Has Another Economic Crash Arrived?
The markets have been going haywire, beginning since mid-2015, and now it hasn't even been a week and the Chinese have halted trading twice, making it the 3rd time in a 9 month period, and this one today happened in less than 14 minutes of opening. Of course this has made ripple effects on the rest of the Asian markets. The European markets, which previously seemed to insulate the Asian problems quite well during the previous halt also dropping like flies, and of course the American markets, both the North and South ones, exhibiting some sort of mild panic.
What are the causes of this impending doom?
What are the causes of this impending doom?
Comments (79)
But of course hardly anybody but the super rich are in the stock market. Over 85% of all equities are owned by the top 10%. The top 1% owns about half. So the stock collapse is just rich people selling to rich people. Hardly any working folk any where in the world have any stake in any stock market, and to the extent they do, it's meaningless to their financial future.
Somebody is now going to mention 401k's - as if any working people actually have any meaningful pension any more. A total myth exposed by the fact that the average American has put away about $10K for his or her retirement. The stock market is utterly irrelevant to 90 percent of Americans
Like I say, markets are mostly rich people buying and selling from rich people for their own reasons (sometimes to lock in capital gain reduction offered by feckless GOP lawmakers sometimes to cover margins allowed by feckless GOP lawmakers). Hardly any stock purchases are related to the companies at issue - only IPOs involve capitalization, and those are vanishingly rare with respect to stock trades.
I'd note that the market has risen to historical heights not too far after the Bush Recession, while unemployment remained high and is still high by historical standards.
Stock options are for comfortable people in the higher middle class who are doing just fine.
You're describing an economy that hasn't existed since the GOP set its sites on destroying unions back in the 80s and succeeded.
Read your own link.
The amount of stock options are meaningless since the average American has about 10K in savings. Your link is about stocks in any case. 85% (about 90% now) are owned by 10% of the upper income earners. 50% are owned by the top 1%. Those facts are not in doubt. Do the math.
You're fallling for WSJ agitprop.
In any case, stock options don't involve current payment of wages but future exercise, so a drop in stock prices has no impact on employment. If you think otherwise, describe the process.
http://inequality.org/wealth-inequality/
http://www.cnbc.com/2014/09/08/the-stock-gap-american-stock-holdings-at-18-year-low.html
http://money.cnn.com/2014/09/18/investing/stock-market-investors-get-rich/
This didn't happen to just me. It happened to huge numbers of people all around the world. You claim yourself that 90% of Americans have no ties to the stock market, but that link says 54% do, directly (as of 2011). Most likely 95%+ have indirect economic ties to the financial markets. So, what's it going to be? Also, say they have 10K in savings, and savings are historically calculated in these polls to include equity in the stock market, then when their 0-10K vanishes in thin air, isn't that a big fucking deal? I don't know about you, but the last time I lost 0-10K in the market that I wasn't even playing, I went starving for half a year.
You're simply not describing reality. The vast majority of Americans - and even more so in the world - own no substantial stocks. It makes no difference to their situatoins whether stocks go up or down.
Read the links. The average middle class family owns - 14K in stocks. That it. It has no impact on their financial situation except in the bad sense that every penny counts for 90% of working people. But you don't retire or start a business on 14K.
Credit crunches are serious matters. Hence the Bush Recession was disastrous. They are almost always the result of underregulation of financial institutions and margin purchases (Thanks Bush). That has no direct relationship to stock prices, much less stock options.
Like I say if you think stock options are related to unemployment, show us the mechanism. That's not how stock options work.
At best they only affect people who are retiring. The average amount of saving a retiring American has is $10K or so. A pittance.
Stock market investments - except for IPOS - do not capitalize companies. It's investment in the same way a gambler "invests" in a roulette wheel.
Sell when the market is high, buy when the market is low. Buy low, sell high. It's a formula that works. Just don't bet the farm on it working conveniently. It may go down when you need it to go up, and you may not have time to wait for a recovery. It took several decades for the economy and stock market to fully recover from the 1929 crash.
The Chinese decided that after a one-day drop of 7%, their market should close (the circuit breaker). The New York Stock Exchange also has a circuit breaker -- it kicks in after a 20% fall. One commentator noted that a 7% brake is too quick -- it cements in the losses for the day. Better to let it fall farther and then recover. Actually, declines in the price of shares is a factor that enables people with less money to buy into the market at all.
According to the Gallop Organization, about 55% of Americans claim to own stock. That doesn't mean that 55% of adults are individually buying and selling stock. About half of Americans have some amount of money (as Lundru noted, not very much) saved for retirement. It is quite often in some sort of tax deferral package like an IRA. Having an IRA isn't that difficult to arrange, and you definitely don't need all that much money. But once you have one, the IRA is usually invested in stock.
A stock market crash (like a 20% drop) causes real economic pain, but in itself it isn't an economic crisis. Some of the causes (and/or symptoms) of economic crises are
2007 was an economic crises, not just a slump in the market.
Whether we have an economic crises or not, most Americans are facing major economic risks naked because they have been in a long-term wage-price squeeze that is the result of policy rather than accident.
The average value of stock owned by middle class people is about $14K. For lower class, it's $6K. And of course over 50% of Americans own no stock. Zilch.
In short, if the market disappeared tomorrow it would have almost zero impact on 90% of Americans. The stock market is owned by the superwealthy and the wealthy. Nobody else has a stake in it.
