TSLA gamed the system - Could Index Funds Be ‘Worse Than Marxism’?

[Beensabu]

Imagine the total market is worth $100. Tesla is 5% with a market value of $5.
I am an index fund with $10 assets. I own 10% of the market, including 10% of Tesla shares, worth $0.50.
If Tesla issues more shares, diluting their share price, they are still worth $5.
But now I don't own 10% of Tesla shares or $0.50 worth.
Don't I need to buy some of these diluted shares?

Tesla is still worth $5, but an individual share price goes down.

And then the company does buybacks at the reduced share price and drives the price back up. I dunno about the whole rest of the index fund cycle blah blah part of it all, but convertible bonds sound like a great way to keep the buyback cycle going.

[NoRegret]

Logica Capital as one example.

Fund ticker symbol, please. I looked and couldn't find anything.

It’s a hedge fund where Mike Green is the CIO. I believe straddle-like positions are the right approach for the next couple of years.

[Doctor Rhythm]

As someone who owns the means of production of ten thousand companies that I never worked at, my Marxist credentials are suspect.

[NYC_Guy]

The convert market is absolutely tiny compared to the total market. It’s a gnat on an elephant.

[Beensabu]

Hmmm.

If it's just that easy, why hasn't it been done before and / or isn't done by more companies?

I just looked it up. They are. Convertible bond issuance has gone bonkers since April 2020, globally, and more and more of them are doing it... It's also the growing proportion of the NR category. Crazy.

[HanSolo]

Imagine the total market is worth $100. Tesla is 5% with a market value of $5.
I am an index fund with $10 assets. I own 10% of the market, including 10% of Tesla shares, worth $0.50.
If Tesla issues more shares, diluting their share price, they are still worth $5.
But now I don't own 10% of Tesla shares or $0.50 worth.
Don't I need to buy some of these diluted shares?

Tesla is still worth $5, but an individual share price goes down.

Regarding the post from eukonomos, there seems to be agreement with the bolded statement, but nobody has addressed the two sentences below that.

[AlohaJoe]

Imagine the total market is worth $100. Tesla is 5% with a market value of $5.
I am an index fund with $10 assets. I own 10% of the market, including 10% of Tesla shares, worth $0.50.
If Tesla issues more shares, diluting their share price, they are still worth $5.
But now I don't own 10% of Tesla shares or $0.50 worth.
Don't I need to buy some of these diluted shares?

Tesla is still worth $5, but an individual share price goes down.

Regarding the post from eukonomos, there seems to be agreement with the bolded statement, but nobody has addressed the two sentences below that.

What is there to address? Maybe eukonomos can explain why they think maintaining a certain ownership percentage is relevant to how index funds work because I'm not following the logic.

Let's pretend Tesla is worth $5. And the entire market is worth $100, so Tesla makes up 5% of the total market. Vanguard index funds are market capitalization weighted, so Tesla will make up 5% of the Vanguard index fund. Tesla issues more shares, diluting their share price. They are still worth $5. They still make up 5% of the market. Vanguard still owns 5% of Tesla at market capitalization weighting without doing anything. Why does Vanguard need to buy more?

[HanSolo]

(deleted)

[HanSolo]

Imagine the total market is worth $100. Tesla is 5% with a market value of $5.
I am an index fund with $10 assets. I own 10% of the market, including 10% of Tesla shares, worth $0.50.
If Tesla issues more shares, diluting their share price, they are still worth $5.
But now I don't own 10% of Tesla shares or $0.50 worth.
Don't I need to buy some of these diluted shares?

Tesla is still worth $5, but an individual share price goes down.

Regarding the post from eukonomos, there seems to be agreement with the bolded statement, but nobody has addressed the two sentences below that.

What is there to address? Maybe eukonomos can explain why they think maintaining a certain ownership percentage is relevant to how index funds work because I'm not following the logic.

Let's pretend Tesla is worth $5. And the entire market is worth $100, so Tesla makes up 5% of the total market. Vanguard index funds are market capitalization weighted, so Tesla will make up 5% of the Vanguard index fund. Tesla issues more shares, diluting their share price. They are still worth $5. They still make up 5% of the market. Vanguard still owns 5% of Tesla at market capitalization weighting without doing anything. Why does Vanguard need to buy more?

You lost me. You said "Vanguard still owns 5% of Tesla", but eukonomos said that before the dilution, the index fund owned "10% of Tesla shares". What do you mean by "still"?

Before the dilution, the fund owned 10% of every company in the index. After the dilution, the fund owns 10% of every company in the index except Tesla. How can the fund accurately track the index in that scenario? In the "after" picture, Tesla is underweighted. If the weighting of each component of the index fund is not proportional to market cap, then it's not tracking a cap-weighted index.

[BeBH65]

Imagine the total market is worth $100. Tesla is 5% with a market value of $5.
I am an index fund with $10 assets. I own 10% of the market, including 10% of Tesla shares, worth $0.50.
If Tesla issues more shares, diluting their share price, they are still worth $5.
But now I don't own 10% of Tesla shares or $0.50 worth.
Don't I need to buy some of these diluted shares?

Tesla is still worth $5, but an individual share price goes down.

Regarding the post from eukonomos, there seems to be agreement with the bolded statement, but nobody has addressed the two sentences below that.

What is there to address? Maybe eukonomos can explain why they think maintaining a certain ownership percentage is relevant to how index funds work because I'm not following the logic.

Let's pretend Tesla is worth $5. And the entire market is worth $100, so Tesla makes up 5% of the total market. Vanguard index funds are market capitalization weighted, so Tesla will make up 5% of the Vanguard index fund. Tesla issues more shares, diluting their share price. They are still worth $5. They still make up 5% of the market. Vanguard still owns 5% of Tesla at market capitalization weighting without doing anything. Why does Vanguard need to buy more?

I understand that share issuance (and share buyback) are events that will make index funds take action to keep the status-quo related to their ownership in the company

Say there are 10M shares initially and there are 11 M shares after the issuance.
Say Vanguard owns 1M shares initially - hence it owns 10% of the company which is worth $5, Vanguards shares is worth $500k
After the issuance the company is still worth $5, split over 11M shares, Vanguard owns 1M shares, 9% of the company. Vanguards shares are worth $454k.

To keep its stake in the company at the same level, would Vanguard not have to buy extra shares, at the lower price to bring its stake in the company back to the previous level?

[bberris]

Hmmm.

If it's just that easy, why hasn't it been done before and / or isn't done by more companies?

There is another essential part of the scheme: the stock price has to go up. This happens automatically when you are in the convertible-index virtual cycle, but the pump needs priming.

[Swivelguy]

The indexes have to sell when dilution lowers the price, so these are offsetting factors in both directions. A lower price means sell, more shares means buy. The equations cancel.

Indexes have to sell when the share price lowers? Since when? The whole point of market cap weighting is that an index fund does not need to trade based on price changes.

[Swivelguy]

Many posts in this thread assert that the market cap of a company does not (or should not) change due to debt conversion resulting in the creation of shares.

However, when debt is converted to shares, the company erases a debt, removing it from their balance sheet, and therefore tangibly increasing the value of the company. This actually should result in an increase in market capitalization.

Or have I also missed something?

[eukonomos]

Many posts in this thread assert that the market cap of a company does not (or should not) change due to debt conversion resulting in the creation of shares.

However, when debt is converted to shares, the company erases a debt, removing it from their balance sheet, and therefore tangibly increasing the value of the company. This actually should result in an increase in market capitalization.

Or have I also missed something?

Yes, I was addressing the case where the market cap of Tesla does not change.

I have no idea if this is how it works, but I imagine the following scenario along the lines of what you suggest:

The total market is worth $100.
Tesla is worth $5, $6 of assets with $1 debt.
There are 100 shares outstanding, each worth a nickel.
The debtholder cancels the debt in exchange for 20 newly issued shares.
The value of Tesla without the debt is $6.
There are now 120 shares, each worth a nickel (i.e., no dilution).
The former debtholder owns 20 shares, worth $1.
Tesla has moved from 5% (5/100) of the total market to 5.9% (6/101).
The value of the shares owned by the index fund have not increased, so they need to up their stake in Tesla to maintain balance.

Does this make any sense?

[Swivelguy]

Does this make any sense?

