Saturday, December 27, 2008

On Magical Thinking And Bubbles Burst

All the wishes in the world won't make a pile of dog poo into a diamond ring and chances are - there is no pony. Why start out with the downer reality jabs? A thing is what it is, it is not something else because it suits our desires for it to be. Back around 1929 a situation existed which was a new thing, the general public owned stocks. Yes, Wall Street was the modern equivalent of a magic money machine and moms and pops all over the nation jumped aboard. Oddly enough, there were just so many publicly traded companies and just so much stock issued. The upshot of such a situation isn't hard to figure in any market with relative scarcity and high demand - prices escalated. OK, in Republican-ese, Surged.

A house is commonly referred to as a home, in homilies. It actually is such a thing, a place where people live, sometimes they rent one, sometimes they own one (generally along with a bank). The thing about it is that people live in them, that is the purpose of them. A person may own a bunch of them that other people live in and that practice is called an investment property. The historical model of property is that one is doing real well if the value of the property appreciation exceeds interest and property tax costs, it is essentially a savings account that has some tax benefits. A homeowner justifies his purchase by paying a bank and the tax man for something that he'll own at some point as opposed to paying a landlord for something the landlord will someday own. A landlord goes through the hassles of renting property to have somebody else buy it for him. There was a return, not a really large one, but something concrete that its owner exercised some personal control over. The difficulty is that houses are a big ticket item, only so many are built in a year, it takes quite a bit to build a house.

Enter the magic:

A thing is no longer what it is, it becomes a money machine. A stock is no longer a fractional piece of a company and a house is no longer a home, they become investment vehicles. All sorts of things become common currency, people get on TV, write books, magazines, and blogs and tell everyone about the magic and how to climb aboard the express. Recent market trends get analysed and people are told how to make money they don't have appear to be money they have so they can put it into the express. It isn't a stock, it isn't a house - it's a gol-dang bonanza and only a fool holds out. The government likes the looks of all this money floating about and narrows the rules on application of capital gains taxes and lowers the rates, no sense in interfering in the bonanza. How odd that with everybody and their brother trying to get a ride on the magical money machine and the government actively encouraging it and talking about not penalizing hard working investors prices escalated.

The problem is that at some point reality catches up with magical thinking and it turns out that a stock is just a fractional piece of a company and a house is just a place where people live. Yes the value of the assets of a company, its sales and profits and a bit of goodwill divided by the shares issued is the value of that stock. It is just a piece of paper with some writing on it that represents a piece of a company, it is an investment in that company. That house is actually a home, its purpose is to be lived in and there is a limit to what people can afford to actually live in. What that house might be worth in a year or five years has no bearing on its affordability. Once you pay for your home there are costs of existing that also have to be covered and if that exceeds your income minus something for oopses you've got a problem.

There is no magic, no transmutation of lead into gold, a thing is still what it is and at some point the market will adjust towards that. If the hucksters, the governmental propaganda, and political lying class have walked you out on a limb, the plutocrats have been busily sawing on you will fall. If two very large markets have been allowed to skip off into la la land a very perfect storm will ensue. But, just suppose that the propagandists have bought their own product, bought is so thoroughly that they have in fact bet largely on it? Now you truly have something to behold.

People have been paid millions and hundreds of millions of dollars per year to ignore the most basic fundamentals of the business they're in. History books and market analysis of years and years of study sat on shelves ignored. But here's the real deal of this particular pile of not diamond rings, those folks have already taken their money out in pay. Your POS stock or house is still yours. The mothers goose told you their tales and walked and now you've got the sound in your ears for your trouble. Cassandras spoke, and you put their eyes out for their trouble. You listened to those with something to gain and they gained.

The real problem with this is that the people on whose backs the wealth was generated to provide for the Monopoly bucks games get whacked. While some corporate jets go away the pain starts at the bottom. Those folks without the money to engage in magical thinking, their jobs go away first and come back last. The lying politicians get may unelected but their pals still have their money, or most of it; and pretty soon the fire sales will start. Distressed assets don't you know? The broken company and the foreclosed house just got a really nice price tag hung on it. For twenty five years you've listened to the siren song of how the greed of those at the top was good for you. You just didn't know what that good for you really meant, character building in adversity...

1 comment:

Tom Carter said...

"A thing is what it is, it is not something else because it suits our desires for it to be." Truer words were never spoken, Chuck.

As far as real estate, stocks, even money itself are concerned, nothing is worth anything more than what we all agree on. When some people I know well have complained that their house "lost value," I've tried to explain to them that the monetary value of their house, or anything else, is only what someone is willing to pay for it. We'd be a lot better off if we thought of our houses as homes, not money machines.

And the stock market? I'm just smart enough to know that I don't know anything about it, so in the past I gave a bit of money to mutual fund managers, figuring they would know what to do with it. Good, solid mutual funds. In the past six months, those geniuses have managed to lose about 35 percent of what I gave them. Honestly, I'd have been better off spending a little fun time in Vegas. At least I'd know how I lost the money, and I'd have more confidence that it wasn't stolen.

Guess I'm going to have to ground my executive jet for a while.