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whereaminow (22.17)

A Letter To Bulls: Please Stop Cheerleading Our Destruction

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October 13, 2010 – Comments (81)

Dear Stock Market Bulls,

Please stop cheerleading our destruction.  I realize you are getting really excited right now.  You can almost taste it.  The market is about to go parabolic and you are in position - champagne ready to pop.  Better yet, in a world where we all feel compelled (by whom?) to pick sides, you can't wait to stick it to the Bears.  Those crummy Bears just hate capitalism and Amurrrica. 

You are cheerleading our destruction.  Before this market hits 15,000 let me tell you something you know to be true, but don't want to admit.  Long term increases in the general price level of the stock market (what Bulls seek) can only come about through dollar devaluation.  Notice that I didn't say dollar devaluation relative to the Euro, or the Yen, or the Yuan.  It is regardless of what other governments do.

This does not mean that excellent stock pickers should stay away from the market.  On the contrary, individual stocks will always go up and down (unless overzealous government stooges known as regulators haphazardly decide that some stocks shouldn't go down - which is as manageable as repealing the law of gravity.)  It does mean however, that some of you are going to ride the coattails of a Federal Reserve induced rally, declare yourselves genuises (which fine, I can't stop you from your own stupidity), declare Bears vanquished (which is fine also, they can take it), when reality will be that the general wealth of America will be reduced.

I say that again, in case you missed it in the run-on rant: the general wealth of America will be reduced.  Oh sure, GDP will go up.  As the Soviets learned, if you print enough funny money, GDP can go up every year for decades even when your country is Bangladesh with tanks. 

But the question every economist that doesn't get on his knees and shill for authority should ask is "in comparison to what?"  GDP is up in comparison to what?  The stock market is up in comparison to what?  The people are wealthier in comparison to what?

I don't blame Bulls for attempting to ride the wave of inflation carrying the market to new highs.  I know they will delude themselves with talk of passing off to the greater fool before the bubble bursts.  But without the printing press, two things would happen: 1) stockpickers would actually have to understand company fundamentals and prospects to make money and 2) The rest of America, the non-investors, wouldn't be robbed blind of their purchasing power while you cheer the market rise.

Not only is the general wealth of America reduced, the seeds are sown for the eventual bust.  It is during the boom that Americans should become concerned, for the boom is the problem.

Let me say that again: the boom is the problem.  The boom lays the seeds for the eventual socialization of credit, growth of government power, growth of Federal Reserve power, destruction of small business, growth of big businesses, growth of talking heads' egos as they get on TV and tell us how terrible the world would be without an insurance giant and a couple large banks.  Oh no!  We know from Austrian Business Cycle Theory that boom created on cheap credit directs resources to investments that can't possibly be sustained by the amount of real savings available.  We know there will be another crash, another group of government hacks and suck-up economists taken by surprise.  We know that everyone will blame capitalism, that system you say you love, and that government and the banks will further strangle competition and individual liberty.

In conclusion Bulls, I hope you don't get the wrong impression.  I'm not rooting against you either. I hope you make some money.  I am not a jealous man.  I wish the best in health, love, and finances for everyone on CAPS, even though I know that some will win and some will lose. 

Just do me a favor.  Don't cheerlead America's destruction.

David in Qatar

81 Comments – Post Your Own

#1) On October 13, 2010 at 11:16 AM, brickcityman (< 20) wrote:

Great post!  Captures my sentiments quite well...

 

Favorite quip:   even when your country is Bangladesh with tanks

 

 

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#2) On October 13, 2010 at 11:23 AM, TMFPencils (99.81) wrote:

It's the sad but unfortunate reality of our state of affairs. There are still quality individual businesses on the market but it's much more difficult to sort them out than it would be in a true free market scenario not manipulated by central bankers. The Fed creates market instability and claims it needs more power (which the government casually hands over) to solve the problems it created on its own.

Personally I'm taking some money out of stocks and purchasing silver. Individual stocks are pretty good inflation hedges (certainly better than just holding the devalued dollars), especially if you own financially solid businesses with smart management. Right now I think a mix of individual stocks and precious metals is a sensible approach. The tricky part is making a distinction between actual progress in a business or a mere side effect of a Fed-inflicted boom period. 

What are your investing strategies at the moment, David? 

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#3) On October 13, 2010 at 11:35 AM, whereaminow (22.17) wrote:

pencils2,

Hi David! It's always nice to hear from you.

My current strategy is as follows:

1. I have a core group of relatively safe companies I think can overcome any market calamity (an example would be Amazon - overpiced yes, but also relatively safe from bankruptcy in a market bust), and some speculative picks for the inflationary boom that I think QE2 will cause.  Plus a couple of Sinchi's fav miners and some speculative miners I picked up from the guys at Gold Seek Radio.

2. I converted most of my long-term cash savings to physical gold and silver, mostly silver.  I reduced my exposure to my 401k last year.

3. I'm not being shy about spending money on things I need.  I spent a lot of money on necessary remodeling for my fiancee's rental properties, for example.  I'm spending money right now on things that I know for certain will be necessary down the road.  Spend it now before costs rise.  If you have savings and no debt, and can afford to splurge (in cash, not credit) for some necessary improvement, I say do it.

4. I'm taking another vacation next month.  Because we all need a break from the grind :)

brickcityman,

Thanks man!  Glad you liked it.

David in Qatar

 

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#4) On October 13, 2010 at 12:12 PM, Momentum22 (29.63) wrote:

Just do me a favor.  Don't cheerlead America's destruction.

David: I respect you and your beliefs.  I also read many of your posts and generally agree with many of your points. This post is not one of my favorites...maybe it is just me but the tone is a bit on the condescending side.

Where exactly would you like to see the market go to best suit the global economy? Must we achieve a dollar for dollar equilibrium with the price of gold to make everything right? 

Anyone who falls in love with their own ideas is at risk of substantial loss...bull, bear or otherwise. I do prefer the market to go up rather than down and just because that might not jive with your belief system doesn't make me a cheerleader for destruction. I feel like you are telling me that I won't be saved unless I bow to your deity. 

Did you place a bet that the market was "rolling over" yesterday or something? : ) 

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#5) On October 13, 2010 at 12:15 PM, MegaEurope (< 20) wrote:

I don't blame Bulls for attempting to ride the wave of inflation carrying the market to new highs.

I don't blame gold bulls for trying to do exactly the same thing.

The implication that stock market bulls are cheerleading America's destruction while gold bulls are not is just bizarre.

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#6) On October 13, 2010 at 12:19 PM, outoffocus (23.22) wrote:

What the Fed and the gov is doing right now is downright criminal (causing inflation while reporting deflation). We left deflation 2 years ago.  We were in stagflation for about a year but now I think we've officially hit inflation. At this rate we'll hit hyperinflation in no time. Commodities are the only real safe haven.