Makes 100% sense to me, but it seems there are others who would disagree on one or multiple points.

[edgeagg]

This title of the post (and the Atlantic article) is totally clickbait. The Atlantic article OTOH had some redeeming qualities as opposed to the OP's post:

1) The top shareholders in large S&P500 companies are index fund companies. That is, there is excessive concentration of voting power in the large index fund companies. This is probably true. The next claim made is a bit more controversial - namely that this power isn't exercised often - though it is unclear what this actually means.
2) The following claim is made: They are committed to being as lean and hands-off as possible, in order to reduce their fees. They do not tend to get involved in shareholder actions or small-bore corporate management, perhaps in part because any one company doing well against its peers is not of interest to the indexers, who want more assets under management and higher corporate profits. The article provides a citation that I will have to read on the weekend (TLDR).

Marxism has absolutely zero to do with any of this - in fact it is actually capital concentration!! Newspeak!

[Ricola]

I thought Marxism is mostly a critique of Capitalism. Of course, there is a lot more to it. Owning shares of companies indexed or not is still a Capitalist idea. TSLA gaming the system would appear to show a weakness in the Capitalist system, thus supporting Marx's criticism. Maybe that is what they are trying to say.

https://en.wikipedia.org/wiki/Marxism

[JupiterJones]

What does the philosphy of the German political theorist Karl Marx have anything to do with this?

That's a direct quote from the linked Atlantic article.

Well its a silly clickbait quote.

More than any random quote... it's the headline of the Atlantic article.

An opportune time to bring up the Law of Headlines: "Any headline that ends in a question mark can be answered by the word no."

[not4me]

Many posts in this thread assert that the market cap of a company does not (or should not) change due to debt conversion resulting in the creation of shares.

However, when debt is converted to shares, the company erases a debt, removing it from their balance sheet, and therefore tangibly increasing the value of the company. This actually should result in an increase in market capitalization.

Or have I also missed something?

Yes, I was addressing the case where the market cap of Tesla does not change.

I have no idea if this is how it works, but I imagine the following scenario along the lines of what you suggest:

The total market is worth $100.
Tesla is worth $5, $6 of assets with $1 debt.
There are 100 shares outstanding, each worth a nickel.
The debtholder cancels the debt in exchange for 20 newly issued shares.
The value of Tesla without the debt is $6.
There are now 120 shares, each worth a nickel (i.e., no dilution).
The former debtholder owns 20 shares, worth $1.
Tesla has moved from 5% (5/100) of the total market to 5.9% (6/101).
The value of the shares owned by the index fund have not increased, so they need to up their stake in Tesla to maintain balance.

Does this make any sense?

1st, I've not read this entire thread, so this may be redundant, but....this could happen but would be highly unusual. When the convertible debt is issued, there are specific terms regarding the conversion. Basically embedded in the debt issued is an option for the stock. Don't know that you'll see a case where they agree to convert at whatever the current market price is. The company may have to payout cash if debt matures & market price is low. I know a couple of years back that happened. Really have to look at the terms for the debt being retired/converted. so in your example, when that debt was issued the terms were probably such that it wouldn't convert at market price. btw, I'm also not aware that the shares are always "newly issued".

[Walkure]

Many posts in this thread assert that the market cap of a company does not (or should not) change due to debt conversion resulting in the creation of shares.

However, when debt is converted to shares, the company erases a debt, removing it from their balance sheet, and therefore tangibly increasing the value of the company. This actually should result in an increase in market capitalization.

Or have I also missed something?

Yes, I was addressing the case where the market cap of Tesla does not change.

I have no idea if this is how it works, but I imagine the following scenario along the lines of what you suggest:

The total market is worth $100.
Tesla is worth $5, $6 of assets with $1 debt.
There are 100 shares outstanding, each worth a nickel.
The debtholder cancels the debt in exchange for 20 newly issued shares.
The value of Tesla without the debt is $6.
There are now 120 shares, each worth a nickel (i.e., no dilution).
The former debtholder owns 20 shares, worth $1.
Tesla has moved from 5% (5/100) of the total market to 5.9% (6/101).
The value of the shares owned by the index fund have not increased, so they need to up their stake in Tesla to maintain balance.

Does this make any sense?

I'm following your example, and it appears that buybacks are essentially the same process in reverse?

The total market is worth $100.
Tesla is worth $5, $6 of assets with $1 debt.
There are 100 shares outstanding, each worth a nickel.
The debtholder buyback cancels the debt in exchange for 20 newly issued existing shares at a cost of $1 of assets.
The value of Tesla without the debt is $6 $5 assets -$1 debt =$4.
There are now 120 80 shares, each worth a nickel (i.e., no dilution).
The former debtholder owns 20 shares, worth $1.
Tesla has moved from 5% (5/100) of the total market to 5.9%(6/101) 4.04%(4/99).
The value of the shares owned by the index fund have not increased decreased, so they need to up reduce their stake in Tesla to maintain balance.

In other words, when a company implements a buyback, the index funds have to sell some of their shares to the buyback, essentially "manufacturing the dividend." What Tesla is doing "manufactures a negative dividend," which is the same as raising capital.

[Superleaf444]

What does the philosphy of the German political theorist Karl Marx have anything to do with this?

That's a direct quote from the linked Atlantic article.

Well its a silly clickbait quote.

More than any random quote... it's the headline of the Atlantic article.

An opportune time to bring up the Law of Headlines: "Any headline that ends in a question mark can be answered by the word no."

FWIW the headline is specific and being used to reference an old piece of work, which they include in the article. Bloomberg (and more) did a piece over it when it came out:

https://www.bloomberg.com/news/articles ... an-marxism

And I the only person that doesn't think this is clickbaiting at all? Its a thought piece over an older piece of work, so idk, it is extremely specific.

As for Tesla, :shrug:

[BogleFan510]

The indexes have to sell when dilution lowers the price, so these are offsetting factors in both directions. A lower price means sell, more shares means buy. The equations cancel.

Indexes have to sell when the share price lowers? Since when? The whole point of market cap weighting is that an index fund does not need to trade based on price changes.

I am assuming you are aware that a market cap is (simplistically) calculated by multiplying the number of shares outstanding x market price per share. Hence if the price drops, the company's market cap drops. If the market cap drops relative to a static total market cap, its share of the total market cap in a cap weighted index is reduced.

Can't understand why this isnt apparent. In reality, index funds do not dynamically rebalance instantly, but over time there is shifting of weights to maintain balance. This whole thread seems silly to me, but fear of market cap weighted index funds somehow 'breaking the market' seems to be fake news that generates clicks, so why not rehash an old story to troll Bogleheads?

[nisiprius]

I don't particularly like being cheated, and resent it in a "principle-of-the-thing" sort of way, but I've assumed all along that it happens to retail investors.

But in terms of what I, as an investor, ought to do, it depends on "how much is that in dollars?" and "what are my alternatives?"

Yes, this is true for expense ratios, too.

For years my main 401(k) holding was a Fidelity Freedom (target date) fund with about an 0.60% ER. In a dull-ache way I was aware of the expenses. In a dull-ache way I believe what I read in Michael Lewis' Flash Boys and assume that I'm being chiseled in a tiny way on every transaction. If someone tells me that someone has made fortunes at the expense of S&P 500 index fund investor by doing something clever with Tesla, I'm prepared to believe it. If someone tells me that someone has made fortunes at the expense of total market index fund investors by doing something with Tesla, I don't see how, but I potentially could be convinced.

But how much is that in dollars? Dollars in my account? They are not of huge importance. And the alternatives might fall under "out of the frying pan and into the fire."

Hey, as an index investor, I was invested in Enron in 2001. Was that dumb? How much did it hurt me and what was the alternative? Wikipedia says "the company's stock price, which achieved a high of US$90.75 per share in mid-2000, plummeted to less than $1 by the end of November 2001." So let's see how much that hurt me in Total Stock, VTSAX, (blue), and for comparison I'm going to include VFIAX, S&P 500, which included Enron (orange); VEXAX (green), everything not in the S&P 500; and DIA (yellow), which tracks the Dow Jones Industrial Average and had a much higher percentage in Enron than any of the others.

