Narrative dominates day to day, but it’s also very easy to overstate its importance. In a bound random walk the bounds and the randomness doesn’t have consistent impact. In the middle of the range randomness completely dominates what comes next, and at the edge the bounds completely dominates the randomness. That’s IMO a better model of these things.
Take say money, second by second the value of USD is determined by people’s perception. However, people in aggregate are required by law to pay a fraction of US GDP in taxes based on the value of stuff besides money, like millions of cars and cans of soup etc. That relationship means without printing new money the value of all USD in circulation must be enough to pay taxes with or you get the monetary equivalent of a short squeeze. Which then represents a bound unlike say cryptocurrency which can actually fall to zero even as the economy continues normally.
I bring up the tax angle specifically because it’s normally irrelevant but changes the behavior at extremes. People tend to think of economies as fragile things because even minor changes have large implications, yet Ukraine’s economy continued even in the middle of an invasion and massive migration etc. Stocks seem divorced from reality up until the point where fundamentals matter.
Take say money, second by second the value of USD is determined by people’s perception. However, people in aggregate are required by law to pay a fraction of US GDP in taxes based on the value of stuff besides money, like millions of cars and cans of soup etc. That relationship means without printing new money the value of all USD in circulation must be enough to pay taxes with or you get the monetary equivalent of a short squeeze. Which then represents a bound unlike say cryptocurrency which can actually fall to zero even as the economy continues normally.
I bring up the tax angle specifically because it’s normally irrelevant but changes the behavior at extremes. People tend to think of economies as fragile things because even minor changes have large implications, yet Ukraine’s economy continued even in the middle of an invasion and massive migration etc. Stocks seem divorced from reality up until the point where fundamentals matter.