Why the Stock Market is so Good when the Economy is so Bad

Posted by PITHOCRATES - March 31st, 2014

Economics 101

No One is going to get Rich by Buying and Selling only one Share of Stock

It takes money to make money.  I’m sure we all heard that before.  If you want to ‘flip’ a house you need money for a down payment to get a mortgage first.  If you want to start a business you need to save up some money first.  Or borrow it from a family member.  And if you want to get rich by playing the stock market you need money.  A lot of money.  Because you only make money by selling stocks.  And before you can sell them you have to buy them.

Stock prices may go up and down a lot.  But over a period of time the average stock price may only increase a little bit.  So if you bought one share of stock at, say, $35 and sold it later at, say, $37.50 that’s a gain of 7.14%.  Which is pretty impressive.  Just try to earn that with a savings account at a bank.  Of course, you only made a whopping $2.50.  So no one is going to get rich by buying and selling only one share of stock.

However, if you bought 10,000 shares of a stock at $35/share and then sold it later at $37.50 that’s a whole other story.  Your initial stock purchase will cost you $350,000.  And that stock will sell for $375,000 at $37.50/share.  Giving you a gain of $25,000.  Let’s say you make 6 buys and sells in a year like this with the same money.  You buy some stock, hold it a month or so and then sell it.  Then you use that money to buy some more stock, hold it for a month or so and then sell it.  Assuming you replicate the same 7.14% stock gain through all of these transactions the total gain will come to $150,000.  And if you used no more than your original investment of $350,000 during that year that $350,000 will have given you a return on investment of 42.9%.  This is why the rich get richer.  Because they have the money to make money.  Of course, if stock prices move the other way investors can have losses as big as these gains.

Rich Investors benefit most from the Fed’s Quantitative Easing that gives us Near-Zero Interest Rates

Rich investors can make an even higher return on investment by borrowing from a brokerage house.  He or she can open a margin account.  Deposit something of value in it (money, stocks, option, etc.) and use that value as collateral.  This isn’t exactly how it works but it will serve as an illustration.  In our example an investor could open a margin account with a value of $175,000.  So instead of spending $350,000 the investor can borrow $175,000 from the broker and add it to his or her $175,000.  Bringing the total stock investment to $350,000.  Earning that $25,000 by risking half of the previous amount.  Bringing the return on investment to 116.7%.  But these big returns come with even bigger risks.  For if your stock loses value it can make your losses as big as those gains.

Some investors borrow money entirely to make money.  Such as carry trades.  Where an investor will borrow a currency from a low-interest rate country to invest in the currency of a higher-interest rate country.  For example, they could borrow a foreign currency at a near zero interest rate (like the Japanese yen).  Convert that money into U.S. dollars.  And then use that money to buy an American treasury bond paying, say, 2%.  So they basically borrow money for free to invest.  Making a return on investment without using any of his or her money.  However, these carry trades can be very risky.  For if the yen gains value against the U.S. dollar the investor will have to pay back more yen than they borrowed.  Wiping out any gain they made.  Perhaps even turning that gain into a loss.  And a small swing in the exchange rate can create a huge loss.

So there is big money to make in the stock market.  Making money with money.  And investors can make even more money when they borrow money.  Making money with other people’s money.  Something rich investors like doing.  Something rich investors can do because they are rich.  For having money means you don’t have to use your money to make money.  Because having money gives you collateral.  The ability to use other people’s money.  At very attractive interest rates.  In fact, it’s these rich investors that benefit most from the Fed’s quantitative easing that is giving us near-zero interest rates.

People on Wall Street are having the Time of their Lives during the Obama Administration

We are in the worst economic recovery since that following the Great Depression.  Yet the stock market is doing very well.  Investors are making a lot of money.  At a time when businesses are not hiring.  The labor force participation rate has fallen to levels not seen since the Seventies.  People can’t find full-time jobs.  Some are working a part-time job because that’s all they can find.  Some are working 2 part-time jobs.  Or more.  Others have just given up trying to find a full-time job.  People the Bureau of Labor Statistics (BLS) no longer counts when calculating the unemployment rate.

