SOMETHING WICKED THIS WAY COMES

I stopped trying to predict markets back in 2008 when the Federal Reserve, Treasury Department, Wall Street bankers, and their propaganda peddling media mouthpieces colluded to rig the markets to benefit the elite establishment players while screwing average Americans. I haven’t owned any stocks to speak of since 2006. I missed the the final blow-off, the 50% crash, and the subsequent engineered new bubble. But that doesn’t stop me from assessing our true economic situation, market valuations, and historical comparisons in order to prove the irrationality and idiocy of the current narrative.

The proof of this market being rigged and not based upon valuations, corporate earnings, discounted cash flows, or anything related to free market capitalism, was the reaction to Trump’s upset victory. The narrative was status quo Hillary was good for markets and Trump’s anti-establishment rhetoric would unnerve the markets. When the Dow futures plummeted by 800 points on election night, left wingers like Krugman cackled and predicted imminent collapse. The collapse lasted about 30 minutes, as the Dow recovered all 800 points and has subsequently advanced another 1,500 points since election day. Krugman’s predictive abilities proven stellar once again.

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  • WillDippel

    Here is an interesting look at how the Federal Reserve has deliberately manipulated the stock market:

    http://viableopposition.blogspot.ca/2016/08/how-federal-reserve-blew-up-stock-market.html

    This explains why valuations have become uncoupled from reality.

  • oooorgle

    “back in 2008” LOL! as if you were born yesterday… As if it 1913 for the first time.

  • Josh Stern

    Prices in any given market (a single stock, and basket of stocks, bonds, commodities, etc.) are determined by the bid/ask behavior of the traders who are active at any given moment. This includes the one’s registering transactions as well as explicit & implicit sets of buy/sell orders that would be triggered if certain price points are reached.

    A lot of trading entities are acting as proxy for many independent agents. For simplicity sake, characterize each of those independent agents by the avg. length of time the plan to hold a security or a commodity before either selling it or redeeming it (if it’s a note held to redemption) or consuming it if it is an end user of a commodity. The overall market then has a kind of time spectrum comprised of the distribution of these avg. holding times, each weighted by the monetary value of the funds they are putting into that market. When the distribution becomes heavily weighted towards short holding times, then there is a sense in which the market’s prediction about long term events becomes less meaningful – more of an uknown – that market is only making a prediction about short term pricing, rather than long term. Investing based on fundamentals claims the validity of strategies for longer term predictions about prices. These could turn out to be right or wrong for many different reasons. For equities, the mechanisms that cause a truly underpriced equity to “correct” to a fair price are pretty robust – someone with a lot of money can step into the market, buy up the shares, control seats on the board, and take control of the company, its current assets, and future income stream. In the case of an equity that seems overrpriced relative to its assets and future income stream, the mechanisms to cause it to fall in price are a lot less robust. Shorting is a difficult long term strategy because shares can be called in before the investor is ready to exit the position (“short squeeze”), the short is responsible for paying out any dividends issued, and for a plain short, the best case profits are smaller percentages than for an undervalued long. So fundamental shorting is a very difficult form of market participation, and most investors stay away from it except as a way to reduce their overall market correlation (in a mix of shorts and longs).

    For all of the above reasons, lots of overrpriced stocks don’t imply a manipulative plot, but rather a market where shorter term traders feel comfortable with the long side, for some combination of readers (right or wrong).

    There’s a dynamic to this. If the market is overrpriced, then a fundamental investor may think “The best thing I can do is stay on the sidelines and wait” But if he is a professional investor, he will go out of business that way. He cannot afford to wait. If the market stays overrpriced for longer than he expected, he may feel obliged to buy back in, driving prices higher. Again, that is not plot but simply a a function of the way the system is set up. The easiest way for individuals to beat the market is to invest in low cost, passive, broad market funds that approximate an equal weighting of many, many stocks. Shifting weight from bonds to stocks after a big crash, and from stocks to bonds when it’s been a long time since a crash, can probably further boost returns.

    • Josh Stern

      Replying to myself – many people write about how the economic expansion over the last 40 years has led to ever increasing concentrations of wealth in fewer hands. In fact, *that* is a kind of fundamental reason for investments to reach higher valuations, because it our day it tends to mean that a smaller and smaller percentage of the wealth is being used for consumption and so, by default, more of it is set aside for investment and looking for places to park. More and more parked wealth ends up looking for ways to serve less and less active consumption. That is a fundamental recipe for higher market valuations.