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Nov 8, 2009 2:03 pm

The s and p lost $2.2 trillion in value from 07 top to 09 bottom.



Where did that money go?

Nov 8, 2009 2:07 pm

It didn't "go" anywhere.  Value was destroyed not relocated. 

 
Nov 8, 2009 9:07 pm

Destroyed meaning lost forever? If it was destroyed, is the value from the lows of March to now created by "new" money? Is the 2.2 Trillion lost forever or lost on paper or lost to the ones that sold? I am sure some was lost forever to offset gains or some stategy or to investors that sold their positions out of emotions without a stategy. I have never really thought about it in the macro sense.

Nov 9, 2009 8:28 am

There are two parties to every trade - so that value did go somewhere.  I'm not going to mention him by name, but I suspect it went to a certain DIY trader's Schwab account.

Nov 9, 2009 10:26 am
iceco1d:

Not necessarily.


Suppose you and I have an agreement for you to buy my house for $250K.  It would probably be most reasonable to assume my house is "worth" $250K.  You back out of the deal.  A new buyer steps in and offers $240K for my house, which I accept. 
 
Should be reasonable assumption that my house is now "worth" $240K.  What happened to the other $10K in value?  Did I get it?  No.  Did you (the guy who backed out) get it?  No.  Did the guy who bought the house for $240K get it?  Not unless he is able to immediately turn around and sell the house in the market for $250K (which, we'll assume he can't). 
 
The $10K in "value" is gone...for now.  Wealth in this sense can be created AND destroyed with the same type of concept.  As demand rises for this house in question (i.e. the area builds up commercially, oil is discovered in the area, etc.), the value will eventually rise again to $250K, and beyond. 
 
but stocks dont normally gap like that.   
 last post:  a buyer for every seller.  
didnt seller get $
Nov 9, 2009 11:03 am

Im too stupid to understand it.   seems like wealth was shifted 

Nov 9, 2009 11:50 am

This is a very interesting discussion, let's keep it going!


iceco1d:

I buy IBM at $150/share in my IRA.  IBM is now trading @ ~$125/share.  I didn't buy or sell any additional shares.  Where did my $25/share in wealth go? It was a eroded by a reduction in demand for IBM shares, which lowered the value. 







 
The person that sold me my shares at $150 already got his money.  The reduction in share price no effect on his wealth, just mine.   
Think about parties outside of the seller and the buyer. The open market in general. Because your previous demand for IBM lifted the stock to $150, there was value created for outside parties, either those who were looking to sell at $150 and lock in their earnings or those who felt the demand was inflated and took a short position at $150 and profited from the drop to $125.
Nov 9, 2009 11:51 am
iceco1d:

Shania,

 
Lets pretend I'm a Shania Twain fan.  I offer you $100 to give me your RRMag forum ID.  Nova gets wind of this and decides he wants your ID, so he offers you $250, which I'm unwilling to pay.  You agree that you'll sell it to him for $250. 
 
Would it be fair to say your forum ID, at this point, is worth $250?  Where did that worth come from?  Demand.  Other people want what you have, and there is limited supply of it. 
 
Now, suppose you sell it to Nova for $250 and he becomes "Shania Twain" on this forum.  But then, RRMag decides that dealing with people like Meletio is too much of a headache for them, and that they are going to close this forum. 
 
The login "Shania Twain" should immediately become worthless, yes?  It won't be usable once the forum closes.  Suppose the forum closes, and all of our names become inactive.  The name "Shania Twain" is now worthless.

What happened to the "wealth" in this scenario?  Did anyone make money by your name going from being worth $250 to $0?  Did RR Mag? 
 
I think I got it.
 
LEH is trading at 85 in july of 2007.   buyers and sellers create that price.
 
But every shareholder is NOT selling on that day.  It could in theory be one share crossed at 85. 
 
d*** Fuld's ROTH ira still holds the $2000.00 of LEH on that day since he didnt sell.       When LEH hits the target price of zero in sept...d***'s roth is worth zip.   
 
wealth wiped out
 
duh
 
i got it.  im a retard
thank you 
Nov 9, 2009 11:54 am

his name really is d ick      why did the d*** me?    

 
forum police a bit sensitive
Nov 9, 2009 12:03 pm

To be fair, there is a bit of a difference between the S & P and home values or even the RRMag handle scenario.

