Finding symmetries in an unsymmetrical world ..

Archive for the ‘Finance’ Category

There is a phenomenon that has long puzzed the economits view of the supply and demand, and it is the Giffen Goods .

A Giffen good is termed as a good which people consume more of as price rises. If that be it, how is it  that this class of good defies the supply and demand equation ?

The existence of the phenomenon was first identified by a Victorian-era British statistician, Robert Giffen.

There are three necessary preconditions for this situation to arise:

a.The good in question must be an inferior good,

b.There must be a lack of close substitute goods, and

c. The good must constitute a substantial percentage of the buyer’s income, but not such a substantial percentage of the buyer’s income that none of the associated normal goods are consumed.

Water, Rice and other staple foods have long been said to be an example of the Giffen goods.

Here’s another view though :

If rice be a Giffen good , then increase in the price should increase its demand. But if for the same amount of money one can afford much luxurious Meat, why would he buy Rice ?

Is it just because Rice would still be more affordable? But even if that be it, why does the demand rice ?

Looking at it from this perspective :

I consume 4 kgs of Rice and 2 Kgs of meat in a week (Assuming these make up the substancial part of my income.

The price of rice now shoots ,and I can only afford to buy 2.5 Kgs.

But rice still being more affordable I cut down on my consumption of meat,and buy rice instead .

Here’s the trick !

If the price of a Giffen  good increases, then the supply for these “luxurious goods ” must decrease ,and they would become more affordable, as there will be more supply of it due to less consumption !

Wouldn’t they appear to be more affordable?

This is a question that is seldom ever raised in the context of the Giffen Goods.

So, the price of so called “Giffen Good” has a virtually cap, after which the demand for it, Must decrease and it will conform to the normal supply and demand curve .

So here’s my take ( Probably justifying why Giffen Goods is a less noted  phenomena) :

There should be none on the Giffen goods, the goods at best can adhere to the inelasticy of the demand curve, i.e the increase in price doesn’t change the consumption of the so perceived vital goods .

~

ek

I doubt, I think therefore I amRené Descartes


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We have probably overheard (and overrated) the rising bubble and the bubble bust.


So what is it that happens when the bubble busts, where does all the money go? Was it converted from some tangible form to an intangible form? What happened of the overall paper money?



There is this interesting article that I caught up, which describes how the asset of any country disappears in thin air. And what is that huge investment banks which draw lineages for over a century, fall back over the blink of an eye?


Clearly something is fundamentally wrong somewhere, So who is it who is making money ?


Well actually No body. Money just changes hands in any bubble bust.The thing about money are that the money that is perceived to be there, never was there. Its valuation in terms of the assets that represent a “quote” is the basis of the evaluation. This again is based on the universal principle of Supply and Demand.


When the bubble is building, there is an excess demand, which leads to shooting up of the prices, and virtual money is created, which fools the economy into believing that Money is created. This money is JUST a result of OVERVALUATION based on the perceived returns.



When the supply gets lower, i.e. when there is a risk associated with the value of the returns vis a vis the investment incurred to acquire these assests, the bubble starts to prepare itself to bust.


Here is an example reproduces from the article I talked about earlier here :

 

Once upon a time far far away, there was a little island country. The land of this country was the tiny island itself.

The total money in circulation was 2 dollar as there were only two pieces of 1 dollar coins circulating around.

 1. There were 3 citizens living on this island country. A owned the land which had no inherent value. B and C each owned 1 dollar. 

 

Citizen A

Citizen B

Citizen C

Total Capital of country

Land

$ 1

$ 1

$ 2

2. B decided to purchase the land from A for 1 dollar. So, A and C now each own 1 dollar while B owned a piece of land that is worth 1 dollar. The net asset of the country = 3 dollar.

Citizen A

Citizen B

Citizen C

Nett Assets of country

$ 1

Land ( worth 1 Dollar)

$ 1

$ 3

3. C thought that since there is only one piece of land in the country and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A and together with his own 1 dollar, he bought the land from B for 2 dollar.

  • A has a loan to C of 1 dollar, so his net asset is 1 dollar.
  • B sold his land and got 2 dollar, so his net asset is 2 dollar.
  • C owned the piece of land worth 2 dollar but with his 1 dollar debt to A; his net asset is 1 dollar.
  • The net asset of the country = 4 dollar.

 

Citizen A

Citizen B

Citizen C

Nett Assets of country

Loan to Citizen C of $ 1

$ 2

Land (worth 2 dollars) less Debt of $1 to A= Nett of $1

$ 4

4. A saw that the land he once owned has risen in value. He regretted selling it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollar from B and acquired the land back from C for 3 dollar. The payment is by 2 dollar cash (which he borrowed) and cancellation of the 1 dollar loan to C.

  • As a result, A now owned a piece of land that is worth 3 dollar.
  • But since he owed B 2 dollar, his net asset is 1 dollar.
  • B loaned 2 dollar to A. So his net asset is 2 dollar.
  • C now has the 2 coins. His net asset is also 2 dollar.
  • The net asset of the country = 5 dollar. A bubble is building up.

