Crash! Assets are sold and the money goes... where?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Topic Author
schuyler74
Posts: 236
Joined: Sat Apr 20, 2013 12:56 am

Crash! Assets are sold and the money goes... where?

Post by schuyler74 »

In 2008 or so, most everything dropped: Stocks, Bonds, REITs, etc. But how can this be? Whenever there are more sellers than buyers, of course prices will fall. Person A sells his shares of <whatever> to Person B at an agreed-upon price. Now Person A has this cash and puts it... where?

It has to go somewhere! And as it does, how are the prices of everything still falling? Wouldn't the price at least rise for the <whatever> that Person A turns around and buys with his new money? Evidently, there were a whole lot of Person A's in 2008, but I can't figure out where the money went. I feel like I should have pre-owned some of whatever it was -- before the rush began. Could've made out big-time.
oxothuk
Posts: 889
Joined: Thu Nov 10, 2011 7:35 pm

Re: CRASH! Assets are sold and the money goes... where?

Post by oxothuk »

schuyler74 wrote:In 2008 or so, most everything dropped: Stocks, Bonds, REITs, etc. But how can this be? Whenever there are more sellers than buyers, of course prices will fall. Person A sells his shares of <whatever> to Person B at an agreed-upon price. Now Person A has this cash and puts it... where?
What happened in 2008 was a a sudden (negative) change in perception about future returns. This change was broad-based, and thus impacted values across many asset classes.

In the end there is always an equal number (sales-weighted) of sellers and buyers.
User avatar
Garco
Posts: 1078
Joined: Wed Jan 23, 2013 1:04 am
Location: U.S.A.

Re: CRASH! Assets are sold and the money goes... where?

Post by Garco »

By definition there must be a seller for every buyer. But it's not true that every dollar from a sale stays in investments of some kind. In a crisis especially a lot of receipts from a sale will go into cash savings. And a lot of that cash in the hands of "Person A" may stay on the sidelines in money market funds or be withdrawn to savings elsewhere or to cover a person's expenses (mortgage, car loans, credit card debt, education, food, etc.).
User avatar
Topic Author
schuyler74
Posts: 236
Joined: Sat Apr 20, 2013 12:56 am

Re: CRASH! Assets are sold and the money goes... where?

Post by schuyler74 »

If Person A uses this cash for personal items, then it goes right back into the economy as business profits. However, if Person A just hoards it in a Money Market or in a Savings Account / CD, then that bank can in turn lend out 90% of it after keeping 10% in reserves. Right? Don't both of these options help the very economy that the investor was worried about -- which means that "future returns" should do just fine?
Valuethinker
Posts: 48944
Joined: Fri May 11, 2007 11:07 am

Re: CRASH! Assets are sold and the money goes... where?

Post by Valuethinker »

When a stock changes hands, the price is set by the *last* buyer and the *last* seller.

Say the company has 1m shares at $10 each so market cap is $10m.

Then it announces bad results, next seller sells at $5. Co worth $5m.

The $5m is lost to *everyone*.
User avatar
baw703916
Posts: 6681
Joined: Sun Apr 01, 2007 1:10 pm
Location: Seattle

Re: CRASH! Assets are sold and the money goes... where?

Post by baw703916 »

All market prices are hypothetical except for what is actually being bought and sold at that particular moment. Take a company's market cap: say that Facebook's market cap is $50 billion. What exactly does that mean? Does that mean that I could buy the whole company if I had $50 billion and were so inclined? No, because that could only happen if everybody who currently owns it wanted to sell, and they would undoubtedly demand a premium if they realized I wanted to buy the whole company. A company's book value is similar: in theory, that's the amount of money you could get for liquidating all of a company's assets. But I'm pretty sure that there has never been an instance in history of a company's assets being liquidated for anything close to book value.
Most of my posts assume no behavioral errors.
User avatar
Ged
Posts: 3944
Joined: Mon May 13, 2013 1:48 pm
Location: Roke

Re: CRASH! Assets are sold and the money goes... where?

Post by Ged »

There were tremendous financial losses due loans not being repaid. This even drove some companies like Lehman bankrupt. The entire S&P actually had negative earnings (i.e. losses) for the 4th quarter of 2008.
learning_head
Posts: 844
Joined: Sat Apr 10, 2010 6:02 pm

Re: CRASH! Assets are sold and the money goes... where?

Post by learning_head »

schuyler74 wrote:Person A sells his shares of <whatever> to Person B at an agreed-upon price. Now Person A has this cash and puts it... where?

It has to go somewhere! And as it does, how are the prices of everything still falling? Wouldn't the price at least rise for the <whatever> that Person A turns around and buys with his new money?
Day 1: Person A has $1 Million worth of VTI. Person B has $1000 in brokerage account.
Day 2: Everyone realizes that this is year 2050 and VTI with its PE if 10,000 is way over-valued. Rally ends and person A sells all his shares to person B for $1000. Now, person A has $1000, and person B has VTI at PE of 10.

Where did money go? It evaporated... Nothing gained.
User avatar
market timer
Posts: 6535
Joined: Tue Aug 21, 2007 1:42 am

Re: CRASH! Assets are sold and the money goes... where?

Post by market timer »

Where did the fictitious wealth of Madoff's fund go when the ponzi scheme was revealed? So much of what we call wealth is just confidence in the future.
User avatar
Kevin M
Posts: 15750
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: CRASH! Assets are sold and the money goes... where?

Post by Kevin M »

Nominal Treasuries did well, IIRC.
If I make a calculation error, #Cruncher probably will let me know.
User avatar
White Coat Investor
Posts: 17338
Joined: Fri Mar 02, 2007 8:11 pm
Location: Greatest Snow On Earth

Re: CRASH! Assets are sold and the money goes... where?

Post by White Coat Investor »

Sure, the proceeds must go somewhere, but keep in mind that a lot of the wealth just disappeared. Instead of a company buying worth $100 Billion, it was now worth $60 Billion. That $40 Billion goes nowhere. It just disappears.

Agree that buyers and sellers are always equal, just the perception of value changes. Also agree that treasuries did very well in 2008.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
User avatar
Kevin M
Posts: 15750
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: CRASH! Assets are sold and the money goes... where?

Post by Kevin M »

EmergDoc wrote:Also agree that treasuries did very well in 2008.
Nominal treasuries. IIRC, TIPS dipped, presenting a wonderful buying opportunity (which unfortunately I did not take advantage of, because I didn't understand them well enough then, and was busy buying other stuff).

