Hi, Kossacks. I've been thinking about the stock market recently and wanted to get some feedback on my thoughts. I'm not a financial guy, so I've probably made some mistakes. Also I've over simplified things deliberately to keep this shortish.
The housing market collapsed because houses don't go up in value so real estate is a bad place to invest. Stocks as well have a fixed price and are similarly a bad place to invest. In fact, investment itself is a Reaganomics myth. According to Reagan investing money is like a farmer planting seeds into the ground and waiting for it to grow into jobs and money. Our parents taught us money doesn't grow on trees and that was wisdom. On the other hand, they told us also not to believe in monsters but that was lies so we could sleep at night. The Stockopalypse is coming.
Everything that is sold must be bought and houses are not like novelty USB sticks which can be shipped all over the world. Houses must be sold where they are built. You can haggle about the price, but eventually it comes down to what people can afford. With a thirty year mortgage most people can afford a house worth three times their annual income. Incomes have not gone up and the price of houses should not have gone up either. Somehow the prices became disconnected from reality. In Arizona, the median house price was ten times the median income. And in the end reality won that battle.
Just like house prices became disconnected from reality, the price of stock has also become disconnected from reality. Here is a link to S&P index performance over sixty years. Something funny happens to the graph around 1980. The stock was growing steadily, but then it starts growing exponentially until we hit the dot com collapse. Meanwhile we all know first hand that paychecks have not gone up, we're facing high unemployment rates and obviously the economy is not growing exponentially.
Also look at how smooth the graph is before 1980 and how jagged it becomes later. The forces which drive the economy are slow shifts like improved education, and changing demographics. If the stock market reflected reality it would be a slow moving line as well. The jaggedness here is caused by exponential upward growth meeting dramatic downward collapse because we're on the edge of a bubble bursting. You would see the same thing if you had this graph for the Great Depression era.
The growth in the stock market is caused by Reaganomics. Reagan loved the stock market. When he came to office, wealthy people had to pay 70% tax but he lowered it to 28% so that they could invest their money. He gave tax incentives to invest. He invented the 401k plan so ordinary people could invest for their retirement. Reagan isn't president but his philosophy is still around. When the same people who fought to preserve Bush's tax cuts turn around the next month and filibuster Obama's tax cut for ordinary Americans, that's Reaganomics at work.
Investors we are told are like modern day, benevolent, warrior kings. Admire them with their thousand dollar hair cuts. Stand in uncomprehending awe of their fancy MBA pronouncements. These people are titans of industry. They have come to create jobs and wealth for all. But I am not a big fan.
First of all, the stock market is unethical. Over and over I have to listen to my grandfather's stories about selling trees to other ranchers for their wind breaks. "If people weren't at home, they would just leave me a blank check on the dining room table and I'd fill in the amount they owed. That's how people trusted me. One time there was this guy who complained about my trees and I offered to refund his money on the spot. Ha! That shut him up for darn sure. I don't need his money, I've got pride." Pride like my grandfather's is what made "Made in America" a stamp of quality. But when you sell stock you are hoping that the person buying will lose money. That's what buy low and sell high means. That's not wisdom. That's selfishness.
Also the stock market does not create jobs. If you buy Microsoft stock, none of that money goes to Microsoft, it goes to the guy who sold it to you. So none of it is used to create a job. Even if it did go to Microsoft, it wouldn't create a job. Microsoft doesn't hire because they have money, only because they need people in order to make more money. Perhaps you've noticed that stores hire more clerks at Christmas time and you assumed it was because the hiring managers got caught up in the Christmas spirit? You were mistaken. There is no Santa Claus.
According to Reaganomics, the wealth is supposed to trickle down and we all benefit, but that's not what happens. If you are an ordinary person and you have some money then probably you go the farmers market and buy a cabbage. The farmer takes the money and buys school books for his kids. The bookshop lady buys a karate outfit. In the end, everyone gets something they need. But if you are one of the super rich and Bush gives you a tax cut then you do not buy a cabbage. You already have more than enough vegetables. In fact, you already have everything that money can buy. The truth is that expensive things are nice but very extremely expensive things are just tacky and stupid like this this diamond encrusted SUV with whale penis leather seats. So rich people do not spend their money, they invest it.
The Bush tax cuts added three trillion dollars to the deficit and we spent that money gambling on stocks in the stock market. The stock market is not like a bank where you can go in any time and withdraw money. The person who sold you that stock has already spent it and used it to buy more stock. The stock market is about trading bits of paper back and forth to each other. It's not about buying useful things like potatoes which you can eat. In a sense, the stock market is where money goes to die.
The price of things depends on how good they are and how rare they are. Look again at that graph of the S&P. It doesn't show stock getting better and better, it shows stock getting rarer and rarer. The graph is exactly what you would expect if you invested money into the stock market at a constant rate without regard to the price of stock. For three decades we have spent trillions and trillions of dollars buying stock. With normal things like washing machines people know how much they are worth. If the price is too high, they won't buy it. But for stock it's been thirty years since the price reflected the actual worth and a young day trader today probably wasn't even born then. In fact, with stock you get the opposite effect from washing machines; when the price goes up it becomes the exciting stock of the day and everybody rushes out to buy it. Who can blame them? Honestly, this is a very exciting time to be an investor. In this jagged end of the stock market, it really is possible to double your money overnight. But don't think you're helping anyone, and don't think it can last.
I was going to write a paragraph about dividends here and how the stock market should work in an ethical sustainable way. I have deleted that because I don't want to give the impression that this thing is fixable. I've read articles talking about the high price of stock that concluded "Oh well, most of these investments are hedged and insured." There is no kind of insurance that can insure even the three trillion dollars from the Bush tax cuts. The coming economic disaster is going to be bigger than anything we have seen before.
The Stockopalypse is coming and it can't be stopped.