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Monday, August 8, 2011

An economic Munchausen Syndrome

Today the markets dropped -635pts to close at 10,809

The previous post we explained why- there's a whole behind the scenes dynamic at play that most everyday investors have no clue about.  In fact there was a medical term I kept trying to recall which was very similar to how the stock market works in post-2008, especially in relation to the demand and more importantly, Expectation for government assistance.

We are are witnessing an economic Münchausen syndrome at play.

Münchausen syndrome is a term for psychiatric disorders known where a person fakes disease, illness, or psychological trauma to draw attention or sympathy to him/herself.  The affected person exaggerates or creates symptoms of illnesses in themselves to gain investigation, treatment, attention, sympathy, and comfort from medical personnel. In some extreme cases, people suffering from Münchausen's syndrome are highly knowledgeable about the practice of medicine and are able to produce symptoms that result in lengthy and costly medical analysis, prolonged hospital stay and unnecessary operations.

The markets did this in 2008 after TARP originally didn't pass (1,100 pt drop in two trading days)..  This is what is going on today..

Let's say you bought $50,000 in stocks today.  You invested in XYZ at $2 share meaning you own 25,000 shares.  Your $50,000 investment may be a big deal to you and most normal people, but it makes zero movement in the Dow for the trading day.  So in order for there to be a pull by the close- meaning the Dow finishes +100 or down -100, it involves millions of trades in that direction.  And since computer algorithms are used by major corporations to allow them to buy or sell in the fractions of seconds it takes between your buy or sell order and when its processed, it creates even more artificial 'volume'.  So when there's violent swings, its not the little person affecting it-  its the Big Boys.

It wants.. needs.. Will get more Quantitative Easing, if it has to take down the entire system.  How does something that appears strong get its yummy 'medicine'?  It feigns sickness.  In the case of Wall St, they act needful.. remorseful.. "Please help us Uncle Sam.. (cough cough)  we're ever so ill.. (cough)  we're dying.. (achooo~) .. some more QE medicine would assuredly do the trick...(sniffle)"

This QE3 I'm speaking of... we're talking about hundreds of billions of dollars at play.. perhaps Trillions.  Free money meant to speculate and/or hoard.  Taxpayer money yes but.. I mean.. heh heh.. its not like that matters to Wall St, you know..  How do you think those on Wall St get their large bonuses- where does the revenue stream come from?   Yes, the QE.  And when corporation suddenly have cash infusions to expand their operations abroad, what was the source of that revenue stream?  Yep.. QE.

These corporations have enormous piles of cash on the sidelines, sitting in banks or reinvested in their own stocks rather than being invested in job creation because improved employment kills all chances at obtaining more free money.  There's zero motivation for businesses to do what is needed to truly kick-start a recovery.  And that's the ultimate catch-22 of QE. Now Wall St are addicts and need their fix.

And so this dramatic dump in stock today-- which is mostly coming from what corporations bought from themselves (corps buy their own stocks to artificially prop up their stock value to look appetizing to investors, then pull back when the figure is high enough to retake profits) is going to scare a lot of people..and it is 100% meant to.

Will it ultimately work?  Oh, probably..yep.  And if it didn't- if the Fed gave no QE3 this week, would the markets stop sabatoging themseves?  Honestly- yes.. temporarily.  They'd look at the crater they created and say "Wow, there's some real value here!" and you'd see a few +400pt days.  Then another scare as it got closer to September's Fed meeting.   That's just how cockroaches work.
PS:  7:35p   Rather than create a new posting which pushes the Munchausen Syndrome one 'down' the line, I wanted to make a couple more brief observations:

1)  Was watching Yahoo! Financial 'Breakout'- one of the group was hoping for an all-out drop.  Why?  So there would be an official 'bottom' for he and others to start buying stocks.  Think about that when you turn on CNBC or Bloomberg or any other Financial News channel-  what is their concern?   National strength and stability?  Better life for Americans?  Or "where to invest"?

2)  If we're still in a 'recovery' or a 'blip' or bleep or bloop, why headlines like this:

Second Recession in U.S. Could Be Worse Than First - NY Times

How to Brace Your Portfolio for Another Recession - MarketWatch

~  If you're a regular reader, you will see how accurate we've been on covering the US economy and how 'in the clouds' most other media have been...

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