I think you're overlooking the fact that if the superwealthy catch cold, the poor die of pneumonia.
A stock market crash triggers a series of events that result in increased unemployment and economic stagnation. When unemployment reaches 25%, it's a depression.
LANDRU: I'M WARNING YOU... WARNING: We are on the same side here.
Your inequality link doesn't contradict what I was saying. Working class people CAN have a personally significant stake in the stock market EVEN IF the working class's collective assets add up to a scant fraction of all the assets there are to be had. The reason they can is that their holdings are small. Some working class people who were lucky enough to have some cash to put into a retirement investment account (say... in the 1980s) and left it there, will have a substantial chunk of money now -- EVEN IF ONLY in proportion to their past annual incomes. It won't be enough to retire on by any stretch of the imagination, but it will definitely help.
401Ks for many working people don't amount to easy street. Perhaps a worker has $100,000 in a 401K when they retire. (He or she would be a fairly lucky working person.) It isn't as if one could retire on that amount alone. It would merely provides a small but helpful monthly supplement to Social Security. A sudden reduction in that supplement will hurt -- because this person's finances are too close to the bone. Even $100,000 + a typical working class Social Security benefit adds up to little financial security. It wouldn't take much of an uninsured illness, injury, or accident to wipe out $100,000.
It may not be a myth that 50% of the people have a stake in the stock market. The myth is that the average stake a working class person has means they are "well off". They are not well off. Being well off would mean having like, one million dollars to retire on, as a minimum. Being well off means having assets that can be sold off without reducing one's quality of life. A second home one almost never uses is such an asset. (Not talking about a small run down cabin on a lake.) A collection of antique cars is such an asset. That "old gold and jewelry one doesn't want any more" is such an asset.
For a working class person, selling stuff for cash without consequences is not in the cards.
No, it doesn't.
A credit bottleneck does. A credit bottleneck may also lead to a decline in the market. But a decline in the market does not by itself lead to unemployment. There is no relationship here.
But if you think it is, describe the mechanism. All a decline in the market means, for the most part, is that very rich people are selling their stocks to other very rich people, at a lower value than the day before. They may still be making tons of profit (if the stock is appreciated). And they may do it because they want to lock in that profit.
Thus when Reagan lowered cap gains on the rich, the market declined precipitously. The reason is obvious. Now lots of things affect the market. But mostly it has to do with what rich people are doing with their money and why. It has little to do with the economy per se.
Indeed, money that is in the market isn't doing anything to create jobs. A decline in stocks can mean that the rich are cashing out and putting money into real investments that actually produce things and hire people. The stock market is almost exclusively a secondary market.
Why did the stock rise 10 times in value? Because DDD absolutely dominated the dildo market and profits were high? Apparently. it's an indirect relationship. If your initial stock of $500,000 had decreased by 10 times, to $10 a share, DDD wouldn't be out anything, but you would. The stock would probably have fallen because DDD's dildos just didn't do it for its consumers. They wouldn't buy more than 1. The value of the stock might be related to the dividends it didn't pay.
The utility of good sales figures, cash flow, profits, and dividends is that when DDD decides to diversify into lawn mowers, it's 'numbers' and the high value of stock will probably mean that it will be easy for DDD to borrow the money to buy Toro Manufacturing Company (maker of lawn mowers). (The company's new slogan is "Fuck Your Lawn With A Toro.") If all goes well, profits will keep going up, and along with it, the value of your stock. After all, you were at the Stock Holders Annual Meeting and you voted for the acquisition.
Alas, it didn't work. The fickle consumer decided that dildos and grass cutting was not a good match and sales plunged. DDD declared bankruptcy. No more profits, no more dividends. Kaput. And what about your million dollars worth of stock that Jack bought on the stock market at a high press? Well, Jack is shit out of luck, because even though the stock has no immediate connection to the company--DDD doesn't own it, after all--it's now worthless. (Jack is screwed--but that was what DDD was in business to do -- that and grass cutting.)
DDD's stock is worthless because nobody wants it. When people did want it, it's value was high. AND there is that "some sort of" connection to the company's profitability.
But then, look at Amazon. Amazon has been in business for... what, 15 to 20 years? and it hasn't been making a lot of profit. It has cash flow and lots of internal re-investment. Yet, it's stock sells at a great price--something like $600 a share. Why? Because Amazon stockholders expect that when the company get's done building this huge merchandizing infrastructure (tangible and intangible assets) it will be in a position to strangle the competition. Walmart and Target, and every other retailer, beware.
Amazon already sells just about everything, and even if it isn't the cheapest place to buy DDD's Fine Dildos, nobody else is building out the ability to deliver your flying fuck (by way of a drone flying boxcar). Should Target, Walmart, Kmart, Petsmart, Bloomingdales, Walgreens, Ace Hardware, California Porn Shoppes, Exxon, Sony, VW, Gazprom, Jolly Time Popcorn, Alibaba, American Airlines, the Mayo Clinic and the Defense Department all merge into one new giant Multinational Combine, they might be able to head off Amazon.
Otherwise...
This is something most people don't understand. They think that "investing" in the stock market capitalizes the business at issue, which can then produce more and hire more people. Of course unless its an IPO (and even that's iffy), the money doesn't go to the company at all. It goes to the owners of the stock who are overwhelming very rich people.
"Investing" in the stock market is like "investing" in a horse race ticket. The "investment" has no impact on who wins.
