patrick.net

http://www.ourbroker.com/investing/do-we-need-a-dow-20/#axzz1PmSmtAUG

You canâ€™t adjust the S&P 500 for inflation because the companies that make up the list are changed so there is no consistency.
Peter at OurBroker.com

Why does that matter? It's the earnings of the top 500 companies at the time.

OurBroker 2011 Jun 19, 12:57pm

It matters because you're not counting the companies that fail, drip out of favor or are combined. It's like the Dow -- the results would be very different if we still counted Studebaker and Remington Typewriter.

With the Dow, as a recent example, Kraft replaced AIG.

MisdemeanorRebel 2011 Jun 19, 2:41pm

Not to mention the huge investment boost companies get (and lose) when they leave/enter the S&P500.

For example, every S&P500 Index Fund or ETF needs to rebalance, and many mutual funds and pension plans are limited to holding only S&P500 companies...

That means more Kraft brought and more AIG sold, which impacts the stock price.

tatupu70 2011 Jun 19, 9:15pm

It matters because youâ€™re not counting the companies that fail, drip out of favor or are combined. Itâ€™s like the Dow â€” the results would be very different if we still counted Studebaker and Remington Typewriter.
With the Dow, as a recent example, Kraft replaced AIG

But the companies get replaced AFTER they are no longer one of the top 500. Most of their losses take place while they are still in the index. (see AIG)

OurBroker 2011 Jun 19, 9:42pm

They get replaced by companies that have a different impact on the index. Imagine how much LOWER the Dow would be had AIG not been replaced with Kraft.

tatupu70 2011 Jun 19, 10:14pm

They get replaced by companies that have a different impact on the index. Imagine how much LOWER the Dow would be had AIG not been replaced with Kraft.
Peter at OurBroker.com

Of course. The point of the S&P is to track the current top 500 companies. Not the top 500 companies from 1965.

The Dow did take the brunt of AIG's pain. It went from ~1400 to 60 while still on the Dow. AIG was basically even with the price of its delisting in January 2011. It's trended downward since then.

So actually the DOW wouldn't be much lower.

OurBroker 2011 Jun 19, 10:47pm

>>>Of course. The point of the S&P is to track the current top 500 companies. Not the top 500 companies from 1965.

Thank you. Then you understand that you cannot compare the 1965 index with the 2011 index because they each reflect the results of different companies and get rid of the failures, the companies that have been absorbed and the companies that do no perform sufficiently well. Thus, the definition of "top companies" does not reflect the market, it reflects an engineered result.

tatupu70 2011 Jun 20, 12:01am

Thank you. Then you understand that you cannot compare the 1965 index with the 2011 index because they each reflect the results of different companies and get rid of the failures, the companies that have been absorbed and the companies that do no perform sufficiently well. Thus, the definition of â€œtop companiesâ€ does not reflect the market, it reflects an engineered result.

But you're still not getting it. The index DOES take into account failures. As I showed in the previous post. Pretty much ALL of AIG's decline was reflected in the DOW index. A company will never be removed from the index until AFTER it has tanked.

OurBroker 2011 Jun 20, 12:09am

>>>The index DOES take into account failures. As I showed in the previous post. Pretty much ALL of AIGâ€™s decline was reflected in the DOW index. A company will never be removed from the index until AFTER it has tanked.

If a company is removed the index cannot track it. It may be that the stock was removed before it hit bottom or before it rose in value. In any case, the index no longer reflects what happened to that stock.

Now, if you want to have an Index 1 and an Index 2 and understand that they are different because the companies involved are different then we can have consistent measures.

OurBroker 2011 Jun 20, 12:10am

No. The issue is not inflation. The issue is accuracy and the consistency of what is being measured.

30 edvard2 2011 Jun 20, 2:56am

That the S&P would recover dramatically isn't exactly unusual. During the 30's depression Wall Street had a similar recovery. Besides- if you're invested in the market and have some of your investments tied to blue chips then you too will benefit from their profits.

tatupu70 2011 Jun 20, 3:09am

No. The issue is not inflation. The issue is accuracy and the consistency of what is being measured.

The chart is consistently and accurately measuring the top 500 companies at the time.

I can't tell if you are arguing that there is a surviviorship bias or just arguing that it's not the same 500 companies. I'll agree with the latter, but not the former.

