Friday, August 19, 2016

"Q: How much is my house worth? A: Whatever the highest bidder is willing to pay for it." and the past few Economic Links

"...prices are set "at the margin". ...prices are set by the person (or people) willing to pay the most.

This person willing to pay top dollar is called the "marginal buyer". '

The amount that a consumer is willing to pay 
minus the amount that is actually paid 
results in a consumer surplus for the consumer. 

Consumer Surplus = Willingness to Pay Price – Actual Price. 

Some people are marginal buyers, 
whose willingness to pay is equal to the market price.

...the marginal buyer not only determines price levels, but also their stability and degree of volatility.

There has to be enough marginal buyers buying
for our economy to function

Imagine what could happen if Sears stopped selling Buggy Whips

The behavior of the marginal buyer, as well as the degree of competition for his/her "top dog" spot, sets the prices of nearly every asset class held by today's investors [and debtors and financial systems].

The less competition for the opportunity to own an item, 
the lower the price should go, unless you have a monopoly underwritten by a printing press
like the healthcare and education and military industrial complex

Imagine for a moment an auction room, filled with people holding their bidding paddles.

Like the stock market

A rare Picasso painting is brought to the block. Paddles all around the room compete furiously as the auction starts; but as the bid price rises higher and higher, fewer and fewer paddles participate in the bidding.

Pretty soon, it's down to just two bidders dueling back and forth with one another. Then, after a stunningly high bid of $106.5 million dollars, no more paddles are raised.

The marginal buyer has been found. 

The marginal buyer on a macroeconomic scale
is the number of people who are willing to pay the top price asked for an item
which bears the 'maximum' profit for the seller for the longest time

No one is willing to outbid his price. (...this is exactly what happened back in 2010 when Picasso's Nude, Green Leaves and Bust came up for sale.)

This example contains several important elements for price-setting.

First: the marginal buyer's last bid is what ends up setting the final price.

And second: the intensity of competition determines how high the marginal buyer's bid will go (if no one else was willing to offer more than say, $10 million, it's unrealistic to expect that the marginal buyer would have still put in a bid as astronomically high as $106.5 million).

That's what happened when oil went down

Now imagine what would have happened if our marginal buyer above hadn't shown up the auction. Maybe he got stuck in traffic, or decided he'd rather own a tropical island instead of a wall hanging.

How much would the painting have sold for then?

It would have sold at a price lower than the losing bidder's last offer. Without our hero in the room, the losing bidder would have become the new marginal buyer. And without the threat from a competitor with deeper pockets, it's quite likely our new marginal buyer would have been able to secure the painting at a substantially lower price.

...The takeaway from the above is that prices are set by two things: the upper limit that the marginal buyer is willing to pay, and how intensely the competition from other buyers pushes him towards that limit.

This is just as true for stocks and housing as it is for fine art [and durable goods sales and staples sales].

...we're now seeing some concerning signs that the marginal buyers, as well as their competitors, are beginning to go on strike across those asset classes.

...the marginal buyer is increasingly looking like that role is being filled today by the central banks instead of from a wide pool of institutional and retail purchasers (...the Bank of Japan now owns over 60% of its nation's ETF market).

...having prices set by a central bank is a huge threat to price stability.

Why? Because no one else can compete with an entity able to print an infinite amount of thin-air money at will.

Most of the World's financial markets are presently somewhat rigged

...We live with a market dependent on a marginal buyer

...the sudden disappearance of the marginal buyer can set off a vicious downwards chain reaction, as it exposes how far prices must fall to become affordable to the next marginal buyer.

That's how bubbles pop

And, of course, in a correcting market, few want to attempt to catch a falling knife -- so the potential population of marginal buyers shrinks as they sit on the sidelines waiting for the carnage to abate.

While most go down with the ship

...the marginal buyer can evaporate faster than you think.

As an investor in a market this full of over-inflated asset bubbles, the prudent move is to hedge. "Hedging" is the practice of allocating a minority percentage of your investments to safer or inversely-correlated holdings relative to the majority of what [you own]."

Textbooks, Tuition, Child and Health Care is Theft

The Healthcare Industry is a legal racket

Icahn on financial markets

All is well

Freight back at 2010

There aren't enough younger people to pay for all the medical and retirement benefits for longer living older folks

Ron Paul on last week's garbage jobs report a few months before November's election

Financial markets are at all time highs as the economy craters according to private measures, but not the government's

Normal Oil Production Peaked around 2005...

Longest Factory Order decline and highest Debt-To-EBITDA Ratios ever, which the News and Record and most of mainstream media won't tell you about

Oil, Oil stocks and pretend money

'Sell everything,' DoubleLine's Gundlach says

Blow off Top? Until...

Fuck Barry Ritholtz; "Let's Put the Lehman Bailout Debate to Rest"

Rising parasitic drug prices are masking the economic slowdown


Central Banks control financial markets

North Carolina's new real estate bubble

"Helicopter money" = Default

IEA July 13, 2016: "Gasoline Glut Could Cause Oil Price Rout"

What direction does oil look like it's going?

There's too much gasoline which eventually equals lower oil prices, worse/better than last year

Economic Policy Uncertainty = The World's Population is Waking Up to Different Truths

The US Bureau of Labor Statistics Net Business Birth/Death Model appears to be garbage/rigged/manipulated/politicized propaganda

"Factory Orders Collapse To Longest Streak In US History