An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
Pages
▼
Pages
▼
Tuesday, July 28, 2009
We're growing again!
A good indicator of growth is tax receipts to the Treasury. Average daily tax receipts for July are now above June. We're growing again! Buy stocks!!!
No society can exist without the real assets--the goods and services--that define our standard of living. Flipping paper contracts or accumulating real estate neither creates nor contributes to the real assets that the society needs, however, it siphons off otherwise smart and talented people that could be working to produce technology, medical services, new forms of energy, vehicles, structures, educational services, et.
Buying stocks and holding them for the long or short run is speculative. Its identical to the oil future investment you and Mike criticized in his previous post.
Its completely incoherent to advocate one behavior while criticizing the other. My recommendation - consistently advocate the right of free people to invest their money however they like, and stop the ridiculous hand wringing.
Public equity markets function in the role of capital formation through the dissemination of ownership. It's entirely different than commodity speculation. Moreover, securities markets are not finite, as commodities are. You need more stock? You issue it. Simple. There can always be more ownership. With materials you can't do that. At some point it's all spoken for. Seriously, you don't see that distinction??
I would rephrase your first sentence something like this: "Buying stocks and holding them for the long or short run is AN INVESTMENT. Its (NOT) identical to the oil future SPECULATION you and Mike criticized in his previous post." From my point of view.
I dont advocate needless Govt meddling either (CAP & TRADE? ugh! Income taxes? ugh!, etc..). But market regulation is required to maintain the order of REAL commerce and broader US interests.
Ill assume you are reasonable too, but next time you run into a radical "free market" type of person (Kudlow on CNBC comes to mind) Run this by them for instance; all you hear this week is how China has combined $2.2T of USD reserves and US Govt securities, etc. Take a look at this Reuters article here from last fall when the commodity volatility was wreaking havoc. If it is accurate, it implies a "farm gate" value of the COMBINED US annual wheat, corn and soybean crops at most $100B. What if China came over here and bought up the entire US ag crop for 5% or less of its USD holdings, took delivery and shipped it to the nearest port and took it out to sea and dumped it? Do you think we all would survive until next year with no food? We would all be dead, yes, but at least we would have "free markets"! LOL.
Company A is valued at $5 million. You own all 1000 shares.
If you divided those shares into 1000 additional ownership units and the value of the company remains unchanged, your shares are worth half as much. The consequence of some new issuance of paper stock under the same circumstances would be identical.
Inflation works in the same way. You can continue issuing paper money or stock shares until you run out of paper, or just wait until you've successfully drive the effective value of any new issuance to 0.
The speculator in a commodities market desires the same thing as a NYSE share holder - to earn a profit from holding their respective equities. There is no substantive difference between the two.
If its a non-consuming speculator, then all the better. They don't plan to "use" the oil anyway. They buy the equity, the value moves up or down, they eventually divest themselves of that ownership stake. What have we to fear from that?
---
I suppose its possible that the Chinese government might attempt to purchase all of the united states domestic food stuffs, but supply and demand would make that a painful operation. The present value of those food stuffs is based on the existing market equilibrium.
If the Red Chinese have decided to starve us all to death, and now intend to buy all US food stuff what would happen? Demand would increase dramatically, assuming supply is fixed, the price of everything skyrockets! The more the chinese purchase, the dearer the remanning supply becomes - and the higher its value. Thank God for free markets!
If earnings per share are growing faster than the issuance of new shares your wealth has increased. Many companies issue stock splits, where you get 2 for 1 and investors end up making far more. The point is, by increasing issuance teh company can get more capital and when combined with other capital, like labor and resources greater output and real wealth is achieved. The rise in the price of a commodity is not the creation of real wealth, nothing new in terms of added value has been created.
A stock split increases or decreases the number of shares in a public company. But the price is adjusted such that the before and after market capitalization of the company remains the same - dilution does not occur. This is not a new issuance of stock.
If the value of the company increases, the value of each individual share is increased relatively.
Thats not at all inconsistent with what i outlined before.
Your correct, this is not "wealth creation". Wealth creation generally relates to innovation (gains from trade, technological improvement, specialization). Productivity gains increase our productive capacity, while reducing capital costs (the investment of time, resources).
The price increase in a particular firms stock reflects increased demand.
The individual that owns the shares is wealthier on paper, but the value of the shares could drop at any time (balance sheet gains and losses). But i digress.
The fact remains - equities of either sort, purchased and sold for the purpose of profit represent the same sort of speculation. This speculative behavior helps generate the price signals necessary for market coordination.
To you it represents speculation because you have a myopic focus on the price. However, the purchase of stock by an investor represents a share in the ownership of a firm that endeavors to create business profits (which goes to pay wages, salaries and for ongoing investment that leads to the growh in savings, etc) as a result of organizing capital and resources and applying technology in such a way so as to produce a useful finished good or service.
In contrast, the act of buying a commodity with the sole intent of selling it out at a higher price constitutes speculation.
The NYSE is a secondary market. Purchases made on the NYSE don't represent direct investment. Unless we're talking about Primary Issuance (IPOs...), most of us purchase stocks on the secondary market.
If you own mutual funds, you may not even know which companies stock you own. You suggested it was time to buy stocks - which stocks did you mean.
The act of buying a STOCK with the sole intent of selling it out at a higher price constitutes speculation. And thats just fine with me. Again, all investment is speculation.
Buying stocks is speculative.
ReplyDeleteYou cant eat a stock.
ReplyDeleteMike Norman said...