Is that dip on 9/21/2001 Enron? I don't know. It's noticeable but not extreme, and even if it is related to Enron it is a whole market effect, not an effect of to holding Enron stock itself--because the size of the dip is about the same for the VTSAX (with Enron), VFIAX (S&P 500, with Enron), VEXMX (no Enron), and DIA (lots of Enron).

So, of course I personally was hurt, bamboozled, cheated by Enron, as a result of mechanically holding the whole market. But as a practical matter, it wasn't of great importance to my retirement savings, and there was nothing obvious I could have done about it.

Source

[secondopinion]

From the atlantic article:
"Analysts at Bernstein have called passive investing “worse than Marxism.” The investor Michael Burry, of The Big Short fame, has called it a “bubble,” and a co-head of Goldman Sachs’s investment-management division has warned about froth too. Shortly before his death in 2019, Bogle himself warned that index funds’ dominance might not “serve the national interest.”

One primary concern comes from the analysts at Bernstein: “A supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active, market-led capital management.” ...........
Active managers direct investment dollars to companies on the basis of those companies’ research-and-development prospects, human capital, regulatory outlook, and so on. They take new information and price it into a company’s stock when buying and selling shares. If Company A’s stock price tanks when it announces a major scandal, that’s because active investors are selling. If Company B’s shares soar when it announces it’s entering a new market, that’s because active investors are buying.

Passive investors, by contrast, ignore annual reports and market rumors. They do nothing with trading-floor gossip. They make no attempt to research what to invest in and what to skip. Whether holding international or domestic assets, holding stocks or bonds, or using a mutual-fund structure or an ETF structure, they just mirror the market. Big U.S.-stock index funds buy big U.S. stocks just because they’re big U.S. stocks.

That commitment to inertia worries the Bernstein analysts, who point out that in a world with exclusively passive investors, capital will get allocated only to the big companies and not necessarily to good, promising, or efficient companies. A gravitational, big-getting-bigger effect would dominate stock-price movements. At least in a Soviet-type centrally planned economy, apparatchiks would be making some attempt to allocate resources efficiently."

One problem with this article; what about all the alternate indexes that favor small-caps, sectors, and other indexes that do not follow market-weight? A lot of passive investors love these. And if the big receive big bucks to force the price higher, wouldn't the small companies receive a higher market premium? I doubt that even indexers and passive investors will pass up such an opportunity. The big getting bigger is always going to be true; if not, then they are certainly bad investments. And all stocks should be getting bigger. The article makes it sound like none of the other stocks have done so. Observe VBR, VBK, VOT, VOE, MGV, MGK; they are all up after 10 years. Does not sound like a problem to me.

[nisiprius]

Oh, I think the authors of the (stupid) article probably expected people to remember the 2016 article they mention, by someone named Inigo Fraser-Jenkins, from a British firm named Bernstein Research that I have never heard of before or since. It was entitled “The Silent Road to Serfdom: Why Passive Investing Is Worse Than Marxism.” It got a lot of press at the time. (In turn, I think Fraser-Jenkins assumed that his readers would remember The Road to Serfdom, by Austrian economist F. A. Hayek).

I assume everyone knows this one?

[Swivelguy]

The indexes have to sell when dilution lowers the price, so these are offsetting factors in both directions. A lower price means sell, more shares means buy. The equations cancel.

Indexes have to sell when the share price lowers? Since when? The whole point of market cap weighting is that an index fund does not need to trade based on price changes.

I am assuming you are aware that a market cap is (simplistically) calculated by multiplying the number of shares outstanding x market price per share. Hence if the price drops, the company's market cap drops. If the market cap drops relative to a static total market cap, its share of the total market cap in a cap weighted index is reduced.

Can't understand why this isnt apparent. In reality, index funds do not dynamically rebalance instantly, but over time there is shifting of weights to maintain balance. This whole thread seems silly to me, but fear of market cap weighted index funds somehow 'breaking the market' seems to be fake news that generates clicks, so why not rehash an old story to troll Bogleheads?

When a share price falls, the market cap falls, but so does the value of the holdings of index funds that already have those shares. By the same percentage. So no rebalancing is needed.

Let's say the overall market cap is $100, and company ABC has a market cap of $5. Index fund JKL has AUM of $1, containing $0.05 of company ABC, which is a correct 5% market cap weighting.

Company ABC has a bad quarterly and drops to $4. It is now 4/99 = 4.04% of the market. Index fund JKL's shares drop from $.05 to $.04, so its total AUM is now $0.99. It has $.04/$.99 = 4.04% weighting in company ABC. Still perfectly market cap weighted, with no trading necessary.

[BeBH65]

When a share price falls, the market cap falls, but so does the value of the holdings of index funds that already have those shares. By the same percentage. So no rebalancing is needed.

Assuming the number of shares remains the same.

The subject of this thread seems to be that extra shares are created.

[Swivelguy]

When a share price falls, the market cap falls, but so does the value of the holdings of index funds that already have those shares. By the same percentage. So no rebalancing is needed.

Assuming the number of shares remains the same.

The subject of this thread seems to be that extra shares are created.

Boglefan510 claimed: "The indexes have to sell when dilution lowers the price, so these are offsetting factors in both directions. A lower price means sell, more shares means buy. The equations cancel"

Yes, indexes have to buy when the number of shares increase. The assertion that they have to sell when the price drops (the "ofsetting factor") is a separate claim, which he or she backed up in later comments asserting that indexes trade to "maintain balance" on price changes in general. I don't believe that to be the case.

[dsasdg]

I suppose an interesting side effect might be that Tesla is one of the most innovative companies we've seen in our lifetimes...

I still don't understand the haters that still, to this day, think it's a gigantic charade that will fall apart at any minute.

Maybe because Tesla isn't very innovative at all, but the magic PR cloud that surrounds Elon just makes it seem like that?

The first electric car was invented in the 1800s, and popularized in late 1800's and early 1900's. Elon/Telsa had nothing to do with it.
Their "autopilot" is anything but.
Their "full self driving" beta is a joke... just go watch all of the videos of such on YT.

What Elon/Tesla did do is take a tested, boring, previously impractical technology and made it cool... at least for the 5% of the worlds population that can, or would want to, afford one. But I wouldn't call that innovative.

Global innovation is slowing down, not speeding up, while pretending that technology is advancing at an accelerated pace. Tesla is just a worse example of this phenomenon.

Citation needed.

https://www.brookings.edu/wp-content/up ... idence.pdf
https://web.stanford.edu/~chadj/JonesSintra2017.pdf
http://documents1.worldbank.org/curated ... ential.pdf
https://www.ecb.europa.eu/pub/pdf/scpwp ... 143.en.pdf
https://growthecon.com/blog/BLS-TFP/

[retiringwhen]

My point is I agree with @mdchemist that I believe the index fund will need to purchase more shares, unlike what others have said. At least that is how I see it.

Most indices only reconstitute (aka rebalance/adjust the size of each stock percentage held within the index) once a quarter (or less) and some index providers like CRSP use random dates and long-transition periods to make any adjustments unexploitable. The dilution may impact the share price over a short period, but there is zero impact on the structure of the fund (aka how many shares they must own as a percentage of fund assets) since the reconstitution step could be as much as 90 days later.

[eukonomos]

My point is I agree with @mdchemist that I believe the index fund will need to purchase more shares, unlike what others have said. At least that is how I see it.

Most indices only reconstitute (aka rebalance/adjust the size of each stock percentage held within the index) once a quarter (or less) and some index providers like CRSP use random dates and long-transition periods to make any adjustments unexploitable. The dilution may impact the share price over a short period, but there is zero impact on the structure of the fund (aka how many shares they must own as a percentage of fund assets) since the reconstitution step could be as much as 90 days later.

I have been using simplistic, theoretical examples to try to understand some things.

I believe you are saying that my theory may be correct, but by the time the index fund actually does the rebalancing, the effects of the dilution cannot be discerned amongst all the other market changes that have occurred.

Is that accurate?

[watchnerd]

Hmmm.

If it's just that easy, why hasn't it been done before and / or isn't done by more companies?

I think other companies are catching on:
https://www.ft.com/content/47cafafd-299 ... fc64d65010

Also
https://www.wsj.com/articles/investors- ... 1604324846

I am not sure, but I think something pretty major happened around 2001 and 2008 (the other 2 peaks). I am calling a market top

Yowza.

