May

9

A friend recently sent me this article from the WSJ that attributes the rise of the markets to reduced stock supply. I have never liked this explanation, or the flow of funds ideas originated by the totally ignorant Henry Kaufman. If there is a rate of return involved, then demand will be infinite if it is too high, or will be zero if it is too low.

 I think one reason that stocks have been so bullish since 2003, over and above the earnings yield differential, et. al. is a variation of the regression effect (the real one as limned by Steve Stigler ). When stocks move there is always a random component to the move over and above the true golden mean. When stocks go down, the random component — the luck component — is on average negative, and people get unduly negative and pessimistic because of this and start delta hedging and long shorting and buying bonds.

People can point to how they would have actually done better in a period such as 2000-2002 using this strategy than they would have if they had been strictly buy and hold, and useful idiots such as Mr. Dow 5000, or the weekly columnist, or the libertarian prudent, or the ghost come forward to say that they see weaknesses in the economy, or the weather.

Retrospectively it fits in with the random component. This raises the required rate of return over and above the 50% a year i.p.o. return that underwriters foist on the companies they bring public, and it raises all other boats along with the normal drift, and the random component of the previous move that caused the excessive pessimism … and everything gives way to normality.


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