Is the market one huge ponzi scheme?

after all these accounting scandals,
after all these corporate CEO salary raids of the treasury
after all these "relevations about ... du jour"

hey,
perhaps it was always a ponzi scheme, and Ponzi copied from the markets....

Chicken or the Egg

Bulls or the Bears,

which came first desides whether you're poor or poorer

 

To diversify their holdings.

 

of course it's a pyramid.

always has been, always will be. it did not start in the nineties.
but unlike real world schemes, you can win in both directions (building up and crushing down the pyramid).

now the next pyramid is building up (pretty high already) in real estate. it will crash down.. and there will be another one, somewhere in the market.

tntneo

 

actually at any given time a large percentage ( but not the majority ) of individual stocks are ponzi schemes and during bubble periods there are more ( etoys, razf, etc. ). But to say that the entire market is a ponzi scheme is a bit of a stretch. Companies with operating profits and positive book value are not ponzi schemes since they will be worth something even if the public markets were eliminated.

 

To put a bit of a historical and economic (my two college majors, Econ and History) spin on this thread, I suggest everyone go to their local libraries and rent "The Commanding Heights: The Battle For The World Economy", a 3-part (6 hour) special which aired on PBS this past winter. It is incredibly well done. If your library doesn't own it, recommend that they buy it, or buy it off of PBS's web site yourself!! It is an investment worth making, I cannot stress that enough. If you don't know these historical fundamental and facts behind global economic trends, currency crises, the workings of the IMF, World Bank (where I worked for over a year in D.C.), WTO, the writings of contemporary economists such as Hernando de Soto, Joseph Stiglitz, and William Easterly, and study the techniques of people like Soros, you're not going to do as well in the long run as you otherwise could. I especially recommend this series for you lefties out there, puts quite a spin on Reagan, Thatcher, supply-siders, and monetarists. Here's to Progressive Republicans!!

 

dotslash, the economy is not a ponzy scheme, I argue the markets are. They represent people's interpretation of value, and that's very "flexible".
There is always a bubble somewhere.

 

When is America gonna get with it man. The word "liberal" is used to mean "conservative" in the entire world except in America.

And as Croesus points out, read "Commanding Heights" - an excellent overview of the macro influences that have shaped our world. Notice the coincidence of the start of the bull (circa 82) and the rest of the western world embracing free enterprise, and leaving behind that socialist crap.

 

When in Rome.....

 

Very, very good show...
Try this.
http://www.pbs.org/wgbh/commandingheights/lo/index.html

 

I came the conclusion that the stock market is a legitimate investment scheme that has Ponzi scheme elements in it that arise due to human nature.

The fundamental basic idea of the stock market is that one can own a share of a business. If that business is performing well, the value of that share increases. If the business continues to do well, and you sell your share to some else, that person will then have increasing value from his original price paid. That’s the legitimate investment aspect.

The Ponzi scheme element comes in from the fact that the stock market is also a big ol’ auction that goes on all day, every business day. In a public auction, you can’t control the
number of bidders who decide to show up and bid for an item (we call that ‘volume’). And in an auction, the bid of an auctioned item tends to rise due to the element of competition. This element of competition (coupled with ignorant bidders attending) often causes the prices bid to go up beyond the mathematically calculated present value of the share and even the FUTURE value of the share (can you say ‘irrational exuberance’). The difference between the rational present or future value of the share, and the higher price being bid for the share, is the Ponzi scheme value of the share. In normal times, the small crowd of professional traders, by buying low and selling high (and selling high and buying low) keep the prices of the share fluctuating around some standard deviations from its rational price. But as a lot of businesses start doing well, and the rational value of their
shares starts to rise, the attention of the ignorant is attracted. This large ignorant crowd then starts stampeding into the auctions and bidding up the prices beyond rational calculation. And of course this starts a self-perpetuating cycle that eventually overpowers the rational trading of the professionals so that even they begin to enter the vicious cycle (the trend is your friend after all). The bubble begins. The percentage of a share’s value that is due to the Ponzi scheme element begins to rise. This all leads up to the big toppy market when even the ignorami realize that the Greater Fool Method is not going work anymore.
And we get the next market down turn. The professionals have already seen it coming and have left (or gone short). The Greater Fools are left holding the bag.

Of course this is a simplification. There are also other things that add to the Ponzi scheme element: Brokerage games, IPO games, short term market marker/specialist games, P/L statement games. These become exacerbated when the ignorant crowd comes stampeding in. (A lot of the problems we are having now with crooked accounting have their origins in the mass shareholder expectations that share prices should move higher and higher on a regular basis, whether this is rational or not. )

In short, if you know what’s going on, its a legitimate investment scheme. If you don’t know what’s going on, its a Ponzi scheme.