Richard Jernigan -> RE: José Ramirez III for sale jewel... (Nov. 25 2012 9:09:56)
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Please let me know when you are selling Ramirez guitar for a penny. I may be able to make some money. quote:
ORIGINAL: Prominent Critic Well, I’ve made the distinction clear as day, but you insist on conflating the two different meanings of “regulate,” so I just can’t spend any more time on this. If a market is free then it will self adjust, or "self-regulate" prices to their lowest point. The point is not even arguable, as it is illustrated all around us in countless different markets where competition drives down prices. Not one single thing you have said in any way refutes that. Mortgage backed securities and credit default swaps traded at escalating prices until those watching the housing market noticed that house prices had peaked in mid-2007. By 2008 large quantities of these securities became totally worthless. They could not be traded at all. Now some of these are salvageable at something like a tenth to a quarter of their 2007 prices, some are back near their pre-crash par. The regulatory laws did not change during the escalation and precipitous drop in prices. The legislative consensus was that the market in these instruments was too free so a more restrictive set of laws were passed. Little has changed in the actual active enforcement of trading in these instruments, due to the prolonged process of developing regulations to implement the new laws, under a storm of lobbying by the banks. This is a clear case of the chaotic behavior of a "free market" which did not behave in the "rational" fashion modeled by economists--a classic financial bubble and panic. The credit markets collapsed when people realized they could not evaluate the balance sheets of their trading partners who were heavily invested in these toxic assets. The entire world economy went to Hell in a hand basket. Millions of people lost their jobs and their homes. All this happened within the last five and a half years. i should think it would have affected your guitar sales. It certainly affected the price I was able to negotiate when I paid cash for my house in January, 2009, while many doubted that the credit markets would recover any time soon. Another recent example of irrational market behavior was the NASDAQ stock exchange bubble of the late 1990s. Yes, at the peak, the cheapest you could buy the NASDAQ Composite Index in the free market was $5000. But you would have been a fool to do so, since only a few months later the same stocks had crashed, and two years later they were worth only $1200. Then there was the Asian currency crisis of the mid-1990s. About a sixth of the total world economy simply evaporated in a period of a few months, due to the collapse of speculative currency markets. Booming stock markets in Korea, Taiwan, Thailand, Singapore and Indonesia all went down in flames. Malaysia wasn't hit quite as hard due to their apostasy from the doctrine of free trade. They instituted currency import, export and exchange controls. There was a good deal of grousing about this in the editorial pages of the Wall Street Journal, the Economist and The Financial Times. Malaysia's reaction was, "You've got to be kidding! Look at what happened to countries who allowed their economies to be destroyed by people pressing keys on currency trading computer keyboards." As it happened, I made money in all these markets. It wasn't because I thought they were operating rationally. In retrospect I could have made even more. Or I could have lost my ass, as a number of my friends did. In each case I invested because the conventional wisdom said it was the thing to do, but I got scared and got out before the crash. It was as much good luck as anything else. But I never felt like I was participating in a rationally self-regulating market. Most of my friends who lost big thought they were. Many of them were at least as smart, and better informed about the financial world than I was. "All this financial stuff is just smoke and mirrors," you may say. "Talk about something physical that has an actual use." Okay. How about silver? It's a commodity with wide industrial use. Its price should be driven by supply and demand in the free market. Yeah, right: Even during the relatively quiet period from 1996 to 2001, there was a sudden 50% upward blip in the price of silver. Supply and demand? Looks like speculation to me. Not on the grand scale of 1980 or 2011, but still... My wife profited from the 1980 attempt of the Hunt brothers and their Arab partners to corner the silver market. She inherited $10,000 face value in U.S. silver coins that her mother had accumulated over the years. A dollar in face value was about an ounce of silver. She got out at $45 on the way down. In a sense, those coins were valuable. My wife traded them for dollars which declined only slowly in purchasing power. She invested the dollars and made money in terms of purchasing power. But would anyone seriously claim that the underlying commodity, an ounce of silver, was ten times as valuable in 1980 as it was in 1978 or 1982? Oil is a bit more complicated. A cartel controls much of the world supply. But people who know the business say speculation is a significant driver in the price of oil. When my Dad retired from the Air Force and worked as a stockbroker for several years, he used to say, "What goes up too fast, must come down the same way." One of his favorite books was the classic "Popular Delusions and the Extraordinary Madness of Crowds." As I remember, the book began with the Dutch tulip mania of the early 17th century where the balance of supply, demand and competition did indeed drive prices--first to staggering heights, and then to a crash. Again as I remember, the book went on to the South Sea Bubble in early 18th century England, and progressed through the main succeeding bubbles and crashes up until the Great Depression of the 1930s. Dad thought it ought to be required reading for all investors. You may have traded in a relatively orderly market for guitars. That doesn't mean that all "free markets" behave the same way as yours. RNJ
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