I'm constantly amazed at how conservative apologists for capitalism either don't know this or pretend not to (like the WSJ does) to foster a false sense that all Americans have a stake in US businesses.
Just to gloss this, we have had a credit bottleneck since the Bush Recession. Hardly anybody but the rich can get any credit (except for student loans and we know what that leads to). Consumer lending is at a stand still and has been for years.
So the volatility of the Chinese market isn't going to affect that. It really can't get much worst, which is why most people's income has been stagnant or declined for the past 8 years - except for the superwealthy - and why growth is anemic. Normal people simply can't get capital to start businesses. All the lending is to large corporations, i.e., to the very rich.
Consumer lending isn't at a standstill. Nor is it in the UK. As may be suspected, there has been a rapid rise in consumer loans in China as well.
People's income has been pretty stagnant for over 30 years now in the United States. In capitalism, the day-to-day salvaging factor for most people (however morbid) is people's access to loans, however despicable the loans may be (like pay day loans, which are making more bank now than ever).
Banks need a relatively good credit market to keep making money. It's against their interests to not continue to put us into debt slavery. That's why Fed money has been cheap and banks have been issuing out more loans than ever.
If the market crashed entirely and the rich lost everything, then I welcome it. But I remember it like it was yesterday that the market was crashing entirely and the government saved the rich by giving them hundreds of billions in bail outs. Oh yeah, and I starved. Just like I starved when the 1997 IMF crash happened in Asia. But they didn't.
If only it was for only the last 8 years.
Purchasing power, wages, benefits, and assets (cash, cars, homes -- personal property) of the working class (the vast majority of people) has been on a steady decline since 1973! The Arab Oil Boycott was the most memorable economic event that year, but what happened is that the post WWII boom ended. Booms always end. They can't go on forever. This boom didn't go bust, like the boom of the 20s did in 1929. It just sputtered out. Prices on ordinary consumer goods started a markéd rise that year. Wages did not increase accordingly. The long wage-price squeeze that has been gradually impoverishing the working class was underway.
The decline for the working class parallels stock market declines. Over two years, 1973-1974, the NYSE lost 45% of it's value. There was a decline from 7.2% real GDP growth to ?2.1% contraction, while inflation (by CPI) jumped from 3.4% in 1972 to 12.3% in 1974. Pre-1974 conditions in the USA didn't return until August 1993—over twenty years after the 1973–74 crash began. (There were some additional crashes, like the 1987 crash.)
There was another crash in 1999 - the "Dot Com Bubble", then another in 2007, which we all remember. So crashes occur rather regularly. Bull Markets shift to Bear Markets. And throughout the last 40 some years, there have been real economic changes that have been impoverishing the working class. By the 1960s, a lot of manufacturing had moved out of New England to the SE states, where unions were non-existent and wages/benefits were all significantly lower. The next moves in manufacturing were from the USA to the Caribbean. Then to Mexico. Japan had always been a large exporter to the US, and in the 1980s auto imports from Japan expanded, along with other categories. China became a major source of less or lower-skill high intensity manufacturing, displacing Japan in that category. India, Pakistan, Bangladesh, Indonesia, Vietnam, Taiwan, and several other countries became the source of clothing, electronic and automotive parts, and all sorts of household goods. All of the imported goods represented a loss in manufacturing in the United States.
The loss of manufacturing jobs--like job losses in any category--has multiplier effect: unemployed people buy less goods and services, which reduces the income for goods and service companies--cafes, dry cleaners, auto shops, groceries, etc. A closed plant can dry out a community economically, and in many cases, there has been no recovery in 30 years or longer.
Job loss, wage reduction, benefit restrictions, price increases, high credit costs, education costs -- there are a myriad ways that over 100 million working class people have had their share of wealth reduced.
Working people who preceded the post war baby boom (and many of who are now dead), and the older members of that bulge, had a better chance to reach retirement economically intact than younger members of the very large group who have spent more decades in a reduced economic situation.
You need to avoid aggregated information in economic matters. It leads to nonsense (like the Bush tax cuts providing Americans "on average" $1800 of relief). Income quintiles matter. Consumer loans are down down down over the past 8 years for most of us (except the pernicious student loans which are up for obvious reasons and are a burden on working Americans). Only the rich see an increase in access to credit.
http://thefinancialbrand.com/43930/millennial-boomer-banking-loans-data/
http://www.cnbc.com/2014/10/18/banks-are-lending-again-but-mostly-to-rich-people.html
There is no worse mistake (and among conservatives it is not a mistake but a strategy) in economics than to aggregate economic data and then suggest it applies to working Americans. It almost never does. The classic case is "free" trade - good in the aggregate, bad for most working Americans.
I'm well aware of the overall decline in income in the lowest quintile over the past 30 years. The Bush Recession however affected the US economy in other quintiles, a new phenomenon which makes narratives about Americans owning stock and 401(k)s obsolete. And that's my point.
2008 was a genuine crisis, and like all crises for shock capitalism, it was used by conservatives to lock in more systematic ways to transfer more wealth from more working Americans to the top 10% and particularly the top 1%. That is a new phenomenon, or at least, we haven't seen such disparity since the Guilded Age.
I'm not quite sure what decline here means, but the relationship between unemployment rates and stock prices is well studied. The relationship is complex but no economist believes that falling stock prices produce increased unemployment and many see no correlation whatsoever.
