Zero Sum Theory.

I tought we got it. We dont. I will just go on "Housing Market Is Different" (Bolimomo):

> the "value" of a house, or all houses, is created through credits.

The value (Why the quote signs, Sir? Is a house of no value or is it no REAL value?) is not created through credits. It is an asset as a stock is an asset and a bar of precious metal is an asset and a car may be an asset. And as such, as an asset, it may be used as a collateral for a credit. This is correct. Did I say that this is exact the same with a stock or a factory or a bar of precious metal? It is. Remember 1929 when everybody ran into margin credits? Hows that? They used assets (stocks) as collateral as the these-times people did with their mortgage. No difference.

And as such an asset it is completely priced on assumed discounted future returns of that asset. The returns have to be assumed, since they shall appear in future which is by definition unknown. Whether they do or not --- the Lord may know. Such an assumption may be wrong which makes it necessary that the price of the asset has to be changed (up when assumptions where too low or down when they have been to high). So anybody may make a bid or offer for this asset and as they meet we will get a transaction and as such a market price which will imediateley become the reference price for all similar assets. What do you think: Why do people minig for gold in south africa listen to the London fixing? And what do you think why someone in Idaho is interested in price of XOM in NY? And why is the house owner intrerested in the sales price of the similar property down the road? Because they know that their assets in south africa, up the road or Idaho are valued through these market prices.

By the way, pack together your fractional reserve banking theory and put it on the dump where it belongs. Or let me know where I got the $100 from which I am putting initially in the bank so the bank can lend $91 to you. Be sure: It is a myth.

And yes, poker is a zero sum game. Same as derivatives trading. And no, dividends make no difference.


MK
 
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One more food for your thought
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When an engineer at INTEL innovates a new chip technology, he/she is saving the cost of manufacturing and making computing faster & cheaper. A great favor to mankind and main street :-) But he gets bonus in tens of thousands.

But what happens when a energy trader makes $5 billions for his firm (GS/JPM/etc)? Future trading is a zero sum game, so most likely airlines and common man is getting punished here and paying the cost of his speculation and/or manipulation. It is a curse for the mankind and main street :-( Totally anti-productive! But he gets a bonus in millions (and demanding for more).

The whole set-up is wrong. For the betterment of mankind, these bankers and speculator should not exist on earth.

Whether it is tax-payers' money or share-holders' money, they never deserve this outrageous salaries and bonus.

Am I missing something?
 
Quote from Bolimomo:

... the futures market is a zero-sum game but the equity market is not a zero-sum game. ...
More...

+1

IMHO, one of the reasons that traders and/or investors don't fare well in the market is because they don't understand the math behind the "game" that they are playing.

Joe.
 
Quote from jagadish:

Trading = Zero Sum
Investing != Zero Sum
More...

WRONG

Stocks create wealth, its paper wealth, but still wealth nonetheless. It increases the money supply. Therefore stocks are not zero sum.
 
MK,

Market values are not tied to currency or gold. They are made up based on the perception of what one is willing to pay for that asset.

Lets look at your example using the actual cash that traded hands and you will see it is zero sum.


In the begining A & B purchased stock for $10/sh.

A: 10 * $10 = (100)
B: 10 * $10 = (100)
---------------------
(200)

And after C comes in and buys 1 share for $20

A: (100)
B: (80)
C: (20)
----------------------

(200)


It the market is always zero sum.

Profits are made when assets are used as collateral against loans.
 
Just for fun...

I sell stock short by brother. I collect interest on short stock sale money generated, I make money. I buy stock back 2 cents higher from my brother, but make 4 cents on interest generated. Assuming my brother did not have to borrow money to buy the stock. ??

Back in the "day" - of 15% interest, we would do reverse conversions on the options floor with banks etc. We would buy calls, sell puts, and short stock...with a zero risk position based on price movement, we collected interest on hundreds of millions of $$$$..... ah, the good old days, LOL.

Also, stocks are actually companies who do make money, and some pay dividends (reinvest etc), and this modifies the overall equation.