Citizen A

Citizen B

Citizen C

Nett Assets of country

Land (worth 3 dollars) less Debt of $2 to B= Nett of $1

  Loan to Citizen A of $ 2

$ 2

$ 5

 

 5. B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollar. The payment is by borrowing 2 dollar from C and cancellation of his 2 dollar loan to A.

  • As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollar.
  • B owned a piece of land that is worth 4 dollar but since he has a debt of 2 dollar with C, his net Asset is 2 dollar.
  • C loaned 2 dollar to B, so his net asset is 2 dollar.
  • The net asset of the country = 6 dollar. Even though, the country has only one piece of land and 2 Dollar in circulation.

 

Citizen A

Citizen B

Citizen C

Nett Assets of country

$ 2

  Land (worth 4 dollars) less Debt of $2 to C= Nett of $2

Loan to Citizen B of $ 2

$ 6

6. Everybody has made money and everybody felt happy and prosperous.

7. One day an evil wind blew. An evil thought came to C’s mind. “Hey, what if the land price stop going up, how could B repay my loan? There is only 2 dollar in circulation, I think after all the land that B owns is worth at most 1 dollar only.”

A also thought the same.

8. Nobody wanted to buy land anymore. In the end, A owns the 2 dollar coins; his net asset is 2 dollar. B owed C 2 dollar and the land he owned which he thought worth 4 dollar is now 1 dollar. His net asset becomes -1 dollar.

C has a loan of 2 dollar to B. But it is a bad debt. Although his net asset is still 2 dollar, his Heart is palpitating.

The net asset of the country = 3 dollar again.

 

Citizen A

Citizen B

Citizen C

Nett Assets of country

$ 2

  Land (worth 1 dollars) less Debt of $2 to C= Nett of -$1

Loan to Citizen B of $ 2

$ 3

 Who has stolen the 3 dollar from the country?

Of course, before the bubble burst Everyone thought B’s land was worth 4 dollar. Actually, right before the collapse, the net asset of the country was 6 dollar in paper.  

What must be kept in mind is though C’s net asset is still 2 dollar, his heart is palpitating about the inherent value of the land owned by B used as collateral for the loan so he calls in his loan to B. 

The net asset of the country = 3 dollar again.

9. B had no choice but to declare bankruptcy. C as to relinquish his 2 dollar bad debt to B but in return he acquired the land which is worth 1 dollar now.

  • A owns the 2 coins; his net asset is 2 dollar.
  • B is bankrupt; his net asset is 0 dollar. (B lost everything)
  • C got no choice but end up with a land worth only 1 dollar (C lost one dollar)
  • The net asset of the country = 3 dollar.

 

Citizen A

Citizen B

Citizen C

Nett Assets of country

$ 2

  $ 0 (bankrupt)

Land (worth 1 dollars) (loss of $ 1 on bad debt of Citizen B) = Nett of $1

$ 3


 


Reccession as per wiki is ” generally describes the reduction of a country’s gross domestic product (GDP) for at least two quarters. The usual dictionary definition is “a period of reduced economic activity”, a business cycle contraction. “


This being a period where the overall sentiment is negative, people prefer to hold paper money to protect their assets from being undervalued. They quickly convert their market valuation based assets (like stocks, land, debts,bonds,and other investment instruments etc.) into tangible ones, paper money. This further creates a heightened sense of overall pervasive risk, and afraid that they would end up losing all they have, they pull out money from the market. Now with even lesser money to circulate, and lesser credit and liquidity, the fear heightens up even more.


Afraid, the consumers say a temporary no to the consumerism, thus there is further loss of demand. When this continues, there are job cuts, because now nobody wants these products or services. Thus bringing down the entire structure on which the economy is based.No demand ,and hence the money circulation is further monitored in an unhealthy way.


All of it, because the risk and fear grips people badly.Greed and fear are two basic feelings controlling our economy today.


Fight them ,Guard yourself against them ! Don’t follow the herd,make your own informed decisions.

 

Here’s an awesome video On the crisis of credit ! Hope you like it as much as I did ..

 

 

~

ek

People demand freedom of speech to make up for the freedom of thought which they avoid.

-Soren Aabye Kierkegaard

Opportunity cost or economic opportunity loss is the value of the next best alternative foregone as the result of making a decision. Opportunity cost analysis is an important part of a company’s decision-making processes but is not treated as an actual cost in any financial statement. The next best thing that a person can engage in is referred to as the opportunity cost of doing the best thing and ignoring the next best thing to be done .

 

 The sad part is that there is an opportunity cost attached to everything, so whatever you do  you will always be tormented by that  feeling of “losing out on something”.

 

In college, the opportunity cost of slogging it out meant losing out the fun, and social networking .In workplace, choosing a particular work profile meant losing out on exploring other avenues.

 

So, if there is a COST that is involved to everything, you might as well do things right. Bottom line: there is nothing free out here, if it is, find who is paying for it.

Now the tricky part: The decision making

 

Define what you want :

 

The more specific you are on what excites you, and what is it that you WANT, the more likely you are to achieve it.

