
The Problem with the Stock Market - Anon84
http://blogmaverick.com/2009/05/06/the-problem-with-the-stock-market/
======
yummyfajitas
Summary of the article: What caused the last two bubbles? Financial engineers
and also some long term investors (people buying houses). I believe the
government should therefore penalize financial engineers vs investors.

Not really worth reading...

------
bokonist
Cuban leaves out the role of monetary inflation. From 2003-2007, MZM was
growing at ~8% a year, corporate revenues at around ~10% a year, bank credit
expanding at ~11% a year, gold at 23% a year. Meanwhile corporate bonds were
only paying about 6%, and CD's were around 4%. In other words, if you can just
buy something that does not dilute (like gold or stocks) you make a return of
~8% a year in dollars.

When monetary inflation is running higher than the interest rate on bonds, the
Nash equilibrium for stock prices is infinity. More precisely, the Nash
equilibrium is for there to be a currency run. It can be somewhat rational to
buy stocks even at obscenely low dividend yields, because it is better than
holding on to a rapidly depreciating dollar. But if the currency run does not
materialize, you are out a lot of dough. We are all victims of an out of
control monetary system.

~~~
smanek
How is the Nash equilibrium for stock prices infinity when inflation is
greater than the interest rate on bonds?

I can see that being the case when the universe of goods consists solely of
stocks and bonds (i.e., no other products are available for purchase) and you
expect the current situation (interest rates, inflation, etc) to persist into
perpetuity.

But, if either of those conditions is untrue I don't see how infinite price is
the equilibrium (which isn't to say it isn't just that I don't see how it is).

Mind explaining?

Also, the fact that some prices were increasing doesn't necessarily mean there
is inflation. Rising prices could be just as easily explained by real
increases in real total wealth while the quantities of some good remained
fixed, or at least grew slower than the overall economies rate of growth.

~~~
bokonist
_How is the Nash equilibrium for stock prices infinity when inflation is
greater than the interest rate on bonds?_

The Nash equilibrium is for the market to select some good other than Federal
Reserve Notes to use as a store of value. People can just keep borrowing
money, investing it in something like gold, and the price will continue to
appreciate in terms of dollars. As everyone start to do that their is a full
fledged currency run. The price of everything in dollars heads towards
infinity as the dollar becomes worthless. (perhaps worthless is an
overstatement as the government might still create some demand by taxing in
dollars. But effectively worthless compared to its value now).

This article illustrates more clearly how the scenario can play out:
<http://www.safehaven.com/article-5205.htm> (note that the author's prediction
did not happen, because monetary inflation came to an abrupt stop in 2008. Not
coincidentally, the stock market proceeded to crash).

 _Rising prices could be just as easily explained by real increases in real
total wealth while the quantities of some good remained fixed, or at least
grew slower than the overall economies rate of growth._

The price of good X is simply the ratio at which market actors are willing to
exchange X for dollars. For the price to rise, one of four things must happen:

\- The supply of X can be decreasing

\- The supply of dollars can be increasing

\- Demand for X can be increasing

\- Demand for dollars can be decreasing

Changes in the supply and demand for dollars we call "monetary inflation".

So if you say the rising prices are some other cause, it can either be the
supply of X is decreasing or the demand for X is increasing. Now we know that
the supply of gold or real estate is not decreasing. So that leaves us with
the possibility that demand is increasing. But the price increase is happening
in every category of good - gold, oil, farm land, downtown skyscrapers,
copper, stocks, etc. When demand for every good denominated is increasing,
that's basically synonymous with saying that demand for dollars is falling.

For further evidence, note that MZM and total credit creation were also rising
at ~10% a year. These are both a more direct measure of monetary inflation.

------
BRadmin
It's not a long entry and his tax proposals aimed at producing desired results
make for a worthwhile read.

He bolded the main takeaway:

"The beautiful thing about this country is that we like to work hard, and we
like to take chances. Unfortunately, over the last 15 years, the incentives
have been to take chances as a financial engineer rather than as an
entrepreneur. We give far more money to people who play games with financial
instruments than we give to people who come up with ideas for the next big
thing. That needs to change if we want to remain a leader in this world."

------
jlefo7p6
I'm not sure how investing is taxed right now. On the assumption that the
author is calling for an existing tax to be taken away from a certain kind of
investment:

Under the current tax structure, the author believes that investors are
encouraged to engage is overly risky behavior. It is not obvious that reducing
taxes on a subset of financial instruments will make the rest of the
instruments less appealing. The flexibility of the taxed instruments is not
necessarily made up for by an increase in the rewards of the untaxed
instruments. Massively increasing taxes on the instruments you dislike seems
like a more straightforward incentive system.

(I'm not convinced that choice of instrument divides investors into "good" and
"bad" categories, but the author's proposed solution seemed like an easier
target.)

