Another debate

[kenberg]

I don't know what a credit default swap is and I ask that those who do understand it please not explain it to me.

 

But would the candidates please address the following: Individuals, many of them, are in hock up to their ears if not beyond. The government is very seriously in debt. Do you, Mr. Candidate, agree that this is unsustainable and if so, what do you see as the way out? I understand that if every person in America decided tomorrow that he would buy no new piece of crap and stop his spending at restaurants until all of his credit cards were paid off, the economy would plunge. I understand, more or less, the government's need to prime economic pumps. Still, the phrase "tiger by the tail" comes to mind. Is there a solution?

 

No doubt we will hear about more tax cuts. I'm thrilled.

[PassedOut]

A couple of years ago I asked Gary Stern, president of the Mpls Federal Reserve, about the consequences of the increasing debt. He used exactly the same word you did - "unsustainable" - to describe the situation.

 

He has to be very careful about the words he uses, so he could not speculate about the specific consequences. However, he did say emphatically, "We can be sure that the unsustainable will not be sustained, in one way or another."

 

I too would like to hear each candidate state a specific plan to work our way out of it. But I suspect that both fear that making the bad news too specific will cost the election.

[Rossoneri]

I too would like to hear each candidate state a specific plan to work our way out of it. But I suspect that both fear that making the bad news too specific will cost the election.

Indeed.

[barmar]

The explanation for the bailout plan has essentially been that banks can't make loans because they need to borrow the money from other banks, who won't loan it because they're concerned that the first bank may fail.

 

Does the phrase "borrow from Peter to pay Paul" come to anyone else's mind? It seems like the money goes round and round among the banks, doesn't it eventually have to stop?

 

I realize that this is a simplistic view. In theory, the original loans should go to companies that are making products and services that increase overall wealth. They then pay back their loans, or pay salaries to employees who pay their mortgages, etc. and eventually everyone gets their money returned plus interest.

 

But it still seems very precarious. And when you throw in derivative markets, you simply have people betting on how things will turn out. No wealth is being created, yet people are being paid from these activities. I'm surprised it ever worked, but I'm not an economic expert. These markets were designed by economists, so I always assumed there were some subtleties that my lay mind didn't understand, that allow it all to work out.

 

Now I'm not so sure. Maybe it was a house of cards, and it finally all fell down.

[mike777]

I don't know what a credit default swap is and I ask that those who do understand  it please not explain it to me.

 

But would the candidates please address the following: Individuals, many of them, are in hock up to their ears if not beyond. The government is very seriously in debt. Do you, Mr. Candidate, agree that this is unsustainable and if so, what do you see as the way out? I understand that if every person in America decided tomorrow that he would buy no new piece of crap and stop his spending at restaurants until all of his credit cards were paid off, the economy would plunge. I understand, more or less, the government's need to prime economic  pumps. Still, the phrase "tiger by the tail" comes to mind. Is there a solution?

 

No doubt we will hear about more tax cuts. I'm thrilled.

The good news is we are going to raise taxes on those top 5% and capital gains taxes on those who own businesses and give the money to many of us who have this debt or the 40% of us who pay no income taxes.

 

As for that other 55% who pay income taxes I am not sure do you recommend we raise taxes on them also and not cut taxes?

 

As for cutting spending, I have doubts that the budget in absolute terms will go down. We need to spend more money on education, infrastructure, health care, and many other things. I suppose we can cut spending by billions and billions on the people in the military or buying tanks, bombs, etc from companies that make them but what happens when they lay off their employees? What happens when the taxes they pay go down when revenue drops off? Of course there are many other good reasons to cut spending on defense and not worry about jobs but will politicians do that?

[Al_U_Card]

Look at it this way.

 

You work all your life and your savings go into investments. You are now told that not only are those investments worthless, they were fictitious to begin with!!! You are now asked to use your future earnings to put value back into those same investments.

 

The people that made money from the investment creation and sale are not to be held responsible? They sold you a "bill of goods".

[Lobowolf]

Look at it this way.

