22 April 2009

Self-Licking Ice Cream Cone: the real financial invention

"Word of the Day today is LIQUIDITY. LIQUIDITY is when you look at your Retirement Account and wet your pants."
- Allen Warren

The folks at etrade sent me a note that starts out:

Not surprisingly, the long and painful bear market has pushed a lot of money to the sidelines. At the end of 2008, cash in money markets and bank accounts had reached nearly $9 trillion or 74% of the value of all publicly traded stocks in the U.S.!

That was the highest such ratio since 1990 — and it would only take a portion of that money moving back into the market to have a powerful effect on stock prices

One of the things that I find so fascinating about social reality is how it differs from physical reality. It does not matter whether you suddenly think that a bowling ball is as soft as a marsh mellow - if you drop it on your foot you will feel intense pain. By contrast, if you suddenly think that that stocks are a bad investment, you'll get evidence of just this thing.

There are real and legitimate reasons for markets going up and down. Having said that, there is a great deal of "me too" money that chases after the trends of these dynamics, the money that makes the bubbles and the bubbles pop.

Right now, there is about $9 trillion waiting for stocks to become safe again as an investment. When will stocks again be a safe investment? When that $9 trillion stops waiting.

What do you think is true about financial markets? The real answer is, Whatever you think is true about (or in regards to) financial markets. Of course, as arbitrary as this seems, it can't just be manipulated at will. It's worth remembering that the publishing industry phenomena the year before the financial crash was The Secret.

How could anyone not find cultures, societies, and markets fascinating?


PlugNPlay said...

Ron - riddle me this. If there is so much money sitting in banks, why are they all claiming they have no money and need a bailout?

Big Al said...

PlugNPlay - there are many financial institutions that are in good health. Unfortunately, there are many financial institutions NOT in good health, with many of these institutions/banks where the money is indeed just sitting there. And remember that many people having placed money in a bank have done so under a contract where they're guaranteed a % return for storing their money in the bank. With the stock market doing so lousy, banks are having a hard time investing all that money sitting in accounts to provide the obligated return on the deposits. And a compounding element in all this is the "toxic" home loans where homeowners can't make their mortgage payments and therefore the banks aren't getting their interest from those mortgage loans. And don't forget that people are now not purchasing as of old. More folks are attempting to spend as little as possible, leading to a reduction in manufacturing as the need for products continues to decline, which then causes company to lay off more folks because production is reduced, not to mention some companies believe designing new products is not necessarily as important right now because the current product designs are not being purchased which then leads to more lay-offs, which means more people can no longer afford their mortgage payments, and the cycle continues to repeat itself.

The money is sitting out there like water behind a dam wall waiting for the floodgates to be opened.

Lifehiker said...

George Soros said, yesterday on NPR, that nobody really understands the markets. However, he also made about $3 billion last fall when the market crashed, so I guess he knows more than most people.

All this money is sitting in banks because (1) banks are having trouble finding credit-worthy customers who want loans, and (2) investors are having trouble finding companies' stocks or bonds they feel are safe enough to invest in, so they leave their cash in the bank at no or little interest. It's a big logjam.

Unfortunately, it's very hard to break up a big logjam. That's what all this "stimulus" is trying to do. Keep your fingers crossed.

Dave said...

I'm a tiny, tiny, tiny, etc. part of the money on the sidelines. I was going to put some in at 7,000 then it jumped and now it just seems that the market is blipping in reaction to good and bad news. Yes that happens all the time; but, there's no sustained uptick yet. For now I'll stick to my almost no interest from the money market.

Big Al said...


Your post is exactly what the vast majority of folks are doing who have money available and are wanting to invest: the money is sitting and waiting 'til the markets can show sustained growth. So many of us have lost so much of our investment that we're perfectly happy to keep 100% of the value of our assets rather than risk losing additional funds.

Investing in stocks is, in its most basic form, legalized gambling. And right now most of us believe if there is money to be made in this "gambling environment" the house will make the money as the odds are totally not in the favor of investors/gamblers like you and I.