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Where does the money come from?

  • #61
  • Jan 25, 2007 3:27pm Jan 25, 2007 3:27pm
Quoting Darkstar
I missed this the first time through. Your right it wouldn't and thats precisley why it IS zero sum. The value of a stock has nothing to do with the value of the company it is meant to represent. The stock price is purely determined by the market capitalization devided by the number of outstanding shares. A market capitalization is simply the value of all the investor funds that are invested in that stock at that moment in time. As funds move into and out of the stock, the market capitalization changes and the aggregate value of each share will rise or fall respectivly. A stocks market capitalization is akin to the jar of water in my earlier example.
We're getting into why people perceive stocks as having value now. The stock does have to do with the value of the company, it is only in the "zero demand" scenario you came up with that it doesn't. Stocks represent ownership of a company and its real, physical assets, which is why there is an underlying asset that will still have a value in the scenario you devised.

As for funds affecting the market cap, that is not how it works. Market cap is not affected by individual buying and selling of shares. It's impacted when the shares are perceived as having a higher value and individuals are willing to pay more for them. An individual sale of stock does not remove money from the market cap because somebody else just put the same amount of money in.

Quoting Darkstar
This being the case, you can only make money by holding a stock while more money is flowing into the stock(or shorting it as money flows out). When you pull it out the aggregate value of each share drops by the amount you removed from the jar.
But when you sell a stock, somebody else buys it. The money you take out is put right back in by somebody else.
  • #62
  • Edited 3:56pm Jan 25, 2007 3:39pm | Edited 3:56pm
Quoting mickeymickey
I assume that stock prices are set by supply and demand based on the performance of a company. Likewise, the assets of a company have value based on supply and demand outside of the stock market. Chapter 7 illustrates my point perfectly. The net assets and the performance of the company determine price. Did I not say as much in my post? I'm not sure where I indicated anything about the hand of God, I'd appreciate it if you kept such silly statements out of this discussion, because I believe I've said anything but that in my last post.

Let me reiterate my point. You argued that in some unreal hypothetical case in which all capital is removed from the market, the underlying assets will decline to zero. You did not specify the conditions of this happening, such as Chapter 7 bankruptcy. You stated that the decline of the underlying assets (caused by removal of investment capital) to zero proves that it's a zero sum game. I disagree, because the company is the underlying asset and it will still be worth something greater than zero even if a share of its stock is equal to zero because you will die in the next minute from owning a stock.

If you want to discuss realistic scenarios such as Chapter 7, then bring up that when trying to prove your point. The "death in a minute" and assumed zero demand scenarios really aren't working for me.
OK, instead of me giving examples and explinations, lets have you explain the calculation used to discover the intrinsic value of a stock and work from there. What is the intrinsic value of say Apple Computer's stock. They have no debt so it should be a pretty simple company to analyze...
  • #63
  • Jan 25, 2007 3:53pm Jan 25, 2007 3:53pm
Quoting mickeymickey
It's impacted when the shares are perceived as having a higher value and individuals are willing to pay more for them. An individual sale of stock does not remove money from the market cap because somebody else just put the same amount of money in.

But when you sell a stock, somebody else buys it. The money you take out is put right back in by somebody else.
These are the key points.

First underlined: If they perceive the shares are worth more, but do do not increase the amount of money chasing the existing shares, the value will not increase. The offer price can shoot up $100, but until a bid hits it, it isn't a valid price. If somone hit the offer, they would be adding that $100 to the market cap. If the seller hit a bid $100 lower then the existing price, that $100 would be removed from the market cap. These are nonsense numbers but it is materially the same whatever the spread is. This is the mechanics of price discovery.

Second underlined: True enough, but only when they agree to transact at the median current price. Since this does not occur (as outlined above), you are either increasing or decreasing the market cap by half the spread for each share you agree to transact. The new market cap is instantly calculated and the remaining shares are valued accordingly.
  • #64
  • Jan 25, 2007 7:27pm Jan 25, 2007 7:27pm
Quoting Darkstar
OK, instead of me giving examples and explinations, lets have you explain the calculation used to discover the intrinsic value of a stock and work from there. What is the intrinsic value of say Apple Computer's stock. They have no debt so it should be a pretty simple company to analyze...
I don't need to provide a calculation, that's not necessary to validate what I'm saying. You asserted this

Quote
I repeat ANY market in which an extraction of all the currently invested capital would drive the value of the underlying assets to zero is a zero sum game.


