Are Index Funds Communist? | Bloomberg Opinion, by Matt Levine

Source: Are Index Funds Communist? | Bloomberg Opinion, by Matt Levine

The function of the capital markets is to allocate capital. … Analysts should be constantly thinking about whether companies are over- or underpriced, so that they can buy the underpriced ones and sell the overpriced ones and keep capital flowing to its best possible uses. But when those thoughtful active analysts are replaced with passive index funds, the market stops serving that function. Whatever the biggest company is today will remain the biggest company tomorrow, and capital will never be allocated from bad uses to good ones.

there is an alternative view that the rise of passive investing will improve capital allocation, because bad active investors will be driven out but good ones will remain. The passive investors can’t influence relative prices, since they just buy the market portfolio, meaning that the fewer but better active investors will continue to make the capital allocation decisions.

The capital allocation problem is a subset of that more general resource allocation problem, and has similar answer choices: You can have clunky central planning, or you can have a market where investors compete to buy securities and thus set prices, or you can have an ideal but as-yet-undiscovered computer do the allocating.

One way to think about [passive index funds] is that they are all crude algorithms for picking the best companies to allocate capital to. True, diversified, market-cap-weighted index funds are the crudest algorithm. They essentially assume that the companies that were good yesterday will probably be good tomorrow. This is not entirely true, of course, but it’s true enough to be useful, or at least to outperform most human money managers most of the time.

And of course any human active investor is mostly relying on historical correlations and pattern-matching to make predictions of future fair value. … this sort of informal empiricism; robot investors just formalize it.

One broadly plausible thing to expect is that, in the long run, the robots will be better at this than the humans. Another broadly plausible thing to expect is that, in the long run, the robots will keep getting better at it. … One other thing to consider is that eventually the best robot will predictably and repeatedly outperform the second-best robot, so why would you invest with the second-best robot?

So the logical/whimsical end point is, if you want to invest in U.S. business, you give your money to the Best Capital Allocating Robot (U.S. Division), and that robot — whose prowess has been proven over time in fierce competition — applies the best algorithms to the best data set to make the best possible capital-allocation decisions, and you get the best returns, and the economy gets the best capital allocation.

The Fraser-Jenkins thesis is that algorithmic investing runs the risk of destroying capitalism by abandoning the pursuit of knowledge. But the really fun alternative is that it runs the risk of destroying capitalism by perfecting that pursuit: Once you have solved the socialist calculation problem, what do you need markets for?

We’re Measuring the Economy All Wrong | Opinion | The New York Times

Source: We’re Measuring the Economy All Wrong | Opinion | The New York Times, by David Leonhardt

The official statistics say that the financial crisis is behind us. It’s not. … The whole point of statistics is to describe reality. When a statistic no longer does so, it’s time to find a new one — not to come up with a convoluted rationale that tries to twist reality to fit the statistic.

Jobs are plentiful, so why aren’t wages rising? | Quartz

Source: Jobs are plentiful, so why aren’t wages rising? | Quartz, by Dan Kopf

RE: Labor Market Concentration (pdf) by Jose Azar, Ioana Marinescu, and Marshall Steinbaum

Follow-up: Concentration in US Labor Markets: Evidence From Online Vacancy Data (pdf) by José A. Azar, Ioana Marinescu, Marshall I. Steinbaum, and Bledi Taska

Using 2011 data from the job site CareerBuilder, the researchers calculate labor market concentration in cities and industries and show that the average market is highly concentrated. They also show that this concentration is associated with lower wages.

The Stock Market Is Shrinking. That’s a Problem for Everyone. | The New York Times

Source: The Stock Market Is Shrinking. That’s a Problem for Everyone. | The New York Times, by Jeff Sommer

When I say “shrinking,” I’m using a specific definition: the reduction in the number of publicly traded companies on exchanges in the United States. In the mid-1990s, there were more than 8,000 of them. By 2016, there were only 3,627, according to data from the Center for Research in Security Prices at the University of Chicago Booth School of Business.

Because the population of the United States has grown nearly 50 percent since 1976, the drop is even starker on a per-capita basis: There were 23 publicly listed companies for every million people in 1975, but only 11 in 2016, according to Professor René Stulz.

In 2015, for example, the top 200 companies by earnings accounted for all of the profits in the stock market, according to calculations by Kathleen Kahle, a professor of finance at the University of Arizona, and Professor Stulz. In aggregate, the remaining 3,281 publicly listed companies lost money.