[Homestead] The Piggy Bank is empty, Wall Street reacts
sgian at planetc.com
Fri Sep 24 14:26:09 EDT 2004
>From Tvo's article:
> Despite strong corporate profits,
the Dow Jones industrial average has been stuck just above 10,000 --
trading in the same sluggish range it has maintained all year.
The National Piggy Bank is nothing more than a fraudulent illusion even when
times are good. What does it mean if you have stock valued at $XXX in ABC
company? It only means that if you are among the first 5% of people to
demand cash for you stock, you will get most of that "value". But the next
5% get far less and so it goes until well before half the stock holders try
to bail out, the "value" of your stock is zero.
Lets suppose there is a box in which each of ten people have put in a
thousand dollars and imagine to themselves that they have a "value" of $1000
on which they can rely. If all ten went back to the box and took out their
$1000, the very last person would still get every penny of his money.
Stocks don't work that way.
Suppose there is a box which is the startup or running expense till of a
company and ten people each put in $1000 with the prospect that holding a
piece of that company will be a valuable thing in the future and their money
will increase. $8000 of the $10000 in the till us used for company
expenses and in the normal course of things the product is sold and the
money is put back .... and more! So the 1/10th share of the money one might
eventually expect to be in the till might now be worth $1200 instead of
$1000. People seeing this might want to get in on the deal and to do so
will not cost them $1200 instead of the $1000 it did the original investors.
But at any given time, there isn't an actual $12000 or even $10000 in the
till. If when there was $2000 in the till (the other $8000 having gone for
expenses and improvements in the company) and one of the ten investors
decides he wants his $1000 back, the company will offer to sell his stock to
someone else and if someone buys it they had the grand over to the original
investor and nothing much has changed.
But the thing I'd point out is that all the 'value' in stocks doesn't
actually exist as cash that could be parlayed into food, housing, fuel, etc.
It is only a long term prospect that the company invested in is likely to do
well enough in the future to temp other people to want to buy the share in
the company should someone want to sell theirs and use the 'value' for real
goods. It absolutely depends on there being only a very small number of
people wanting to do this at the same time.
Otherwise it is like my expense till illustration. If no one is willing at
that time to buy up the share of the person cashing out, the 'value' of that
share must be lowered until someone IS willing to buy it, and the original
investor only gets that much. If he originally put in $1000 and asks to
have his money back, and the most anyone is willing to give for his 'share'
is $600, that's all he gets. Seeing this, people will be even less willing
to buy from the next person who bails out and the next person might only get
$400. If everyone scrambled to bail out at once, the amount they would get
would be next to nothing.
So Wall Street reacting to an empty Piggy Bank is unconvincing, Wall
Street's piggy bank never had any actual coins to shake out on demand, it
has been empty all along.
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