 

You work all your life and your savings go into investments. You are now told that not only are those investments worthless, they were fictitious to begin with!!! You are now asked to use your future earnings to put value back into those same investments.

 

The people that made money from the investment creation and sale are not to be held responsible? They sold you a "bill of goods".

If you're of retirement age, and you've been consistently putting money in index funds since you started working, and paring back the amount in stocks as retirement drew closer, you're probably pretty happy. The S & P is about 20x what it was 45-50 years ago.

[PassedOut]

As for that other 55% who pay income taxes I am not sure do you recommend we raise taxes on them also and not cut taxes?

Can't speak for Ken, but I don't think we should be lowering anyone's taxes (even mine).

[kenberg]

Most importantly to me, I would like to hear the candidates assessment of the situation. For example: The Dow dropped 700 or so today. Part of the explanation, as I got from NPR, comes from new figures showing that folks were not spending as much money in September as was hoped. Hmmm. Good God, people are actually acting with some sense! It will ruin the economy! Better send them some more stimulus checks, hopefully they will go out and spend it instead of doing something antisocial such as paying off a credit card or, gasp, socking it away for their kids' education.

 

Both candidates have been asked how the current economic situation might affect some of their plans. We are all waiting for an answer. Edit: This is not quite correct. They will both cut taxes.

 

 

I am certainly no economist but I gather spending is necessary to avert a severe recession. OK. But I insist that not all spending is the same. You spend to build a bridge, you have a bridge. You spend to build a bomb and use it to blow up a bridge, you no longer have either the bomb or the bridge. In between these extremes, if you spend the money on crap, you have crap and China, or Thailand, or wherever, has your cash.

 

What do I recommend about taxes? I dunno. I am not living in fear of having to pay taxes, but I understand the need for stimulating economic growth. I would like to hear someone who knows more than I do address our serious problems seriously. In the 1940s, when I was very young, we stopped building cars because it was more important to build tanks. I am not suggesting that we repeat this, not at all. I am suggesting we need to address our priorities. Stimulating random spending with no purpose other than to keep the economy humming seems stupid, given our current debt.

 

 

And to briefly address barmar's robbing Peter to pay Paul: I first heard about this reading Paul Samuelson's Economics as an undergrad in the fifties. I didn't follow it then and I don't follow it now. Seems some money is shipped from bank A to bank B to bank C and than back to bank A and everyone gets rich. I'm still working on understanding this.

[barmar]

I've got it, it's like M.C. Escher's "Waterfall"

 

http://www.meridian.net.au/Art/Artists/MCE...fall-medium.jpg

[barmar]

I am certainly no economist but I gather spending is necessary to avert a severe recession. OK. But I insist that not all spending is the same. You spend to build a bridge, you have a bridge. You spend to build a bomb and use it to blow up a bridge, you no longer have either the bomb or the bridge. In between these extremes, if you spend the money on crap, you have crap and China, or Thailand, or wherever, has your cash.

But in between isn't all crap.

 

You spend to buy a car, you have transportation AND all the people in the car industry have jobs. If car sales drop, car manufacturers (and their suppliers) start laying off people. Then those people stop buying other things, so those industries also dry up, and so on. And most of these people who lose their jobs can't afford their mortgages, so the banking industry fails. CRASH!

 

Basically, spending is a drug and the entire economy is hooked on it. If we try to get off it, we have to go through a difficult period of withdrawal.

 

I also don't care for your point that "China ... has your cash". We live in a global economy, I don't believe in Us vs. Them. This economic crisis hasn't just hit one country, we're all dependent on each other.

[kenberg]

Yes, I agree. My point though is that we cannot have everything and I watch as people spend money they do not have on things they do not need. And I am not trying to bash China just as I would not bash Saudi Arabia. We send them cash, they send us oil. But we will eventually run out of cash.

 

I am fine with the global economy. We need to watch our spending, individually and as a nation, in any economy, global or not.♠

[mike777]

I agree the nation, state and local governments need to watch spending. If you got ideas on what spending we should cut back on, lets hear them.

