Stock market shake-up: So what happens Monday?

[ralfy]

1) You do not need "abnormal" returns to cover inflation (see wiki definition at the OP).

No, you don't, but you still need increasing inflows for obvious reasons.

2) Then the shops, malls, factories, self-employed professionals, the entire economy are a Ponzi scheme. What is the usefulness of such a definition?

You can have increasing inflows outside a Ponzi scheme. It's called "capitalism."

A stock market becomes a Ponzi scheme given the example in the wiki.

3) The market can continue operating even if the fees become insufficient. Remember "Margin Call" - they let go like 80% of their staff. They can shed staff, increase the fees. So instead of 0.01% fee you'd have to pay 0.1% and that'd put off a bunch of small speculators. The market will shrink but continue operating. At recession times the market stays on depressed levels for months or even years but continues operating.

I am referring to the organization that runs the exchange, not the brokerage firms.

We can manipulate the definition of Ponzi however we like, but then again, what is then the usefulness of the concept. The original wiki definition at the OP includes the word "perpetuation".

If it's seen as a Ponzi scheme, then forum members who support that might be discouraged from trading in stocks. The same goes for anyone who will use a rise in the stock market as evidence that the economy is improving.

The are references to the entire economy as a Ponzi scheme above in the thread, that's why the comment was made.

Sorry, I am only referring to the title of the thread. The idea of the "entire economy" being a Ponzi scheme is another topic but may be considered given the nature of money as well as the premise that market forces will ensure continuous economic growth in a world with limited resources.

How is the market guilty of it. Lots of people are pouring in in search of free money and a greater fool. Lots of people are gambling in Las Vegas. Do not forget that many people, normally a substantial majority, stay away both from the bubble investments and from gambling.

This argument makes no sense to me. It is as if you want to separate the idea of a stock market with the actual one involving "lots of people...pouring in in search of free money," etc. This, of course, implies the possibility of a stock market that will involve only people who will 'stay away [from both] the bubble investments and from gambling." Good luck with that.

You might be attacking the wrong guy. If pensions plans are directed to a place unsuitable for them, that you'd rather be after whoever directs them rather than after that place. If a broker makes empty boasts then go after that broker.

I think this is what got the U.S. into trouble in the first place, i.e., the assumption that the market is "self-correcting," and that the reckless will suffer and the prudent will triumph. Of course, that assumes that the reckless aren't in power.

What is exactly you suggestion for the way forward? To shut down the market? If anything, the market provides another degree of economic freedom. You always have an option of going there or refraining from going there; if the market is not there, then no such option is available.

There is no "way forward". And if "the market provides another degree of economic freedom," then count on people to look for more "economic freedoms," leading to more economic crises. The idea of "going there or refraining" will become irrelevant given problems like peak oil.

Seeking speculative (more than normal) returns in the market is a less then zero-sum game - you have to rip off the guy on the other side of the transaction plus keep your broker fed. No one hides this fact. So if you are after free money from the market then this is not exactly the place for high moralizing. You win - enjoy, you lose - take stock and go on. You were after ripping off that other guy and he did not let you - not exactly the point for grand moral standing.

Except that the "zero-sum game" actually involves the powerful getting bailouts at the expense of the citizenry, which the former can easily do because they are powerful. Also, the "zero-sum game" through financial speculation contributes to higher food and oil prices, if not to economic crises that leads to more unemployment and lack of income.

So much for that. Eventually, the real zero-sum game will come out: we use lots of oil to prop up "economic freedoms" including a stock market, and when oil production starts to go into decline....

But the other side of the coin - the market puts you in a perfect competitive position, where your performance depends only on yourself. You and impartial numbers only. A breath of fresh air really. And far from free money - hard work. Many other economic activities like "jobs" have long digressed mostly to nothing more than endless fuss of office politics.

"Impartial numbers," indeed. Like much of total money supply.

[radon]

I am referring to the organization that runs the exchange, not the brokerage firms.

I know, but it does not make difference.

Many valid points, but again, they appear to directed at various business/state entities, rather than the market itself. In summary, the key contentious point is:

Market <> Market bubbles
Market <> "the powerful getting bailouts at the expense of the citizenry"
Market <> anti-market government interventions
...

This argument makes no sense to me. It is as if you want to separate the idea of a stock market with the actual one involving "lots of people...pouring in in search of free money," etc. This, of course, implies the possibility of a stock market that will involve only people who will 'stay away [from both] the bubble investments and from gambling." Good luck with that.