 
Unlike home prices or the handle scenario the S & P is a function of the stock market, which is an auction based system.
 
Auction based systems are a zero sum game. That means for every 'price' there is a seller and a buyer. Home sales (irrespective of foreclosures which are typically auction sales) are not an auction process. Thus the 'value' of a home at any given point is indeed a guess.
 
If you define value as the amount of money a particular good or service is worth at any given point, then a home is only worth what the most recent offer to purchase is. Since there may not have been a recent offer, the 'value' is assumed to be 'x' at a given point.
 
In relative terms to the Stock Market, this value given to homes is the equivalent to a closely held public company with very little liquidity in the market. Thus when you asses value to a company like that you give a range of values at best, or quote the book value but not the stock value.
 
That's a long way of explaining how auction sales are far differnent than home sales. The end result is that in an auction sale if you buy IBM for $100 per share, you have to buy it from an entitity who sold it at $100. Thus if the stock dropped from $100 to say $50, the 'lost money' was only lost by one party. The original seller in this example did not lose money because they still have the $100. It's a zero sum game.
 
Now, the original question was what happened to the money? The short answer is that when money leaves the market (i.e. more sellers than buyers, thus the price drops based on the auction sales) there is some paper loss of money. By that I mean, the original transaction was a realized gain for the original seller of $100 (don't worry about cost basis for this discussion). However, the 'paper loss' or 'paper gain' is for value of an item that has not been sold or bought.
 
The short answer is then, there was a $2.2 trillion (using op's numbers, not confirmed by me) loss in the market, but what amount of that was realized? For instance, say I still own the IBM stock now at $50. I have a paper loss of $50, but not a realized loss.
 
Do not discount the psychological effects of paper losses in consumer spending. When your home 'loses' 100k in value and you tighten your spending or delever you affect the economy, even though none of that loss was realized yet.
Nov 9, 2009 12:05 pm

in all fairness, the posts on this page weren't showing when I responded so sorry for the duplication of concepts.

Nov 9, 2009 12:21 pm
iceco1d:

Not necessarily.


Suppose you and I have an agreement for you to buy my house for $250K.  It would probably be most reasonable to assume my house is "worth" $250K.  You back out of the deal.  A new buyer steps in and offers $240K for my house, which I accept. 
 
Should be reasonable assumption that my house is now "worth" $240K.  What happened to the other $10K in value?  Did I get it?  No.  Did you (the guy who backed out) get it?  No.  Did the guy who bought the house for $240K get it?  Not unless he is able to immediately turn around and sell the house in the market for $250K (which, we'll assume he can't). 
 
The $10K in "value" is gone...for now.  Wealth in this sense can be created AND destroyed with the same type of concept.  As demand rises for this house in question (i.e. the area builds up commercially, oil is discovered in the area, etc.), the value will eventually rise again to $250K, and beyond. 
 
Either you are looking too Micro, or I am too Macro.  By disappearing wealth, I was viewing it from a money supply view.
 
Per your example, let's get Macro.
 
Seller (s) has $300,000 in cash, and a home "worth" $250,000.
Buyer (b) has $300,000 in cash, and no home.
 
Total Cash between 2 parties - $600,000.
 
House is sold for $240,000. 
 
Results:
 
S has $540,000 cash.
B has $60,000 cash.
 
Total cash between 2 parties - $600,000.  Wealth wasn't created or destroyed.
 
With stock, wealth isn't destroyed either in a Macro sense - it just changes hands and either stays in the market (to another investment) or taken out of the market.
Nov 9, 2009 12:59 pm

I agree with ice.  Look at it from the perspective of an incredibly volatile penny stock.  Let's take Dendreon for example:

DNDN was at one point trading around $2.00 a share (even less).  After the initial FDA panel allowed the drug to go to a full FDA vote, the stock shot up to around $25.00 a share. 

However, a little later, the FDA said they required a new battery of tests and data.  Stock crashes to back around $8.00.  This of course, before the market opens back up.  In a panic, people sell the stock that they bought around 22 or 23 a share, resulting in a loss.

Since no one had yet sold the stock, the price of $8 a share was a perceived price. 

Let's look at it from WB perspective.

OB buys stock at $22 a share (we'll say 100 shares) for $2200.

He becomes a seller now.

He has $2200 in stock - that's it.