Kevin
If I make a calculation error, #Cruncher probably will let me know.
Call_Me_Op
Posts: 9872
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Crash! Assets are sold and the money goes... where?

Post by Call_Me_Op »

schuyler74 wrote:
It has to go somewhere!
Not really. The value of stocks can literally evaporate. After the evaporation, what's left has to go somewhere if the stock is sold, but much of the value can simply vanish.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
User avatar
Kevin M
Posts: 15750
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Crash! Assets are sold and the money goes... where?

Post by Kevin M »

I believe there can be temporary imbalances between buyers and sellers. This is referred to by traders as "order imbalance". Market makers can step in to buy or sell to help manage this, and the order imbalance is part of what causes the price to move. The price moves to a point that restores order balance, which is one of the fundamentals of efficient markets.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
IlliniDave
Posts: 2388
Joined: Fri May 17, 2013 7:09 am

Re: CRASH! Assets are sold and the money goes... where?

Post by IlliniDave »

schuyler74 wrote:In 2008 or so, most everything dropped: Stocks, Bonds, REITs, etc. But how can this be? Whenever there are more sellers than buyers, of course prices will fall. Person A sells his shares of <whatever> to Person B at an agreed-upon price. Now Person A has this cash and puts it... where?

It has to go somewhere! And as it does, how are the prices of everything still falling? Wouldn't the price at least rise for the <whatever> that Person A turns around and buys with his new money? Evidently, there were a whole lot of Person A's in 2008, but I can't figure out where the money went. I feel like I should have pre-owned some of whatever it was -- before the rush began. Could've made out big-time.
It all went down in "value" together because people didn't want it as badly any more. The money that sellers pull out does get disbursed in various ways, but an equal amount goes in from buyers, so I don't know what the net cash flow out of the markets were.

The whole mess started because people started defaulting on mortgages and equity loans while real estate values fell. Perhaps too many people were funding above-their-means consumption (consumption being the bigger part of our economy) on too much borrowed money, and when all that soured, the impact of sharply less debt-fueled spending on the economy was greater than the activities of people who pulled cash out of the markets. Apparently a fair bit of that money went to repay debt. At the time I believe lenders became very leery of letting money out too easily, and a lot of banks bolstered their reserve positions.
Don't do something. Just stand there!
User avatar
baw703916
Posts: 6681
Joined: Sun Apr 01, 2007 1:10 pm
Location: Seattle

Re: Crash! Assets are sold and the money goes... where?

Post by baw703916 »

People are used to thinking of their portfolios as containing $X worth of equities. But fundamentally this is wrong. What they actually have in their portfolios is fractional ownership in a number of businesses, which in theory they could sell for $X right now. What they might sell it for at some point in the future depends on how much someone who wants to buy is willing to pay. But it doesn't represent money, it represents ownership.
Last edited by baw703916 on Sun Jun 02, 2013 4:56 pm, edited 1 time in total.
Most of my posts assume no behavioral errors.
User avatar
nisiprius
Advisory Board
Posts: 52105
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: CRASH! Assets are sold and the money goes... where?

Post by nisiprius »

market timer wrote:Where did the fictitious wealth of Madoff's fund go when the ponzi scheme was revealed? So much of what we call wealth is just confidence in the future.
I think that's correct.

It's easier if you think about something like a fashion trend. Unfortunately I'm so clueless about fashion I can't give a specific example, but a clothing retailer might find that some line of clothing is flying off the shelves. Since it can sell everything it has instantly at the marked price, the value of its inventory is the marked price times the number of pieces it has. Then suddenly nobody wants that style any more. The inventory is physically the same but now nobody will buy it at the marked price, it can't be sold unless it is marked down. The value of the inventory has dropped. Where did it go? It didn't go anywhere.

The source of the value was that someone wanted it. Someone stops wanting it, the value goes away.

Or, suppose you have a rare postage stamp Someone agrees to buy it for $1 million. It is worth $1 million... as long as you believe the sale will be consummated. On his way to pick it up, the buyer is abducted by a flying saucer and never seen again, and it turns out the only other buyer you can find for it is only willing to pay $100,000. Where did the $900,000 go? It didn't go anywhere.

How about technological obsolescence, or surprise changes in regulations, or materials availability?

Value can be destroyed.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Dandy
Posts: 6701
Joined: Sun Apr 25, 2010 7:42 pm

Re: Crash! Assets are sold and the money goes... where?

Post by Dandy »

There has to be a buyer for every seller but when a few sellerd sell their shares of XYX Corp for $2 less than the previous day that can set the value and if there are a million shares outstanding the value of those shares dropped by $2million - even though a relatively few shares were sold. The Crash of 2008 wiped out Trillions? of value for investments and real estate for those who "stayed the course" - i.e. they were not sellers. But those that did sell (and buy) set the value of the remaining assets. So I believe most of the trillions lost were paper losses not actual sales.

I'm sure that many who sold shares used the money to pay down debt, margin calls and/or faced job loss and used money for living expenses. Once the downward spiral started fear, greed and panic just made matters worse. Even if people didn't sell shares or property they stopped spending and fed the negative earnings'.

I had just retired in 2008 and Harry Reid (bless him) said a large insurance co was about to declare Chapter 11.(Never happened). I moved my large 401k from my previous insurance co employer which was 40% in equities to Vanguard's Admiral Treasury fund and curbed spending. Soon after DCA'd back into equities. So my money basically went to money market funds and CDs.
User avatar
Topic Author
schuyler74
Posts: 236
Joined: Sat Apr 20, 2013 12:56 am

Re: CRASH! Assets are sold and the money goes... where?

Post by schuyler74 »

nisiprius wrote:
market timer wrote:Where did the fictitious wealth of Madoff's fund go when the ponzi scheme was revealed? So much of what we call wealth is just confidence in the future.
I think that's correct.
Well, if this "wealth" isn't really actual wealth but rather materialized confidence, then why does the federal government argue about how to proceed when all they need to do is whatever instills the most confidence in investors? But what would that be?

Last night, I read this from Joe Davis, Vanguard's chief economist, entitled "Faith in the Fed: Joe Davis talks with IndexUniverse", and he said:
Joe Davis wrote:Take all that political drama out and the economy would have grown 3 percent, not 2 percent, irrespective of policy.
Is that true?? Policy doesn't matter so much as instilling confidence? Confidence in what, exactly?
User avatar
market timer
Posts: 6535
Joined: Tue Aug 21, 2007 1:42 am

Re: CRASH! Assets are sold and the money goes... where?