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#7) On October 13, 2010 at 12:22 PM, MegaEurope (< 20) wrote:

Long term increases in the general price level of the stock market (what Bulls seek) can only come about through dollar devaluation.

Any student of economic history should realize that gains in stocks over the last few centuries have come primarily from increases in value, not from inflation.  It's a pretty good bet that over the long term (multiple decades) stocks will continue increasing in value. As far as I know no bear has ever made a convincing counterargument.

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#8) On October 13, 2010 at 12:23 PM, dragonLZ (99.36) wrote:

Dear Stock Market Bulls,

Please stop cheerleading our destruction.

whereareyounow, So you Bears hoping for the double dip, and cheering every time market has a significant drop, is not cheerleading our destruction.

Please explain to me why is DOW at 5,000 good for America?

Also, aren't you (and other Bears) the one cheering Gold (a lot more than bulls cheering the equity market)?

As far as I know, gold goes up when dollar goes down, isn't that correct?

So my message for Bears would be: Please stop being hypocrites... 

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#9) On October 13, 2010 at 12:30 PM, whereaminow (22.17) wrote:

Momentum22,

I'm not trying to be condescending.  I'm only trying to explain a concept that is controversial, but should not be.  My venom is reserved for mainstream economists and empty suits/skirts that will cheerlead this coming inflationary rally.  I hope to warn a few people about this phenomenon before they become the unwitting suckers that a policy of inflation needs.

Let me explain further.  Please examine this chart first.

(If the link doesn't work, it's the DJIA historical price chart.)

Examine the general price level of the stock market since the early-to-mid 1990s, when the Federal Reserve began to actively manipulate the interest rate in order to create a paper money paradise.

My friend, the Federal Reserve is hindering our economy.  They are making economic calculation impossible through inflation and re-inflation.  They are exacerbating the boom/bust cycle.

In early 1999, when the DJIA topped 10,000 for the first time, two idiots appeared on my television screen.

Idiot #1 was in full celebration mode.  This was evidence, she exclaimed, of the robustness of the American economy and the successful marraige of government and business for modern day global capitalism.

Idiot #2 pointed out that 10,000 was a number of no significance except that people like round numbers.  9,999 would be just as important, he said, if we decided it to be so.  What's really important, he reminded the suckers, is that the market is going up and that speaks the robustness of the American economy.

Neither one mentioned that the general price rise we had witnessed could only happen by printing money, devaluing the currency, robbing people of their savings, destorying the purchasing power of people on fixed incomes, and eliminating the middle class.

Where exactly would you like to see the market go to best suit the global economy?

If the market set the interest rate, if the market decided upon the strength of the currency, then the stock market's general price level would remain flat - increasing only when money came off the sidelines and only as long as that could be sustained, until the opportunity cost of alternative investments made them more attractive.

Individual stocks would still go up and down on fundamentals, speculation, etc.

Did you place a bet that the market was "rolling over" yesterday or something? : ) 

I am not a deflationist.  I've warned aobut the betting against the Fed's power to create money many many times.

David in Qatar

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#10) On October 13, 2010 at 12:37 PM, whereaminow (22.17) wrote:

MegaEurope,

Any student of economic history should realize that gains in stocks over the last few centuries have come primarily from increases in value, not from inflation.  

Really?  Perhaps any student of the Orthodox Economic History handed down by the same economists that miss every market crash.  Not a student that has studied the history of economics of the Austrian School. (Oh I know, you think they are loony, so insert perjorative here.)

Tell me, how could the market rise for 20 years straight without the printing of money?  How can the overall value of companies rise when the increase in one company's market share decreases other companies' market share?  When a new market reduces the value of companies' in an older market?

Most significantly, please do tell, why the American stock market's tremendous rise in the general price level has coincided with the Federal Reserve's increased manipulation of the interest rate and the amount of money created since the early 1990's.

David in Qatar

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#11) On October 13, 2010 at 12:43 PM, whereaminow (22.17) wrote:

dragonLZ,

I don't cheer gold.  I find it amusing that the same people calling for further monetary intervention cannnot understand why the price of gold is rising.

But the rising price of gold is a terrible omen. Every gold bug knows this.

And I didn't call for a double-dip either. I'm not a Bear.  I'm a follower of the Austrian School of economics.  That means I understand that there was no recovery, just a re-inflating via QE1 that could not be sustained.  Therefore, there can be no double dip. 

David in Qatar

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#12) On October 13, 2010 at 12:52 PM, BillyTG (29.25) wrote:

It's tough to be on high ground as an investor in anything these days. If you are long the stock market, you are participating in a government-backed economic suicide. If you are short the stock market, you are taking big risks and hoping for economic failure. If you are long gold, you have effectively withdrawn your dollars from the economy and placed them in something that adds no value, an ultimate betrayal. If you are traveling or investing outside of the US,  you are a bad American. If you are holding cash, you are going to lose. If you are holding debt, you are going to lose. If you are holding fixed-income, you are going to lose. If you stock up on food and supplies, you are called paranoid. If you don't stock up on food and supplies, you are called naive. Things are going to get interesting.

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#13) On October 13, 2010 at 12:55 PM, MegaEurope (< 20) wrote:

Tell me, how could the market rise for 20 years straight without the printing of money?

...

Most significantly, please do tell, why the American stock market's tremendous rise in the general price level has coincided with the Federal Reserve's increased manipulation of the interest rate and the amount of money created since the early 1990's.

Strawman.  I didn't say the price increase from inflation was 0, I said it was smaller than the price increase derived from value. 

Notice how stocks increased much more than the price level.

How can the overall value of companies rise when the increase in one company's market share decreases other companies' market share?  When a new market reduces the value of companies' in an older market?

Maybe you should adjust your theory to fit reality.  I don't think you will be a very good long-term investor if you don't understand this.

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#14) On October 13, 2010 at 12:58 PM, AvianFlu (34.67) wrote:

We live in an exciting time from an investment standpoint. It is impossible to predict timelines, but I am convinced that there will be earthshaking events in the markets. Some investors will win big. Others will lose big. Check back in 5 years and see what happened.

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#15) On October 13, 2010 at 1:07 PM, Momentum21 (83.58) wrote:

#9 - labeling folks as idiots is exactly why you and Peter Schiff will have a tough time gaining the respect of the people needed to truly create change with your ideas.

Apparently the neo - Austrian School is more about being "right" than it is about successful investing...not that it is any different from any other economic theory.  

 

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#16) On October 13, 2010 at 1:10 PM, whereaminow (22.17) wrote:

MegaEurope,

Do you seriously believe that the return of all businesses in America was equal to $1 in 1801?

Notice how stocks increased much more than the price level.

No, I notice that returns have increased more than the price level.  The general price level of the stock market (note the difference) did not increase until the monetary base was increased on a regular basis as a matter of policy.