 

For instance are you against buying bombs/bullets or other stuff that may explode? I have not heard any candidate say we should stop buying bombs/bullets.

 

OTOH if you are for buying even more bridges will that not just encourage people to buy/use cars more and use more oil? Will not getting the material(steel, iron, etc etc) for bridges cause more pollution, will not all that construction work cause pollution and use scarce resources?

 

From what I hear in the debate both candidates are 100% against wasteful, useless spending and against stuff that causes global warming!

[kenberg]

Hew are two choices:

1. Another stimulus check costing x dollars. Send out the money, hope it does some good.

2. Take the same x dollars, and build bridges, improve rail travel, give grants to rebuild some decaying schools, fund scientific research, etc. We could debate the etc.

 

Either plan would be paid for in the same way.

 

Both involve spending money and, as I understand it, would be an economic stimulus♠. I prefer the second line of attack. I think actually Obama does also. In four minutes or so, we may hear.

[barmar]

The stock market also seems like a big shell game, the more I think about it.

 

When you buy shares of a company, what are you really getting? It's a part ownership of the company, but what can you really do with that? Normally when you buy things, you get to use them -- you buy a car and you can drive, you buy a house and you can live in it, you buy a painting you can enjoy looking at it on your wall.

 

All you can do with shares of stock is sell them to someone else. But why do THEY want them? It's not like a used car, where the new owner can use it. Again, all they can do is sell them to someone else.

 

In some cases the company pays dividends, i.e. you get a share of the profits the company is making. But these days, I think this is relatively rare, so I don't consider it a big factor in stock investing.

 

Eventually the company may be sold. The new owner MIGHT pay cash for it, in which case the final set of stockholders get this money. But more often I think the stock shares are simply exchanged for shares in the new company, so you're still playing the same game.

 

NPR's Marketplace tonight had a nice piece explaining why companies care what their stock price is. They don't actually get anything directly when their price goes up, or lose anything when it goes down. But it's a representation of what "the market" thinks of the company and their prospects, essentially a big opinion poll. Thus, a company will have a harder time borrowing money when their stock price drops, and people may be hesitant to buy their products, because the market is saying that they're in bad shape. But it can be a self-fulfilling prophecy, because a company that can't borrow and whose sales drop will have a harder time staying in business. I suppose the theory is that people will be more honest about their opinions when money is on the line, but isn't there still room for collusion and manipulation?

 

It may be a shell game, but it's the only game in town. So I'm in it up to my ears. I don't need to understand why it works, just know that it does.

[mike777]

Barmar....you understand what owning stocks means more than most do. You hit the nail on the head when you said you are now a part owner of a company.

"It's a part ownership of the company"

 

 

 

 

 

"But it's a representation of what "the market" thinks of the company and their prospects, essentially a big opinion poll."

Again you hit the nail on the head..you understand this very well!

 

 

"In some cases the company pays dividends, i.e. you get a share of the profits the company is making. But these days, I think this is relatively rare, so I don't consider it a big factor in stock investing."

This part is confusing but the vast majority think this is the biggest factor in stock investing. A company is worth what it "pays out on a discounted factor"

1) Buy a company that is paying or you have faith will pay out before you die or

2) Buy so much of a company that you can force it to pay out.

 

 

 

AGain you hit the nail on the head.

"But it can be a self-fulfilling prophecy, because a company that can't borrow and whose sales drop will have a harder time staying in business"

 

"I don't need to understand why it works, just know that it does."

If you just keep in mind what you said above and nothing else you are far far ahead of everyone else

 

 

"The stock market also seems like a big shell game, the more I think about it."

When you say shell game, for me that means hidden stuff, very important hidden stuff. I would try my best that is possible to not buy/bet my money on hidden stuff. In addition if I can get a hint that the guy in charge is running a shell game, I try and run away fast.