Post by market timer »

schuyler74 wrote:
nisiprius wrote:
market timer wrote:Where did the fictitious wealth of Madoff's fund go when the ponzi scheme was revealed? So much of what we call wealth is just confidence in the future.
I think that's correct.
Well, if this "wealth" isn't really actual wealth but rather materialized confidence, then why does the federal government argue about how to proceed when all they need to do is whatever instills the most confidence in investors? But what would that be?

Last night, I read this from Joe Davis, Vanguard's chief economist, entitled "Faith in the Fed: Joe Davis talks with IndexUniverse", and he said:
Joe Davis wrote:Take all that political drama out and the economy would have grown 3 percent, not 2 percent, irrespective of policy.
Is that true?? Policy doesn't matter so much as instilling confidence? Confidence in what, exactly?
Political self-interest can result in sub-optimal outcomes for all sorts of reasons. As for why confidence is important, consider that the national debt is over $16 trillion and the US has $222 trillion in unfunded liabilities, according to Kotlikoff. Confidence is why anyone accepts the dollar as a form of payment, and why the world continues to fund US deficits.
dbr
Posts: 46137
Joined: Sun Mar 04, 2007 8:50 am

Re: Crash! Assets are sold and the money goes... where?

Post by dbr »

baw703916 wrote:People are used to thinking of their portfolios as containing $X worth of equities. But fundamentally this is wrong. What they actually have in their portfolios is fractional ownership in a number of businesses, which in theory they could sell for $X right now. What they might sell it for at some point in the future depends on how much someone who wants to buy is willing to pay. But it doesn't represent money, it represents ownership.
This is correct. Stocks are not money. When stock asset value goes down, no money is lost because there is no money there to begin with.

A different way to see this is to recognize that you as an investor lose all your money when you buy the stock. In exchange you get the aforementioned share of ownership. To get money back you have to sell the stock to someone who will exchange money to you for your share of ownership. When a company issues shares of stock they exchange shares of ownership for money that they spend on on expenses, on capital investment, or for the previous owners to line their pockets with cash (see IPO). If the company goes private someone is willing to unline their pockets of cash, give it to you, and take back the ownership. ETC.
Jack
Posts: 3254
Joined: Tue Feb 27, 2007 1:24 am

Re: Crash! Assets are sold and the money goes... where?

Post by Jack »

schuyler74 wrote:It has to go somewhere! And as it does, how are the prices of everything still falling? Wouldn't the price at least rise for the <whatever> that Person A turns around and buys with his new money?
The simple answer is that the money went into treasury bonds and therefore the price of bonds went up (yields went down).
User avatar
Boglenaut
Posts: 3508
Joined: Mon Mar 23, 2009 7:41 pm

Re: Crash! Assets are sold and the money goes... where?

Post by Boglenaut »

If you bought an apple (a real apple, the fruit) with the intent to sell it, then you find it has worms and is worthless, where did the money go?

Same for stocks.
User avatar
Topic Author
schuyler74
Posts: 236
Joined: Sat Apr 20, 2013 12:56 am

Re: Crash! Assets are sold and the money goes... where?

Post by schuyler74 »

Boglenaut wrote:If you bought an apple (a real apple, the fruit) with the intent to sell it, then you find it has worms and is worthless, where did the money go? Same for stocks.
The money went to whomever you bought the apple from. And isn't that the same for stocks, as well? I understand that the value of a stock will drop when the perception of the value of its company falls, but it's not like the money actually disappeared but rather just the perceived wealth. I guess the best explanation (to me) so far is this:
dbr wrote:Stocks are not money. When stock asset value goes down, no money is lost because there is no money there to begin with. A different way to see this is to recognize that you as an investor lose all your money when you buy the stock. In exchange you get the aforementioned share of ownership. To get money back you have to sell the stock to someone who will exchange money to you for your share of ownership. When a company issues shares of stock they exchange shares of ownership for money ...
This is all very disconcerting. I keep buying all these stocks and my statements say they're worth $X but really they're not actually worth anything to me until the moment I sell them, at which point they may not be worth much at all. Still, what's the alternative? Bury it in a hole?
bayview
Posts: 2332
Joined: Thu Aug 02, 2012 7:05 pm
Location: WNC

Re: Crash! Assets are sold and the money goes... where?

Post by bayview »

schuyler74 wrote:
Boglenaut wrote:If you bought an apple (a real apple, the fruit) with the intent to sell it, then you find it has worms and is worthless, where did the money go? Same for stocks.
The money went to whomever you bought the apple from. And isn't that the same for stocks, as well? I understand that the value of a stock will drop when the perception of the value of its company falls, but it's not like the money actually disappeared but rather just the perceived wealth.
Exactly. The 25 cents that you gave the apple seller still belongs to the apple seller, but the $1.25 that you thought that apple was now worth has evaporated (minus the initial 25 cents.)

Although there are some counter-arguments (there always are around here :D), there's neither a profit nor a loss unless and until you sell. There are just hopes and fears, respectively.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
User avatar
LadyGeek
Site Admin
Posts: 95466
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: Crash! Assets are sold and the money goes... where?

Post by LadyGeek »

schuyler74 wrote:This is all very disconcerting. I keep buying all these stocks and my statements say they're worth $X but really they're not actually worth anything to me until the moment I sell them, at which point they may not be worth much at all. Still, what's the alternative? Bury it in a hole?
You're missing the concept of risk vs. reward, a.k.a. "There's no such thing as a free lunch." You take a chance that those stocks will be worth more when you want to sell them. But, they might not. Which ones do you place your bets on? Hard to tell.

So.... you take your money and buy something else that has a better chance to give you a profit when you sell. The only fly-in-the-ointment (overused cliche) here is that you won't have as much profit as if you had bought stocks. Catch-22. You need both stocks and something else (like bonds) to get the best overall chances of a good return (minimize your risk).

The balancing act of investing in different things is called diversification. See: Risk and return: an introduction

The actual ratio of the percentages of stocks/bonds that you come up with (to set your level of risk) is called Asset allocation. Getting this ratio correct is the single most important decision you can make when you setup your investment portfolio.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
adam1712
Posts: 566
Joined: Fri Jun 01, 2007 5:21 pm

Re: CRASH! Assets are sold and the money goes... where?

