Gyroscopic Investing

Recently there's been a trend of all of the PP assets going down together at the same time. Where's the money going? Typically when gold goes up, it's because money has flowed from other assets that people sold to buy gold, and those other assets drop in value due to the sale.

When everything is going down together at the same time, I question where the money is going. Does it just mean that we are destroying value as a global economy so there is less wealth per unit of fictional money?

I realize the time frame is reasonably short, and I'm not worried about the PP. I'm just curious where the money is going? It's not going into cash because the yields in cash are going up too.

I'm guessing that fear is pushing people into cash more than other assets. Unfortunately we can't see our own cash gain in value in any measurable way except to see that Stocks/Gold/Bonds all drop. Like today.

With all the Black Friday deals out there today, perhaps our purchasing power is still growing somewhat.

TripleB, if I understand correctly, if someone gets a bank loan  (to for instance buy stocks, gold and LTT on margin), then that creates money. If they pay that loan off, then that destroys money. So in a liquidation panic, people with margin acounts get margin calls, sell stuff off and  pay down their margin debt. If you look at a chart of the amount of margin debt outstanding then it plummets during a crash. That is money that came out of thin air by banks creating loans and it gets converted back into thin air by those loans being paid off. The values of assets are set by such bank loan created leveraging up. That is true not only of stocks and gold but also of house prices etc. Any asset price based on people borrowing money to bid up the price and then using the bid up price as collateral to get a bigger loan to bid the price up higher etc etc is like that.

TripleB look up charts of M0, M1, M2 etc to see how little money is actually base money ie bank reserves. The vast bulk of money is created by bank loans and shadow banking credit creation.

Big investment banks such as Goldman Sachs and JPM each control over $1T of assets and those are held at high leverage. Think of all the futures trading and how that is leveraged up. Hedge funds are leveraged. Leverage sets asset prices as far as I can see.

QE creates more base money but all of that fresh base money can be offset by private sector deleveraging. So M0 can increase 10x but M2 actually drop and asset and consumer prices fall even if money velocity doesn't change too much (I hope I'm not in a muddle here).

Perhaps some of the money has gone into other currencies.

Also for stocks, that "money" wouldn't be there until you sell at a certain price and swap your share for somebody else's cash (or margin loan). I didn't really lose $60 a share in real money on Apple since it's high at $426...

jmourik wrote: Also for stocks, that "money" wouldn't be there until you sell at a certain price and swap your share for somebody else's cash (or margin loan). I didn't really lose $60 a share in real money on Apple since it's high at $426...

Yes, you did really lose it. It's gone. Also, Santa Clause doesn't exist. It's time you were told the truth.

I guess even in a world without leverage asset prices are only what someone will pay. If gold was to be thought a bit naff and old school or vulgar or whatever then no one would be able to find a buyer and the price would fall to zero.

There might be a purgatory where money goes for some period of time after leaving one asset before appearing in the value of another asset.

That could explain the periodic declines in the value of the PP.

As for Santa Claus not existing, my understanding was always that if you did not believe he existed he would not bring you any presents.  I always felt that that was a good reason to maintain one's belief in Santa Claus.  (This logic can also be applied effectively with respect to the maintenance of other convenient but non-confirmable beliefs.)

MediumTex wrote: There might be a purgatory where money goes for some period of time after leaving one asset before appearing in the value of another asset.

That could explain the periodic declines in the value of the PP.

As for Santa Claus not existing, my understanding was always that if you did not believe he existed he would not bring you any presents.  I always felt that that was a good reason to maintain one's belief in Santa Claus.  (This logic can also be applied effectively with respect to the maintenance of other convenient but non-confirmable beliefs.)

Or, as the philosophers call it, "Pascal's Santa Wager."

Look at UUP or the dollar index during the period when the Permanent Portfolio assets all declined in tandem..

TripleB wrote: Yes, you did really lose it. It's gone. Also, Santa Clause doesn't exist. It's time you were told the truth.

Hmmm. I bought Apple about three years ago so I really do feel Santa Clause exists. Or rather, in my case, Sinterklaas...

The fact that UUP increases when treasuries and gold and stocks all fall together I guess means that people are just wanting USD monetary base (bank reserves) more rather than assets. If someone sells shares at a low price, no money get destroyed by that transaction. It is just that the value of those shares relative to money has gone down. Money does get destroyed if they then go and pay off a loan with the money they have just got (and that action would increase UUP even more).

stone wrote: If someone sells shares at a low price, no money get destroyed by that transaction. It is just that the value of those shares relative to money has gone down.

I disagree. Suppose you own shared in a company that are valued at $100 each. The shares are worth $100 because the net present value of future cash flows *expected* by that company cause it to be valued at $100. This is based on the company continuing to do business at the rate they are doing it at now.

Now let's say something happens and we realize that this company can't make Widgets anymore, because the market has dried up. Technology has changed, and Widgets are no longer useful.

The share price drops, because the present value of expected future cash flows has dropped. So you sell your shares at a loss.

Value did get destroyed, because now one small piece of the global economy is gone.

Triple B, I guess I was at cross purposes saying money wasn't destroyed whilst you are saying that value is destroyed if the company screws up. I was simply meaning that share price is based on what people guess the value is going to turn out to be. If opinion on that changes (irrespective of how well the company is doing or does in the future) then that share trading behaviour will shift the share price. Value and money are different things and share price is different again. Value as you point out depends on the company doing well, money is created and destroyed by credit creation and deleveraging and share price is set by trading behaviour (that is determined rationally or irrationally) based on people's choice between holding money or shares.