I was, yesterday, asked the almost inevitable question that is sent in my direction every time stock exchanges fall significantly, and that is, 'Where did all that money go? '
The answer is 'Nowhere'.
There was no money that disappeared. It has not even been lost as such. All that has happened is that the price of shares, euphemistically sitting on a shelf waiting for sale, has fallen.
Let me offer an analogy. If Tesco, Sainsbury's, Lidl, Asda, Aldi, Morrisons or even Waitrose marked down the price of baked beans from 50p per tin to 30p a tin, you would not ask, 'Where did all that money go? ' Or, at least I would be very surprised if you did.
In fact, such a cut would save people in the UK around £400,000 a day since we consume around 2 million tins of beans every 24 hours, apparently. That is £146 million a year.
But still, do we ask 'Where did all that money go? ' as a result? I very strongly suspect that we do not.
Instead, we might ask what to do with the savings.
But we also might laugh at the number, because we would not expect these price cuts to last long. So if anyone said the whole market in baked beans had collapsed by such a number because of a short-term price cut, we would not take them seriously. We would just say this is a blip, with no long-term impact.
All of which still means that we are very unlikely to ask 'Where did all that money go?', even if we were an investor in a baked bean manufacturer. That's because even they presumably think such an event need not cost them money - but might persuade more people to buy more beans instead.
In other words, it is bizarre that it is reported that hundreds of billions or more of value has been wiped off the value of shares because the relatively modest numbers sold in the last few days were traded at a lower price than the same shares might have been sold for last week.
The price of any share traded on any particular day does not indicate the true worth of a company as a whole, as is always clear if a takeover bid arises. The value of companies as a whole tends to be very much higher than the proportionate value of a few shares in them, which is what are sold each day. This makes a mockery of the idea that short-term price changes can be extrapolated to markets as a whole. That is not possible, meaning that, once more, the question, 'Where did all that money go?' makes no sense.
On the other hand, the analogy does break down in part because a few shares in any company are, in fact, inherently worthless, unlike baked beans, which clearly have value. A few shares give no one the right to participate in the management of a company. Nor do they give the right to ask any meaningful questions of its management. And the person who confuses owning shares with owning the company itself is seriously mistaken. The shareholder in a retailer who thinks that gives them the right to go into a store and take some of its property is going to find themselves on a shoplifting charge, like anyone else. All a share provides is a right to a possible future income stream that may, and might as easily not be, paid in the future. No wonder the price of such things is so easy to manipulate. At best, a share price represents the price of hope.
So, when the price of baked beans falls, some people get a bargain.
When the price of shares falls, many feel that they have lost hope.
But there are exceptions. Those who can buy whole companies - call them oligarchs, call them billionaires, call them whatever you wish - suddenly can see a bargain on a shelf that they can now buy at a knock-down price. What is more, because they want to buy the whole company, they can ask questions of management to find out its real story. They, in other words, can turn this situation of knock-down share prices to their own advantage, unlike almost anyone else, and you can be fairly sure they are looking at doing that.
Cut-price baked beans are good news for consumers, and bad news in the short term for producers. Wealth (but not money) moves from the producer to the consumer.
Cut-price share prices are good news for corporate predators, but not for ordinary shareholders. Wealth (but not money) moves from the small saver to the big investor.
No money came or went in either case - things for sale are just traded at different prices from those that prevailed before. But this is not to say that wealth - which is different from money, even if it is measured in it - has moved. And in the current situation of panicked share price cuts, wealth moves upward. I think you can be sure Trump knows that. But no money went anywhere. Values, in the form of prices, and measures of wealth, moved, but hundreds of billions of dollars supposedly wiped off the value of stock markets did not move, or go anywhere. That number is just made up, and is, at best, a measure of lost hope.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
The relation between share prices and pension funds is why non oligarch individuals are fearful. Should ‘seemingly’ losing money off your US 401k or UK pension pot not be a political consideration ? How and why do neo liberals justify the insecurity and iniquity inherent in allowing Big Money to plunder the majority of their voters savings ?
Good questions
But the real question is why are pensions invested in this way, with massive government subsidies supplied fur doing so?
The exactly reverse question is to ask, when a share price or the whole stock market rises, where does that additional money come from? And you will instantly see that there is no additional money. There might be an unrealised paper gain – some notional figures on a spreadsheet have changed, because you hope someone will pay more today than you expected yesterday – but until you actually realise that gain by selling some shares, there is no money for you. Similarly when the share piece falls there is a paper loss (and sadly the price you hope to achieve today will be less than yesterday). A year or more of paper gains may have been wiped out. But with 40 years of retrospect, even the 1987 crash looks like a blip. It is just unfortunate if you planned to retire later this year rather than last year, and turn your capital into an annuity. Not that many people do that nowadays until they have to.
Much to agree with
Hmm… I’m busy with people using the open market option to purchase annuities with some or all of their defined contribution pension funds. According to the ABI, annuity sales rose by 24% in 2024, with 89,600 being bought with £7bn. That’s the highest sales since 2015.
Most that I arrange are inflation linked (RPI) and the six providers in the market compete keenly for business.