If you think that the majority are dumb herd who should be protected from abuse by closing the market for them, then a way to go could be limiting the market participation to qualified investors: net wealth threshold, qualification exams with a heavy state levy, limitation of the investment scope for pension schemes/life companies. In absence of investment alternatives, you'd pretty much finish up with everyone holding the government debt, like the Japanese do.

You do not have to have markets in order to have you pensions going unfunded. When the Soviet Union collapsed the Russian pensioners were left without pensions, and there were not stock markets in place at all. The Russian pension system is now effectively (for all the talk of 3-tier system) is state/tax sponsored pay-as-you-go. When the pensioners get a pay hike, the agencies and analysts scream "The markets will not like it", as though the markets have soul and mind. What we can say for sure is that the agencies and analysts don't like it, whatever their motivation is. Not "the markets".

[dinopello]

Wait until the Baby Boomers really start pulling their money out of the markets due to mandatory withdrawals as required by law.

Demographics is an important factor in all this. What do you think the Baby Boomers will do with all that money they are pulling out ?

[Lore]

Wait until the Baby Boomers really start pulling their money out of the markets due to mandatory withdrawals as required by law.

Demographics is an important factor in all this. What do you think the Baby Boomers will do with all that money they are pulling out ?

Spend it on health care where it will be quickly sucked down a rat hole. They, as a group, won't be spending it on new homes, cars, furniture, or just about any other long term major purchase that produces the most jobs for the private sector. This includes all the toys of youth.

Since they will be on a fixed income theIr investments will be quickly taken advantage of to supplement their last years.

[vtsnowedin]

If a boomer has mandatory withdrawals that are higher then he needs for current expenses he can turn around and buy stock with the after tax portion and keep it in a regular account in joint ownership with his heirs.
The whole point of the mandatory withdrawal is to let the IRS get their cut of your profits. Once those taxes are paid you can do whatever you want with the balance and a solid dividend paying stock is a good option. Some might even buy gold with it.!! All of mine will certainly go to current expense.

[Quinny]

The naive idea that the market is something that gives some kind of natural balance is garbage. Most people are (and have been for decades) struggling to survive from day to day and the market is something that they have no connection with.

[ralfy]

I know, but it does not make difference.

My only point is that a stock market needs ever increasing inflows, whether or not you consider it a Ponzi scheme. That's because the organization (not brokerage firms) that runs the exchange has costs such as wages and utilities that go up each year due to inflation. In fact, the same applies to may businesses that have such costs.

Many valid points, but again, they appear to directed at various business/state entities, rather than the market itself. In summary, the key contentious point is:

Market <> Market bubbles
Market <> "the powerful getting bailouts at the expense of the citizenry"
Market <> anti-market government interventions
..

That depends on the type of market involved. One that involves a barter system, for example, will not experience bubbles. The second point will always happen in any capitalist system because those to which financial power is concentrated (which is inevitable in such a system) will soon take control of the government, and thus receive bailouts if they take risks and make mistakes. Finally, not all "government interventions" are "anti-market."

If you think that the majority are dumb herd who should be protected from abuse by closing the market for them, then a way to go could be limiting the market participation to qualified investors: net wealth threshold, qualification exams with a heavy state levy, limitation of the investment scope for pension schemes/life companies. In absence of investment alternatives, you'd pretty much finish up with everyone holding the government debt, like the Japanese do.

Who determines who is "qualified"?

You do not have to have markets in order to have you pensions going unfunded. When the Soviet Union collapsed the Russian pensioners were left without pensions, and there were not stock markets in place at all. The Russian pension system is now effectively (for all the talk of 3-tier system) is state/tax sponsored pay-as-you-go. When the pensioners get a pay hike, the agencies and analysts scream "The markets will not like it", as though the markets have soul and mind. What we can say for sure is that the agencies and analysts don't like it, whatever their motivation is. Not "the markets".

I don't understand your argument: are you saying that markets are self-correcting or self-regulating?

[radon]

I know, but it does not make difference.

My only point is that a stock market needs ever increasing inflows, whether or not you consider it a Ponzi scheme. That's because the organization (not brokerage firms) that runs the exchange has costs such as wages and utilities that go up each year due to inflation. In fact, the same applies to may businesses that have such costs.

Meaning that this organization is not different from a brokerage firm or any other business in this respect. It can shed staff and raise fees according to inflation. Lets call it Ponzi if it makes us happier. Alternatively, we can simply call it "inflation".

That depends on the type of market involved. One that involves a barter system, for example, will not experience bubbles.

Are you sure?
But anyway, even if it's true, it does not really matter.

Who determines who is "qualified"?

