The common argument why quantitative easing didn't cause inflation of consumer goods, is that it all went into stock-market, real estate and bond markets.
But what I dont understand:
If I buy a stock for 100$, I now own the stock, but whoever owned the stock before me, now has the 100$.
So this money is still there... and should still cause consumer price inflation in the end ?
My theory how the stock market can soak up the money:
I buy a stock with 100$ new money.
Then the party who just got the 100$... buys another stock. And so on.
There are constantly millions of stock being traded... so the stock market kinda "binds" some amount of money constantly.
But that could also mean, that the money could suddenly move to another market... without actually causing a decrease in stock prices
(just reducing the turnover)
Is that understanding correct ? Or I'm wrong ?
money "goes into stocks"
Re: money "goes into stocks"
Your understanding is not wrong, but incomplete, which can lead to erroneous conclusions. You are assuming a world with a constant volume of money moving at a constant velocity. People (and large financial institutions) can and do borrow money to buy stocks and other assets or sell stocks or assets and retire that debt, increasing or decreasing the amount of money in the system and putting more pressure on the "buy" or "sell" side for a given asset in a given time frame.
Moreover, inflation, as defined by rising asset prices, is really a measure of the number of transactions times the amount of money used in those transactions. This is also how GDP is measured -- by the volume of transactions in a given time, not by the amount of money sitting in accounts.
Finally, the other reason that prices of certain things, particularly consumer goods, would not rise is that people have found ways to produce and market them more cheaply. This has been especially true with items like clothing, where you can see the means of production move from high cost countries like the US and Europe to lower cost countries like China and now to even lower cost countries like Vietnam. It has also been said that the internet is one of most deflationary devices ever invented, and it is quite true to the extent it reduces transaction costs, middle-men and the prices of goods overall.
Ultimately, the price of something on an open market is determined by how many willing buyers and sellers are buying and selling it on a given day. But that's only the tip of the iceberg, as markets are both complex and discontinuous, making them highly unpredictable.
Moreover, inflation, as defined by rising asset prices, is really a measure of the number of transactions times the amount of money used in those transactions. This is also how GDP is measured -- by the volume of transactions in a given time, not by the amount of money sitting in accounts.
Finally, the other reason that prices of certain things, particularly consumer goods, would not rise is that people have found ways to produce and market them more cheaply. This has been especially true with items like clothing, where you can see the means of production move from high cost countries like the US and Europe to lower cost countries like China and now to even lower cost countries like Vietnam. It has also been said that the internet is one of most deflationary devices ever invented, and it is quite true to the extent it reduces transaction costs, middle-men and the prices of goods overall.
Ultimately, the price of something on an open market is determined by how many willing buyers and sellers are buying and selling it on a given day. But that's only the tip of the iceberg, as markets are both complex and discontinuous, making them highly unpredictable.
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Riggerjack
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Re: money "goes into stocks"
I agree with all of what dragline said (how often has that happened?!?) Though he places more importance on velocity than I do.
But there is still more. QE worked by buying wholesale lots of Mortgage Backed Securities. This drove down rates on mortgages ( with the accompanying rise in housing prices) and by extension, other bond rates. Traditionally, 30y MBS move near the 10y Treasury note. When MBSs dropped, all bonds dropped with them. Lower bond rates pushed money into the stock market, as investors searched for returns.
QE stopped years ago. And yet, people continue to make their mortgage payments. I stopped digging into this year's ago as well. But at that time (2013-14?) QE had stopped, but rates were still artificially low, and the fed balance sheet was remaining stable. The only explanation I could find for this was that the fed wasn't "printing money" to feed into MBSs anymore, but they were taking the income from their MBSs and rolling it back into more MBSs. Thus their balance sheet looks the same, rates stay low, and all other asset classes appreciate.
This is causing a strategy shift for me as I look to liquidate my RE, while prices stay high. I just look at it as adding additional potential volatility to all asset classes.
But there is still more. QE worked by buying wholesale lots of Mortgage Backed Securities. This drove down rates on mortgages ( with the accompanying rise in housing prices) and by extension, other bond rates. Traditionally, 30y MBS move near the 10y Treasury note. When MBSs dropped, all bonds dropped with them. Lower bond rates pushed money into the stock market, as investors searched for returns.
