Free market and value

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I’ve been thinking more about the weird aspects of the free market economy and the concept of valuation in general.

There are two basic ideas about value; first is that everything has some sort of “intrinsic value” and the point of free market is to discover it. The second idea is that there is no intrinsic value, that things are dynamically valued according to utility and scarcity and the market value is the only value there is.

I had a problem with this, you see. The concept that there is no objective value is contrary to my belief system, where certain things are valuable as such, not just because someone put a market price on them. I’m not talking about gold or bitcoin, I’m talking about more fundamental principles, such as virtue or spirituality. Some things can be infinitely valuable even if there isn’t a market value. So, basically, I am opposed to the free market fundamentalist idea that there is no value outside the market. However, I don’t think there is an inherent value to anything material, outside human needs, utility, desire and fear, which create a balance of desirability and scarcity, eventually resulting in market valuation. For instance, water and air are extremely desirable, but if they are not scarce, their market valuation is low. However, if they for some reason become scarce, their market valuation could climb to extremes. Also, some things can be extremely rare, but if they have no utility and nobody needs them for anything, their market valuation can be extremely low, so scarcity is no guarantee of value either. An example are exotic elements found in piles of radioactive waste – all quite rare, but nobody so far found any use for them, and as a rule you have to pay people to take them, not the other way around.

And then it dawned to me: market doesn’t discover the value of things. It reveals a quantified representation of human needs, desires, greed and fear. Market is a mirror in which humanity sees itself through value it puts on things. If probabilistic statistics quantifies human ignorance, marketplace quantifies human values: shelter, food, energy, hygiene and cosmetics, greed, status symbols, sex, guilt, fear. Basically, if Ponzi schemes are popular, what does that reveal? It reveals that people are greedy and stupid, not that the schemes themselves are actually useful, valuable or scarce. They stop being popular only when enough people lose enough money that it becomes common knowledge that they are the opposite of useful.

This is also my answer to the question of inherently worthless assets that trade on the market for often insane amounts of money – why are they popular, why are they valuable, and what does it mean. It’s not the worthless asset that is made valuable, it’s the human greed and madness that became revealed and quantified. You can actually convert greed, madness, stupidity and sin into money, and it’s not only easy, it’s the foundation of the most profitable business models; for instance cosmetics and luxury items are ways of monetizing human vanity.

The more “normal” assets are very easy to evaluate in this manner – for instance, the fact that you buy food gives you the obvious answer that you need to eat in order to survive. The fact that you buy fuel for your car says you need mobility in order to function. However, luxury clothes, watches and cosmetics, they are more difficult, because their function is to create an outward appearance of yourself, and the underlying motive can be dignity, vanity, or in fact anything. It can be samyama on some aspect of God, or it can be deception, of both self and others. In any case, it’s a wonderful opportunity for introspection.

Thoughts on value

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I watched a video today where some average young people were shown watches of various brands, and they tried to guess the price. More often than not, they would be wrong by several orders of magnitude – for instance, estimating a Paul Newman Daytona as something in a $800 magnitude, while the actual price is $250000.

That made me think: are they ignorant, or are we often duped into believing that paying extreme amounts is reasonable, for things that aren’t worth that much money in any reasonable frame of reference? I used to live in a world where mechanical watches were the norm, and it used to be that a watch would justify its higher price by accuracy, durability and actual features, and “brand” was just something that would make you recognise things that were well made. Today, the concept of “brand” is detached from every possible objective criterion of quality, and a brand like Seiko or Citizen can produce a watch that is objectively better by every single metric, compared to top tier luxury watch brands, and yet they are perceived as “mass market junk” that cannot possibly command the price of the “quality” brands. The madness goes so far that actual metrics, such as accuracy, are seen as irrelevant, or even as a property of low-tier watches. I’m not necessarily even talking about quartz watches – for instance, ETA coaxial movement designed for the Omega brand, with a silicon hairspring and non-magnetic properties, is technically speaking the best mechanical watch movement ever made, and yet this somehow doesn’t have anything to do with the price of the watch. Omega Aqua Terra coaxial is seen as a mid-range watch, while some Rolex or Patek that is an order of magnitude less accurate, and also infinitely less resistant to magnetic fields, can command ten times greater price, or more. This is obviously beyond all reason, so why would anyone be surprised that normal people, who didn’t memorise the expensive brands so that they could tell what should be expensive, can’t tell based on the actual features of a watch? If the actual reality is that a technically superior watch can be a thousand times less expensive than a limited-series “haute horlogerie” brand watch, then you can’t really come up with a reasonable estimate of the price based on the inspection of the features of the actual device, which is another way of saying that the price is based on bullshit.