I thought that this was the question that I should ask you.
As for the real life examples, then the answer can be: law.
There are whole classes of the so-called alternative investments where investor qualifications have long been in place: private equity, hedge funds etc.

I don't understand your argument: are you saying that markets are self-correcting or self-regulating?

No, I am saying that you do not have to have markets in place in order to be ripped off. The market is a convenient scapegoat as it is faceless and helpless, and can say no word in own defense.

[ralfy]

Meaning that this organization is not different from a brokerage firm or any other business in this respect. It can shed staff and raise fees according to inflation. Lets call it Ponzi if it makes us happier. Alternatively, we can simply call it "inflation".

Exactly, until it reaches a point when the exchange shuts down. That's why a stock market requires ever increasing flows. The same goes for a capitalist economy.

Are you sure?
But anyway, even if it's true, it does not really matter.

Definitely. Can you envision a "bubble" taking place in a barter system?

I thought that this was the question that I should ask you.
As for the real life examples, then the answer can be: law.
There are whole classes of the so-called alternative investments where investor qualifications have long been in place: private equity, hedge funds etc.

It will not matter who is qualified if they are not in financial power. That is why this "way to go" doesn't make sense.

No, I am saying that you do not have to have markets in place in order to be ripped off. The market is a convenient scapegoat as it is faceless and helpless, and can say no word in own defense.

A market is neither faceless nor helpless. It is composed of individuals engaged in business transactions. It never operates in a vacuum.

This thread is about stock markets and not just any market. A stock market that consists of an exchange requires ever increasing flows to pay for the services of those operating the exchange. If that doesn't take place, then it eventually shuts down.

The stock market once had low volumes of transactions because most people worked in manufacturing and agriculture. But as wages and costs for supporting a middle class lifestyle started to increase, then more manufacturing was outsourced, agriculture was mechanized and subsidized, and more moved to the service industry, including finance. That coupled with deregulation (which was inevitable as government essentially works for households and corporations) led to a significant increase not just in stock market volume but in financial services, including corporate, government, and household debts. The result is an economy where around 70 pct work in the service industry and where around 70 pct of economic activity may be connected to consumer spending.

Thus, in order for the the U.S. economy to continue growing or to "recover", it has to accumulate more debt and spend more. And the stock market is part of the same economy. This is where the Ponzi scheme takes place, which involves all sorts of financial speculation, from call and put options to futures trading. Again, look at the second section of the wiki entry.

All this is part of a capitalist system which requires increasing production and consumption of resources supported by increasing credit, with credit increasing further as more move from manufacturing and mechanized agriculture to services, esp. to finance, where even more money can be made, all needed to support a middle class lifestyle. And this applies not only to the U.S. economy but to the global economy. That is why similar problems are taking place in BRIC and emerging markets.

Ultimately, increasing debt will lead to one credit crisis after another, which is what we've been experiencing since 2008. But that will be a walk in the park compared to the effects of a resource crunch, which no amount of funny money creation will solve.

[radon]

Exactly, until it reaches a point when the exchange shuts down.

Yes, it can reach this point. Meaning that there is not enough demand and it can no longer operate as going concern until the demand revives. No different from any other business.

Definitely. Can you envision a "bubble" taking place in a barter system?

Hypothetically, yes. When, for example, hysteria around a certain product reaches the point where people are prepared to give up disproportionate amount of their goods to acquire this product.

Not exactly barter-based, but the system in which tulip mania occurred was not fiat-money based either.

It will not matter who is qualified if they are not in financial power.

Can always change the investment restriction to those who are in the financial power; how exactly - is a technical issue.

That is why this "way to go" doesn't make sense.

I was not advocating it. I was illustrating what may happen if we limit the investment scope, namely - everyone will finish up holding the government debt. You think pensions/savings would be safer?

A market is neither faceless nor helpless. It is composed of individuals engaged in business transactions. It never operates in a vacuum.

Again, this appears to be the key distinction in our approaches. You appear to be incorporating in the concept everyone who is involved in operations in the market, and nowadays this is almost any active economic agent - the "entire economy". Some others even view the market as a magnificent living being with an invisible hand.

My approach is far more primitive, narrow, and, in my view, practical. I view it as infrastructure that enables me to trade the assets that I like to trade. I am not concerned with brokers, dealers, analysts, and even counterparties as long as I am delivered with the asset that I would like to acquire at a price that I have reached an agreement to pay. The fact that certain parties or groups engaged in the market operations may promote excessive trading activities in certain asset classes does not bother me, as I can always stay away from it. It is not the infrastructure, it is the specific market parties that promote those activities that you should go after if you think that they perpetrate abuse.