I am not surprised
I was not aware of the RPI option
If your name is Donald Trump you can of course overstate the value of your assets, and create a false confidence in your business empire and get other people to throw money at you.. In New York courts they called that fraud, convicted him 34 times, and he effectively got away with it. He will continue to get away with it as long as the world’s leaders think more about themselves than the good of their citizens.
Strange concept ‘Wealth’
I live on the Somerset/Wiltshire border
If I cross over into Wiltshire there are lots of villages that were once making money from the Wool trade.
The evidence is still there in the form of lots of well built houses. You can imagine the original owners enjoying good but not flashy lives. The sort of thing Cobbett might have approved of.
Clearly if the wool market had gone wrong for some reason their fields would still have fed and clothed them and provided fuel and building material.
Not the sort of ‘wealth’ the Trump’s of this world enjoy.
I live in Somerset, and one of the County’s glories are the church towers – built off the back of sheep.
A measure of lost hope. Add that to the lost marbles. Here is Sam Coates on Sky News:
After the 2008 Financial Crash, and the 2020 Pandemic: “the Bank of England rose to the challenge too, using its quantitative easing scheme to ensure cheap money. But as we stand on the precipice of economic decline of uncertain severity, it is clear that any kind of big bazooka option of the scale seen during those two crises is not open to the UK this time around.”
In 1939 the UK Debt/GDP ratio was 135%. Faced with World War, we spent the money, and in 1945 the UK Debt/GDP ratio was 250%; but we survived. You do what you have to do.
In 1929 UK Debt/GDP ratio was 180%. The Great Depression followed the 1929 Stock Market crash. The economy, employment and living standards were destroyed, just in order to reduce the UK Debt/GDP ratio to 135%, by 1939. Then we faced war, and found we had run down the armed forces, and could scarcely defend ourselves, and with a decayed economy, on its knees (and left behind by the scale of German investment). This is what happens when you do not do what you have to do. The only crisis that justifies spending is not just war, it is economic disaster. Keynes understood that one hundred years ago. You do what you have to do.
Then we had to raise spending, and in 1945 UK Debt/GDP ratio was 250%. You do what you have to do. And again, Germany has decided neoliberalism will not produce the answer, and Chancellor Merz intends to change the constitution, faced with disaster (both economic and defence threats in Europe); and stop the rot – end the Schuldenbremse barrier to public investment (the fiscal rules), and invest in the economy, infrastructure (which is disintegrating under neoliberalism), and in defence (which is inadequate).
But now, in Britain we are going to do nothing; but we have Sam Coates as the fount of economic wisdom.
There is no Magic Debt Level. You do what you have to do. Or you sink.
And in fairness, Sam Coates is better than average, and not an economics correspondent.
Interesting point about Merz changing the constitution in order to fund government spending.
As Germany is part of the EU and the Eurozone, it does not have a “sovereign” currency so presumably the EU as a whole would have to vote in favour of increased spending. In which case, are we likely to see increased QE-funded spending across the whole of the EU and if so, will that result in investment other than defence?
Mr Sevvides,
Germany is proposing breaking the fiscal rule spell, binding the EU to neoliberalism. Mistakes will be made. But Merz stated proposal is to spend €1Trn ( rasing Debt/GDP from 62% to around 90%): €500Bn on defence, and €500bn on infrastructure, which is under invested and decayed (but not nearly as old and outdated, broken and bust as the UK, which is still over-reliant on Victorian infrastructure; like sewers). We are just constitutionally incapable of facing the scale of our problems (many self-inflicted) in Britain.
There are huge changes underway. Everybody is now looking only at the US and China; the Titans. But this change is the tipping point, for some. Britain has been slowly declining relentlessly, unstoppably, in power, influence and relative wealth since 1945. In 2014 the Scots intuited the end game was inevitable (and the Scots were the only dedicated Unionists from conviction); but they just couldn’t face the reality. They voted for the sleep of the dead. Its over. All that is left for Britain on its own is work for the clean-up crew.
I don’t think the ECB has the power to tell any Eurozone nation what their fiscal policies should be.
They can announce what they consider wise spending would be, but my understanding is they have zero power outdide of monetary policy.
It’s a good trigger to catch up on what the ECB’s powers actually are.
I think they can impose sanctions
In reply to ‘John’ on ECB sanctions, here (https://www.bankingsupervision.europa.eu/activities/supervisory-measures/sanctions/html/index.en.html#:~:text=Allocation%20of%20sanctioning%20tasks,accordance%20with%20applicable%20national%20law.&text=ECB%20decisions%20imposing%20penalties%20are,may%20be%20anonymised%20or%20delayed.).
Notice that the sanctions (which I think can be severe), appear to be imposed on undertakings (eg., banks), but it does not appear sanctions are imposed by the ECB directly on Treasuries. Ironically, the ECB has always appeared to run on lines approved by the Germans, including the Schuldenbremse.
“You do what you have to do.”
Ref 1930s recession, 1939 rearmament, 1945 reconstruction, 2008 bail-out, 2021 covid expenditure.
