Stock Market: Speculation vs Investment

[adios]

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Because there is so much money in the stock market that shouldnt be there, short term investment (speculation) is promoted and long term investment is discouraged.

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I agree with that. Look at the P/E ratios. THe vast majority of the worth of a lot of stocks comes from all the boobs that have their money lying around in it. When they pull out (as they like to do when it goes up), the stock goes right back down. The wealth it not really tied to anything, except the money of a bunch of faithless investors. Poor people who don't really know what's going on investing in the stock market have no edge against people with more money and better information.

But like poker, the financial elite can only really profit if people aren't gullible idiots. If you're investing in something you don't understand, you deserve to lose.

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This is wrong on so many levels it's almost unbelievable. First of all the valuation of the stock market is concentrated in relatively small number of stocks that are comprised by the likes of GE, XOM, MSFT, WMT, etc. These stocks are widely owned and have extensive analyst coverage. If there's anywhere the market is effecient it's with widely owned stocks that receive extensive analyst coverage.

Second of all the stock market is not a zero sum game, i.e. investors are compensated for owning stocks with a risk premium that is higher than the yield paid by long term government bonds. The magnitude of the "spread" between what stocks pay and bonds pay is open to debate and a widely discussed topic in finance.

Thirdly the market is dominated by instutions such as pension funds, mutual funds, hedge funds and such. These are the entities that influence overall market valuations for the most part.

Fourth of all more money is invested in bonds than stocks. There's actually not a shred of evidence to support your claims.

[Machinehead]

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Actually they're replaced with non marketable treasuries i.e. they can't be bought and sold on the open market like marketable treasuries. So basically the only party that can redeem the non marketable treasuries is the U.S. government which means the U.S. government can do anything they please with them. So in essence the Riddick is correct.

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I understand what you're saying, I just think calling it an IOU is misleading. By that logic, couldn't you call any currency an "IOU"? I also thought it was misleading saying it's a promise to raise taxes later. That's what the entire national debt is basically. It's not like there's a deadline date that the government has to come up with this money. When the bonds are needed they'll most likely just pull from somewhere else to pay it. Treasury bonds are considered the safest investment on the planet, so it's not like the surplus is in danger of not being paid out.

Like I said before, what should they do with the surplus if they aren't putting it into bonds?

[lehighguy]

A bond is only an asset if it is held by another entity. Imagine if GM issues GM bonds and bought them itself. How much money would GM raise? $0. Similarily, the US government issuing bonds to itself creates both an asset and a liability. Thus it doesn't create value.

If they wanted to keep the "surplus" they could use it to pay down existing debt or obtain securities issued by other entities (countries, corporations) or simply buy commodities (gold, oil).

[Machinehead]

Wouldn't you be attaching some level of risk by obtaining securities from other entities or buying commodities? With bonds the government has the ability to raise taxes and/or print more currency to pay it back when needed. Granted, paying down existing debt would be a good idea. But that's really a seperate issue of the government spending too much money.

[hmkpoker]

I guess I need to study up on it more [img]/images/graemlins/frown.gif[/img]

[Riddick]

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I understand what you're saying, I just think calling it an IOU is misleading.

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If you actually understood "what he's saying" then you wouldn't believe it to be misleading.

What is misleading is saying that there is $1.7 Trillion in the trust fund, enough money to pay for Social Security until 2054!

Maybe you should educate yourself on some basic level, get some sort of a clue, before you start accusing me of being "misleading".

Like for instance, a basic understanding of the trust fund balance:

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These [Trust Fund] balances are available to finance future benefit payments and other Trust Fund expenditures – but only in a bookkeeping sense.... They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits. (from FY 2000 Budget, Analytical Perspectives, p. 337)


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Or a basic understanding of how the trust fund works.

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It's not like there's a deadline date that the government has to come up with this money.

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[img]/images/graemlins/confused.gif[/img] [img]/images/graemlins/confused.gif[/img] [img]/images/graemlins/confused.gif[/img]

Umm, yes, there is. Its called bond maturity. Good grief.

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When the bonds are needed they'll most likely just pull from somewhere else to pay it.

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Somewhere else??? [img]/images/graemlins/confused.gif[/img] [img]/images/graemlins/confused.gif[/img] Do you mean, like, the Treasury Department accounts? Where they send collected taxes to? Where else would this money come from?

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Like I said before, what should they do with the surplus if they aren't putting it into bonds?

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How about give it back to the taxpayers from whom it was stolen?

[lehighguy]

Yes, the government could pay these obligations by printing more money, but that would cause massive inflation and devalue the asset to begin with.

So because we are spending the "surplus" right now we will one day have to raise taxes or inflate our currency to pay it off. Doesn't sound like much of a surplus to me...

[Machinehead]

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Yes, the government could pay these obligations by printing more money, but that would cause massive inflation and devalue the asset to begin with.

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The only reason I mentioned that was because I was explaining why these bonds are considered the safest investment on the planet. I don't think that this would be a good to do.

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So because we are spending the "surplus" right now we will one day have to raise taxes or inflate our currency to pay it off. Doesn't sound like much of a surplus to me...

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Theyll probably just add more debt to pay it off. I don't think debt is a good idea, I just think that's how they're going to handle it and there wont be a big tax raise or inflation when they have to start paying out the bonds.

[lehighguy]

When the surplus turns into a deficiet because of demographic changes, the SS fund will start to become a net redeemer of Treasury bonds rather then a net exceptor. At that time the treasury must cash these bonds being redeemed. If it does this by selling bonds to the public it will dramatically inflate the currency.

A simpler example. If you have credit card bills, and you use another credit care to pay for the interest, aren't you adding more the more liabilities you have to pay someday.

[Machinehead]

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If you actually understood "what he's saying" then you wouldn't believe it to be misleading.

What is misleading is saying that there is $1.7 Trillion in the trust fund, enough money to pay for Social Security until 2054!

Maybe you should educate yourself on some basic level, get some sort of a clue, before you start accusing me of being "misleading".

Like for instance, a basic understanding of the trust fund balance

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Im just talking about how the money isn't in danger of not being paid. No need to get all pissy, I wasn't attacking you personally.

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Or a basic understanding of how the trust fund works.

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You're linking me to the Heritage Foundation? I bet I can find an article about how the earth is 6000 years old too. I'm talking about how the National Debt in general works. I understand that there is no tangible assets attached to these Bonds.

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Somewhere else??? Do you mean, like, the Treasury Department accounts? Where they send collected taxes to? Where else would this money come from?

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They'll borrow more money and the debt will increase. When the bond matures it doesn't have to take a hit on the taxpayer with higher taxes. I'm not saying I'm pro-national debt.

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How about give it back to the taxpayers from whom it was stolen?

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I'll just say I'm not an A/Cer.

I'm new to this subforum forum, and I notice a lot of these threads turn into personal insult collections. When I said it was misleading, it wasn't intended for it to be an attack on you, I was just making a point, civilly.