Why the Stock Market is so Good when the Economy is so Bad

Posted by PITHOCRATES - March 31st, 2014

Economics 101

No One is going to get Rich by Buying and Selling only one Share of Stock

It takes money to make money.  I’m sure we all heard that before.  If you want to ‘flip’ a house you need money for a down payment to get a mortgage first.  If you want to start a business you need to save up some money first.  Or borrow it from a family member.  And if you want to get rich by playing the stock market you need money.  A lot of money.  Because you only make money by selling stocks.  And before you can sell them you have to buy them.

Stock prices may go up and down a lot.  But over a period of time the average stock price may only increase a little bit.  So if you bought one share of stock at, say, $35 and sold it later at, say, $37.50 that’s a gain of 7.14%.  Which is pretty impressive.  Just try to earn that with a savings account at a bank.  Of course, you only made a whopping $2.50.  So no one is going to get rich by buying and selling only one share of stock.

However, if you bought 10,000 shares of a stock at $35/share and then sold it later at $37.50 that’s a whole other story.  Your initial stock purchase will cost you $350,000.  And that stock will sell for $375,000 at $37.50/share.  Giving you a gain of $25,000.  Let’s say you make 6 buys and sells in a year like this with the same money.  You buy some stock, hold it a month or so and then sell it.  Then you use that money to buy some more stock, hold it for a month or so and then sell it.  Assuming you replicate the same 7.14% stock gain through all of these transactions the total gain will come to $150,000.  And if you used no more than your original investment of $350,000 during that year that $350,000 will have given you a return on investment of 42.9%.  This is why the rich get richer.  Because they have the money to make money.  Of course, if stock prices move the other way investors can have losses as big as these gains.

Rich Investors benefit most from the Fed’s Quantitative Easing that gives us Near-Zero Interest Rates

Rich investors can make an even higher return on investment by borrowing from a brokerage house.  He or she can open a margin account.  Deposit something of value in it (money, stocks, option, etc.) and use that value as collateral.  This isn’t exactly how it works but it will serve as an illustration.  In our example an investor could open a margin account with a value of $175,000.  So instead of spending $350,000 the investor can borrow $175,000 from the broker and add it to his or her $175,000.  Bringing the total stock investment to $350,000.  Earning that $25,000 by risking half of the previous amount.  Bringing the return on investment to 116.7%.  But these big returns come with even bigger risks.  For if your stock loses value it can make your losses as big as those gains.

Some investors borrow money entirely to make money.  Such as carry trades.  Where an investor will borrow a currency from a low-interest rate country to invest in the currency of a higher-interest rate country.  For example, they could borrow a foreign currency at a near zero interest rate (like the Japanese yen).  Convert that money into U.S. dollars.  And then use that money to buy an American treasury bond paying, say, 2%.  So they basically borrow money for free to invest.  Making a return on investment without using any of his or her money.  However, these carry trades can be very risky.  For if the yen gains value against the U.S. dollar the investor will have to pay back more yen than they borrowed.  Wiping out any gain they made.  Perhaps even turning that gain into a loss.  And a small swing in the exchange rate can create a huge loss.

So there is big money to make in the stock market.  Making money with money.  And investors can make even more money when they borrow money.  Making money with other people’s money.  Something rich investors like doing.  Something rich investors can do because they are rich.  For having money means you don’t have to use your money to make money.  Because having money gives you collateral.  The ability to use other people’s money.  At very attractive interest rates.  In fact, it’s these rich investors that benefit most from the Fed’s quantitative easing that is giving us near-zero interest rates.

People on Wall Street are having the Time of their Lives during the Obama Administration

We are in the worst economic recovery since that following the Great Depression.  Yet the stock market is doing very well.  Investors are making a lot of money.  At a time when businesses are not hiring.  The labor force participation rate has fallen to levels not seen since the Seventies.  People can’t find full-time jobs.  Some are working a part-time job because that’s all they can find.  Some are working 2 part-time jobs.  Or more.  Others have just given up trying to find a full-time job.  People the Bureau of Labor Statistics (BLS) no longer counts when calculating the unemployment rate.

This is the only reason why the unemployment rate has fallen.  If you add the number of people who have left the labor force since President Obama took office to the number the BLS reports as unemployed it would bring the unemployment rate up to 13.7% ((10,459,000 + 10,854,000)/155,724,000) at the end of February.  So the economy is still horrible.  No secret to those struggling in it.  And the median family who has seen their income fall.  So why is the stock market doing so well when businesses are not?  When profitable businesses operations typically drive the stock market?  For when businesses do well they grow and hire more people.  But businesses aren’t growing and hiring more people.  So if it’s not profitable businesses operations raising stock prices what is?  Just how are the rich getting richer when the economy as a whole is stuck in the worst economic recovery since that following the Great Depression?