QE stopped years ago. And yet, people continue to make their mortgage payments. I stopped digging into this year's ago as well. But at that time (2013-14?) QE had stopped, but rates were still artificially low, and the fed balance sheet was remaining stable. The only explanation I could find for this was that the fed wasn't "printing money" to feed into MBSs anymore, but they were taking the income from their MBSs and rolling it back into more MBSs. Thus their balance sheet looks the same, rates stay low, and all other asset classes appreciate.
This is causing a strategy shift for me as I look to liquidate my RE, while prices stay high. I just look at it as adding additional potential volatility to all asset classes.
Re: money "goes into stocks"
End of the day it's all about the relative number of buyers vs sellers trading at a particular point in time that sets the price, doesn't really matter how much total money is trading from a pure price perspective. If theres more buyers then sellers at a certain price then prices will move up until the buyers are satisfied , price move down when there are more sellers then buyers until the sellers are satisfied, markets seek equilibrium between both parties. This is basically the first few months of my undergrad micro-economics class in a nutshell (supply and demand). What's more important to prices is fundamentals (macro and micro) and aggregate investor psychology because this is what drives the buyers and sellers into the markets to trade.Frosti85 wrote: ↑Mon Jul 10, 2017 3:56 am
I buy a stock with 100$ new money.
Then the party who just got the 100$... buys another stock. And so on.
There are constantly millions of stock being traded... so the stock market kinda "binds" some amount of money constantly.
But that could also mean, that the money could suddenly move to another market... without actually causing a decrease in stock prices
(just reducing the turnover)
Is that understanding correct ? Or I'm wrong ?
Re: money "goes into stocks"
Incomplete.
Stocks can be bid up without being traded. Closely held shares can do this very quickly. Market cap can be created out of thin air and likewise be destroyed without any money changing hands.
Right now yield is expensive. I'd go as far to say it is inflated. Too much working capital chasing too little real work...or a shrinking pool of human capital so to speak.
Stocks can be bid up without being traded. Closely held shares can do this very quickly. Market cap can be created out of thin air and likewise be destroyed without any money changing hands.
Right now yield is expensive. I'd go as far to say it is inflated. Too much working capital chasing too little real work...or a shrinking pool of human capital so to speak.
Re: money "goes into stocks"
AFIK Prices are determined by trading (and sometimes by stock splits), when there is no trading there are no market cap movements. Market cap is a function of prices and thus trading. I'm not aware of instances where that's not the case. I am not grokking your argument please elaborate with an example of market capitalization changing without any trading in the underlying securities.
Re: money "goes into stocks"
I actually do not know this. I was assuming a surplus of buy orders come in the price or a security goes up...or sell orders can drive prices down without actually settling. But I guess the sale must be settled at a "market price" to determine market value. Mark to market? Anyhow, I take back what I said. My understanding is incomplete.
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Riggerjack
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Re: money "goes into stocks"
Well, with small, closely held companies, you have a wide bid ask spread, so if the bid was $90/share, and ask is $100, then someone bids for more shares at up to $110, it could be reasonable to base market cap at $110 times shares outstanding. However, market cap is really just a fictional number. It's all theory until money moves. And then it's still theory, since that isn't the liquid value.
So if a big player liquidates, and the price drops to $45, they may report that half the value of the company was destroyed overnight, but this is just for drama. Gotta keep the clicks coming. No wealth was transfered, no damage was done. The same company is still doing the same business the same way. Their yield just got cheaper.
So if a big player liquidates, and the price drops to $45, they may report that half the value of the company was destroyed overnight, but this is just for drama. Gotta keep the clicks coming. No wealth was transfered, no damage was done. The same company is still doing the same business the same way. Their yield just got cheaper.
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Riggerjack
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- Joined: Thu Jul 14, 2011 3:09 am
Re: money "goes into stocks"
Says the guy who knows so much about the stock market he consistently loses money on individual stocks... 
