cropped-buysellhold.jpgWhat causes the price of an asset class to go up or down?

Should you buy, sell or hold?

Earnings? P/E ratios? Yields?  How are the stars aligned? What is the weather outlook? What is the moon cycle? Who is the President? Is Pyong Yang launching missile? ….

Back to basics. Demand and Supply What has been will be again, what has been done will be done again; there is nothing new under the sun. Ecc 1:9 (Niv)

It is all about Demand and Supply. Buyers and Sellers. Whatever the news and views, what ultimately drives prices up are buyers. More buyers then sellers.

Buyers willing to bid higher because they can’t get enough at current prices. Sellers getting greedy and waiting for prices to go higher before selling.

The same goes for prices going down. Sellers, in fear, wanting to get rid off as much of what they have, as fast as they can. But no buyers are coming in. Buyers are in fear too !

Greed and Fear. Demand and Supply. And so the story continues… there is nothing new under the sun. Ecc 1:9 (Niv)


 One of my favorite stories illustrates the essential mechanism of the business cycle very well. It goes like this:

Once there were two Cajun farmers down in Louisiana named Pierre and Sasson. One day, Pierre is over at Sasson’s farm admiring his horse. “Sasson, mon ami,” said Pierre, “that ees a beautiful horse. I must buy that horse.”

“Ah Pierre,” replied Sasson, “I cannot sell eet. I have owned thees horse for a long time and am very fond of eet.”

“But ah will geev you ten dolaire for eet,” says Pierre.

“Ooo la la,” says Sasson, “zen reluctantly, I agree,” and they wrote up a contract.

About a week later, Sasson comes over to Pierre’s farm and says, “Ah Pierre, mon ami, I must have my horse back. II miss eet terribly.”

“But Sasson,” replies Pierre, “I cannot do zat. I bought a cart for thees horse to pull, and ze cart cost me five dolaire.”

“Ah, but I will geev you twenty dolaire for both zee horse and zee cart.” says Sasson. Pierre does a quick calculation-a five-dollar profit on a 15dollar investment in one week that’s over a 1700 percent annualized rate of return! So he says, “Done, mon ami!”

 Pierre and Sasson keep trading the horse, cart, and other minor additions back and forth until they no longer have enough cash to finance each successive trade. So, they get the local banker involved. The banker, looking at their creditworthiness and the historic appreciation of the horse’s value. loans money first to Pierre and then to Sasson, with the price of the horse escalating on each trade. After each transaction, the banker gets paid back in full, plus interest, and both Pierre’s and Sasson’s cash flow is increasing geometrically.

 Well, this goes on and on, until after several years, Pierre buys the horse for $1,500. Then a Yankee (an MBA from Harvard), gets wind of the price appreciation of the horse and, after making some sophisticated rate of return projections, makes a special trip to Louisiana and buys the horse from Pierre for $2,700.

When Sasson finds out about the sale, he is furious, and charges over to Pierre’s farm yelling, “Pierre! Idiot! How could you sell zat horse for twenty-seven-hundred dolaire! We were making a great living on zat horse!”

 In a nutshell, this story demonstrates the essence of the business cycle. Pierre, Sasson, and the banker were unwittingly propagating an illusion, creating paper money to bid up the price of the same horse. No new wealth was created, but plenty of money was, and everyone was enjoying their apparent prosperity. But, ultimately, the Harvard MBA was left holding the nag, and the bubble of apparent prosperity burst.

 Booms and busts are the result of attempts to lower rates by means of credit expansion. To fully understand the meaning of this and, therefore the cause of the business cycle, it is necessary to understand exactly what money and credit are and how they work in a complex market economy.

 Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited. — George Soros