OurBroker 2011 Jun 20, 3:15am

The problem is this: Someone says look at how the S&P has changed since 2008 or whenever. However, the companies are different and the result is that the comparison is invalid. This is like measuring two bundles of apples. The bags may be the same size but the contents may be very different.

tatupu70 2011 Jun 20, 3:19am

Yes and no. The individual companies have changed, but taking the S&P 500 as representative of the top 500 companies, one can make valid comparisons. Are the top companies earning more now than 50 year ago, etc.

OurBroker 2011 Jun 20, 3:24am

I'm not sure that the top 500 companies are earning more now than 50 years ago. How do we value safer workplaces and better products?

tatupu70 2011 Jun 20, 4:12am

Iâ€™m not sure that the top 500 companies are earning more now than 50 years ago.

I'm not either. But I think it's an interesting comparison

How do we value safer workplaces and better products?

Please tell me you aren't arguing that workplaces were safer 50 years ago. That's not even funny.

OurBroker 2011 Jun 20, 6:00am

Nope. Not me. I think workplaces today are better -- when they're in the US and when our citizens are employed.

The fact that a company's profits increased because it sent jobs overseas does not impress me.

tatupu70 2011 Jun 20, 6:58am

Nope. Not me. I think workplaces today are better â€” when theyâ€™re in the US and when our citizens are employed.
The fact that a companyâ€™s profits increased because it sent jobs overseas does not impress me.
Peter at OurBroker.com

Ah--good points. Agreed.

uomo_senza_nome 2011 Jun 20, 8:24am

tatupu70 says

Is Monopoly a â€œrigged market capatalisticâ€ game or just a free market game?

No it is not. It is complete ignorance to think of free market capitalism as the game of monopoly because business is not conducted with roll of dice in real life. The consumer dictates the flow of capital towards the necessary goods to generate profit.

There is no consumer choice and no consumer sovereignty. This is not a small detail. The entire raison dâ€™etre of the market is missing, and thus the real goal and the guide of all production in a market economy.

Consumer choice is replaced by a roll of the dice. The player then becomes passive. Landing on property owned by another person creates not a mutual gain but a loss. In this way, trade is portrayed as "zero-sum." The elimination of consumer choice leads to the belief that businesses profit only at the consumersâ€™ expense.

In the real world, when consumers choose to purchase items from businesses, there are always expected gains from trade. Two people voluntarily act in their own best interest and take advantage of their differences in subjective valuation. A reverse inequality of values is what gives rise to trade in the first place. When a person exchanges something, he values what he gets more than what he gives up. The other party to the exchange values what he gets more than what he gives up. Both parties are better off than before the trade. Business transactions between sellers and buyers are positive-sum transactions in the real world because both parties enter the agreement voluntarily.

In Monopoly, a roll of the dice forces exchanges between producers and others. However, business-to- business transactions are left to free negotiation. Players are allowed to offer property for trade or cash to other players on mutually agreeable terms. Even in these transactions, regulation raises its ugly head when there are buildings on the property. Players are forced to demolish buildings before making any property exchanges.

The pervasiveness of monopolies in the game does not represent the situation in the real world. Every piece of property on the game board is essentially a monopoly; once the dice roll determines where a player lands, there is only one seller whom the consumer must purchase from. The monopolies are easily obtained by purchasing land from the bank or another player.

In the real world, however, consumers are rarely compelled to purchase goods from a sellerâ€”or if one seller exists it is because it has out-competed others over time. Even with one seller, consumers can always switch to substitutes or abstain from purchasing completely. That is not the case in Monopoly. Again, this is not a small matter. The game is wrong on the central point of economic decision making: who is in control of what is produced and how?

Full article at: http://mises.org/freemarket_detail.aspx?control=498

MisdemeanorRebel 2011 Jun 20, 8:41am

Can't free markets lead to rigged markets, if those who concentrated wealth in the free market era use it to usher in a rigged market environment?

Especially in a country where the courts have decided that money=political speech ?

Is Efficiency the ONLY goal we should be pursuing as a nation?

uomo_senza_nome 2011 Jun 20, 8:47am

thunderlips11 says

Canâ€™t free markets lead to rigged markets, if those who concentrated wealth in the free market era use it to usher in a rigged market environment?

Excellent Question. I think the answer is: yes it can, if the political leaders are corrupt. In a corrupt-free society, I see free markets flourishing much better than centrally planned, socialistic markets.

thunderlips11 says

Is Efficiency the ONLY goal we should be pursuing as a nation?

