And they call them Equities?

If you had bought the whole basket of stocks used to provide the Dow Jones Index in 1999 in preparation for your retirement this year it would have cost you $10,000. Guess what? The Dow just clawed its way back to $10,000 this week – you wouldn’t have lost a thing. Except today’s US dollar would buy you 25% less than it would in 1999. Good luck on your retirement.

The dictionary says of the word equity; fairness or impartiality, justness, something that is fair and equitable. Since everyone’s stocks would have lost the same amount of value I suppose one must concede that the stock market is eminently fair and equitable. I’m not so sure I would call it just.

I have stayed away from the stock market for 40 years, because the hit I took in 1969 convinced me that the only source of profits in the market are the losses of the poor suckers whose stocks go down. And the probability was strongly in favour of mine being the ones to go that way. I don’t know horses, but I would expect an equal amount of insight and judgement devoted to following the races as one spends on investigating corporate balance sheets would result in somewhat better returns. At least horses don’t lie, even if their owners might.

Of course, most people put their savings in the hands of experts – mutual funds, hedge funds, real estate income trusts and the like – and sleep soundly at night. The question there is the competence of experts – the economists who advise banks and governments for example. The people who I follow online at the Daily Reckoning have a sound contrarian take on economists, quote –

“Of course, everyone now knows that the recession is over. NABE interviewed 44 economic forecasters. Four-fifths of them said the recession was over.

But we don’t care what they said. These are the same seers who missed the biggest single event in financial history. There are many banking crises, recessions, panics and defaults in the record books. But none were as great as the one that hit September a year ago. Most economists didn’t see it coming; why should we trust them to tell us when it is going?”

The US administration is attempting to shore up the hole in the credit dyke with every last trillion they can borrow (satire intended) – and badgering wiser foreign governments into maintaining the same reckless policy. The problem isn’t a lack of credit – it’s an overwhelming preponderance of debt. People don’t want to borrow and spend – they have already borrowed and spent too much. They are trying to whittle down the debt they’ve already taken on. The only organizations accepting the free credit that the US government is shovelling out the door are the banks, who borrow it for next to nothing and turn around to lend it back to the government as Treasury bonds making a 4% return. Talk about money for old rope. Talk about a swindle.

Goldman Sachs announced a big profit. JPMorgan, the Wall Street firm that was bailed out by the feds a year ago, reported income of $3.6 billion in the 3rd quarter. Isn’t that good? Not if you look where the money came from – the poor sucker who foots the bills, the US taxpayer.

Following the Daily Reckoning again – the current crisis is not a recession, it’s a depression. A recession is a temporary hiccup in the daily flimflam of putting one over on the suckers – it recovers quickly once the markets hit the brakes and then the accelerator and continue with business as usual. But when the problem comes from a systemic failure – like the failure of the credit bubble that has lasted for around thirty years – and no amount of twiddling will get the fuel flowing again, then you’re in a depression.

Everybody’s mother warned them about borrowing when they were in the cradle – or should have. When you borrow, the folks who loaned it expect it back – with interest. If you borrow more than you can pay back you land in the poorhouse with Dickens’ Mr Micawber – “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” The US, both government and society, have been borrowing and spending far beyond their means since, at least, 1973. There can be no recovery until a huge portion of that debt is paid off and the creditors are confident that the rest will follow in due course.

The rest of the world waits with bated breath to see what is going to happen, but some are still betting on the stock market – in this case, not that stocks will go up in value but that they will come down. They are shorting the market, selling stocks that they do not have in the expectation that they will be able to buy them at a lower price by the time the law requires them to hand them over. Is what happens to the sucker who just bought them at the higher price equitable? Is it fair and just? Considering that the market would be a great deal fairer if the law required a more prompt delivery of the stock – but doesn’t – the amount of profit to be made at the sucker’s expense could be limited. Regulate such a thing? Outrageous! How are the financial wizards to keep their profits up and their queue of eager clients increasing? I guess the other fellow’s loss is unimportant if it doesn’t happen to your savings.

If you’re into stocks, the $10,000 Dow is an illusion. It can fall as fast as it did last year. October is a good month for stock market crashes … and waddayaknow, it’s October now.

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One Response to “And they call them Equities?”

  1. joylene Says:

    Lost my shirt in the 80s, which taught me a valuable lesson. Always been in awe of those who did well tho. Especially anyone who bought into Gates computers back in the day.

    Good post, Chris. Thanks for sharing.

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