Sunday, May 13, 2007

Let’s Define “A Depression”

It’s a drop in economic productivity for a length of time. Speculation comes to a standstill, and bubbles cannot exist. There is a tremendous contraction in the wealth of the whole country. The great money making machines (plural) will collapse.

People are beginning to see the housing bubble. The machine that is cranking out new houses, is still making a profit. Building contractors can easily undercut home sellers, no reason to stop yet. Sticky housing prices are a plus (to the builder).

The stock market has Google at $500 and no dividend. It will probably still go higher. I still laugh about the AOL Time-Warner take over. It was like John Paul Jones with the Bon Homme Richard against the H.M.S. Serapis all over again. Then there are hedge funds who hypothecate the whole mess. They seem to be making big returns. When money enters the market faster than the creation of new issues, then prices rise—-forever???

The IRA’s and Mutual funds are increasing in value because of the increase in share price. What you are looking at is not a return on equity, but an increase in the prices of the equity. For example if Google rises to $600 you have a market perception of its new worth. But if IBM doubles its dividend, this is a real return on an investment. A money manager would probably invest in Google over IBM, because the apparent gains from that investment strategy would bring more investors to his fold. (I could be shot for this oversimplification)

If you look at Detroit, houses are so cheap, that you can't build a new one at those prices. The builders are leaving. The stock market could go to the same extreme. In a crash, Investors would demand a dividend of $4 to warrant a price of $100. Otherwise why not put it in the bank. What we would be looking at, is a return to more realistic values for assets. Some comedian during the Great Depression quipped, "I'm not interested in the return on my money, but rather, the return of my money."

The collapse will be a massive redistribution of wealth, hitting the rich, not the poor. All of this hypothecated wealth would disappear. The million dollar cats, dogs and tulips would be marked to market. Paper millionaires would go up in a puff of smoke.

Decreased consumption, would lead to layoffs. This would expose the credit card bubble and threaten the banking industry, or who ever holds all of this credit debt. Liquidation would then be the final game.

If that isn’t enough, Congress will rise up and try to save us. That's the scary part! It's kind of like getting on an airplane and having an election, to see who's going to be the pilot.


Anonymous said...

Yes! Let all the cardboard cutout wealthy who don't contribute anything to the "real" economy go up in a "puff of smoke". I can live with the shadowy,clever, Hapsburg type wealthy who have always been around since the beginning of time--what I can't stand is all the paper rich low- born sticking their bellies out like they're the next Rockefeller!

Anonymous said...

I'm not sure the stock market is a safe place for everyone to keep their moolah, especially for their reiterment nest egg. As a long term investment, retirement funds, pensions 401k's- everyone seems to agree that the maret is the end point for their hard-earned.

I ask myself "why am I skeptical?"

I can't figure out what makes the stock market such a worthy place?

Not much but pervasive CW influence maintains that this is the place?

But the picture I am trying to paint is the entire population of this country is keeping their eggs in one basket. Isn't it?

The number of people who invest in gold, which besides real estate is the only place to 'park' one's wealth is, compared to the markets, negligible.

But I do like the scenario you describe about the manipulators getting their rich desserts in the end. The wealthy do very little to keep commerce alive. By reinvesting, "their" money never reaches street level- it stays on ice, never being defrosted.

Jumping from Detroit to a similar stock market crash is too great a leap in logic for me to take with you, but I unerstand your underlying point, which is the market(s) overvalued.

The stock market makes me nervous, always has. Is it because my father was born in 1928? Perhaps also being practically raised by my grandparents, who trained me to be thrifty and conserve? These were people who were profoundly influenced by the Great Depression of '29. The mistrust of the market, or more correctly, the forces that can bend and shape it to their will (who really understands it well enoough to trust in it? Only they should invest in it.) stays with me now. They felt tricked, swindled, and bomboozled, and they never directly invested one dollar in the stock market.

Jim in San Marcos said...

Anon 2

You're right about the Detroit paragraph. It wasn't very well written so I changed "a stock would have to have" to "Investors would demand." I think it reads a little better now.

Your link on convention wisdom, reinforces what I have been saying. If enough people believe something is true, then it is true, even if it really isn't.

I can remember buying stocks in the 1970's on my own without a brokers advice and people though I was crazy. You just didn't do that back then.

People in today's market think they are investing. In reality, it borders more on speculation and gambling.

Jim in San Marcos said...

Just a little note to those that read the comments. If you check "other" when choosing an identity, when posting comments, you can type in any name you want and that's a tad better than anon.

Plus here is a little goodie I use everyday with bloggs.Spell Check

Install the program from the link above, then when you type in comments to a blog, you can highlight the text and do a right click and select spell check and it will correct errors.