This is not much different from the weekend veggie/fruit market. The guy selling the watermelons (the broker, effectively) shouts trying to attract the buyers, then calls some ridiculously high price to boost his earnings, and then he wants to sell at bulk, and then we bargain and settle, and even then he may try to give me a tainted fruit. They do try to rip you off from time to time, but as long as you keep watching you finish up with a beautiful fresh fruit at a decent price, thanks mister city mayor for putting up all this weekend market infrastructure in place.

This thread is about stock markets and not just any market.

Valid point, but it doesn't seem to be any harm in extending the argument to other financial markets.

The stock market once had low volumes of transactions because most people worked in manufacturing and agriculture. But as ....

This actually confirms that the market (or market infrastructure) per se is not an inherently Ponzi-like structure.

[ralfy]

Yes, it can reach this point. Meaning that there is not enough demand and it can no longer operate as going concern until the demand revives. No different from any other business.

This supports my argument.

Hypothetically, yes. When, for example, hysteria around a certain product reaches the point where people are prepared to give up disproportionate amount of their goods to acquire this product.

Not exactly barter-based, but the system in which tulip mania occurred was not fiat-money based either.

This also proves my argument. In addition, fiat money was not needed, as promissory notes from banks would have had the same effect.

Ironically, we live in the same world today, where most of total money supply isn't created by governments or central banks but by commercial banks each time they extend credit. The largest component is between $600 trillion and $1.2 quadrillion in unregulated derivatives.

Can always change the investment restriction to those who are in the financial power; how exactly - is a technical issue.

Only if those who will enforce such restrictions are more powerful than those in financial power. In which case, this is far more than just a technical issue.

I was not advocating it. I was illustrating what may happen if we limit the investment scope, namely - everyone will finish up holding the government debt. You think pensions/savings would be safer?

Again, who limits the "investment scope." The government that also works for those in financial power?

Again, this appears to be the key distinction in our approaches. You appear to be incorporating in the concept everyone who is involved in operations in the market, and nowadays this is almost any active economic agent - the "entire economy". Some others even view the market as a magnificent living being with an invisible hand.

No, my approach is not free market capitalism. My point is that regulation won't work because those who will regulate essentially work for those who don't want regulation. In which case, expect deregulation, which is exactly what happened, and the effects of such, which is what we are seeing right now.

My approach is far more primitive, narrow, and, in my view, practical. I view it as infrastructure that enables me to trade the assets that I like to trade. I am not concerned with brokers, dealers, analysts, and even counterparties as long as I am delivered with the asset that I would like to acquire at a price that I have reached an agreement to pay. The fact that certain parties or groups engaged in the market operations may promote excessive trading activities in certain asset classes does not bother me, as I can always stay away from it. It is not the infrastructure, it is the specific market parties that promote those activities that you should go after if you think that they perpetrate abuse.

Your approach already took place. But as some became more interested in making money by lending it or buying and selling commodities, then the rise of the finance industry was inevitable. The same goes for more of the middle class moving from manufacturing and agriculture to the service industry.

Why didn't the government "go after" those who "perpetrated abuse"? Because they were also benefiting in the same way as corporations and middle class households.

This is not much different from the weekend veggie/fruit market. The guy selling the watermelons (the broker, effectively) shouts trying to attract the buyers, then calls some ridiculously high price to boost his earnings, and then he wants to sell at bulk, and then we bargain and settle, and even then he may try to give me a tainted fruit. They do try to rip you off from time to time, but as long as you keep watching you finish up with a beautiful fresh fruit at a decent price, thanks mister city mayor for putting up all this weekend market infrastructure in place.

A nice, cute, middle class story with the city mayor, the weekend market, and lots of nice "infrastructure" in place. Of course, for much of the world, the story is very different.

Valid point, but it doesn't seem to be any harm in extending the argument to other financial markets.

Definitely, as stock markets are financial markets. But markets don't consist essentially of financial markets.

This actually confirms that the market (or market infrastructure) per se is not an inherently Ponzi-like structure.

Ponzi schemes start small.

[radon]

Of course, for much of the world, the story is very different.

Much of the world. A bright Indian trader with Internet access can now outcompete first-worlders who thought that they were shrewd investors but, in reality, simply arbitraged the privilege of access to the financial markets afforded to them by their place of residence.

[ralfy]

Much of the world. A bright Indian trader with Internet access can now outcompete first-worlders who thought that they were shrewd investors but, in reality, simply arbitraged the privilege of access to the financial markets afforded to them by their place of residence.

60 pct of the global population earn only around two dollars daily. Most lack access to one or more basic needs, from potable water to basic public health care to even food.

[azouz110]

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