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A reply to a question

Postings not related to the writing of the Manifesto or policy chapters
are likely to be summarily rejected. Thanks for your understanding. IPI
Received this q. from Puneet. Thought it was an interesting question,
and might help clarify some doubts in other members' minds. Hence
replying to IPI. (see q. below)


Dear Puneet, I don't believe that your question is properly phrased. The
moment, in your case, the buyers have purchased their new stock, if
there is no other buyer, the value of the stock will drop steeply. The
stock market cannot function very efficiently in a case where there is a
very thin supply of buyers and sellers. In reality the stock market is
very large, with millions of buyers and sellers; hence at each time, the
price is determined in a way that both parties gain (even the seller who
is selling at a loss "gains" since he/she is selling because he/she
thinks the price won't increase further; i.e., he/she is cutting loss).

The "market" is not growing at a faster rate than the "economy." The Dow
Jones or some other index 'index' is growing faster. Inside this are
companies which are rising and falling rapidly, depending on their
future potential (as assessed by the market). Stock prices always
reflect the best assessment of future cash flows by the entire bunch of
buyers and sellers in the world.

Since technology drives growth, and technology is growing at an
enormously exponential rate, that DRIVES growth in the industrial
sector. The 'market' which represents the technological progress in the
country is thus the fastest growing subset of the economy. Other sectors
'pull' the growth down, such as the failures of many firms, the slow
moving sectors such as agriculture which are actually subsidized and act
as a drain on the economy, the education (nonproductive) sector, welfare
sectors, etc. That is why to support a high GDP growth, you need a MUCH
higher industrial sector growth. 

If the market grows slower than the economy (as has been happening in
India for nearly a decade, and in Japan too) that is because the
assessments or expectations that were built into the market prices at
one point of time were dashed or belied by future developments. Also,
could be due to manipulation such as by Harshad Mehta. In India's case,
both reasons have a role to play in the dismal performance of the stock


PS: Those who can elaborate/ clarify this answer may do so, of course.

On Fri, 8 Jan 1999, Puneet Singh, wrote:

> Consider this street gurus:
> I, you, trader and 3rd party.
> I have $3, you $7, trader has two stocks worth $4 ea (total value $8),
> 3rd party has $10.
> Between us we have a total value of $28 right?
> Now you and I want to buy the stock from the trader. I borrow $2 from
> you and bid.
> We both end up buying the stock at $5 (price goes up since buying
> market) and ends at a $6 price
> since 3rd party also wants to buy (but actually doesnt). Ignore marginal
> changes; i.e when I ask to buy a stock at $4 it will go up from $4 to $6
> gradually, I've averaged it to $5.
> The way I look at it: I owe you $2 and own a stock worth $6, so I made a
> net profit of $1 over my investment of $3. You think you made $1 on
> stock price valuation and the interest chiller I will pay you.
> Trader got $10 for his $8 value stocks. The 3rd guy was sleeping so
> nothing changed for him. Most people are happy thinking they are rich.
> Total value at the end of this: $(6 + 6 + 10 + 10) = $32
> Is the $2 only our sentiment growth?
> My reason for asking: if the real economy is only growing at 3-4% how
> can the market grow so much faster? Where is the real wealth? Does
> anyone know where the money is coming from? Bond market? Has that been
> dropping? From money lenders (since interest rates dropped) or fed
> accounts? Treasury bonds? How is printing treasury bonds different than
> printing currency?
> As you can tell I'm trying to understand the market, maybe Sanjeev can
> help, he's doing a PhD in economics.
> -Puneet
> --
> -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=
> Puneet Singh                                (psingh@scdt.intel.com)
> SC12-601, Intel Co                          Tel: (408)-653-5520 (W)
> 2200 Mission College Blvd                   Fax: (408)-765-6298 (W)
> Santa Clara CA-95052                        Tel: (408)-254-2864 (H)
> -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=

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