Why people who know one thing will do another

[RGacky3]

I'm talking specifically about buisiness leaders, I find it intesting that a citi group executive gets that cost cutting and loosing demand will ultimately crash the economy even if it leads to short term profits (http://www.huffingtonpost.com/2011/08/30/citi-cio-corporations-can-not-continue-simply-cut-costs_n_941737.html). This is'nt the first executive to point out the obvious.

Whats interesting is that before the crash many people in wall street viewed the stock market as overvalued and even the housing market as a bubble, yet they continued inflating it.

A Stock Broker I know explained to me how a bubble will continue to grow even when everyone knows that it is a bubble, that instead of that knowledge leading to the deflation of the bubble it continues to grow and burst.

People act in competition with each other, and always for the short term, stock brokers trade stocks very quickly and many times hold a stock for a very short time. If a bubble is forming you can see it going up, you want to make a short term profit on it, so people will continue to inflate it because they can make big money on the way up, no one is going to be willing to take the hit and stop the growth just so hte bubble does'nt burst, if he does that everyone else will take advantage of what he's doing and keep it going up and they'll make the profit. Then when it bursts, you have a few loosers on wallstreet (most of them made major money on the inflation) and a TON of externalities.

The same goes with what the executive is talking about, buisiness people understand that continual cutting of variable cost and even sometimes non-variable cost hurts demand and overall will destroy the economy, yet they all do it, because there is major profits to be made on the way, no one is willing to take the hit to save the economy, the one individual who stops the cutting madness looses out on the profits while the other ones continue the bubble.

So its competition ultimately that crashes economies and grows bubbles.

Now the buisiness class WILL ALWAYS unite over things that benefit them as a class, for example their ability to make these bubbles and profits, or keeping down working class power, but when it comes to destroying economies for profit, they are competing over who can do it the best.

[Dean]

People act in competition with each other, and always for the short term, stock brokers trade stocks very quickly and many times hold a stock for a very short time.

"short term": This isn't always the case. But with high frequency trading, it is increasingly the case. A new facility is/was built at NYSE precisely for the HFT crowd - the benefit is to be closer to the NYSE servers.

Long term profits do matter. High-volume traders receive dividends which are private - these data are guarded fiercely, too. These dividends vary from customer to customer - the dividends that you can see on financial tickers only apply to low-volume purchasers who have not made special deals with the firm.

In many ways, dividends are long-term profits in a market that is prone to short-term profits. Its a different model of valorization, and they don't necessarily rely on a business being successful - but more on the size of the investment being made by the purchaser. These also tell an important story about who is benefiting in markets - a lot of these are set up like bonds. It's like a hidden bond market.

[RGacky3]

"short term": This isn't always the case. But with high frequency trading, it is increasingly the case. A new facility is/was built at NYSE precisely for the HFT crowd - the benefit is to be closer to the NYSE servers.

When your a institutional investor, short term is almost always the case, considering you give quarterly reports and your stock price depends on it.

The stock trade is just an example, its not a perfect example, but you can see how bubbles grow even when everyone knows it, the same goes for economic crisis, people will act in a way that ultimately will destroy the economy even though they recognise that everyone doing the same will destroy the economy.

The same argument can be made for people shopping at Walmart seeing their wages drop.

[danyboy27]

Its one of the inherent contradiction of capitalism.

to make capitalism work, you must plan on a long run, but most of profits are made on a short run, putting the whole long run planification in jeopardy threatening the short run profits.

Just like the free market is controlled to allow the free market to exist beccause without regulation there would be no market but only cartels.

[Bud Struggle]

Its one of the inherent contradiction of capitalism.

to make capitalism work, you must plan on a long run, but most of profits are made on a short run, putting the whole long run planification in jeopardy threatening the short run profits.


You are right. That's why making money ina Capitalist society is an art not a science.

[Dean]

When your a institutional investor, short term is almost always the case, considering you give quarterly reports and your stock price depends on it.

