Vertiginous Stocks

“Dear Jack:  Don’t buy a single vote more than is necessary. I’ll be damned if I’m going to pay for a landslide.”

—JFK quoting a made-up telegram from his father, Joseph Kennedy, after he first won election to Congress.

Here’s a thought:  overdoing the stimulus — and rocketing stocks higher — can backfire, blunting (or worse) the very “wealth effect” that Ben Bernanke’s Fed is now very bubbleadmittedly trying to engineer.

Dynamics of a Bubble; Substitution Effect(s)

How’s that?

When stocks soar as they’re doing now, instead of selling to lock in profits and spending the proceeds (“wealth effect”), feverish investors speculators cling to what they have, in hopes of even lusher “profits” tomorrow.

That limits the supply of shares for sale, driving up prices further, which serves to increase everyone’s ardor for stocks even more.

Eventually, people start throwing fresh money at the expanding bubble, even going into debt (“buying on margin,” etc.) to do it.

Which highlights side effect #2 of genuinely big bubbles:  to the extent that people feel wealthier on paper and spend more . . . too many make the fatal mistake of “reinvesting” in the growing bubble.

As opposed to, say, actually consuming things, per the elusive “wealth effect.”

Thus do bubbles first attract — and then destroy — vast amounts of capital, while failing to stimulate the economy as much as you’d expect along the way.

Late to the Party:  (Almost) Everyone

But that’s all later.

For now, it’s lots of fun and even a little thrilling. 

Eventually, of course, the music does stop playing, and the erstwhile “players” become the next cycle’s sick men (and women*).

Just two questions:  1) who gets bailed out next time around? (I’ve got a hunch): and 2) who does the bailing?

*Now that the Supreme Court has ruled that corporations are people, I have a question:  do they have a gender?

See also, “Corporations Are Not People.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

Leave a Reply