So how to game the gaming?

[Swivelguy]

So how to game the gaming?

iShares Convertible Bond ETF (ICVT) is currently up roughly 100% YoY, I suggest a time machine.

[not4me]

I believe you are saying that my theory may be correct, but by the time the index fund actually does the rebalancing, the effects of the dilution cannot be discerned amongst all the other market changes that have occurred.

Is that accurate?

In the example you had earlier, it had "no dilution"...in this post, you seem to be saying there will be dilution. I'm not sure I'm following.

While certainly not simple, you might benefit from looking at recent tesla 10-k & doing a find on convertible. I think part of what you are missing is that on tesla books, there will be an equity component & a debt portion in the case of convertible debt. What is on the books may not match the current market price. It can go either way, but very unlikely there will be an exact wash. Especially when you look at the possibility of some redeem early (but at different times), others letting it mature, and in some cases the company redeeming early.

Or, maybe you just want to consider 1 of the many cases that might result?

[eukonomos]

I believe you are saying that my theory may be correct, but by the time the index fund actually does the rebalancing, the effects of the dilution cannot be discerned amongst all the other market changes that have occurred.

Is that accurate?

In the example you had earlier, it had "no dilution"...in this post, you seem to be saying there will be dilution. I'm not sure I'm following.

I have had 2 simple examples. The first I thought was relevant to most of the thread where there was dilution.

You are referring to the second, in response to Swivelguy, where I simplified to the case of debt matching current price and no dilution. And conceded that I had no idea how accurate that was.

While certainly not simple, you might benefit from looking at recent tesla 10-k & doing a find on convertible. I think part of what you are missing is that on tesla books, there will be an equity component & a debt portion in the case of convertible debt. What is on the books may not match the current market price. It can go either way, but very unlikely there will be an exact wash. Especially when you look at the possibility of some redeem early (but at different times), others letting it mature, and in some cases the company redeeming early.

Or, maybe you just want to consider 1 of the many cases that might result?

I see that it is complicated. I hope my simplified contributions to the discussion have not been a hindrance.

[daniel2000]

Hmmm.

If it's just that easy, why hasn't it been done before and / or isn't done by more companies?

There is another essential part of the scheme: the stock price has to go up. This happens automatically when you are in the convertible-index virtual cycle, but the pump needs priming.

The cult of Musk + ESG investing was the priming on TSLA

[Superleaf444]

Hmmm.

If it's just that easy, why hasn't it been done before and / or isn't done by more companies?

There is another essential part of the scheme: the stock price has to go up. This happens automatically when you are in the convertible-index virtual cycle, but the pump needs priming.

The cult of Musk + ESG investing was the priming on TSLA

Yeah, what's up with that cult? It is weird.

[BogleFan510]

The indexes have to sell when dilution lowers the price, so these are offsetting factors in both directions. A lower price means sell, more shares means buy. The equations cancel.

Indexes have to sell when the share price lowers? Since when? The whole point of market cap weighting is that an index fund does not need to trade based on price changes.

I am assuming you are aware that a market cap is (simplistically) calculated by multiplying the number of shares outstanding x market price per share. Hence if the price drops, the company's market cap drops. If the market cap drops relative to a static total market cap, its share of the total market cap in a cap weighted index is reduced.

Can't understand why this isnt apparent. In reality, index funds do not dynamically rebalance instantly, but over time there is shifting of weights to maintain balance. This whole thread seems silly to me, but fear of market cap weighted index funds somehow 'breaking the market' seems to be fake news that generates clicks, so why not rehash an old story to troll Bogleheads?

When a share price falls, the market cap falls, but so does the value of the holdings of index funds that already have those shares. By the same percentage. So no rebalancing is needed.

Let's say the overall market cap is $100, and company ABC has a market cap of $5. Index fund JKL has AUM of $1, containing $0.05 of company ABC, which is a correct 5% market cap weighting.

Company ABC has a bad quarterly and drops to $4. It is now 4/99 = 4.04% of the market. Index fund JKL's shares drop from $.05 to $.04, so its total AUM is now $0.99. It has $.04/$.99 = 4.04% weighting in company ABC. Still perfectly market cap weighted, with no trading necessary.

First, I never said trading was necessary to maintain market cap weights. You are replying to the wrong person if you think I said that.

Second, you cut one sentence in your quote out of context. Please dont do that. Post my whole quote, where I was clear in what I was saying. If one bit was not worded exactly, but the point was correct, then you are being a troll by harping on it.

Ive always said that there is no need to buy or sell shares based on dilution events and that there is not price pressures from Indexes being forced to do anything. I was contradicting a statement that said that issuing new shares and dilution of shares make the index buy more shares which causes the price to rise, which is nonesense, by saying the pressures will remain in balance due to market forces. When new shares enter the market, the price drops but the shares are bought at the new price. That is what I was saying. When I said sell, I meant people sell at the new price and the index buys enough to maintain their market cap weight, if necessary. So I was talking about dilution events like executives exercising options or these convertable securities.

There was also a statement that the percentage was the same if the price drops. The percentage of that holding is not the same if the price drops, but it is if the price drops simultanious to new shares via dilution with the same market cap. You conventiently cut out the very point I was correcting. If market cap of the stock changes, the percentage changes. If more shares were issued, but the market cap remains unchanged, then shares are bought but the $ percentage of the index remains the same. It seems obvious, so will leave it at that.

For example, assume an index is $100, with one big company worth $4 of that $100, which is 4% of the market. Lets say in a day the company drops in value 50% or one half, due to bad news, with little changes elsewhere. The overall market is now worth $98 ($100-.5x$4), with that company being now $2 of the 98.

Its percentage is now 2/98. 2/98 is not .04. The market weight percentage is not static, which is what I stated.

Anyway not replying again.

[alex_686]

Also, the index funds won't just automatically buy in the given scenario you've presented. Index funds hold stock in proportion to market cap, not the number of shares outstanding. If the number of shares outstanding increase with a concomitant decrease in price that leads to an equal market cap before and after the issuance, then the index fund will do nothing.

Exactly. This is perhaps the most common of the recurring errors in articles written about index funds. Excluding fund purchases and redemptions, when prices go up index funds do nothing, when prices go down, index funds do nothing.

No, the index fund would but more shares.

Lets say a index fund holds 1% of all outstanding shares, thus 1% in a companies market cap.

If the company issued new shares the index fund would have to buy to keep its stake at 1% market cap - even if the market cap goes down.

That being said, I strongly disagree with the OPs premise. Index funds buying the newly created stocks would at best have a small temporary effect as it would be transitory.

[David Jay]

Also, the index funds won't just automatically buy in the given scenario you've presented. Index funds hold stock in proportion to market cap, not the number of shares outstanding. If the number of shares outstanding increase with a concomitant decrease in price that leads to an equal market cap before and after the issuance, then the index fund will do nothing.

Exactly. This [Saying that index funds must purchase more more shares when prices rise] is perhaps the most common of the recurring errors in articles written about index funds. Excluding fund purchases and redemptions, when prices go up index funds do nothing, when prices go down, index funds do nothing.

No, the index fund would but more shares.

Lets say a index fund holds 1% of all outstanding shares, thus 1% in a companies market cap.

If the company issued new shares the index fund would have to buy to keep its stake at 1% market cap - even if the market cap goes down.

That being said, I strongly disagree with the OPs premise. Index funds buying the newly created stocks would at best have a small temporary effect as it would be transitory.

I shouldn’t have endorsed permport’s post without reading more carefully. The issue with the financial press stands.

[nigel_ht]

I suppose an interesting side effect might be that Tesla is one of the most innovative companies we've seen in our lifetimes...

I still don't understand the haters that still, to this day, think it's a gigantic charade that will fall apart at any minute.

Maybe because Tesla isn't very innovative at all, but the magic PR cloud that surrounds Elon just makes it seem like that?

The first electric car was invented in the 1800s, and popularized in late 1800's and early 1900's. Elon/Telsa had nothing to do with it.
Their "autopilot" is anything but.
Their "full self driving" beta is a joke... just go watch all of the videos of such on YT.

What Elon/Tesla did do is take a tested, boring, previously impractical technology and made it cool... at least for the 5% of the worlds population that can, or would want to, afford one. But I wouldn't call that innovative.

