You'll recall my discussion of a collectible market - the one that isn't controlled by the price mechanism. (The price mechanism is the engine of the free market, constantly bringing changes in supply/demand back to an equilibrium.)
In a collectible market, when the price goes up, there is no rush to market to supply the demand and return to equilibrium. In fact when the price goes up, it encourages collectors to stay away from the market, which phenomenon raises their determination to keep away from the market in expectation of further increases.
In a collectible market income doesn't matter. Price is everything.
I pointed out that the land market is a collectible market - a major reason for the land component being between 50% and 70& of the cost of housing.
However, the top end of the stock market also acts like a collectible market, which is why we have a price/earnings ratio that's out of kilter, causing some concern to market analysts.
What happens in the market has little effect on the economy, though what happens in the economy usually has considerable effect on the market.
One recalls what happened to the economy in the 80's during "the worst stock market crash since the depression". The answer was nothing.
Whatever the ups and downs of the stock market, they don't matter (except to the participants). The crucial question must be -are the goods still leaving the factories, or are they slowing and stopping?
I could add more to this but let me simply say that mostly the people who "run" the economy haven't a clue why the economy behaves the way it does. They really don't know why the economy has been in "boom" and they don't know why the boom has faltered.
I will say that it has nothing to with the stock market, nothing basically to do with the currencies or the banks (these react to an existing economic condition) - but everything to do with why production slows and stops.
Harry
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Keith Hudson wrote:
Hi Steve,
It's nice to have someone on FW agreeing with me for a change!
However (with my second pot of tea of the day) I have before me an article
by Gerard Baker in today's FT headed: "America sails serenely through a
perfect storm", with the subtitle, "If current trends hold, it is likely
that the US will make a remarkable recovery from its shortest recession on
record." In the article itself (which I haven't yet read properly), he
doesn't seem to give any factual evidence. But it's now time for my dogwalk
and reading it further will have to wait for breakfast time.
So we will see (as you say, "in the next few weeks") whether Baker or we
will have to eat our words!
Incidentally, what I didn't mention in my original posting is that within
each of the last three recessions there was a "W"-shaped surge in
investment. There's so much liquidity sloshing around at present that no
doubt this will also happen this time. The point is though that this sort
of attempted "recovery" investment had better be high-quality (and with
quick results) or else it will fail to promote a wider recovery. It's most
unlikely to be successful in my view. There are too many other things that
are awry.
Keith
At 17:07 23/01/02 -0500, you wrote:
>My analysis here in North America matches Keith's, as does one done by a
>friend in Australia. Mine & my friend's include technical analysis
>alongside the historic fundamental approach. There is a fan distribution
>top being formed in the S& P 500 index (500 largest US public
>companies). The next few weeks are critical. If the market can't rally
>above long term moviing average (200 day) and hold above it for some
>months, the liklihood is that the loews of last October will be tested.
>In my view they will not hold, and valuations will then have a
>significant reduction to the P/E levels Keith mentions. The big unknown
>is what the earnings themselves will be. If they drop, say 25%, the
>stocks might have another 50% to drop!
>
>Steve
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Harry Pollard
Henry George School of LA
Box 655
Tujunga CA 91042
Tel: (818) 352-4141
Fax: (818) 353-2242
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