Post by adam1712 »

schuyler74 wrote:If Person A uses this cash for personal items, then it goes right back into the economy as business profits. However, if Person A just hoards it in a Money Market or in a Savings Account / CD, then that bank can in turn lend out 90% of it after keeping 10% in reserves. Right? Don't both of these options help the very economy that the investor was worried about -- which means that "future returns" should do just fine?
The economy was just not as productive in the next couple years from 2008 onwards. Crashes happen because of huge misallocation of resources. In 2008, following the housing bubble, there were too many home builders, banks making money on home mortgages, and too many recently built homes that people suddenly realized they couldn't afford. Your scenario of people continuing to buy different things and banks instantly lending to the correct borrowers doesn't happen. It takes time to reallocate, in the meantime there's higher unemployment, companies have useless machines to make things people no longer want, houses sit empty, etc. The overall economy is just less productive.

In 2008, it got so bad that banks stopped lending their 90% like you would hope. As much as the Fed has been trying to give away money, many banks choose to just let it sit in storage at the Federal Reserve instead of putting it to work since they couldn't find good options and/or afraid. Here's a chart from the Federal Reserve of St. Louis I think gives a clue of what was going on:

Image

http://research.stlouisfed.org/fred2/se ... NS?cid=123
User avatar
Oicuryy
Posts: 1959
Joined: Thu Feb 22, 2007 9:29 pm

Re: Crash! Assets are sold and the money goes... where?

Post by Oicuryy »

schuyler74 wrote:This is all very disconcerting. I keep buying all these stocks and my statements say they're worth $X but really they're not actually worth anything to me until the moment I sell them, at which point they may not be worth much at all.
Is money worth anything to you until the moment you trade it for something else? What else do you do with it?

Ron
Money is fungible | Abbreviations and Acronyms
Valuethinker
Posts: 48944
Joined: Fri May 11, 2007 11:07 am

Re: Crash! Assets are sold and the money goes... where?

Post by Valuethinker »

nisiprius wrote:
market timer wrote:Where did the fictitious wealth of Madoff's fund go when the ponzi scheme was revealed? So much of what we call wealth is just confidence in the future.
I think that's correct.

It's easier if you think about something like a fashion trend. Unfortunately I'm so clueless about fashion I can't give a specific example, but a clothing retailer might find that some line of clothing is flying off the shelves. Since it can sell everything it has instantly at the marked price, the value of its inventory is the marked price times the number of pieces it has. Then suddenly nobody wants that style any more. The inventory is physically the same but now nobody will buy it at the marked price, it can't be sold unless it is marked down. The value of the inventory has dropped. Where did it go? It didn't go anywhere.

The source of the value was that someone wanted it. Someone stops wanting it, the value goes away.

Or, suppose you have a rare postage stamp Someone agrees to buy it for $1 million. It is worth $1 million... as long as you believe the sale will be consummated. On his way to pick it up, the buyer is abducted by a flying saucer and never seen again, and it turns out the only other buyer you can find for it is only willing to pay $100,000. Where did the $900,000 go? It didn't go anywhere.

How about technological obsolescence, or surprise changes in regulations, or materials availability?

Value can be destroyed.

We really need to understand the difference between a stock and a flow in economics here.

GDP is an example of flow. Money spent over time on goods and services in an economy.

Market cap is a stock> fixed at a moment in time.


Would someone buy the entire US stock market at its current price/ market cap? No. It's a fixed instant in time (happens that we use end of day trading, normally, for that price ie 4.30 pm). We can talk about inflows into the market (buying less selling and not reinvesting that cash in other stocks) and outflows, but we can't talk about the current value of the US market as meaning anything.

Say there are 100 million homes in the US at $200k average price. Does that mean US real estate is 'worth' $20 trillion? In the sense that tomorrow we all sell our house and buy our neighbour's house and have $20 trillion of trades? No. What it means is that on average, the house sold tomorrow will be bought for $200k, and sold for $200k-- cash will trade hands from the buyer to the seller. If it's a newly built home, from the buyer (and her mortgage company) to the housebuilder, which will use it to pay suppliers, contractors, reinvest some in building further houses, pay out some as profits to shareholders. That money is not 'lost' it's just out of houses and into groceries that the contractors' spouses and the retired shareholders buy.

the Madoff example confuses the issue. A Ponzi Scheme is a different thing.

It's not a helpful analogy.


Madoff's fund was valued at $50bn. But those assets did not exist, cash inflows had gone to fund 'returns' to investors (often other investors). The underlying money didn't exist. It was outright accounting fraud-- net asset values were computed but there were no net assets to the fund.

Actual financial losses in Madoff were the cash inflows-- about $20bn. The rest never existed. All that Madoff's NAV did was determine, when people took their money out/ in, the fraudulent rate of exchange.

That's not the same thing as owning a stock that goes down. When you buy a stock:

- if the company issues new stock, then your money goes into the company and is invested in plant and equipment, R&D, wages and salaries etc.

- if you buy it from someone else, then they get the cash, and you get the right of ownership in the company

If the stock goes down your investment is worth less, but your money has not in any sense disappeared-- because some seller cashed out.

Because in Madoff what people put in and what other people took out had no fundamental relationship, I think using Madoff as an analogy to describe the stock market is unhelpful.
Valuethinker
Posts: 48944
Joined: Fri May 11, 2007 11:07 am

Re: Crash! Assets are sold and the money goes... where?

Post by Valuethinker »

Oicuryy wrote:
schuyler74 wrote:This is all very disconcerting. I keep buying all these stocks and my statements say they're worth $X but really they're not actually worth anything to me until the moment I sell them, at which point they may not be worth much at all.
Is money worth anything to you until the moment you trade it for something else? What else do you do with it?

Ron
Money is worth potential though as well. Because you don't know what you will want/ need to buy in 5 minutes, 5 hours, 5 years, it has value in that sense. As a means of exchange and as means of denomination.

Because cash is convertible into goods and services, whereas property, stocks, bonds generally are not swappable for other goods and services, money (currency) has a unique value in an economy.

That's why high inflation is so bad for an economy, because it destroys the unique value of cash.

(a small bit of inflation is good for an economy, because of 'sticky prices and wages'. Ie it's very hard to get people to cut their wages and businesses resist cutting prices, so the economic cost of deflation is quite high-- asymmetric as we say-- you get a sharp rise in unemployment. 2% inflation doesn't cost you much, 2% deflation can cause you serious issues with unemployment and lost output. Most economists would, I think, agree that economies need at least 1% inflation, and some would suggest 4-5% in certain extreme conditions of recession or depression, although that latter point is hotly debated).
Valuethinker
Posts: 48944
Joined: Fri May 11, 2007 11:07 am

Re: CRASH! Assets are sold and the money goes... where?

