market is broken

Intrasector relative price/multiples still make alot of sense with respect to revisions - which make sense since a lot of the active volume today is from pods who are trading fundamentals on a sector neutral basis. These participants factor constraints also create some fundamentally irrational short term reactions to events as well. Passive dollars, dumb algos reading pumpy press releases and a washout of skepticism from sell side due to career attrition from ZIRP have made sellside consensus less reflective of buyside consensus. IR teams have learned to walk street to bullshit numbers on ‘tiger-y’ TAM & unit economics. There’s alotta bullshit. It should be an opportunity.

I have both a theoretical argument (which is a rant I will keep to a minimum) and a practical argument.

(1) In terms of the theoretical argument, the standard economic framework that functionally everyone learns, including hardcore economists, is neoclassical economics (or a derivative of it). The assumptions that underlie standard economics are not necessarily true. This means the theory is not always descriptively applicable. And the stock market provides a great example of this. The standard economic framework (both in regards to the current theory and how the theory is actually used in models as these are two very different things) says that there should be substantially fewer stock market trades then there actually are. If standard economics was always descriptively accurate, the stock markets would see a much lower quantity of trades. 

The reason for this is because standard economics is a reductivist approach. It reduces away the complexities of reality in order to make the math easier to solve. This was mainly for practical reasons (this economic theory developed before digital computers) and there was good reason to do this. Just standard economics has yet to evolve being accurate beyond a very narrow set of use cases. Markets are a great example of this. Fundamental analysis, technical analysis, these concepts are just not relevant. Those types of analysis as they apply to markets are entirely arbitrary (besides being illogical which I discuss in more detail below). It is like saying Enron's stock was overpriced because it had red in its logo. 

To put it another way, let's look to physics. Classical physics is really good at describing reality within the confines of its assumptions, just like neoclassical economics. However, classical physics can't explain quantum phenomena, just like how neoclassical economics is unable to explain basically any system-level phenomena (which is just about everything that people actually care about). To complete the loop, the market is basically quantum phenomena while fundamental and technical analysis is more-or-less classical physics. If you use the wrong tool for the job, you are likely to get the wrong answer. This is pretty self-evident.

All this is a real travesty because we have better economic frameworks. We do have theories that are actually descriptively accurate. We have a quantum mechanics. We just choose not to use them, although that is ever so slowly changing. This is ironic because the problems with standard economics have been identified by people like Adam Smith and Alfred Marshall. These critiques are not new. Smith is an economist from the 1700s and Marshall is a founding father of neoclassical economics. We just haven't had the ability to do better until relatively recently. Computer technology just wasn't good enough until about the 1980s. 

(2) In terms of the practical argument, market prices are literally only determined by one thing and one thing only: whatever clears the market. If we take the best form of the fundamental argument, you run into the joint hypothesis problem. The "market is detached from fundamentals, therefore the market is broken" argument is an unprovable argument. You can never actually demonstrate the truth of that statement. And in terms of the technical argument, at least this looks at actual prices. However, this is pretty much just a glorified gambler's fallacy (or if you want to be harsher, bad math). 

The type of inefficiency that is meant when people cry about the market being broken, if we take the best form of the argument, is not knowable. 

When my PA is down I say the market is broken.

When my PA is up I say it is functional.

It’s that simple!

Valuation is not a thesis

Markets aren't necessarily broken they are just stuck in a rising tide. This is due to LIRP and ZIRP post GFC to pay off debts owed to bond holders. As another poster said, low interest rates and ZIRP have drained all the upside out of other investment vehicles like bonds and CDs, forcing investors to whole hog it into markets/equities.  This LIRP/ZIRP initiative by the Fed and government has  discouraged actives from  shorting the market while also making potential sellers think twice about taking profits due to a lack of other assets (like CDs pre 2008) to fight the rising tide of currency debasement for the sake of repaying past debts.   

