Tag Archives: economic growth

Random thoughts – keeping you on your toes

Equity Market Supply and Demand

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At a recent Reuters Investment management conference, presenters suggested the growth in Corporate earnings during the past year is in the double digits.

Credit Suisse reported an annual increase in global wealth of $17 trillion U.S. dollars, rising to an overall estimated total of $280 trillion.  This growth linked to increases in Corporate earnings.

This capital accumulation needs to be employed whether as venture capital, equity  or other investments.  That is, within the constraints of risk, as your capital increases you have a desire to employ it to get more capital.

Availability of Equity

On the flip side of growing capital are equity investments.  Although not a unique vehicle, investing directly in a companies stock via direct purchase, mutual funds or exchange traded funds (ETF), is a popular way to continue to grow your wealth.

At the aforementioned Reuters conference there was also some solid data presented indicating the supply of new equities was currently experiencing a net growth of zero.

Market Value Rises

And so, we arrive at a simple but logical explanation for the current explosion in the value of equity markets – world wide.   It is probable, one of the factors driving price gains is the ready availability of capital versus the flat supply of available equities to invest in.

Simply put demand exceeds supply.

The Predicted Market Correction

For months now many analysts have noted the precipitous heoghts equity markets have risen to, predicting a correction or a crash.  Historically the economic fundamentals do not support this so it is puzzling for some.

I believe the current state of prices is to some extent just a reflection of supply and demand and won’t change until either of those factors are altered, i.e., more equities available for sale or less capital accrued.  Both things are linked to overall economic activities.

Random thoughts – keeping you on your toes

The Sales Rant Continues

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One of the foundations of our economy is sales.  It is a very simple equation.  On one side is a producer with a product or service to sell and on the other is the consumer who needs the product or service.

When the price the producer wants equals what the consumer wants to pay a sale occurs.  No sale, no economic activity.  The buy and sell transactions can be linked in chain.

In these cases, failure to sell at the bottom of the chain can impact a long string of financial activity.  For example, the steel sales falls through, the car is not built, so no gas or oil need be purchased.

Sales are Good for All

Logically then, from this perspective, sales are good for everyone and important for a growing and/ or thriving economy.  Yet sales people have a bad reputation.

Many feel, don’t sell me, if I want to buy it I will seek you out.  The problem with this is the fact sales are a fundemental driver of our economic prosperity and the submit and hope approach really doesn’t cut it.

In short, the economy needs  sales activities and not just neccessities like food but unnecessary things like junk food sales are a key factor in vibrant economy.

Valuing the Sales Person

Over the years my wife and I have bought and sold seven homes.  We paid for the services of a professional sales person in every case (i.e.a real estate agent).

If we had not recieved value from these agents we would have stopped using them.  However, seven times without fail they helped us get better faster deals, with less effort on our part.

A service well worth paying for.  Like most I don’t like dealing with sales people, but I sure see the value.

 

Random thoughts – keeping you on your toes

Why Money?

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The basic worth of things is determined by demand (desire to have it), supply (whether it is available) and resources (you have what is required to acquire the thing you want – basically a good or a service).

Believe it or not these 3 simple things are the fundamentals of economies around the world.   We would not be human though if we did not add massive complexity to this.

It all starts with Barter

In the barter world you can substitute goods or services in every category.    For example I desire wheat to make spaghetti (demand).  Wheat is available, lots of farmers have wheat warehoused and just waiting for me (supply).  The farmers don’t have tomatoes but I do (resources.)  Put these three things together and you have a barter transaction.  I give the farmer tomatoes from my home garden (keeping some back for my spaghetti sauce).  The farmer gives me wheat, transaction concluded and everyone gets what they want.  One question about this though is was it a fair trade?

Over time, civilized beings that we are, we substituted the resource part of the barter transaction from a good or service to money.

What is money worth?

Back to my post’s of the last two days,  money’s value is dependent on how much you have (how hard it is to get), how badly you want to use it (desire for a good or service) and how readily the good or service you want can be acquired (is it easy or hard to find).

Basically the value of money is in our heads, collectively, in economic groups, like say a county.  So unlike a real resource used in barter money is only worth what we think it’s worth.

Digression

What I mean by a real resource with real worth is for example; a tomatoes base real worth is that it sustains life.   Money does not do that, if you have money but can’t find tomatoes to buy you will still die, having money or not.

Some basic Economics

If our economic group (our country) decides to put money into the system that usually results in inflation (there are lots of ways to put money into the system – see my earlier post on the fractional reserve system for an example).    That is as more money is available (i.e., resources) we are willing to use that money to get more of what we want and as the ability to acquire more (increasing demand)  tends to limit supply, prices go up.   Also though more hunting/gathering occurs to increase supply to meet the demand.  Positive economic activity rises.

Now reverse this, the supply of money diminishes, less is used to acquire things (i.e., reduced demand) , so less things are produced, economic activity drops, this is often called a recessionary cycle.

This recessionary cycle results in less money overall in the economics group, lower demand, lower prices and this is called deflation.

Usual Disclaimer

These ideas I have been discussing over the last couple of days have been presented in a very simplified format.  My plan is to post on a number of financial concepts and over time build in (build up to) more complex concepts.  I believe simple explanations will help to build a solid framework for these concepts that can be built on.

Please do comment on these posts; questions, challenges are welcome and they will help guide future topics.