This is the only reason why the unemployment rate has fallen.  If you add the number of people who have left the labor force since President Obama took office to the number the BLS reports as unemployed it would bring the unemployment rate up to 13.7% ((10,459,000 + 10,854,000)/155,724,000) at the end of February.  So the economy is still horrible.  No secret to those struggling in it.  And the median family who has seen their income fall.  So why is the stock market doing so well when businesses are not?  When profitable businesses operations typically drive the stock market?  For when businesses do well they grow and hire more people.  But businesses aren’t growing and hiring more people.  So if it’s not profitable businesses operations raising stock prices what is?  Just how are the rich getting richer when the economy as a whole is stuck in the worst economic recovery since that following the Great Depression?

Because of near zero interest rates.  The Fed has lowered interest rates to near zero to purportedly stimulate the economy.  Which it hasn’t.  When they could lower interest rates no more they started their quantitative easing.  Printing money to buy bonds on the open market.  Flooding the economy with cheap money.  But people aren’t borrowing it.  Because the employment picture is so poor that they just aren’t spending money.  Either because they don’t have a job.  Only have a part time job.  Or are terrified they may lose their job.  And if they do lose their job the last thing they want when unemployed is a lot of debt they can’t service.  And then there’s Obamacare.  Forcing people to buy costly insurance.  Leaving them less to spend on other things.  And increasing the cost of doing business.  Another reason not to hire people.

So the economy is going nowhere.  And because of the bad economy businesses have no intentions of spending or expanding.  So they don’t need any of that cheap money.  So where is it going?  Wall Street.  The only people who are borrowing and spending money.  They’re taking that super cheap money and they’re using it to buy and sell stocks.  They’re buying and selling like never before.  Making huge profits.  Thanks to other people’s money.  This is what is raising stock prices.  Not profitable businesses operations.  But investors bidding up stock prices with borrowed money.  The people on Wall Street are having the time of their lives during the Obama administration.  Because the Obama administration’s policies favor the rich on Wall Street.  Whose only worry these days is if the Fed stops printing money.  Which will raise interest rates.  And end the drunken orgy on Wall Street.  Which is why whenever it appears the Fed will taper (i.e., print less money each month) their quantitative easing because the economy is ‘showing signs of improvement’ investors panic and start selling.  In a rush to lock in their earnings before the stock prices they inflated come crashing down to reality.  For without that ‘free’ money from the Fed the orgy of buying will come to an end.  And no one wants to be the one holding on to those inflated stocks when the bubble bursts.  When there will be no more buyers.  At least, when there will be no more buyers willing to buy at those inflated stock prices.  Which is why investors today hate good economic news.  For there is nothing worse for an investor in the Obama economy than a good economy.



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Air Handling Unit, Outside Air, Exhaust Air, Return Air and Energy Recovery Unit

Posted by PITHOCRATES - March 27th, 2013

Technology 101

Things that Absorb Energy can Cool Things Down and Things that Radiate Energy can Warm Things Up

When two different temperatures come into contact with each other they try to reach equilibrium.  The warmer temperature cools down.  And the cooler temperature warms up.  If you drop some ice cubes into a glass of soda at room temperature the warm soda cools down.  The ice cubes warm up.  And melt.  When there is no more ice to melt the temperature of the soda rises again.  Until it reaches the ambient room temperature.  The normal unheated or un-cooled temperature in the surrounding space.  As the soda and the air in the room reach equilibrium.

When two temperatures come into contact with each other what happens depends on the available energy.  Higher temperatures have more energy.  Lower temperatures have less energy.  For heat is energy.  Things that absorb energy can cool things down.  Things that radiate energy can warm things up.  And this is the basis of our heating and cooling systems in our buildings and homes.

Boilers burn fuel to heat water.  A furnace burns fuel to heat air.  The heated water temperature and heated air temperature is warmer than the temperature you set on your thermostat.  When this very hot water/air circulates through a house or building it comes into contact with the cooler air.  As they come into contact with each other they bring the air in the space up to a comfortable room temperature.  Above the unheated ambient temperature.  But below the very hot temperature of the heating hot water or heated air temperature.

