It always WAS fake

Oct.13, 2008 in Market Outlook

I don’t know if people really understand that the equity in your home, 401(K), or stock portfolio was FAKE, not REAL. It always WAS fake, UNLESS you managed to convert it to cash by selling to a “bag-holder” before the price dropped.

Where did that wealth go? Simple: the person you bought the over-priced house or stock has it! They converted their make-believe equity gains into “real” cash, and remember there were many winners in this little game.

Can you blame them? They saw the handwriting on the wall, and profited from their timing. The gov’t offered big breaks on capital gains taxes, lowered interest rates on loans, etc. encouraging speculative behavior. These specuvestors played the game, and they won. So let’s not act like the game wasn’t defined from the beginning: it was.

Who else got the profits? Well, the banks/lenders, real estate agents, mortgage brokers, etc only profited by ever-rising housing prices (which means bigger commissions, and more profitable loans!), so there was NO motivation for any of these parties to step on the brakes, NOT to encourage the housing bubble. They profited handsomely from the bubble. Of course, now that the markets have CRASHED, they want a bail-out? Hmmmm, nice scam: keep the profits on the way up, and accept hand-outs from Uncle Sam when it goes against them. Anyway, don’t forget there were WINNERS in this transfer of wealth, and are enjoying their profits now. This was a HUGE power-play by Wall Street lenders to eliminate the little-fish lenders nibbling at their feet, and they succeeded at breaking the backs of the competition (New Century), as well as some of the bigger-fish (Bear Stearns). Only problem is, they d***-near committed financial suicide, taking the market down with them in the process.

On the other hand, those who bought at the peak are left with the uncomfortable choice of either:

1) holding on to the asset, hoping for a rebound,
2) selling now, and realizing the loss.

I don’t know what’s going to happen, so no advice there. I suspect we’re headed for a year of volatility with downward trend overall, but we’ll see.

Frankly, as a day-trader I don’t care, as I follow the market: I look for the trend to reveal itself, and hope to follow it. I use tight stops to sell if the market turns against me, making the decision of when I’m going to sell BEFORE I buy. You’ll get stopped out, missing out on some run-ups, but at least I don’t get caught in the whole “should I ride it down, hoping for a bounce?” nightmare! Been there, done that, and never again!

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