Understand what I am arguing.  I am arguing price level not returns.

Thank you.

David in Qatar

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#17) On October 13, 2010 at 1:11 PM, whereaminow (22.17) wrote:

Momentum21,

Stop nitpicking.  If it makes you feel better, I wish nothing but health and happiness for the two idiots that appeared on my television screen in 1999.

David in Qatar

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#18) On October 13, 2010 at 1:23 PM, whereaminow (22.17) wrote:

Can someone who has a few minutes upload the DJIA historical price chart so people can see what I'm talking about?

Thanks in advance.

David in Qatar

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#19) On October 13, 2010 at 1:33 PM, MegaEurope (< 20) wrote:

The Dow is up about 37x since 1930.  The overall market (S&P 500 if it had existed) would be up more than that.  (The Dow was extremely mismanaged, for example leaving out IBM for 40 years.)  Compare that to the price level being up around 17x.

Do you seriously believe that the return of all businesses in America was equal to $1 in 1801?

No.  I seriously believe that you constantly put words in the mouth of people who disagree with you.

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#20) On October 13, 2010 at 1:33 PM, whereaminow (22.17) wrote:

MegaEurope,

A couple more questions, since my theory (increasing general price level of stocks can only be sustained through monetary expansion) does not fit reality (even though if you pull up a chart of the price level of the stock market it clearly does):

1. Since returns, as indicated in the chart you posted, increased during times of stable monetary levels and non-stable monetary levels, why is it necessary to have a policy of moderate inflation to promote growth, as taught in mainstream economics classes?

2. Why was the general price level of the stock market nearly flat until recent times, even as returns were rising for over a century?

David in Qatar

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#21) On October 13, 2010 at 1:36 PM, whereaminow (22.17) wrote:

The Dow is up about 37x since 1930. 

And when did it start rising?  Are you trying to shift the sands here?  Pull up the chart and just look at it.

I seriously believe that you constantly put words in the mouth of people who disagree with you.

Hey, you're the one that changed it from price level to returns.  Now that we agree that I am referring to the general price level, do you think you could post a chart of the DJIA that I linked to in comment #9? 

Thanks.

David in Qatar

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#22) On October 13, 2010 at 1:38 PM, TMFHousel (91.85) wrote:

Nice post David, and I mostly agree. To play devil's advocate though, doesn't the same hold true for gold bulls? I own stocks like P&G and Philip Morris International because I'm confident they'll be able to raise prices alongside inflation and dollar devaluation when it comes, and they pay me nice dividends all the while, which makes it easier for me to value them. Gold bulls own gold because they're confident it'll keep up with inflation and dollar devaluation. In that sense, aren't we owning these respective assets for very similar reasons? With the exception of the idiot bond bulls, I think most people own assets today with the thought of protecting wealth from the Fed's actions. Gold or stocks, we have similar goals, no? 

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#23) On October 13, 2010 at 1:41 PM, Rehydrogenated (32.36) wrote:

Tell me, how could the market rise for 20 years straight without the printing of money? 

Companies become more efficient over time. Thus generating more profit and increasing the value of their stock.

How can the overall value of companies rise when the increase in one company's market share decreases other companies' market share? 

Competition combined with increased efficiencies forces/allows companies to lower prices. Lower prices means more demand. People can afford more stuff, without necessarily taking market share from any other company or industry. 

When a new market reduces the value of companies' in an older market?

New products naturally have more benefits than the ones they are replacing, which frees up resources. Maybe time, money, materials, water, oil. These resources are no longer tied up in the old products and can be used for other more productive ventures.

Most significantly, please do tell, why the American stock market's tremendous rise in the general price level has coincided with the Federal Reserve's increased manipulation of the interest rate and the amount of money created since the early 1990's.

No doubt this had a huge effect on the stock market...

If gold = the true value of money

The stock market = gold + increases in company profitability with some time lag.

Stocks are valued based on the profits they can distribute to their shareholders. Profit is not fixed and can even be disengaged from the economy. Even if our economy as a whole takes a decade to recover, many large businesses will see increases in profitability and increases in their share price (more than will decrease -- the economy is not a zero-sum game). 

 

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#24) On October 13, 2010 at 1:48 PM, whereaminow (22.17) wrote:

TMFHousel,

I am in 100% agreement. 

I'm not saying people are dumb for buying stocks, or that stocks do not protect you from inflation.  I love capitalism (the free market kind, not the crony kind.)  I love great companies.  I love what they provide to this world.

I am merely trying to get people to understand that a perpetually rising stock market is very very dangerous and in no way a reflection of a real increase in the nation's wealth, just as a perpetually rising GDP is meaningless and misleading.

And yes, a rising gold market indicates very bad things as well.  I do enjoy poking fun at the anti-gold sentiment, but I know that gold at $50,000 is a nightmare scenario.  For the very same reason, the DJIA going to 1,000,000 would wipe everyone out.

Americans (well, actually everyone) need to understand the dangers of a policy of inflation.  We need to demand that it come to an end. 

David in Qatar

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#25) On October 13, 2010 at 1:49 PM, MegaEurope (< 20) wrote:

And when did it start rising?  Are you trying to shift the sands here?

The DJIA started rising when it was first published.  It was at 28 in 1896.  So if you use a longer time period my argument is actually stronger.

Hey, you're the one that changed it from price level to returns.

That was an accident, I am used to focusing on returns.  But when I looked at prices, it turned out I was still right.

I can see the DJIA chart just fine, I assume everyone else can too.

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#26) On October 13, 2010 at 1:55 PM, whereaminow (22.17) wrote:

Rehydrogenated,

I'll go one at a time. After this one, I gotta take a break for a little while. 

Companies become more efficient over time. Thus generating more profit and increasing the value of their stock.

1. Doesn't that reduce the value of companies that did not become more efficient, reducing their profit, and reducing the value of their stock?

2. Companies becoming more efficient is not a new phenonemon that started in the last 20-30 years.  This does not explain the parabolic rise of the general level of stock prices.

3. The stock market does not rise simply because companies gain efficiency.  It can only rise if money comes into the market from individuals (and governments) seeking higher returns.  Or it can rise from the creation of money.  I argue that the vast majority has come in from the creation of money.  Money coming off the sidelines has a limit, as the more that comes in, the better opportunities will arise in other investments due to marginal producitivity of capital. (Also known as marginal efficiency of capital.)

David in Qatar

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#27) On October 13, 2010 at 1:58 PM, TMFPencils (99.81) wrote:

Hi David,

If you are ever in the Kentucky region let me know, it'd be great to meet up! I'm attending Berea College in Kentucky, so this will be my home for the next few years. 

Best,

David

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#28) On October 13, 2010 at 2:05 PM, whereaminow (22.17) wrote:

The DJIA started rising when it was first published.  It was at 28 in 1896.  So if you use a longer time period my argument is actually stronger.