Because of near zero interest rates.  The Fed has lowered interest rates to near zero to purportedly stimulate the economy.  Which it hasn’t.  When they could lower interest rates no more they started their quantitative easing.  Printing money to buy bonds on the open market.  Flooding the economy with cheap money.  But people aren’t borrowing it.  Because the employment picture is so poor that they just aren’t spending money.  Either because they don’t have a job.  Only have a part time job.  Or are terrified they may lose their job.  And if they do lose their job the last thing they want when unemployed is a lot of debt they can’t service.  And then there’s Obamacare.  Forcing people to buy costly insurance.  Leaving them less to spend on other things.  And increasing the cost of doing business.  Another reason not to hire people.

So the economy is going nowhere.  And because of the bad economy businesses have no intentions of spending or expanding.  So they don’t need any of that cheap money.  So where is it going?  Wall Street.  The only people who are borrowing and spending money.  They’re taking that super cheap money and they’re using it to buy and sell stocks.  They’re buying and selling like never before.  Making huge profits.  Thanks to other people’s money.  This is what is raising stock prices.  Not profitable businesses operations.  But investors bidding up stock prices with borrowed money.  The people on Wall Street are having the time of their lives during the Obama administration.  Because the Obama administration’s policies favor the rich on Wall Street.  Whose only worry these days is if the Fed stops printing money.  Which will raise interest rates.  And end the drunken orgy on Wall Street.  Which is why whenever it appears the Fed will taper (i.e., print less money each month) their quantitative easing because the economy is ‘showing signs of improvement’ investors panic and start selling.  In a rush to lock in their earnings before the stock prices they inflated come crashing down to reality.  For without that ‘free’ money from the Fed the orgy of buying will come to an end.  And no one wants to be the one holding on to those inflated stocks when the bubble bursts.  When there will be no more buyers.  At least, when there will be no more buyers willing to buy at those inflated stock prices.  Which is why investors today hate good economic news.  For there is nothing worse for an investor in the Obama economy than a good economy.

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Wall Street doing Very Well under President Obama while Main Street Continues to Suffer

Posted by PITHOCRATES - May 18th, 2013

Week in Review

The Dow Jones Industrial Average is at a record high.  The unemployment rate fell one tenth of a percentage point in April.  Nonfarm payroll employment rose by 165,000 in April.  And interest rates are still so low that they are almost negative.  Good news for Wall Street.  And rich investors (see Revised Wall Street Forecast: We’re All Going to Be Rich by Kyle Stock posted 5/13/2013 on BloombergBusinessweek).

Whether, the country’s 500 biggest companies are collectively worth that much is another question. Goldman says most of its own valuation engines show the market is currently at or above where it should be trading. In other words, eager buyers are keeping it high. Low interest rates are spurring things along, as investors borrow increasingly large sums to place bigger bets.

That’s not to say some people aren’t nervous about the recent gains. “It’s one big carry trade, and all it’s doing is setting us up for a bigger correction,” says Joseph Saluzzi, partner and co-founder of Themis Trading, an institutional brokerage firm that specializes in equities. “Whether it’s going to be a week from now or a year from now, I don’t know; but it’s going to be ugly.”

President Obama has been saying for years now that the economy has turned around and things are getting better.  But better for who?  Wall Street.  Not Main Street.  The 1%.  Not the 99%.   Things are still pretty horrible for the 99%.  The unemployment rate may have fallen in April but the labor force participation rate hasn’t budged from March.  It’s still at record lows.  You have to go all the way back to President Carter’s Seventies to find so many people unable to find full time work.  That’s right, even George W. Bush had better economic numbers throughout his presidency.  And he suffered through a couple of recessions.  And the greatest terrorist attack on American soil.  So things aren’t getting better.  They’re only getting better for the 1%.  Who are borrowing that cheap money the government is printing to make more money.  While the general economy languishes in the worst recovery since that following the Great Depression.

And it gets worse.  Once the markets correct all of that irrational exuberance the economy is going to crash.  Hard.  Just as it always does after artificially low interest rates push stock prices into the stratosphere.  And “it’s going to be ugly.”  As it always is.  And the longer they keep those interest rates artificially low the uglier the inevitable correction will be.  When the correction comes it will be the 99% that will suffer the most.  As they always do.  As even more people will be unable to find a full time job.  Pushing the labor force participation rate even lower than it ever was in the Seventies.  This is what President Obama is doing to the 99%.  While he and his 1% friends are living large.  And will continue to live large after the crash.  Just as Hugo Chavez was able to live large in a country that couldn’t even make enough toilet paper for its people.  Because rich people and those in government always do well.  No matter what they do to the people.

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FT118: ” It’s better to have rich investors risk their wealth than having the government risk our taxes.” -Old Pithy

Posted by PITHOCRATES - May 18th, 2012

Fundamental Truth

It wasn’t the Private Investors who lost Half a Billion Dollars on Solyndra

It takes money to create jobs.  Some conveniently forget this fact when the politicians want to take money away from rich people who got rich by creating jobs.  But the politicians always remember this fact when they want to ‘invest’ our tax money into projects to create jobs.  When they want to spend our taxes they then fully understand the concept that it takes money to create jobs.  Funny how that works.

