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  Stock Market and the Principle of Price Decision 2017-05-23 10:55:34  
  작성자: 최용식  (221.♡.102.211)조회 : 894      

Stock Market and the Principle of Price Decision

While the mainstream economics has founded on the preconditions of perfect competition and general equilibrium, the stock market meets these preconditions most closely. In particular, informations of the market are released more often and their acquisitions are also easier and faster than any other market. The transactions of the market need less time and cost than any other market. In addition, buyers and sellers of the market are so numerous that can not be compared to any other market. So economists should be likely to succeed in investment in the market because they would understand the price theory better than anyone else.

However, historical facts have turned out to be the opposite. Only a handful of economists such as David Ricardo, John M. Keynes and Paul A. Samuelson are known well to have succeeded in investing in the market. Ricardo was originally a security broker, so it is hard to say that he succeeded as an economist. Keynes had gone through three major failures to lose almost all of his property and Samuelson had leaved early the market after success. There are thousands of economists who have doctorates in Korea, but it is hard to find anyone who have made big money from the investment in the market. It is rather true that most economists who invested in the market suffered losses. How can any economist who loses money open his mouth? The bankruptcy of the LTCM which was participated by two winners of the Nobel Prize in economics is comic.

What is the reason that economists who have studied the price theory for years do not succeed in investing in the market? Is the principle that price rises when demand increases more than supply and price falls when supply becomes more than demand wrong? No, it is a truth immutable eternally. Why do not economists have succeeded in investing in stocks? The reason is simple. Economists do not have investigated when demand becomes bigger than supply and when supply becomes bigger than demand. Why do not they have picked the reason up? It is not yet known that income determines demand and supply. It is the view of Choe's economics that economists could succeed in investing in stocks if they know this fact and if they keep track of when demand is getting bigger than supply. So when does demand increase more than supply? There is a point that needs to be clarified before examining this problem.

Most economists or economic experts in Korea answer that the stock market leads the economy, if it is asked which is ahead of them. There are few exceptions to the economic experts who have experienced abundantly in the stock market. The economic leading indicator released by the National Statistics Office also includes the stock index. Even policy makers consider the stock index to be ahead of the economic cycle. So does the stock market really lead the economy? No, it does not. It was a correct answer until the 1980s. Economic experts in korea have become insensitive to the international trend of economics.

What would be the answer if anyone asked it to a leading investor in the developed world? He would surely look at the questioner as a stranger. Indeed, the stock market is fluctuating every time when any economic indicator related to economic trend is announced in the USA and Europe. It is common knowledge that the economy prevails the stock market in such countries. Why do the economic experts in Korea misunderstand that the stock market is leading the economy? It is because they neglect the fact that the indicators to judge economic activity have developed remarkably. Let's look briefly at the development history of indicators that judge the economic activity at this opportunity.

The basic indicator that shows the economic activity is growth rate. The economy is brisk if the growth rate is high and the economy is sluggish if the growth rate is low. And the growth rate means the increasing rate of the national account. This national account has been developed over the years. At first, Gross National Income(GNI) was the central concept in judging the game. However, it turned out gradually that GNI was insufficient to read accurately the flow of the economy. In particular, the growth rate of GNI was far from the unemployment rate. So the Gross National Product(GNP) was emerged from the 1960s. The viewpoint of production in the national account, rather than the viewpoint of income, is suitable for us to read the overall business flow as well as unemployment flow more accurately than before.

This GNP is collected both domestically and abroad if it is produced by the native people. However it was gradually revealed that GNP had also limit to read accurately the economic flow. At last Gross Domestic Product(GDP) has emerged from the 1980s. It is a new finding that the added values produced domestically have direct effects on the economy, regardless whether it is produced by foreigners or natives. The reason is that domestic production works the front-to-back chain effect, such as increasing purchases of raw materials and equipments as well as activating services such as transportation and storage. So most countries have compiled national accounts based on GDP since the 1990s.

Additional efforts have been made to read the economic flow more accurately since then. At first, the growth rate of GDP over the same period of the previous year was taken as the main indicator of the economy. This is the year-on-year(yoy) growth rate, which shows how much GDP has increased compared to the same period last year. This was relatively accurate in judging whether the economy was brisk or sluggish. However, a different indicator is needed in order to know where the economy will go in the future. In other words, a new indicator is needed to show whether the economy is rising or falling. That is why the main indicator is changed to the current growth rate compared to the previous period from the growth rate over the same period of the previous year since the 1990s. It is a new recognition that the direction of the economy can be gauged on grasping how much GDP of the current quarter has increased compared to the previous quarter. If we judge based on the current growth rate compared to the previous period, we can detect relatively accurate whether the economy rises or falls and comprehend which direction the economy goes.

It is easy for us to understand that the economy is leading the stock market if we check the economy based on the current growth rate compared to the previous period. In fact, foreign investors made remarkable profits by investing in the Korean stock market based on this judgment. Korea has allowed foreign investors to invest in stocks since 1991. From then foreign investors made net investment of 34.6 billion dollars by 2012, earning 363.4 billion dollars, a 10.5-fold increase. In particular, the return on investment by 2009 was remarkable. The total amount of domestic stocks of foreigners reached 236 billion dollars while the amount invested up to then was 87.4 billion dollars, the recovered amount was 86.3 billion dollars and net investment was 1.1 billion dollars. The profit is more than 200 times than net investment. Most of the profit was scored during the years since 2000. After that, the profit was somewhat lower, but they earned 127.4 billion dollars while the net investment was 33.5 billion dollars for the three years from 2010 to 2012. They earned about 3.8 times of investment amount.

