Wednesday, June 25, 2008

Pushing Paper Money; Public Paper Profits

The sad truth about the American economy is that it has shifted from producing things to moving money; in other words, from manufacturing to finance. That's not only true in New York but even in Detroit. The profound consequences of this transition only now are becoming apparent. (Randal Forsythe, Barron's on line.)
The quote came at the end of an article about GM and F. I've remarked the same in this space--in relation to the continued marveling of the weak dollar and how good that was for exports (CNBC was the biggest purveyor or that line). Given that we do not produce very much, but we buy a lot of oil, that sentiment always rang oddly to my ear.

I have finished my Reminiscences of a Stock Operator. It's enough to put you off the market entirely. If you have not read it, I would encourage you to do so. Why? Because you will get an account of how stocks are "moved" out of the hands of a few and into the hands of many (public). Here's one passage that I found somewhat chilling:

In every boom companies are formed primarily if not exclusively to take advantage of the public's appetite for all kinds of stocks. Also there are belated promotions. The reason why promoters make that mistake is that being human they are unwilling to see the end of the boom. Moreover, it is good business to take chances when the possible profit is big enough. The top is never in sight when the vision is vitiated by hope. The average man sees a stock that nobody wanted at twelve dollars or fourteen dollars a share suddenly advance to thirty--which surely is the top--until it rises to fifty. That is absolutely the end of the rise. Then it goes to sixty; to seventy; to seventy-five. It then becomes a certainty that this stock, which a few weeks ago was selling for less than fifteen, can't go any higher. But it goes to eighty; and to eighty-five. Whereupon the average man, who never thinks of values but of prices, and is not governed in his actions by conditions but by fears, takes the easiest way--he stops thinking that there must be a limit to the advances. That is why those outsiders who are wise enough not to buy at the top make up for it by not taking profits. The big money in booms is always made first by the public--on paper. And it remains on paper. (p. 240)

The above ought to remind you of the dotcom bubble and housing--I'm sure that passage is appropriate for every bubble.

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