The DJIA went from 2,000 in 1987 to 14,000 in 2007, a 7 fold rise in just 20 years, at the same time that the Federal Reserve increased the True Money Supply 6 fold. 

Another interest point.  You note that the DJIA was 28 in 1896, which coincided with a 17 year period of stable money, falling prices, and stable economic growth. Yet, in your chart on returns, market returns continued to rise throughout the 1800's, even while we were on a classical gold standard for most of that time.

Why is unbacked paper money, or more specifically, a policy of 'moderate inflation' necessary to promote economic activity?

David in Qatar

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#29) On October 13, 2010 at 2:09 PM, MegaEurope (< 20) wrote:

Long term increases in the general price level of the stock market (what Bulls seek) can only come about through dollar devaluation.

If you admit you were wrong about this, then we can move onto the next point.

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#30) On October 13, 2010 at 2:21 PM, whereaminow (22.17) wrote:

MegaEurope,

I don't know what I'm supposed to admit.  Are you arguing that the general price level of stocks would keep rising for decades even if the monetary base was flat? 

Tell me what you are arguing.  Because if that's it, then no, I'm not going to admit to that because it's not actually possible.

David in Qatar

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#31) On October 13, 2010 at 2:25 PM, rofgile (99.25) wrote:

whereaminow:

 You believe the only way the market can rise is through inflation?  That is wayyyy off.

 Lets suppose the market has three companies, A, B, and C.

 A and B tread water, the companies don't grow earnings or revenues but are healthy.  Their valuations remain the same.  Company C starts doing better in their business.  Company A, B, and C are not competitors.  If Company C does better, its valuation (what companies A and B who might try to merge with C) should increase.  It does.  

 The market index is a composite of the values of A, B, and C.

 The market index rises because C does better.  It is NOT a zero-sum world, where C doing better makes A and B do worse.  In fact, C doing better could make A and B do better (as perhaps C buys parts to make widgets from A and B).

 ---

 The stock market was at a valuation of S&P 1500 just three years ago.  Is still running at far lower valuations, because businesses are not in a boom (where are the consumers? hey) like they were in 2007.  However, revenues, earnings, sales and margins are improving for sooooo many companies right now.  

 This improvement is reflected in these companies valuations and hence in the indices.  This is not correlated to monetary inflation.  If the monetary base dictated where the market was, it would be higher now than in 2007. 

 The market is determined by what people will pay for companies.  Say that again a couple of times.  Memorize that.

----

 David, if the market only increased when there is inflation, we would be in a world with 0% real economic growth, because you world view would require that (to have zero-sum markets that rise only with monetary increases).  All economic growth would simply reflect monetary base expansion.  

 That is ludicrous.  I hope you realize that.

----

 I believe the market indices reflect the health and valuation of businesses.  I think it is GOOD that valuations are rising and businesses are becoming more healthy.  That means our county has hope of doing well with more jobs and better quality of life.

 Have you ever considered that gold could simply be a bubble based on fear?  Fear of inflation, fear of Obama, fear from Glenn Beck and Goldline.  Combine this with easy access to GLD paper trading, and gold pushers left and right.

 We have these facts:

 A) Market indices are rising, business revenues and earnings are matching.

 B) Consistly low reported inflation (from government stats) but also recently corroborated with Google's Price Index (GPI).  It shows deflation over the last year. 

 C) Bond yields are low, because bond traders recognize that inflation is low, risk is high and low yields are ok and safe.  This goes against inflation as well.

 D) Gold is going up through the roof.  The price of gold is a self-circular argument that the dollar is falling - because of huge inflation, gold is going up reflecting the underlying reality.  So you should buy gold to protect yourself (which causes the price to go up more).  If gold reflected the true state of inflation, the price of televisions, cars, radios, fancy suits, would have stayed even when reflected in gold.  This is NOT the case.  An oz of gold is worth twice as many objects now as it was 10 years ago.  The price of these objects in dollars has not increased. 

---

 Gold is the bubble, disinflation/deflation is really happening, monetary increases by the FED are at best balancing the loss of circulating currency in the form of new loans, and we just past through a monetary crisis.  Businesses are recovering and its a good time to be a shareholder.

 -Rof 

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#32) On October 13, 2010 at 2:31 PM, SkepticalOx (99.45) wrote:

whereaminow,

OK, I think I need to simplify it to understand (tell me if I'm getting it right)?

If there's only $100 in all of country A (and there are no outside investors), and $50 of it is in the stock market, then the stock market as a whole can't be more than $50, except split differently amongst the stocks that make it up. It will go down if the citizens of country A remove money from the stock market, and go up if they add more (up until all $100). After that, the only way it can go up is if more money is printed?

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#33) On October 13, 2010 at 2:33 PM, whereaminow (22.17) wrote:

Rof,

You wrote a lot there, and I don't mind that you find this controversial.  But most of what you are saying is not actually what I am arguing.  You're talking about value and earnings and fortunes of individual companies.  I am talking about the general price level of the entire stock market.

I'm just going to keep pointing out one thing:

The general price level of the stock market does not rise because companies do better and it does not fall because companies do worse.

It rises because money flows into the stock market.

It falls because money flows out.

I'll be back with more after I eat. I gotta run for now.  I see that I have to explain this concept much more clearly.

David in Qatar

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#34) On October 13, 2010 at 2:39 PM, whereaminow (22.17) wrote:

SkepticalOx,

Yes. Though you could never get to $100, since the marginal productivity of capital would lead investors to pull money out of the stock market and into other profitable investments as you increased the money taken off the sidelines.

And it would not matter one iota how many companies were added to the stock market, how efficient everyone had become, or how many new markets were discovered.  The market could only go up if new money was created.

And new money would be created, in a free market economy, to match the demand for money.  But in our world, money is created, sans demand, and then used to push up the stock market.

In other words, the cart leads the horse.

Now we can argue, and many of us do, constantly, why money must be created to stimulate an economy, but it is not actually possible to have a rising stock market for decades without creating new money.

David in Qatar

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#35) On October 13, 2010 at 2:41 PM, SkepticalOx (99.45) wrote:

You're making perfect sense and it's quite logical. Enjoy your dinner :) (it's like almost 10 in Qatar no?) 

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#36) On October 13, 2010 at 2:58 PM, mtf00l (46.55) wrote:

This is all good and well...

Let's say the hypothetical President of the US comes to you tomorrow and says, "You seem to have an idea what the problems are.  What's the fix?" 

Your answers please...

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#37) On October 13, 2010 at 3:11 PM, SkepticalOx (99.45) wrote:

#36

If the U.S. voted in a President who followed libertarian thought, I would think the President would cut taxes, cut spending even more, de-regulate, privatize public agencies, end the wars, end the fed, possibly take a look at the gold standard again, and on a whole make the entire government a smaller part of your life. I think David sorta points out his viewpoints pretty clearly.

