What a stock bubble looks like

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No matter how great your economy, an 80% increase in value can’t be real. It is a lesson each generation has to learn again, as apparently greed is encoded in human DNA and overrides rational thought.

As it started to unravel, the Communist China government tried at least three things in public – the government buying up stocks, preventing sellers from selling, and devaluing their currency. Their fundamental misunderstanding of a “free market” has failed miserably. The executions of the innocent are about to commence.

The London newspapers report the President’s daughter is unhappy, riding her bicycle on Martha’s Vineyard. Maybe she needs some sugary soda.

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16 Responses to What a stock bubble looks like

  1. Art Stone says:

    It’s the “abnormal speculators” that did it!

    http://bloom.bg/1EoOK81

    While the masses view futures and options as evil people profiting on the backs of the people who eat ramen noodles, the purpose of “speculators” is to decrease volatility.

    Today, if a farmer in Kansas is deciding to grow corn or soybeans in the spring, the futures markets offer a guaranteed price for those two crops, so he can make an informed choice. By locking in a price in the spring, he can be assured of a profit, which is important to the bank that will be loaning money for the seed and fertilizer and repairs for the tractor. This is not very different than people in New England who sign a heating oil contract in the early fall to lock in their heating oil price for the winter. If the homeowner takes the risk, they can just buy the oil at “today’s” price in the middle of winter – the “cash” price. You might save money, you might end up burning furniture in the fireplace. This concept is based on you heating oil dealer buying a futures contract, so he doesn’t have to take the risk of guaranteeing you $2.50 oil then having to pay $5.00 wholesale because of a brutal winter or a war in Iraq. No futures means everyone becomes a speculator – they buy more oil than they need and start storing it in their own storage tanks to resell if the price goes up. Oil deteriorates quickly and leaks from tanks.
    If the farmer in Kansas can’t know what the price will be, he is more likely to let the fields sit fallow, sell the land for a new subdivision or grow the wrong crop and go bankrupt. The person eating ramen noodles will blame some evil speculator for the ramen maker increasing prices due to a hike in the wheat price on the spot market, not their demand to outlaw “speculating”

  2. Art Stone says:

    Monks from Tibet caused the crash!

    http://bloom.bg/1MS673B

  3. Art Stone says:

    Despite Matt Drudge, Fox News and Bloomberg trying to scare the sheep off the cliff, markets around the world are bouncing back – with the exception of the Shanghai index, which lost another 10%. It looks like that market has a 10% down trading halt rule to stop it falling further. The Chinese experiment with government controlled free markets is over. The index is getting close to where it started the year.

    Remember – Don’t Panic! 🆙

  4. Art Stone says:

    5% drop at the opening has triggered the circuit breakers in the U.S. My 13 year old memory thinks that means a halt to “program trading”. I guess the Fed needs to spend more money in Chicago catching a falling knife.

  5. Art Stone says:

    While we were watching China, the Socialist government in Greece quit

    http://www.newsweek.com/why-tsipras-called-election-greece-365230

  6. Art Stone says:

    What is really a problem is when the Fed is clueless

    http://bloom.bg/1KFILrU

  7. Art Stone says:

    Europe basically just is mirroring the U.S. decline on Friday. Everyone is treading water to see what the U.S. Markets do. I would bet the Fed has placed a bunch of option contract orders in Chicago.

    There is a fatal flaw with hedging – if you believe “if A goes down, B will go up” – like “if the value of the dollar goes down, the price of gold will go up” – if your belief is wrong, your “hedge” clobbers you on both sides. There is not a thing in the entire world (other than stock in Cumulus Radio) that is going up.

  8. briand75 says:

    Ah yes. It’s okay to discuss Andersen. They are gone – completely. I can testify to what changes were made in the Big 4 to ensure that doesn’t happen again. I remember a friend of mine took a lofty job at Enron about 6 months before it imploded. I hope he survived.

  9. briand75 says:

    What printing money until it’s worthless looks like – DOW drops 1000 in less than a week – primarily because the Fed can’t ignore it anymore I think.

    • Art Stone says:

      I was going to share this in private, but what the heck… When I was working for NASDAQ, we had a herd of Arthur Anderson Consultants running around consulting. At the time, Yahoo Finance put on a contest giving people make believe money to buy a make believe portfolio, with the winner getting to have sex with Martha Stewart (I may have that detail wrong). It was a great idea of how to gather inside information without breaking the law.

      Well, the A/A people all around the world started sharing information with each other, and they went crazy buying this company where the accountants had great insights. The company they bought stock in like crazy was a little company called Enron – about a day before the real stock imploded

    • Art Stone says:

      By the way, pay no attention to the Dow, for a variety of reasons I can go into if anyone really cares. While TV people think the Dow has meaning, the S&P 500 is the one to pay attention to.

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