The article linked below surveys the literature for the US, China and Japan. To the extent the OP claims that the recent fall in stock prices predicts higher unemployment in any of these three nations, it is simply contrary to the data.
http://ccsenet.org/journal/index.php/ijef/article/view/25036/15607
Yea.. money is confidence. A drop in stock prices reflects worries... known as the Bear.
A crash means the bottom has dropped out of confidence in the economy. There's usually something gravely wrong that precipitates a crash. These days, a sign that a crash is trying to happen is that markets halt trading. If they're doing that.. that's a bad sign.
You say that stock markets don't have anything to do with the liquidity of industries. That's true when the stock market is characterizes by what's called a "speculative bubble." That means the market has become a casino.
There has never been a speculative bubble that didn't eventually pop.
My advice: broaden your view of the situation. But you've never taken my advice before so...
Carry on. :)
Of all the people that are or have been saying that this bull market is over, you refer to Zizek???
Quoting Landru Guide UsThis is quite naive even from you, Landru.
If the market dissappeared tomorrow, we would have a recession. The prices of stock actually have a meaning to the corporations and companies. If you don't understand that, here's an article that explains that in simple term: "Why Do Companies Care About Their Stock Prices?". So what happens in the Stock Market, especially if the trend is longer than the occasional panic or frenzy, it does have consequences. It will affect employment. A recession or an economic depression would affect even the ordinary guy that has never ever owned any stock.
One stock analyst said to me in the fall of last year, If China goes under, sell all of your European stock.
Well, no - it means that the rich have put their money somewhere else. It's not like they care about the US economy or the glories of the stock market.
It just so happens that the US stock market, like T-Bills, has for the past 90 years been a safe and predictable place to put your money if you're rich. But of course, it wasn't always that way and maybe that's all changed, as Zizek has suggested.
Zizek said it a long time ago.
The market has always been a side bet. Like the guy who bets on whether the dice player will crap out or not.
You must be aware that when you "invest" in the market, not a dime of the purchase price goes to the company? I hope you are
Investopedia -- a perfect source for your understanding of advanced capitalism!
Of course you have it backwards. Recessions cause stock prices to fall, not the other way round. But I suspect you're going to persist in your cliches.
Investopedia!
The United States isn't a 'fake economy'. Economic activity is as real here as it is anywhere else. We produce, manufacture, buy, sell, consume. Real goods. Real services. The GDP represents real activity. The Uber Wealthy in the United States have a real stake in the prosperity and stability of the United States: Not all of their wealth, but a good share of it, is anchored in US properties. Secondly, there are not many other places in the world that provide all the stuff that the USA provides, and which they control. France is a nice place, but the American Rich don't own France the way they own the USA. China may be a dynamo of profits, but most rich Americans do not seem to want to actually live in China.
It is true -- usually when the stock market goes down, the rich will be the first ones out. Why? Because they can afford the best advice, and can arrange a fast exit if need be. Of course, they can get caught too. If the collapse happens very rapidly, they will be stuck with losses (which of course will not reduce them to eating discounted canned baked beans). Secondly, the rich can afford to have vastly diversified holdings, even within the continental USA. Land, rental properties, railroads, mines, warehouses, shipping firms, and so on and so forth, in addition to stock. The oldest, and richest of New York families , for instance, own land under skyscrapers and have long term (like, 99 year) leases. Unless the Empire State Building or Met Life Building (the old Pan Am Building) were to mysteriously disappear some afternoon, their rent on that land is about as secure as anything can be. Most cities are owned in the same way. The first families bought a lot of land, the city was built on it, but the original owners retained title to the ground.
Another factor about the rich: Their activity sways the market. Several rich families could start a very bad day on the market by suddenly dumping a lot of stock. Other investors would notice, and decide that they should get rid of their stock too. Before long, the market would be a lot cheaper. Later that day or the next day, the rich folk could buy up the now-much-cheaper-stock with just the profits they made from the sell off the day before.
The market being a casino reminds me of a WC Fields joke. Fields is dealing the cards. A sucker asks, "Is this a game of chance?" Field answers, "No, not the way I play it." The market is, to some extent, like W. C. Field's card game.
First you have the excesses of banks lending gone haywire with banks competing of market share and basically pushing money to everyone that wants it and creating a stock market bubble (and likely a real estate bubble) in the first place. Once this pops it means that there will be a banking crisis. That banking crisis will have a direct consequence of banks closing their lending taps even to totally healthy companies too. And how does a lending bubble then pop? Well, once the stock market or real estate market starts to collapse.
Your idea of first their being a recession and only then afterwards somehow the stock market noticing it creates a crash is persistent with your illogical Landru-kool aid views.
Personally I find that one cannot really compare the two countries, as they have very different in governmental and economic models, but there is certainly a more obvious effect/affect of the crisis in the USA. Something tells me that it makes a bit more sense to address this issue of economic crisis in much tighter and specific context than any general worldwide notions.
Tiff mentioned that she hasn't felt the first one leave and I sort of haven't noticed the first one at all. Indeed I'm not wealthy or 'well-off', but I cannot say that this crisis has been more than a small bump for my life. My friends and neighbors (in Austria) have very much the same experience as I do. Indeed a country that is geographically small and a very small population is easier to govern, but maybe size matters? The bigger you are the harder you fall? Difficult to say...
Meow!
GREG
If one is employed, recessions--even depressions--are not catastrophic. 75% of the workforce was employed during the great depression of the 1930s, and for them the depression wasn't horrible. "A recession is when your next door neighbor is unemployed. A depression is when you are unemployed."