The problem right now is whether or not the citizens of the U.S. are willing to do all these things, or if they prefer to cling onto all their entitlements even when it's unsustainable (check Greece). 

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#38) On October 13, 2010 at 3:18 PM, FreeMarkets (93.79) wrote:

#11 "But the rising price of gold is a terrible omen. Every gold bug knows this." -- whereaminow

People keep asking me how my gold investments are doing and no matter how many times I tell them "As good as the dollar is bad" they just don't seem to get it.  I don't WANT gold over $1,300 oz, I want it around $250/oz.  My six months of cash reservers for a rainy day are getting pounded by this inflation and I need to build them further, but soon I will stop building them up and instead buy more gold.

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#39) On October 13, 2010 at 3:29 PM, XMFSinchiruna (27.56) wrote:

From my article that appeared yesterday:

You might think I'd be dancing a celebratory jig now that $1,345 gold has vindicated my bullish commentary from the past several years, but nothing could be further from the truth. Gold's rise is for me a somber affair, marking as it does the grossly irresponsible stewardship of our free-floating paper currency.

No one wins when a delevering financial system -- perched as it still is atop a broken foundation of irreparably toxic derivatives -- triggers widespread impoverishment via the competitive debasement of currencies.

I believe we are witness to a tragic chapter of American history. Under the circumstances, dancing about because my investments have risen hardly seems appropriate.

 

 

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#40) On October 13, 2010 at 3:52 PM, whereaminow (22.17) wrote:

mtf00l,

For many more reasons than just this one, I would recommend terminating the Federal Reserve and removing legal tender laws.

SkepticalOx,

Thank you very much.  I thought for a second that I was doing a terrible job of presenting this theory.  I think I went wrong by choosing the words "dollar devaluation" in the post instead of "monetary expansion."  But monetary expansion without a corresponding increase in demand is  dollar devaluation, so I figured that wouldn't be too controversial.  In my next comment, I am going to do some more clarificaion and add some examples of ways the market price can rise temporarily.

FreeMarkets and TMFSinchiruna,

Thanks guys!  If I hear a gold investor cheering I get the feeling they do not understand the ramifications of what is happening.  I have always known that you guys get it.

David in Qatar

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#41) On October 13, 2010 at 3:54 PM, rofgile (99.25) wrote:

Response to #33

Hi David,

 I was going to write another reallly long reply.  But I just lost it by hitting the back button accidentally (shoot- well I should be working anyways).  So, I'll just summarize.

 Money does not flow into or out of markets.

 Instead, money exchanges between two people making a sale of stock.

 This is very important of a point.  

 When a stock price rises because two people came together and made a sale, other people holding the same stock might feel richer.  But no money was magically made for them.  They only get more money if they can also find a buyer at that price.  If they all try to find buyers at that price, pretty soon it'll be a much cheaper price!

----

 While money can flow into someone's bank account, or flow into a mutual funds pool of cash, it does not flow into or out of a market.  Market indices are determined by the last trading sale.  This does not correspond to actual money that people actually have.  They only get money when they sell a stock.

 The market is just an abstraction.  Money flows between two people or two companies or two banks or two XX.  The market means all the buyers and sellers.  The market cannot have more or less money.  It could have more or less transactions (volume) happening.

 So, the premise increased monetary base resulting in increased money "flowing into a market" makes no sense from the ground up.  

--- 

 It is however true, that you could have a bank getting 0% interest loans and using that money to buy stock from an individual at a higher price which pushes up the index.  This is what I think you are talking about.  That individual got richer. Money flowed to that individual.  Individual sellers can get richer (as long as they don't lose their purchasing power).  

 Prices on equities can rise from such a speculation above.  But they can also rise by reasonable exchanges, where a seller realizes his company is simply worth more now (in a real way, could be in terms of blocks of gold, heads of cattle, barrels of oil, dollars which haven't lost value) and finds a buyer who agrees with him.  When this is happening, the price of the company should track well with its current and future earnings - and the value of those earnings should be growing in terms of heads of cattle, barrels of oil, etc.  In an improving business world, many companies real worth could rise together, resulting in higher valuations based upon better underlying businesses themselves.  In such a world, the market indices might track pretty well with increases in the variety and number of businesses, in the quality of life of people, and the ability of individuals to buy more and better goods.  We've been seeing this across the world since WWII ended...

 -Rof 

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#42) On October 13, 2010 at 3:56 PM, rofgile (99.25) wrote:

David.. sorry.. I guess it still ended up really long!

 -Rof 

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#43) On October 13, 2010 at 3:56 PM, Option1307 (29.79) wrote:

Interesting discussion, +1.

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#44) On October 13, 2010 at 4:10 PM, SkepticalOx (99.45) wrote:

#41 

In a two stock, two person market, each investor having $10 in the market, with two stocks with one share each, each stock would be $10, and the total stock market value would be $20. 

In this scenario, how can the stock market possibly rise without money "flowing" in or out? Either one of the investors has to put some money into this trading account (money flows into the market) and buys the shares of the other guy at a higher price, or have another person join the market bringing money in. The stock market can't magically increase in value without the money flowing into it. The seller of one stock can't sell to a buyer unless the buyer has some way to pay him, and the only way to do that is to bring money into the market.

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#45) On October 13, 2010 at 4:18 PM, whereaminow (22.17) wrote:

Ok, here's another way to look at this idea.

"A rise on the securities market cannot last any length of time unless the public is both willing and able to make increased purchases." - Fritz Malchup, "The Stock Market, Credit, and Capital Formation" (1940, p. 90.

What ole Fritzy is saying here is that there has to be money available to make the stock market rise indefinitely.  And the only way to do that is to continually increase the supply of money.

Company profits in the aggregate cannot increase in a society with a stable money supply.  Notice I didn't say that wealth cannot increase.

Wealth, in purely economic terms, is "stuff" for lack of a better word.  It's the goods and services produced. (I realize that wealth defined as happiness is more than stuff, and I wholeheartedly agree, but that's not the issue here.)

With a stable money supply, prices for goods and services would be decreasing as output increased.

Aggregate company profits would remain unchanged.  That doesn't mean society's wealth remained unchanged.  Wealth is goods and services that can be purchased.  Not zero's at the end of a bank account.  That's a nominal representation of wealth that must be understood in context to... what it can purchase, understand?

So what are some ways that the general price level of the stock market increase temporarily?

1. A decrease in tax revenue.  Decreasing tax revenue increases the amount available for investment in the stock market.  This could push the entire market higher.  But obviously this has a limit.