Global innovation is slowing down, not speeding up, while pretending that technology is advancing at an accelerated pace. Tesla is just a worse example of this phenomenon.

Citation needed.

https://www.brookings.edu/wp-content/up ... idence.pdf

“Technology, especially information and communication technology (ICT), is advancing rapidly and optimism in Silicon Valley is unbounded, yet, paradoxically, productivity growth is slowing down.”

This paper does NOT assert that innovation is slowing down. It does claim that productivity growth is slowing down based on their selected metrics.

The data also ends in 2014...7 years ago.

https://web.stanford.edu/~chadj/JonesSintra2017.pdf

This paper makes the assertion that technological growth remains constant (ie not slowing) but the cost of innovation is increasing exponentially. It ignores two things: 1) yes, it does become harder to improve things the more mature they are. However, paradigm shifts occur and you again see rapid productivity growth. This is quite clear regarding the Moore’s Law example they use. Increasing transistor density IS becoming harder but folks are working on the next breakthrough. 2) the paper ignores China. Manufacturing productivity in the US, EU and Japan may have become static but China’s productivity has increased significantly.

http://documents1.worldbank.org/curated ... ential.pdf

This paper essentially documents that China has captured a lot of the low hanging fruit (decrease is state run industry to private, mobilization of rural workforce to industrial, etc) and growth will be slower.

It does seem to indicate that a lot of all that missing growth in the previous papers was, unsurprisingly, happening in China.

But again this is growth of productivity and NOT innovation or technological advancement.

https://www.ecb.europa.eu/pub/pdf/scpwp ... 143.en.pdf

This paper talks about the transmission of technology in the Central and Eastern European countries and makes no assertion that global innovation is slowing down or the rate of technological advances is now increasing.

https://growthecon.com/blog/BLS-TFP/

This paper actually does claim that technological growth is slowing...but only in passing and without any substantial discussion or proof. It too goes on to discuss TFP and how the slowdown started in the late 60s early 70s with a small increase around 2000 (1995-2005) that all the other papers you provided are using as a baseline. Yes, sure but the growth of even that period is slower than 1948-1972...so essentially 1972 to 2019 looks pretty flat when you zoom out and the slope is markedly lower than that of 1948-1972.

So unless you want to claim that technology growth has been on the decline for the last 50 years this paper doesn’t support your assertion that technology growth has slowed at all.

So citation STILL needed to show that technology growth has slowed and your BS assertion that Tesla is just rehashing old technology is simply that. BS.

Hate him or love him Elon has moved the ball forward in ways GM and other big car manufacturers never did. Taking “boring, previously impractical” things and disrupting an entire industry is innovative.

Folks who don’t understand that simply don’t understand innovation at all. Nobody invents anything while cloth...they stand on the shoulders of the giants before them but add that missing ingredient that turns the “impractical” to change.

All the pieces to build the first powered airplane finally existed in 1903 but until the Wright brothers managed to put them in the right combination you couldn’t fly. They turned what was “tested, boring, previously impractical technology and made it cool... at least for the 5% of the worlds population that can, or would want to” fly.

The wright brothers didn’t invent the internal combustion engine. There was already a biplane glider. They married the two and added their innovation...3-axis control.

Tesla’s story is both similar and different.

https://hbr.org/2020/02/lessons-from-te ... innovation

It’s not just empty marketing as some folks claim. And EV’s wouldn’t be where they are today without Tesla.

Further you can see how Musk has disrupted other industries like space launch. The cost to get something into orbit has dropped dramatically because of SpaceX and to a lesser extent Blue Origin.

Technology advances may or may not be accelerating but there is no indication that it’s slowing down. The fact that you have a significant percentage of the worlds knowledge at your very fingertips anywhere you go with a cell signal is one indication that technological advancements is still progressing well.

So citation still needed.

[dsasdg]

Maybe because Tesla isn't very innovative at all, but the magic PR cloud that surrounds Elon just makes it seem like that?

The first electric car was invented in the 1800s, and popularized in late 1800's and early 1900's. Elon/Telsa had nothing to do with it.
Their "autopilot" is anything but.
Their "full self driving" beta is a joke... just go watch all of the videos of such on YT.

What Elon/Tesla did do is take a tested, boring, previously impractical technology and made it cool... at least for the 5% of the worlds population that can, or would want to, afford one. But I wouldn't call that innovative.

Global innovation is slowing down, not speeding up, while pretending that technology is advancing at an accelerated pace. Tesla is just a worse example of this phenomenon.

Citation needed.

https://www.brookings.edu/wp-content/up ... idence.pdf

“Technology, especially information and communication technology (ICT), is advancing rapidly and optimism in Silicon Valley is unbounded, yet, paradoxically, productivity growth is slowing down.”

This paper does NOT assert that innovation is slowing down. It does claim that productivity growth is slowing down based on their selected metrics.

The data also ends in 2014...7 years ago.

https://web.stanford.edu/~chadj/JonesSintra2017.pdf

This paper makes the assertion that technological growth remains constant (ie not slowing) but the cost of innovation is increasing exponentially. It ignores two things: 1) yes, it does become harder to improve things the more mature they are. However, paradigm shifts occur and you again see rapid productivity growth. This is quite clear regarding the Moore’s Law example they use. Increasing transistor density IS becoming harder but folks are working on the next breakthrough. 2) the paper ignores China. Manufacturing productivity in the US, EU and Japan may have become static but China’s productivity has increased significantly.

http://documents1.worldbank.org/curated ... ential.pdf

This paper essentially documents that China has captured a lot of the low hanging fruit (decrease is state run industry to private, mobilization of rural workforce to industrial, etc) and growth will be slower.

It does seem to indicate that a lot of all that missing growth in the previous papers was, unsurprisingly, happening in China.

But again this is growth of productivity and NOT innovation or technological advancement.

https://www.ecb.europa.eu/pub/pdf/scpwp ... 143.en.pdf

This paper talks about the transmission of technology in the Central and Eastern European countries and makes no assertion that global innovation is slowing down or the rate of technological advances is now increasing.

https://growthecon.com/blog/BLS-TFP/

This paper actually does claim that technological growth is slowing...but only in passing and without any substantial discussion or proof. It too goes on to discuss TFP and how the slowdown started in the late 60s early 70s with a small increase around 2000 (1995-2005) that all the other papers you provided are using as a baseline. Yes, sure but the growth of even that period is slower than 1948-1972...so essentially 1972 to 2019 looks pretty flat when you zoom out and the slope is markedly lower than that of 1948-1972.

So unless you want to claim that technology growth has been on the decline for the last 50 years this paper doesn’t support your assertion that technology growth has slowed at all.

So citation STILL needed to show that technology growth has slowed and your BS assertion that Tesla is just rehashing old technology is simply that. BS.

Hate him or love him Elon has moved the ball forward in ways GM and other big car manufacturers never did. Taking “boring, previously impractical” things and disrupting an entire industry is innovative.

Folks who don’t understand that simply don’t understand innovation at all. Nobody invents anything while cloth...they stand on the shoulders of the giants before them but add that missing ingredient that turns the “impractical” to change.

All the pieces to build the first powered airplane finally existed in 1903 but until the Wright brothers managed to put them in the right combination you couldn’t fly. They turned what was “tested, boring, previously impractical technology and made it cool... at least for the 5% of the worlds population that can, or would want to” fly.

The wright brothers didn’t invent the internal combustion engine. There was already a biplane glider. They married the two and added their innovation...3-axis control.

Tesla’s story is both similar and different.

https://hbr.org/2020/02/lessons-from-te ... innovation

It’s not just empty marketing as some folks claim. And EV’s wouldn’t be where they are today without Tesla.

Further you can see how Musk has disrupted other industries like space launch. The cost to get something into orbit has dropped dramatically because of SpaceX and to a lesser extent Blue Origin.

Technology advances may or may not be accelerating but there is no indication that it’s slowing down. The fact that you have a significant percentage of the worlds knowledge at your very fingertips anywhere you go with a cell signal is one indication that technological advancements is still progressing well.

So citation still needed.