This made me think further, and I remembered a similar video where someone was asking people on the street how much do they think a gold coin was worth, and I think most of them would rather take a $5 candy bar than a $500 coin, or something like that. It makes you wonder how well we would fare if we had to trade gold and silver for goods and services in some post-apocaliptic scenario. If I showed a Krugerrand to random people, how many would understand that this thing costs $1900? After all, it’s just a coin, and coins are perceived as something of low value today. As for gold, most people never saw gold in person, except in insignificant amounts used in jewelery. Any estimate of value would probably be wildly off.

I can’t really blame them – I was shocked to learn how much an ounce of Rhodium was. I know that it’s a Platinum-group metal, and I expected the price of Rhodium to be comparable to that of Platinum, but it is not. It was – up until 2020, when the price went off exponentially for some reason I won’t even pretend to understand because it’s probably something to do with some industry or another, and it’s now in the order of magnitude of 20000 USD/oz, which is about ten times more than gold, and 16 times more than Platinum.

One conclusion is that our intuitive sense of intrinsic value can be wildly off. Supply and demand as a measure of value can produce very weird valuations where, at least temporarily, complete garbage can appear to be precious, and otherwise precious things can be valued as garbage. More often than not, market valuations are a measure of human greed and fear, rather than intrinsic value. Also, people tend to value things that other people value; when they see that something is commonly perceived as precious, they will usually adjust their sense of value to match. That’s not the case just with watches or precious metals; it extends everywhere.

In any case, it’s a very interesting line of thought.

Lights off, but buy a Tesla

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The EU is implementing new 2016-2019 laws, designed to “save energy”, among other things by turning off the lights in businesses overnight. To quote a site that commented on it:

“The European Commission’s snappily-titled “Ecodesign Working Plan 2016 – 2019” will require all light fixtures and accessories sold after September 2020 to meet improved efficiency targets. In the previous version of the rules, studio and theatre lighting was exempt from the targets, as long as the lights designed for this purpose were not used domestically. But this exemption has now gone missing.”

 

Basically, replace all the tungsten filament light sources with LED because nature and ecology and electricity is precious, but we are supposed to believe their propaganda about switching our ICE cars to electric. Let’s all buy electric cars, because electricity is green and abundant, and fossil fuels are evil.

If you believe they won’t pass a law restricting private ownership and use of electric cars, being the worst “pollutants” and “waste” of energy as soon as people transition to them, you obviously haven’t been paying attention.

My take on r/WallStreetBets

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There’s been lots going on regarding r/WallStreetBets and I’ve been paying attention, of course. Let’s summarize.

r/WallStreetBets is a Reddit group where traders evaluate investment options. The opinions on who they actually are, are divided, but it is my opinion that at least a percentage of them are professionals: expert traders who do this for a living, some of whom used to work for Wall St. hedge funds, investment banks etc. I’ve seen media portrayal of r/WallStreetBets as a band of disenfranchised millennials who are trading with welfare money out of their moms’ basements, and this image is very misleading. The part of them being millennials might be true, but think Elon Musk. Some of those people could invest 10M USD just for shits and giggles. I’ve seen reports of some players using 640M USD. Those are not what you would expect to see if you trusted the “main stream” media, were you by some chance foolish enough to do so. No. The top 1% percent or so of r/WallStreetBets are basically super-wealthy people who habitually invest in the stock market, and have a very large portfolio, and a comparatively small amount they can gamble away on questionable things.

