Friday, August 20, 2010
The Flying Flipping Finger of Fate
Why did I say in a previous post that many times when non-economists use the world "speculator" they are probably engaged in a pejorative and emotional description that has little to do with economics?
A good working definition is that speculation is a purchase (or a sale) whose motivation is for capital gains rather than for (or in addition to) a stream of consumptive benefits or for the hedging of risks. There's no moral content to the term "speculation," and the definition covers numerous activities that average Americans practice all the time. Have you ever been a collector of anything (baseball cards, campaign buttons, plates) in which you bought something because you thought it might go up in value? Then you are a speculator. Do you consider whether the funds in your IRA or 401k will go up in value and when you can cash them in? Speculation. Have you or has anyone you know ever said something like "I'll buy a townhouse for my daughter while she goes to college; it's really a good investment and I can sell it at a profit when she graduates" ? You qualify too.
My hypothesis is that we have social conventions in which some commodities (anything that can generate capital gains) are naturally thought of in a way that says that they are supposed to go "up" or "down" in price, and that anyone trading for capital gains in the opposite direction is tarred as a "speculator." Thus, this public expectation is that stocks "should" go up in price, and anybody who trades on opposite expectations (a short-seller) is a nasty speculator. On the other hand, food and energy prices are good when they go down. So, when oil price rise, we look for the speculators (but not when they go down). And, as we saw in the Graham book from my previous posts, when food prices go up during a shortage, we blame the "sinful" (quite literally, in Graham's eyes) speculator. On the other hand, if you spend any time in rural areas, you'll find that it's the evil speculators who are always driving down the prices of corn, soybeans, or wheat, but when prices are going up, that's good ole supply and demand. (To an economist, demand or supply shifts from changes in expectations about the future are correctly part of the supply and demand process).
But, probably the best example of recent memory has been U.S. housing prices. Everyone wanted on the capital gains bandwagon (unless, of course, you were a middle income young couple trying to buy your first house). So according to my hypothesis, people who traded on upward expectations were the good guys; traders who expected that the bubble would eventually burst, would be the villains. Indeed, I've talked with friends and family who can't believe how people can walk around as upstanding citizens and admit that they were shorting the housing bubble. I tell them that we would have been a lot better off if MORE people had realized that the bubble was going to burst and that, if I had could have found a convenient security to have profited from an eventual housing price drop, I probably would have done the same thing. On the other side, the speculators who were helping to drive up the price of housing took on the status of cult heroes. According to this count, we had no fewer than five cable television shows on house flippers: Flip This House, Property Ladder, Flip That House, Real Estate Pros, and Flipping Out. I think my conjecture explains why we didn't have shows called "Short This Bubble."