2. A decrease in consumption.  If there was an aggregate decrease in consumption, the increase in savings could be transferred into the stock market, pushing the general price level higher.  Again, this can only happen termporarily, as eventually savings would dry up, or other avenues for capital would become more attractive, flowing money out of the market.

I'm sure people can think of other ways the market can be pushed higher temporarily. But, a long term increase is impossible unless you create new money.  And if you are creating new money wihout a matching increase in the demand for goods and services, you are devaluing the currency.

That is why I urge you not to cheer the coming rally. I believe 15,000 DJIA is around the corner, and with it a surge in speculation that will create a bubble worse than the last one.  Then what?

David in Qatar

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#46) On October 13, 2010 at 4:34 PM, whereaminow (22.17) wrote:

Rof,

I'm sorry. I will do the best I can to show why I think you are wrong.  In the end, you will have the final say on that. 

I really see you confusing the fortunes of individual companies and not looking at the aggregate.  Capitalism is a positive sum game, but not because more companies win than lose.  That's simply not true.  Capitalism is a positive sum game because some companies win, some companies lose, but the consumer benefits from the increased output arising from the struggle.

From reading your commentary, I think you believe that the stock market should be a positive sum game because capitalism is a positive sum game.  That does not follow.

Again, given a static money supply, company profits in the aggregate would remain static as well.  Some companies would increase market share and others would lose.  The positive sum game refers to the benefit felt by consumers as their real wealth increases due to increased output.

In this scenario, Benjamin Graham style value investing would still be a very effective strategy.  But the increase in value from quality companies would be offset in the aggregate by companies whose market capitalization shrunk.

This does not mean that under a static money supply, the general price level of the stock market would be the same at every instant.  Money flows in and money flows out.  But over the long haul, the price level would be relatively flat.

I hope this helps.

David in Qatar

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#47) On October 13, 2010 at 5:03 PM, Rehydrogenated (32.36) wrote:

The general price level of the stock market does not rise because companies do better and it does not fall because companies do worse.

Tell that to BP. The entire stock market fell because BP fell, no? You don't think that BP failing affects Wal-Mart or Bank of America or Arcelor Mittal?

It rises because money flows into the stock market.

You think that if someone adds 1 dollar to the "stock market" the value of the stock market increases by a dollar? 

It falls because money flows out.

You also think the opposite is true?

I'm sorry, the stock market doesn't work that way and neither does any market. New companies can enter the stock market and increase its value from their very IPO (think google) and not take resources from other companies while providing the entire world with a benefit (google search, efficient advertising, etc.). 

The market could only go up if new money was created.

If you add up the "value" of the entire stock market (so the price of every stock) and figure out how many shares are out there. The total would vastly exceed the money supply.

In your example above (the $100 economy scenario), say all the companies traded on the stock market have combined earnings, payable to shareholders of $30. The value of the stock market would be around 8x that or $240. But a new process is invented, Just In Time inventory. Just in time inventory increases productivity immediately and the combined earnings that are distributable to shareholders is now $32. Companies announce their new earnings projections and poof! The stock market rises to $256. Was money added to the stock market? Not necessarily. The value that people would have pay to own 1 share of the stock market has increased because the people who were previously willing to sell at $240 got new information, and now they will not sell for less than $256. 

Well, where did the extra $2 of earnings come from? This is a fixed economy. It must have come from somewhere else!

Correct, the $2 in earnings comes from the $70 of money in the economy that was being spent to earn the earnings. $2 of efficiency has been created. It now only takes $68 to produce the exact same amount of stuff as when we started - thanks to our new process.

And new money would be created, in a free market economy, to match the demand for money.  But in our world, money is created, sans demand, and then used to push up the stock market.

In other words, the cart leads the horse.

That's true, and you are right about the stock market going parabolic being the result of parabolic increases in the money supply. But the stock market should see steady (linear) increases over time without an increase in the money supply, thanks to increases in efficiency. 

1) Money inflows and outflows are only 1 factor that affects the value of the stock market, they do not control it. Prices can fluctuate without any net inflow or outflow. Inflows mean more liquidity in the market, but do not necessarily mean higher prices. 

2) Stock prices in the long-run tend to regress to the value of the earnings they can return to their shareholders. Any stock that is around long enough will do this. The amount of money a company can return to their shareholders increases as they become more efficient and so their stock price also increases. 

 

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#48) On October 13, 2010 at 5:16 PM, SkinneeJ (28.37) wrote:

Why would a stock market expect linear growth?  Isn't the whole idea of re-investing dividends and such to get compounding growth?  Compounding growth is parabolic.  In addition, even the population of the world is parabolic in nature, not linear, so wouldn't one expect that economies increase parabolically with the population? 

Not sure how to post pictures, but here is a link to one...

http://www.susps.org/images/worldpopgr.gif

 

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#49) On October 13, 2010 at 5:57 PM, whereaminow (22.17) wrote:

Rehydrogenated,

Tell that to BP. The entire stock market fell because BP fell, no? You don't think that BP failing affects Wal-Mart or Bank of America or Arcelor Mittal?

You are confusing temporary with long term.

David in Qatar

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#50) On October 13, 2010 at 6:03 PM, whereaminow (22.17) wrote:

SkinneeJ,

Population growth pushes down wage rates by increasing the supply of labor, but it does not follow that this would lead to a rise in stock prices. 

David in Qatar

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#51) On October 13, 2010 at 6:09 PM, whereaminow (22.17) wrote:

If you add up the "value" of the entire stock market (so the price of every stock) and figure out how many shares are out there. The total would vastly exceed the money supply.

Yes, but it would not exceed the money supply + available bank credit, which is a money substitute.  Available bank credit is determined by the interest rate.  Raise the rate, see the bank credit disappear, watch the market tumble.  This is one of the biggest reasons the Fed is so intent on keeping rates artificially low. 

You can say that your gold necklace is worth a quadrillion dollars, but that does not make it so. 

David in Qatar

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#52) On October 13, 2010 at 6:21 PM, Momentum21 (83.58) wrote:

Population growth pushes down wage rates by increasing the supply of labor, but it does not follow that this would lead to a rise in stock prices. 

Do you just pick and choose the variables that suit your argument?

What about the productivity piece of that equation?  

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#53) On October 13, 2010 at 6:32 PM, whereaminow (22.17) wrote:

Momentum21

Are you being serious?  I didn't make the argument, he did.  I'm just pointing out that population growth does not lead to a rise in stock prices.

What about the productivity piece of that equation?  

What about it?  Was that a part of his argument?  Productivity increases do not lead to a rise in the general price level of stocks either. 

Rehydrogenated,

I just looked up the Fed's leverage.  Jim Grant of Grant's Interest Rate Observer puts the New York Fed at 71:1 leverage.  I think it's safe to say that money supply (however you measure it) + available bank credit far exceeds the total amount of money in the stock market. 