Another factor: Most European Community countries have intact safety-nets. The USA has been busy getting rid of generous protections. The "social contract" in Europe is more protective. In the United States it is more oriented toward keeping labor relatively poor.
In 2008 we cashed out our 401k's to make payments for the deed on the ranch, while two of our friends were advised and decided to take the route of a 'strategic foreclosure'. My feeling has always been that if you give your word, you do everything in your power to uphold that word, including keeping our word to continue to invest in our ranch. In 2004 we were approved for a $999k loan for a home which NEVER in a million years, would we ever be able to afford if we took any kind of a financial hit. We purchased our ranch for $400k and at it lowest value in 2010 it's value was $159k. Now in 2016 it is projected to be worthy $375k. Has it been worth it to uphold our commitment on the deed? For me? Yes. Everyone around me says that I made an emotional decision about a financial decision which we are still paying for and I admit they were right. However after losing everything that was not living in a house fire in 2003, making a home that we could raise our family safely in was my first priority. Stability.
Having said all that, I know that there are other's around me, some here in TPF that needed more than the trunks of food and toiletries that were delivered to our ranch to keep us from going hungry. I am reminded that there are others who lost so much more, so, so, much more.
There will come a time when we will be able to afford health insurance, a second car and maybe be able to put both are Indians thru a University after they give me 2 years at the community college. I was raised thinking that college was as mandatory as primary school, I didn't realize that it was a privilege until I neared my Junior year.
I have learned a lot along the way, who my parents are and who I wish my children to be. Rich in health, love and happiness is all I wish to create. Utopian views I know but they get me thru the tougher times.
More whacky economics from somebody who doesn't understand what the stock market does. SSU probably thinks that when he buys IBM stock the money goes to IBM. Invincible ignorance.
This is what happens why you look to Investopedia for your understanding of advanced capitalism
Fairly extreme views are presented by media at times, and sometimes these poorly represent reality. For instance, declines in the DJIA is just about always described as a bad thing. It is perfectly normal and healthy for markets to bounce up and down (like a hookers drawers). What is relevant is long term trends -- not a week or a month long, but year and years long.
Employment and unemployment figures, GDP, trade figures, etc. are important too -- probably more important than the DJIA or the averages of other exchanges. Some of these figures conceal worrisome conditions that are not featured much: unemployment is down, but there are large numbers of people who are not working, not looking for work, and they are not idle rich. They are people who have dropped out of the labor force because they don't fit anywhere.
China needs economic growth. No growth is not an option. It has a huge population, it's population is growing, and large numbers of people expect opportunity and rewards. If 200 million people are grossly disappointed, watch out. So, slowdowns in China are more significant than slowdowns in Canada. (Nothing against Canada, of course...)
A lot of economic reporting is, to use the technical term, bullshit. American Public Media's "Marketplace" sometimes has decent content, but much of it is slop and fluff. Their 1/2 hour show sometimes is devoid of significance. Sometimes it's OK, but mostly it's easy listening happy chatter.
I'm amazed you'd think otherwise.
Working people have almost no significant ownership in the market. Working people have very little credit issued to them, at least not the kind that has anything to do with the market, like corporate bonds.
The issue for working people is not where the market is at (are you really claiming that working folk have profited by the huge increase in the value of equities since the 2008 meltdown?). But rather where the economy is at. If the economy is in recession, and people get laid off, then that affects working people. Recessions have lots of causes. One of them is not a stock market decline.
The current market sell off - the topic of the OP - has nothing to do with a recession and will have no impact on jobs. Neither China nor the US are in a recession and nobody is predicting that there is any risk of one, except the usual rightwing kooks. You've got the cart before the horse.
Quoting Landru Guide UsThis is the biggest piece baloney for a long time to come of out you and tells about utter ignorance of basic facts.
Working people have little credit? Are you really implying that working people don't have debt in order to buy their homes? That home mortrages are not the biggest share of loans that banks basically give loans to?
Here's a graph about the US debt composition:
I think you are alone with your ideas, as disoii's question showed. It's obvious that you fail to understand how the financial sector does have an effect on ordinary people.
If you don't understand the stock market, then at least you should understand how financial institutions with the real estate market creates these boom and bust cycles every now and then. It's an easier way to understand how markets have an effect. For example, the construction business gives jobs to people as obviously homes and offices cannot be built by robots in China. When banks (or financial institutions) compete in market share and push loans to the market, housing and real estate prices go up. With rising real estate prices real estate projects look good. Then when the real estate bubble bursts, the financial sector has a problem. Projects are shelved. Then come the layoffs for people.
Here's a graph that shows just what banks do when there is a banking crisis:
Now, compare the above graph to the following graph:
I would assume that a drop of over 3 million jobs does have an effect on the economy. (Do notice the effect of the real estate boom also)
So based purely on that article (and I have nothing else to go on as I don't know much about the economy) it seems that Landru is correct; remove the stock (i.e. secondary) market and the only people who'll lose out are the investors. Only the IPO, the favour of creditors, and public demand matter to the company's success itself.
When stock markets plunge, it makes more difficult for companies to make successfull IPO's or to issue new stock. That means that fewer companies can get the money for investments, especially if the market crash results in a banking crisis. Then there is the wealth effect for those that own shares. And a lot of people actually do in the form of pension funds (you in the US have your 401k's).
