Economics Notes

Note 1
The difference with 2000 is encapsulated in this question: Is this the only bubble currently running? In other terms, the US Tech market is likely to be on a bubble schema (fair enough), but what about the remaining? What matters is comparing the current situation on this market with other US stocks market segments and alternative financial instruments. If we do that we will see that currently, more than at the end of “The Roaring Nineties”, we are in a (unique/unheard) multi-inflated/ multi-bubbles configuration due to an historical unparalleled monetary intervention, i.e. the QE experiment.
The real question is then: How and at which speed this generalized inflated phenomenon will be digested? A single ingredient is needed: (long term- minimum 5 years- of) stability. US (and others) monetary authorities are aware and ready, the issue is more on the geopolitical side: Is our geopolitical background stable? Will it last?

Note 2
To be honest, the last barrier which is preventing populist to win the electoral vote in NL, AT, FR is (paradoxically) the Euro: Indeed, in all these countries the population is aging and, as for instance in FR where they voted massively for Fillon  (more than 40%, details here:, they all want to protect their pension and therefore they will never vote for someone who is proposing a big jump in an unknown territory, i.e. to leave the Euro. This is more an important factor, in my opinion, than the pro-European statements of Macron.

Note 3
But we do not know where Frodo is in his journey: Is he in Lorien, i.e. in the middle of his long and painful path? Or is he in Mordor ready to destroy the ring? In my opinion, the first option is the right one: Frodo is just in the middle of the struggle, and some huge challenges are waiting ahead, e.g. firstly, a possible bank crisis in Italy if the ECB will modify its policy too strongly and quickly.
Besides, the (euro) ring is still there, which means that we continue to have a monetary zone in which federal fiscal policies are still too weak and therefore the business cycle is mitigated mainly by the monetary power.
All in all, it’s time to take some European equities positions, nevertheless the risk remains very high because we are not sure that Macron (Frodo) will become an enough powerful leader to implement the (highly expected) Eurozone reforms.

Note 4
The major conclusions of this article are just spot on: nowadays, too much -asset management- money is invested in those vehicles. But, is it not the ultimate and expected consequence of years spent repeating the market efficiency mantra?
I mean, it is this (tricky/ ambiguous) idea, which is used to justify that only ß is available and no (systematic) α is there.

So, if we want to have a more reasonable healthy financial system in which (active) asset management is correctly reward, a new financial market pedagogy should be accepted and taught, e.g. we all should agree that bubbles phenomena exist, that irrational exuberance (as well overconfidence) are always looming in financial markets and so on and so forth.

Only when this key step will be done, asset management’s clients will be ready to accept the costs related to an actif portfolio. An actif portfolio, which, by definition, will be better equipped against widespread market movements.

Note 5
Comment 1:
Very interesting article indeed, because, dramatically, it stresses the obvious.
Indeed, I am quoting:
« They [several senior executives at Vanguard] denied any attempt at collusion, and underlined their hands-off approach to investing: One reason Vanguard is able to charge such low fees is that it doesn’t expend a lot of resources investigating individual companies or meeting with managers. […] Its index-fund managers don’t engage with companies about their businesses. »
A fortiori, more than the oligopolistic powers, we understand why passive vehicles should not be compare so easily with active ones: The α is out there but to have it you need to bear a cost.
So, if we want to have a healthy financial system in which active fund managers are correctly reward and continue to live alongside passive ones, a new financial market pedagogy should be « explained » to clients:
An α always implies an extra cost to capture it.
At the contrary, if we continue to compare active and passive funds as being equals, then a lot of nasty issues looming ahead of us; you can refer here for a list of them here:

Feedback: Eurof Uppington
I could theoretically accept the « apathy » defence at Vanguard ie they don’t have the headcount to conspire to run the world. It sounds truthy!

My problem with excessive indexing is I worry it has a dampening effect on large cap volatility. I think it might partially impair the signalling function of the stock market. Also I tend to be long volatility so I dislike anything that could potentially reduce it…

Comment 2
Yes, dear Eurof, I like your theoretical argument.
Nevertheless, to really have a rational debate we should agree about a small but key detail.
Namely, passive funds managers claim: We are passive because we are not intervening. But, from a logic perspective, if you decide to say nothing then you are doing something: Doing nothing is a choice and a signal.
There is a misuse of terms here.
A passive strategy is a decision-making mechanism, which favors the current management of a given firm.
This consequence should receive more attention because its implications can be very heavy.

Note 6
This sentence mixes up two different, usually separated, perspectives:
On one side, the scientifically defined concept of asset bubble with, on the other side, a moral concept, the fact of being jealous.
Let’s go a step further.
About the first aspect, a bubble is basically, Keynesian- N.B., one of the rare economist who gained his pie in stock markets- wisdom:
“There is nothing so disastrous as a rational investment policy in an irrational world.”
Or alternatively:
“Markets can remain irrational a lot longer than you and I can remain solvent.”

Those quotes, roughly, point out a single focal aspect: It is not important to known if a market is in a bubble or not. What matters it is your timing, i.e. when you decide to enter and when you decide to leave!

The other aspect is a moral one: Our rational analysis concludes by suspecting a generalized irrational market behavior; we are, therefore, jealous of the gains collected by the irrationals.
We can react either irrationally, i.e. we enter in the market despite our rational analysis keeping the hope the circus will continue; or we can play rationally, just avoid and we keep our moral concern for us!

Note 7:
S’il y a des phrases à retenir, je me dois de choisir ce passage : « Depuis les années 1980, elle s’est concentrée sur la performance relative à un indice plutôt qu’une performance « raisonnable » adaptée à l’investisseur. Elle s’est focalisée sur la performance de court terme en sacrifiant, sans le vouloir, celle de long terme pourtant attendue par la plupart des investisseurs. « En gros ceci nous dit qu’on a eu peur de faire de la pédagogie avec et pour le client. On a eu peur de le perdre si on lui expliquait trop ! On a préféré ainsi recourir au marketing le plus abject sans aucune idée des conséquences à long terme du message ainsi véhicule ! Et voilà, le long terme arrive et votre belle mécanique déraille. De ce point de vue, il y a bien un autre facteur qui a été accepté aveuglement : Le marché actions serait, toujours et immanquablement, efficient. Mais si c’est le ça, la meilleure stratégie est bien celle d’acheter le marché et donc l’indice. En conclusion, c’est bien le fait d’avoir insisté d’une part sur le côté performance à court terme et d’autre part sur l’efficacité du marché actions qui a cassé, à mon avis irrémédiablement, l’engin investissement actif.