David in Qatar

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#54) On October 13, 2010 at 6:34 PM, MegaEurope (< 20) wrote:

David #1: Long term increases in the general price level of the stock market (what Bulls seek) can only come about through dollar devaluation.

David #30:  Are you arguing that the general price level of stocks would keep rising for decades even if the monetary base was flat?

David #40:  I thought for a second that I was doing a terrible job of presenting this theory.  I think I went wrong by choosing the words "dollar devaluation" in the post instead of "monetary expansion."  But monetary expansion without a corresponding increase in demand is  dollar devaluation, so I figured that wouldn't be too controversial.

It's not semantics, there is a significant difference between dollar devaluation and monetary base growth. For example, if real productive capacity/wealth grew 45% in the 1890s and the monetary base grew 40% (through mining, forex flows and lending), was the dollar devalued by 40%?  No, obviously not.  Ignoring data to the contrary, you seem to think that 100% of monetary base growth since 1970 (or whenever) represents dollar devaluation.

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#55) On October 13, 2010 at 6:44 PM, whereaminow (22.17) wrote:

MegaEurope,

I assumed too much. I assumed that people would understand that monetary expansion that exceeds the market demand for money is dollar devaluation. 

The market demand for money determines the natural interest rate.  If a central planning agency keeps the interest rate artificially low, it must create more money than the market demands, by definition. My regular readers know this, because that is the classical definition of inflation:

Inflation is an "expansion or extension beyond natural or proper limits or so as to exceed normal or just value, specifically overissue of currency." Funk and Wagnalls Standard College Dictionary (1941)

But I failed to realize the significance that this post would draw in many readers that are not familiar with the economic theory I explain, and so I should have taken the time to explain that concept.

Btw, the money supply decreased slighty from 1879-1896.

David in Qatar

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#56) On October 13, 2010 at 6:52 PM, MegaEurope (< 20) wrote:

Long term increases in the general price level of the stock market (what Bulls seek) can only come about through dollar devaluation.

By the way, I'm a stock market bull and I seek total returns, not just capital gains.  And I don't think I'm alone in this opinion. 

 

Also, regarding #44-#51, I don't think you and SkepticalOx understand how capital market pricing works.  The marginal investors (the last people who happened to buy and sell) determine the capitalization of the entire market.  So a tiny flow of money can have a much larger effect on the market capitalization, and society can put $3T into the market and end up with a $6T market cap.

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#57) On October 13, 2010 at 6:57 PM, whereaminow (22.17) wrote:

MegaEurope,

So a tiny flow of money can have a much larger effect on the market capitalization, and society can put $3T into the market and end up with a $6T market cap

If society puts $3T in the market, it got that $3T from somewhere. It either comes from the sidelines or from creating new money.  If it's from the sidelines, it must come out.  Again, marginal productivity of capital. Capital flows to the highest return.  If you keep pulling money off the sidelines, higher returns will become available in other markets.

The only way keep the market's general price level rising for the long term is to keep creating money.

You should read Malchup's book.  It's very good.  It's a defense of the stock market, not an indictment.

David in Qatar

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#58) On October 13, 2010 at 7:01 PM, whereaminow (22.17) wrote:

Btw, just so readers of this conversation are clear.  Fractional reserve bank credit is creating money out of thin air.  If you put that money in the stock market, that's all well and dandy. It's still created money.  Whether that process is good or bad is irrelevant.  It's newly created money.

David in Qatar

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#59) On October 13, 2010 at 7:03 PM, MegaEurope (< 20) wrote:

Btw, the money supply decreased slighty from 1879-1896.

I know prices fell slightly over that period.  Regarding your claim about the money supply, this would be a great opportunity for you to cite a data source.

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#60) On October 13, 2010 at 7:09 PM, whereaminow (22.17) wrote:

There seems to be some confusion here, reading through the comments, that a transaction can be made with no money changing hands that affects the price of an asset.

I don't know where this idea comes from, but it's simply not true.

Let's say you go to an auction, the ultimate competitive market, and MegaEurope and I bid up the price of a painting to $100,000.  Is that the new price of the painting?  It isn't if neither Mega nor I had the $100,000 or any intention of paying it.  It isn't the new price if we can't get bank credit (new money) to pay it.  It certainly isn't the new price if the auction winner says to the auctioneer, "aw come on, all I've got is $20."

So I don't know where this idea comes from that prices can be bid up in perpituity without money changing hands, but that's not the case.  Either you have money or you have bank credit.  Either way, someone is getting paid for a transaction to take place.

David in Qatar

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#61) On October 13, 2010 at 7:11 PM, whereaminow (22.17) wrote:

MegaEurope,

A Montery History of the United States 1867-1960, Frideman and Schwartz

Don't remember the page number off hand, but I'll look it up.

David in Qatar

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#62) On October 13, 2010 at 7:15 PM, whereaminow (22.17) wrote:

Montery

Monetary

hehe. First one sounds like a history of cheese (which might work if it was written in hip hop.)

David in Qatar

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#63) On October 13, 2010 at 7:17 PM, MegaEurope (< 20) wrote:

I assumed too much. I assumed that people would understand that monetary expansion that exceeds the market demand for money is dollar devaluation. 

But I failed to realize the significance that this post would draw in many readers that are not familiar with the economic theory I explain, and so I should have taken the time to explain that concept.

You used one term when you actually meant another.  Don't blame that on my understanding, I understand inflation and money supply just fine.

The monetary base has been growing for centuries.  Before it was printing bills, it was mining gold and silver (the global supply increase of PMs used to be way above the current ~2% per year).  Monetary expansion is not going to stop just because you imagine it.

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#64) On October 13, 2010 at 7:21 PM, whereaminow (22.17) wrote:

(1) Prices (the NNP deflator) fell -0.93 percent per year between 1879, when the United States returned to the gold standard, and 1896, when the deflation came to an end, and then rose 2.08 percent per year between 1897 and 1914. The stock of money behaved in a similar way.

I can't find a copy online of Friedman, so this is second best, based on the book.

http://eh.net/node/2744

Rothbard's History of Money and Banking in the United States is also a very good book on the subject.

http://mises.org/pdf/Rothbardreaders/Part1.pdf

David in Qatar

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#65) On October 13, 2010 at 7:26 PM, whereaminow (22.17) wrote:

MegaEurope,

I never said I wanted monetary expansion to stop.  I said very clearly, and have said very clearly dozens of times since I started blogging here two years ago, that I don't want the money supply centrally planned by people that get rewarded for a policy of inflation - creating money beyond market demand.

I said that the only way that the general price level of the stock market can rise for decades is by perpetually creating new money, which must be done in excess of the demand, therefore devaluing the dollar.  It's like cheering because the price of milk reached $10/gal. 

That point is irrefutable.  Now if you want to argue about whether or not the increase in the supply of money should be determined by central planners, then go right ahead.