So unless you want to claim that technology growth has been on the decline for the last 50 years

- Yes, that is correct. For the last 50 years, technological and social growth has been declining. It has actually been negative since the 1970s, only to be inflated into positive growth by increasingly more spurious inflation data.

This decline has been even more severe after 2014, as long as one considers that global investment rates continue to rise while economic growth slows further.

The slowdown in TFP reflects a slowdown in technological progress and a slowdown in other social advances that benefit productivity. China is now the engine of global growth. Their negative TFP growth means not only a decline in total (global) growth, but also a decline in (global) technology growth.

This can be seen everywhere in the world, including Japan, Europe, the US, Latin America, Eastern Europe, Africa, the Middle East, and China, India.

"BS" or deliberately selected descriptive articles do not show that it is not slowing down, any more than twitter or globalization can be described as great progress. Musk's "low cost" comes from the loss of state property under the NASA privatization program that has been planned since 2000, and it was after this program became widely known that he decided to build a private rocket company.

There is the prospect of a sharp decline in global total factor growth rates similar to that of the late 1960s and early 1980s, i.e., the possibility of global Japanization. And the productivity rebound has been talked about many times, most infamously in 2006 before the 2008 global economic crisis, when the Financial Times boasted that people had recaptured the good old days of rapid productivity growth before the 1970s.

[nigel_ht]

So unless you want to claim that technology growth has been on the decline for the last 50 years this paper doesn’t support your assertion that technology growth has slowed at all.

So citation STILL needed to show that technology growth has slowed and your BS assertion that Tesla is just rehashing old technology is simply that. BS.

Hate him or love him Elon has moved the ball forward in ways GM and other big car manufacturers never did. Taking “boring, previously impractical” things and disrupting an entire industry is innovative.

Folks who don’t understand that simply don’t understand innovation at all. Nobody invents anything while cloth...they stand on the shoulders of the giants before them but add that missing ingredient that turns the “impractical” to change.

All the pieces to build the first powered airplane finally existed in 1903 but until the Wright brothers managed to put them in the right combination you couldn’t fly. They turned what was “tested, boring, previously impractical technology and made it cool... at least for the 5% of the worlds population that can, or would want to” fly.

The wright brothers didn’t invent the internal combustion engine. There was already a biplane glider. They married the two and added their innovation...3-axis control.

Tesla’s story is both similar and different.

https://hbr.org/2020/02/lessons-from-te ... innovation

It’s not just empty marketing as some folks claim. And EV’s wouldn’t be where they are today without Tesla.

Further you can see how Musk has disrupted other industries like space launch. The cost to get something into orbit has dropped dramatically because of SpaceX and to a lesser extent Blue Origin.

Technology advances may or may not be accelerating but there is no indication that it’s slowing down. The fact that you have a significant percentage of the worlds knowledge at your very fingertips anywhere you go with a cell signal is one indication that technological advancements is still progressing well.

So citation still needed.

So unless you want to claim that technology growth has been on the decline for the last 50 years

- Yes, that is correct. For the last 50 years, technological and social growth has been declining. It has actually been negative since the 1970s, only to be inflated into positive growth by increasingly more spurious inflation data.
This decline has been even more severe after 2014, as long as one considers that global investment rates continue to rise while economic growth slows further.

The slowdown in TFP reflects a slowdown in technological progress and a slowdown in other social advances that benefit productivity.

The rate of TFP growth may have slowed but productivity is a proxy measurement for technological advancement not a measurement of advancement itself.

“TFP is interpreted in the literature in different, mutually contradictory ways. Changes in TFP are shown to measure not technological change, only the super-normal returns to investing in such change - returns that exceed the full opportunity cost of the activity. Thus, in the limit, technological change can proceed with unchanged TFP.”

https://www.jstor.org/stable/3696125?seq=1

” Richard G. Lipsey of Simon Fraser University and Kenneth Carlaw of the University of Canterbury in New Zealand provide a trenchant critique of the concept of total factor productivity. They conclude that "the degree of confusion surrounding TFP, particularly the assumption that low TFP numbers imply a low degree of technological dynamism, would seem to us to justify dropping the measure completely from all discussions of long term economic growth".

https://www.researchgate.net/publicatio ... ty_Measure

Robert Gordon wrote a book (which I’m now reading on Kindle because I’m a history geek) and reviewers note:

“Throughout the first two parts of the book, Gordon repeatedly explains why it is not possible to evaluate the impact of inventions through the GDP and price statistics, and therefore through the total factor productivity figures based on them...”

http://www.enlightenmenteconomics.com/b ... an-growth/

Even though he spends the last 100 pages doing just this to claim that innovation growth is declining...

TFP is also fundamentally flawed as a measure because it’s based on GDP:


“Gross domestic product (GDP) is increasingly a poor measure of prosperity. It is not even a reliable gauge of production”
...
“It is not just that many new services are now given away free; so are some that used to be paid for, such as long-distance phone calls. Some physical products have become digital services, the value of which is harder to track. It seems likely, for instance, that more recorded music is being listened to than ever before, but music-industry revenue has shrunk by a third from its peak. Consumers once bought newspapers and maps. They paid middlemen to book them holidays. Now they do much more themselves, an effort which doesn’t show up in GDP. As commerce goes online, less is spent on bricks-and-mortar shops, which again means less GDP. Just as rebuilding after an earthquake (which boosts GDP) does not make people wealthier than they were before, building fewer shops does not make them poorer.”

https://www.economist.com/briefing/2016 ... e-with-gdp

China is now the engine of global growth. Their negative TFP growth means not only a decline in total (global) growth, but also a decline in (global) technology growth.

China had massive productivity growth because prior to 1980s it was mostly agrarian and used inefficient centralized economic planning and state run factories.

The TFP growth was abnormally high because they were able to import western technology and more efficiently use their massive population. That rate of growth was unsustainable over time AND the improvement on quality of life as incomes rise (ie lowering productivity) over time has a negative GDP growth impact.

Again TFP is not itself a measure to technology growth/innovation any more than volatility is a measure of risk.

Volatility is used as a proxy for risk because risk itself is difficult to quantify and volatility is easy. TFP is easy to measure but no more accurate a proxy than volatility despite widespread use of both in economics and the financial industry.

"BS" or deliberately selected descriptive articles do not show that it is not slowing down, any more than twitter or globalization can be described as great progress. Musk's "low cost" comes from the loss of state property under the NASA privatization program that has been planned since 2000, and it was after this program became widely known that he decided to build a private rocket company.

Lol. First, “state property” was not “lost” because the intent of NASA developed technology has always been intended to be transferred to private industry. Claiming that SpaceX is the product of “loss of state property” is like claiming that Teflon or Velcro products today is due to “loss of state property”.

The way he builds rockets is different. There is large process innovation in what SpaceX does with the same core technology available to ULA and other traditional NASA contractors.

So don’t talk about stuff you don’t understand and expect folks to blindly agree and not call you out on it. Those of us in the industry are hugely excited because lowering cost to orbit has always been known to be THE key enabler for new innovations in space. That my personal 401K could get a 200 kg payload into Sun Synchronous Orbit is a massive game changer.

That you don’t think so is totally immaterial. Elon Musk is the Thomas Edison of our generation...and he follows Edison’s playbook pretty well.

Look at TSLA and this passage:

“Edison's method was to invent systems rather than components of systems. Edison did not just invent a light bulb, he invented an economically viable system of lighting including its generators, cables, metering and so on.”

https://en.m.wikipedia.org/wiki/Edisonian_approach

TSLA didn’t just build an electric car but developed a support system of charging stations, invested in fast charging technology, and created a sales infrastructure that pisses off car dealers...an economically viable system.

The valuation for TSLA may be higher than I would buy today but they significantly moved the EV ball forward.

And Edison was more than a bit of a grandstander in his day too. So was Nikola Tesla for that matter.

[retiringwhen]

And Edison was more than a bit of a grandstander in his day too. So was Nikola Tesla for that matter.

The story of how and why Edison invented the Electric Chair is more shocking and ridiculous than anything Musk has done.

BTW, I agree Musk is a truly a once in a century kind of guy and I also expect his Tesla venture will be the footnote in the history books with all the focus on SpaceX. SpaceX has and continues to completely re-write the play book for the space business in a way that none of the intrenched players or billionaire playboys have even thought through, let alone tried.