I think by letting efficiency work out the right way, it would be beneficial for the overall society. Take for example, the corn subsidies by the Federal Government for ethanol. It makes no economic sense from an EROEI (Energy Return on Energy Invested) perspective, so in a free market that's not meddled by the Government through favoring one solution, this corn for ethanol would have been rejected right away, the most economic solution has a higher likelihood of getting found.

leo707 2011 Jun 20, 8:52am

@austrian_man

Kind of funny, but in reading this thread you remind me of some conversations that I have had with anarchists.

So full of hope that your system will lead to a utopia of human well being, but so blind to human nature (or I should say the nature of some humans) in an unregulated environment.

Granted I think that the "free market" of which you speak is more grounded in reality than the utopia of the anarchist, and has more value to offer humanity, it still is horribly unworkable in a "pure" form.

This thinking is the basic problem:
austrian_man says

In the real world, however, consumers are rarely compelled to purchase goods from a sellerâ€”or if one seller exists it is because it has out-competed others over time. Even with one seller, consumers can always switch to substitutes or abstain from purchasing completely.

Even in our very flawed free market of today consumers are compelled all the time to buy the goods and services of virtual monopolies. Unless of course one is willing to live totally off the grid, but is that really a choice?

leo707 2011 Jun 20, 8:58am

thunderlips11 says

Canâ€™t free markets lead to rigged markets, if those who concentrated wealth in the free market era use it to usher in a rigged market environment?

Excellent Question. I think the answer is: yes it can, if the political leaders are corrupt-free. In a corrupt-free society, I see free markets flourishing much better than centrally planned, socialistic markets.

Of course it can, but this is exactly the problem with an anarchist system as well.

There is no such thing as a corrupt-free society, and it is unlikely that there ever will be

Communism would also have worked very well if it took place in a corrupt-free environment. That is why it works so much better on a very small scale.

You have to plan for corruption, and a free market does not do that.

uomo_senza_nome 2011 Jun 20, 8:59am

There is no such thing as a corrupt-free society, and it is unlikely that there ever will be

I don't think that's true. There are countries such as New Zealand, Sweden that have very high ranking on corrupt-free governance.

leo707 2011 Jun 20, 9:01am

One crucial point: The enterprise in monopoly is guided by chance, not by intelligent forecasting of an entrepreneur with consumerâ€™s needs in mind.

Real economies have to deal with luck and chance. Systems are too complex for any "intelligent" forecasting to be perfect. This randomness is represented by dice in the game.

While I agree that it is not a perfect comparison, the outcome of the game and a totally free market is the same.

leo707 2011 Jun 20, 9:03am

leoj707 says

There is no such thing as a corrupt-free society, and it is unlikely that there ever will be

I donâ€™t think thatâ€™s true. There are countries such as New Zealand, Sweden that have very high ranking on corrupt-free governance.

Yes, but "very high" is not corrupt-free, and... they are "socialists" with systems in place to try and control corruption.

The problem is that with a totally free market corruption is encouraged. If both those countries went free market I would be willing to bet you would see the numbers change.

uomo_senza_nome 2011 Jun 20, 9:12am

Real economies have to deal with luck and chance. Systems are too complex for any â€œintelligentâ€ forecasting to be perfect. This randomness is represented by dice in the game.

I don't think it is entirely random and that's the point. You are waging a bet, but with some intelligent thought behind getting it back with some profits. In a global economy that is as complex as it is today, I agree there's more to this "chance factor". But on a smaller scale, the factor reduces and it is a crucial difference.

uomo_senza_nome 2011 Jun 20, 9:17am

Yes, but â€œvery highâ€ is not corrupt-free, andâ€¦ they are â€œsocialistsâ€ with systems in place to try and control corruption.

You can never have a perfect, corrupt-free society purely because you cannot expect all the humans within the society to be morally on the highest plane of thinking at the same time. Yes I do agree that the examples quoted are socialistic economies and are centrally planned. But that is not to say it is the most practical and efficient way to run a stable system.

The problem is that with a totally free market corruption is encouraged.

I do recognize this problem and this is where I think a sound monetary system will help. It will remove Government printing money at will, encourage savings/capital accumulation -- which would then be put to use in a careful way.

If both those countries went free market I would be willing to bet you would see the numbers change.

Deregulation + fiat currency = economic night mare.. US is the living, breathing example for this.

leo707 2011 Jun 20, 9:19am

I donâ€™t think it is entirely random and thatâ€™s the point. You are waging a bet, but with some intelligent thought behind getting it back with some profits.

Yeah, true. The game Monopoly has almost no strategy to it, 99% luck, but the end result is the same.

leo707 2011 Jun 20, 9:27am

Yes I do agree that the examples quoted are socialistic economies and are centrally planned. But that is not to say it is the most practical and efficient way to run a stable system.

