Bull Markets, Asset Inflation and Obscene Profits. Normally in the past, an increase in the stock market was considered to be GOOD. It was an indicator of prosperity and economic good times. But after the stock market increases of the past decade many have decided that the Bull Market is BAD. It is a "bubble" that must "burst". It is claimed by some that any increases in stock prices are like the tulip prices on Holland during the great bubble that collapsed. The stock market is a "zero sum game" like poker: some can win only as a result of others losing. Buyers seek to sell to the "greater fool". Michael Coburn has even formulated the theory that all government deficit spending must result in inflation. And since the large deficits of the Reagan, Bush and early Clinton years have been accompanied by a falling rate of inflation as measured by the Consumer Price Index, but an increase in the stock market, Coburn has decided that this must be a different kind of inflation: asset inflation. Why is this "asset inflation" (BAD), and not an indication of good economic times? Well because stock prices are high relative to corporate earnings, and least as compared to the historic "price-earning ratio". However current stock prices are not determined my CURRENT earnings, but by the stock purchaser’s estimate of FUTURE earning for the company. People buy a stock now if they think the current price is low relative to future earnings. And the big surge in recent stock prices have been in the internet biotechnology, and other high technology corporate stocks. So either this is all just a "bubble that must burst" when people wise up to the fact that the effect of technology is over estimated; or the people buying the stocks have correctly predicted that the new technology will transform the economy and that the companies that get in on the ground floor will soon be generating enormous earnings. Which is it? Will the internet prove to be a 90’s version of CB radio? Or will it be the modern equivalent of the automobile in the 1890’s? And if corporate earning do catch up with their current stock prices, that too will be BAD. Because then the companies will be earning "Obscene Profits". -- ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) For a good time call http://www.geocities.com/capitolhill/4834 > Jim Blair: > >>Normally in the past, an increase in the stock market was considered to > >>be GOOD. It was an indicator of prosperity and economic good times. ebus38@uniserve.com: > >A current indicator, not a leading one.... SUSUPPLY wrote: > Here are the leading economic indicators: > > 1. Average Workweek (Manufacturing) > 2. Initial Unemployment Claims > 3. Consumer Goods Orders > 4. Vendor Performance > 5. Nondefense Capital Goods Orders > 6. Building Permits > 7. Stock Prices (S&P 500) > 8. Real M2 > 9. Interest Rate Spread > 10. Consumer Expectations > > I hope ebus likes #7. > > Patrick Hi, Now that is what I call an example of breaking a bubble of misinformation with a pin prick of fact. REPLY: From: ebus38@uniserve.com Organization: Uniserve Newsgroups: sci.econ References: 1 , 2 , 3 , 4 On Tue, 21 Dec 1999 20:00:21 -0600, jim blair wrote: >ebus38@uniserve.com wrote: > > Nah. It was the stock price boom in 26-29 that presaged the disaster > of 30-33. Not surprisingly, school kids like you _don't_ learn > that.... So if stock prices never went up, they couldn't come down? >??? No, if stock prices never went up faster than GDP for extended >periods of time, the result could never be a wrenching financial >correction that crunches the economy. Do you think the Smoot-Hawley tariff had any connection to the market crash of 1929 and to the Great Depression? >Not much. The crash had to happen anyway. The Depression was created >by money supply contraction more than trade restrictions. Or that the increase in capital gains tax in Japan had any connection to the decline of the stock market there? The capital gains tax was changed on 1/1/90 on real property... The rule had been you had to hold property for five years to get the preferential rate of 17% tax if you sold it. The rule on that date required you to hold it for ten years... or pay 57%. So the capital gains tax rate on assets held for over 5 but under 10 years jumped from 17% to 57%. Could that change have triggered the stock market decline (that started on the first day of 1990? >Absolutely not. When they increased the capital gains tax on land a >few years earlier, land prices _rose_, because no one wanted to sell >and pay the tax, so supply dried up. Japan's stock market declined >because it was hugely overvalued, and even what value there was was >often based on wildly inflated land values. The introduction of the >3% consumption tax was also a powerful blow to consumer morale (I was >there. You could feel it.). >But the Japanese stock market crash was, paradoxically, triggered by >good news: the victory of the ruling (and highly stock-price-friendly) >Liberal Democratic party in the February 1990 general election. The >market had fully discounted this victory in the months before the >election, so when it finally happened, people realized there was no >more reason for stocks to go up. With no capital appreciation in >sight (and Japanese tax law being porous enough that the increased >capital gains tax would not have had all that big an effect), there >was no reason to hold stocks that paid no