Victor, it's the same "simple arithmetic" you were spouting. Try to stay with me here. Assume an economy of $1000, one stock and five investors (you are rich and hold $900 of the $1000). XYZ Corp. issues 1000 shares at $1. You buy 900 shares. If Don, Roger, Axxel and I each buy 1/4 of the other 100 shares and trade them between us for 2.5 years and the stock price doubles, but XYZ is making no more money now than it was day 1 (2.5 years earlier) (sort of like the S&P 500), are you any better off than on day 1? You own the same piece of the same income stream. What if we traded the 100 shares again and the price dropped in half? Gee, you'd be back where you started.
Let's assume the money supply increased by $100 when us four traders got tax rebates (a political gimmick to try to stimulate the economy enough to get somebody reelected - you were rich, so you didn't get one). This allowed us to trade the stock up to $2, making your 900 shares worth $1800 on paper. Could you realize $1800? No. There's not enough money in the economy (but we'd be happy to take them off your hands for $200 or 22 cents each).
What if Don decided to take the $100 he just got for selling Axxel 50 shares and pulled it out of the market? Suddenly, there's only $100 for Roger, Axxel and I to trade the 100 shares. Ours is an efficient market, so the stock quickly goes to $1.
Hey, a few minutes ago, we had $2000 chasing those 1000 shares. Don took out $100 and now we have $1000 chasing 1000 shares. Do you feel poorer?
My point is simply that asset price inflation creates paper wealth. Asset price deflation destroys it. If the underlying asset has no greater ability to produce income than it had 2.5 years ago, has its real economic value increased? No. Then why has its price? Asset price inflation! The money supply grew by enough to cause prices, on the margin, to rise.
The reality, whether you want to talk about it or not, is that the S&P 500 has about doubled in the last 2.5 years while its earnings have gone nowhere. |
