What can be learned from stock markets that is useful for controlling inflation?

The process of discovering prices in the markets is complex, it is at times random, independent and variable over time, at times deterministic, biased, tendentious.

Two obstacles present themselves in this price discovery process: ignorance and uncertainty. Faced with the latter, we can do little or nothing, only increase the strengths and know the weaknesses. But over ignorance the remedy is information and knowledge, the more the better.

The subjects that participate in the markets are varied, as are their interests, quantity and subjectivity. They range from entrepreneurs who produce, market, through intermediaries, investors, to reach users, customers and consumers. In turn, these subjects and these markets are subject to conditions: initial (historical and rooted cultural) and edge (national and global) that also influence, affect, induce, restrict. The concretion in the reality of supply and demand is in these markets, increasingly complex and sophisticated.

Monitoring prices and the behavior of their participants over time is a necessary task from everyone's perspective to avoid and mitigate the effects of so-called market imperfections or failures. It also facilitates timely action in the face of contingencies and fortuitous and unpredictable situations that affect its normal development. Monitoring and control is a task that requires science, technology and art.

There are markets for mass consumption goods and services to satisfy people's needs. In contrast, there are stock markets to invest in products that are not consumed, where papers with commitments are traded, markets where investments are made to protect against unforeseen events or to obtain profits.

While in a financial market the rise in prices is a good sign, in the goods and services market it is a bad sign. That is why we say that there is good inflation and bad inflation, or perhaps we should say inflation with good press and inflation with bad press.

What can be learned from stock markets that is useful for controlling inflation?

Before we tackle that question, let's ask a few more to add heat to the issue.

If someone close, very trustworthy, invites you to invest in a business, without specifying much about it, but from which you can obtain a monthly income of, say, 50%. Would you think so?

You. Do you know the story of George Soros and how on November 16, 1992 he broke the Bank of England? It is said that on that day he took approximately 1,100 million pounds sterling speculating in the exchange market of the pound sterling against the German mark . Would you like to be a George Soros?

You. saw the movie with Will Smith, “The Pursuit of Happyness” 2006, or the Michael Douglas movies with Wall Street 1, 1987, Wall Street 2: Money Never Sleeps, 2010 or the movie “The Wolf of Wall Street” , with Leonardo Dicaprio, 2013? How much is fiction and reality in these films?

What do you think about the power that Elon Musk has in the financial markets, each statement or intervention of his in relation to some value in these markets causes it to rise or fall in price? Just like he did with bitcoin and dogecoin as well as Twitter stock.

You. Heard of the scandal over coordinated market manipulation on  Reddit forums , social network, and some stock giants through the Robinhood platform linked to various stocks, such as GameStop?

When deciding to do a risky but very profitable business, would you think about the government and the trust it has in you, or about your personal needs and interests, or about your moral and ethical values?

The issue is complex, it is not as trivial, mechanical, or rational as it is idealized in economic theories or from a distance.

Effort has been made to study, analyze, monitor and regulate the securities markets for various reasons.

To illustrate, we show the historical behavior of the price quotation in the stock markets of three commodities: wheat, corn and coffee, and of the Nasdaq composite stock market index. Two approaches, one disaggregated by products and the other, an index that reflects the aggregate of all the products that are traded in the market, a kind of Consumer Price Index (CPI). Based on  macrotrends figures , site consulted between July 10 and August 3, 2022.

Historical 63 years of the international price of Wheat

15,904 days of closing prices are analyzed, from 7-1-1959 of 1959 to 8-3-2022, with an average international price of US$ 3.76 per fanega (27.21 Kgs.), with a minimum of US$1.17, on 12-8-1968 and a maximum of US$12, on 7-3-2022. In its 63 years, three sections of similar behavior can be distinguished, in terms of peaks and valleys.

The first, from 7-1-1959 to 9-8-1972, 13 years, with an average price per fanega of US $1.74, with variations, maximum and minimum, between +31.15% and -31.28% of the average.

The second tranche, from 9-9-1972 to 6-29-2007, a little over 34 years, with an average price of US $3.5 and variations between +94% and -42.8% of the average.

The third tranche, from 6-30-2007 to 8-3-2022, 15 years, with an average price of US $6.15 and with variations between +110% and -38% of the average.