dividends. >At the risk of being accused of prophecy, I can see a possibility of >the same sort of thing happening with US stocks after Y2K. Obviously, >if the sky falls, the stock market is toast; but the market at the >moment seems to think that Y2K will be a big non-event. If it is, >people may realize that the good news has already been fully >discounted and head for the exits, as the Japanese did after the 1990 >election. There would no doubt be much head scratching if Y2K did >nothing, and then the market crashed anyway... >-- royl@not.this.partistar.ca jim blair: Do you think the Smoot-Hawley tariff had any connection to the market crash of 1929 and to the Great Depression? Mason Clark: > Very little if any connection. The stock market in 1929 was a bubble. Hi, But you know it was a bubble only AFTER it bursts. If it had not burst, it would not have been a bubble. It could have been a "bull market" like the US has had for nearly 20 years. You think it just 'coincidence' that the 'bubble burst' just days after the passage of the Smoot-Hawley tariff was assured? And a similar 'coincidence' that the Japanese stock market 'bubble' burst just as changes in the tax laws would be expected to reduce the value of Japanese corporations? And I bet that a big increase in some US taxes would 'burst' the current US 'bubble'. ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) Madison Wisconsin USA. This message was brought to you using biodegradable binary bits, and 100% recycled bandwidth. For a good time call: http://www.geocities.com/capitolhill/4834 AND From "Debt and Delusions" by Peter Warburton, pages 15-16: "In order to appreciate the significance of this revolution for western economic development, it may be helpful to consider how events might have unfolded in its absence. If this powerful shift from traditional bank borrowing towards the capital markets in North America and Western Europe had not taken place, it is most probable that there would have been a much longer period of economic recession and consolidation in the aftermath of the late-1980s property bust. Governments would not have been able to offset the weakness of personal and corporate spending by running large budget deficits to the same extent. If the tide of government bond issues had met an indifferent demand from the institutional funds sector, then these deficits would have been funded only at unattractively high bond yields. Deprived of the easy option of selling bonds to investment funds and individuals, the government would probably have resorted to greater monetization of their borrowing. Monetization refers to the act of adding to the stock of liquid assets (cash and bank deposits) in the hands of the private sector, that is, individuals and companies. In effect, the government covers its budget deficit by levying a tax on existing money holdings; this is sometimes referred to as an inflation tax. The principle is not dissimilar to that of a rights issue by a company wishing to raise additional capital. Shareholders who do not take up their rights to buy the shares (which are offered in proportion to existing holdings) suffer erosion in the value of their shares. In practice, monetization occurs when the central bank expands the issue of notes and coins in general circulation or when it persuades the banking system to hold more government securities and the private sector fewer. The net result is an expansion of the private sector's holdings of bank deposits, which constitute the money supply. If this traditional course of action had been followed, then there is little doubt that the inflationary fires would have been rekindled in the western economies during the early 1990s. By pressing additional liquidity (cash and bank deposits) into the hands of consumers and firms, the demand for goods, services and assets would have increased relative to their available supplies. After a couple of years or so, the outcome of excessive money creation would have been a resurgence of consumer price inflation, following the pattern of the 1970s and early 1980s. This inflation would have alleviated the debt burdens accumulated during the late-1980s property boom and would have lowered the real cost of borrowing. In time, a steep rise in interest rates, deemed necessary to address the inflationary problem, would have stifled any revival in private sector loan demand. If the post-war inflationary history of the large western nations had repeated itself in the 1990s, then the progress of western stock markets would most probably have been stopped in its tracks long ago. Bond yields would have risen in anticipation of higher inflation rates. Finan- cial asset prices would have followed a weaker trend as higher bond yields weighed on the equity market, and households would not have committed such a high proportion of their savings as investments in equities and bonds. In the context of much less impressive financial market returns, there would have been less incentive to shun bank deposits and Certificates of Deposit (CDs) in favour of stock market investments. In summary, sometime around 1985, the western economies were diverted from the inflationary path along which they had travelled for the previous 20 years. Instead of repeating the inflationary cycle described above, these countries embarked on a capital markets adven- ture holiday." 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