Were it Not for Dumb Money…

Thank God for dumb money!

What would the world be without chumps? Suckers? Bagmen and patsies?

Who would buy a ladies handbag for $1,500? Or blue-jeans for $150? Who would buy an oversized show-off pickup…or a $4 million McMansion?

Who would buy Facebook?

The Facebook IPO seemed to attract dumb money. Billions of it. Investors thought they could buy it at the offer price and get an almost guaranteed “pop.” They thought the fix was in.

They were right. Trouble was, the fixers ‘f’ed up. The fix was broken even before the market opened. Smart insiders were supposed to sell their shares — which they got in the IPO — to the dumb outsiders on the open market. But so many investors had gotten shares at the IPO price, and hoped to get out at a higher price, there wasn’t enough dumb money to take their shares. Everybody lost money…with the stock falling to $28 yesterday.

It made us think more about what a vital role dumb money plays in our economy. More below…

For now, a Wall Street Journal headline yesterday announced that the housing crunch was over. But when we read the details, we discovered that prices were still falling! Housing prices in the US dipped again in the first quarter of this year. Not much…but they were down. And in March, not adjusted for seasonal variations, house prices fell 2.6% from the year before. As “The Big Picture” puts it: “Case Shiller: The housing bear market has not turned.”

The stock market might give you the wrong impression too. House-builder stocks are selling at relatively high prices. Pulte sells for 15 times earnings. Toll is at 33 times earnings. Seems a little odd to us. Housing starts are only about half their level of 10 years ago. Why would investors think these builders deserve growth-stock prices?

We’ll wait for the big discounts. After all, there are some 18 million empty housing units in the US. At present rates of building, new household formation and immigration, it will take decades to work off the inventory.

Business Insider: “Another housing collapse is coming soon.”

As you know, dear reader, we think the whole world economy is going into a slump. Britain is already in recession. Euroland is probably in recession or close to it. That’s the world’s biggest economic region right there. America is sinking too. Japan has been up — largely because of all the post Fukushima rebuilding — but it won’t hold up long if its customers cut back.

American consumers already seem to anticipate a pullback.

“US consumer confidence falls unexpectedly in May,” reports The Financial Times.

“Consumers were less positive…” the FT continued.

Hardly surprising, is it?

A report earlier in the week told us that soldiers returning from service in Iraq or Afghanistan were going on disability at twice the rate of those who did their service in the Gulf War. Why? They can’t find jobs, says the reporter.

They can’t find jobs because the economy is not recovering. And now the stock market, the oil market, the gold market are all catching on. And the bond market too.

“Gold investors rush for the exits,” says The Wall Street Journal.

And here’s Bloomberg on the bond market:

Treasury Yields Tumble to Records…

Treasury 10-year note yields fell to a record low as investors sought refuge from the deteriorating credit conditions of European sovereign borrowers.

The benchmark yield reached 1.6085 percent, less than its previous all-time low of 1.6714 percent on Sept. 23, as Spain struggled to recapitalize its banks and Italian bonds fell as the country sold less than its target at a debt auction. The Federal Reserve announced Sept. 21 that it would buy $400 billion of longer-term Treasuries, funding the purchases with sales of shorter-term notes, in an effort to bolster the US economy and spur jobs growth.

Benchmark 10-year note yields fell 12 basis points to 1.62 percent at 5:02 p.m. New York time after touching the lowest in Fed figures beginning in 1953. The 1.75 percent note due May 2022 added 1 1/8, or $11.25 per $1,000 face amount, to 101 5/32, according to Bloomberg Bond Trader prices. The yield drop was the biggest for the benchmark note since April.

As for stocks…Marc Faber:

“There are more and more stocks that are breaking down — economic sensitive stocks and companies that cater to the high-end,” he said. “That suggests to me the economy is likely to weaken and the huge asset run is likely to come to an end with significant asset deflation.”

Stock prices…bond yields…housing — all going down. Where are the chumps when you need them?

The trouble with chumps is that they are unreliable. You count on them to buy Facebook, for example. And then, the patsies don’t seem to get the message. They sell!

“Investors bet against Facebook,” reports The Wall Street Journal.

And poor Zuckerberg. The man was knocked off the richest-of-the-rich list. Bloomberg has that story:

Zuckerberg Drops Off Billionaires Index as Facebook Falls

Mark Zuckerberg, Facebook (FB) Inc.’s co- founder and chief executive officer, is no longer one of the world’s 40 richest people.

The 28-year-old’s fortune fell to $14.7 billion yesterday from $16.2 billion on May 25, as shares of the world’s largest social-networking company dropped 9.6 percent. They slipped another 2.3 percent today to $28.19. That extended the stock’s losses to 26 percent from the worst-performing large initial public offering in the past decade and cut Zuckerberg’s net worth to $14.4 billion.

Typically, lottery and IPO winners have dumb money. Sports stars often have dumb money too. Of course, a lot of wealthy people — the ‘patsy rich’ — have money so dumb it should be forcibly sterilized.

When poor people get money it is usually dumb money. They don’t know what to do with it. So, they do dumb things. That’s why they’re poor. They pay more than they should…often for things that aren’t worth buying at all. Fancy cars…fancy houses…fancy restaurants… They think the idea is to get rid of money. Usually, they part company with their loot quickly…and they’re poor again.

People think the rich are different. They think the rich are smart about money. But very often, it ain’t so.

Wall Street is a sophisticated industry. It has developed products that appeal to every taste and every budget. It’s good at separating the poor and middle classes from their money; they put their dough into mutual funds and Facebook shares. They’re even better at separating the rich from their money. Why? The rich have more money to lose.

More tomorrow…

Regards,

Bill Bonner
for The Daily Reckoning