[dsasdg]

So unless you want to claim that technology growth has been on the decline for the last 50 years this paper doesn’t support your assertion that technology growth has slowed at all.

So citation STILL needed to show that technology growth has slowed and your BS assertion that Tesla is just rehashing old technology is simply that. BS.

Hate him or love him Elon has moved the ball forward in ways GM and other big car manufacturers never did. Taking “boring, previously impractical” things and disrupting an entire industry is innovative.

Folks who don’t understand that simply don’t understand innovation at all. Nobody invents anything while cloth...they stand on the shoulders of the giants before them but add that missing ingredient that turns the “impractical” to change.

All the pieces to build the first powered airplane finally existed in 1903 but until the Wright brothers managed to put them in the right combination you couldn’t fly. They turned what was “tested, boring, previously impractical technology and made it cool... at least for the 5% of the worlds population that can, or would want to” fly.

The wright brothers didn’t invent the internal combustion engine. There was already a biplane glider. They married the two and added their innovation...3-axis control.

Tesla’s story is both similar and different.

https://hbr.org/2020/02/lessons-from-te ... innovation

It’s not just empty marketing as some folks claim. And EV’s wouldn’t be where they are today without Tesla.

Further you can see how Musk has disrupted other industries like space launch. The cost to get something into orbit has dropped dramatically because of SpaceX and to a lesser extent Blue Origin.

Technology advances may or may not be accelerating but there is no indication that it’s slowing down. The fact that you have a significant percentage of the worlds knowledge at your very fingertips anywhere you go with a cell signal is one indication that technological advancements is still progressing well.

So citation still needed.

So unless you want to claim that technology growth has been on the decline for the last 50 years

- Yes, that is correct. For the last 50 years, technological and social growth has been declining. It has actually been negative since the 1970s, only to be inflated into positive growth by increasingly more spurious inflation data.
This decline has been even more severe after 2014, as long as one considers that global investment rates continue to rise while economic growth slows further.

The slowdown in TFP reflects a slowdown in technological progress and a slowdown in other social advances that benefit productivity.

The rate of TFP growth may have slowed but productivity is a proxy measurement for technological advancement not a measurement of advancement itself.

“TFP is interpreted in the literature in different, mutually contradictory ways. Changes in TFP are shown to measure not technological change, only the super-normal returns to investing in such change - returns that exceed the full opportunity cost of the activity. Thus, in the limit, technological change can proceed with unchanged TFP.”

https://www.jstor.org/stable/3696125?seq=1

” Richard G. Lipsey of Simon Fraser University and Kenneth Carlaw of the University of Canterbury in New Zealand provide a trenchant critique of the concept of total factor productivity. They conclude that "the degree of confusion surrounding TFP, particularly the assumption that low TFP numbers imply a low degree of technological dynamism, would seem to us to justify dropping the measure completely from all discussions of long term economic growth".

https://www.researchgate.net/publicatio ... ty_Measure

Robert Gordon wrote a book (which I’m now reading on Kindle because I’m a history geek) and reviewers note:

“Throughout the first two parts of the book, Gordon repeatedly explains why it is not possible to evaluate the impact of inventions through the GDP and price statistics, and therefore through the total factor productivity figures based on them...”

http://www.enlightenmenteconomics.com/b ... an-growth/

Even though he spends the last 100 pages doing just this to claim that innovation growth is declining...

TFP is also fundamentally flawed as a measure because it’s based on GDP:


“Gross domestic product (GDP) is increasingly a poor measure of prosperity. It is not even a reliable gauge of production”
...
“It is not just that many new services are now given away free; so are some that used to be paid for, such as long-distance phone calls. Some physical products have become digital services, the value of which is harder to track. It seems likely, for instance, that more recorded music is being listened to than ever before, but music-industry revenue has shrunk by a third from its peak. Consumers once bought newspapers and maps. They paid middlemen to book them holidays. Now they do much more themselves, an effort which doesn’t show up in GDP. As commerce goes online, less is spent on bricks-and-mortar shops, which again means less GDP. Just as rebuilding after an earthquake (which boosts GDP) does not make people wealthier than they were before, building fewer shops does not make them poorer.”

https://www.economist.com/briefing/2016 ... e-with-gdp

China is now the engine of global growth. Their negative TFP growth means not only a decline in total (global) growth, but also a decline in (global) technology growth.

China had massive productivity growth because prior to 1980s it was mostly agrarian and used inefficient centralized economic planning and state run factories.

The TFP growth was abnormally high because they were able to import western technology and more efficiently use their massive population. That rate of growth was unsustainable over time AND the improvement on quality of life as incomes rise (ie lowering productivity) over time has a negative GDP growth impact.

Again TFP is not itself a measure to technology growth/innovation any more than volatility is a measure of risk.

Volatility is used as a proxy for risk because risk itself is difficult to quantify and volatility is easy. TFP is easy to measure but no more accurate a proxy than volatility despite widespread use of both in economics and the financial industry.

"BS" or deliberately selected descriptive articles do not show that it is not slowing down, any more than twitter or globalization can be described as great progress. Musk's "low cost" comes from the loss of state property under the NASA privatization program that has been planned since 2000, and it was after this program became widely known that he decided to build a private rocket company.

Lol. First, “state property” was not “lost” because the intent of NASA developed technology has always been intended to be transferred to private industry. Claiming that SpaceX is the product of “loss of state property” is like claiming that Teflon or Velcro products today is due to “loss of state property”.

The way he builds rockets is different. There is large process innovation in what SpaceX does with the same core technology available to ULA and other traditional NASA contractors.

So don’t talk about stuff you don’t understand and expect folks to blindly agree and not call you out on it. Those of us in the industry are hugely excited because lowering cost to orbit has always been known to be THE key enabler for new innovations in space. That my personal 401K could get a 200 kg payload into Sun Synchronous Orbit is a massive game changer.

That you don’t think so is totally immaterial. Elon Musk is the Thomas Edison of our generation...and he follows Edison’s playbook pretty well.

Look at TSLA and this passage:

“Edison's method was to invent systems rather than components of systems. Edison did not just invent a light bulb, he invented an economically viable system of lighting including its generators, cables, metering and so on.”

https://en.m.wikipedia.org/wiki/Edisonian_approach

TSLA didn’t just build an electric car but developed a support system of charging stations, invested in fast charging technology, and created a sales infrastructure that pisses off car dealers...an economically viable system.

The valuation for TSLA may be higher than I would buy today but they significantly moved the EV ball forward.

And Edison was more than a bit of a grandstander in his day too. So was Nikola Tesla for that matter.

Teflon or Velcro products today is due to “loss of state property”.

- Yes, government always collect taxes from labour and pay for private capital in this way.

But the space x case is even worse. It benefits from public money in many other ways.

In addition to total factor productivity, the slowdown in technological progress can be illustrated by the decline in the number of patents/research funding to personnel input ratio.

The emphasis on the increase in consumer surplus due to free services brought by the Internet does not take into account the corresponding monetization process/deepening monopolies that make people pay for previously free services, nor the decrease in consumer surplus due to price increases, nor the fact that free Internet services crowd out consumer surplus from other free services (e.g., low-cost social activities irl), which is another way of masking what I call a long-term decline.

Total factor productivity is certainly not just an indicator of technological progress, as it also includes other factors to improve productivity, and its measurement has been improved, just as people begin to emphasize skewness.

[nigel_ht]

Teflon or Velcro products today is due to “loss of state property”.

- Yes, government always collect taxes from labour and pay for private capital in this way.

But the space x case is even worse. It benefits from public money in many other ways.

In addition to total factor productivity, the slowdown in technological progress can be illustrated by the decline in the number of patents/research funding to personnel input ratio.

https://www.aalbun.com/blog/increase-in-patents

Patents applied vs granted (though 2010)



https://www.researchgate.net/publicatio ... gures?lo=1

Uh huh. That we are graduating more folks doesn't mean that the technological itself progress is slowing unless you think hockey stick patent growth is "slowing".

And that's completely ignoring that much of the innovation today is in software which is still predominantly protected by copyright rather than patents.

Nice try. Well, no. Not really.

