, I am fiscally conservative. The US messed up pumping the economy for all the years it was expanding. For that, there is no excuse and is the definition of poor planning and economically destitute behavior. We need to learn or put more constraints on central bank actions when we aren't in crisis or in an economic downturn.

Republicans and Democrats are to blame and Congress should take back their power from the central bank, the Presidency, and manage the fiscal aspect of their Constitutional duty better. Simply put, the fault and error of the Treasury has been committed years ago and is the opposite of anything resembling fiscal constraint or good economics. You don't stimulate and carry low interests rates in an expanding economy. Revoke their degrees and make them attend basic economics courses again please.