Six months on, this video is as relevant as when we first made it, except a crash is probably nearer now. Every time stock markets drop, headlines say that billions have been lost. But where does that money actually go? If you want to understand crashes, confidence, and the baked bean market (trust me), this one's for you.
And apologies for the repeat: I really could not face doing a longer recording yesterday.
This is the audio version:
This is the transcript:
I am expecting a stock market crash. I don't know when it's going to happen. I do think it will happen.
Why do I think it will happen? Because the peace that has been brokered in the Middle East is not going to last, and the euphoria that is still sweeping markets is going to end, and as a consequence, I think markets will fall.
Every time that happens, a newsreader in a studio in the UK reads out a headline that says something like "A hundred billion pounds was wiped off the value of the stock market today", and the question that I'm always asked as a result is, where did that money go? And the answer is nowhere. Let me explain.
Imagine that there aren't shares for sale, but instead, there are tins of baked beans for sale in the stock market, and the stock market looks remarkably like Sainsbury's, or Tesco, or Lidl, or Asda, or wherever else you go. Let's give the Co-op an honourable mention.
Those tins of baked beans are sitting there at a price of £1 each. And suppose that there are one million tins of baked beans available for sale today in the UK, which is a number which I suspect is not far from the truth.
Now, what is the total value of the baked bean market today? If the beans are sold for one pound each, it's £1 million. That's the value of the baked bean market.
Now, let's suppose that one of those supermarkets decides that it's going to drop its price of baked beans from £1 to 80p, and all the others will copy because this is one of those benchmark items on which they price match. So the consequence is, everybody will cut the price of baked beans to 80p, and there are still 1 million tins available, so what is the value of the baked bean market today? It's £800,000.
£200,000 has disappeared, apparently, except it never existed.
The £1 price tag that was attached to the baked beans was simply a hope value. It was a measure of what the supermarket hoped that you would buy baked beans for, but until you paid it, there was actually no proof that the price was right.
And now the hoped-for price of baked beans has fallen from £1 to 80p. The market has revalued baked beans. Hopes have changed, but no real money changed hands as a consequence.
The same thing happens in stock markets. If £100 billion is lost because the price of shares has fallen, people are no longer willing to pay the higher price. A share that was valued at £1 is now valued at 80p, in exactly the same way that a tin of baked beans that was valued at £1 can now be valued at 80p.
No money's disappeared. All it means is that the expectation of the sale price that the share in question might realise if somebody came along to buy it has changed.
There's been a repricing of hope in the stock market, and stock market values in this sense have nothing to do with money in the bank. They're a measure of the hope of the amount of money that might end up in the bank if every single share that was available for sale in the market was sold at the price somebody might pay today.
In other words, that value is just a guess. It's nothing more than that. There has been no sale to prove it's right in most cases. There has been no money made across the market as a whole at the price in question.
So, when, and if, markets are revalued, the people who hold the shares that have now fallen in value will have made a loss, but only on the shares they're holding for sale. If they didn't expect to sell them, they've lost nothing at all. They've still got the share, and that's exactly the same with the supermarket. They will, as a consequence of repricing baked beans from £1 to 80p have lost 20p on each tin of beans that they sell, but suppose that in the couple of days time everybody is flooding into the shops and buying lots of bake beans, they can put the price back up to £1 again, and their hope value will have been restored. The loss would've been small. So might it be when there's a hundred billion pounds written off the value of stock markets.
The point is this. Markets are not built on certain prices. They're built on confidence, and confidence comes and goes. When confidence is high, prices go up. When confidence is low, prices fall. But that doesn't mean that money has gone anywhere, because all that the price of a share represents is that ticket, which is on the stock market shelf, which says you can buy this if you are willing to part with this much now, and the price of a share can move quicker than the price of any tin of baked beans because that's just the way that stock markets are designed. But to suggest that the value was certain in the first place is wrong. It was wrong, in fact, to price the product - the share - at £1 - because, in fact, it turns out it was only worth 80p.
So the point is, has there been a profit? Has there been a loss? Well, in principle, those who own the shares that they could put up for sale have made a loss, but if they sit things out, as I just explained with regard to baked beans, the price might go up again very soon, and they've lost nothing at all.
If somebody's got to sell today because the share is sitting on the shelf and has to go by tonight, like some perishable food item rather than a tin of baked beans, then yes, sure, they've made a short-term loss.