Post by Valuethinker »

adam1712 wrote:
schuyler74 wrote:If Person A uses this cash for personal items, then it goes right back into the economy as business profits. However, if Person A just hoards it in a Money Market or in a Savings Account / CD, then that bank can in turn lend out 90% of it after keeping 10% in reserves. Right? Don't both of these options help the very economy that the investor was worried about -- which means that "future returns" should do just fine?
The economy was just not as productive in the next couple years from 2008 onwards. Crashes happen because of huge misallocation of resources. In 2008, following the housing bubble, there were too many home builders, banks making money on home mortgages, and too many recently built homes that people suddenly realized they couldn't afford. Your scenario of people continuing to buy different things and banks instantly lending to the correct borrowers doesn't happen. It takes time to reallocate, in the meantime there's higher unemployment, companies have useless machines to make things people no longer want, houses sit empty, etc. The overall economy is just less productive.

In 2008, it got so bad that banks stopped lending their 90% like you would hope. As much as the Fed has been trying to give away money, many banks choose to just let it sit in storage at the Federal Reserve instead of putting it to work since they couldn't find good options and/or afraid. Here's a chart from the Federal Reserve of St. Louis I think gives a clue of what was going on:

Image

http://research.stlouisfed.org/fred2/se ... NS?cid=123

Whilst your diagnosis of the US economy (excessive expansion of credit and the nontraded goods sector ie housing and housing related finance) is correct and was undoubtedly a big part of what led to the 2007 recession, it is important to recognize (as you imply in the second part of your post) what happened next. Which is not primarily a story about the US housing crash, otherwise the return of that sector now would solve the world's economic problems.

The Lehman crash and events surrounding were unprecedented since the 1930s. Just as in 1931 we had CreditAnstalt in Austria, and that brought down the world economy (the US had already had its Wall Street Crash and the world economy was suffering, but 1931 finished it off and indirectly led to WW2), so the Lehman shock caused a collapse of global liquidity.

The story ceased to be one about a housing bubble in the US, Ireland and Spain. Or about a country with 300,000 people in the middle of the Atlantic that had borrowed 15 times its GDP (Iceland). After all we had had bad housing crashes before (Canada early 90s, Norway and Sweden early 90s, etc.) which had not had global consequences. Some housing bubbles kept right on ticking over (Australia, Canada, UK since 2008, arguably China and Hong Kong).


The story became about the financial crash itself and the complete loss of confidence in the financial system and financial institutions even in countries where the banking system was not overly exposed to US residential property. The 'Shadow Banking System' collapsed (Money Market Funds, hedge funds and all the connected mechanisms) and corporate liquidity collapsed-- Ford and GE literally could not pay their bills at one point (due to the failure of the MMFs to 'roll' their Commercial Paper). No financial institution was safe.

That led to the most explosive collapse in the world economy since the 1930s-- world trade was actually falling faster in the October 2008-March 2009 period than it had done in the 1930s.

The impact of US housebuilders on the German economy is minimal. Yet German companies also saw their orders collapse. The world quit buying. You saw that in the freefall of commodity prices-- oil dropped to $40/bl (from $150 the summer before).

The world economies began to stabilize in March 2009-- the formal US recession, which had begun in early 2008, was actually over by 2010.

However that led to the second wave of the crisis, mostly in the Eurozone. A series of credit crises around the ability of peripheral European countries to repay their debts.

We are still living through this second phase.

In actuality the US housing sector is now a net positive to the US economy for the first time in 5 years. However whilst the US economy is still hugely important to the world economy, that in and of itself won't drag the world out of the mess it is in. Any more than the extraordinary Chinese fiscal stimulus immediately post 2008 did-- it just broke the fall and helped to stabilize things.
Valuethinker
Posts: 48944
Joined: Fri May 11, 2007 11:07 am

Re: Crash! Assets are sold and the money goes... where?

Post by Valuethinker »

schuyler74 wrote:
Boglenaut wrote:If you bought an apple (a real apple, the fruit) with the intent to sell it, then you find it has worms and is worthless, where did the money go? Same for stocks.
The money went to whomever you bought the apple from. And isn't that the same for stocks, as well? I understand that the value of a stock will drop when the perception of the value of its company falls, but it's not like the money actually disappeared but rather just the perceived wealth. I guess the best explanation (to me) so far is this:
dbr wrote:Stocks are not money. When stock asset value goes down, no money is lost because there is no money there to begin with. A different way to see this is to recognize that you as an investor lose all your money when you buy the stock. In exchange you get the aforementioned share of ownership. To get money back you have to sell the stock to someone who will exchange money to you for your share of ownership. When a company issues shares of stock they exchange shares of ownership for money ...
This is all very disconcerting. I keep buying all these stocks and my statements say they're worth $X but really they're not actually worth anything to me until the moment I sell them, at which point they may not be worth much at all. Still, what's the alternative? Bury it in a hole?
The only thing which is worth anything is money in the bank.

Actually what money in the bank is worth is the goods and services you can buy with it. So you have to have a calculation about expected inflation -- if that is high, then money in the bank depreciates quite rapidly.

All other forms of investment, and I include the 'worth' of your equity in your house, are just paper entries *until you sell them*. Note that, unfortunately, the mortgage you owe is a very real cash cost on your future-- your only way out of that is to repay, or bankruptcy. In the case of student loans, there is not even bankruptcy in US law, as I understand it-- your only way out of those is death (or inflation significantly above the interest rate charged).

Because cash is essentially risk free (within FDIC limits) it gets a serious premium. That serious premium is that it pays almost no interest-- returns on cash long run just about average inflation, *before tax on interest* so most people are actually running behind inflation on their deposits.

You can generally *only* maintain and grow your buying power, earning a positive real return on your capital, by taking risk. Low risk (US Treasury Bonds, TIPS, ibonds) or higher risk (corporate bonds, home equity) or a lot of risk (equities) or really a lot of risk (venture capital, private equity, commodities, leveraged funds etc.).
Valuethinker
Posts: 48944
Joined: Fri May 11, 2007 11:07 am

Re: CRASH! Assets are sold and the money goes... where?

