The farmer wants the price of wheat high enough so that he can make a profit. Yet he also wants the price to be low enough so that buyers will take up his entire crop production. The baker wants the price of wheat low enough so that he can make a profit. Yet he also wants the price to be high enough so that farmers will continue growing a stable supply.
That is how the market-pricing mechanism works, to the mutual benefit of both buyers and sellers.
Over the short term, external factors can disrupt this pricing system. Weather factors can both increase and decrease expected supply, changing price discovery that can essentially be detrimental to both farmers and bakers. Farmers have no control over adjustments that bakers must make to change consumer demand. Bakers cannot fully anticipate temporary cost-push problems that farmers may encounter.
However, the market-pricing mechanism will always come back to equilibrium unless “permanent” interference, most generally from government, happens. And you see it all the time. Government subsidies, in particular, where commodity producers rush to take advantage of the free money. Oversupply occurs, causing market price to drop to a level where distributors to end-users cannot make a profit. Then the government must intervene to subsidize that side of the equation.
The US government subsidizes milk producers that create an oversupply, outstripping market demand. So, that excess milk is made into cheese, which the government buys. Currently, the US government has a stockpile of processed cheese of about 1.4 billion pounds or 4.25 pounds for every person.
The market pricing mechanism, though, only functions properly for a commodity where there is an end-user for the asset. Farmers actually grow wheat and bakers actually bake bread. Speculators, only interested in trading profits, can enter and make a short-term price fluctuation that moves in their favor. But the farmer who produces an average of 1.2 million pounds of wheat determines the general price through the market.
Therefore, genuine stable market pricing does not properly function when there are few, if any, reliable end users and that includes stocks, cryptos, and most precious metal trading.
Nobody bought Bitcoin to buy a sandwich at a Subway store in Buenos Aires. Even Amazon does not accept it. While the best-selling author and smartest person in the stock market has said to buy Jollibee Foods Corp. shares at P300 in January 2019, no one bought it for a share-of-the-profits P2.60 cash dividend. Buyers bought for “capital appreciation,” better called “let’s make a quick buck” trading or speculation.
Therefore, pricing is genuinely based on the “greater fool theory,” which sounds much more offensive and rude than it truly is. You can apply that to trading baseball cards, condos, and farmland in Batangas if current income is not the investment objective. You are buying, anticipating that someone will pay you a higher price in the future.
The pricing mechanism is simple. The price will increase—or decrease —based on the amount of money that is willing to buy and take ownership or sell and relinquish ownership of the asset.
Speculative investing and buying and selling shares is easier if you realize the uncomplicated truth of following the money. Too many investors waste precious time and money trying to figure out what is going to happen in the future, like how much bread people are going to buy next year. Instead, look at what people are doing with their money right now.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.
1 comment
Hi John, I agree that it’s futile to try to “time the market”. So I’ve taken the plunge and hope to make decent returns over a 3 to 5 year horizon. So far, some of my investments are under water, but others have done well. Thank you for your column.