Quoting Michael
Well, you could similarly say that real estate prices going down is an effect / a barometer also. Here's a bit longer answer than dicoii.
The basic reason, I would argue, is what the banking sector and the financial sector does. If it pumps too much money into the economy and this results in a speculative bubble in the markets, watch out below when the bubble bursts. I would be careful with the term malinvestments, because there are allways good and bad investments, yet what usually happens when the lending taps are opened, first the money goes into the most sound investments, then more riskier investments and finally into pure speculation about asset prices. Now Landru would say that who cares, it's the rich and some stupid taxi drivers playing in "the casino", and it hasn't any effect on the real market. And most times the volatility doesn't matter. As the saying goes: Stock markets have predicted 10 out of the last 3 recessions.
Yet sometimes it matters. Especially when there has been a speculative bubble. And they don't emerge just because people are irrational, they emerge because of the financial sector. The changes in the Price to earnings ratio, the P/E, show this. You would think that the P/E would stay somewhat close to some long term average, but it isn't so:
In Japan when their bubble burst, the P/E ratio was something like 100. Hence it took a Century in annual earnings to get back the price of the stock.
True, it would be a problem when issuing new stock.
So in this sense a failing marketing is like panic-inducing media?
Well, not me as I'm not in the US. ;)
Ironically, the companies that can issue IPOs are the very ones that don't need capital. If they are so successful that they can go public, they can get all the private capital they want or need. A marginal company wouldn't even try to go public.
The purpose of an IPO is not to obtain investment capital, but for the owners to cash out. Usually a large portion of the IPO capital goes to the founders as part of the deal.
So the notion that a falling market starves out struggling IPOs is simply a fantasy. If you're in a position to go public, capital is not a problem.
In any case, this is absurd. IPOs are a vanishingly de minimus part of stock market transactions even in the boom times. They have no impact on a $17T economy.
Actually, no, they usually aren't. Since most of the market is owned by the rich, they are basing their decision on their particular economic situation - it usually involves tax planning to maximize after tax cash. Thus when Reagan lowered capital gains, the market fell precipitously. Can you guess why? It has nothing to do with the economy.
In any case, the market and its relationship to the economy, particular bonds, is highly complex. Anybody who sees a one-to-one relationship with equities and anything is not to be taken seriously.
We already know how the Bush Meltdown happened: deregulation of mortgage lenders (the gutting of Glass-Steagall) plus deregulation of credit default swaps plus falling income due to the income gap resulting in middle class people using their only major asset (their homes) to pay for health care and their kids' college.
Almost all the rise in loans in the 2000s were refinances, not purchase money.
In short the rich had so much money they put it into lending institutions, usually in the form of high risk REITS. When the bubble burst (and the bubbles created by income inequality always do), the risk was everywhere due to CDSs. The result, a credit bottleneck that caused job losses, causes more mortgage defaults, causing more job josses. We always get mortgage defaults. The FDIC can handle it because with Glass-Steagall there were always lenders with good portfolios. But the deregulation of CDSs (thanks Bush) made all the portfolios toxic.
You're not going to get into some rightwing meme about how poor people were "living beyond their means" are you. God, I hope not. You really have no idea what you're talking about on this issue, do you? It's all from googling.
When and by whom were credit default swaps ever regulated? My understanding was that CDS were outside regulation jurisdictions (in practice, if not by rules). They hadn't been in use that long (13 years) at the time of the 1007 crash. Credit default swaps have existed since 1994, and increased in use after 2003. By the end of 2007, the outstanding CDS amount was $62.2 trillion, (Information obtained by Googling "credit default swap history".)
There is something facile about your dismissal of everyone else's interpretation of the way the economy works. It isn't as if the operations of the economy are so obvious that even high school drop outs can readily make sense out of it. Economists don't all agree on these things.
He reviews a little of the history of oil, the nations and policies involved. He thinks that oil may stay depressed at least through 2020 and maybe longer, which will change the whole balance of power around in the world. Think of how many national economies have been built and sustained by oil.
Interesting idea, it certain might affect stock picks...many industries had to raise their pricing because oil was over $100 a barrel, now at $33 a barrel, these companies profit margins must be going through the roof....if much of food cost is its transportation cost..then look at grocery chains and other fuel sensitive industries.
Article here: http://www.tomdispatch.com/post/176089/tomgram%3A_michael_klare%2C_the_look_of_a_badly_oiled_planet/
It's just shorthand, Bitter, for the rather serpentine process whereby Republicans, particularly the odious conservative Phil Gramm, made sure they weren't regulated, as they obviously should have been. He snuck an exemption into a budget bill. Typical rightwing bad faith. I didn't want to get into the weeds.
If you want to call it facile be my guest. You don't seem to be aware of the above facts.
The point is SSU's analysis of the Bush Meltdown is rubbish. If conservatives hadn't prevented regulation of tabletop mortgage lenders and CDSs, if they hadn't gutted Glass-Steagall, if they hadn't given the rich the biggest transfer of wealth in US history with the Bush tax cut, the Meltdown wouldn't have happened. There would have simply been a normal recession with a level of mortgage defaults that the system could easily handle as it always had by having the good banks buy up the bad inventory. But due to CDSs, there were no good banks - they all held the toxic assets in the form of CDSs.
Conservative economic policy is always a horrible failure (except to transfer wealth to the rich). Democrats should never agree to any part of it. Not one inch.