 

To use bridge as an example : If I think the opp are playing a shell game I run away as fast as possible.....and even if my partner is running a shell game and winning I run that much faster

 

OTOH if I can buy Hamman, Italy, meckwell, Helgamo, Martel, or my nonfamous bridge friends when the market is crashing.....BUY!

[barmar]

My point is that when you're a part owner of a company, you don't really own ANYTHING, because a "company" is not something you can do anything with, it's just an idea. Yeah, you get to vote on the membership of the board of directors, and occasionally some other matters. Other than the big institutions, how many investors really care about these votes? I can't recall the last time I did anything other than "vote as recommended by the board" when I received a proxy notice (isn't there a conflict of interest when the board provides recommendations on how I should vote on elections of board members?).

 

The only time this part ownership really turns into something is if the company goes out of business. After paying off all the creditors, the assets are liquidated and the investors get their share of the money. This is the theory behind "value investing", where you invest in companies whose market value is less than the presumed value of their assets. But who really invests in companies that they want to fail so that they'll be liquidated?

 

It's not like when you're the owner of your own business, or a small partnership. Then you're the boss, and you get all the profits; on the other hand, you're also taking all the risk that the business will fail. When you're a shareholder, you're just one of thousands of "bosses", with virtually no power, and get little or none of the profits.

 

But maybe it's not really so hard to understand. Money itself isn't real, either, it's just a proxy for goods and services that's easier to carry around. Ever since society moved away from simple barter systems, everything financial has actually been a form of "derivatives". It's just that some instruments are further removed than others, so they feel more like gambling, but in reality we're all in a huge, worldwide casino, betting that the money we earn today will be able to buy things tomorrow.

[mike777]

1) As a part owner( we are except FredG) you really need to make sure you trust management to make the right decisions and that you bought at a price with a margin of safety!

2) "This is the theory behind "value investing", where you invest in companies whose market value is less than the presumed value of their assets. But who really invests in companies that they want to fail so that they'll be liquidated?"

 

 

This is the extreme view of value investing....read Ben Graham as we all have. :)

But if you know any companies such as this tell............so I can buy them!

 

I am a value investor but only get companies such as above in my dreams .....more often I buy low and watch them go lower.

 

3) "It's not like when you're the owner of your own business, or a small partnership. Then you're the boss, and you get all the profits; on the other hand, you're also taking all the risk that the business will fail. When you're a shareholder, you're just one of thousands of "bosses", with virtually no power, and get little or none of the profits"

 

YES

 

 

4) "Ever since society moved away from simple barter systems, everything financial has actually been a form of "derivatives". It's just that some instruments are further removed than others, so they feel more like ga"

 

Yes!

[barmar]

Yeah, shell game was a poor metaphor. I didn't mean that there's something hidden, just that everything goes round and round in a confusing way.

 

You mention "buy Hamman, etc.". Are you thinking about a Calcutta? When people buy shares of a company, it feels like bidding on players in a Calcutta. But the difference is that the Calcutta is a finite game: when the tournament ends, the money that was put in is all distributed (except, perhaps, for the house's cut). If you bought the right players, you make a profit. But the stock market has no end, it just goes on and on, and the money goes round and round. But unlike the old song, it never "comes out here".

[cherdano]

In some cases the company pays dividends, i.e. you get a share of the profits the company is making. But these days, I think this is relatively rare, so I don't consider it a big factor in stock investing.

The value of a stock is still the sum of all future dividends (interest-rate adjusted, of course). If a company makes a profit but doesn't pay a dividend, you should think of the shareholders reinvesting the profit into the company in order to increase future profits, and thus dividends.

 

The expect growth of profits in the future is much more relevant to the stock price than this year's profits, and dividends.

[mike777]

Yeah, shell game was a poor metaphor.  I didn't mean that there's something hidden, just that everything goes round and round in a confusing way.

 

You mention "buy Hamman, etc.".  Are you thinking about a Calcutta?  When people buy shares of a company, it feels like bidding on players in a Calcutta.  But the difference is that the Calcutta is a finite game: when the tournament ends, the money that was put in is all distributed (except, perhaps, for the house's cut).  If you bought the right players, you make a profit.  But the stock market has no end, it just goes on and on, and the money goes round and round.  But unlike the old song, it never "comes out here".