Heating and Cooling Buildings consume up to Half of all Energy on the Planet

Large buildings have air handling units (AHU) that ventilate, heat and cool the building’s air.  They’re big boxes (some big enough for grown men to walk in) with filter sections to clean the air.  Coil sections that heat or cool the air as it blows through these coils.  A supply and a return fan to blow air into the building via a network of air ducts.  And to suck air out of the building through another network of air ducts.  And a series of dampers (outside air, exhaust air and return air).

To keep the air quality suitable for humans we have to exhaust the breath we exhale from the building.  And replace it with fresh air from outside of the building.  This is what the dampers are for.  The amount they open and close adjusts the amount of outside air the AHU pulls into the building.  The amount of the air it exhausts from the building.  And the amount of air it recirculates within the building.  Elaborate computer control systems carefully adjust these damper positions.  For the amount of moving air has to balance.  If you exhaust less you have to recirculate more.  Otherwise you may have dangerous high pressures build up that can damage the system.

It takes a lot of energy to do this.  Buildings consume up to half of all energy on the planet.  And heating and cooling buildings is a big reason why.  Because it take a lot of energy to raise or lower a building’s air temperature.  And keeping the air safe for humans to breathe adds to that large energy consumption.  If you stand outside next to an exhaust air damper you can understand why.  If it’s winter time the exhausted air is toasty warm.  If it’s summer time the exhausted air is refreshingly cool.

An Energy Recovery Wheel is a Circular Honeycomb Matrix that Rotates through both the Outside & Exhaust Air Ducts

In the winter large volumes of gas fire boilers to heat water.  Electric water pumps send this water throughout the building.  Into baseboard convection heaters under exterior windows to wash this cold glass with warm air.  And into the heating coils on AHUs.  Powerful electric supply and return fans blow air through those heating coils and throughout the building.  After traveling through the supply air ductwork, out of the supply air ductwork and into the open air, back into the return air ductwork and back to the AHU much of this air exhausts out of the building.  That returning air is not as warm as the supply air coming off of the heating coil.  But it is still warm.  And exhausting it out of the building dumps a lot of energy out of the building that requires new energy to heat very cold outside air to replace it.  The more air you recirculate the less money it costs to heat the building.  But you can only recirculate air so long before you compromise the quality of indoor air.  So you eventually have to exhaust heated air and pull in more unheated outside air.

Enter the heat recovery unit.  Or energy recovery unit.  There are different names.  And different technologies.  But they do pretty much the same thing.  They recover the energy in the exhaust air BEFORE it leaves the building.  And transfers it to the outside air coming into the building.  To understand how this works think of the outside air duct and the exhaust air duct running side by side.  With the air moving in opposite directions.  Like a two-lane highway.  These sections of duct run between the AHU and the outside air and exhaust air dampers.  It is in this section of ductwork where we put an energy recovery unit.  Like an energy recovery wheel.  A circular honeycomb matrix that slowly rotates through both ducts.  Half of the wheel is in the outside air duct.  Half of the wheel is in the exhaust air duct.  As exhaust air blows through the honeycomb matrix it absorbs heat (i.e., energy) from the exhaust air stream.  As that section of the wheel rotates into the outside air duct the unheated outside air blows through the now warm honeycomb matrix.  Where the unheated air absorbs the energy from the wheel.  Warming it slightly so the AHU doesn’t have use as much energy to heat outside air.  It works similarly with air conditioned air.

Many of us no doubt heard our mother yell, “Shut the door.  You’re letting all of the heat out.”  For whenever you open a door heated air will vent out and cold air will migrate in.  Making it cooler for awhile until the furnace can bring the temperature back up.  It’s similar with commercial buildings.  Which is why a lot of them have revolving doors.  So there is always an airlock between the heated/cooled air inside and the air outside.  But engineers do something else to keep the cold/hot/humid air outside when people open doors.  They design the AHU control system to maintain a higher pressure inside the building than there is outside of the building.  So when people open doors air blows out.  Not in.  This keeps cold air from leaking into the building.  Allowing people to work comfortably near these doors without getting a cold blast of air whenever they open.  It allows people to work along exterior windows and walls without feeling any cold drafts.  And it also helps to keep any bad smells from outside getting into the building.



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