Re: money "goes into stocks"
@Riggerjack: You're right illiquidity can cause huge price moves, prices don't move penny by penny up and down. A stock price can go from $100 to $1 in a heartbeat but the reported price is always a historical record of the last trade. It's always a newsworthy event when there are big market moves and the news outlets can report how x billion dollars were wiped off the face of the planet in one day because they use market cap as a proxy for value.
Funny thing is the "value" investors will often hold stock that has lost tons of market cap knowing that the value is still solid. Then someone like Warren Buffett will come along and buy the company whole for some huge premium and all of a sudden news outlets rave about how much value has been created by increasing market caps.
Funny thing is the "value" investors will often hold stock that has lost tons of market cap knowing that the value is still solid. Then someone like Warren Buffett will come along and buy the company whole for some huge premium and all of a sudden news outlets rave about how much value has been created by increasing market caps.
Re: money "goes into stocks"
I don't really understand how prices settle and how equities are marked.
But...how come a strategy like this works?
https://en.m.wikipedia.org/wiki/Naked_short_selling
Is it because other shareholders sell their positions in response to the unfilled sell orders and tank the stock?
Unfortunately this is an area where I thought I knew how it worked but I really just assumed things worked a certain way. I've held some tightly held shares (listed family businesses)and watched them fluctuate wildly as family members argued over ownership. My impression was large amounts of money were not being transferred during that period and that is why the bid ask spreads got so insanely large.
I think I'm getting confused with equity sales like Monopoly property, eBay or my neighbor's house where bidding can drive up a price before any money actually changes hands. An entire neighborhood can become more valuable overnight without any sales or at least few sales as the majority of the community never intends to sell. Then real money can be created out of thin air by borrowing on the properties for example. As I said, I think I'm mixing up the fine details of how prices are marked and how things are settled.
Wasn't that the whole issue with FAS 157? Again, this is boiling down to a rule in a game that I play but don't quite understand.
But...how come a strategy like this works?
https://en.m.wikipedia.org/wiki/Naked_short_selling
Is it because other shareholders sell their positions in response to the unfilled sell orders and tank the stock?
Unfortunately this is an area where I thought I knew how it worked but I really just assumed things worked a certain way. I've held some tightly held shares (listed family businesses)and watched them fluctuate wildly as family members argued over ownership. My impression was large amounts of money were not being transferred during that period and that is why the bid ask spreads got so insanely large.
I think I'm getting confused with equity sales like Monopoly property, eBay or my neighbor's house where bidding can drive up a price before any money actually changes hands. An entire neighborhood can become more valuable overnight without any sales or at least few sales as the majority of the community never intends to sell. Then real money can be created out of thin air by borrowing on the properties for example. As I said, I think I'm mixing up the fine details of how prices are marked and how things are settled.
Wasn't that the whole issue with FAS 157? Again, this is boiling down to a rule in a game that I play but don't quite understand.
Re: money "goes into stocks"
@Sclass
Market prices are based on trading. I think you're maybe confusing other price types like sticker price, MSRP, appraisal etc. with market prices. When people talk about market cap, they're always using market prices. Event OTCBB market caps are based on market prices.
Re naked shorts. After reading that wikipedia entry there doesn't seem like there's been a material effect as a result of failure to deliver against naked shorts. So prices can be set without trading, like if someone were to place an enormous naked short and then fail to deliver causing prices to decline without a settled trade taking place. I suspect this is extremely rare as brokers are often compelled to back stop their clients trade and there are regs helping prevent abuse, still a possibility though.
Market prices are based on trading. I think you're maybe confusing other price types like sticker price, MSRP, appraisal etc. with market prices. When people talk about market cap, they're always using market prices. Event OTCBB market caps are based on market prices.
Re naked shorts. After reading that wikipedia entry there doesn't seem like there's been a material effect as a result of failure to deliver against naked shorts. So prices can be set without trading, like if someone were to place an enormous naked short and then fail to deliver causing prices to decline without a settled trade taking place. I suspect this is extremely rare as brokers are often compelled to back stop their clients trade and there are regs helping prevent abuse, still a possibility though.