While I respect and use the "bullish sentiment" indicators and, in fact, just commented on it last week I've also started thinking about the "herd mentality" as it applies to rational decision making.
Please do not take this as a BUYBUYBUY opus, but let's think about where we are in the universe (see Tuesday's post).
Starting with our spaceflight motif. I see the market as skimming along the upper atmosphere, the bottom of the ship buring red hot as we pick up speed but with the pull of gravity and the resistance of atmostphere slipping away. As any rocket scientist will tell you (and I know some), physics are a real bitch if you ignore them. So cutting the boosters, or running out of fuel, when you still have .001% of the Earth's gravity to fight off may feel good for a while and you will float – but you will also EVENTUALLY, INEVITABLY experience ORBITAL DECAY!
So here we are in our shuttle craft and the thrusters are easing off a bit and we're starting to feel a little weightless and some people want to get up and mess around but some people are still clinging to their seats, still thinking we could come back down at any minute.
Now the physicysts (analysts) are debating whether we can coast into orbit or do we need more fuel and, as you can tell from the padded walls, it's a well known fact that gravity can catch you by surprise if you miscalculate but, at some point, probably after a few people (bears) throw up – everyone may have to admit we have finally left Earth orbit.
That's where I see us now, right at the outer end of Earth's gravity well, ready to head off into space on a quest to go where no market has gone before (Dow 15,000). It just so happens we are launching a shuttle mission this week and, while it is now fairly routine, those of us who still watch such things still get the same feeling that any bear might have watching the markets take off.
They pick a launch time, they delay it. They pick another launch time, the weather is no good. They pick another launch time, there's a stock option scandal. They pick another launch time, Microsoft delays Vista…
Finally, the rocket is on the launch pad, the countdown is ready to go, the engines fire and it takes off. Those of us who have seen a few rocket disasters (and market disasters) know that queazy feeling that lasts all the way until those rockets finally go off and the small ship that was sitting on top of those big rockets finally separates and heads off into space. At any given point, something could still go wrong…
I asked on Wednesday "Are we there yet?" and it turns out we weren't but we sure don't look like we're crashing yet either. Ever since man first learned to fly (and, I'm sure, invest) there have always been bears standing on the ground with 1,000 reasons why it will never take off!
Now here's where it starts to get interesting:
This isn't an article about market gravity, we've done those, this is about the herding instinct. The biggest bear case at the moment is "if so many people are positive on the markets – they must be wrong." You should be insulted by this attitude!
What the analysts are actually saying is "if you don't listen to me – you must be wrong."
Analysts, fund managers, brokers etc. want you to be good little sheep and let them tell you when its a top, when to start and stop buying, what to buy, what to sell… If you don't listen to them then IT'S CHAOS!
Chaos for them anyway, chaos for GS who make Billions and Billions of dollars telling you what to think. Goldman said buy oil, buy more oil and, when in doubt, buy more oil – HOW DARE YOU STOP BUYING OIL!
YOU are not supposed to stop buying oil until after THEY stop buying oil, get out, get THEIR friends out, put out a private letter to THEIRclients and THEN go on CNBC to tell YOU to get out. If you jump the gun you'll ruin everything!
But this isn't an article about oil (actually it's starting to sound a little like Alice's Restaurant but bear with me, I'm on a roll), this is an article about the the dollar that I promised for the weekend.
So there's no inflation right? The government tells us there's no inflation and they've never lied to us before so there must be no inflation. It is true that a lot of suff costs less, IPods, TV's, Computers, Telemarketers (as long as you don't mind the accent), your salary, SS benefits (adjusted for the inflation that doesn't exist) and therefore anything you may be paying more for is just a function of your questionable negotiating skills.
In fact the same Goldman analysts who tell you inflation isn't a problem are also telling you that the price of oil isn't a problem if you adjust it for inflation. I try to stay on top of all this BS but they just keep piling it on!!
Oh yes – the dollar! So Hank Paulson, my nominee for the Mr. Potter look alike contest AND former head of Goldman Sachs, is off to China next week to prop up the dollar and, after much discussion, I've decided to let him use my Roach Motel Theoryas a Weapon of Mass Dollar Destruction (WMDD) against the Chinese.
You see all these non-inflationary dollars that have been flooding the markets for the past 10 years have to be going somewhere. We created(and this is estimated now because they stopped reporting it) $1,200,000,000,000 brand new dollars last year and not many of them ended up in your wallet (unless you are in the top 10% of the country in which case you got 85% of it).