You made this assertion and the only way this assertion is correct is if you deny that companies have any value outside of the stock market. It's not necessary for me to calculate the value, it's necessary to either accept or deny the value as existing.
  • #65
  • Jan 25, 2007 8:01pm Jan 25, 2007 8:01pm
Quoting mickeymickey
I don't need to provide a calculation, that's not necessary to validate what I'm saying. You asserted this

[/color]

You made this assertion and the only way this assertion is correct is if you deny that companies have any value outside of the stock market. It's not necessary for me to calculate the value, it's necessary to either accept or deny the value as existing.
I'm not saying companys don't have value, I'm saying that the stock price is only conceptually related to the company. Unless or until a calculation can be shown that directly equates the intrinsic value of a company to the market capitalization of a stock, they are two distinct subjects.
  • #66
  • Jan 26, 2007 12:09am Jan 26, 2007 12:09am
Quoting Darkstar

horseshit

Forex IS a zero sum game. All markets are zero sum. Some of them just have a more abstract method of price discovery.



Borrowers print money, not governments. If you dislike fiat currencies, stop taking out loans.
Now Darkstar, put down Keynes and take three steps back ... you are among friends here; no need to curse. And don’t leave now – you are a worthy and intelligent adversary.

Help me out on this. I probably did a lousy job of explaining myself. First, I don't recall anyone saying governments print money. Their central banks, not the government themselves, do control the money supply, and somewhat arbitrarily, so the currency is thus fiat, whether anyone likes it or not. I never said it was good or bad, it just is.

Second, I don't believe that borrowers print money. They take part in the expansion in money by depositing a loan in a fractional reserve bank, but the resulting expansion is more the function of the regulator of the reserve fraction than the borrower. The borrower is passive in this whole process. Joe six-pack depositing a home-improvement loan probably has no idea that he is expanding a monetary aggregate, so his role is more passive. The central bank plays a more active role, because they set the level of the reserve fraction, thus the amount of the monetary expansion. I'll bet we're in agreement here; maybe I just gave a slipshod explanation last time.

But finally, please explain how, in a dynamic supply, an exchange is necessarily a zero-sum game? Especially when only a portion of the pool is actually up for exchange against another currency? The majority of the currency in an economy is for purchasing goods and services. A county's money supply is not really analogous to the outstanding shares of stock in a corporation, unless people are out there bartering for groceries and gasoline using GM shares. Please explain this. You probably know something I don't or something I've overlooked.
  • #67
  • Jan 26, 2007 2:23am Jan 26, 2007 2:23am
Quote
Thanks for your comment DS, yes I know that all are willing to play and are playing consciously. But if you are a boxer and a not bad one you can hit and harm someone, all are willing to participate thats not a street fight but the problem remains.

Imho playing is not immoral and certainly occasionally its a kind of service to hedgers and banks. On the other hand i see a pictore of a friend of mine who lost 8 k lately, yes he is conscious person (i think ) and i'm not responsible for his loss and him.

maybe my problem is of emotional nature, i'll try to think about it. Any comments welcome.

You dont have to think of the profits in forex as a loss to everyone else.
Let's say you plan to sell your long position. The other side would buy your position to secure his own profits from a short position.

If you are too worried about hurting others (even when that's not the case) you cannot live in this world. If you own a business, your business success may kill other competitors, driving them to financial problems. They need to feed their kids too, right ?
If you got a job, your success is a failure to other 9 candidates. Some of them may not have money to even eat twice a day.

Hope that helps pal.
  • #68
  • Jan 26, 2007 4:29am Jan 26, 2007 4:29am
....just a thought,...when u take a credit in lets say YENS, im sure the bank will hedge your total ammount with the euros...

10 k euros in Yens is currently XYZ yens
the bank should hedge and will buy 10k eur/jpy for xy years,...am i right?
its just money
  • #69
  • Jan 26, 2007 7:28am Jan 26, 2007 7:28am
Quoting backinblack
Now Darkstar, put down Keynes and take three steps back ... you are among friends here; no need to curse. And don’t leave now – you are a worthy and intelligent adversary.

Help me out on this. I probably did a lousy job of explaining myself. First, I don't recall anyone saying governments print money. Their central banks, not the government themselves, do control the money supply, and somewhat arbitrarily, so the currency is thus fiat, whether anyone likes it or not. I never said it was good or bad, it just is.

