Sunday, October 4, 2009

How the stock market works to redistribute wealth and the Vegas Sports Book

In the post consumer world two things will rule. Regular folks will have figured out the stock market is run to move small wealth from workers to large wealth capitalists. No more no less. Its an elite form of lottery with some winners so you can point to them to get the perpetual losers to ante up. Secondly, regular folks won't have superflous money to speculate heavily, like we have for the past two or more decades. Speculative investing will return when we have created a healthy balance of post consumer wealth.

I hadn't set out to write this post, but I can't get it out of my mind I believe in investing as a long term strategy, but I know I can't be an outsider and expect to make money. I have decided to make my speculative investments outside the stock market and in the local "slow money" movement. (See a future posting on "Slow Money")

Most people understand the Vegas sports book, there are winners and losers and the house always gets its cut of he action (win or loose). Simple, if I bet against Duke and they win, I loose, those who bet for Duke win. Except there is the "spread" where no one wins or looses and that's where the house really gets wealthy.

All stock exchanges work exactly the same. I bet that GE is going up and the seller bets that GE is going down, and the traders take a commission from both then buyer and seller. The traders just need to keep the uninitiated convinced that the market is always going up and the only losers are those sitting on the sidelines. (There are derivatives and futures, but at the fundamental level its the same thing, but stupider for the outsider).

The truth is that the stock market is a sports book, where very smart folks who went to the same universities or whose professors went to those universities make the rules and run the book. mnarket makers  know that if they are betting against other smart folks with the same educations they will get a net zero result. Except the house always makes its vig or juice. The "vig" is what you pay the bookie to have the right to make a bet. In the stock market its the traders fees or commissions.

So if the stock market can't work when only smart folks are betting, how do they get it to continue to seemingly work. That's where advertising, propaganda, and the included media come in. The market needs an unending number of "bigger fools" who will be willing to buy your questionable investments at a price higher than you paid. If there are an infinite number of bigger fools, you keep winning. When you are the last of the fools, the market collapses, and you keep lowering your price until you find a buyer.

Where are we now. The market seems to be going up, but that's a ruse. The "smart" fools who make and own the market are artificially driving the market up to convince those on the inside rail to get back in. However, if we buy now the insiders make a profit because they bought their stocks at trash prices from us when we could no longer stand to loose more. My post consumer mind tells me that the whole idea of buying and selling speculatives is a thing of the past that is running on its own momentum and will surely come to an end when the insiders come to realize that there is no one on the sidelines. We were wiped out, and have nothing to go back to the market with. There is another view that the sideline money is the really smart and really rich money waitng for the market to completely tank and buy based on the real value of a firm based on its ability to make profit and pay dividends. Paying dividends as a valuation method was one thing that seems to have disappeared sometime in the early 1990's when the market decided that real value was in "potential to make money" rather than actually making money.

Where do we go. I don't know, but I am moving forward but its not in the stock market. Right this minute, my best investments are at


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