Stock Market Takes a Beating

The market is way down this morning. Merrill Lynch has been sold. Lehman is filing for bankruptcy. And on top of everything, the price of crude dropped over five dollars a barrel. There are some problems with the economy, it seems.

All I know about finance is what I read in a Barron’s book by that name, and some random stuff I watch on CNBC. Stock prices and the economy seem to me to be a lot like thermodynamics in that both are determined by random processes. The random motions of atoms determines temperature and pressure in a gas. The random buying and selling of stock determines prices and available capital. Just how smart is it to fund a business with a random process like selling stock to the highest bidder?

The stock market is how people raise money for their corporations by appealing to people’s urge to gamble. You invest in buying a stock hoping the price will go up and you can make money by selling it to somebody else. The only thing driving the price of stock is new people wanting to buy in to the investment. If people think things are going bad for a company, they will bail out like rats leaving a sinking ship. If nobody wants to buy, prices go down. What a wonderful system a stock market is. Appeal to people’s greed to get your hands on some of their cash.

The problems in the market are a reflection of the problems in the greater society. People lose their jobs, because companies switch over to cheap foreign labor. People without jobs can’t pay their mortgage. Mortgage companies lose money because people can’t pay their bills. Mortgage companies lose money so nobody wants to own their stock. Stock prices take a nosedive, and companies go bankrupt. What is the cause of the problem? Greedy companies trying to make more money.

The market is very complex and there are a lot of factors that affect it. Any time you have more than three bodies in a physics problem, you have random solutions to the paths of those bodies. There are many factors in economic equations, and a lot of those factors are pretty much best guesses. Thus, the price of stocks will fluctuate randomly. You have two possibilities when you buy stock. Stock goes up, or stock goes down. You can blame what happens to the price of stock on any number of things, but the bottom line is if nobody wants to buy and everybody wants to sell, the price will drop. All a drop in the market says is that people are cashing out their investments. Because of the cause-effect relationship of buying and selling on price, people will lose money today. This is how the market operates. It harvests money from the many to make the few wealthy.