Foreigners’ Investment and Possession in Korean Stock Market(Billion dollars)

Year

91-01

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Invst

39.6

-1.6

12.6

9.5

-1.4

-13.3

-28.9

-41.1

25.7

18.7

-0.7

15.5

poss

70.0

75.7

116.8

156.4

249.5

276.4

320.1

124.7

236.0

317.3

284.3

363.4

Source; Monthly Statistical Bulletin June 2013년, The Bank of Korea

How did foreign investors make such a huge profit? In short, they used to buy stocks when the current growth rate compared to the previous period increased. There is few exception in general, but special cases also happen. On the other hand, domestic investors used to buy stocks after the economy picked up which means that they used to buy after the stock market showed an upward trend. Foreign investors have bought stocks at relatively low prices and domestic investors have bought stocks only after the price goes up high. Most of domestic investors in the stock market have seen big losses. Korean people have been forced to hand over their accumulated wealth to the foreign investors.

Can the domestic investors as you make big profits if you buy stocks when the growth rate rises? Of course you can. However, you should be able to capture the business flow more quickly and more accurately than other investors, needless to say that it is also important to choose good stocks. That way you would buy stocks at cheap price, and you could make big profit by selling at high price. So how can you catch the business flow more accurately and faster than others? This is not going to happen overnight. It is necessary for anyone to study various economic indicators closely and steadily for a long time. The more accumulation of such efforts, the more accurate and early the business flow will be able to be read. The problem of how to diagnose and predict it is covered in the last part of this book, so you may want to refer to that training.

By the way, why is the stock market strong when the economy rises and weak when the economy is down? The reason is that the demand for buying stocks is basically due to the saving of income and savings are increased much when the economy rises. In fact, income increases faster than consumption when the economy rises and the demand for stocks increases in this case as savings grow fast. For reference, one of the most important principle of mainstream economics on the variation of savings is the life cycle theorem. In other words, you save more for your old age when you are young and you save less when you go to old age. However, this theorem was easily denied even by the reality of inheriting rather than consuming all assets before death. Charles Kindleberger, an eminent economist, argues that the theorem of life cycle applies well to the national economy as young countries save more and old countries save less, but it is easily denied as we will see later in the ‘Theory of System’. Therefore, it is correct to see that savings increase more rapidly when income increases more rapidly.

The stock market is affected not only by income fluctuation but also by the financial market. When liquidity becomes abundant, the stock market is affected by the influence of liquidity and the market usually shows an upward trend. And liquidity becomes rich when the economy rises. The stock price naturally rises as the liquidity becomes abundant when the economy rises. In the opposite case, liquidity declines and stock price falls accordingly when the economy declines. In short, the stock market is affected by money and income. This problem will be discussed in detail later in the "Monetary Financing Theory".

What does it mean? It means that the principle of price decision dominates the stock market. And it means that the principle of price decision is operated in the interaction of income, money and price. This principle of price decision dominates the prices of all goods, not just the prices of the stocks. The stock market shows the easiest way how important the principle is. In conclusion, the principle of price decision plays a decisive role in all price phenomena. This price decided by the principle of price decision fluctuates in the interaction of supply and demand and is also affected by the chaos phenomenon. However, the price fluctuation principle which is worked by the interaction of demand and supply does not go over the price range determined by the principle of price decision, and the price change happened by the chaos principle does not go over the price fluctuation which is determined by the price fluctuation principle. The principle of price decision is therefore very important in economics. The level and flow of any price in any market are not able to be read accurately without the principle of price decision.


  프루동 (218.♡.77.117) 17-05-25 08:43  
안녕하세요 ! 같은 국가경제 내에서 회사와 회사간의 주식 가격 차이 그리고 동일한 종류의 제품의 가격 차이 등등 그러한 가격 차이를 만들어 내는 것은 무엇인가요 ?

 그리고 price determination 이라고 하시지 않고 price decision이라고 하시는 이유는 price가 누군가의 어떤 의사 결정 프로세스에 의해 만들어 진다고 생각하시기 때문이신가요 ? 

  최용식 (58.♡.97.84) 17-05-25 22:06  
프루동님, 반갑습니다.

주식 가격도 일반 재화와 똑 같은 경제원리의 지배를 받습니다. 각 재화의 교환비율은 물론이고 특정 재화의 가격은 소득, 통화, 물가의 상호작용 속에 결정됩니다. 소득이 증가함에 따라 특정 재화의 수요와 공급은 얼마나 증가하거나 감소하는가, 통화가 변동함에 따라 특정 재화의 수요와 공급은 또 어떻게 변동하는가, 물가가 변동함에 따라 각 재화의 수요와 공급은 어떻게 변동하는가 등이 재화의 교환비율과 특정 재화의 가격을 결정하는 것이지요. 노파심에서 한말씀 드리자면, 노동은 가격에 지대한 영향을 끼치는 수요와 공급과 분배 중에서 공급 즉, 생산에서만 중요한 역활을 하지요. 노동의 관점에서 가격에 접근하면, 다른 경제문제도 마찬가지지만, 경제현상 중에서 일부분만 보게하는 결과를 빚습니다.

Decision이라는 단어를 사용하는 것은 특별한 의미가 없습니다. 굳이 그 의의를 찾자면, 가격의 주도적인 역할을 강조하기 위해서입니다. 가격이론에서는 가격이 주체적인 역할을 한다는 것이지요. 

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