Also funny is that the projects the politicians want to invest in are not projects the rich investors want to invest in.  Because it’s their wealth they’re risking they are a little choosier in deciding where to invest it.  So they don’t invest in these losers the politicians champion.  For even though these politicians are Ivy League graduates who are smarter than everyone else they only like to risk other people’s money.  Unless they have inside information.  Such as pending legislation that will affect the market.  Then they’ll invest their own money.  But that’s the only time.  For as smart as these Ivy League graduates are they have little understanding of free market capitalism.  Or what it takes to be an entrepreneur.  And have no idea how to evaluate an investment opportunity without having inside information.

Still, politicians are so arrogant to believe that they are smarter than the market.  And that if they ‘wisely’ invest our tax money that they can do a better job than those who risk their own money.  People the politicians believe aren’t smart enough to make the best and wisest investments.  Despite their having gotten rich doing just that.  Making wise investments.  For example, it wasn’t the private investors who lost half a billion dollars on Solyndra.  For they saw the only thing keeping the solar industry afloat were government subsidies.  And any industry that requires government subsidies is not likely ever to earn a profit.  So they said ‘no’ to Solyndra and put their money in what they deemed wiser investments.  While the government invested in Solyndra.  Because they saw that as the ‘wiser’ investment.  Only to lose a half a billion of our tax dollars in the process.  Yup.  When it comes to making smart investments the politicians are regular ‘geniuses’.  And by that I mean they are actually the opposite of geniuses.  I was using sarcasm.

Politicians lose Hundreds of Billions of our Tax Dollars in Investment after Investment because they Care 

So the politicians are worse than the worst rank amateur investor.  We know it.  They know it.  At least they should know it what with their perfect record of failure.  So why do they do it?  Why do they continually take money away from the people who know how to better invest that money so they can make some of the worst investments of all time?  That’s a good question.  And we really need to think about it. 

To figure this out think about this one word.  Elections.  That’s the key.  You see, a majority of people wouldn’t vote for these politicians.  Because they want to spend our money.  They want to raise our taxes.  So they can spend it on more Solyndras.  How does that help them?  Here’s how.  People at these companies who receive this federal money are very grateful.  And to show their gratitude they make campaign contributions.  Often with some of the very money they received from the government.  Part of that ‘wise’ investment to create the ‘smart jobs’ of the future.  And why not?  There’ll be a little left over after paying some generous executive salaries and bonuses.  Why not give a little back to the people that made all of that possible?  Make a nice campaign contribution to help the politicians convince the people that they are smart and wise and deserve to win the next election.  So they can spend more of the people’s taxes.  Into other wise investments.  Like Solyndra. 

You just need one thing to make this all possible.  A bad investment.  An investment so bad that no rich people will risk their own money.  Because they know what a loser the investment is.  It has to be that bad.  So someone in the government can say rich people are evil and selfish.  That they only care about turning a profit.  That they are not interested in the jobs of the future.  Or high paying jobs with good benefits for the working man.  Like the politicians do.  They care about the people.  Instead of turning a profit.  And are willing to invest taxpayer money in the poorest of investments.  And lose hundreds of billions of our tax dollars in investment after investment.  Because they care.  More for their own self-interests but they care.  Unlike those evil rich people.  Who refuse to waste valuable investment capital.  And won’t let the people they’ve loaned it to waste it either.  Because they only care about the money.  Unlike our government.  Who has no problem throwing away trillions of our tax dollars.

Investors Invest Responsibly and know how to Pick a Winner that will Create Jobs 

Rich investors take risks when they invest their own money.  So they are very careful in how they invest it.  And when they invest it they are very interested in how that money is used.  They don’t need any oversight committees or legislation.  Because they are no one’s fool.  They are not rank amateurs.  And they appreciate the value of hard-earned money.  They have a vested interest to make sure that money is used in the most efficient manner possible.  Because it’s their money.  And they care.

Politicians invest taxpayer money.  They have no vested interest.  So they don’t care.  When they run out of money from all of their bad investments they don’t suffer any consequences.  All they do is malign rich people again to foster a little class warfare to make raising taxes on the ‘evil rich’ easier.  Then they keep on making bad investments.  Mostly to their political cronies.  Who will return some of that public money back to them in the form of a campaign contribution.

That’s why it’s better to have rich investors risk their wealth than having the government risk our taxes.  Investors will invest responsibly.  The politicians will not.  And the investors know how to pick a winner that will create jobs.  The politicians do not.  The only way they know how to make money is with inside information.  Or skimming a little off the top of the public purse.  Which is the only way to explain investments like Solyndra.  It’s either that or our politicians are just really stupid. 

What a choice.  Corrupt or stupid.  Or is it even worse?  Are they corrupt AND stupid?  If so it sure would help explain a lot.

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