When Gamblers Drive the Markets

At least someone is making money from this foreclosure racket. Bloomberg has the report, below.

But let’s not get distracted by envy. We need to keep our eyes on the ball. And right now, the ball is bouncing around in a room full of spikes. There’s the prickly point of China; it could puncture the US stock market any day. There are huge banks and whole foreign governments sticking out like nails. Anyone of them could flatten this ball in a matter of hours. And what about that cactus thorn…the dollar itself? What if investors finally got tired of worrying about the greenback going down? What if they decided to get out en masse? Or, imagine what would happen if Bernanke decided to defend the dollar!

But investors aren’t worried. They anticipate more loose money…and more bouncy prices in stocks and commodities.

So, when the G-20 meeting ended without an agreement, they took it as an “all clear” for further gambling.

Bloomberg’s headline: “US Stocks Gain as G-20 Fuels Fed Easing Speculation.”

In other words, this market is not driven by real economic growth. It’s driven by the hope of fast, easy money. Pure gambling, in other words.

Not that we have anything against gambling. But when you gamble you have to realize that you’re going to lose sooner or later. A coin only comes up heads so often…there are only so many aces in the deck…and the “fool” in the game is sooner or later going to be you.

Investors believe the Fed will provide the fast, easy money. And they believe they will be able to get some of it by staying with stocks and commodities. Maybe they’re right. But don’t bet your life savings on it.

The promise of the stock market is fundamentally as fraudulent as the promise of the welfare state. The welfare state pretends to give citizens back more, in services and benefits, than they pay in taxes. Wall Street offers gain with no pain.

But the stock market – in total, over time – cannot really grow any faster than the economy itself. “Stocks for the long run” is a scam. Because you can only get from the stock market what you would have gotten from just about any other investment. As the economy grows, so does the value of the productive assets in it. Companies don’t grow faster – unless they are selling to other markets in other economies…or taking market share from companies. Overall, on average, you’re only going to get from stocks what the economy allows you to get – about what you would have gotten from having your money in real estate, collectibles, or other investments.

Sometimes you’ll get a bit more from stocks – even a lot more – as the stock market booms. Then, you MUST expect to get a lot less…so that the long-term performance of the stock market comes back in line with the underlying economy.

We can see this just by looking at the US stock market over the last three decades. It grew some 14 times from ’82 to ’07 – far outstripping the economy. But then, it needed to slow down…and even reverse. Over the last ten years, stock prices have gone nowhere. It wouldn’t be surprising if they dropped 30% to 50% from here… And it wouldn’t be surprising if they went nowhere over the next 10 years too.

Remember… Japan is the cutting edge market model. Japanese stocks hit a high in ’90. They’ve been going down ever since. Twenty years of correction…in order to bring it back into line with the economy.

The US stock market will do the same thing. More or less.

That ball is going to hit a spike…it’s just a matter of time.

Bill Bonner
for The Daily Reckoning

The Daily Reckoning