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October 13, 2005
Where does all the money go?, Thurs., Oct. 13, 2005, 12:15 PM
A Canadian reader asked me today: All this money gone in the last few weeks, where has it gone or has it just vapourized? Would it be around a trillion?"
My answer was this.
If your neighbours value your house at say 4x and then suddenly it's 3x, what is the value of x? Did you lose it? Did you gain x when it supposedly went from 3x to 4x?
Unless you happened to trade (i.e., buy/sell) rather than buy/hold, you made no money, and you lost no money.
High commodity prices mean high raw material prices, which are costs. The higher they go, the higher the selling prices must go (i.e., inflation) because these people are trading. Without higher prices, trading profits fall.
Inflation is bad for stocks and bonds. And if the rising raw material costs cause a slowdown in the economy, that's also bad for stocks, and for the public.
With all the phoniness from Wall Street and government in the past few years, the chickens are coming home to roost. It's a market process called Reversion to the Mean.
There is a basis of "real" wealth in the world, and prices are now trying to find it to get into sync. That's all.
And whether it's a trillion or a gazillion makes no difference. In some countries the inflation has been so bad their currency went from being denominated in tens to hundreds, then thousands, then millions.
Then the government stopped printing all the extra zeros, and went back to tens. Life still went on as usual.
It's just that the people in those third world countries realized that their governments and their capital market operators had very little integrity. That is becoming an issue to ponder today in some of the major economic nations.
But all this will pass. There will be adjustments here too. And life will go on. There will be a new bull market some day, and in time the people will forget these bearish days.
Posted by Posted by Bill Cara on October 13, 2005 12:16:33 PM | Category: Cara Today in the Market