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Pastimes : The Big Picture - Economics and Investing
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To: Arik T.G. who wrote (596)11/30/1998 10:20:00 AM
From: Sid Turtlman  Read Replies (2) of 686
 
Arik: Besides the impact on spending, the overlooked element of the wealth effect is on the buildup of capacity throughout the world, as a consequence of the way that the booming stock market of the last several years has made it so easy for companies to raise money. When they raise money, they spend it - on equipment, employees, computers, etc., and that increase in demand masks the buildup in supply.

There is an old, established market letter called Market Logic which keeps tracks of dozens of indicators. One of their most intriguing is stock offerings as a percent of GDP. This figure has been running at about a 2% rate for most of the last several years. If you assume that most of the money raised gets spent over a several year period, then that means that almost all of the growth in the economy of the last few years came from the spending of money raised in the stock market. If the market declines and IPO's and additional offerings become impossible again, demand for goods and services in the economy will shrink, but the supply we have been creating will still be there, desperately trying to cut prices to maintain market share. It won't be pretty for profit margins, whenever (I wish I knew when!) it finally unfolds
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