Blithering Idiots on Financial News

Last Monday’s Noon Business Hour on the CBS radio affiliate in Chicago reminded me why listening is hazardous to my health, for one simple reason: The “experts” they interview discuss concepts so unreal and stupid that a 9-year-old can see their silliness.

My poster child for this is admonishments to be bullish on stocks because there’s “money on the sidelines” that can still come into stocks and drive prices higher.

Now think about that.

One day I trip over a million dollars I didn’t know I had, and I embrace bull fever and rush all that fiat script to my broker. He uses it to buy a bunch of AAPL stock, just like every other lemming.

Does that million dollars go to Wall Street to sit in someone’s vault? How exactly does it go INTO the market and STAY THERE?

Of course it doesn’t. The seller walks away with it. So isn’t there STILL a million “on the sidelines?” Isn’t there ALWAYS the same amount of money on the sidelines?

How on Earth, then, does dollar value parked in bank accounts, money market funds or anywhere else have anything whatsoever to do with driving stock values higher?

The only relationship (and it’s a fickle one) is that the wealthier people feel, possibly the more willing they are to agree that stock prices should be higher.

The problem with this is that such beliefs are the only thing that ever sustains a bull (or bear) market.

Just as Bill Gates cannot convert all his wealth to actual banknote cash without driving down the value of his stock shares, the total value of the stock market (or bond market, or real estate market) is an accounting illusion.

It’s kind of like Schrodinger’s Cat. It’s only there if you look at it, but the moment everyone tries to actually touch their “wealth” by converting it to banknotes it turns into something else…or actually, nothing else.

The dirty little secret of all intangible wealth is that it exists only in the collective conscious. If IBM has just under a billion shares outstanding, and the price per share is $188, its owners all think they collectively own $188 billion dollars, right?

Adjusted for splits, IBM has about doubled in the last 5 years. For the people who ultimately owned shares that entire time, what did they do to “double their wealth?” Where did that wealth increase come from?

Sideline cash? HAH! We already noted that there is no such effect.

In fact, all that had to happen was a succession of agreements (trades) between buyers and sellers who collectively agreed that the value (in dollars) of the shares should be higher.

Theoretically, it could have been the same two people (individuals) who traded 1 share of stock back and forth several times, each time agreeing that the value should be higher, while everyone else did absolutely nothing whatsoever.

Now, all the while IBM’s employees were presumably doing something useful and productive, providing manufactured goods or services a willing buyer paid for in a free market, but for the most part the profit “dollars” earned in that endeavor do not simply get stored in an IBM basement somewhere.

The dollars the firm earns in its business are largely separate from the doubling in share price (and total value of the firm) in the last five years.

In reality, all the stock market really represents is an agreement, at any one time, among the potential sellers and potential buyers of stock about the relative value of shares.

It is a state of mind of the collective, AKA mob psychology, and endless soothsayers and shamans are trotted out to rationalize what is actually a very ethereal and intangible figure.

This is why, when the mood changes and people begin to worry about the future, the feedback loop of prices rising can invert and a succession of paired buyers and sellers agree that the price is too high and should be lower.

When this happens, money doesn’t “come out of” the stock market. Every dollar an actual seller walks away with was a dollar an actual buyer took from the bank (or whatever) to make the purchase.

The big issue, however, is that owners of IBM stock who are NOT actively selling their shares still watch as the actions of others (actively trading) drive down the value of their property, just as happened on the way up.

The “wealth” that the bull market created from nowhere goes right back to its source. No net money comes out of IBM stock, but as the share price declines, total accounting wealth falls for real.

We remain in the stratosphere of a once-in-300-years asset mania, but what very few seem to understand is that all the dollar-value accounting wealth they think they own is simply a shared belief, not something carved in granite and thus permanent.

If that shared belief rolls over and overshoots some mythical normal to the downside, it is perfectly reasonable to imagine most of the growth of the last 35 years disappearing back into the ether from where it came.

That’s something the shamans will never share with you.

Author: DC Sunsets

Married, with grown kids. Occupation: salesman (in medical fields) Philosophy: "Imagine standing in a darkened warehouse; you can't see the walls or ceiling, only a small radius around you lit by a flashlight, but you sense that the room is enormous. The room represents the sum of all possible knowledge, and the flashlight's beam represents your own knowledge. When you learn something new, your flashlight gets brighter...you can see more of your surroundings....but.....your sense of the total size of the room grows exponentially. No matter how knowledgeable you become, your share of the sum of total knowledge is insignificant. Wisdom is recognizing that there are no masters, only students on a path. "The wise are hesitant while fools clamor to rule. This is why humanity is always ruled by fools or by sociopaths, for fools lack the humility of wisdom and seek power, life's most addictive and abused substance, while for sociopaths, the exercise of power over others is their highest joy, akin to love's adoration in normal people."