Imagine if we had NOT done what we had to do. Imagine if Rachel Reeves and Mr Starmer had said, “Our fiscal rules are cast iron. We can’t afford it.” on each of those occasions.
My “garden” council estate would not have been built and several thousand people would have stayed in urban slums. (1934).
Hitler would have invaded UK and won the war. (1940s)
Even if he hadn’t, post war reconstruction would not have happened.(1945+)
The banks would have failed along with the economy.(2008)
Millions more would have died of covid and millions more would have lost their jobs. Michelle Mone and Karen Brost wouldn’t have got dodgy PPE contracts (there’s always a silver lining).(2021/2)
On each occasion, however imperfectly, someone had the guts to say, in the face of opposition or even ridicule, “I don’t care what the economists or the press barons say, we ARE going to do this because it’s the right thing to do and if we don’t do it, millions of ordinary people will suffer.”
The problem is, the markets aren’t supplying us with politicians who have guts any more – because there isn’t any demand for them. We prefer to be ruined by corrupt self-serving incompetents or snake-oil merchants. So we get Reeves and Starmer and Fa***e.
You are, of course, right
Mr Warren,
Thank you for your reply.
A good time to buy Tesla then (all of it) – I must ring my broker…
A drop in the price of beans could be long term if it was due to a new technology coming on the scene. Gene editing so that the beans can be grown in the UK on land previously requiring subsidies to sheep farming would be an awesome development.
In fact it wouldn’t have to be in the UK, the advance could come from any country that we had free trade with that was willing to supply our supermarkets.
That was very clearly not the scenario I was discussing.
Are you outing yourself as a troll?
So clear sighted and calmly expressed, no wonder the media Trump feeders ignore this stuff.
The “loss” is just headline bait.
According to the media £90 billion was lost on the London stock exchange (FTSE100) yesterday. However the total trades on the day were about £2 billion, and even if all of those shares were bought on the day they had their highest valuation (they certainly won’t have been) the loss would only have been £100 million.
Most likely the shares had been bought much longer before and on average were sold at a profit, just not as big a profit as a hypothetical sale on the date of the most recent maximum value.
Agreed, entirely
It is a measure of hope! Everyone buying shares will be hoping that they will worth more in the future. Psychology plays a big part in market “valuations”.
Around 2020, Apple Inc. was worth (it’s share price and market cap) more than the entire FTSE 100 index. That was the case recently as well. It may have changed in the last few weeks, but Apple is “valued” today at $2.83 trillion. Is it really worth that?
2023 — The $109 Trillion Global Stock Market in One Chart.
https://www.visualcapitalist.com/the-109-trillion-global-stock-market-in-one-chart/
The trade deals that Trump is bullying other countries and blocs into signing will contain clauses that PREVENT national governments or the EU enforcing environmental, consumer protection, Health and Safety, employment, Human Rights, or any other sort of legislation, if it results in trans-national corporations like Tesla, Google, Meta, Amazon, Texaco, or Apple losing profits. It will also make boycott and divestment campaigns liable in the same way. These clauses have been part of most of the big trade treaties being discussed over the last couple of decades and are now a fact of life. Nation states are small beer compared to the huge corporations and national sovereignty is a joke. Fa***e would surrender it in an instant for a whiff of power or, even more importantly, access to super-wealth.
Much to agree with
‘The value of companies as a whole tends to be very much higher than the proportionate value of a few shares in them, which is what are sold each day’
Please can you explain the evidence that individual share prices routinely underestimate the value of a company, let alone by a significant amount?
I am not aware of any published papers supporting this theory.
This is widely undeerstood.
What are called minoroty interests in companies have no control – and so are discoumted in value
Majority interests have power and so values reflect that fact.
Search company and share valuation and you will find this explained, I am sure. It is widely understood in valuation for tax purposes, for example.
Sheep have a lot to answer for – which a study of Reformation Church History makes clear. They also featured in radical politics about “commons” land in the English civil war and Highland clearances in Scotland.
Very political animals sheep.
BAAA!
Nowadays, they tend to become Labour MPs.
“Four legs good, two legs better “ ….
Animal Farm by GeorgeOrwell.
Great analogy. Very useful
I always laugh when people use tbis failed analogy.
Especially when they use individual’s worth based on share prices.
” Mr/Mrs X lost $1billion yesterday”
“Oh yeah, how mamy shares did they sell at exactly the 12% market drop they originally bought them for?”
It is not “where does the money go” but who is going to buy the shares and thus gain control of the companies and the economy. Is not Trump just a megaphone causing chaos while the hedge funds and oligarchs buy in cheap because it is control they want not necessarily the monetary value?
Correct
The world’s economies are being pulled apart by the folly of a narcissistic madman and our gov is fretting over petty fiscal rules. As if it makes any difference to anybody whether these ‘rules’ are obeyed or not. If they were broken, would the economy fall apart? Most definitely not.My message to Reeves and Starmer is go ahead and break them. The right wing press might complain for a few days, but it will not cause even a ripple in any markets. The voting public have no idea why we have such rules or how they work.