Thursday, November 7, 2013

All A Twitter In The Greed And Stupidity Loop

This market is all a twitter as we continue in a "greed and stupidity loop." The loop can be explained as follows, stocks are rising so why get out, not getting out is causing the stocks to rise. Yes we are indeed experiencing a double down and let it ride mentality. I don't have to explain the greed part, a perfect example is how Twitter ratcheted upward its IPO price over the last few weeks from the mid teens to $26. People continue to enter the stock market at these nose bleed heights and often at super high multiples in an effort to make money in an economy where few opportunities exist.

The stupidity part is more interesting to explore, many people have noted the disconnect between Wall Street and the economy yet the market continues to punch out new record highs. The stupidity is that many investors discount the risk or are oblivious to how vulnerable they are to a rapid and massive loss. From a low of under $30 just a year ago Tesla stock surged to a high of around $180. Yesterday the stock of Tesla Motors plunged 14.5% to close at $151 after trading as high as $180 on Tuesday. Anyone highly leveraged and trading on margin would have been toast following a day in hell.

While people continue to tout the stock market as the place to be in this low interest rate environment where few options exist, it is a dangerous place. Placing your money safely in a bank means you can watch it slowly be nibbled away by inflation. Ben Bernanke and the Federal Reserve have made the manipulated and distorted stock market ground zero in the war to convince us all is well. The idea is that a soaring market will bolster pension funds, support housing prices, and generate a wealth effect is flawed, instead it only creates a bubble. Fact is if QE or the massive government deficit spending that props up our economy is removed it will collapse.

The entitlement societies that have developed over the last several decades were created on the back of the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances. They were built on the assumption that those advantages would continue in both Europe and US, and that ever greater prosperity and entitlements would be sustained through debt financed consumption growth. In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about ever more growth. Now reality has raised its ugly head and it is becoming apparent that this is unsustainable and major structural adjustments must be made.

The entitlements and promises that have piled up have become overwhelming. While the populations of Europe and America were led to believe the good times would never end, their core advantages in technology, capital, and productivity started to erode, and  to lag behind the emerging countries. Manufacturing jobs have steadily gone elsewhere, replaced by low skilled service jobs, this has removed the supports from our debt fueled prosperity showing it to be unsustainable. It might be best to avoid the greed and stupidity loop.

 Footnote; This post dovetails with many of my recent writings, for more I might suggest reading the article below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged,

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