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Old 12-26-2001, 07:36 AM
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Default the currency effect

Understand that the only way your stock price can rise is if the producers and manufacturers of stock - the capitalists - manufacture just the right amount of stock or too little stock. It is always possible to manufacture too much of anything, causing the price to collapse.

And it may be this very indiscriminate purchasing of stock without regard to price - indexing - that delivers the false price signal.

In other words, look at it like a gigantic bid-ask spread, where the public buys at the venture-capitalist offer, and then sells at the leveraged-buyout bid. If you keep buying at the offer they'll just keep manufacturing more stock to sell you, they'll NEVER stop. By paying a hair more for stock than it costs them to make it, you cause the supply to become infinite.

I call this "the currency effect" because it is a problem that generally occurs with manufactured currency. The simplest example is, suppose people know they want to buy a dome house 10 years from now. There are no dome-house futures for delivery in 10 years, you can't today buy a dome house 10 years from now, it's just not the same thing, trust me.

So, instead, people buy gold, with the intention to sell the gold in 10 years and use the proceeds to buy their dome houses. Problem is, the price signal this sends is to manufacture gold. Since it looks like people want gold - and no speculator could possibly guess they want dome-homes - all the dome-home construction workers get laid off and go to work in gold mines, until gold is worthless.

That's what defines an inventor or a speculator, because there is no specific immediate price signal telling him to produce what he produces. There cannot be a price signal in products which have not yet been invented! Problem is, retirement investors buy too much stock - because there are no uninvented-pill futures - and all the eggheads out of college go to work starting new companies at the VC firms, not inventing new geriatric cures at the biotech firms.

There is, in fact, an indicator you can look at that my brother used to fiend all over when he ran a hedge fund. I forget how it was constructed - by the real freaky balance-sheet crunching types - but it basically measured the price of stocks compared to the costs of building the companies from scratch or by buying their parts. The ratio between these two numbers gives you the rate at which stock is being manufactured, and it is obscure enough to actually work.

No, it ain't in the Yahoo stock screener, but if you want to construct it yourself, you might want to start with all the recommended reading for the Level I examination towards the CFA designation (and probably Level II as well which deals with international accounting and reporting conventions). (Level III is mostly academic hogwash.)

So, anyway, as usual I forgot the point. I guess it was something like the only way your stock can hope to be worth peanuts a few years out, is if stocks are undervalued leading up to the period when you want to sell them, otherwise they'll swamp you with supply. Problem with buy-and-hold is that the capitalists will give you all you can carry, and then make some extra just in case.

Or something...


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