My 2.2345 cents worth LOL.

Don
 
MK:

What you said is true. I did not consider trading stocks on margin. The zero-sum versus not zero-sum was strictly from the assumption of basic stock buying and selling. There was a time that our stock market had a lot higher margin leverage than 2:1 or 4:1.

But with the housing market, it is quite common. Really... how many people pay 100% the purchase price from their pocket? Most did it with 10% down or 20% down. But those days may be over. Still, comparative speaking the real estate class of assets rely a lot more on borrowed money than others.

The idea of using a quote around value is more an indication of perceived value. But you are right, values are all perceptions. A bulb of tulip worthed hundreds of dollars... at the time. Whether it as a bubble or not... only history can tell.


But here is something that I don't understand - what you said:

Quote from MK90210:

By the way, pack together your fractional reserve banking theory and put it on the dump where it belongs. Or let me know where I got the $100 from which I am putting initially in the bank so the bank can lend $91 to you. Be sure: It is a myth.
More...

It's not my banking theory. I learned that from economics 101. (And I said $90 not $91.) Would you expand more on why it is a myth? (Or what the myth is, because I am unclear.)
 
> Market values are not tied to currency or gold. They are made up based on the perception of what one is willing to pay for that asset.


First sentence and done: And what is the one paying with when not money denominated in a currency? Clay plates? Eggs or straw?

Also, please let me know, mr. boston consulting, why A and B activate their assets to half of the market price? Accrued liabilities? Whats up there?


>Profits are made when assets are used as collateral against loans.


At last, pleeease, let me know: How are these profits made when something is used as collateral?

Go on.


MK
 
Quote from failed_trad3r:

WRONG

Stocks create wealth, its paper wealth, but still wealth nonetheless. It increases the money supply. Therefore stocks are not zero sum.
More...

failed_trad3r:

The "wealth" that you spoke of are money brought forth by other people (they may obtain this money by borrowing).

Your perception of "stocks create wealth" is only true from the perspective of someone who bought the stock at a lower price and now sell the stock at a higher price. That transaction brought wealth to that individual. But the money came from other players.

It's a potluck dinner party. The bread doesn't grow into 2 breads. Other people bring more bread to the party.
 
Hey Bolimomo,

concerning fractional reserve banking theory: Theory is that the bank receives $100 holds reserve of $10 and lends the $90 left ad infinitum.

Great. Just, wait. One second. Where come the initial $100 from? Some one paid as salary to me. Sure. But where did he get it from?

Ok, let us put it the other way around: To get the initial $100 I have to go to the bank. Pledge collateral (there it is: an asset) in credit contract and so "create" the $100 which are nothing more than liab. in the bakns balance sheet while the credit is their asset and my liab. Now the bank has to have some reserve as the fed or bank of engeland requests her to hold it. Also, maybe I am coming by and want to withdraw the $100 to pay some ones elses salary. So cash is needed. That goes as follows. Bank discounts asset (ah, back again) at the fed, bank of engeland or bundsbank and receives cash.

Next one steps in to the bank and on the rondo goes. $100 more not only $90 or $91. Lets get it on. As long as he can pledge collateral (asset) which is accepted by the commercial bank he receives $1,000.

Of course I can pay someone with my $100 and he puts his earnings in his bank account. Good for him. Just, the bank never can lend this money to anyone. Why? Because they are already lended to someone else (me, in this case). This becomes clear when one thinks in balance sheets: Bank lends to me against collateral and so creates $100 which where non-existent before. Banks balance sheet becomes $100 longer on asset side (their claim against me) and a $100 longer on liab. side ($100 on my account with them). Now I pay someone, means: Bank books from my bank account to his at the same bank (assume we got only one bank here). That means, that no change takes place in banks balance sheet here. She owed $100 to me beofre (my account with them) and now to Mr. Lucky (his account with that bank). Maybe more on that later.

The moral here: Think in balance sheets.


MK
 
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