Historical 63 years of the international price of Corn

15,903 days of closing prices are analyzed, from 7-1-1959 to 8-3-2022, with an average international price of US$ 2.8 per bushel (25.4 Kgs.), with a minimum of US$ $1.07, on 11-21-1960 and a maximum of US $8.31, on 8-21-2012. In this case, five sections of similar behavior, peaks and valleys, are distinguished.

The first, from 7-1-1959 to 6-30-1971, almost 12 years, with an average price per fanega of US $1.22, with variations, maximum and minimum, between +31.02% and -17.74 % of average.

The second tranche, from 7-1-1971 to 10-3-1974, a little over 3 years, with an average price of US $1.97 and variations between +101% and -42.56% of the average.

The third section, goes from 10-4-1974 to 8-17-2006, almost 32 years, with an average price of US $2.56, with variations between +97% and –44.19% of the average.

The fourth tranche runs from 08-18-2006 to 7-2-2008, almost 2 years, with an average price of US $4.18, with variations between +82.4% and –47.5% of the average.

The last tranche runs from 7-3-2008 to 8-3-2022, 14 years, with an average price of US $4.7, with variations between +76.86% and -34.84% of the average.

Historical 49 years of the international price of coffee

12,305 days of closing prices are analyzed, from 8-20-1973 to 8-3-2022, with an average international price of US $0.652 per pound (0.435 Kgs.), with a minimum of US $0.026, on 22- 7-2022 and a maximum of US $3.56, on 4-14-1977, with percentage variations, maximum 414.77% and minimum -96.84% with respect to the average. In this case, a single section with similar behavior is distinguished, in terms of peaks and valleys.

Currently, the international price of coffee has been falling since June 24, 2022, when it went from US $2.26 to US $0.0215 per pound, on 8-3-2022, since then it has remained low. You. Have you noticed this change in the price of the product at the retailer level?

Historical 51 years of the Nasdaq Composite Index

A little more 618 months of the Nasdaq Composite Index are analyzed, four sections can be seen: two of long growth and two short ones of sustained fall.

The first goes from 1-2-1971 to 1-2-2000, 29 years, with an average index of 1,240, a maximum of 8,195.72 precisely on 1-2-2000, it is a behavior of sustained growth, with few valleys and peaks, with monthly percentage variations in the section: average of 0.86%, maximum of 21.9% and minimum of -27.4%.

The second section is a brief sustained fall of two and a half years, it goes from 1-3-2000 to 1-9-2002, the average rises to 4,037, reaching a minimum of 1,918, with monthly percentage variations in the section: average of -3.98%, maximum of 16.01% and minimum -22.95%.

The next section is one of sustained growth, but now 19 years, it goes from 10-1-2002 to 12-1-2021, until reaching its historical maximum of 16,630, with monthly percentage variations in the section: average of 1% monthly, maximum 16.25% and minimum -16.88%.

The last section began on 1-1-2022, it is a sustained drop, for 3-8-2022 it registered 12,348.76.

Two comments: The variation of the international prices of commodities, whose value changes several times a day, based on future contracts, present a behavior between valleys and peaks, in general, similar. The variations, in relation to the average, range between a maximum of 414.77% and a minimum of -96.84%, both high variations in coffee prices. Commodity markets look controlled in terms of price increases, despite the high level of daily trading. This behavior has nothing to do with the behavior of another financial product such as our national currencies against the US currency, in the markets known as Forex. Why will it be?

As for the Nasdaq Composite Index, the behavior is growing and sustained, but moderate, with monthly percentage variations that are around 1%, with maximums and minimums that do not exceed 21.9% and -27.4%. Some countries in the region would like to have this behavior in their Consumer Price Index (CPI) or in its parity against the USD.

Stock or financial product markets are centralized, free, regulated, organized or not, and closed. Monitoring is daily, in some cases (Forex) up to 24 hours a day, except on weekends, each transaction is recorded in real time, price and volume, who comes from and who goes. This information is public, not only for the formal participants, but for everyone.

Its regulation, believe it or not, is at two levels: at the national level, through a government institution called, generally, the National Securities Market Commission with its respective legal framework, and at the specific market level, established by a particular organization made up of private partners, where the right of admission is reserved and rules of operation are established for the partners. Also, there is an unorganized market (Over The Counter – OTC), where transactions take place face to face, in this case there are no specific regulations additional to the national ones. The market is free but...

