4 ms·
How can everything go down at once, doesn't the money have to go somewhere? Best hypotheses so far along with how to test them: 1. Perhaps the parts of the CP
by whatshisface 4y ago
How can everything go down at once, doesn't the money have to go somewhere?
Best hypotheses so far along with how to test them:
1. Perhaps the parts of the CPI that companies in the stock market can produce are being outpaced by the components that are not produced, like real estate, and so can't contribute to an increase in share prices. (How to check: Look up changes in the CPI components, which are detailed in the reports.) (Edit: This does not hold up, almost all the increases are in energy, which is produced and held in reserve by public companies.)
2. Perhaps the consumer goods in the CPI are increasing in price far more rapidly than prices of goods and services overall, leading to an underestimate of the value of the dollar to anyone except a consumer. (How to check: Since capital goods are eventually used to make consumer goods, this should eventually correct itself. Also, is there a broader version of the CPI?) (Edit: This might be it, although energy is 8% of the CPI and GDP, it is only 4% of the S&P 500.)
3. Perhaps money is leaving the USD, US bonds, and US stocks and going somewhere else. (How to check: Make these same charts but with broader indices.)
- compumike 4y agoMoney (cash) is not wealth. Wealth can be created, or destroyed. The clearest explanation I've read for this was a PG essay: http://www.paulgraham.com/wealth.html http://www.paulgraham.com/wealth.html specifically the "Money Is Not Wealth", "The Pie Fallacy", and "Craftsmen" sections. Of course this essay has a positive/optimistic take on it, but certainly wealth can be destroyed as well.
- whatshisface 4y agoThat's true, but I am not aware of any wealth indices, only price indices, and price indices can only increase and decrease relative to each other.
- JumpCrisscross 4y ago> I am not aware of any wealth indices Term you’re looking for is “benchmark.”
- jagtesh 4y agoShort unambiguous answer is yes. However, the destination doesn’t have to be limited to stock/bond markets. Think property, gold or toilet paper rolls. Last one is a joke. It’s hard to accurately measure investments flowing into property (what part of the world?). There are many variables to consider and I don’t think there’s a single trend that will end up as a winner. My hypothesis is that we will see many (eg. very wealthy doing X in Y country/city, middle class doing A in B country/city, etc).
- whatshisface 4y ago>Think property, gold or toilet paper rolls. Last one is a joke. Since corporations produce commodities, wouldn't gold and toilet paper be on the stock market? I guess gold reserves (as opposed to production) and property would have a lot of ownership outside the S&P 500. I wonder if there are any super-broad indices that include them in a cap-weighted form.
- echelon 4y agoThe stock prices capture sentiment. The price people are willing to pay given all the other places their money could go. People are selling in anticipation of the market going lower, to cover debts, to take advantage of lower asset prices, opportunity costs, margin calls, etc.
- whatshisface 4y agoWhen they sell they're wanting money, an equal amount of money to the stock they're selling. That should make the dollar go up by the amount the stock went down. (I don't really believe this, because it clearly does not describe the chart, but it makes sense and I want to understand why it doesn't work like that.)
- mrkstu 4y agoBecause money is a notational bookkeeping exercise at this point in time and has been since the dollar went off the gold standard. It can't be affected by demand for things as small as stocks, but only its relative demand to other notational currencies.
- whatshisface 4y agoThe total US stock market cap is $45T[1] and M2 is $20T[2]. Are you sure currency prices can't be influenced by the stock market? [1] https://www.statista.com/statistics/1277195/nyse-nasdaq-comparison-market-capitalization-listed-companies/ https://www.statista.com/statistics/1277195/nyse-nasdaq-comp... [2] https://www.federalreserve.gov/releases/h6/current/default.htm https://www.federalreserve.gov/releases/h6/current/default.h...
- mrkstu 4y agoI think that just furthers the point- there isn't enough 'money' in M2 to 'pay' for all the stocks in the stock market. Yet there that value sits and real estate is another 20+ trillion in land value. In other words the actual 'money' is a transactional grease for the wheels of commerce- notational/bookkeeping mechanism. The sale of Apple (the largest value stock in America) as a whole probably couldn't be accomplished in cash only, but even if it was, it'd be mostly notational numbers in an account somewhere and wouldn't 'flood the market' with dollars and crash the value of the currency.
