I don't know about "ruining."
The fact that the market-cap weighting of the S&P 500 forces the ETFs based on the index e.g. the Vanguard (VOO) and the SPY to buy more and more, say, Nvidia, seems truly wonderful.
From John Authers at Bloomberg Opinion, November 28:
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Global capitalism is beset with problems, but a lack of liquidity is not one of them. More money flows through an ever bigger pool of investments each day. The Global Financial Crisis of 2008 was barely even a speed bump. Twelve years later, Covid-19 did stem financial market activity for a while, but that is also now a thing of the past.
If money is being put to work anywhere it has to come to rest somewhere. Abundant ready funds, buoyed by increasingly lenient central banks, have propelled global stocks to one of their best years on record, enriching investors in the process. It’s fueled what looks like a bubble in the big US artificial intelligence companies, and the rising tide of short-term funding has lifted boats beyond the US even more — European, Japanese, and emerging-markets equities have all outpaced the S&P 500 so far this year.
The raw numbers of the most liquid markets are breathtaking. The Bank for International Settlements recently published its latest three-yearly survey of trading in foreign exchange and interest rate derivatives — which are vital in keeping financial markets moving. Trade in interest rate derivatives this year is averaging $7.9 trillion per day. ‘Twas not ever thus. In 1998, when the BIS did its first triennial survey, it was $265 billion.
Trading in currencies is $9.6 trillion per day — roughly double Germany’s gross domestic product, or all that it produces in a year. Despite all the talk of the retreat of globalization and the decline of trade, this is triple the FX volume that the BIS recorded in the spring of 2007, on the eve of the GFC.
This would appear to be one area where global capitalism continues robust and defiant, where there is no need to worry. But that might be wrong. The financialization of the global economy may, critics now allege, have swamped the role of judgment. Far from surfing on the waves, efficient capital allocation may be drowning in liquidity. And that might explain why a deregulated and ever more confident financial economy is coexisting with a real economy that many find intolerable.
Liquidity, Judgment and Friedrich Hayek
The nub of the argument against liquid markets was made forcefully by the Columbia University economist Amar Bhide in his book A Call for Judgment. Counterintuitively, he argues that Friedrich Hayek, the great apostle of free-market economics, would have been totally opposed to the form modern markets have taken.
Hayek argued passionately against centralized planning, saying that markets were far better suited to capturing the local information necessary to decide how best capital could be deployed. They were the natural way to synthesize knowledge and arrive at the best available outcome.
The problem, Bhide says, is that the act of financialization — taking an underlying financial agreement like a mortgage, bundling it with others and imposing standards so that it can be traded on financial markets — requires crude and arbitrary judgments no subtler than would have been made by a communist planner.
Once indexes and standardized contracts are available, then they can be traded on a top-down basis by algorithms. “A new form of centralized control has taken root,” Bhide argued. “One that is the work not of old-fashioned autocrats, committees, or rule books but of statistical models and algorithms.”
His argument, which seems ever more pertinent, is that the jobs of bankers had been industrialized, excluding any role for personal judgment, or for individuals and institutions to build up the mutual trust that was the backbone of the laissez-faire era when J.P. Morgan and others were building their fortunes.
Such a judgment is an almost diametric reversal of the approach of the last two generations, as Western capitalism has spread through what became known as financialization. Financial engineering has created a baffling array of products making any number of formerly illiquid assets — from mortgages through infrastructure projects to reinsurance contracts to foodstuffs — into instruments that can be traded in fast-flowing markets....
....MUCH MORE