The reputable ones do. Every recession is preceded by a growing income gap. Every single one. The larger the gap, the larger the recession. The facts are indisputable. Feel free to google them yourself.
The Bush Meltdown was preceded by the largest income gap since the Depression due to the triumph of conservative economic policies of deregulation and wealth transfers to the rich.
Sorry, it's just the way it is. And I do dismiss the rightwing memes that say otherwise.
I agree. Few things can jump start an economy better than cheap fuel prices. Right now, tens of millions of Americans who commute are on average getting a "rebate" of about $100 a month because of lower gas. It's in their pockets and will be spent. The velocity of that money is one of the best ways to make an economy grow.
Moreover cheap oil will work its way through the system and result in cheaper food prices. None of this will show up in core inflation figures since they exclude energy and food as too volatile. But it will have significant impact on working peoples' lives if it continues.
The idea that they care about stocks falling while they have more money to spend shows a lack of perspective about how most workers actually live.
Quoting Landru Guide UsDeregulation typically makes banks or financial institutions to compete of market share. Deregulation is one of the things that do get a speculative bubble moving.
Yet then typical loony-Landru: "plus falling income due to the income gap resulting in middle class people using their only major asset (their homes) to pay for health care and their kids' college". OK, so what you are saying that falling income creates a housing bubble?
Quoting Landru Guide UsMy my. Corporate finance isn't one of Landru's strongpoints either. And do note that already established stock companies can issue more stock. It's a convenient way if you can yourself (or the owner) can decide just what kind of "interest rate" they might choose in the way of dividends. They can opt not to pay dividends at hard times. But the competitiveness of financing companies through issuing more stock is of course rubbish according to Landru.
Quoting Landru Guide UsHere the Strawman-Landru goes again. What ought I be talking about? Ah... I got it: the ridiculous argument of Welfare queens and Clinton being the reason! That's what you think anybody saying anything other than exactly your view will be talking about.
You know, you don't even bother to think through what happens when you take Glass-Steagall out of the picture, when you have deregulation, when you have lax control or the worst that is called "self-regulation". What happens? Exactly what I said: financial institutions start a massive competition of the "new" opportunities to grow their market share. Since prices are rising, the losses are minimal as people that cannot make their payments simply can sell the real estate with profit. One economic historian I knew that had wrote a history of one bank here that in the end went bust said that there's a clear point when the whole thinking of bankers changed: when normal banking was referred to "selling" and "buying" money. And what the bankers that earlier had been taught to be carefull were now demanded to sell money as much as possible.
Anyway, this answer is a perfect example that you just assume people to write what you think, not actually bother to look at what they say. You don't explain at all why my argument is rubbish, and you even didn't notice that I was talking in general about these events, even if the graphs were as an example from the US (because why would you care about anything else).
Pay more attention, don't just anticipate some moronic answer you think other people will give. The whimsical US political discourse about just about everything, actually, isn't the only viewpoint.
In Australia, at least, most workers' superannuation is invested in the markets' so yeah, here they do care.
I explained in detail.
IPOs have no impact on the market or in capitalizing businesses. I told you why. Anybody who understands IPOs beyond what they google understands the situation.
You apparently were blissfully unaware of CDSs and their role in the Bush Meltdown, until I pointed it out to you.
You can't rebut the facts so you post a long-winded skein of more rubbish.
Meanwhile, the critical fact remains unscathed - the vast majority of US workers have no ownership of equities. Period.
Most workers depend on Social Security for retirement, which is barred from being invested in the market. So ups and downs in the market don't affect it.
A growing number of US workers simply can't afford to retire so they work until they die.
Well, the Social Security Fund is invested almost totally in special treasury bills, which are the safest investment on the planet.
The concept of SS is that it is not an investment, but a guaranteed payment. So the point is not to maximize returns, but to make sure the fund is able to pay out the promised benefits as people retire. In that respect it's the most successful US government program ever. It's the largest most solvent fund on the planet. Noting is even close, despite all the rightwing agitprop against it.
Again you are inventing your whimsical strawmen is obvious. When you make arguments that the stock market isn't a competitive way for companies to get finance, then I have to speak in general terms. This wasn't about exactly the US financial crisis, it could be about various financial crises. I could refer to the banking crisis in the Nordic countries in the early 1990's.
So now you think I'm blissfully unaware about credit-default-swaps. Lol. Remembers me when I started on the old PF in February 2008 a thread "the oncoming Banking Crisis", well before Lehman disaster in September. Had then good discussions with Unrealist42, Benkei and Fried Egg also in other threads we then had a lot of talk about the issues. Derivatives were then debated. A lot of people in PF then weren't going with the media, which I remember declaring that the crisis was over (and subprime was an unimportant controllable blip). Mind you that from this site I got the first warnings that the then called "Goldilocks"-economy was in trouble (when I joined back in 2007). Have respect for those members.
But I was ignorant about until you now informed me. Should I add personal hubris to the repertoire of condescending answers?
How about CDO's, the collateralized debt obligations, not just credit-default-swaps? Must have just google them up too. Or why you don't just refer to over-the-counter derivatives, the perhaps correct term.
But Ok. I mean I am used to Landru comments from Landru, and we do disagree lot (sometimes agree, interestingly), but now it seems it's not even about the subjects, but just assumptions what one is supposed to write.
Is this anger over Trump or what? I don't know.