 

 

Analyze why you want and evaluate the alternatives:

Analyzing why you want one thing over another, is as important, because this lets you achieve the tradeoffs in the options abundant world. The more the options open to you, the more should analyze why you chose one thing over another.

 

Some reasons be may inherently justified, like leaving a job to pursue higher education. Here’s a good example that I came across :

 

Consider the case of a MBA student who pays $30000 in tuition and fees at a private university. For the two year program this would amount to $60000.This is the monetary cost of education. However when making the decision to go back to the school, one should consider the opportunity cost, which includes the amount that the student would have earned had he chose the decision of remaining in his/her job. If the student had been earning $50000 per year and assuming a 10% increase in salary in the second year, $105000 in salary would have foregone as a result of decision to return to the school. Adding this amount to the tuition fees results in $165000 for the degree.

 

 

Just do it :

 

Simple as it may sound, you are anyway paying for every single decision that you make, you are giving it your time, which by far is the most precious resource that you alone have.

 

If something is worth doing, it is not worth doing it bad .


~

ek

The question isn’t who is going to let me; it’s who is going to stop me.

Are Economic Facts Driving Stock Prices or Merely Rationalizations for Existing Price Moves? At the heart of it this symbolizes Casino Capitalism. A question like this is sure to engage a debate from the houses, the hard core finanancial-academic-research savvy giants, and the wall street-speculating stock traders.


The fact is that we are moving from rationalization to a point where we measure what we are paying for a commodity from just its supply and demand. Now what is inherently wrong with this is ,we are undervaluing the basics of what we already know, the simple equation ..

 

 

The supply and demand equation

The supply and demand equation

 

 

 

 

 


Unless there is an equilibrium that is reached between this, there is bound be a blind gamble that is open in the market, hence the casino..


What this also means is that, stock prices for legitimate companies, and prices of other paper assets, are more a function of psychological factors, than economic realities. In fact, in many instances, economic facts are used to justify a price rise (or fall), after the fact. So in reality, the economic rationalization is a reaction to the price change, rather than a cause. It is used to “defend” the price change, or “market” the story.


So between the economic considerations and the psychological factors (i.e. anticipation of the prices, and the general sentiment of the market), there is bound to be bias towards the latter, simple, because psychological factors can be imposed, or introduced artificially for short term gains, but what rules eventually is how strong is the organization that you are investing in, how is the management, and how does the customer perceive of it. Of course this perception part on the customer is different from what the naïve investor thinks about it, one who is just interested in making some quick money. This can also be termed as the noisy market hypothesis.

But alas, the pricing of this oraganisation, depends to a very large extent on this naïve, otherwise uneducated customer, because he controls how the balance is achived;for he decides the overall sentiment in the market, and the worst part, such investors tend to imitate other naïve investors, setting up a model where the overall sentiment is no indicator of the current valuation of a stock.


What you need to be sure is that you invest early enough when the stock is underappreciated or is undervalued for its potential. This is also the basics of the Warren Buffett investor principles, because the later you jump in the market in that particular stock, the more will you be part of the bull market, when the investor confidence is on a high note.


So what you can do is invest smart, early, and when the stock is still undervalued, and when it justifies every single hard earned penny that you are investing it in. Don’t blame someone for all your financial woes.

This also justifies that bailouts are not the answer to pull an economy out, neither is the blame game. You are responsible for what happens around you, even if you do not participate in it. And by just taking up this responsibility you have come from the “victim” to be someone who can emerge redefined, and start all over again. Go Do that! 


~

ek

A simple word success story : DO 

As per wiki, consumerism is “the equation of personal happiness with consumption and the purchase of material possessions.”

 

A market always expands to fit the products in consumer needs, rather than products tailored to meet those needs. The marketing tantrums are aimed at making any consumer believe that he really wants to POSESS it. In other words , he is misled into believing that he WANTS IT ALL. It makes the consumer have that urge to stack everything out in the market at his/her home, purchasing goods in excess of their basic needs.

 

But the catch is that consumerism is subjective, for what is basic to you, might not mean basic to me. If it did, it would mean Totalitarianism, which is fitting things on a common stage, and regulating to a close extent. Some would call it micro management. to others it may authoritarian. But why tomato sauce alone, why not the brewing cofee parlors around the city which lead you into believing that a lot does happen over coffee ? 

 

To me, consumerism is simple, If I lose my job today, would I still buy the utility ? If the answer is yes, it is basic’ to me.

 

The greatest example of a consumerist society is America, an entire nation fooled in believing that it wants more of everything, Junkies, consumer goods, Credit cards, and pillowing up debts. The greatest example of this greed is the flagrant recession triggered by sub prime crisis. So much is the entire globe connected to America that there is a sentiment of a global economic collapse.


Bottom line : Consumerism is a greedy society’s religion. This is not the religion to be embraced, but who is forcing you not to, anyway .


~

ek

Knowledge is the currency of the new economy.


Hey there, would be nice to have you around !

That’s me

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