Fruits and Vegetables Versus Assets in Demand
There is a way in which fruits and vegetables and financial products are opposites: when quantities are high for fruits and vegetables, quality is high, and prices are low. With financial products, when issuance is high, quality is low, and pricing is expensive, leading to poor future returns from lower yields, and higher future defaults. I offer this for what it is worth, but is there something more to it, than the seeming oppositeness? Why are they opposites?
June 9th, 200910:43 am at
When produce is in season, both the quality and quantity is high due to favorable growing conditions.
When financial products are “in season,” the quantity is high because of good liquidity but the quality is low because good liquidity doesn’t improve the availability of good investments, so marginal and even fraudulent opportunities get funded.
In the first case, both quality and quantity depend on the producer, and the consumer has more or less constant demand. In the second, the producer (borrower) has a more or less constant array of products (investment opportunities) available but the amount of money available for investment is highly variable.
June 9th, 200911:20 am at
Because high issuance and shifts in the demand curve go hand-in-hand, whether you want to call it central bank incompetence, animal spirits, reflexivity, or whatever. Now will you please leave me alone so I can eat my apple?
June 9th, 200912:05 pm at
Because one is a real product in a real market and the other is a fraudulent product in a fabricated market.
June 9th, 200912:25 pm at
George Cooper discusses this at length in his fantastic book: The Origin of Financial Crises.
Specifically he notes that:
“Frequently in asset markets demand does not stimulate supply, rather a lack of supply stimulates demand. Equally price rises can signal a lack of supply thereby generating additional demand, or, conversely, price falls can signal a glut of supply triggering reduced demand.”
More to the point, perhaps:
“The critical difference between markets for goods and those for assets is how the markets respond to shifting prices, or equivalently shifting demand. In the goods market higher (lower) prices trigger lower (higher) demand; in the asset market higher (lower) prices trigger higher (lower) demand. One market is a stable equilibrium-seeking system and the other habitually prone to boom-bust cycles, with no equilibrium state.”
Marking assets to market creates additional collateral that can be used to back credit expansion. This credit is often used to buy still more assets, driving up prices and creating even more collateral. We have an inflationary spiral for asset prices…a bubble. In reverse you have debt deflation.
This has devastating implications for efficient market theory and, consequently, for central banking policy that rejects the notion that asset bubbles exist….
June 9th, 20096:17 pm at
is there a thing called an ‘orange bubble’?
June 10th, 20098:57 am at
This is a good question–related to the issue of why people want to sell stocks when prices are lower and buy them when prices are higher. I think it relates to the fact that financial instruments are not bought to be consumed, and they are not viewed as being perishable. No one would say, “I’m buying these carrots today because the price will be higher tomorrow and I will sell them back to the grocery store.”
When we force asset prices into the paradigm of goods prices all sorts of anomalies will pop up. How we deal with them will determine our outlook.
June 10th, 200912:00 pm at
Maybe to piece together what others have been saying, one is an organic process, whereas the other is not. When an asset is in demand, and the price is well in excess of the cost of creating it (be it high multiples paid to book, or whatever), capital floods to the area to earn quick returns… but with less than rigorous quality control.
What does this say about Central American countries? All my winter produce seems to be from Mexico or Guatamala…
June 10th, 200912:36 pm at
Financial assets may be of low quality but they do not “spoil” in the sense that the passge of time leads to physical deterioration.
The costs of storing financial assets are virtually zero.
That means that value-oriented investors will buy up under-priced financial assets with the intention of selling them for more in the future.
Fruits and vegetables cannot be stored for long and even what storage is possible is also costly.
So, we don’t often see people buying them in the hope of selling them for more 6 or 12 months hence.
Industrial commodities (e.g. crude oil) and some grains are in an intermediate category.
Fruits and vegetables are not storable so their prices