It is looking more and more like a good thing, however - a loss of trillions for the rich who own most of the market. The less money the rich have, the better off we all are. Recessions are always caused by income gaps and too much money in the hands of bubble-creating rich people. I would say that this sell-off is actually a good sign that the economy will not enter a recession soon, despite 7 years of (sporadic and modest) growth.
I suspect most of this money went into T-bills, which is good for the country, especially if we can oust the GOP congress and start investing in infrastructure on low rate bonds.
Quoting Landru Guide UsChina isn't as irrelevant as you may think. China has an effect on the global market today. Long are the time since the Chinese economy was the size of the Netherlands. Yes, the Chinese statistic are exxaggerated, but there has happened a real economy growth sprint on a historical level in China.
The whole raw materials "bubble" happened because of the historically huge Chinese investment program. Yet as you said Landru (I'll have to give one thing right), traditionally lower oil prices would mean higher growth rates, yet that has to materialize. It is odd, I agree.
I think at least one of the reasons is simply the dominance of day traders in the global market and simply speculation. All time high puts in oil prices. Cushing and other storages are quite full. Rig count is falling rapidly. Again these rollercoaster rides that happen because of speculation. No need to try to rationalize the swings by looking at some fundamentals.
Quoting Landru Guide UsThat Manhattan Project you have wished will not happen. Sorry to say that, even if it would mean good things to the whole World.
So what is "over production"? From a climate warming perspective, most of it is over production.
Correct me if I am wrong, but perhaps the margin between too much oil and not enough oil probably isn't all that large at any given moment. The margin nevertheless makes a big difference. If demand falls, the profits to be made are reduced, and then the product is worth less. If profits are reduced (not necessarily eliminated) some operators stop producing and wait.
The Saudis are, apparently, making enough money on oil to take the risk of lowering the price by pumping away, partly to drive US wells out of production (or producers out of business) and partly to keep Iran from getting too much income from its oil. In the US, leveraged operations can't stand a large fall in profitability, because they have a lot of loan payments to make. They go broke. Production is reduced.
Shale oil production isn't economic at all at these prices. It's more in the 50-70 dollar range. Yet Shale Oil producers are basically waiting to overcome the low prices (and not go bankrupt). A "fundamental" reason is that Saudi Arabia has and is pumping as much as possible oil. The reason is that a) It's fighting a war in Yemen and needs income and b) it wants to hurt Iran and also the Shale producers with low oil prices. That hasn't stopped Shale production. But rigs are being shut.
[img]http://www.euanmearns.com/wp-content/uploads/2015/04/us-oil-forecast.png[img]
Even If US production has zoomed to new heights, do notice that US oil production hasn't drastically increased overall global production, it's basically replaced production in other areas (like Libya). And lower oil prices haven't instilled economic growth as the classic economics view is.
Well, the Saudis are burning up their cash reserves at an alarming rate. But they are willing to wait it out and not decrease production in order to inflict pain on Iran, their arch Shi'ite enemy, who is not only harmed by lower oil prices, but lacks cash reserves to weather the storm.
Meantime, Iran has just returned to the world market, thanks to the Obama deal, further depressing prices.
It's a perfect storm for cheap energy, and mostly the US middle class benefits. So I'm all for falling oil prices; the fact that the rich stockholders in China and the US are suffering only adds to the delight.
I am unsure if this is true, but all the statistics I've looked at point to it being true.
The richest people in the world, according to Forbes Magazine--1,826 billionaires--are worth a little over 7 trillion dollars. Less than 2000 people. Who are they? Nameless, faceless, unknowns? No, for the most part they and their sources of wealth are very recognizable. Most of them own businesses of various kinds. They own product manufacturers, retailers, banks, heavier and lighter industries, real estate operations, all sorts of various kinds of businesses: Among them are:
Microsoft, Berkshire Hathaway, Zara, Oracle, Koch, Walmart, L’Oreal, LVMH, New York Mayor Michael Bloomberg, Amazon, Facebook, casinos, Google, ball bearings, Mars candy, H&M, George Soros, Nutella, Nike, Aldi, Trader Joe, publishing houses, newspapers, Sunglass Hut and Lenscrafter, beer, Dish Network, Lidi and Kaufland, Apple, Disney, Dell, BMW, Anheuser-Busch InBev, and various hedge funds, investment and real estate, oil, media, IT, pharmaceuticals, and so on.
These 1,826 people's wealth is greater than the combined wealth of much of the earth's population (assuming that the assets of the world population adds up to less than $7 trillion).
Of course, 7 trillion dollars isn't all the wealth, by any means. Real estate accounts for a lot of stored value. Other entities such as corporations (and their stock holders), account for a lot of wealth above and beyond $7 trillion. But as Landru has noted, however you look at it -- the wealth which exists is NOT divided up in any way approaching 'equitable'.
Actually now you have a similar condition with oil as was during the financial crisis, oil price going down with speculators having to cut their losses and selling while other speculators renting oil tankers as storage for the oil to sell it later with a profit.
Furthermore, one should remember that the biggest oil companies are state own entities, the old western companies like the successors of Standard Oil aren't the biggest producers.
(somewhat old graph, but still it's something like that...)
As I see it, there isn't that big of a difference except juristically as far as state owned versus privately owned trust funds go. As far as they are actors in the market, state actors are simply more privileged investors, in many cases, with responsibilities also their citizenry (although, in practice, this isn't always the case; much of Aramco profits, for example, go straight to the Saudi lordships; I'm sure the same happens to other state run entities).