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Monday, March 4, 2013

The Stock Market Balloon< Ready to Pop?

       If your watching the market and trying to figure out what to do it is really simple. Take your money and run.  The market is not up regardless of what it appears to be doing. It is another bubble just waiting to pop. If you listen to commentators they are saying personal income had its worst drop in 20 years.  The GDP has only gone up .01 %.  People are spending more. Wonder if that could be because of inflated prices that the Fed denies is happening.  At the same time people are saving less.  If that is the case what is driving the market up.  It is really pretty simple to understand. Many people pay into retirement plans which then invest the money in the markets. Well they can't put the money in savings. Interest is virtually zero on savings. They can't put the money in bonds as interest rates are in the tank on bonds also.  The government can not let interest rates go up because it will drive up the cost of borrowing money to keep the government running. The only things going up are the housing market and the stock market.

     So why is the housing market going up when everything else is in the tank.  It is pretty simple really.  It is the only place you can put money and hope to have something to show for it when the market collapses. Many people got burnt back in the 07 to 09 downturn.  My wife lost 40% of her retirement over a two year period before her retirement in January of 09.  She could have kept working, but she was ready to retire and we managed our money so that she was able to retire regardless.  The key was having no debt.  We knew having no debt was the only way we could survive and had been planning accordingly.  It has been the key to our survival so far.  Our real estate investments took a beating, but we still owned them.  Lately we have been taking advantage of the rise to unload some properties we had and turn them into cash.

     The stock market is not going up because it is increasing in value.  It is going up because for many investors it is the only place to put their money.  The stocks themselves are not really gaining in value.  What is happening is something like a water hose under pressure.  If you step on a hose in one place it simply sends the flow toward the place of least resistance.  If another person steps on the hose and the flow can't escape it will move toward the weakest point in the hose and it will start inflating.  Not because the hose is a good place to store the flow, but because it is the only place it can go.  Eventually the pressure will get so high the hose will explode.  When that happens the contents of the hose will escape.  Where the contents escape to is the question. In the case of stocks the funds just miraculously disappear.  The companies certainly do not give back the money.  They do not tend to invest it either.  At least that is what is happening at this point in time.  Government regulations are stopping many companies from investing.  They are scared if they try to grow, their investments will be consumed by Obamacare and government taxes and regulations.

    It is the uncertainty that is holding economic growth back. It is not a shortage of funds by corporations. Many are in the best financial condition they have ever been in.  They are sitting on tons of capital and it keeps increasing as people keep buying stocks.  The trick is that they need to invest to keep the growth going.  If they do not the stock bubble may bust. Then the economy collapses and they lose their opportunity.  It is a sort of danged if you do, danged if you don't for corporate America.

      One of the good things that was not mentioned above in all the gloom and doom. While income is down and the GDP growth is down, like many other indicators.  Personal debt is also going down. People may not be saving, but they are reducing their debt load.  That means they will or may be able to survive if the market collapses.  It you owe nothing you need much less to survive on.  Some people are spending money to buy property they can grow their own drops on.  Some are creating their own cash flows through crafts and bartering for goods and services.  During the Great Depression many people survived simply by learning to do for themselves and get along with less.  It may be a lesson that will have to be applied by many if the market collapses.

    In the Great Depression era banks and big business went broke but the government was solvent. The total national debt at the time was only 38% of the GDP.  The government was able to help to some degree.  If there is a total economic collapse there is no one to bail America out this time.  The government is in worse condition than most of those who depend on it this time.  The government will not be able to bail anybody out.  Sure they can print money. The only thing it will be good for is toilet paper.  I always hear people say you need to be in gold.  Well as I always say, 'I can milk and then eat my cow.  I can't eat that gold.  It has no value as far as I am concerned.  The only thing that has value is what will keep you alive.  Which brings us to the scary part of the equation.  What will happen to those 300 million guns when the economy collapses.  Will we return to a wild west type environment.  If no one is in charge that is certainly the direction that seems most likely.  If the government fails to support the economy which sequester indicates is exactly what is happening.  Then people will be left to fend for themselves.  Scary thought.  Enough gloom and doom, but I hope you get the picture of where this could be headed.  Guess I will keep raising my chickens and tomatoes till some idiot comes up my drive with his assault rifle.

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