At the same time, tax advantages for passive investment vehicles and the  rise of benefits/pensions and low cost ETFs/mutual funds has been noted as causing an exponential increase in passive investment, most often at the expense of active investors chasing alpha. Politicians have continously indirectly aided this push into generally passive market growth as they routinely bad mouth short sellers as being evil and pass laws that hurt the short side of active investing.  Couple all of this with the increasingly loud political vitriol that has labeled short sellers as market "profiteers" whom they consistenly paint as  evil entities posessing ill-gotten gains purportedly made  by taking food off the plate of the average joe investor and the general public. This growing disdain for short side activities has also been exacerbated by the government excluding the average Joe from shorting markets themselves post GFC, creating a us vs them/ little guy vs big guy dynamic that harms the actives/short side and puts them in the political crosshairs of politicians looking for votes from the financially uneducated public who dont realize short sellers are necessary for market fundamentals and proper  price discovery to occur.

This rising tide due to LIRP + the push into large scale passive spurred on by tax advantages and benefit adoption by employees + increasingly loud political vitriol for short side profit generation has slowly drowned active investors in the deep end. Such actions by the government and politicians have  inevitably created a market dynamic that discourages any true price discovery which then causes  a failure of the old time market fundamentals that the old time religious used to swear by as gospel.

This is, for better or worse, a road that will continue on until

A) the majority of boomers fade out to retirement or suffer lower life expectancy and cash out of their passive portfolios

B) the policians give tax incentives to active participants or remove tax incentives for passive participants

B) interest rates increase dramatically from 20 year  post GFC averages, or

C) the country starts to balance its budget and deficit spending, particularly in the realm of welfare and SS (both of which directly impacts the market environment as that money is immediately spent on market products like utilities, food, housing, and medicine) 

A good source for understanding the rise of passive and the changing market dynamics brought on by it is Mike Greene, whom you can readily find on Youtube. Prior to him the only time I ever really heard FAANG or Big Tech and passive mentioned as a threat to active investors and the gospel of market fundamentals  was by Scott Galloway way back in 2015 when he called Big Tech the biggest beneficiaries of passive investment and  labeled them the "Four Horsemen" of an impending economic apocalypse due to their increasing stranglehold on lines of cheaper credit (a finite and precious resource to spur company growth)  that would otherwise have been distributed and lent out  to other companies  that are more risk averse in terms of credit due to their smaller market cap and lower profit margins and P/E.

With all that said active investors and alpha chasers will probably not return in any signification fashion until after 2027 based on current boomer retirement/life expectancy projections, barring some major recession, crisis, or fundamental change in how the government spends and services its debt financing.

Also as a final independent note, most  active investors are older (think about those who follow the Book of Buffet) and do not understand the change in growth propositions afforded to the market by techs ability to develop and scale/expand into other industries via efficiency gains. This rising tide of muddied water, so to speak, has also helped discourage many of the old time religion folks who follow the Book of Buffet  from taking any active stance one way or the other. Due to computer and data tech advancements bringing efficiencies that did not exist previously in the past, we are living through a fundamental and seeminly drastic change in how we understand market structure and growth that the "old-time religion" class of investors cannot fully comprehend or account for in their sacred texts. Its a new age that requires a new testament for the market gospel.  A prime example of this is algo trading beating everyone to the punch when the press releases. Another prime example of this is AI (which I think is currently way overrated but still important) and its growing effect on various industries. My favorite example however is Tesla, which is not even really a car company anymore when you really think about it and its patent history in the correct light. My opinion is Tesla is an energy innovation tech company posing as a car company.  In 20 years Tesla will be vital to many industries. I think of it not as a GE or Ford (which most people compare it to today) but rather more as a fledlging GE or more appropriately, I compare it to the  likes of  the glory days at Westinghouse, which grew by releasing patents to the public for free so that Westinghouse could then piggyback of improvements to those patents in the future  as the rest of the market adopts the patents as their cornerstone architecture and improves upon Westinghouses original designs.    My vision surmises, much like Westinghouse of old, that Tesla's  battery and alternative energy advancements and aggresive patent release stance will inevitably help it overtake any prior competitive advantages it had  gained when they started as the first succesful EV brand. Just like Westinghouse started as a railroad/train company and then released their patents and R&D'd their way to become a multi-industrial all encomposing economic powerhouse... Tesla  started as an EV brand and has increasingly become an alternative energy powerhouse and one day much much more as the company freely releases patents for the public good to develop independently. This free release of critical patents in my eyes will inevitably allow them to freely use any advancement that is in any way shape or form based off said patent. Tesla gave the public the horse and collar (patents) and now in exchange, because they got the free pony from Tesla, they get to enjoy the pony express and the wheel and carriage others developed off their prized stallion.