Apparently a substantial number of professionals, researchers and companies are dedicated to the study and analysis of these markets, their operation, everything concerning the practice that occurs in them. Decisions are based on intuition, fundamental analysis and technical analysis, using sophisticated models and performing simulations of the processes of price evolution and behavior.

In these markets, care is taken against fraud, manipulation, abrupt falls and rises that could greatly harm the participants. On occasions we have heard when the operation with a certain share or with a certain partner or minority trader is suspended if some abnormal behavior occurs or is suspected. In these markets there is no intervention by setting prices, restricting or expanding the flow of capital.

In contrast, the monitoring and control of the market for national mass consumption goods and services is insufficient or absent. When it exists, it is out of date with respect to the digital world in which the economy unfolds, where there is so much exchange of information and payments, it is a liquid world. Will this situation be similar in all countries, whether they are advanced economies or not?

When figures for inflation in commodity goods and services markets are available it may be late and as a consequence the measures lose effectiveness.

Frequently it is not possible to identify abnormal behaviors by product or participant, nor market manipulations in time.

There is no real-time information on the evolution of prices by products or aggregates such as the CPI. Regulators seem to act somewhat blindly or with very little information.

Users, customers and consumers need information, geospatialized on prices, that allows them a better shopping experience. Consumers still have to get pigeon on foot, by car or even by subway, looking for prices, offers, taking data from other consumers and users, to combat speculation in practice.

On the other hand, the companies that produce, trade and invest need pertinent quality information on these markets to discover opportunities, optimize their operations and their offer, improve their profitability and retain customers.

Investing in financial market products may be more profitable than investing in companies that trade, produce and provide services in the real economy, but it is riskier. However, when there is inflation, it seems that as long as the bubble continues to fill, this investment turns out to be the preferred option.

In the US, at the beginning of the pandemic, in the phase of quarantine or shelter in homes, there was an expansion of more than 3 trillion dollars with the intention of offsetting the economic effect. However, the complaints that were reported in the press was that there were companies that used this aid to buy back their shares and increase their revaluation in the capital market, instead of investing them in production. Also, it was mentioned of individuals who used these aids to invest in financial markets through platforms such as Robinhood or buying bitcoins, that is, this monetary expansion was not reflected as well as it could in consumption. How to avoid this deviation? The theory of money does not contemplate this situation.

The excessive and sustained increase in the prices of financial assets known as bubbles (inflation with good press) and general financial crises are linked. That seems to show the history of the 17 world crises, ranging from the tulip bulbs in 1637, in the Netherlands, through the so-called Great Depression, in 1929 and the  dotcom crisis from 2000, until the subprime crisis in 2008. In 12 of the 17 crises the epicenter is in the US Regardless of who initiates them, stock markets and financial markets in general are always involved. Its occurrence in number: one in the 17th century, two in the 8th century, five in the 19th century, eight in the 20th century and two so far in the 21st century. These crises are global in scope and affect the real economy, to a greater degree each time, with greater intensity and duration in developing economies. The more these bubbles grow, the more the real economy of the countries weakens. The knowledge, monitoring and control of these markets is the answer, although little is advertised in neoliberalism.

Inflation, devaluation, debt and corruption are recurring themes that are not lacking in the speech and in the government program of any politician. However, no one has been able to control, let alone prevent these problems. Governments pass and these issues remain unresolved, their effects becoming more critical and frequent.

To do?

1. Even though the market for mass consumption goods and services, in particular, those that make up the basic basket with which the CPI is calculated, is varied and multiple, it is geographically dispersed, many and diverse participants concur, it is poorly organized, especially retail businesses, it is possible to: achieve greater knowledge of them to improve their understanding, generate and disseminate more public information about them to improve everyone's experience, carry out greater monitoring and control of them.
2. Promote the formalization of markets for mass consumption goods and services, whether or not their parts are organized, where it is guaranteed that the participants are legally registered. This will make it possible to channel the stimulus policies of the real economy, in terms of the development of production and the increase in the well-being of the population.
3. Improve control of inflation in this market of goods and services for mass consumption with real-time measures, with the possibility of focal and extended application.
4. Review the State institutions that regulate this market of goods and services for mass consumption, reorient them more towards the innovation of proactive practices, which improve the experiences of the participants by adding value, which strengthen this market and discourage speculators.
5. The study and analysis of both markets, that of goods and services for mass consumption and that of securities, should be promoted from the academy and from private initiative. Inflation, understood as the uncontrolled increase in prices, is not good, in any of its forms.