While I don’t own any stocks of any kind, I do keep up with the market. I watch it every day with great amusement. Not precious metals stocks, but stocks in general. I know all about P/E ratios, and what is a good buy. I subscribe to Richard Russell’s Dow Theory Letters, even though I don’t own stocks. Maybe it’s because this geezer is brilliant, and has harped for months about how risky the market is, and that people should own gold. Of late, I have observed something which I am sure Russell has noted, but I haven’t noticed him writing about of late.
The stock-market, and for that matter every other market, is totally controlled by sentiment. Soybeans, gold, antiques, or pork bellies, are all controlled by sentiment. Opinion might be another synonym, but it is the feeling masses of people develop, which makes them act. The most brilliant economist that ever lived was Ludwig von Mises, and he at one time gave a brilliant definition of economics. “People Act.” It’s just that simple. What makes people act? Sentiment, opinion, and on rare occasions, information. What caused the NASDAQ to crash, after such a brilliant up-move? Why did it suddenly go south? The P/E ratios hadn’t changed. They were always terrible, with few profits in most cases. They were a bubble, which burst. About 4,000 points lost. Boom, and down it went, taking it is said, $5 trillion with it.
Something triggered that crash. What was it? Suddenly, lots of people decided it had gone high enough, and they decided to sell. If you look at the history, it didn’t happen exactly that way. It hovered around its top and went nowhere for a while, and then began its trip downward slowly at first with rapidity after a while. Look at the Dow now, and tell me this isn’t happening. While it has lost 700 points, it has done it gradually. Look at the new highs and new lows. Look at how small the decline is on a daily basis, and if it goes up, look at how feeble it does so. While there are a billion shares that trade hands, the sentiment is such that almost as many want to sell, as who wish to buy.
After Greenspan’s soliloquy, the fools did buy, but not much. The following day the Dow went down a hundred, and as I write this, it is about break even.
The Dow will run down 75 points, and before close, it will have recovered 50 of its loss. Tell you something? It tells me that a lot of guys are selling, and when it goes down the 75, some think it is bargainsville, and buy making it recover a bit.
FOR EVERY BUYER THERE HAS TO BE A SELLER. FOR EVERY SELLER, THERE HAS TO BE A BUYER. This is true of all markets or whatever merchandise, services, supplies, commodities, real estate, or what have you. An undeniable rule. When there are few buyers, prices go down. When there are more buyers than sellers, prices go up. Suppose you own widget stock, which you bought at $5, three years ago. It has gone up to $12, and you decide to take your profits by selling. Maybe a hundred other holders of Widget decide at the same time to sell. There might be more sellers than buyers, and the price will decline till someone thinks it is a bargain. The point at which someone thinks it is a worthwhile buy, will be the price which sellers and buyers will meet. The Dow has about reached the point at which almost as many want to sell as want to buy, with the leaning on sellers. This is responsible for the 700 point decline.
The law of buyer-seller agreement even comes into play with a hooker on the strip of Las Vegas or elsewhere. She wants $200, or whatever (I have never been a buyer!) and the john only has $100 or whatever prices there are. She may say OK, or hold out for a better offer. Used cars, real estate, and stocks all operate on this principle. A guy has his house listed for $250,000 and gets an offer of $200,000. Was his asking price too high? Maybe an experienced broker can tell him to accept it or hold out for his price. At some point, a meeting place will be reached between buyer and seller in anything. Almost.
In 1929, there were millions of sellers, and no buyers. The market crashed because of a lack of buyers. Sentiment was extremely negative. When there are no buyers, or few anyway, the prices will plummet. When a hot new toy comes onto the market at Christmas, people will pay through the nose to get it for their little rug rats, so they will be popular with the other brats on the block. A limited supply of anything, which suddenly becomes popular, will drive prices to the stratosphere. The stock market now, in my opinion anyway, has reached the point where sellers outnumber buyers by a small margin, causing prices to go down. As they go down, a few pick them up as they believe a “bottom” has been reached. Except no one knows where a “bottom” will be. It’s all guesswork.
To me, when a market is slowly declining, It may well take a steep dive, when just a few more sellers come on line, and a few less buyers do also. At this point, there may not be a bottom for a long time. The trend is down, and sellers outnumber buyers by a small margin. To bet that buyers will outnumber sellers, thereby raising prices, when the economic situation is so grotesque, not to mention the huge deficit and war expenses to me once again is placing a bet on a losing horse. Markets usually re-test their lows, and the Dow is far from that currently.
Remember, a stock is a teeny, tiny part ownership of a corporation run by a CEO, and an army of employees. It is a sort of title to this microscopic ownership. If the CEO is smart, and the corporation has something decent to sell, at a profit, your may receive a microscopic part of the profits in the form of a dividend. Few dividends are being paid. Profits and dividends are two distinctly different animals. The CEO may take the profits and declare a huge bonus for himself and his officers, depriving you of a dividend. The CEO or CFO (chief financial officer) may declare dividends and not contribute to the retirement fund, as has happened in hundreds of corporations. This denies retirees the benefits promised them when they were faithful employees. It may be unfair, but there’s nothing they can do about it, as they are at the mercy of those who control the retirement funds or disburse dividends. The three major auto corporations, are hundreds of billions in arrears to their employee retirement funds, and it bodes ill for them in the future.
A fire may destroy the timber of a lumber company, or real estate may tumble, taking away profits from the corporation that builds. Ships may sink causing huge claims from loss of life and boat, which may not be covered by insurance. Railroads have derailments, airlines have plane crashes, and natural weather extremes can cause unlimited losses for some corporations. Government rules and regulations may remove profits from any number of enterprises. Time and happenstance can curtail profits and solvency of all corporations, causing their stocks to go south. Good luck and skill of the CEO and board of directors can have marvelous effects. Now, there seems to be an even split between the optimists and pessimists. I think the sellers will soon outnumber buyers by huge numbers, and cause stocks to go way down.
On the other hand, due to the extreme low supply of above ground silver, plus increasing demand; I think silver will go way up in dollars. Gold too. The gold and silver markets, compared to the stock market, are extremely small, dollar wise. 26 million ounces of silver have recently been delivered out of COMEX vaults, leaving far less than half of the number of ounces there are contracts for, which means future prices for silver will simply have to go up.
As a comment on last week’s Assignats column, I have this letter from a retired Ph.D. professor of French History at Texas A&M. “At the time of the revolution, the church held some of the richest agricultural lands in France. The middle class lusted for these, and supported the idea of confiscating church property. They presented a way to solve the fiscal crisis. To solve the immediate crisis, the government should print assignats, then sell the church land to the lusting, deprived, middle class. As the lands sold, then the assignats would be recalled in an orderly fashion. The crisis would be solved, the middle class get the land, and the middle class would then be solidly and economically bound to support the revolution. This would be the same way as had happened in England when King Henry VIII confiscated church land, and gave it to the middle class. What went wrong was when the government took the lands, lo and behold, somehow virtually no buyers appeared!”
The best laid plans of man. At any rate, the folly of government and its foolish plans and schemes always seem to come to naught. Gold and silver stand by themselves, with no strings or government schemes to blunt them. The manipulators will fail, just as the government under the French revolution failed to set things straight. Napoleon Bonaparte got it right. Protect yourself.