Its been a fantastically long time since I last updated anything, but that is not for lack of things to write as much as because of lack of time and effort to put thoughts onto computer!
Well, no Management/Economics type blog can ignore the current economic Superhit show that is playing on all Business News Channels today, and mine is no exception. People are blaming the current mess on US Housing Market bubbles or irresponsible lending or greedy managers, but is that the REAL reason for boom and bust?
I am sure these are reasons for the current mess, but why not try to see if there is a deeper underlying principle here? And this morning, I finally think I have found one.
First the Assumptions:
1. People Consume all they produce
2. Productivity is something that is consistent and measurable.
3. Inflation does not exist (I know…silly one that, but will relax it later)
The Logic
Economic Growth is something that makes peoples lives better. Quantitively, economic growth means that people have more ability to purchase goods and services. This is easiest measured by money. If you have more money in your pocket, you are doing better than you were. The same is true for countries as it is for people. The more “Money” a country has at its disposal, the better it is doing.
So, how does the money that a country have increase? Well, its simple really if you think about it. There are 3 basic ways.
First of course, is if the people in the country work more. Lets say they all had 5 day weeks. Now they suddenly decide to work 6 days a week. Suddenly they would therefore produce more goods and thus would have more “money” (assuming all the increased goods are sold at the same price)
Second is if more people were to start working. This is 2 components. First, all those new young people joining the working population. Second would be if the retirement age of the country went up, thereby increasing the workforse. (This is assuming that all those who reach working age get a job…not all that easy!)
Third is if those who are working suddenly become more productive. Thus if a worker were given a new thingummijig that could increase his production rate, then more goods would be produced in less time with the same amount of workers, increasing the workers wealth. (Of Course, assuming that all that increased production is sold for a good price.
So this is my economic theory. ” The maximum long term growth rate of any country’s economy is the product of the growth in working population, productivity and hours of work.”
This seems very simple indeed. And the Boom and Bust that we see in today’s stock exchanges seems to me to be comeuppance for the rise that the Indian markets saw post 2001.
If the stock exchange rises by 50% while the constituents of the exchange grow by 20%, then the assumption is that the stock exchange has priced in an increase in one of the three parameters that I had laid down. But how much can productivity and workforce increase so that you can maintain the increasingly dizzying valuations that were used for companies?
So, now the Indian market begins to make sense. It may look irrational, but that is only because we lack the timeframe needed to judge things. Ideally, the stock market should have stagnated until its companies reached the size that justified their valuation. However, like a governer hunting for the position of stable equilibrium, the market had overshot the fair valuation and bumped the value too high. Now, in trying to find the fair value, the market has actually beaten down (certain) companies to values that are well below their actual capabilities.
Of course, the problem with spikes and troughs is that they tend to make the fundamental premise of economics fail, which is one where we believe that the market has rational decision makers. Todays markets are ruled by fear, and have little of the rational among them.
So what started out as reason is now culminating in panic. And I am now finally buying stocks…after 2 years of looking at the markets as a mere speculative gambling table, it looks like there are quite a few valuable gems lying there getting ready to be picked up. So like Warren Buffet says (or should have said)… a panic selloff is the time for the rational investor to buy.