Post by Valuethinker »

market timer wrote: Political self-interest can result in sub-optimal outcomes for all sorts of reasons. As for why confidence is important, consider that the national debt is over $16 trillion and the US has $222 trillion in unfunded liabilities, according to Kotlikoff. Confidence is why anyone accepts the dollar as a form of payment, and why the world continues to fund US deficits.
Neither of which looks remotely scary when we consider that the sum total of spending on goods and services in the US economy, also known as GDP, is *15 trillion dollars* every year. So the CBO numbers show a stabilization of deficit (they then show an uplift, but that's hugely dependent on assumptions about medical cost growth). The 'unfunded liabilities' are really a discounting trick- -change the assumptions, change the number.

Also that the US has borrowed a lot more money in the past, relative to GDP, and paid it back.

The reason the US government interest rate on its debt doesn't look like Italy, let alone Greece, is that the market knows this, and the market is quite relaxed about the whole thing.

The really key factor in the US economy is that the Baby Boomer Generation 1945-65, the 1966-1985 generation and the 1985+ generation are all about the same number of people. That makes the US very different from just about any developed country (even Canada and Australia, which are close) and puts the US in a completely different, and far better, demographic position. The 'crunch' comes in the early 2030s when the Baby Boomers have all retired but have started to die off en masse, and then falls away quite quickly.

Italy? Japan? There is a huge problem arising from very low birth rates and fast aging populations (and limited immigration). France? You have a retire at 50 pension system which is approaching bankruptcy. US? Not so.
Last edited by Valuethinker on Mon Jun 03, 2013 5:23 am, edited 1 time in total.
Valuethinker
Posts: 48944
Joined: Fri May 11, 2007 11:07 am

Re: CRASH! Assets are sold and the money goes... where?

Post by Valuethinker »

market timer wrote: Political self-interest can result in sub-optimal outcomes for all sorts of reasons. As for why confidence is important, consider that the national debt is over $16 trillion and the US has $222 trillion in unfunded liabilities, according to Kotlikoff. Confidence is why anyone accepts the dollar as a form of payment, and why the world continues to fund US deficits.
I am rather older than you and that gives me an advantage on this-- I remember the early 1980s.

At that time, Social Security was in much worse fiscal shape than it is now. Collapse of the system threatened as revenues were less than expenditures and there was bitter partisan division. The US had lived through a period of stagnant economic growth and unprecedented peacetime inflation. Not to mention urban guerillas, anti war protests, bitter social divisions over civil rights and other issues oh and a retreat from a disastrous foreign war- -probably the most disastrous war in American history (making 1812 look like a border skirmish). Did I mention a president resigning for corruption and 2 successors each in turn being defeated as indecisive and ineffectual? Interest rates were 21% perhaps the highest in American history. Oil prices were near all time highs. Unemployment was double digits. The Soviet Union had invaded Afghanistan and seemed to be on the point of a major extension of its global power against the Free World. An American embassy had been seized and its diplomats held hostage for nearly 2 years, a rescue mission had failed, America seemed utterly impotent to deal with its enemies.

It all looked pretty bleak. The rhetoric on both sides was incredibly divisive. There were far greater differences in the policies of the 2 main parties then than there are now.

An Irish-American named Thomas P 'Tip' O'Neill and another one named Ronald R Reagan got together over an Irish whiskey, and thrashed out a deal. Social Security was saved.

Therefore I urge you to have faith in the American political system and the United States and its people. Or as Winston Churchill said I believe 'we can rely on the Americans to do the right thing. After they have tried everything else'.
User avatar
HardKnocker
Posts: 2063
Joined: Mon Oct 06, 2008 11:55 am
Location: New Jersey USA

Re: Crash! Assets are sold and the money goes... where?

Post by HardKnocker »

[OT comment removed by admin LadyGeek]
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
adam1712
Posts: 566
Joined: Fri Jun 01, 2007 5:21 pm

Re: CRASH! Assets are sold and the money goes... where?

Post by adam1712 »

Valuethinker wrote:
Whilst your diagnosis of the US economy (excessive expansion of credit and the nontraded goods sector ie housing and housing related finance) is correct and was undoubtedly a big part of what led to the 2007 recession, it is important to recognize (as you imply in the second part of your post) what happened next. Which is not primarily a story about the US housing crash, otherwise the return of that sector now would solve the world's economic problems.

...
Excellent points and I agree with pretty much all of it. The financial sector assets are a little more abstract to try to visualize and understand how market crashes are related to loss of value. But in terms of understanding the magnitude and a full explanation of the recent economic problems, you're absolutely correct.
oxothuk
Posts: 889
Joined: Thu Nov 10, 2011 7:35 pm

Re: CRASH! Assets are sold and the money goes... where?

Post by oxothuk »

schuyler74 wrote: Well, if this "wealth" isn't really actual wealth but rather materialized confidence, then why does the federal government argue about how to proceed when all they need to do is whatever instills the most confidence in investors? But what would that be?
In the short run, investors look for indications of stability and are scared by erratic behavior. This is why Fed chairmen in particular choose their words VERY carefully.

In the long run, investors look for indications that the economy is healthy and likely to grow. This is where we have two political parties which argue about how to proceed. And that's as much as one can say in this forum.
swaption
Posts: 1245
Joined: Tue Jul 29, 2008 11:48 am

Re: Crash! Assets are sold and the money goes... where?

Post by swaption »

To make what I think may be the simplest analogy for most, consider the housing market. The collective value of the "market" went down quite a bit due to a small number of transactions, at least in relative terms. For most, the value of their home and wealth declined with no actual cash flow.
User avatar
LadyGeek
Site Admin
Posts: 95466
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: CRASH! Assets are sold and the money goes... where?

Post by LadyGeek »

oxothuk wrote:And that's as much as one can say in this forum.
Thanks. The limits are in the Forum Policy, under "Politics and Religion"
Usage of factual and non-derogatory political labels when necessary to the discussion at hand.
The discussion so far has been factual to help the OP understand what happens where the money goes when you sell a stock. In a similar perspective, economics should be limited to factual statements (opinions of the process are off-topic :wink: ).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
fulltilt
Posts: 271
Joined: Thu Dec 01, 2011 1:23 pm

Re: Crash! Assets are sold and the money goes... where?