A buyer comes along and says, I don't care what anybody says, this is going to be a billion dollar stock.  Sees the opportunity when the stock plummets from $22 to $8.

Buys the 100 shares from the OB (who is now the OS) for $800. 

Combined, they both had $3000.  Now however, they both have $1600.  What happened to the $1400?

Because the value of the security was damaged by the news release, the $1400 loss did not transfer to anybody receiving a gain.  No one got that money.

And down the rabbit hole we go.

Nov 9, 2009 1:03 pm
Wet_Blanket:
iceco1d:

Not necessarily.


Suppose you and I have an agreement for you to buy my house for $250K.  It would probably be most reasonable to assume my house is "worth" $250K.  You back out of the deal.  A new buyer steps in and offers $240K for my house, which I accept. 
 
Should be reasonable assumption that my house is now "worth" $240K.  What happened to the other $10K in value?  Did I get it?  No.  Did you (the guy who backed out) get it?  No.  Did the guy who bought the house for $240K get it?  Not unless he is able to immediately turn around and sell the house in the market for $250K (which, we'll assume he can't). 
 
The $10K in "value" is gone...for now.  Wealth in this sense can be created AND destroyed with the same type of concept.  As demand rises for this house in question (i.e. the area builds up commercially, oil is discovered in the area, etc.), the value will eventually rise again to $250K, and beyond. 
 
Either you are looking too Micro, or I am too Macro.  By disappearing wealth, I was viewing it from a money supply view.
 
Per your example, let's get Macro.
 
Seller (s) has $300,000 in cash, and a home "worth" $250,000.
Buyer (b) has $300,000 in cash, and no home.
 
Total Cash between 2 parties - $600,000.
 
House is sold for $240,000. 
 
Results:
 
S has $540,000 cash.
B has $60,000 cash.
 
Total cash between 2 parties - $600,000.  Wealth wasn't created or destroyed.
 
With stock, wealth isn't destroyed either in a Macro sense - it just changes hands and either stays in the market (to another investment) or taken out of the market.
 
SIMPLE concept
 
 Harry buys 100 shares xyz at $1, share price falls to $.85  Harry lost $15 cash and wealth. Money is lost not transferred.
 
Harry sells 100 shares xyz to sally for $1, share price falls to $.85.  Sally lost $15 dollars. Harry gained nothing. Money is lost not transferred.
 
Stock price is nothing more than what someone else is willing to pay. You do NOT own a piece of anything. Stock has no REAL value. Macro micro doesn't matter.
Nov 9, 2009 2:38 pm

In your senario shania received $250, so therefor it was a transfer of wealth. 

 
The long short answer in BOTH. 
 
Some wealth was destroyed and some people profited.
 
Some people sold out and went to cash (profited since what they sold is now worth less meaning they can own more at the current prices with the same $ they had)
 
Some shorted- obviously profited
 
Some wealth was destroyed.  Mostly a little at a time.  Whenever a stock gaps down whether it is $.05 or $1, the shares are worth less and no one sold inbetween, so value has eroded (except for those who sold/shorted).
 
NEARLY ALL OF IT is paper only.  Look at Bear Stearns for example.  The company was worth tens of billions and was sold to JPM for pennies on the dollar (forget about the gov't taking losses etc. for the illustration).  Some day the value of the franchise might increase maybe even making up for a good chunk of the loss.  The winners will be JPM shareholders/employees if the value increases.
 
Until currency (whether it is cash, stocks whatever) is bartered for goods or services it is a unit of value.  How much that unit of value is worth is a variable that can only be determined when it is spent, not while it is saved.
 
 
Nov 9, 2009 3:30 pm
howboutshoeshine:
Wet_Blanket:
iceco1d:

Not necessarily.


Suppose you and I have an agreement for you to buy my house for $250K.  It would probably be most reasonable to assume my house is "worth" $250K.  You back out of the deal.  A new buyer steps in and offers $240K for my house, which I accept. 
 
Should be reasonable assumption that my house is now "worth" $240K.  What happened to the other $10K in value?  Did I get it?  No.  Did you (the guy who backed out) get it?  No.  Did the guy who bought the house for $240K get it?  Not unless he is able to immediately turn around and sell the house in the market for $250K (which, we'll assume he can't). 
 
The $10K in "value" is gone...for now.  Wealth in this sense can be created AND destroyed with the same type of concept.  As demand rises for this house in question (i.e. the area builds up commercially, oil is discovered in the area, etc.), the value will eventually rise again to $250K, and beyond. 
 
