What Is Real Wealth
By Melvin J. Howard
With the stock market on drugs you have to wonder is
money and stock real why do we feel that if the stock market is in the dumps we
feel that we lost all of our money? “Trillions in stock market value - gone.
Trillions in retirement savings - gone. A huge chunk of the money you paid for
your house, the money you're saving for college, the money your boss needs to
make payroll - gone, gone, gone.
"Whether you're a stock broker or Joe Six-pack,
if you have a 401(k), a mutual fund or a college savings plan, tumbling stock
markets and sagging home prices mean you've lost a whole lot of the money that
was right there on your account statements just a few months ago. You might be
disappointed to learn that is was never really money in the first place.
"Robert Shiller, an economist at Yale, puts it
bluntly: The notion that you lose a pile of money whenever the stock market
tanks is a 'fallacy.' He says the price of a stock has never been the same
thing as money - it's simply the 'best guess' of what the stock is worth.
'It's in people's minds,' Shiller explains.
'We're just recording a measure of what people think the stock market is worth.
What the people who are willing to trade today - who are very, very few people
- are actually trading at. So we're just extrapolating that and thinking, well,
maybe that's what everyone thinks it's worth.'
"Shiller uses the example of an appraiser who
values a house at $350,000, a week after saying it was worth $400,000. 'In a
sense, $50,000 just disappeared when he said that,' he said. 'But it's all in
the mind.'"
Psychology of the Wealthy investor
No doubt you've noticed that different wealthy people
respond very differently to particular situations. One might respond to a sharp
market dip by wanting to discuss its causes and ramifications with you at
length, for example, while another would prefer that you not talk about it at
all. There are distinct personalities that all affluent investors tend to fall
into. But it’s all in the mind of the individual investor it is psychology or
what I like to refer to as Quantum reality they break down as follows:
Family Stewards
Caring for family is dominant focus conservative in
personal and professional life. Not very knowledgeable about investing
Investment Phobics
Confused and frustrated by the responsibility of
wealth dislike investing and avoid technical discussion of it choose advisers
based on level of personal trust they feel
Independents
Seek the personal freedom money makes possible feel
investing is a necessary means to an end not interested in the process of
investing
The Anonymous
Primarily concerned with confidentiality prize privacy
for financial affairs likely to concentrate assets with an adviser who protects
their privacy
Moguls
Maintaining control is a primary concern use investing
as another way of extending personal power decisive in decisions, rarely look
back
VIPs
Investing results in ability to purchase status
possessions place high value on prestige is important like to affiliate with
institutions and financial advisers with leading reputations
Accumulators
Focused on making their portfolios bigger investment
performance-oriented tend to live below their means and spend frugally
Gamblers
Enjoy investing for the excitement of it tend to be
very knowledgeable and involved Exhibit a high-risk tolerance
Innovators
Focused on leading-edge products and services
sophisticated investors who like complex products tend to be technically savvy
and highly educated
No matter the investor type it is all based on
psychology what do you think is the value of something. Since it not backed by
anything tangible it is what you are willing to pay for it.
What is “Real Wealth and what is an illusion ”?
Russell M. Randall an economist writes “Real Wealth”
is ultimately that which all humans seek from an economic context, NOT MONEY!
All fiat currency and debt securities are at best contracts to acquire Real
Wealth. Real Wealth is exclusively Goods, Delivered services, Infrastructure,
natural resources, and Human Capital. Recognizing natural resources as a given
within any sovereign country, incremental Real Wealth can only be created from
work (labor). One cannot WILL Real Wealth into existence! Businesses are a
subset of the aggregate Real Wealth on earth, and are made up of Goods
(including raw, work-in-process, and finished goods inventory), Capital stock
(including the supporting utilities and building infrastructure, tools,
equipment, and etc.), and the most important component Human Capital. Business
Real Wealth in aggregate cannot increase without work (labor). Even Human
Capital must receive training and education to increase Real Wealth for any
business. Hence, when the total stock market rockets up (or down) by more than
a snails’ pace, there is likely a complete disconnect between business Real
Wealth and the stock pricing that the financial and political worlds would like
you to believe reflects Real Wealth.
Value is always relative. If an investor values stock
“A” more than stock “B” that he owns, he may bid on stock “A” forcing the price
up, but stock “B” MUST come down when he sells it, otherwise the aggregate
stock valuation (read price and market cap) becomes out of line with the real
wealth make-up of the companies (capital stock, human capital, inventories,
etc.). Certainly limited short-term market volatility is in order for the
mechanics of the trading process to function. However, without the systemic
central liquidity manipulation, the total market cap valuation increases would
stay in line with the “snail’s pace” Real Wealth creation. Lot's of assumptions
here, but hopefully you get the idea. Bottom line…. The stock market would only
move up an average of 0.012% per day (1% population increase and 2%
productivity increase divided by 250 days) assuming all businesses including
gold-mining companies increase productivity at a 2% annual rate. Volatility
would be massively reduced because humans controlling the expansion of credit
would be on a very tight leash, since they would no longer have the power to
create rampant liquidity illusions that find their way into our equity markets.
Just imagine…. If we ditch our unfair and manipulated fiat currency charade, we
might find those who capitalize upon the daily financial market volatility and
the puffed-up financial world actually shift into industries that produce
consumable, durable, or capital goods. Many of America’s greatest minds would
leave the liquidity manipulation world and enter the industrial world to enable
our long-term global competitiveness.
Conclusion
Sudden market increases do not reflect an increase in
Real Wealth; nor do sudden stock market decreases reduce Real Wealth. By
converting to a fiat-money system in 1971 we have gradually enabled a complete
disconnect between the Financial economy and the Real Economy. Anytime a
politician or our central bank feels compelled to “do something” about the
economy, the go-to course of action is to grease it with more liquidity. That
process only exacerbates the imbalances and illusions that exist, and makes the
inevitable return to stability that much more abrupt and painful. I expect the
illusory assets to become exposed when Boomers all over the world begin leaving
the work force in mass beginning 2008-2010. The Boomers then tasking (cashing
in) the financial assets will force a re-pricing we have never experienced in
the history of the Republic.
