Turns out prices aren’t set by Random Lengths afterall. Adam Taggart, President of Peak Prosperity, explains that prices are actually determined by two things: the upper limit that the marginal buyer is willing to pay, and how intensely the competition from other buyers pushes him towards that limit. Taggart tells us that this basic economic principle that prices are set at the margin, “is just as true for stocks and housing as it is for fine art,” adding: “Most of us don’t really think about the marginal buyer much, but he (or she) is very important. The marginal buyer can evaporate faster than you think. That is the nature of an asset bubble’s unavoidable destiny to pop.”
So what happens when the “current” marginal buyer of an asset disappears? “Prices must fall to become affordable to the next marginal buyer,” confirms Taggart. The example he cites hits home. He submits the marginal buyer of Metro Vancouver real estate has vaporized since the provincial government’s August 2nd passage of the 15% foreign buyer tax. His expert analysis makes for an interesting read, here.
Wall Street Farm Animals?
When a truckload of pigs going to slaughter rolled over this morning in Burlington, Ontario, it’s reported the surviving swines sprung to their hooves and made their getaway. Freedom! We’ve since learned that all that futures bacon has been corralled. The Great Escape was foiled. Bummer. It’s certainly a reminder there’s no underestimating the relative value pigs bring to the table when it comes to serving up a good breakfast. The chicken makes a significant contribution, but the pig makes the real commitment.