How the market works

[Pat McCotter]

Once upon a time in a place overrun with monkeys, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers, seeing that there were many monkeys around, went out to the forest, and started catching them.

The man bought thousands at $10 and as supply started to diminish, they became harder to catch, so the villagers stopped their effort. The man then announced that he would now pay $20 for each one.

This renewed the efforts of the villagers and they started catching monkeys again. But soon the supply diminished even further and they were ever harder to catch, so people started going back to their farms and forgot about monkey catching.

The man increased his price to $25 each and the supply of monkeys became so sparse that it was an effort to even see a monkey, much less catch one.

The man now announced that he would buy monkeys for $50! However, since he had to go to the city on some business, his assistant would now buy on his behalf.

While the man was away the assistant told the villagers. 'Look at all these monkeys in the big cage that the man has bought. I will sell them to you at $35 each and when the man returns from the city, you can sell them to him for $50 each.'

The villagers rounded up all their savings and bought all the monkeys. They never saw the man nor his assistant again and once again there were monkeys everywhere.

And now you know how the market works.

[AntonLee]

haha caveat emptor

[tomgh]

Is your point that those who were taken in were simply looking for a free fortune, and deserved what they got? I don't see anyone innocent here?

Are you attacking capitalism?

[John Edward Mercier]

The 'markets' and capitalism are not one and the same.

Most of the people that buy shares in the 'market' (myself included) do not act in the same manner as independent proprietors as far as business ownership is concerned.
We largely 'bet' whether the 'market price' of the share will go up or down... and sometimes with little regard to the underlying asset.

[tomgh]

But buying shares IS business proprietorship. When I buy stocks I am buying ownership. The stock market is the essence of capitalism, isn't it?

You suggest that the buyers of stocks deserve to get stuck.

[John Edward Mercier]

Not really. Capitalism existed prior to the 'market'... the 'market' only allowed it to flourish.
But as technology expands the 'market' it allows for speculation. Speculators own shares, or at least a controlling option of such... but really have no intentions other than acquiring the 'spread' created during periods of inefficient transfer of information.

For instance, Donald Trump purchase a large holding of UAL... dumped the information to the media... then sold after the frenzy. He did so knowing full well he had no intention of buying and managing UAL.
He understood the psychology of the herd, and used it to his advantage.
The people that 'read' what he was about to do, made money through short selling.

[KBCraig]

The stock markets are not free markets. The "capitalism" practiced there is more properly classed as mercantilism.

[AnCapMan]

Dr. Thorpe considered the stock market as a game and was extremely successful applying game theory to it. To me it's less representative of game theory although one can apply the tenets of it. In my opinion the market at least the part of it that deals with stocks and bonds is simply an example in speculative auction. Where buyers are looking to become sellers when the perceived value of the share goes up. Most stock increases are purely emotional or inflationary. But to say this is capitalism or what not is extremely intellectually dishonest. It's a very small subset of capitalism akin to the idea that not all drs. are neuro surgeons.

Is it wrong to build up the Perceived value of a stock in an attempt to sell what you have at a better price? Absolutely not. No more than it would be to advertise "supplies limited" thereby increasing demand and raising the clearing price. The stock market just determines the clearing price of a share with some volatility due to the fact we are not dealing with a marginal utility product.

The monkey example is a terrible example of free markets. 1 man was able to manipulate the entire market. In a free market that could not happen.  Bill gates for example could only control about 1/4000th of the world market. A ripple for sure but hardly a wave.

[John Edward Mercier]

Historically that is not correct.
Several 'booms' have occured... and the basis of which generally begins with one person.

The stock markets are not free markets. The "capitalism" practiced there is more properly classed as mercantilism.

I would equate that to the 'Exchange' rather than the market.
The origin of the markets did not have 'seats' nor open-ended brokers.

[AnCapMan]

Wow, thats a truly Keynesian analysis of booms and busts.....

Lets look at it from reality, from the greatest economic minds of the 20th century (Mises, Hayek, Friedman, Rothbard etc)

the booms have always been caused by intervention by the central bank through tricking business owners that there is an excess of savings, and therefore capital is cheapened. This is done through arbitrarily lowering interest rates. So business owners take the cheap capital and invest it in capital goods (labor, improved production etc) - Unfortunately this is always followed by a bust, because the malinvestment is exposed when it is proven, through eventual lack of consumer purchasing of the goods, that savings was not high and there was no excess capital.

In small short run, stocks, and commodities can be influenced by one person, although this is relatively short lived and very little overall boom or bust to the market is created. I reliaze Keynesian economics is all they teach in schools, so this may be new to you, but seriously almost every large boom and resultant bust can be explained via government intervention and not individual action. Read some stuff by the above named authors who all wrote heavily on the boom of the 20's and resultant bust.

The market would be a relatively steady increase if government did not intervene (but then we would have no government yay! as in the end all politics is economics). Investors and businessmen alike would have more information and it would be true information to base their investments.

[John Edward Mercier]

Tulipmania was caused by central banking?

Under free banking conditions fraction reserve lending reaches its zenith...

Currency supply can move all other commodities up and down relative to it... but to single one out is mostly mass fervor.

[AnCapMan]

Tulip mania was hardly one person. It was a mass of people who were increasing demand emotionally for tulip bulbs.

Fractional reserve banking in of itself is not wrong. As long as the deposited is aware of the risk and is able to choose all spectrums from full reserve upwards. Full reserve you would pay the bank. Would it debase the currency? Well it would if that currency was fiat. If one was depositing a weight of currency your value is maintained.

[John Edward Mercier]

The Monkeymania was also not one person. Although one person induced the mania... like my Trump example... it takes the masses for it to work.

The complexity is the effect of the Exchanges and their seated brokers on the market.
A noted analyst at a brokerage house issuing 'buy, hold, or sell' calls can make the brokerage house profits by inducing movement within its holdings in a predetermined direction.