Re: Re pension funds

[wfhummel@xxxxxxxxxxxxxx (William F. Hummel)]

On Fri, 03 Oct 1997 Oliver Kamm wrote:

>James R. Olson, jr. wrote:
>>
>>  The stock market is already inflated, what would pouring all
>> the money going into SS into it do?
>>
>> This may be a secret agenda of those pressing for privatization of SS, a
>> source of new funds to keep the current bull market alive.
------------
I have no doubt that security dealers are strongly in favor of
privatization of SS.  Adding liquidity to the financial markets
at the present time, however, either by privatization of SS or by
lowering interest rates, will merely add to the pain when the
bubble bursts, as it surely will.
>
>If this is a secret agenda, it's a misguided one. Stock prices, unlike other prices
>in basic microeconomic theory, are not determined by shifts in supply and demand
>curves. They're set by, and only by, investor expectations for the fundamentals
>that determine the net present value of a future stream of cash flows.
------------
If this were literally true, the volatility in stock prices would
be a small fraction of what is observed.  Hedge funds would go
out of business, and the large literature on technical analysis
would dry up because it wouldn't sell.  Speculation in the stock
market using momentum strategies plays a major role in price
swings.  Fundamentals are fine for the buy and hold investor, but
prices get detached from fundamentals in the short run.
>
>Suppose every quoted company in the US market bought back all of its own stock
>simultaneously, with the single exception of Microsoft. The supply of equity would
>plainly contract sharply, while the volume of liquid funds available for stock market
>investment would expand. But the price of Microsoft stock would not change, because,
>other things being equal, there would have been no change in the earnings prospects of
>the company.
------------
This is a remarkable conclusion.  If the market price of
Microsoft stock were based solely on its earnings prospects, then
those who invest in the stock must be planning to hold that stock
a very long time indeed.  But every day there are a huge number
of sellers of Microsoft stock involving hundreds of millions of
dollars.  Is that because they need the cash?

>Bond prices, incidentally, behave differently, because the bond market, unlike the
>stock market, has a single price-setter - the government.
-----------
The price of short term credit is set by the Fed.  The price of
bonds is set by the market.  The long bond is, in fact, the
favorite instrument for betting on interest rate changes.  This
is quite evident if one looks at bond yields as a function of
maturity.  The long bond (last issued T-bond) always yields
several basis points less than bonds of a few years shorter
maturity.  The reason: its liquidity due to speculation.

William F. Hummel