Post by fulltilt »

There are some really accessible explanations about the housing crash on Planet Money and Khan Academy. They are worth checking out.
Walk a single path, becoming neither cocky with victory nor broken with defeat, without forgetting caution when all is quiet or becoming frightened when danger threatens. -- Jigoro Kano
User avatar
Oicuryy
Posts: 1959
Joined: Thu Feb 22, 2007 9:29 pm

Re: Crash! Assets are sold and the money goes... where?

Post by Oicuryy »

Don't confuse money with value. Money is a thing. Value is an ethereal attribute we attach to things. The confusion arises because we use the same word - dollar - as the unit for counting money and as the unit for measuring value.

In 2008 the value of stocks, bonds, houses and lots of other things declined sharply. But the amount of money increased sharply. Stocks publicly traded in the U.S. lost about 8.2 trillion dollars worth of value (about 41% of their year-end 2007 value). The amount of money increased by about 0.8 trillion dollars (about 100% of its December 2007 amount).

You can see how using the same word for two different units of measure can be confusing. Money was not lost in 2008. Value was.

Ron
Money is fungible | Abbreviations and Acronyms
scone
Posts: 1457
Joined: Wed Jul 11, 2012 4:46 pm

Re: Crash! Assets are sold and the money goes... where?

Post by scone »

But how can this be? Whenever there are more sellers than buyers, of course prices will fall. Person A sells his shares of <whatever> to Person B at an agreed-upon price. Now Person A has this cash and puts it... where?

In a certain sense, it doesn't matter. It's the wrong question, because it contains the hint that someone always wins, even if someone else loses-- a zero-sum game. But the value of a stock is not "conserved." The fact is, a stock can become utterly worthless almost instantly, because the price of a stock really represents the sum of opinions about it's worth, at a single moment in time. A stock can "lose value" simply because it becomes unfashionable, and the fickle market no longer loves it. This is often the fate of growth stocks like Apple or Facebook. For that matter, an entire stock exchange can be vaporized almost overnight by war and revolution-- this has happened more than once in the last 100 or more years.

That's why stocks are supposed to pay you. That's what risk is. In theory, you are risking losing all your money, and should expect-- or hope-- to be paid back a handsome sum for throwing the dice. But sometimes the reward does not materialize. You lose--irretrievably. Wall Street is littered with the bones of people who "blew up." It's a hard bargain, with absolutely no guarantee of success. Just a mathematical probability of a win-- for some. Look at the Nikkei, it has been a cautionary tale of faith unrewarded. Will it eventually turn around? If anyone tells you they know the answer, they lie. No one knows anything.

I think many people rationalize this risk away by magical thinking, which amounts to, "if only I am faithful and true, and stay the course, the powers that be will reward my loyalty handsomely. Because, you know, I have been a loyal follower of the one true way and I deserve it." But that doesn't always happen. Risk is risk, it never goes away no matter how nice you are, no matter how true blue you are, no matter how much you need the money. The world of investing does not care about you, your needs or emotions. It's going to do what it's going to do, and you will be one of the lucky ones, or not, as fate will have it.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Crash! Assets are sold and the money goes... where?

Post by Phineas J. Whoopee »

Oicuryy wrote:Don't confuse money with value. Money is a thing. Value is an ethereal attribute we attach to things. The confusion arises because we use the same word - dollar - as the unit for counting money and as the unit for measuring value.

In 2008 the value of stocks, bonds, houses and lots of other things declined sharply. But the amount of money increased sharply. Stocks publicly traded in the U.S. lost about 8.2 trillion dollars worth of value (about 41% of their year-end 2007 value). The amount of money increased by about 0.8 trillion dollars (about 100% of its December 2007 amount).

You can see how using the same word for two different units of measure can be confusing. Money was not lost in 2008. Value was.

Ron
I agree with Ron and would like to add something, which I believe we've already talked about (although without reaching much consensus).
http://www.bogleheads.org/forum/viewtop ... 0&t=104582

There are at least two difficulties:

1) The idea that like conservation of mass-energy, there must be conservation of money: that is, in a closed system money can neither be created nor destroyed. Sometimes this idea is misinterpreted as the old gold standard, but with ongoing mining operations money was indeed created; just with no relationship to the needs of the economy.

2) The idea that every dollar is like a dollar in the bank. It isn't true, and that's what I agree with Ron about. In our society money serves three functions, but we only like to think about the first two. The third is the confusing one.

The functions of money:

1) A medium of exchange. My employer can pay me $10 for my labor, and I can exchange that for a couple of raw chickens - think cash;

2) A store of value. I can put my $10 under my mattress and, subject to the whims of inflation, buy a couple of raw chickens later - think savings account; and

3) A unit of account - think yesterday's closing net asset value for TSM.

In the first sense there's a sawbuck. In the second there's a passbook. But in the third, where's the money? There is none. People are only saying that if I were to sell this asset right now I could get two fins, each of which could get me a raw chicken. But I haven't sold it right now, because I don't need the chickens right now. And I don't have the chickens. Neither do I have the ten dollars. I have whatever the asset is.

Money is a socially-constructed agreement, regardless of how it's counted and passed around. The Onion had a good write-up.

PJW
User avatar
roymeo
Posts: 1278
Joined: Sat Apr 28, 2007 7:19 pm
Location: Oakland, CA
Contact:

Re: Crash! Assets are sold and the money goes... where?

Post by roymeo »

schuyler74 wrote:
Boglenaut wrote:If you bought an apple (a real apple, the fruit) with the intent to sell it, then you find it has worms and is worthless, where did the money go? Same for stocks.
The money went to whomever you bought the apple from.
[/quote]

You bought an apple for 50 cents from a farmer, thinking you were going to take the apple to the city and sell it for $5.00. You get to the city and find that the apple is rotten. We know where the 50 cents is, but the question is where is the $5 at?
schuyler74 wrote:
dbr wrote:Stocks are not money. When stock asset value goes down, no money is lost because there is no money there to begin with. A different way to see this is to recognize that you as an investor lose all your money when you buy the stock. In exchange you get the aforementioned share of ownership. To get money back you have to sell the stock to someone who will exchange money to you for your share of ownership. When a company issues shares of stock they exchange shares of ownership for money ...
This is all very disconcerting. I keep buying all these stocks and my statements say they're worth $X but really they're not actually worth anything to me until the moment I sell them, at which point they may not be worth much at all. Still, what's the alternative? Bury it in a hole?
I posit that that existential fear is what drives the gold-bugs. You're right, those stock options I had and couldn't sell would have been worth a lot of money if I had the ability and inclination to sell them at a specific time, reality was that when I was able to sell them I earned a pizza. That's a good reason to me to hedge my bets and invest in broad-based mutual funds.