Either you are looking too Micro, or I am too Macro.  By disappearing wealth, I was viewing it from a money supply view.
 
Per your example, let's get Macro.
 
Seller (s) has $300,000 in cash, and a home "worth" $250,000.
Buyer (b) has $300,000 in cash, and no home.
 
Total Cash between 2 parties - $600,000.
 
House is sold for $240,000. 
 
Results:
 
S has $540,000 cash.
B has $60,000 cash.
 
Total cash between 2 parties - $600,000.  Wealth wasn't created or destroyed.
 
With stock, wealth isn't destroyed either in a Macro sense - it just changes hands and either stays in the market (to another investment) or taken out of the market.
 
SIMPLE concept
 
 Harry buys 100 shares xyz at $1, share price falls to $.85  Harry lost $15 cash and wealth. Money is lost not transferred.
 
Harry sells 100 shares xyz to sally for $1, share price falls to $.85.  Sally lost $15 dollars. Harry gained nothing. Money is lost not transferred.
 
Stock price is nothing more than what someone else is willing to pay. You do NOT own a piece of anything. Stock has no REAL value. Macro micro doesn't matter.

Not to be a jerk, but stock does have a tangible value. That value is the percentage of ownership of the company if that company were liquidated and sold off piece by piece.
 
In reality, there are many times that a 'stock' is worth more if the company goes belly up.
 
Burlington Northern is a good example. The 'value' of the company is what it was worth when Berkshire bought them. The value of the stock went up because the 'book value' (i.e. the price paid for the company in it's entirety) went up and you owned a fractional piece of that value.
 
In the above examples the part that is missing is the 'cash'.
 
Morean's example shows a person owning 100 shares of stock at $22 a share. $2200 in value. Price drops to $800 and next person buys stock at $8. The second person did not have $3 k that turned into a $1400 loss, he had $800. He has suffered no loss, the first person lost money, but then again, the person he bought it from still has the $2200 in cash.
 
So all told the transactions in this example : Person A Sold $2200 to Person B. Person A has $2200. Person B sells shares after they fall to Person C for $800. Person B has $800 in cash. Person C has shares.
 
IN the end it was a zero sum game. There are still $3000 in circulation and still 100 shares. There was no creation or destruction of wealth because it was an auction.
 
The home price example is different because the home 'value' was not dependent upon someone buying the home (and thus a transfer of cash). A homes 'value' can be borrowed against (refi) and thus creates wealth. Auction sales are different.
Nov 9, 2009 3:33 pm

I thought we were talking about the loss of value as it relates to the stock market.  Did I miss something?

Person A sold to person B for $2200.

Person B now has $2200 worth of stock and person A has $2200 in cash.

Person C buys stock for $800.  He now has $800 worth of stock.

So A ($2200 cash) + B ($800 cash) + C (800 stock) = $3800

Except that the original amount of combined value for all of them was:

$5200

Person A ($2200 stock) Person B ($2200 cash) Person C ($800 cash).

Where is the $1400?

Nov 9, 2009 3:36 pm

What you say is true in a very FEW examples. The thousands of companies that disapeared during the TECH crash are better and there were many more of them than the 200 or so worldwide companies you speak of. Only one of the original DOW 30 companies still trade because stock prices are false. You own nothing. Last I heard, owners were more powerful than those that work for them? Give Bill Gates a call if you owm MSFT and see how much time you get.

Nov 9, 2009 3:38 pm
Moraen:

I thought we were talking about the loss of value as it relates to the stock market.  Did I miss something?


 
You missed nothing, you are correct
Nov 9, 2009 3:47 pm
Moraen:

I thought we were talking about the loss of value as it relates to the stock market.  Did I miss something?

Person A sold to person B for $2200.

Person B now has $2200 worth of stock and person A has $2200 in cash.

Person C buys stock for $800.  He now has $800 worth of stock.

So A ($2200 cash) + B ($800 cash) + C (800 stock) = $3800

Except that the original amount of combined value for all of them was:

$5200

Person A ($2200 stock) Person B ($2200 cash) Person C ($800 cash).

Where is the $1400?



Your numbers are correct.  We got off on a tangent about paper losses or realized losses. From a realized number, money was neither created nor destroyed which is where alot of the conversation went to.