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Saturday, October 20, 2007

Stock Market Volatility Explained

Most stock market volatility is actually money supply volatility.

It is unreasonable to think that a corporation like Coca-Cola is worth $1/share more today than it was yesterday, if there was no news released that affected Coca-Cola or the overall economy. However, stocks like Coca-Cola go up or down $1 seemingly at random.

The problem is not volatility in the value of Coca-Cola. It is volatility in the value of the dollar itself. Due to the Compound Interest Paradox, the money supply is always growing and shrinking. As loans are repaid, the money supply shrinks. As new loans are issued, the money supply expands.

In the long run, prices in the stock market increase. Alternatively, you could say that, in the long run, the value of the dollar decreases. With debt-based money, there needs to be continuous inflation or the system collapses. If deflation did occur, it would benefit the average person too much. The average person typically holds mostly cash.

Each stock has different sensitivity to changes in the money supply. An established large corporation like Coca-Cola is relatively unaffected by changes in the money supply. A growing company with lots of leverage is very sensitive to changes in the money supply. A leveraged company loves money supply expansion, because that means it can repay its debts easier and there's more money around for people to buy its products. A leveraged company hates money supply contraction, because that means it's harder to repay its debts and it's harder to sell its products.

The Federal Reserve says that it tries to manage the money supply so that the rate of inflation is constant over a long period of time. This makes it easiest for large corporations to plan. The Federal Reserve states that it tries to avoid abrupt money supply contractions. I wonder if the people who work at the Federal Reserve are dumb enough to believe this? Occasional abrupt money supply contractions are an inevitable consequence of debt-based money. Some other factor always gets the blame; it's never the fundamental structural defect in the monetary system. The international banking cartel loves the occasional sharp money supply contraction. That forces businesses into bankruptcy and allows banks to confiscate their assets. By the time the bankruptcy is completed, the economy is in boom phase again and the stolen property can be sold at an attractive price. Periods of stable inflation encourage corporations and people to load up on debt, and the abrupt money supply contraction forces a lot of them into bankruptcy.

Stock market analysts come up with all sorts of silly explanations for stock price volatility. Some of them use the current value of the 3rd derivative of a company's earnings to extrapolate what will happen for the next 20 years. Don't be fooled by any of these explanations.

The real reason for stock price volatility is money supply volatility. In the long run, the Federal Reserve has no choice but to expand the money supply. That's why the standard advice of "dollar cost averaging" is sound. When stock prices go down, you should buy, because the Federal Reserve is guaranteed to expand the money supply in the long run.

Stocks tend to rise faster than the rate of money supply growth. After all, if consumer prices rise slower than the rate of money supply growth, prices elsewhere must grow faster than the rate of money supply growth. Stock prices rise faster than the rate of money supply growth because large corporations and the financial industry are the recipients of a massive government subsidy.

Almost all stock price volatility is really money supply volatility. Different corporations have a different degree of sensitivity to the expansion/contraction of the money supply. Don't be fooled by alternate explanations.

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