- Upside Down Markets (Interview with @JesseLivermore)
Invest Like The Best Podcast
The blogger behind the Jesse Livermore pseudonym did a second public interview. He talks about his latest blog post. Here’s the description from Invest Like The Best:
My guest today is Jesse Livermore. I’ve worked with Jesse as part of our research partners program at O’Shaughnessy Asset Management for years now. Whenever there is a huge, important, and complex issue to be studied, I believe he’s among the best minds in the world to tackle it. He did that recently on the topic of what he calls “upside down markets,” which is the topic of this conversation. We seek to answer the simple question: against a horrible economic backdrop, how can the stock market be near all-time highs? Jesse explains in detail the impact that fiscal policy has had on the market and may have in the future. Please enjoy this master class in upside down markets.
His work is dense but he’s gifted at breaking things down into small steps to impart his findings. It’s a very rewarding experience to read his work because there is a meta-learning experience built in — how to think from first principles. The joy of building an understanding from accounting identities is a fresh break from the pseudoscience feel of macro theories. It seems fitting that this exceptional work would come from someone outside of finance.
- The full Upside Down Markets post (link)
- He mentions how exceedingly high valuations are increasingly dependent on liquidity or what he terms “networks of confidence”. I wrote a thread musing about liquidity (thread)
- Jesse’s liquidity thought experiment (thread)
- Jesse: Market-Cap Weighting under Policy Dominance (Fiscal nGDP Targeting): The disadvantages of market-cap (mcap) weighting are well known. Here, I want to elaborate on a benefit that it might offer, which I mentioned in recent ILTB podcast. (thread)
- Profit Margin Mean Reversion Is Not Relevant (link)
This post is one of my favorite older Jesse posts because he uses his first principles approach to dissect Hussman’s contention that the mean-reverting qualities of profits would be a tailwind to stocks. The upshot: ROE not profit margins are what matter. There’s a lot to learn from this deconstruction.
A tangential takeaway for me was how stock market wealth is fungible with household savings at the aggregate level, even if the dynamic is regressive. It’s sustainable so long as labor continues to maintain positive savings rates. Unfortunately this say nothing of the risks to social fabric if equality widens in step.
The post is 6 years old and it’s interesting to see that the recent embrace of fiscal expansion could help to narrow equality, as least at first glance.