But there's only really a big loss if everybody starts to sell in a panic, and all of those people who then force their shares into the market create massive cash losses, and that's what, for example, happened in 1929, and to some extent it happened in 1987, and it happened again in 2008. It's only panic that really creates big, real losses in financial markets, when there are usually just small movements day by day, and the market goes up by a few billion or down by a few billion. Then there's not really any cash loss at all. This is just a simple repricing exercise. So crashes shift hopes, but unless everybody sells at the new lower price and nobody is normally forced to do so, they don't shift bank balances.
So, did money go anywhere as a result of that £100 billion being wiped off the markets?
No, the money didn't disappear because it was never there in the first place. The only thing that was there were shares that were made available for sale at the wrong price, and as a result of things changing, expectations changing, there's been a revaluation of the market, but there's been no destruction of cash.
The simple point is, value is a guess; we get our guesses wrong, stock markets reprice our expectations, and then share trading carries on. Market crashes are about emotion, not the physical exchange of goods or services, or even money. They are just about people having hopes for the future, which they sometimes get wrong, and when they do, the value of stock markets falls, but don't let that sort of panic define your truth. A stock market crash does not need to mean an economic downturn.
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Nothing seems to underscore that that much of money is ‘made up’ than this – the valuation bullshit factor. And then starts the socialisation of the these imagined losses?
I mean, in the last crash, the ratings agencies said that much of their ratings were just ‘opinions’. It seems that the same applies to prices? With the well-known problems in accounting standards? If the losses were contained so that only the players lost – well, there you go. But the way that these losses are then made everyone else’s problem is frankly unacceptable.
I hope that you are feeling better.
Feeling grotty this morning. Back to bed soon. I admit most of the blog posts were written yesterday.
I guess it is similar if the value of stocks and shares, tins of baked beans and house prices rise in value, you could ask where will the money come from to pay for them. So the answer must be the same: the money may not be available to buy any of them, but if it was, the value is then realised when a trade it made.
This Labour government, like previous UK governments for several decades now, stupidly thinks it’s clairvoyant and can anticipate the “repricing of hope” (John Maynard Keynes’s “animal spirits”) long into the future. What else is the “Fully-Funded Rule” except an activity which actually feeds back cybernetically into that “repricing of hope” by trying to balance the government’s books through raising taxation. Put simply raising taxes affects future investment demand.
The motive for balancing is also stupid of course because they don’t understand chartalism. This is despite John Maynard Keynes writing the following nearly 100 years ago in his book “A Treatise on Money.” He wrote the following right at the beginning of the first chapter:-
“… the age of money had succeeded to the age of barter as soon as men had adopted a money of account. And the age of chartalist or State money was reached when the State claimed the right to declare what thing should answer as money to the current money of account—when it claimed the right not only to enforce the dictionary but also to write the dictionary. To-day all civilized money is, beyond the possibility of dispute, chartalist.”
See page 28:-
http://tankona.free.fr/keynescw5.pdf
Google AI explains chartalism as being:-
“Sovereign power: A government with a sovereign fiat currency system can issue as much money as it needs to finance spending, and is not revenue-constrained in the traditional sense (though it must still manage inflation).
Non-neutrality of money: Money is not neutral in the economic process, and government spending can be a primary driver of demand and employment.”
Where might we trace the root of all this stupidity? I would suggest not recognising the need to balance two drives within us as human beings and life generally Communitarianism and Libertarianism.
You could place a bet that the Treasury Committee in Parliament today will miss the disfunctional cybernetic effect caused by the adoption of the Fully-Funding Rule!
https://www.theguardian.com/politics/live/2025/dec/10/pmqs-latest-news-updates-rachel-reeves-treasury-committee-keir-starmer-kemi-badenoch
If I want to restore the hope value of my supermarketful of 80p baked beans to £1, then planting a story about haricot bean shortages in S America, a mysterious bean virus in Asia and perhaps a rumour of a dock strike in Felixstowe, should promote some panic buying and sustain a price of £1.20 until the shelves are empty. At least then some real money will have then changed hands, in the usual direction, from the shoppers upwards to the wealth extractors.
I wonder, is it possible to create a share shortage, or a rumour of one?
Get well soon.
To some extent you can also note that our mandated safeguards can contribute to the problem.
If you limit your exposure on an asset by having a stop loss that’s triggered if the value drops a certain amount, then individually this protects you from making a larger loss. And can help you to run your wins and limit your losses. Collectively, however, this can trigger a cascade of additional sales at lower and lower progress, creating a crash as those stop loss sales set off further triggers.
That also means that those losses are crystallised, and not waited out, to a larger extent.
