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Politics : View from the Center and Left -- Ignore unavailable to you. Want to Upgrade?

To: bentway who wrote (237842)	11/14/2013 6:47:06 PM
From: Sun Tzu	Respond to of 543637

I used to be very active on the market, swinging huge trades and writing about markets. It took me quite a bit of studying to come up with what I am about to tell you, though in the hindsight it may seem trivial. A fundamental law of economics is supply-and-demand. Meaning that as the price of something increases, quantity demanded must shrink while the quantity supplied will increase. If you think about it, this makes perfect sense. Tow years ago, many people were flocking to Detroit houses because the price was dirt cheap. You could justify bunching a whole block at those prices. Of course at the higher prices, now you are having some developers throwing their hat in the market and are willing to supply you with houses. As the price has increased, the demand has tapered off and the supply has increased. This is as it should be. In a bubble, an increase in price actually brings about an increase in demand. This is how you can recognize bubbles, no matter what anyone in the market tells you at the time. So people were not buying houses or (or stocks or gold or whatever) because they needed it but because the prices were going up. The problem is that the second part of the economics law is not affected by the bubble. That is the supply will continue to increase during the bubble. At some point in time, there will be so much supply that the demand cannot absorb it and as a result the prices will stop going up. And that is when the crash begins. So when is the crash over? Forget about all the nonsense trying to estimate the magnitude of crash based on the length and magnitude of the bubble. The real answer is that prices will continue to fall so long as people have to sell because the prices are falling. The first people to exit are those who bought only because the prices were going up. But as the prices keep falling, margin calls are made (in stock market) or people walk away from their mortgages because it is not worth paying $500k to the bank where they could have the house for $300k. So long as the reason to sell is that the prices are falling, the crash continues. You may think that rising and falling prices are or should be the only reasons people buy and sell anything, but that is not true. When your cash flow and profits are so much higher than the opportunity cost, you have reasons to buy regardless of the price action. But of course fear of falling prices blinds people to this just as greed was working on the other side. During the last two years of the housing bubble, my wife and I had many arguments about buying property. She was for it and I was against it. I kept pointing out to her that the cash flow would not justify the purchase, she kept telling me that the property prices keep going up and will make up for the cash flow. In the end she grudgingly listened. We now have a very good house in one of the best neighborhoods. The purchase price for it was the lowest in the subdivision during any 5-year period you can measure. Fundamental to above is understanding why you are buying and selling. There are of course momentum players who make money in the market. But in my experience most people are too emotionally attached to their positions to be momentum players and will rationalize the wrong decision. later, ST