The Magic of Market

INTRODUCTION

I’ve chosen the book entitled “How does the free market function?” written by Joel Kurtzman ( journalist and editor at “New York Times”, editor at “Harvard Business Review” and founder editor at “Strategy and Business”) and published at “Curtea Veche” publishing house (Bucharest,2006) because I’ve wanted to learn more about the basics of financial market through an experienced economist eyes. Being written in an original style with many useful examples was another reason for me to read it. It is structured in nine proportional chapters that deal with various financial instruments in order to explain the magic of market.

CHAPTER 1-WHAT ARE PRICES?

Chapter 1 focuses both on the mechanism and importance of financial market. Some of the basic steps related to this market are : assures the capital needed for investments and establishes the prices and distributes the degree of risk between the economic agents involved. Known as the commonplace where participants confront their ideas and money, the market has a real face and a virtual one too. “If u want to play you must pay first” is the motto used to describe best the mechanism of market according to the author.

Starting with the 90’s the trend of saving money in bank accounts was replaced by the idea of investing money in mutual funds. The statistics show that in the last 20 years the total amount of money has increased from 2 to 20 billion dollars.

The relation between money and prices is very-well shown in Kennedy’s famous quotation : “All the stalled boats can be lifted by an ascending wave”.

Goldman Sachs, Solomon Brothers, Merrill Lynch are few of the authorized guarantors, in the trade and issuance of securities, that grant credits to companies in need.

- HOW ARE THE PRICES ESTABLISHED?

It is a process that gathers both visible and invisible factors that are permanently changing. According to Joel Kurtzman the main factor is the cost (e.g. the rent, the electric power, the equipments) of producing commodities. Every economic agent tries to maximize his profit and minimize the risk. Through the market producers are able o sell their products and though competition low-quality commodities are eliminated from the market. In his book Joel Kurtzman affirms: “As Buddha’s smile or as the sand-shapes left by the wind, the prices can be misleading” or as the Greek philosopher Heraclit said: “ You can’t step twice in the same place “- prices are changing all the time. This brings the author to the question: How much a financial instrument measures? It depends on the moment you put the question. The price is determined as a mixture of factors like: supply, demand, inflation, revenue etc.

CHAPTER 2- WHAT IS VOLATILITY?

Defined as an aggregated movement of prices over a period of time, its increase is highly related to the up trend of computers and internet users in investments and brokerage offices. Nowadays, almost all international financial markets became more volatile and the rate of volatility has obviously increased. Once did the technology developed so did the brokerage services. As they begin to be more and more informed about the market context the brokers try to react as soon as possible, instead of “chewing” the events. This situation is known as the “ loop of regeneration”.

This evolution took place mostly because of Reuters press agency flexibility at innovation.

A famous economist on Wall Street sustained that: “You can’t come up against the general belief of the market, even if the market is mistaken”. What the author suggests is that the absolute truth of information provided by the market is not what counts, what matters is people’s reaction. The chapter also focuses on the Nobel Prizes won by some great economists like : Harry Markowitz (a mathematical model to create a portfolio for showing the degree of risk), Fisher Black and Myrom Scholes (estimative methods of obtaining the price of a stock in a future trade), Merton Miller and many others.

In the first decades of the 20th century the trade of securities was very difficult because the Telecommunication System was at beginning. Nowadays thanks to CNBC, CNNfn, Bloomberg TV, Reuters etc the news are delivered with the speed of light. But this progress was also encouraged by famous names like : General Electric, Microsoft, Intel, Berkshire Hathaway , Home Depot. The electrical neural system shown that ,in time, the critical moments in economy are starting to diminish and if the sudden changes had the shape of U(before rising again, the lowest points stay in depression for a while) nowadays they have the shape of V (before rising again, the lowest points stay in depression for a short period of time).

CHAPTER 3- THE SECRET LIFE OF MONEY

From the author’s perspective money represent a collective idea that people use, contribute and transmit but they do not own it, not individually. For a better understanding Joel Kurtzman gives an social-cultural example. He says that if Martha Stewart cooks and decorates her house for Thanks Giving Day that does not mean she owns the national festival. Martha is using this festival just as the rest of us. The same story goes with the money. The value of money increases as people tend to trust in their power and start using them more frequently.

- MONEY AS A BELIEF

This section highlights the fact that money are impartial, just as the amber is used for making perfumes- a odorless substance poured ,by producers, into the ingredients to maintain their beautiful smell.

Academia de Studii Economice