"As the total value of the global financial market has vastly outgrown the value of the real economy,
financial institutions on this planet have created a web of interactions whose size and topology calls for a quantitative analysis by means of Complex Networks."
refer to Capital in the Twenty-First Century :
"The book's central thesis is that when the rate of return on capital (r) is greater than the rate of economic growth (g) over the long term, the result is concentration of wealth, and this unequal distribution of wealth causes social and economic instability."
regarding models, in a conclusion of Nature paper:
"Differently from other networks, here nodes have some ability to anticipate the future, including the future structure of the network and try to take advantage of it. Although in reality such ability is much more limited than what models in mainstream economics postulate, it represents a circularity in the model that is difficult to treat with analytical or statistical tools. "
so, participants use models and apply them to change behavior, making the system harder to model (!)
I am ignorant here, but isn't this property true of iterated prisoner dilemma situations? Is game theory not an adequate model here?
Compare to a lot of engineering models being reduced to "just calculus"
yikes, no thanks, keep it academic.
Honestly, calling for an academic treatment of economics like this, is less compelling for me even in retrospect, than quantitatively substantiated, current, analysis. How many people understand modern financial flows at scale? .. the topic of the original post.
Having multiple solutions is somewhat equivalent to having different states of matter in physics. And economies definitely have very different modes, or states, that we call recessions or booms. Being able to have these sorts of local optima would seem to be necessary foe any model of an economy.
But I may not be understanding you, because we are using the same words in different ways...
As I recall they began by adopting a structural model for debt valuation that assumes no dependence on any external assets other than the debtor's. Then they reintroduce full n-dimensional dependence through a different mechanism they made up to try and force the 1-dimensional solutions into a state of consistency. It's a bit of a mess.
Actually you're right. The presence of multiple solutions is not in itself enough to make me hate the model. The analogy relating different economic regimes to different phases of matter is potentially a good one.
Not disagreeing with you, just wondering out loud if it could be revisited with other methods.
What the hell is this supposed to mean? What is "value" here, can financial markets conjure more houses, crops or datacenter capacity? Or does it mean that "market prices of securities" have outpaced the "market prices of" .. "the real thing"? Like, seriously, what?
The market prices of securities, and (critically) the returns on those securities, are now higher than the book value and returns of the cash invested in companies whose shares back those securities.
The delta between the book value and the securities pricing is the estimated future profits. Now how exactly did you arrive at the conclusion that the future profits estimation is too high?
But, since we're now talking about overvalued securities:
The market returns are calculated over a fixed and usually short time period and are easy to calculate. Because the markets in question are expectations markets the prices move around a lot and hence the measured returns move around a lot.
Compare that with defining "returns on actual businesses" in a way which is both sensible (ie accurate) and has even a reasonable level of precision - it's impossible. For example, a commonly used and easy way to measure it is Return on Equity. Net Income / Book Value. Book Value is an accounting number based on the past. The "true" value put on an asset by investors is based on guesses about the future of the business and said business's ability to put cash in the pockets of the owners. Net Income misses important value changes - consider Intel, who have been making crazy decisions for years which allowed AMD back in the x86 server game. Intel don't have to report a "we did stupid things which will cost us billions in 10 years time" on their income statement for a given year. So, RoE isn't good and other similar numbers are similarly bad.
So, your statement about returns on securities should really say: "for the last few years, returns on securities appear to have exceeded the changes in value for the underlying businesses". To which a reasonable response is: "Yup, it happens sometimes".
I would argue that there is an increasing amount of evidence that statement has gone from "plausibly true" to "pretty obviously not the case, for many securities."
The underlying problem, regardless of the terminology or metrics being used to estimate value, seems to be that those with $10b in cash seem increasingly inclined to use it to speculate using various financial instruments, rather than e.g. building a manufacturing plant or a new housing development or apartment building. The growing size of the financial sector relative to the rest of the economy is the evidence I would put forward that "the returns on securities are exceeding the returns on actual business."
But if you want to make up bullshit, you could pretend it doesn't and that you and I are now the world's largest economy, trading 2tn a day.
It's a great way to make your maths easier (but wrong) and your headlines much more attention grabbing.
How much you bet is up to you and your counterparty; the amount is not in any way constrained by the actual value of the companies in the S&P500.
And that's how the size of the derivatives market can look like this when compared to the stock market:
In summary, the word "value" gets thrown around loosely.
Folks should use the right terms if they genuinely want to communicate ideas.
Notional value is somewhat meaningless, tomorrow you could buy a single out of the money SPX 0DTE option for $100 that has a notional value of $423,900
You either claim that the interest rate (or various risk premia) are too low, or that the estimates of future profits (for whatever reason, higher COGS, higher cost of labor, higher taxes, under-measured depreciation and higher capex, natural calamities, lower GDP and thus lower revenues, or really any other reason) are too high.