# The Money Mustache Community

## Learning, Sharing, and Teaching => Investor Alley => Topic started by: gooki on May 27, 2012, 03:57:40 PM

Title: How the stock market and economy really work
Post by: gooki on May 27, 2012, 03:57:40 PM
http://mises.org/daily/4654

Anyone agree, disagree?
Title: Re: How the stock market and economy really work
Post by: Daley on May 27, 2012, 05:28:07 PM
http://mises.org/daily/4654

Anyone agree, disagree?

Interesting read. I still stand by my thesis that the market and economy are driven by heavily intoxicated chimps with darts and yesterday's copy of The Wall Street Journal tacked to the walls, though.
Title: Re: How the stock market and economy really work
Post by: grantmeaname on May 29, 2012, 06:46:25 AM
This article irks me. For a published author, professional financial analyst, and economics MS holder, the article's author sure has a shaky grasp on how mathematics and science work. I'm not arguing he gets his math wrong. He just doesn't seem to know what it means.

I cringe whenever I read something like:
Quote
In this formula, price (P) is determined by demand (D) divided by supply (S). The formula shows us that it is mathematically impossible for aggregate prices to rise by any means other than (1) increasing demand, or (2) decreasing supply
Models are used to describe a phenomenon observed in the real world. What the author calls 'mathematical impossibility' is actually the entire universe of relevant factors not considered in the model. He tries to explain a complex real world phenomenon using a model, which follows reality and was written to try and reflect some aspects of a phenomenon. Then, he bases his argument on the fact that reality follows the model -- and thus ignores things like irrationality, which he just explicitly acknowledged in the first paragraph but is now ignoring because it's not in the (reductive) model.

Quote
There are other ways the market could go higher, but their effects are temporary. For example, an increase in net savings involving less money spent on consumer goods and more invested in the stock market (resulting in lower prices of consumer goods) could send stock prices higher, but only by the specific extent of the new savings, assuming all of it is redirected to the stock market.
That doesn't demonstrate that changes are temporary. That demonstrates that changes are finite. There's a difference.

Then he brings in a quote by a presumably respected author that just makes a series of axiomatic statements, none of them supported by anything, and ending with a jaw-dropping non sequitir supported by something that the article's author in his infinite brilliance has excluded with ellipses.
Quote
A rise on the securities market cannot last any length of time unless the public is both willing and able to make increased purchases.
Unless financial innovations like derivatives increase the supply of capital. Or business advances increase the efficiency with which businesses can exploit capital. Or investors' expectations of future earnings increase, causing them to accept higher prices. Or the nation's position in the global economy changes, causing it to trade with other nations at an advantage relative to its past position. Wouldn't all of these cause a rise on the securities market for any length of time? Perhaps the quoted author addressed some or all of these points elsewhere in his book. In the selection quoted, though, he just declares a handful of causes to be the only explanations for a handful of effects, without any of the logical support that would lead us to believe what he's saying.
Title: Re: How the stock market and economy really work
Post by: gooki on May 29, 2012, 02:37:51 PM
Thank's grantmeaname.

I agree with a lot of you observations, but also see the authors point of view that purely the demand for stocks accounts for some of the price increases. Specifically I'd be interested to see how internet trading has changed demand for stock market investing.
Title: Re: How the stock market and economy really work
Post by: darkelenchus on May 29, 2012, 02:50:05 PM
Then he brings in a quote by a presumably respected author that just makes a series of axiomatic statements, none of them supported by anything.

If only the statements were axiomatic. Then they wouldn't need substantiating.
Title: Re: How the stock market and economy really work
Post by: grantmeaname on May 29, 2012, 07:38:02 PM
Haha, that's interesting. While we had axioms in math, we also used "axiomatic" derisively to refer to unsupported points. I guess if they were really axiomatic they wouldn't be lacking for support.