The basics of stock market, forex, commodity and financial economy models
I am writing this article on the stock market, commodity, forex, financial economy, capital markets models as in Malaysia there seems to be a lack of knowledge of the basics of the technical behaviour of the stock market. Actually, one or two Unit Trusts in Malaysia, over the last two weeks, seem to be trying their level best to attack my research work and my theories. Lately, these companies have been publishing erroneous explanation of the stock markets and the financial economy in our local newspapers. What is worse is that they are teaching the public wrong knowledge or a falsehood and we will eventually see the impact of such learning later. Dr. Paul Krugman put it succinctly – Voodoo Economics. Just imagine that these are the very same people who laughed at the idea that the 'stock market could be predicted'. What they do not realise is that I used to be a trainee Unit Trust agent in one of these companies and I ran away from them for my dear life.
I have been ripped off many times and my work has been plagiarised a few times in Malaysia. I am used to being attacked for my work. In fact I was almost physically assaulted by some VIP's son or son-in-law while trying to explain my theories to them, at the request of a third party. I ran and escaped by taking the fire exit staircase. It does get tiresome when people attack you for no reason. I guess they have lost their credibility and need to attack someone else in order to make themselves look smarter but it’s a hollow type of smartness. Do they feel superior by destroying other people? They remind me of school bullies who pick on the innocent weaker guys. Why can’t they do something constructive with their lives? I have been among people, here in Malaysia, in Klang Valley, who in front of you say wonderful things but behind your back try everything possible treacherous scheme, tactic or plan just to destroy your work. They were trying to make you fail at all cost so that they can claim that your work is wrong or useless and you are a failure. They do this so that they can take over your position and work and then claim all your work is actually their work. Will you trust these people? They should read my article on Judgement and Judgement Day. Malaysia is actually becoming a very dangerous place to do research and development.
A long time ago, someone advised me “Don’t get mad, get even” and I have stayed with his advice ever since. I am getting even by adjusting my Financial Licence pricing – currently, it is at a very low price.
I suspect that the root of the problem lies in the education of people. Engineers, scientist, technologist operate on God’s Laws which are immutable and stable for an eternity. For example,
Acid + Base = Salt + Water
This law cannot be changed as this is the way God created the universe. Scientist, engineers and technologist are trained that way so they tend to be more honest and straight forward and easier to deal with. Whereas financial people are trained on man-made laws and as a result they look for loop holes and ways to bend the system. They begin with loop holes and move onto hype then, consciously or unconsciously, push the limits until hype becomes a scam. It gets to the point where getting the money and showing huge profits is more important than anything else. A financial guy can tell you that
Acid + Base = Gold + Water
Then he makes it sound so believable that everybody wants to buy Acid and Base to make their own Gold. That is a scam, isn’t it? Eventually, the whole world gets hyped and there is no true value to anything. This is happening in the stock market. Financial people were the original Alchemist and it’s all about Financial Alchemy 101.
What is the reality of the stock market, commodities, forex, the financial economy?
Let me show an approximation of the amount of money in the stock market, commodities, forex in the financial economy, which runs in the trillions.
There is about 5 to 12 times more money in the financial markets, the stock market, commodities and forex than in the Real Economy. The Real Economy accounts for only 20% of all trade. The rest is the stock market, commodities and forex in the financial markets. That means a lot of money is not put to any good real work. Worst still is that when the markets fall, a lot of wealth is lost. Didn't this occur in the 2008 financial crisis? In the Real Economy you will still have your house or land or plantation or office or factory … something solid to hold on to. In the stock market, commodities, forex of the Financial Economy you only have that piece of paper that promised you that you were going to be a multimillionaire. You trust your dreams and goals on a piece of paper?
Just imagine that, in the West, for every $100 in your pocket, you put $80 in the stock market and $20 into the Real Economy. No wonder China is growing. Please read my article, Temple of Doom about the stock market and the financial economy.
One of the simplest ways to channel these excess funds from the financial markets into the Real Economy is to introduce the ‘stock tax’ as proposed by the Americans. I think this is a brilliant idea and it would help Western economies overcome their deficit or debt problems as there is no true growth in the Financial Economy. This could be done as a temporary measure until debts are paid for. The Financial Economy is just a mirage.
The stock market, forex, commodities in the financial economy is a mirage of growth
Take a box of 10 oranges and try selling them to 10 people. Now try selling them to 100 people. Those who didn’t manage to buy the oranges will buy it at a higher price from those who had bought them. The price of oranges keeps climbing. They think they are making money but it is the same oranges going around. That is what happens in the stock markets, commodities, forex of the financial economy. We trust our pension funds to this? There is no real growth. As long as people are happy circulating the same oranges, or shares, at higher and higher prices everything is fine and there is a false sense of growth. It is just a mirage. Should someone suddenly decide that the oranges are spoilt (or company shares are not really that good) and shouts loudly about it then the price of oranges collapses. It is still the same ten oranges but the last few buyers lost a lot of money, holding dud shares … oranges. Didn’t this occur during the 2008 financial crisis? It is a zero sum game.
The amount won + the amount lost = zero …. over a period of time.
Where is the growth in the stock market, forex, commodities in the financial economy?
So how does it seem to be growing, this thing called the stock market or share market or financial economy? Well, those who are making money shout and dance over their winnings (media news) and attract more and more people to join in to buy the same oranges. Sounds like a news media driven Ponzi scheme? As more people enter the market the price of the same oranges climb but there is no real growth. Prices increase without growth. There are a lot of similarities to a Ponzi scheme where return on investments or growth comes from more people entering the market. Once the fund managers, find it difficult to attract more people into their funds they go overseas to get more people to buy the same oranges. It is when people wake up from this dreamy mirage that they leave the market, and then the markets dry up. The Financial Economy has become too big to fail.
The financial economy never sleeps
Didn’t Gordon Gekko say “Money never sleeps”? The world has moved from 8 hour trading to 24 hour trading. This is true for commodities and forex and I wonder if it will occur in the stock market. Human beings can’t keep awake for most of that time, let alone concentrate on the task at hand, so we have put computers in place of humans to do the trading. Unfortunately, computers don’t know if there is crop in the field or not, which means that the markets are not real markets anymore.
True growth in the stock market, commodities, forex in the financial economy
The only true growth in the financial markets is when companies pay out dividends to their shareholders. Just like you getting one free orange for every 5 oranges you own. Invest in the company and not in its shares.
Please don’t misunderstand me; we need capital markets for companies to raise funds. As for fund managers, once they realise that the stock market, commodities, forex in the financial economy is a zero sum game then they will understand that someone has to loose for them to make money. It is normally the guy who is listening to rumours that loses most. Those with advanced predictive models will be way ahead of the others and will end up making all the money – creaming the markets.
Growth and The Law of Pigs
For real growth to occur the business system must obey the Law of Pigs.
The Law of Pigs states that pigs are highly self-replicating to the point that the revenue generated from the sale of pigs is greater than the cost of maintaining the pigs.
Every year, a couple of pigs will produce about 20 piglets. After two years you will have more than 11 pairs * 20 piglets = 220 pigs. With a starting capital for two pigs, after two years, you can sell many pigs and generate revenue, and generate revenue for every year after that. That is real growth. A factory is a system for self-replicating products, a business is a system of self-replicating services to new customers but a fund manager only exchanges shares at a stock exchange. That is why the stock exchange was called an exchange and not a stock growth center or a stock farm.
I guess I too would invest in gold when they succeed in minting male and female gold coins.
- Dr. Peter Achutha, 16 September 2011