Economy crash =/= stock market crash?

Audaxer

Linton said:

sevenhills said:

MK62 said:

No way to know.......when one does arrive you'll get no real prior warning anyway......although after the fact, there'll be the usual gaggle of "experts" in the press saying how they predicted it all along......

Where would the millions invested in the stock market go, if we knew there was a crash coming?

It wouldnt go anywhere, it's not actually there in the first place in any physical sense.  A share is created by a company X and sold to you  for £1.  Company X gains £1, you cash drops by £1 and you hold a share.  Today it's valued at £10, which means that if you were to sell it you would expect to get £10.  But you dont sell it.  Tomorrow the price drops to £5..  You still own the share and company X still has £1 so nothing has changed except your expectations.  You sell the share for £5 to Joe.  You gain £5 and Joe loses £5.  Now the share is owned by Joe. The only people affected are you and Joe.  Company X still has its £1.

But in that example surely the company is affected as it's value has reduced by 50% when the share price dropped from £10 to £5?

Thrugelmir

Audaxer said:

Linton said:

sevenhills said:

MK62 said:

No way to know.......when one does arrive you'll get no real prior warning anyway......although after the fact, there'll be the usual gaggle of "experts" in the press saying how they predicted it all along......

Where would the millions invested in the stock market go, if we knew there was a crash coming?

It wouldnt go anywhere, it's not actually there in the first place in any physical sense.  A share is created by a company X and sold to you  for £1.  Company X gains £1, you cash drops by £1 and you hold a share.  Today it's valued at £10, which means that if you were to sell it you would expect to get £10.  But you dont sell it.  Tomorrow the price drops to £5..  You still own the share and company X still has £1 so nothing has changed except your expectations.  You sell the share for £5 to Joe.  You gain £5 and Joe loses £5.  Now the share is owned by Joe. The only people affected are you and Joe.  Company X still has its £1.

But in that example surely the company is affected as it's value has reduced by 50% when the share price dropped from £10 to £5?

The company remains unaffected. Stock market gyrations have no direct impact on the day to day operating activity of the company.  The greatest asset many companies have is their employees (collectively as a sum of the parts). 

kuratowski

However, there can be an indirect effect.  A sharp fall in the share price of a company has a likelihood of causing the current management to be forced out.  As a result, senior management time will probably be diverted towards trying to bolster the share price.  This can result in short-term decisions being made, which may not be beneficial in the long-term.  A relatively large part of the literature mentioned by Thrugelmir is devoted to debating this kind of problem.

Nanpy

kuratowski said:

 A sharp fall in the share price of a company has a likelihood of causing the current management to be forced out.  As a result, senior management time will probably be diverted towards trying to bolster the share price.

Since CEO pay got 95% linked to share price performance (median CEO to average worker pay in a company used to be 20:1, now it's more like 250:1) all CEOs do is build share price. If you speak to anybody in a company management team, that isn't a start-up, all they talk about is increasing the share price. You can lay off half the work force, abandon entire markets you used to dominate and still see share price increase. Even the start-ups have a 5-10 year goal to be bought-out, rather than establish a company that they'll hand down to future generations - to be fair that's probably a good thing in most cases. 

EDIT: Ten posts in ten years? Ain't I quite the Chatty-Cathy?

Alexland

Thrugelmir said:

$300 billion of debts is no small sum.

From what I understand the $300bn is the total debt of which the majority is backed by assets? While I am not downplaying the problem the company has in meeting it's debt service obligations or the risk of further contagion from those relying on those debt repayments the net size of the problem does seem to be smaller than most headlines are suggesting.

Malthusian

sevenhills said:

MK62 said:

No way to know.......when one does arrive you'll get no real prior warning anyway......although after the fact, there'll be the usual gaggle of "experts" in the press saying how they predicted it all along......

Where would the millions invested in the stock market go, if we knew there was a crash coming?

If we knew there was a crash coming there would be no millions invested in the stock market. The crash would already have happened. There is no escape from the Efficient Market Hypothesis. If there was one the Efficient Market Hypothesis would have already closed it off.

lozzy1965

Malthusian said:

sevenhills said:

MK62 said:

No way to know.......when one does arrive you'll get no real prior warning anyway......although after the fact, there'll be the usual gaggle of "experts" in the press saying how they predicted it all along......

Where would the millions invested in the stock market go, if we knew there was a crash coming?

If we knew there was a crash coming there would be no millions invested in the stock market. The crash would already have happened. There is no escape from the Efficient Market Hypothesis. If there was one the Efficient Market Hypothesis would have already closed it off.

Hadn't heard of that.  Read a summary now.  Interesting, but it is a disputed theory, with believers and non believers - like so much in this world.  So it seems like there IS an escape from it, if you are a non believer.

tebbins

Malthusian said:

sevenhills said:

MK62 said:

No way to know.......when one does arrive you'll get no real prior warning anyway......although after the fact, there'll be the usual gaggle of "experts" in the press saying how they predicted it all along......

Where would the millions invested in the stock market go, if we knew there was a crash coming?

If we knew there was a crash coming there would be no millions invested in the stock market. The crash would already have happened. There is no escape from the Efficient Market Hypothesis. If there was one the Efficient Market Hypothesis would have already closed it off.

The market is never perfectly efficient, and I think less so than usual given current QE, a savings glut, and bubbly valuations across all asset classes - record low savings rates, bond yields, high equity valuations especially in the US, house price to household income ratios, rising inflation especially via commodity prices etc.
That said I haven't the foggiest what to do with that information.

Thrugelmir

Alexland said:

Thrugelmir said:

$300 billion of debts is no small sum.

From what I understand the $300bn is the total debt of which the majority is backed by assets? 

Evergrande has a market capitisation of just $3.84 bn. Not much realisable security it would appear. Be interesting to know if Evergrande is registered in the Cayman Islands, if so it has no direct ownership of assets on the Chinese mainland. That's the opaqueness of investing in Chinese companies.  Interest payment is due tomorrow on $84 billion of offshore bonds. 

Evergrande is just the tip of the iceberg. There's some 10 other more riskier developers with a combined liability of 2.7 times the size. 

As was found in the aftermath of the GFC tentacles connect the most unexpected of parties. 

sevenhills

A bit of a wobble today, the FTSE is down 1.7% and my Asia stock is down with the building up of tensions between China and Taiwan.

Fuel shortages, lack of workers, troubles with COVID in other countries. More QE needed?