Atlas Shrugged

[moda0306]

Isn't forced saving simply diverting that same transfer via Wall Street with all the waste and pratfalls that entails?

No... it's still your property.. not wall-street's.  You have to specifically choose to invest it in risky areas (which I'd suggest should be disallowed) for wall street to get its grubbies on it (and even still it's not THEIR property)... It is still your property, though... unlike current SS, where the property has literally transferred in title from you to a retiree.  You can never get it back from a savings account... you have to hope some youngster with a job will do the same for you in the future.

The rest of your points around the stock market may be valid, but keep in mind it's the free choice of the investor to make their capital available to corps in the form of stock ownership instead of bond ownership or simply sitting on cash.

The are not forced upon people.  They can choose not to participate. In fact my ideal "forced savings" SS probably wouldn't allow stock investment, unless in the form of a PP type arrangement.

The secondary stock market may be made up of buyers and sellers, not corps, but that's like saying the farmer's market is made up of buyers and sellers.  Fact is, many of the sellers aren't selling because they think their apples are a bad deal, but because they are in the business of selling apples, and will go pick more after their inventory runs out.

The act of "picking apples" in stock terms is the effect of corporations realizing that there's lots of people out there willing to "invest" in the corps of the S&P at a relatively low required rate of return.  That makes it cheaper to find capital for corporations, and they therefore can invest with a lower required rate of return, since they have access to such a large market of money.

When required return is low, more investment opportunities are lucrative, and they pursue those and hire more people.  This is helped by gov't in some ways... some good, and some bad... but in many ways is the free market at work.  Now all these companies can make products at 6% ROI instead of 10% because of a liquid secondary market, the 10% rate would have stifled many projects, so a 6% ROI requirement will increase GDP and employment.

The secondary market, simply, contains a whole lot of retailers that will go BACK for more inventory if it gets used up by investment consumers.  These people are like apple sellers at the farmers market... they WILL go back for more inventory, and it will change the business decisions of the apple-growers (corporations themselves), hiring more people as they realize their product is in higher demand.

[moda0306]

I still am in the mode where I think demand is going to really set the tone for investment, but a lower required rate of return never hurts.  People WANT ROI out of their savings, and if our economy has capacity in labor and capital, it will accept 6% instead of 10%, and projects that never before would have been thought lucrative are now much moreso.

[stone]

Moda, excuse me for saying this but your comment almost makes it sound as though companies sell stock. They typically don't (except at public offerings of new stock). They sell goods and services. Existing previous shareholders are the people selling stock to new shareholders. Whether or not a company spends $100M on a new plant to make widgets has nothing to do with whether their stock price is $1 per share or $100 per share (except if the company wants to pay for it with debt and the debt market uses the stock price as a barometer of wellbeing). If the $100M new plant creates $10M in new earnings per year then that will make sense and get done whatever the stock price. If the stock price is low then those new earnings will be spread less thinly across the market capitalization but that will not make it any more or less sensible to invest in that new widget plant. To my mind an inflated asset market just makes asset bubbles relatively less unattractive in comparison to real productive capital that generates earnings.
Is your point that in a stock bubble, people will find the stock market unattractive and so instead put their money into start ups? I suppose in the tech bubble corporations did buy start ups using stock for payment and the venture capitalists did to some extent sell that stock to cash in. From what I can see though a lot of those start ups were totally phoney. Essentially there was industrialized lying.
I really welcome your feedback on this because it is one of the big puzzles I have in trying to understand all of this.

[moda0306]

These businesses may not be explicitly in the business of issuing stock, but you can bet their CFO feels like they are.

If a company wants to secure financing, they look at what they can sell their stock for to the secondary market vs what they can borrow for.  They may not participate after this point, but they're always deciding whether or not to sell or buy back stock to the secondary market.

This secondary market provides an extremely important role in the finance of these companies... if it's flush with cash, and stocks are expensive, it will issue new stock and get lots of money without having to dilute shares very much.  The liquidity of this market makes it much easier for companies to get ahold of money at a relatively low price.

For instance, look a the P/E ratio of the S&P 500 and its implied yield...

http://www.multpl.com/

It appears to be an implied yield of under 5%, if using the last 10 years' earnings.

Do you think a non-public company would ever be able to obtain equity financing for under 5%?  Would you invest in a company that has historical earnings at less than 5% of its price?

This is the market that private companies looking to go public want to tap into.

[moda0306]

If the $100M new plant creates $10M in new earnings per year then that will make sense and get done whatever the stock price.

Not really.  If the stock price indicates a required rate of return of 15%, and the plant can generate only 10%, it will not get built.... that's barring any easy debt financing... both are analyzed for project funding.

Also, all this doesn't necessarily need to be a bubble.  If the financing is there at a given rate of return both through debt and equity sources, and you can beat that rate of return by operating a business, then it makes sense to do so.

This is the natural balance that libertarians would claim should always take place to revive our economy without stimulus... as people try to find sources for productive growth with their money, and less are available, it will make the money cheaper, and therefore make more projects seem lucrative again.

Think of it this way... if you are trying to decide whether or not to replace your furnace when you retire, all things being equal, the rate of return on your investments is going to vastly skew that decision.

[stone]

Moda, I thought that currently (and perhaps normally) companies typically financed new projects using retained earnings or debt rather than by issuing more shares? I can remember seeing some analysis of the pharmacutical industry and it showed a massive flow of money from medicine purchases to dividends and sharebuybacks and to investment in research. There was no flow from the stockmarket back to investment in new drugs or whatever. There was some money put into early stage development by venture capitalists.

[moda0306]

Maybe I'm simply speaking in a theoretical world, when in the real world it's a "one-and-done" deal.

My finance class lead me to believe that CFO's were constantly looking at where to best receive funds... equity vs debt.... and they're always trying to maintain the correct ratio.

You could be right on this... but even if you are I'd say it's the liquidity provided by the secondary market that allows for cheap initial share-issuance by the corporation.

Otherwise, why would a group of closely-held business investors ever go public... the access that's given to the secondary market is what drives the massive price increase that can often follow such a decision.

Good discussion... Don't confuse the assured nature of my comments for absolute knowledge... I'm only 60% sure on all this... just walking through the logic of it all with a dash of finance 101.

[stone]

Moda, in practice though the rate of return goes to zero with everyone unemployed and someone sitting on a big pile of cash .

I think the expected rate of return for productive investment also has to compete against speculative gains that increase as prices become more volatile because they have elevated beyond a point where earnings are relevant.

I really don't think that pumping more money into the stockmarket would cause some new sustainable technology to be developed. I think it would only serve to cause even more potential technology developers to instead work in Wall Street.

Thanks for explaining the argument though (if I'm understanding it right now).

[stone]

Moda, at least you had finance 101!

As an example, my better half's job is with a company that started up with venture capital and then was bought by a large corporation. From what I could see the corporation used retained earnings to finance the buy out.
At the very beginning, the venture capitalists did get the money from an initial offering to form a venture capital trust. That then paid to convert an invention into a product that could be sold. But that venture capital raising is a very different beast from the stock market. The fact that the large corporation could buy the small company was obviously what rewarded the venture capitalists but from what I can see that has nothing to do with the stock price of the large corporation. The buy out was with cash from retained earnings not with stock of the large company.

[moda0306]

I can't disagree at all with your comment on green energy vs bubbles with low interest rates.

That's the nature (an unintended (or intended?) consequence) of such a liquid market.  Quarterly returns, not world-changing technologies, become the name of the game all too often. 

We're agreeing with each other and arguing at the same time, methinks!