- Symmetry 4y agoAndrew and Barney are shipwrecked on an island with nothing but their clothes, the cash in their wallets, and a book Andrew has. Barney pays Andrew $100 for the book since he hasn't read it but Andrew already had. Later, after finishing it Andrew is able to buy it back for $80 because it's old to both of them but has a bit of sentimental value for Andrew. The dollar denominated wealth on the island has gone down by $20 but the same stuff and same number of dollars are there.
- whatshisface 4y agoThe consumer price index on the island has gone from $100 for the basket of one book, to $80 for the same basket, causing an increase in the measured value of currency equal and opposite to the decline in the price of the good. If you made the CPI more realistic by including other goods on the island, this website would show the dollar go up as the stock market (of booksellers with an interest in book prices) went down.
- roenxi 4y agoThe book is an asset in this example. CPI isn't relevant, because trading the book does not affect it.
- whatshisface 4y agoThe book doesn't represent any invested capital, so let's not say that it is an asset. Instead, let's say that there are shares in a book making company, tracked in the index, and also books, which will be in the CPI. The value of being able to make one book per day is linked to the price of a book, which means that on the island, the CPI and the stock market have to rise and fall together. That causes the stock market and currency to move inversely.
- roenxi 4y agoDo you want an answer to your original question or do you want to try and argue that the stock market and currency move inversely? Because if you want an answer, you aren't making changes to the example that will help you understand. You're introducing confusing factors that are not needed. The original example gave a neat little illustration of how wealth-as-measured can drop without money disappearing. Don't bring CPI in to it (and stock prices don't drive the CPI so that is a reasonable assumption). If you want to argue that the two move inversely then go ahead and don't mind me, but you might like to add in some evidence or case studies. And you'll need to be precise about real vs nominal, and probably start modelling other effects.
- hobo_mark 4y agoRecent noahpinion episode about this very topic: https://noahpinion.substack.com/p/where-does-the-wealth-go-when-asset https://noahpinion.substack.com/p/where-does-the-wealth-go-w...
- whatshisface 4y agoAccording to that explanation, the index value of a dollar should still go up when the price of all assets goes down.
- peterisza 4y agoMoney doesn't go into the stock market. If you buy a stock from me today, I can use the exact same money to buy bread tomorrow. That money keeps circulating in the economy, it doesn't go into or out of the stock market.
- nly 4y agoExactly. The current stock price is just the last price it traded at, or some measure of supposed liquidity or depth in the market at some price. That liquidity just exists as unfilled orders or quotes on the order book on an exchange and can vanish in an instant. The other thing is that buying stock for a company A isn't the same as "investing in" company A, since company A doesn't get your money...it's a secondary market! As buffet says, the stock market is a voting machine in the short term and a weighing machine in the long-term.
- imtringued 4y agoIt circulates in theory. In practice people keep saving ever greater amounts of money.
- PheonixPharts 4y ago> How can everything go down at once, doesn't the money have to go somewhere? How can everything go up at once, doesn't the money have to come from somewhere? Certainly we can have everything go up whenever we find more resources than we consume. Natural resources, when exploited create value for all. A more energy and resource rich world causes everything to go up. Why is it so hard to understand that increasing energy and resource constraints causes everything to go down? And, more specific to our situation, much of the perceived value is credit. If I owe you $100,000, as long as you know I'll pay, you can consider that part of your value. But if I don't make enough to pay you, suddenly you aren't going to get that money. Our entire global economy is massively over-leveraged and the only way to maintain that is perpetual growth, in a real sense of having access to ever more energy and resources. When the future delivers less than expected we start seeing that value disappear from the books.
- rmah 4y agoNo, the money doesn't have to go anywhere. Nor does it have to come from anywhere when everything goes up at once. Because there is no money involved. It's sort of like asking "where do the pounds go when I lose weight?" You are conflating using "dollars" when used as a unit to measure the value something, with "dollars" as an asset in the economy when used to conduct trade. This confusion is easy to make (and widespread) because we use the same word for both things. The vast majority of wealth in an economy is not in monetary form. It's in hard and soft assets: land, buildings, cars/trucks, factories, raw materials, home appliances, copyrights, patents, film libraries, etc. The economic value of all those things is just measured in dollars.
- s1artibartfast 4y agoUnrealized gains can simply evaporate. If a crap company has a 1 B valuation and it fails, that money is gone. The value in stockholders portfolio just goes down, not to anywhere in particular.