Having said that, much of that investment which uses stop losses is the technical analysis side which can be seen as more speculative. After all, if you’re investing in a company based on the fundamentals of the business, then a fall in its value might instead be a time to buy more of those shares as you already felt the price was reasonable before the drop.
So, your conclusion is?
That sometimes we implement the wrong safeguards. That more focus should be on fundamental analysis rather than technical analysis. That liquidity is a double-edged sword – and that as you’ve proposed circuit-breaker type systems seem necessary, particularly when there is a ‘flash crash’ which would exceed normal volatility ranges and set off endless stop loss triggers.
I’d argue that flash crashes are an inherent part of a highly liquid financial system that has ceased to value companies based on fundamental business performance.
You proposed a transaction fee and larger fee under certain circumstances. My concern there would be that with stop losses automatically triggered, this would create a further expense on an already costly trade, and since it’s about automated safeguards they would still trigger. It would also reduce liquidity, potentially making larger stop loss trades more loss-making.
The reliance of modern markets on technical indicators creates the problem. I’m just thinking about areas where a safeguard that helpfully influences decision-making for manual trades may harm automated safeguards, but that’s still within the system of speculative value from the separation from company fundamentals. Unless there is a path towards share values returning to be more based on business performance with less speculative froth, I’m not sure any new rules will about some level of collateral damage.
In a sense though you have already made a loss when you use money to buy a share. You may gain back the money (and more you hope!) when you sell the share, but until you do, you are down the amount you paid.
I like your baked beans analogy, although there is a quantitive difference I suggest. It costs nothing for a company to issue shares (well some legal and administrative fees I guess), but it does cost a supermarket real money to buy the tins of baked beans in the first instance. Now if the tins cost the supermarket £1 (perhaps they want them as a loss leader), but because they aren’t selling, they reduce the price to 80p, the supermarket would really be losing 20p per tin sold (or rather only recover 80p of their initial £1 outlay).
Thanks and don’t worry about re-using or re-purposing content. That’s a valid and effective content strategy. Not everyone is going to see everything you ever do.
Agreed.
YouTube experts promote the idea.
What to do with financial products? Please note that these are observations, not advice.
If you believe that the price of financial assets like stocks & bonds will fall and if your ‘time horizon’ is short (i.e. between now and using the assets for the purpose you set them up) – 5 years or less, say, then switch to cash. This isn’t a permanent decision, but can bring comfort. Stocks & Shares ISAs can be transferred to cash ISAs. Not all cash ISAs take transfers-in, but many do. Stick to the FSCS protected £120,000 per financial institution. If you have a defined contribution pension plan – a personal pension say – that is “unit-linked” you can switch to a lower risk fund such as cash. These funds are not directly comparable to bank and building society accounts, as they can fluctuate a little in price, but they will do.
Consider using products with robust guarantees, such as conventional annuities, “short-term” annuity-like products, holding NS&I and deposit accounts in your SIPP (if you have one) and so on.
None of this is particularly complex or expensive to implement, but do consider taking independent advice from an adviser that doesn’t charge a percentage fee based on your portfolio size (there are a few of us out there) as they will want you to stay ‘invested’.
Finally, you need to set the right context for the actions you take, and that is a very personal set of decisions.
Thanks, Mark. Much to agree with.
I was a bit uncomfortable during Martin Lewis’s ITV show last night, where for the first time he talked about Investing.
Much of it was very good, especially explaining how things work, as you would expect form Martin.
But when asked about whether this was a good time to invest, one of the “Experts” quoted that old trope that “the best time to invert was yesterday, the next best is today”.
And Martin himself said that he is talking about investing 5-10 years and over that time span it will all even out and you will be ahead.
Anecdotally, the story I am hearing is about people getting out of shares, getting out of SIPPS (expecting those to become liable for inheritance tax in the near future) and sitting on cash for the time being.
I’m a bit confused by a few points that I could do with some clarifying.
Firstly, when comparing baked beans to shares you assume that a firm can change the price of a share in the same way that it can change the price of a tin of beans. But the only mechanism through which a firm can reduce their share prices is by increasing the supply of shares, or by shareholders selling off shares. Comparatively, coop can slap a 20p price hike on their beans. So basically ‘confidence’ is just a representation of the price people are buying and selling at at that moment rather than a speculative thing?
Secondly, money is lost in the sense that a pensioner’s future expected income has reduced due to stock market downturn (and will therefore have to adjust current spending accordingly) and Elon’s capacity to take out loans from the bank has reduced (because the value of his collateral has also reduced).
These are just doubts I’ve had, but I would love for someone to correct my understanding.
I think you are being too literal about the metaphor. If it does not work for you, let it go.