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Originally Posted by MoneyGuy
You laugh at the notion that the market will eventually reach 20,000, but it will. When it does, Slava and I should come back here with our own LOLs.
Hear me out. North American markets are right now, let's say, roughly 7,800. At an average gain of 8% (not unrealistic, I'd argue, using today's low prices as a base point) it would take a little over 12 years to get to 20,000 (if 9% = 11 years). This assumes a constant rate of growth, which we all know is impossible. The point is that we will see 20,000 and it should happen in the next 10-15 years. Of course, we could see a serious correction like this one when the market reaches 19,900 which would delay the inevitable, but 20,000 is inevitable.
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You are confusing 'money' with 'wealth'.
Not surprising since you work so closely to the problem that I am sure it seems more abstract than it really is.
I actually do not laugh at all at the notion of a 20,000 DOW, I only laugh at the notion that a 20,000 DOW will mean anything other than inflation eating away at real wealth across the board.
For example your "8%" growth, you really think America is producing 8% in additional REAL productive
wealth each year? I would say even in a good scenario it is likely under 2% (like any mature lumbering giant of a value producer). They are however definitely producing 8% more
money each year. And if you want more money at the cost of more wealth go ahead -- I'd take wealth over money any day of the week. (Thus my bearish stance, because wealth is being destroyed just to get money for unproductive sectors of our economy like bankers and hedgefund losers who add ZERO real value to the economy all while the real productive types suffer and pay for it with the wealth they work so hard to create.)
You can keep on creating more and more money to cover up a lack of wealth for quite a long time, especially when so many other nations hold you up to secure their own well being, but eventually -- whether today, tomorrow, or in 10 years, or 100 years that HAS to end and whomever has been actually creating wealth takes over and that old money has zero value because it is no longer backed by anyones hard work (hard work = wealth).
Excellent article on the matter here:
http://www.minyanville.com/articles/.../index/a/20376
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Money doesn’t create wealth, and more money does not necessarily mean more wealth; wealth is only created through production. If you create more baseless money, but don’t create more wealth, you’re just dividing the existing wealth by more money.
Since price is the amount of money it takes to do a thing, prices will go up if you create more money (but wealth will not). For example, if IBM stock is trading at $100 and overnight the amount of money in the system is doubled (willy-nilly), the stock price of IBM will jump to $200 (all else being equal).
And we finally come to the conclusion we’ve been looking for - the one the Fed doesn’t want you to recognize: When they create more money out of nothing (debt) they aren’t creating more wealth; they’re just raising nominal prices.
Citizens need to quickly come to the understanding that more money isn’t more wealth. By devaluing the currency, the Fed has propelled asset prices higher and higher without creating any new wealth. The government cannot create wealth, but can only transfer that wealth from one person to another.
Unfortunately, the government tends to transfer wealth from productive activities/people to unproductive ones, thus perpetuating the problem of debt: Because we’re unproductive (empty strip malls and repaved highways), we need more and more debt to maintain our standard of living. But we’re only borrowing that standard of living from our children.
Yesterday was a sad day indeed: The Federal Reserve said it will “print as much money as necessary to revitalize growth.” As I’ve pointed out, this won’t revitalize growth, as it creates nothing but more dollars. What they’re really saying is “We will borrow as much as necessary from your children’s standard of living to keep things going today.”
Congress and the President stress that we must “share the wealth.” By this, they mean to take our children’s (perhaps the most productive assets this country has) wealth away and use it to bail out bad banks and companies (who have proven they’re unproductive).
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It is ironic (as Cowboy and Phanuthier astutely point out) that equities actually become a decent store of value if/when inflation really kicks in. As long as you don't lose more on the currency than you gain on the equity....
Thus in terms of the market, in light of the MASSIVE amount of money (in their own words 'virtually limitless') being pumped into them by the US government/fed, I start to look at equities bullishly even if the value they represent does not justify it. The big question is in which currency to price those equity plays (as I posted an article about a while back)? Japan (because they have been going through this for years?)? Canada (because we have been a bit more prudent with government spending than most)? It is something I wish I knew the answer to but is beyond my knowledge base....
Claeren.
(PS - The same thing applies to home prices as well. High ratio loans, just like the 40-year/0-down ones exploited in Canada, merely created more
money in the system and raised prices. What it never did was raise the underlying
value (or 'stored wealth') of those homes. Leaving people owing/paying a lot of money without getting much in terms of value. Likewise to the general economy, the party eventualy ends and no more money can be added to the system, a situation we have seen play out badly in America, roughly 2 years before it hits here...)