Let us know if you find something SAFE and with a positive return after inflation, fees, and taxes!
The sewer system is a form of welfare state. | -- "Libra", Don DeLillo
hazlitt777
Posts: 1033
Joined: Fri Aug 12, 2011 4:10 am
Location: Wisconsin

Re: Crash! Assets are sold and the money goes... where?

Post by hazlitt777 »

schuyler74 wrote:In 2008 or so, most everything dropped: Stocks, Bonds, REITs, etc. But how can this be? Whenever there are more sellers than buyers, of course prices will fall. Person A sells his shares of <whatever> to Person B at an agreed-upon price. Now Person A has this cash and puts it... where?

It has to go somewhere! And as it does, how are the prices of everything still falling? Wouldn't the price at least rise for the <whatever> that Person A turns around and buys with his new money? Evidently, there were a whole lot of Person A's in 2008, but I can't figure out where the money went. I feel like I should have pre-owned some of whatever it was -- before the rush began. Could've made out big-time.
Your question sparked a lot of responses. Good question!

One way to respond to this is to rephrase the question: Where did all the value go?

There were, give or take a bit, the same number of stocks, bonds, cash and gold etc. What changed was the relative valuation. In other words, the value tended to go into cash. After the crash, you could buy more stocks, bonds or stocks with the same amount of cash. The value went into the cash.

On the other hand before the crash, you could "buy" more cash with your stocks or bonds.

So for the most part, nothing "disappeared." Rather value was transferred through what people (the market) were willing to pay for stocks, bonds, commodities or cash.
......
The only caveat I would add is that I do believe the pie shrunk a bit through some bonds going unpaid, being written off, and some companies going under, thus the stocks "disappeared." That aside, fundamentally, it is a question of "Where did all the value go?" not "Where did all the cash go?"

p.s. And as others have pointed out, there are always an equal number of buyers and sellers, just that the agreed upon price of exchange is going down when stocks are going down...or on the other side of the transaction, up, if you are looking to "buy" cash.

My five cents.
User avatar
Topic Author
schuyler74
Posts: 236
Joined: Sat Apr 20, 2013 12:56 am

Re: Crash! Assets are sold and the money goes... where?

Post by schuyler74 »

All the explanations above were very helpful -- thanks! I realize my main mistake was thinking that individual stocks have actual cash value, but of course it's not like that. When the expected outlook for a stock falls, then its value will fall accordingly since people don't want it as bad. True cash doesn't do this. (Right?)

So right now there's an active thread entitled NY Times:"Bond Market Decline That Baffles The Experts" that discusses the recent drop in the value of bond funds. Going back to the question raised in the OP, if people aren't buying bonds, then what are they buying? Shouldn't we anticipate this and move our money -- before those people do -- into whatever it is they're about to be buying?
Jack
Posts: 3254
Joined: Tue Feb 27, 2007 1:24 am

Re: Crash! Assets are sold and the money goes... where?

Post by Jack »

schuyler74 wrote:Going back to the question raised in the OP, if people aren't buying bonds, then what are they buying?
The answer to your original question is that during the crisis people sold stocks and bought bonds. Stock prices went down and bond prices went up.

Now your second question. The crisis has passed so people are selling bonds and buying stocks. Bond prices are falling and stock prices are rising.

Nothing complicated about it.
User avatar
Oicuryy
Posts: 1959
Joined: Thu Feb 22, 2007 9:29 pm

Re: Crash! Assets are sold and the money goes... where?

Post by Oicuryy »

schuyler74 wrote:When the expected outlook for a stock falls, then its value will fall accordingly since people don't want it as bad. True cash doesn't do this. (Right?)
Well, actually, it does. Just not so dramatically.

The value of money, like the value of everything else, is determined by supply and demand. The demand for money depends on how many transactions people make with it and on how much of it people want to use as a store of wealth.

The supply of U.S. dollars is controlled by the Federal Reserve. The Fed's target is for the dollar to lose about 2% of its value per year.

Ron
Money is fungible | Abbreviations and Acronyms
Chris M
Posts: 88
Joined: Tue May 28, 2013 6:25 pm

Re: Crash! Assets are sold and the money goes... where?

Post by Chris M »

schuyler74 wrote:In 2008 or so, most everything dropped: Stocks, Bonds, REITs, etc. But how can this be? Whenever there are more sellers than buyers, of course prices will fall. Person A sells his shares of <whatever> to Person B at an agreed-upon price. Now Person A has this cash and puts it... where?

It has to go somewhere! And as it does, how are the prices of everything still falling? Wouldn't the price at least rise for the <whatever> that Person A turns around and buys with his new money? Evidently, there were a whole lot of Person A's in 2008, but I can't figure out where the money went. I feel like I should have pre-owned some of whatever it was -- before the rush began. Could've made out big-time.
Two asset classes went up--Treasuries and gold. The price of gold was $736 on Oct. 9, 2007 (the market top) and $923.75 on March 9, 2009 (market bottom). So gold went up 25.5%. The average short-term government bond fund went up 6.9 percent between these same dates. These two asset classes are viewed as safe havens.
Valuethinker
Posts: 48944
Joined: Fri May 11, 2007 11:07 am

Re: Crash! Assets are sold and the money goes... where?

Post by Valuethinker »

Oicuryy wrote:
schuyler74 wrote:When the expected outlook for a stock falls, then its value will fall accordingly since people don't want it as bad. True cash doesn't do this. (Right?)
Well, actually, it does. Just not so dramatically.

The value of money, like the value of everything else, is determined by supply and demand. The demand for money depends on how many transactions people make with it and on how much of it people want to use as a store of wealth.

The supply of U.S. dollars is controlled by the Federal Reserve. The Fed's target is for the dollar to lose about 2% of its value per year.

Ron
AFAIK the US Federal Reserve has no inflation target. Or has Bernanke announced a formal one?

The Bank of England has a 2% central target (1-3% range). European Central Bank 1%. Bank of Japan is now targetting 2% inflation (from virtually zero in Japan over the last 20 years).

Note although the Fed controls the monetary base, the actual money supply in circulation is not in direct Fed control-- can be steered, but not controlled absolutely (Goodhart's Law-- the control of any macroeconomic variable leads to it becoming irrelevant-- coined during the British experiment with extreme money supply control under Margaret Thatcher in the 1980s).
Post Reply