The stock market has become detached from reality. But why?

At one point, investing in stocks was actually a risk. It was kind of like betting on the win-loss record of a sports team at the beginning of the season. You could see what the team or a company was projected to do, and you believed they would either be better or worse than that projection.

Back then, though, who could invest in the first place was pretty limited. There was no Robinhood. If you wanted to invest in equities, it had to be through professional investment advisors and stockbrokers, and the like. 

Now, it’s easier to invest than ever. You don’t need a stockbroker or investment advisor anymore. People can easily invest from their phones or online, and as a result, more people are investing than ever, by a considerable number. The ‘you need to make your money’ grow narrative is ingrained in all of us. 

However, most people don’t have the time to be professional investors, and they can’t spend hours a week looking up companies trying to find undervalued ones. What they do instead is invest in index funds that track the whole market. Most investing in the US is done through these funds now, which is a massive shift from just 20 years ago.

Because of this idea that you need to make your money grow, which comes from inflation – you need to make your money grow because the money that you keep in the bank isn’t going to hold its value – people are just dumping their savings into the stock market through index funds. 

Because it’s easier to invest than ever – all this new money is in the economy, and so many new people are investing in index funds – stock valuations do not reflect actual cash flows, projected growth, or anything fundamental anymore. Since people are investing in funds that track the market as a whole, the valuations of all companies are increasing whether or not they’re financially sound. Index fund investing has risen all tides. 

In the past, if a company underperformed its projections – a sign that the company is doing worse than expected – it would mean the stock price of the company would go down since projected future growth is now worse than previously expected. In today’s market, however, that stock will be at all-time highs again in two weeks.

Stocks, primarily through index funds, have become a vehicle for savings for most Americans. Instead of investing being a game of winners and losers, a risk, investing has now become so critical to the financial security of Americans – with most people’s savings stored in markets where they don’t even care what companies they’re holding – that the stock market has become a place where everybody has to win. Numbers have to keep going up, or else.. The entire country is invested in a way that’s never happened before. Investing has become saving.

What’s really happened here is that stocks have taken on a monetary premium for filling the store of value feature of money. When a new good becomes money, its value increases beyond its general utility. As we know, gold and silver have an industrial value and are often used in machinery. The price of gold and silver, though, is much higher than their industry value would otherwise be if they were not fulfilling a role of money – in this case, to hold value. When a good acquires a monetary premium, its value exceeds its base worth. 

In a way, people treat their investment account as if it’s a savings account. People often critique Bitcoin because you can’t spend it in stores, but stocks function in the same role. They have become store-of-value money. A savings account that you can’t spend. 

You may still think that stock prices are based on something tangible. Cash flows and revenues. I’m not so sure. 

Don’t get me wrong, I’m still playing the game. When the music is on, you gotta dance. But the idea that valuations reflect fundamental value is just as wrong as the belief that gold’s value is related to its use in certain industrial electronics. Monetary premium is everything.

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