Subject: Re: Control Panel: Sticking the soft landing, “Soonico
The price of a stock, like any other commodity, is driven by supply and demand...


A side note / talking head moment ---

I believe this to be a common, sometimes fatal, category error. It's true in the very short term, but not for long.

That's because financial assets are fundamentally unlike capital goods (and commodities).

A purely capital good like a painting or a Beanie Baby or a bitcoin has a price set entirely by supply and demand, since it doesn't and can't ever earn anything. It's worth what somebody will pay for it. More demand relative to supply will generally lead to a higher price.

Purely financial assets aren't like that. (I say "purely" financial because there's a middle ground for nominally financial assets which are purchased more as capital goods. Stocks of Tesla and Ferrari stock are often owned partly for the feeling they generate rather than the expectation of a particular return)

A purely financial asset has price elasticity around the consensus of what it ought to earn: rising demand doesn't cause rising price, rather rising price causes falling demand and (extremely weak) mean reversion. The fair value is the present value of all future possible distributions and any terminal value. The consensus of that estimate will certainly change a lot over time, changing the asset's price, but a change in demand alone generally won't (usually not much longer than the time for news to be disseminated).

Consider the example of a bag clearly containing a hundred $100 bills. That's a purely financial asset, unless you happen to like the bag. This will probably have a market price of about $10k. The important thing to note is that the going price will NOT change based on how many such bags are for sale, nor how many people are looking to buy one. Shares are the same thing. There is variation in how much the consensus value is, sometimes even wild variation, but incremental demand is rarely an issue simply because there is essentially infinite demand for free money. The few exceptions are short time periods (a "sell at market" order of a billion shares), insufficient visibility to cause sufficient liquidity (75% stock overhang on a microcap hitting the market), or an utter lack of information from which to build any kind of value estimate so the only thing left is speculation (a startup visiting a VC office with nothing but a business plan).

There is a subtle case to be made regarding price elasticity falling in recent years because such a large fraction of fund fiduciaries are now forbidden from changing their equity allocations: a price rise causes them to want to sell but they can't. So that's another possible exception. But that's a flaw in current market structure, not a case that financial securities trade purely on demand. Remember that an already-running business tends to trade for between 5 and 25 times its annual earnings, and most of the time closer to the middle of that range. The same was true 1000, 2000, or 3000 years ago. I'm pretty sure demand has changed quite a lot in that time, but the desire for income hasn't.

For the sort of securities that people pay attention to the most, large cap liquid equities with the observable factors driving their future value well known, it's generally changes to the perceived future that matters to what bid goes in, not the number of market participants pondering the issue. Generally : )

Jim