ReplyDeleteNo society can exist without the real assets--the goods and services--that define our standard of living. Flipping paper contracts or accumulating real estate neither creates nor contributes to the real assets that the society needs, however, it siphons off otherwise smart and talented people that could be working to produce technology, medical services, new forms of energy, vehicles, structures, educational services, et.
Buying stocks and holding them for the long or short run is speculative. Its identical to the oil future investment you and Mike criticized in his previous post.
Its completely incoherent to advocate one behavior while criticizing the other. My recommendation - consistently advocate the right of free people to invest their money however they like, and stop the ridiculous hand wringing.
Public equity markets function in the role of capital formation through the dissemination of ownership. It's entirely different than commodity speculation. Moreover, securities markets are not finite, as commodities are. You need more stock? You issue it. Simple. There can always be more ownership. With materials you can't do that. At some point it's all spoken for. Seriously, you don't see that distinction??
ReplyDeleteAnthony,
ReplyDeleteI would rephrase your first sentence something like this: "Buying stocks and holding them for the long or short run is AN INVESTMENT. Its (NOT) identical to the oil future SPECULATION you and Mike criticized in his previous post." From my point of view.
I dont advocate needless Govt meddling either (CAP & TRADE? ugh! Income taxes? ugh!, etc..). But market regulation is required to maintain the order of REAL commerce and broader US interests.
Ill assume you are reasonable too, but next time you run into a radical "free market" type of person (Kudlow on CNBC comes to mind) Run this by them for instance; all you hear this week is how China has combined $2.2T of USD reserves and US Govt securities, etc. Take a look at this Reuters article here from last fall when the commodity volatility was wreaking havoc. If it is accurate, it implies a "farm gate" value of the COMBINED US annual wheat, corn and soybean crops at most $100B. What if China came over here and bought up the entire US ag crop for 5% or less of its USD holdings, took delivery and shipped it to the nearest port and took it out to sea and dumped it? Do you think we all would survive until next year with no food? We would all be dead, yes, but at least we would have "free markets"! LOL.
Resp,
A thought experiment:
ReplyDeleteCompany A is valued at $5 million.
You own all 1000 shares.
If you divided those shares into 1000 additional ownership units and the value of the company remains unchanged, your shares are worth half as much. The consequence of some new issuance of paper stock under the same circumstances would be identical.
Inflation works in the same way. You can continue issuing paper money or stock shares until you run out of paper, or just wait until you've successfully drive the effective value of any new issuance to 0.
The speculator in a commodities market desires the same thing as a NYSE share holder - to earn a profit from holding their respective equities. There is no substantive difference between the two.
If its a non-consuming speculator, then all the better. They don't plan to "use" the oil anyway. They buy the equity, the value moves up or down, they eventually divest themselves of that ownership stake. What have we to fear from that?
---
I suppose its possible that the Chinese government might attempt to purchase all of the united states domestic food stuffs, but supply and demand would make that a painful operation. The present value of those food stuffs is based on the existing market equilibrium.
If the Red Chinese have decided to starve us all to death, and now intend to buy all US food stuff what would happen? Demand would increase dramatically, assuming supply is fixed, the price of everything skyrockets! The more the chinese purchase, the dearer the remanning supply becomes - and the higher its value. Thank God for free markets!
If earnings per share are growing faster than the issuance of new shares your wealth has increased. Many companies issue stock splits, where you get 2 for 1 and investors end up making far more. The point is, by increasing issuance teh company can get more capital and when combined with other capital, like labor and resources greater output and real wealth is achieved. The rise in the price of a commodity is not the creation of real wealth, nothing new in terms of added value has been created.
ReplyDeleteA stock split increases or decreases the number of shares in a public company. But the price is adjusted such that the before and after market capitalization of the company remains the same - dilution does not occur. This is not a new issuance of stock.
ReplyDeleteIf the value of the company increases, the value of each individual share is increased relatively.
Thats not at all inconsistent with what i outlined before.
Your correct, this is not "wealth creation". Wealth creation generally relates to innovation (gains from trade, technological improvement, specialization). Productivity gains increase our productive capacity, while reducing capital costs (the investment of time, resources).
The price increase in a particular firms stock reflects increased demand.
The individual that owns the shares is wealthier on paper, but the value of the shares could drop at any time (balance sheet gains and losses). But i digress.
The fact remains - equities of either sort, purchased and sold for the purpose of profit represent the same sort of speculation. This speculative behavior helps generate the price signals necessary for market coordination.
To you it represents speculation because you have a myopic focus on the price. However, the purchase of stock by an investor represents a share in the ownership of a firm that endeavors to create business profits (which goes to pay wages, salaries and for ongoing investment that leads to the growh in savings, etc) as a result of organizing capital and resources and applying technology in such a way so as to produce a useful finished good or service.
ReplyDeleteIn contrast, the act of buying a commodity with the sole intent of selling it out at a higher price constitutes speculation.
The NYSE is a secondary market. Purchases made on the NYSE don't represent direct investment. Unless we're talking about Primary Issuance (IPOs...), most of us purchase stocks on the secondary market.
ReplyDeleteIf you own mutual funds, you may not even know which companies stock you own. You suggested it was time to buy stocks - which stocks did you mean.
The act of buying a STOCK with the sole intent of selling it out at a higher price constitutes speculation. And thats just fine with me. Again, all investment is speculation.
Mike, kmeleanthony:
ReplyDeleteI understand both points of view, and I thank both of you for the education.
Excellent discussion!