Second, I don't believe that borrowers print money. They take part in the expansion in money by depositing a loan in a fractional reserve bank, but the resulting expansion is more the function of the regulator of the reserve fraction than the borrower. The borrower is passive in this whole process. Joe six-pack depositing a home-improvement loan probably has no idea that he is expanding a monetary aggregate, so his role is more passive. The central bank plays a more active role, because they set the level of the reserve fraction, thus the amount of the monetary expansion. I'll bet we're in agreement here; maybe I just gave a slipshod explanation last time.

But finally, please explain how, in a dynamic supply, an exchange is necessarily a zero-sum game? Especially when only a portion of the pool is actually up for exchange against another currency? The majority of the currency in an economy is for purchasing goods and services. A county's money supply is not really analogous to the outstanding shares of stock in a corporation, unless people are out there bartering for groceries and gasoline using GM shares. Please explain this. You probably know something I don't or something I've overlooked.
I'm not angry. I love the discussion. My apologies if it came off that way.

You can't have fractional reserve banking without loaning out the non-fractional component of the reserves. In plainer language, the moneysupply does not increase until a bank loans out the money a depositor has placed with them. It is the loaning process that creates the synthetic asset on the banks balance sheet (while it simultaneousley resides on the depositors balance sheet) which is eventually included in the monetary aggregate calculations. I posted a much more thorough explination of fractional reserve banking mechanics some time ago, but it seems to have vanished.

It may very well be true that Joe sixpack has no idea what he is doing when he borrows this money, but that doesn't excuse him from the responsibility. I'm pretty sure were both on the same page with this. Our difference is simply semantics.

I'm not sure what your implying in the zero sum portion.
  • #70
  • Jan 26, 2007 11:07pm Jan 26, 2007 11:07pm
Quoting Darkstar
I'm not angry. I love the discussion. My apologies if it came off that way.

I'm not sure what your implying in the zero sum portion.
Well, not only are you intelligent, but you are a gentleman, as well.

My whole theory about forex not being a zero-sum-game is because it differs in nature from stocks (or futures), which has a fairly static quantity, and a specific purpose. If there are, for example, 500,000 outstanding shares of Widgets Inc., that's not going to change, unless a stock buy-back or a new issue occurs; either is rare and subject to a lot of prep beforehand.

Since the quantity of money supply varies, and only part of it is for exchange against other currencies, and is valued by multiple factors, it can be traded without one person losing. If I win, it can be done without the person on the other side losing, because there is multiple uses for the currency (whereas there is not in stocks), and there is an ever-expanding pool of money (again, not so in a stock).

Example: I cash out of my position at a higher price than I purchased it last week. Another buys it (obviously), but the currency still appreciates due to the county's productivity gains released the following week. He also realiizes a gain. The Fed desires to intensify the minor "boom," so it injects a small amount of cash into the money supply by purchasing debt titles (open market operations). In this scenario, everyone wins.

Now, if I'm in error, I need to know, because I value clarity above being right. Thanks.
  • #71
  • Jan 27, 2007 11:15am Jan 27, 2007 11:15am
This is precisely why the concept of zero sum has to be analyzed through the concept of complete liquidation. While it is certainly true that your direct counterparty may benefit from purchasing your profitable position, the net result of all the positions in the market has to balance out to zero (technically it’s a negative when you account for transaction costs, but let’s keep it simple).

The error in logic that is occurring in your theory is that the your assuming the forex market is a component of the money supply. It actually operates independently of what happens with regard to the expansion and contraction in the total number of currency units in existence (not unlike a stock in relation to the company it is meant to represent). A forex contract is not a monetary unit; it is a commitment to transact monetary units in the future.

Let us examine 1 contract between 2 parties. Irrespective of the underlying need for either party, one party agrees to provide the other party a number of monetary units 3 days from now. Once the contract (trade) is executed the agreed upon rate between the two parties will not change. However, the value (as determined by other participants in the market) will change between the time the contract is executed and the time it is eventually delivered. Some real numbers will make more sense I imagine…

Party 1 offers party 2 $100,000 USD for $200,000 CAD. Once they have made this agreement, the exchange rate is fixed between them. If after a few hours the open market rate has changed so that $100,000 USD is now worth $300,000 CAD, party 2 can sell the agreement to someone else and pocket the $100,000 CAD. Party 1 can also liquidate the contract, but he would have to take a loss of $100,000 CAD. The fact that someone else may take that contract is irrelevant and here’s why:

Lest say party 3 and party 4 buy the agreements from party 1 and party 2 respectively. What would happen if the open market rate moved back to its original value of $100,000 USD = $200,000 CAD? Party 3 would gain $100,000 CAD and Party 4 would lose it. As you can see, the net value of both the gains and losses is zero, and forex is thus a zero sum game.

