Today, I am in the mood to give gyaan and what's a better way to give gyaan then to write your heart out and share it :) Now, this time I don't wanna speak on philosophical stuff, relationships, my mood, weather and all, lets talk business today. Now, this inspiration came after reading a research report on Kel Kelly's blog so it consists of examples given by him....Enjoy!
In one way or the other, each one of us have an understanding of the stock markets. Don't we? Now, this takes me back to days when I was teaching Business Journalism to BMM third year students and on the very first day I asked them the same question. All I got was googled answers and definitions of the same....What is really a stock market if we want to understand it the real way without googling the same. Everything, according to me, can be defined by the way it functions. The stock markets does not work the way most people think. There is a commonly held belief- that a stock market boom is the reflection of a developing economy as the economy progresses, companies make more money and stock value rise. Similarly, a stock market bust goes the other way when there is a drop in consumer and business confidence and spending due to inflation, rising oil prices, high interest rates that results in a decline in profits of businesses and rising unemployment. Now, whatever might be the cause of a weakening economy it results to a fall in company revenues and falling stock prices ultimately. This is what we have read and heard from most investment professionals. This understanding and explanation is absolutely correct technically but technicals is what I stay away from. So, lets emerge out of these theories and look at it differently....
The only real force that makes a stock market or any market rise or fall is simply the change in quantity of money and volume of spending in any economy. Stocks rise when there is more money in the economy and in the markets.
It is all about that simple maths formula P=D/S. In this formula Price (p) is determined by demand (d) divided by supply (s). Which means, that it is mathematically impossible for aggregate prices to rise by any means other than increasing demand and decreasing supply that is by either more money being spent to buy goods or fewer goods sold in an economy. The same formula can be applied to asset prices - stocks, bonds, house, commodities etc. It is very well suitable to be applied to corporate revenues.
Markets cannot rise continually without more money inflow. Right? There are of course other ways a market witness rise but thats temporary. Whatever is the country's population, it is using finite quantity of money accompanied by publics ability to add additional funds to the market in order to drive prices higher.
What links stock markets to country's economy? An increase in money and credit is what pushes both GDP and stock markets.
A developing economy is one in which more goods are produced and its the real stuff not money which represents real wealth. The more TVs, cards, clothes, food the better is the state of an economy. If goods are produced faster....faster than money, prices will fall. A constant supply of money makes the wages to remain the same while prices will fall but even when prices rise because money is created faster than goods, prices fall in real terms because wages rise faster than prices. So, by this logic growing economy consist of prices falling not rising. Now that tells us GDP does not actually mean number of goods and services being produced. It only tells us if GDP is rising, the money supply is rising to some degree. Otherwise, with a constant supply of money and spending, the total amount of money companies earn the total selling prices of all goods produced and thus GDP will remain constant.The same concept would apply to the stock market: if there were a constant amount of money in the economy, the sum total of all shares of all stocks taken together could not increase. Plus, if company profits, in the aggregate, were not increasing, there would be no aggregate increase in earnings per share to be imputed into stock prices.
Neither the stock market nor GDP can rise on a sustained basis without more money pushing them higher. An improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise.
What we are really seeing is our currency being devalued by the addition of new currency issued by the central bank. The prices of stocks, houses, gold, etc., do not really rise; they merely do better at keeping their value than do paper bills and digital checking accounts, since their supply is not increasing as fast as are paper bills and digital checking accounts. When the government creates new money and inserts it into the economy, the new money increases sales revenues of companies before it increases their costs; when sales revenues rise faster than costs, profit margins increase. Since business sales revenues increase before business costs, with every round of new money printed, business profit margins stay widened; they also increase in line with an increased rate of inflation. This is one reason why countries with high rates of inflation have such high rates of profit. During bad economic times, when the government has quit printing money at a high rate, profits shrink, and during times of deflation, sales revenues fall faster than do costs.
So, whats important and what is the real indicator is MONEY SUPPLY. Therefore, following monetary indicators would be the best insight into future stock prices and GDP growth.