Interestingly enough, Peter Turchin has a hypothesis that there is a mathematical model for the growth and decline of human societies and that we generating too many elites...not just financial ones but also educational. That we are graduating far more physics (and other) PhDs than society can use is an indicator for rough waters ahead. His thesis is that this elite overproduction inevitably leads to a counter elite movement driven by elites that could not get a position in the hierarchy. It's a interesting take but there are, of course, folks who disagree with him. Still, when you publicly make a prediction in Nature and it comes true, folks notice.

https://www.theatlantic.com/magazine/ar ... re/616993/

https://www.forbes.com/sites/johnmauldi ... 20e53168b5

https://www.livescience.com/22109-cycle ... -2020.html

I've been thinking about how that might be actionable and the only thing I can come up with is increasing my GLDM and VXUS allocations as a hedge. Nothing outlandish...just going 20% VXUS and 10% GLDM.

However, to reiterate, that we are generating more researchers today than ever before is not an indicator that the rate of technological change has slowed.

The emphasis on the increase in consumer surplus due to free services brought by the Internet does not take into account the corresponding monetization process/deepening monopolies that make people pay for previously free services, nor the decrease in consumer surplus due to price increases, nor the fact that free Internet services crowd out consumer surplus from other free services (e.g., low-cost social activities irl), which is another way of masking what I call a long-term decline.

Total factor productivity is certainly not just an indicator of technological progress, as it also includes other factors to improve productivity, and its measurement has been improved, just as people begin to emphasize skewness.

Again, TFP isn't a measure of technological progress any more than volatility is a measure of risk and deeply flawed because of the fundamental dependence on GDP.

That I can find these references, read them and respond to your post from my phone while riding in a car (or last night, laying in bed) for "free" (ignoring my cell phone bill) is ancedotal evidence that not all of the advances in technology is captured in something like TFP or GDP and that a large part of your tirade above is based on personal bias and not on objective analysis of the underlying data. That you would attempt to obfuscate the massive increase in patent applications by hiding it as a ratio is...absurdly humorous.

[dsasdg]

Teflon or Velcro products today is due to “loss of state property”.

- Yes, government always collect taxes from labour and pay for private capital in this way.

But the space x case is even worse. It benefits from public money in many other ways.

In addition to total factor productivity, the slowdown in technological progress can be illustrated by the decline in the number of patents/research funding to personnel input ratio.

https://www.aalbun.com/blog/increase-in-patents

Patents applied vs granted (though 2010)



https://www.researchgate.net/publicatio ... gures?lo=1

Uh huh. That we are graduating more folks doesn't mean that the technological itself progress is slowing unless you think hockey stick patent growth is "slowing".

And that's completely ignoring that much of the innovation today is in software which is still predominantly protected by copyright rather than patents.

Nice try. Well, no. Not really.

Interestingly enough, Peter Turchin has a hypothesis that there is a mathematical model for the growth and decline of human societies and that we generating too many elites...not just financial ones but also educational. That we are graduating far more physics (and other) PhDs than society can use is an indicator for rough waters ahead. His thesis is that this elite overproduction inevitably leads to a counter elite movement driven by elites that could not get a position in the hierarchy. It's a interesting take but there are, of course, folks who disagree with him. Still, when you publicly make a prediction in Nature and it comes true, folks notice.

https://www.theatlantic.com/magazine/ar ... re/616993/

https://www.forbes.com/sites/johnmauldi ... 20e53168b5

https://www.livescience.com/22109-cycle ... -2020.html

I've been thinking about how that might be actionable and the only thing I can come up with is increasing my GLDM and VXUS allocations as a hedge. Nothing outlandish...just going 20% VXUS and 10% GLDM.

However, to reiterate, that we are generating more researchers today than ever before is not an indicator that the rate of technological change has slowed.

The emphasis on the increase in consumer surplus due to free services brought by the Internet does not take into account the corresponding monetization process/deepening monopolies that make people pay for previously free services, nor the decrease in consumer surplus due to price increases, nor the fact that free Internet services crowd out consumer surplus from other free services (e.g., low-cost social activities irl), which is another way of masking what I call a long-term decline.

Total factor productivity is certainly not just an indicator of technological progress, as it also includes other factors to improve productivity, and its measurement has been improved, just as people begin to emphasize skewness.

Again, TFP isn't a measure of technological progress any more than volatility is a measure of risk and deeply flawed because of the fundamental dependence on GDP.

That I can find these references, read them and respond to your post from my phone while riding in a car (or last night, laying in bed) for "free" (ignoring my cell phone bill) is ancedotal evidence that not all of the advances in technology is captured in something like TFP or GDP and that a large part of your tirade above is based on personal bias and not on objective analysis of the underlying data. That you would attempt to obfuscate the massive increase in patent applications by hiding it as a ratio is...absurdly humorous.

Likewise, the argument about patents ignores the portion of technological improvements that were originally more unpatented that later became incorporated into the improvements of the patent system, and the decline in the marginal effect of a single patent now, so that the decline in productivity of the R&D component is more pronounced than I originally pointed out.

It is the efficiency of production, not the volume of production, that matters, because the latter can be obtained by piling up capital/manpower.

The existence of free services is even more unfavorable to the assumption of productivity growth, because economic development has mainly allowed more social activities that are not involved in economic activity to become counted in production, such as many "free" services that are actually part of the production of advertising services, while the social activities they replace were really not counted in GDP.

GDP is greatly inflated by underestimated inflation and the inclusion of activities that would otherwise not be included in GDP, rather than underestimating productivity growth rates. Based on this correction, it is just right to conclude that productivity is not even stagnating, but is already declining.

“More and more people get rich”

No, fewer and fewer people are getting rich because productivity is declining, inequality is rising, and social mobility is declining.

A major slowdown is unlikely to occur in the 2020s, but there is a real possibility of a further productivity recession starting in the 2030s similar to that of the 1970s.

[JoMoney]

At what aspect of Marxism are index funds worse? If one has a negative view of Marxism, could being bad at it be a positive thing

[nigel_ht]

And Edison was more than a bit of a grandstander in his day too. So was Nikola Tesla for that matter.

The story of how and why Edison invented the Electric Chair is more shocking and ridiculous than anything Musk has done.

BTW, I agree Musk is a truly a once in a century kind of guy and I also expect his Tesla venture will be the footnote in the history books with all the focus on SpaceX. SpaceX has and continues to completely re-write the play book for the space business in a way that none of the intrenched players or billionaire playboys have even thought through, let alone tried.

Yep, totally agree. As Elon himself put it in 2006:

"My day job is running a space transportation company called SpaceX, but on the side I am the chairman of Tesla Motors"

Interestingly his master plan, seen 15 years later, seems to be on track:

"the master plan is:
Build sports car
Use that money to build an affordable car
Use that money to build an even more affordable car
While doing above, also provide zero emission electric power generation options"

https://www.tesla.com/blog/secret-tesla ... you-and-me

Then 10 years later:

"Create stunning solar roofs with seamlessly integrated battery storage
Expand the electric vehicle product line to address all major segments
Develop a self-driving capability that is 10X safer than manual via massive fleet learning
Enable your car to make money for you when you aren't using it"

I do like this line:

"As of 2016, the number of American car companies that haven't gone bankrupt is a grand total of two: Ford and Tesla. Starting a car company is idiotic and an electric car company is idiocy squared."

https://www.tesla.com/blog/master-plan-part-deux

But yeah, SpaceX is where his focus is and where the real innovation is occurring. Raptor (his methane engine) is different than other main engine designs using full flow staged combustion and they've been kicking it around since at least 2009. It can lead to an order of magnitude increase in chamber pressure and that's killer.

This stuff is what space geeks have been waiting for since the 70s. Back in the 90s I worked on LM's SSTO RLV...yes, I still have the t-shirt. That used a linear aerospace engine. The engine was looking promising but the tank delamination and politics killed us.

If anyone is skating to where the puck is going rather than where it is these days its Elon and crew.

And in other news, another 60 Starlink birds launched 2 days ago on a Falcon 9 (for a total of 1445...40 thousand-ish to go). Turn around time on the launch vehicles used was 27 days and 8 hours. The 2nd fastest for SpaceX so far...

[daniel2000]

More humorous take on the productivity debate:
US big mac's per average wage has decreased from 46 in 2002 to 32 in 2018.
https://knoema.com/infographics/dybnzpe ... d%20States