It gets confusing because the markets are so large. More often than not, parties 1,2,3, and 4 are not all dealing with the same single contract. A forex contract is standardized, so they are interchangeable with any other and thus this simple example would probably mushroom out to 6 parties trading 5 distinct contracts in the real world. Even if all 6 of these parties manages to make a profit on their dealings by liquidating at different times, somewhere down the line someone (or an aggregate of someones) will lose the exact amount of profit these parties gained. In forex the someTIME component is 3 days into the future. 3 days after all these trades occur, every contract will have to be settled; which is why most people can grasp how forex is zero sum while the stock market supposedly is not.

I said the stock market is zero sum over a long enough timeline because it adheres to these same mechanics, but without a settlement date. The losers are perpetually rolled forward in time. If all the positions in both markets were liquidated at the same time, all the losses would accrue to the winners. And so they are zero sum.

NOTE: I don’t know if my party 1, 2, etc profit accrual directions are correct. It requires too many abstract components for me to figure out in my head. Just know that the concept is correct even if the correct winners aren’t acknowledged…
  • #72
  • Feb 1, 2007 11:12pm Feb 1, 2007 11:12pm
After extensive deliberation on the subject I have determined that I made two mistakes. The stock market and the bond market are not completely zero sum. Stocks that pay dividends are positive sum up to the amount that has been paid out to shareholders. This says nothing about the intrinsic value of a stock ofcourse because the companies are under no obligation to pay it.

Bonds are not zero sum either. The futures market where bond prices are determined is zero sum for the same reasons the forex market is. However, once the underlying security is paid for, the future revenue stream collected in interest is a positive sum accrual to the purchaser. Bonds have an intrinsic value, wherein the calculations will vary from bond to bond. It should be noted that the intrinsic value is determined at the time of issuance, not in the open market.

The capital gains portion of the argument is still valid because the quoted price of the securities can only change through the supply/demand factors introduced by market participants.

That probably wasn’t the clearest explanation, so I welcome any comments or questions…
  • #73
  • Feb 2, 2007 11:20pm Feb 2, 2007 11:20pm
Quoting Darkstar
After extensive deliberation on the subject I have determined that I made two mistakes. The stock market and the bond market are not completely zero sum. Stocks that pay dividends are positive sum up to the amount that has been paid out to shareholders. This says nothing about the intrinsic value of a stock ofcourse because the companies are under no obligation to pay it.

Bonds are not zero sum either. The futures market where bond prices are determined is zero sum for the same reasons the forex market is. However, once the underlying security is paid for, the future revenue stream collected in interest is a positive sum accrual to the purchaser. Bonds have an intrinsic value, wherein the calculations will vary from bond to bond. It should be noted that the intrinsic value is determined at the time of issuance, not in the open market.

The capital gains portion of the argument is still valid because the quoted price of the securities can only change through the supply/demand factors introduced by market participants.

That probably wasn’t the clearest explanation, so I welcome any comments or questions…
You are right. Just to add, stock and bond holders also have the power over the companies. They can vote out directors and bondholder can get the court to order the company to pay the coupon.

But a large amount of investors are playing the stocks and bonds for the capital gains. That's the part that is an almost-zero sum game.
  • #74
  • May 14, 2007 3:44am May 14, 2007 3:44am
it is soo confusing that make me want to ask a simple question...

if i buy a burger for $9 and eat it, i am on the loosing side? seeing that way, loosing is not that bad....... that $9 is still exist too,
but if seen by my side only, now i have $9 less , without trace
  • #75
  • Last Post: May 14, 2007 3:53am May 14, 2007 3:53am
Quoting Gwan
it is soo confusing that make me want to ask a simple question...

if i buy a burger for $9 and eat it, i am on the loosing side? seeing that way, loosing is not that bad....... that $9 is still exist too,
but if seen by my side only, now i have $9 less , without trace


Yes, but did you order your burger with extra cheese?
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