So we didn't get the money as salary which means that retailers didn't get it either. The auto companies didn't get it. The airlines didn't get it (see a pattern) – none of the things we (The People) like to do got it. So who got it?
Why the rich did silly! The bankers, the brokers, the doctors, the lawyers, the traders, the CEOs… The top 1% of the income earners (oh sure the "other" 9% got some too) got pretty much all of it. It's not just here in this country, this is a global fad.
All that money has caused inflation of all the things you don't want to spend money on: Drugs, Health Care, Housing, Commodities, Legal Bills and, yes, stocks! You like it when your stocks go up, but HOW are they going up?
Has anyone built something new and cool that makes your life better? Are there any great scientific and medical advances that have actually cured anything (rather than put you on a pill popping treadmill for the rest of your life)?
Did American companies hire millions of high salaried workers or did they cut back on the blue collar jobs and cut out the white collar jobs entirely while executive salaries tripled in the past 10 years?
Nothing has been built, no major projects have been undertaken, no one is looking for oil or creating better means of transport or really doing any damn thing to improve the quality of life for the bottom 90%. And, no, I'm not going all communist on you but the number one investment made by corporations last year was in buying back their own stock!
Is this really what we pay them to do? This is not a good thing for anyone but the current shareholders who, coincidentally, happen to be, in large part, the Management! That's right in 1995 you paid your CEOs just 1/3 of what they make today and they said "pay me a bonus based on performance" and that sounded fair so we said "sure."
Well they got us good! We thought Exxon was going to open up vast new reserves, explore deep sea drilling, find alternative energy, give America a wonderful, energy independent future… So what did they do instead? They bought out the competition, cut back production and bought their own stock, driving the price into the stratosphere!
This is not because they are a better company, not even because they will make more money next year (they project 0 sales growth and a modest decline in profits), the shares are up because, much like oil, they have created an artificial scarcity of them.
On the average one out of 10 shares of XOM you are bidding for is being bought by — XOM!
"So", you may say, "companies plowing record profits into buying their own stock accounts for $400Bn of the $1.2T we flooded the global markets with last year – where did the other $800Bn go and may I have some please?"
Perhaps you weren't paying attention. They're not giving it to you. In fact, if you work there they are likely to tell you how tough things are and how you'd better chip in more for health care. Don't worry, it's very fair – the CEO has to chip in the same $500 a month that you do to pay his medical bills – so we're all in this together!
They're not going to give it to you and they're not going to spend it on any other part of the economy either: ordering new computers, upgrading infrastructure, research and development… Nope, not going to do it. Exxon made $40Bn in the past 4 quarters and about the only thing they could think to do with it, other than compensate the executives who came up with this plan, was to buy back $24Bn of their own stock.
That other $800Bn is being spent, in recycled dollars, on more stocks and bonds and the $1T our government has to borrow this year to keep the lights on in this country. That situation is getting so nasty that Mr. Paulson has to go to China to make sure foreign investors keep giving us $100Bn a month or they may have to eat that White House turkey after all!
That's why Paulson is the perfect man to mount this attack against China, he's a CEO Banker/Broker Billionaire – he's like an economic superman!
He flys off to China (under his own power – of course!) and reads them the riot act.
Why will they listen? Ah, that's where the old Roach Motel Theory kicks in – not as it applies to oil, but as it applies to dollars. The Chinese have a Trillion US dollars! While they may threaten to diversify them into something more stable Mr. Paulson is going to point out to them that they are not the only roach in the motel.
Japan also has a Trillion of our dollars, we send them more every time we buy a Toyota but the biggest joke of them all is that we've been shipping these ever devaluing dollars to OPEC and every other oil producing country at the rate of $165Bn a month (what, did you think Jihads just fund themselves?). Oil is traded in dollars, people who want to sell oil must accept dollars, people who want to buy oil need dollars to buy it…
Ha ha! So the devaluing US dollar will hurt China, Europe (the least), OPEC AND every one of that top 10% of the world's richest people who have 85% of the dollars that are floating around. I challenge you to find a government, no matter how communist, that can afford to ignore them!
So we will keep printing dollars and China will keep buying them, as will everyone else and, now that we have pushed commodities to the limit, they will start using those dollars to buy other American goods and services – maybe even an IPod!
Hopefully some of those dollars will find their way into some actual infrastructure improvements and will accidentally make some of the poorest 1% of the world's (3 Billion people) lives just a tiny bit nicer.
Meanwhile for us investors, that ever expanding money supply has to go somewhere and we may be heading into a very, very soft landing on a very big pile of US dollars!
So let's throw those dollars onto the fire and light up those market engines – we're taking this baby to the moon!