Again you make an excellent super point! Lol you must really be a super investor!

 

I buy Hamman and others long term....long term meaning I may die before they do!

 

Let me use an extreme example....if you can live with the violitity of "JL"...long term you buy...if you cannot you do not buy!

 

Please note none of the above means JL will not win BB or other..........you just discount back.....and understand your willingness for risk(ups and downs).

[barmar]

In some cases the company pays dividends, i.e. you get a share of the profits the company is making.  But these days, I think this is relatively rare, so I don't consider it a big factor in stock investing.

The value of a stock is still the sum of all future dividends (interest-rate adjusted, of course). If a company makes a profit but doesn't pay a dividend, you should think of the shareholders reinvesting the profit into the company in order to increase future profits, and thus dividends.

 

The expect growth of profits in the future is much more relevant to the stock price than this year's profits, and dividends.

But many companies NEVER pay a dividend. I suppose you're betting that eventually the company will get big enough that it can afford to share its profits with investors.

 

The comment about "buying Hamman" has got me thinking some more. Suppose there were a stock market for bridge pros. One way it could work is if shareholders received a portion of the fees as dividends. Or, the pro could put in his will that the shareholders will inherit his estate; that's the liquidation model. In either case, the pro could set his rates based on his share price, and investors would set their share prices based on how much they think the pro can attract in rates; it circular logic!

 

But again, the difference between this and the real stock market is that you know the pro will eventually die, so it's still a finite game. Good companies, on the other hand, are expected to live on forever, either on their own or by being absorbed into some other company. We buy shares, but never actually expect to get our piece of the pie.

 

The stock market seems like this: Suppose you and a bunch of friends each put in a couple of bucks, planning to buy a pizza. But instead, one guy takes the money home, and promises that the next time you all get together he'll buy the pizza. When that day comes, someone takes the money from him, promising that he'll buy dinner the next time. And so on and so on. Money is going around and around, but no one gets to eat!

[mike777]

In some cases the company pays dividends, i.e. you get a share of the profits the company is making.  But these days, I think this is relatively rare, so I don't consider it a big factor in stock investing.

The value of a stock is still the sum of all future dividends (interest-rate adjusted, of course). If a company makes a profit but doesn't pay a dividend, you should think of the shareholders reinvesting the profit into the company in order to increase future profits, and thus dividends.

 

The expect growth of profits in the future is much more relevant to the stock price than this year's profits, and dividends.

:)

 

I agree if you have a math model that tells me future profits....that justifies my risk. Please post ")

 

:)

 

I do not want to buy lehman or AIG or etc that have truncated.....dividend payouts :)

[Lobowolf]

2) "This is the theory behind "value investing", where you invest in companies whose market value is less than the presumed value of their assets. But who really invests in companies that they want to fail so that they'll be liquidated?"

 

But if you know any companies such as this tell............so I can buy them!

Wasn't quite there, but I bought Apple Computer at $16/share when they had about $11/share ($4 billion or so with 375 million shares outstanding) in cash sitting in the bank. They had some long-term debt at the time, but much less than the cash on hand. Less than a billion in long-term debt, as I recall.

[mike777]

2) "This is the theory behind "value investing", where you invest in companies whose market value is less than the presumed value of their assets. But who really invests in companies that they want to fail so that they'll be liquidated?"

 

But if you know any companies such as this tell............so I can buy them!

Wasn't quite there, but I bought Apple Computer at $16/share when they had about $11/share ($4 billion or so with 375 million shares outstanding) in cash sitting in the bank. They had some long-term debt at the time, but much less than the cash on hand. Less than a billion in long-term debt, as I recall.

lol I just bought a couple of companies that have more cash....than total.......value of company....

 

hmm today they went down

 

I did not buy Apple but your point is valid.....I do not understand tech companies..I do not own an Iphone let alone a cell/mobile phone.