ARE 143 - ARE 143 Stock prices go up bc of demand demand...

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ARE 143 Stock prices go up bc of demand, demand goes up bc of increased expected profits. Ch 1 1. When you borrow money (margin or leverage) to acquires and asset (like stocks) and the asset value falls by a certain amount, the lender has the right to ask for more collateral to make up the difference. a. Ex. Loan can’t be more than 50% of the asset value i. Loan is for 100k, the asset value is 200k. the asset value decreased to 180k, you have to pay 10K bc 50% of 180k is 90k. aka 10 less than the 100k lent. ii. What the broker does is sell 10k of the asset to make up the difference. iii. If everyone is in the same boat, then there are too many sellers and no buyers and prices fall further 2. How the market moves a. Perverse i. View 1: increase wages decrease profits decrease in stock market ii. View 2: increase wages increase consumption increase profits increase in stock market. b. Offsets to higher wages or higher costs of production (addition to View 2) i. Can lead to higher productivity (output per worker/hour) which then lowers average cost 1. ex. work for 5, flip 50 burgers, work for 10, flip 100 burgers c. bubbles (artificial increase in prices, aka not supported by market fundamentals) i. when bubble breaks we have deflation 3. Deflations a. Def: decrease in the general price level i. Can occur in isolated pockets like, cars b. Harmful to the economy bc : (See in the RE and Mortgage market) i. Businesses experience a decrease in profits with deflation 1. profit squeeze due to costs already incurred (bc of contracts) and decreases in prices. a. When profit falls increase unemployment decrease consumption 2. leads to stock market decline ii. Consumers expect prices to fall further put off purchases until later profits fall further layoffs. iii. Financial fragility/instability (“fragility” coined by Hyman Minsky) 1. decrease in asset prices/values leads to increase loan defaults financial crisis which results in reduced available
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credit/loans contraction aka further reduces market decrease stock market. 2. Or: increase of loan defaults decrease in asset prices increases in loan defaults. 3. but if asset prices go up, you can get bigger loans and borrow against the appreciation. a. Stock/RE prices go up, don’t sell the assets, borrow against the appreciation, aka equity loan from a second lender. b. Ex. house appreciates from 100k to 200k, you can borrow against the appreciation at 100k. i. Prices fall, and lenders call in the money, can’t pay the difference. c. increase unemployment decrease consumption decrease profits decrease stock market. d. OR: increase unemployment decrease in interest rates in US vs interest rates abroad leads to a weaker dollar bc of inflation but increase exports increase stock market. e.
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This note was uploaded on 04/11/2009 for the course ARE 143 taught by Professor Brinkley,g during the Winter '08 term at UC Davis.

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ARE 143 - ARE 143 Stock prices go up bc of demand demand...

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