One of those questionable things is investing in shares of failed or deeply distressed companies, where the Wall St. professionals, namely the hedge funds, are betting on them going belly-up in the very recent future, and are invested in short-selling their shares, which basically means “borrowing” shares now, to be paid at a later date at the price as it is on that date, and selling them now, at the current price. If the price goes down as expected, they sell expensive, buy cheaper and pocket the difference. In cases where they are betting that the company will declare bankruptcy before they need to purchase the shares, they gamble by “borrowing” more shares than there actually are in existence; one such case was “caught” by the r/WallStreetBets analysts, who found out that the shares of GameStop are shorted at a record rate of 140% of total shares in existence, which means the hedge funds who were betting heavily on the company going belly-up in the short term could be caught with their pants down if the price of the shares happened to be driven up by, let’s say, record demand from a huge number of Internet traders from r/WallStreetBets. Initially, it was seen as an opportunity to make money, because the investment funds will be forced to buy the shares at higher prices to close their short positions, but very quickly it evolved into “payback time, bitches”, because those hedge funds apparently have many things to account for, such as people’s homes being foreclosed, or people’s businesses struggling because all the credit money circulates in the upper echelons of Wall St., never trickling down into the actual economy, and they are seen as someone with a deep insider connection with any sitting government, because they finance politicians from both parties, and so the government keeps bailing them out whenever their gambles fail to pay off. This was seen as a “let’s see you get out of this” situation, and that is when large groups of young/disenfranchised people started gambling on GameStop shares with money they couldn’t afford to lose, basically throwing their livelihoods on the line in an attempt to damage the “system” they perceived as inherently oppressive.

At some point the GameStop shares jumped from the initial $17.25 to $483, but later fell down to $225. It is my opinion that this will be hugely profitable for those who bought below $100 and sold above $400, but I also expect the short-sellers to have bailed themselves out quite early, and then used the momentum to make money out of it, and the millions of amateur traders who came to the party too late, and those who naively hold on to the stock for too long, will be left with the bag, even poorer than they were before. This just can’t end well for the majority of investors because the fundamentals of GameStop aren’t good enough to justify anything even approaching this astronomic valuation. What needs to be seen is whether the hedge funds that were caught with their pants down already closed their short positions accepting a limited loss, because if that is so, remaining in GameStop shares might actually help the hedge funds recuperate their previous losses. The ability of professionals to out-manoeuvre hysterical mobs who think in memes and emotions should not be underestimated. r/WallStreetBets movement can basically execute only one manoeuvre at the time, because if they try to introduce complexity, they disperse, and, although the “leaders” of the movement are highly competent and intelligent, the mob they are guiding has huge inertia, measured in days, in a job where seconds can make all the difference. It is therefore my opinion that it is quite possible for the movement to produce real and significant effects, but it is also almost certain that most of them will incur heavy losses.

There was talk about r/WallStreetBets trying to influence the silver market, silver being the most “shorted” thing in existence today. As a result, the silver prices spiked and the retail sellers of physical silver sold out their inventory within a day. People on r/WallStreetBets concluded that the idea must come from the hedge funds themselves, who are trying to disperse the attack on GameStop, but I would not be so sure. In fact, I think r/WallStreetBets “short squeeze” of GameStop seems to have given some very smart people an idea, because it is known in the precious metals market that the prices of silver and gold are being artificially suppressed for a very long time, and the supply side hasn’t really recovered from the shortages that became visible around April last year. Also, Tesla is really ramping up their car production, and they need significant amounts of silver to put each of those cars on the road. r/WallStreetBets might actually have very little to do with the rising prices of silver and gold, because I expected those to rise before GameStop was even a thing, for completely unrelated reasons, having everything to do with the fundamentals. Sure, I wouldn’t mind someone accelerating the process, but I certainly don’t rely on that alone.

