Have a Little Confidence
How we made the bad economy.
Let us boil down the stock market. At its very core, it is just gambling. In the same way that one would take all available information on two teams in a sporting event and decide who is the best bet, a person will do the same when investing in a company on the exchange. It is basic handicapping. You take your money and decide which company is going to give the best return, and there is always the chance that you can lose. There are a few fairly significant differences, though.
Sporting bets are an all or nothing proposition. Once the wager has been made it is all over. You win, or you lose everything. In the stock market, though, you have the option of getting out before you lose everything, or you can opt for a better horse in the middle of race.
Another is that the companies you throw down on will take that money to advance their own cause. It is seed money for growth to attract more investors. Most companies on the exchange have come to rely too heavily on this new capital, and are for all intents and purposes gambling on what they may receive, to develop their strategies.
The stock market is also very large, diverse, and immensely complicated. An almost incalculable amount of money changes hands every day. To work in the business, one must be a highly educated professional; and unlike sports or Para mutual betting, entire trust and retirement funds are wagered on the exchange. The sad truth is that the exchange has been elevated to such a status, that most people don’t really consider it gambling. Like it or not, though, it is; and one way or another it effects everybody.
Now recent events have conspired to cause a nearly cataclysmic upheaval in this important segment of our economy. Most of them were predicted, and if we had responded correctly we would not be in nearly the trouble that we are. Unscrupulous lending practices in a flush economy, and the over development and over inflation of the real estate market began the problem.
When the real estate market began to adjust, values fell and building slowed down. At the same time a significant portion of the sub-prime mortgage loans began to fail. Banks were left with a debt and cash flow problem. They could no longer secure funds in order to continue lending. Meanwhile, some workers in the construction trades began to lose their jobs. At that point the problem was isolated to just one segment of the economy, but the media dutifully reported the meltdown. The rest of the blame for the current debacle rests on the shoulders of the public, and the government.
The government, for its part, should have had more control of those industries in the beginning, and then not have been so slow to respond to the fallout. The rest of it is on the citizens, businesses, and corporations.
The real estate market was just in adjustment. It is really not an unusual event, when looking back on long terms cycles. The layoff of construction workers represented only a small and temporary downward spike in the employment rate, and the failed mortgages were not largely due to people losing their jobs. Most of these loans were given to people who did not qualify, and the only way that they could get into a home was on an ARM (Adjustable Rate Mortgage) that allowed them to pay the interest only for the first few years. When the higher rate kicked in they could not meet the payment, and neither could they sell the home because of the slumping real estate market.
Instead of understanding the problem, though, there was wide spread panic. People tightened their purse strings, businesses stopped hiring, and corporations began divesting and realigning. Higher fuel prices only drove prices up, and before long sales fell. Then people did start losing their jobs. Now, not only did less people have money to spend, it exacerbated the alarm and caused the people who did still have money and jobs to become even more tight fisted. This of course only made matters worse and accelerated the downward spiral.
So let us go back to the stock market. The value is down; and part of that is real, but it is also due to perception. Sales are down for these corporations. Many of them still hold debt accumulated from speculation during better times. Those who do not, have little equity and are bleeding what they do have as investors continue to bail out. Add these to the fact that they have no fresh capital to work with; it makes them statistically unattractive. The perception is, though, that the stock market is a bad risk, and this is not necessarily so. One just needs to be more careful.
Now, the government has assumed the banking debt and lead the public to believe that this will make things better; and it may in the future, but how can it immediately when there is panic in the land. In Nevada, where gaming rules, Casino revenues have dropped for five consecutive months. When people worry about, rent, food, and fuel, some things become expendable. Likewise investors have become unwilling to stay with the stock market, but the more they balk the worse things get. Companies get weaker, values diminish, and the perception of risk becomes a self-fulfilling prophecy.
It is not all bad news, though. There is money to lend. The dollar is weak; making American companies selling abroad a good bet. Real estate is cheap. Stock is cheap. Do the research, and make the smart moves. There is money to be made in this economy.
Fear, however, is a hard monster to slay; but unless investors quit hoarding, there is almost no end to how bad this could get. Who has the courage to step out and restore value and confidence? Who is going to get people working and spending again?
Don’t wait for the government. It’s going to take everybody.