David in Qatar

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#66) On October 13, 2010 at 7:28 PM, MegaEurope (< 20) wrote:

#20, if I only have $20 obviously I'm only in the market for .0002% of a painting.  Yet if the person before me bought .0002% at $19, my $20 trade moved its market cap up $5000.

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#67) On October 13, 2010 at 7:41 PM, whereaminow (22.17) wrote:

Ok, now I have to openly wonder if the difference between temporary price movements that are the result of marginal buyers and sellers at the margin versus long term price movements that reflect the subjective evaluation of the aggregate participants in the market needs to be explained.  Perhaps that will be the next post.

Clearly this subject needs a part Two.

David in Qatar

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#68) On October 13, 2010 at 7:48 PM, starbucks4ever (97.77) wrote:

Great post. Believe me, I am not cheerleading this rally even though I turned bullish in September and find myself nominally richer today. This gain is completely erased by the coming inflation and with proper accounting, I will be lucky to break even. But a victory, though a Phyrric one, is better than outright defeat. So I am continuing to ride this wave even though I am aware how far we are now from S&P's natural valuation. And I have no doubt we'll crash again sometime, but we can't tell when it will happen. Maybe in 5 years, maybe in a decade. Or maybe much sooner. But hey, while the music is playing you've got to dance, right?

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#69) On October 13, 2010 at 7:51 PM, FleaBagger (28.93) wrote:

David, on the chart you posted, the nominal price of the DJIA doubled or almost tripled every ten years starting with the end of WWII in Oct. 1945, except from 1965 to 1975. It just looks more dramatic at the end, due to the magic of compounding, unless you control for it by displaying it as a logarithm. I'm with you on most things, but you undersell the resiliency of the formerly free economy or the amount of currency manipulation between 1914-1980 (or whenever), or probably both. 

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#70) On October 13, 2010 at 7:51 PM, MegaEurope (< 20) wrote:

I said that the only way that the general price level of the stock market can rise for decades is by perpetually creating new money, which must be done in excess of the demand, therefore devaluing the dollar.  It's like cheering because the price of milk reached $10/gal. 

That point is irrefutable.

Stock prices rose 3.9x from 1814-1925, when the dollar was not significantly devalued.  (This is in addition to the much larger return from dividends.)  Refuted. 

Source: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=236982, pages 23-26

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#71) On October 13, 2010 at 8:02 PM, whereaminow (22.17) wrote:

MegaEurope

You are missing the point of this entire post, and I'm not sure if you are doing that intentionally because you have to "win" the argument or from misunderstanding.

The dollar was not devalued significantly from 1814-1925 because a central planning agency did not determine the interest rate.

That does not mean that new money was not created.  New money was added to the economy from 1814-1925.  Either in gold flowing into the country or the addition of fractional reserve bank credit.

Not refuted.

The only way to have the stock market rise decade over decade is to increase the money supply.  That's the only way.

The only way the money supply is increased under the Federal Reserve is to purposefully force interest rates too low, which is by definition inflationary.

Split hairs all you want.  If you are celebrating perpetually rising market prices you are celebrating the creation of new money.  If you are celebrating the creation of new money, it must be new money created by the Fed and its member banks, because that's the only kind of money we have.  You are celebrating inflation.

David in Qatar

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#72) On October 13, 2010 at 8:11 PM, MegaEurope (< 20) wrote:

I said that the only way that the general price level of the stock market can rise for decades is by perpetually creating new money, which must be done in excess of the demand, therefore devaluing the dollar.  

Do you seriously not understand how stock market data from the 1800s proved this statement wrong?

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#73) On October 13, 2010 at 8:14 PM, whereaminow (22.17) wrote:

FleaBagger,

DJIA doubled or almost tripled every ten years starting with the end of WWII in Oct. 1945

And what has happened to consumer prices during that same time frame?  Remember, no country has had anything resembling real deflation - consistent decline in the general price level - not even Japan, since WWII.  That's when Bretton Woods started, remember?  And what did the US do from 1944-1971?  Printed money, hoping no one would call them on it.

I'm going to write a Part Two and I think you'll see things a littel different.  If not, no big deal.

David in Qatar

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#74) On October 13, 2010 at 8:18 PM, whereaminow (22.17) wrote:

MegaEurope,

which must be done in excess of the demand

Do you seriously not understand how that part of the statement refers to the operations of today's Federal Reserve - a central planning agency that did not exist for most of the 1800s?

David in Qatar

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#75) On October 13, 2010 at 8:20 PM, whereaminow (22.17) wrote:

MegaEurope,

Do you understand how money comes to the market without a central planning agency?

David in Qatar

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#76) On October 13, 2010 at 8:20 PM, MegaEurope (< 20) wrote:

I'm not a psychic David.  If you want to argue with me, try to write what you mean.  I'm out.

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#77) On October 13, 2010 at 8:23 PM, whereaminow (22.17) wrote:

MegaEurope,

If you spent less time trying to win arguments and more time trying to understand different ideas, this would be less painful.  For both of us.

David in Qatar

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#78) On October 13, 2010 at 9:07 PM, whereaminow (22.17) wrote:

MegaEurope,

On second thought, it's by far more my fault than yours.

I did not appeciate how far apart our economic framework is.  And since this is my post and it was directed at the mainstream economic view, it was my responsibility to give a further explanation - an explanation that was easier to understand for people that have not had much exposure to Austrian School economics.

So I'm going to do that in Part Two. I hope it helps bring us a to better place of understanding.  But if not, at least I will have given a better effort than I did here.

David in Qatar 

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#79) On October 14, 2010 at 12:34 AM, rhallbick (99.59) wrote:

David,

Kudos to you for the efforts you have been putting in on these blogs. 

I saw it mentioned two or three times in the discussion above about new money going into the stock market.  This is something that I can't make myself understand how it can possibly happen.  Have you ever read anything or given it any thought?  If every transaction results in the seller receiving this new money, which is then either taken away or used in a new transaction, for which there is now a new seller, how is there ever more money put into anything?  It would seem to me that all that happens is the overall market prices of things would change based on how much money is sloshing around and the comparative advantages assigned to what is available for sale.

I can give myself a headache if I imagine that when a piece of  goods or an asset is originally created and sold, the money goes to the creator and there never has been any net money in anything.

Of course, each thought leads to another, but I'll stop there. 

Looking forward to part II; I alway learn something from your discussions.  Thanks!

RH 

 

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#80) On October 14, 2010 at 12:57 AM, starbucks4ever (97.77) wrote:

Same money velocity, higher prices ---> greater money supply. 

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#81) On October 14, 2010 at 1:34 AM, whereaminow (22.17) wrote:

Part Two is up. I hope you enjoy it.  We can continue the discussion there, but I will gone for the next 12-14 hours. 

David in Qatar 

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