My opinion on gold and silver is known, as is the fact that I’m heavily invested in gold, and to a much lesser degree in silver, because I expect the financial system to be restructured with gold as one of the main pillars of currency, together with real-estate mortgages and sovereign bonds. For that to happen, the price of gold will have to go up by an order of magnitude, and I don’t know what silver will do. Also, I expect the real-estate prices to collapse, because they are currently maintained at this level by artificial means. The entire system – governments, banks, stock market, businesses – is presently stretched beyond the expected breaking point and the only thing keeping it together is a combination of inertia and unwarranted optimism. This overextended rubber band will break, and when it does, I don’t want to be anywhere near. I see this stock market madness of inflating certain shares far beyond their fundamentals as a symptom of desperation, and historically it is a precursor to the collapse.

Sure, there is good money to be made in this phase, if you’re positioned well, you know what you’re doing and are willing to gamble, but my assessment is that when this thing starts to unravel, huge amounts of money will start collapsing into precious metals as the only remaining safe haven, and I want to be there already when that happens. The only reason why we haven’t had hyperinflation in the Eurodollar zone already is because all of the money is basically locked in the upper echelons of finance and business, none of it trickling down to the masses, so basically the wealthy have so much cash they can’t decide what to spend it on, and the masses are starved for basic liquidity and fundamentally disenfranchised. Also, the system is so hyper-regulated, it is almost impossible to do business at all. If you think this can end well, I have a piece of real estate on the Moon to sell you.

Hardware upgrades

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Every time I write an article about how I don’t need a new computer because my old one works just fine, you know what’s going to happen next. 🙂

I basically concluded that I’m spending too much mental energy arguing with myself that I don’t need to spend money on new computers despite the fact that most of my gear is 4-5 years old and old computers are neither fast nor reliable, and for someone like myself who does basically everything with computers, it’s not the best idea to keep the old stuff for too long, because it increases the probability of random failure, so preventative maintenance in form of replacing the workhorse machines every 5 years at max is simply a reasonable thing to do.

So, I got both a new laptop and a desktop upgrade kit; I upgraded the desktop to Ryzen 5900X with 64GB of RAM, and I got a new M1 Macbook Air. The desktop thing is obvious – I basically replaced the motherboard, which was actually producing issues with sound going mute for a second every now and then, which must be a USB issue since my sound works through s Schiit Modi 3 DAC connected via USB, and not the built-in audio. The issue went away with motherboard change. I also got rid of the DDR3 RAM, which was running at 1600MHz, and I got a high end CPU. Basically, in most things I do it conformed to my predictions – it’s no faster in normal desktop use than my old system, but Lightroom runs significantly faster, and I actually use 44GB of RAM under serious load, so 64GB is not overkill.

As for the laptop, the 15” Mac was not the best match for my usage case (too big and awkwardly shaped for writing books/articles in my lap), so I bought an Asus Zenbook ultralight a couple of years ago, because the new Air had shit keyboard and shit CPU, and it cost significantly more, but the screen and battery on the Zenbook were sub-par, and I prefer Mac OS on the laptop, so I got the new Apple Silicon Air now, which is fast, has great keyboard, touchpad and screen, and the battery life is better than anything I could imagine existing on a laptop. I managed to compile the GNU tools I needed in Macports, and unless I need a dedicated portable Lightroom machine later on, I’m done with hardware now and I can go back to blissfully ignoring it into the foreseeable future. Basically, I replaced both my old laptops with a single new one, except for Lightroom on a vacation, where the 15” Macbook pro will continue to be used, due to bigger screen and more RAM, which make it a superior photo editing machine. The new Air has sufficient resources for everything other than Lightroom, which is a specialized task that requires so much more resources it just makes no sense to try and cram it all into an ultraportable, especially since the screen size is one of the main limitations, and for everything else that I do the Air is as fast as the new Ryzen desktop.