Does a 5 billion liquidity injection into Bank of America (http://www.charlotteobserver.com/2011/08/26/2554115/buffett-investing-5b-in-bofa.html) - arranged privately and directly - count as institutional investment?


The stock trade is just an example, its not a perfect example, but you can see how bubbles grow even when everyone knows it, the same goes for economic crisis, people will act in a way that ultimately will destroy the economy even though they recognise that everyone doing the same will destroy the economy.

The same argument can be made for people shopping at Walmart seeing their wages drop.

Hey, I wasn't arguing against your point. I've made similar points before. I wanted to point out a couple things:



There is more to the economy than stock options. In fact, besides dividends, stock indexing - a kind of speculation without direct commodity/capital purchases - may be more important than straight stock ownership
As the rate of profit falls, management positions in corporate structures are increasingly valuable. This is because the value of malfeasance in corporate culture often has a set or expanding value (i.e. disproportionate compensation for CEOs) while the rate of profit falls due to competition, innovation, etc.

The thing is - even if stocks were completely eliminated as a form of capital management, the private control over capital would still resolve itself into the valorization / exploitation models described by Marx et. al.


You are right. That's why making money ina Capitalist society is an art not a science.

This has some truth to it. Building on what Gacky and Dany already said, there is the issue of synergy of human activity. The market is based on confidence and expected norms - and human beings respond to market conditions dynamically. So things will always be changing - and yet, private profits will also be emphasized consistently. This is an inherently volatile system, as humans try to constantly second guess each other.

[RichardAWilson]

It's called the Greater Fool Theory. You buy, knowing something is inflated, believing that somewhere along the line a moron will pay even more.

[RGacky3]

Does a 5 billion liquidity injection into Bank of America (http://www.anonym.to/?http://www.charlotteobserver.com/2011/08/26/2554115/buffett-investing-5b-in-bofa.html) - arranged privately and directly - count as institutional investment?


Well it was done by an institutional investor, so yeah, what I mean by institutional investeors are people who work for goldman sachs, Deutchebank and so on.

BTW, Warrent Buffet likes to play like he's an only value investor, owning companies that produce and so on, but he's made a majority of his money the other way, the same way as other investors made it, riding speculative bubbless, playing with complex derivatives and so on.



There is more to the economy than stock options. In fact, besides dividends, stock indexing - a kind of speculation without direct commodity/capital purchases - may be more important than straight stock ownership


Absolutely



As the rate of profit falls, management positions in corporate structures are increasingly valuable. This is because the value of malfeasance in corporate culture often has a set or expanding value (i.e. disproportionate compensation for CEOs) while the rate of profit falls due to competition, innovation, etc.


Empirically thats true, althought i don't get why, Executive pay has sky rocketed even when profits drop, and the rate of profit definately drops, but it sounds like a good explination, can you expand on it?



It's called the Greater Fool Theory. You buy, knowing something is inflated, believing that somewhere along the line a moron will pay even more.


Thats with the stocks, and with the whole economy its kind of a different attitude, every one knows the right thing to do, but if they do it alone they'll fall behind, so what ends up happening is no one does it and the economy crashes.

[RichardAWilson]

It's no longer attached with "just stocks." It's now applied to housing and commodities (like corn, oil and aluminum). A double wide mobile home in Southern California was never "worth" $1 million. =) Didn't matter as long as there was a greater fool.

[Judicator]

If you know there's a bubble, how will buying and selling a lot help you profit from the belief that there's a bubble? Say the Dow will be at 20,000 next year, how does trading a lot help me any more than just buying the Dow and selling it at the end of the year?

[RGacky3]

Ask the institutional investors

[Judicator]

Tons of institutional investors lost money, so they might not be the best people to ask.

[RGacky3]

Yes, but overall, most of them made out like bandits, when the mongols raided towns and burned them down I'm sure they lost a couple of riders on the way.