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9 Comments
Administrator
Administrator
October 9, 2014 4:47 pm

Whipsawed

Yesterday’s late afternoon Fed rally that ran up so sharply faded just as sharply today.

Yesterday the Fed’s dovish tones had American stocks partying like it was 1999. And today, after the cold water was thrown on the global economy by more dire outlooks from Europe, traders reconsidered and thought, ‘yes the Fed is dovish, because the economy is not recovering. Hey, the economy is not recovering. Sell!’

The Fed’s jawboning giveth and the Fed actions or lack thereof taketh away. At least in terms of money manipulated wealth.

I don’t want to give these markets too much credit for thought though, considering that the average holding time of a stock trade is now measured in seconds. These sharp moves ought not to surprise one too much. This is a very speculative, hot money driven, technical market. It reminds me of a description I read of the stock markets volatile up and down moves in the Summer of 1929.

We are now in earnings season. It was not auspicious that Alcoa beat on earnings and came inline on revenues last night, put out a rosy forecast, and the stock sold off today.

Well that’s today. And here in the United States of Amnesia, we only live in the now.

And it doesn’t matter if the broad swath of people, thriving, as long as they are surviving. It matters that the things that really count to the power players look good. And baby, our one percent look marvelous.

Jesse

Administrator
Administrator
October 9, 2014 4:48 pm

Robert Johnson: US System Is Broken and Heading Toward Social Conflict

“We are on an unsustainable financial trajectory, the financial system has been unmasked as unstable and unfair, and that contributes to inequality, part of which comes from the operations of the financial sector, and is a formidable, formidable cause of social instability in the medium term.”

Robert Johnson

The English-speaking people are marvelously unaware and uninformed of what is happening in their own countries.

Peaceful demonstrations and grievances such as Occupy Wall Street are systematically stifled and crushed. Non-sanctioned opinions are marginalized and ridiculed.

A vocal minority is energized by stimulating their fears, hatreds, and paranoia. The majority are ‘diverted’ and confused. The professional class is acquiescent to the status quo. The intellectuals hide in their studies.

The plutocracy’s standing order of the day is ‘keep a lid on it.’ Until when? The increasing use of force? And then what?

There will be change in finding the right issue, the fulcrum of change that will enable diverse groups with different perspectives to come together and energize themselves in a common cause. Favorite causes and individual egos will continue to be an impediment to this. The Occupy movement lost focus because it chose to protest in favor of everything and became enamored of process over substance.

I thought Johnson’s idea of eliminating private schools was in the wrong direction. Consolidating the schools and eliminating diversity while giving them to an unreformed and corrupt political regime does not seem to be in the first priority for change. Social engineering tends to be longer term, divisive, and debilitating. And I don’t think eliminating choice is the key to achieving progress. It sounds somewhat statist.

The focus of effective reform needs to be struck at the root, which is the financial sector and the mechanism of financial looting, and the money corrupted political process which is how injustice is propagated.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.

Jesse

TE
TE
October 9, 2014 4:57 pm

While Jesse is right, he is also wrong.

That won’t stop the hoards of destroyers unleashed upon the productive (not employed, but producers) by the feds, states and locals.

When Michigan went into their “one state” recession, they touted how they “cut payroll” and “costs.”

All they did is force a few old folks to retire (and still be paid), not hire for a couple years in accounting, but MASSIVELY hire tax collectors, auditors, inspectors, regulators and the like.

We added more Sales Tax Auditors than we laid off in ALL other departments. That was considered “cutting.”

We could blow up WDC and Wall Street, but sadly, we would just add more levels at the local to cover it up.

Nothing has “changed” and everything has, in actuality, gotten worse.

When this puppy finally blows it is going to be spectacular. Freaking spectacular.

*boom*

Stucky
Stucky
October 9, 2014 5:27 pm

Admin

I’m doing a “deceiver” article …. something about Jesus’ brother (but, not what you think) …. should be done by 7PM …. I expect top billing. :mrgreen”

Stucky
Stucky
October 9, 2014 5:27 pm

:mrgreen:

IndenturedServant
IndenturedServant
October 9, 2014 5:29 pm
Spinolator
Spinolator
October 9, 2014 5:48 pm

Yes. You’re a total lemming. I would buy a Navigator, a new iphone, and a big flat screen. And maybe some Sears stock now that it’s at a bargain price. I invest in real things you see. Fools!

El Coyote
El Coyote
October 10, 2014 1:19 am

The market is all a notional value, it’s all about the ‘story’. Today’s story is, AAPL is undervalued by half. Eventually folks will see the dollar for what it is, a storyline, an article of faith and magic.

When folks lose heir faith in the dollar, even that piece of paper will have a fluctuating value attached but it will be measured against the Yuan. We will have a paper currency that looks like a Yuan bill but we will refer to it as a Chink-dollar to make folks comfortable with the changeover.