Great Depression Online Archive Issue:

How the Stock Market Works

Great Depression Online
Long Beach, CA
May 28, 2010

Inside This Issue You Will Discover…

*** The Dollar Dodo
*** End the Fed
*** How the Stock Market Works
*** And More

The Dollar Dodo

Ten Year Treasuries yields touched down at just 3.14 percent on Tuesday.  Our eyes bugged out and our jaw hit the ground.  What to make of it?

Stocks Overvalued, US Treasury Yields Reflect “Flight to Quality,” was how one headline put it.

Here at the GDO we’re highly suspicious of the quality of U.S. government debt.  For one, it’s the biggest pile of debt in the history of the world.  On top of that, we don’t believe the nation will ever be able to repay it.

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But that’s not all…

We’re also highly suspicious of US Treasury yields.  For U.S. Treasury yields have been so low for so long people have come to believe that is where they will always be.  In fact, it has become so certain the government can borrow money for so cheap that everyone, including the U.S. government, has come to expect it. 

At the GDO, we believe U.S. Treasuries are not at a normal equilibrium…but at an epic bubble.  One day, perhaps soon, interest rates will rise…and they’ll rise a lot.  That’s when U.S. inability to repay its debt will become painfully obvious.  After that the dollar will go the way of the dodo bird.

In the meantime, the Fed asserts its independence to monkey around with the price of money…

End the Fed

“The Federal Reserve and other central banks must protect their ability to make key economic decisions free from political interference,” said Federal Reserve Chairman Ben Bernanke at an international conference on central banking in Tokyo Japan on Wednesday.

He was referring to the political pressure to keep interest rates artificially low to stimulate the economy.

“Such gains may be popular at first, and thus helpful in an election campaign,” said Bernanke, “but they are not sustainable and soon evaporate, leaving behind inflationary pressures that worsen the economy’s long-term prospects.”

“Thus political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation.”

He’s right.  Politicians shouldn’t intervene in markets.  But neither should the Federal Reserve.  Our solution: End the Fed; let the free market determine rates of exchange.  While free markets sometimes overshoot the mark, when the money supply’s stable, they always eventually give people just what they deserve.

Take the stock market, for example…

How the Stock Market Works

The stock market works in seemingly predictable ways.  It goes up.  Then it goes down.  After that, it goes down then it goes up.  Yesterday the stock market went up.  The day before it went down.  Do you see how it works?

You can look at a chart of stock price movements over time, and if you squint long enough, you see patterns.  Some even call these patterns waves.  And from what we’ve read from the chartists, there are waves within waves.  What’s more, if you zoom in close enough, they say, the waves repeat as tiny little fractal waves.

We’ve never quite got the hang of these wave patterns…not for anything of much use at least.  We don’t trade them.  We wouldn’t gamble on them.  But that doesn’t mean they don’t exist.  For they do.  The problem, however, is not that they’re predictable.  Or, for that matter, that they’re not predictable.  It’s that they’re almost predictable.

Yet, when it comes down to it, the stock market works like this…

During a bull market people make money and brag to their friends about how smart and clever they are.  Many offer advice at cocktail parties…including the latest hot stock tip.  During a bear market they go broke, their wife calls them a fool, and they drink Strawberry Hill Boone’s Farm from the bottle.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  You can’t cure debt with more debt.  And if you can produce the stuff in unlimited quantities, then it’s not money – that is, not if your definition of money is something you can use to efficiently hold and transfer wealth.  Read more.

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