The Stupidity Bubble: No Inflation, Just High Prices

May 27, 2008

A few months ago, I had a discussion with John Dvorak (TDI Podcast Episode #41) that focused on the pending economic stimulus plan and how I felt that it was not going to do much. I asserted that, one rudimentary principle in life is that consumers (that means us) will spend money. Some cultures do this in a manner that is responsible and others do not. In the U.S., there is the realization that the dollar is just is not spending like it used to. Fuels costs more, food prices are rising and if you really think about it, almost everything has become more expensive during the past year. (sans the cost to read a good blog post)

Scott Hoyt from Economy.com writes:

The real reason for concern over the state of consumer finances is larger than what the slowing in income growth would suggest, however. Growth in cash flow fell last year and is continuing to weaken. This is due to reduced realized capital gains and, most importantly, reduced borrowing. Neither of these will be quick to recover so household cash flow growth will remain weak even next year.

Gas Prices shrink Wallet

More concerning though is the fact that there has been an overwhelming blatant disregard for all of the warning signs that should have raised the alarm to investors that there is trouble brewing. Instead, money has been flowing into the equity markets during the first part of May with a reckless disregard for risk. Stocks prices moved up towards 2008 highs as the buzz filters through the media was showing that investors were “accurately predicting the conditions 6-12 months forward as the markets are an “anticipatory mechanism.”

Yet, once again, it seems that the rationales are pushing the outcome rather than the outcomes proving the rationales. It is a simple result of data-mining as the need to find irrefutable evidence for investors in order to provide comfort for holding any long positions into a market with openly failing fundamentals.

Bloomberg recently explained:

Without the $70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor’s 500 Index tumbled 26 percent and 30.2 percent as of last week, the biggest decreases for any quarter since Bloomberg started compiling data in 1998.

That is not what I would call comforting…It is not comforting that we, as investors, taxpayers and citizens of the great U.S.A. are able to accept the historic write-offs that banks and other companies are now reporting. It is unconscionable that they saw fit to provide loans in a manner that has shown to be reckless and financially harmful. It is not comforting that the amateurs are pumping up stock prices into earnings that are nothing more that better-than-lowered expectations.

The next bubble is forming….The stupidity bubble. When this one pops there will be a full explosion of the dead brain matter that will be mapped back to the investment center of the cerebellum. It will only be after a thorough autopsy that we will find that the collective brain had been marked abbey-normal since 1999. OOPS!

I digress, but so do the markets I suppose… Watch for a few more economic charts to follow.

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Written by Andrew Horowitz · Filed Under Economy, Short Ideas 

Comments

2 Responses to “The Stupidity Bubble: No Inflation, Just High Prices”

  1. supraman on May 27th, 2008 12:10 pm

    The oil prices are a bubble. Don’t forget the barrel price of oil in 98 of around $11. So I think we’re seeing the classic bubble here. Just like the housing bubble and Silicon Valley bubbles of recent past. The key here is like the last couple bubbles. There is no increased demand to justify this price just made up demand. For the housing bubble the demand was not created by people needing houses it was low interest that created the demand. Also with the internet bubble there was no increased demand for advertising and commerce it was all based on how much money an investor THOUGHT you might make in the future.

    The WORST thing that could happen for our economy that could happen right now is an increase in taxes. That would slow economic growth to a complete standstill, and increase the length of the recession. The govenrment shouldn’t be trying to bail the economy out of a recession unless that means LESS taxes and LESS spending.

  2. Andrew Horowitz on May 27th, 2008 5:51 pm

    Sup:

    There are many problems… Oil is on top of the moment taking the eye off of the distressing issues surrounding the financials and our inept govt.

    :-()

    A

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