Jul

30

Milton FriedmanPrice Theory by Milton Friedman discusses Ceteris Paribus, which is the analysis of the demand curve where all things are held constant. Since all other things cannot be held constant, he uses an Engel Curve to define the demand curve by holding income constant. Under this theory what is the demand curve on the current market with recent drops in price and how will it act given real income? What is the elasticity of price? Certainly, the market this year that could not go down had little elasticity.

Recently the yield of the S&P has gone up since the income remains about the same, but the price is lower. Given a fixed income or amount of money, a trader can now buy more of the S&P than he could with the same money a week ago, leaving that trader with more income or more money left over after purchasing S&P say Friday at close or right at the recent open. Looking at alternatives, mainly bonds, the yield for bonds has dropped radically recently, making the S&P look even better.

This is the underlying theory behind the Fed model. Given that the measure of the nation's income is the GDP, and it remains about the same, as long as it keeps going up, under an Engel curve, the S&P will keep going up. Given in real terms, with inflation starting to abate, in fact the real yield of the S&P is going up even more, making it an even better deal under this analysis. The bottom line is there has not been much chance in the last year for a buy and hold type to get in. Now seems like a good time.


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