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Casino capitalism is the winning and losing of fortunes in the stock market. So wrote (and we paraphrase) John Maynard Keynes in his famous General Theory of Employment, Interest, and Money in the midst of the Great Depression (1936). He went on to warn about extremes:

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.

Continue reading “Capitalizing … on Casino Capitalism” →

The Precedents

Beyond surviving the uncertainty of our fragile financial system, capitalizing on it requires a combination of unique traits. These include a deep, experience-based understanding of how businesses are valued; an uncompromisingly skeptical mindset; and emotional acrophobia (a condition in which high and rising prices cause acute discomfort). By contrast, high-price euphoria is the prevailing emotion—at least of the moment. This is one of those uncommon times in history that will once again prove the adage that it’s easier to make money than keep it.

Continue reading “More Than Surviving Uncertainty (Part II of II)” →

A wise man observed that figures don’t lie, but liars figure. Failing to embrace the importance of that idiom makes idiots of the unwary. In our reflection on uncertainty, study our figures (and those of others) skeptically, even if you trust us. As for the charts in this post, go figure.

Continue reading “More Than Surviving Uncertainty (Part I of II)” →

A Bloomberg article headline on Saturday, July 24 caught our attention: “Stock Bulls Look Toward $17 Trillion Burning a Hole in Pockets.” It was the weekend, and this piece must have slipped through the editorial cracks. Phrases like “cash on the sidelines” and “dry powder” are common enough these days—but not from the likes of Bloomberg.

Continue reading “Cash on the Sidelines?” →

On August 13, 1979, nearly 42 years ago, a BusinessWeek (Figure 1) headline infamously announced “THE DEATH OF EQUITIES” with the subtitle, “How inflation is destroying the stock market.” The cover story captured well the antipathy of investors toward the prospects for future returns from equities.

Continue reading “The Death of Discernment” →

Less than two months after the CDC declared COVID-19 a public health emergency on February 3, 2020, the stock market slump that followed abruptly ended and equities have rocketed upward ever since. The Wilshire 5000 Total Market Cap Index, the most comprehensive measure of the market value of publicly traded U.S. corporations, nearly doubled to record highs from the March 2020 lows, rising from $22.5 trillion to $43.3 trillion by late May 2021.

The economy proved no less resilient. On the heels of the shortest major recession on record, resurgent GDP (gross domestic product) rebounded to the December 2019 peak by the end of the first quarter of 2021, reaching $22.1 trillion. Economically and financially, the headlines telegraphed ‘All’s well.’

Continue reading “The Broken Window Fallacy” →

This week, Edward Chancellor, our esteemed once-a-year guest writer, again digs deep into contemporary financial deceptions, “lipstick on a pig” reincarnations of past “beggar thy neighbor” scams. Because there’s a smidgen of truth in every lie and a pinch of rationality in every bubble, his forensic prism sees clearly through the fog of obfuscation. Moreover, Chancellor peels away more layers of onions we’ve dissected in earlier posts – e.g. WeWork and SPACs – taking the reader ever closer to the core.

Some claim we are seeing a rebirth of the “roaring twenties” (a.k.a., the “Age of Wonderful Nonsense”). As previous untouchables like Modern Monetary Theory (MMT) are gaining credence, the INEPT pricing theory seems almost rational.

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Continue reading “The Rationality of INEPT (Investment Entertainment Pricing Theory)” →

Flash back to 2007 and this excerpt from A Decade of Delusions, page 343:

…First, a combination of factors has given rise to some huge but so far largely disregarded risks in the financial services sector, as addressed in the [July 2007, Martin Capital Management] Quarterly Capital Markets. Unprecedented technology and communications developments, copious amounts of leverage made possible by sometimes fleeting liquidity, and the increased complexity in financial innovation and “tight coupling” have created a Demon of Our Own Design—Markets, Hedge Funds, and the Perils of Financial Innovation, the title of the book by Richard Bookstaber that captures poignantly the systemic nature of the risks. The reality that they are woven together informally but with an unavoidably tight interdependence among similarly constituted firms, particularly in times of crisis, can result in highly irrational behaviors. These excitable emotional responses, exacerbated by the self-perpetuating nature of informational feedback loops, can have potentially dramatic effects on the prices of those securities. The companies about which I am writing are the major investment banks on Wall Street: Goldman Sachs, Bear Stearns, Lehman Brothers, Merrill Lynch, and so forth. Unlike the portfolio insurance scheme of 1987, an unwinding of the above may not impact the security markets as a whole as they did in 1987. It’s hard for me to imagine, however, that the major players on Wall Street can avoid a body blow to their balance sheets and income statements should the system under which they are operating malfunction in unison. Should that occur, I would expect their shares to drop dramatically. [1]

Continue reading “The Goldman Rule, 2.0” →

As markets rise to fresh highs, the worries of the past months, much less previous years, seem to have happily dissipated. Gone are concerns about lost consumer income, falling productivity from reshoring production, or the growing horde of highly indebted companies sustaining themselves despite rising interest rates.

With the addition of augmented unemployment benefits and direct federal payments, worries about household debt have almost evaporated. Meanwhile, that indebtedness has grown throughout the crisis. Average wages have remained flat after a bump in April 2020 as legions of low-wage workers became unemployed. Household incomes, which include government transfer payments, remain high on the back of continuing federal support. In other words, the consumer is being propped up by Washington.

Continue reading “On Fragility and Avalanches” →