Yeah, there may be better ways of running a system, but we can learn a lot from systems that currently are working. Personally I think that workable solutions are more hybrids of economic philosophies rather than "pure" systems.

I do recognize this problem and this is where I think a sound monetary system will help. It will remove Government printing money at will, encourage savings/capital accumulation â€” which would then be put to use in a careful way.

In an unregulated "free" system where cheating has huge rewards cheating will be rampant, regardless of what monetary system is used. Corruption existed long before fiat currencies.

Deregulation + fiat currency = economic night mare.. US is the living, breathing example for this.

Yeah, I don't think that we are a total nightmare yet...

But, we are well down that road a this point.

uomo_senza_nome 2011 Jun 20, 10:32am

Yeah, there may be better ways of running a system, but we can learn a lot from systems that currently are working. Personally I think that workable solutions are more hybrids of economic philosophies rather than â€œpureâ€ systems.

Sure, I'm in complete agreement.

n an unregulated â€œfreeâ€ system where cheating has huge rewards cheating will be rampant, regardless of what monetary system is used. Corruption existed long before fiat currencies.

How can cheating have huge rewards in a sound monetary system? Every investor or consumer would not throw his money into the market (as it is practiced today). If there was someone cheating, they will be weeded out since reputation plays a big role in the free market. There is actually a financial incentive (more people will trust doing business with the said person) to show moral character.

No system is perfect, you can always have people who cheat in any system. So I'm not here claiming free market with sound money is panacea for all. At the end of the day, moral character of the people determines the level of corruption in any society.

Corruption existed long before fiat currencies.

I am not saying gold standard solves the problem of corruption. It certainly does not let a market such as the derivatives market of today run amock to a half-a quadrillion dollar notional amount. Irrational exuberance, ridiculous risk taking will be curtailed in a gold standard.

MoneySheep 2011 Jun 20, 12:00pm

If you look at the system from peasants' point of view, it is rigged. But that is the wrong point of view.

The system was created as the playing field of the elite by the elite. The results apparently look puzzling when the market goes up when the "economic fundamental" goes down. This is because the "economic fundamental" are looking at the peasants.

So if you want to win using moral hazard, be on the side of the elite.

leo707 2011 Jun 21, 3:22am

How can cheating have huge rewards in a sound monetary system? Every investor or consumer would not throw his money into the market (as it is practiced today).

I am not exactly sure what your point is here; if my response is off base I apologize.

Cheating = Corruption, even if we were to assume that the monetary system was perfect, and beyond manipulations, there are may ways to "cheat", independent of the currency system, in a totally free market system.

If there was someone cheating, they will be weeded out since reputation plays a big role in the free market.

Yes, if they get caught. In any system reputation plays a big role.

The problem with a totally free market is that regulation is so weak that back room deals are easy to hide from prying eyes, and it can take years to catch and discredit someone. At that point they have already made their millions/billions.

At the end of the day, moral character of the people determines the level of corruption in any society.

Are the people in New Zealand and Sweden of a higher moral character than most other countries?

I don't think so. I think that the system in which people are "playing" has a big effect on their behavior.

When a system is set up to facilitate/allow corruption many people, who otherwise would not, will become "corrupt" because that becomes the "norm" and if they don't they risk falling behind. There are many psychology/sociology studies that I believe display this kind of behavior.

I think that it is up to "moral" people in a society to demand a system that reduces corruption.

uomo_senza_nome 2011 Jun 21, 3:37am

even if we were to assume that the monetary system was perfect, and beyond manipulations, there are may ways to â€œcheatâ€, independent of the currency system, in a totally free market system.

You said cheating has huge rewards in a free market. I am saying that in a free market with sound money, cheating has relatively much lesser rewards as opposed to cheating in a manipulated market with unsound money (money that can be printed at will).

In any system reputation plays a big role.

Reputation plays a useless role in an unsound monetary system, because the true meaning of money is lost when it can be printed at will. People start to believe that they can create something out of nothing. very dangerous, adds more risk to the system. Risk-taking is rewarded with handsome profits, which makes it a positive feedback loop of more risk taking...and in the end, the system breaks down...as it did in 2008.

The problem with a totally free market is that regulation is so weak that back room deals are easy to hide from prying eyes, and it can take years to catch and discredit someone. At that point they have already made their millions/billions.

I agree regulation and vigilance is needed regardless of the type of monetary system, but the rules of the game are much simpler in a sound monetary system..i think.