How the Stock Market Works (Amazing!)

  • What to Tell Your Kids About the Stock Market: If they ask, the stock market is definitely not “on fleek”…
  • How to Fall in Love With Panic: “I love it when traders panic,” says Zach Scheidt of Income on Demand…
  • The Hidden Reason Why the Stock Market is Tumbling: Bill Bonner joins the show to rap about the recent plunge…
  • From Dream to Nightmare: “Now, investors may get what they least want: a deep and extended bear market.”

The stock market is on flail. Not to be mistaken with “on fleek.” Which is, I’m told, the hip new term for “on point.”

Therefore, the stock market, if your kids or grandkids ask, is definitely not on fleek.

Just say it. They’ll get it.

And if they happen to ask you to elaborate… or, worse, if they happen to ask you how the stock market works, here’s an amusing cartoon that’s been floating around the interwebs you can use to template your response.

Yes… stocks are off to their worst start to a year in history. 

Pessimism abounds. As Greg Guenthner of Rude Awakening fame said yesterday, the bears are back in town.

“Bespoke Investment Group,” he wrote, “notes that Google searches for the phrase ‘bear market’ is now tied for its highest monthly total since March 2009. And if my memory serves me, those were pretty bleak times…”

Greg’s point? Despite what the pundits might tell you, don’t be too trusting of the recent rally.

“I do not think Wednesday morning’s lows marked a bottom,” he wrote yesterday. “The main reason is because we still have yet to see a big spike in volatility.”

Want to see for yourself? Check out the Volatility Index, or VIX.

The VIX, if you don’t know, is the volume of S&P 500 index options. It’s used as the market’s “fear gauge.”

To Greg’s point, although the VIX has been creeping higher in the New Year, it’s still not at “panic room” highs.

“If you look back to late August,” Greg says, “you can clearly see an angry VIX ripping higher as the market tumbled from its highs. Compared to those readings, the action so far this month looks downright ordinary.”

“With implied volatility well below panic levels,” he goes on, “you can see why we should expect more downside action in the near future. In order for the market to put in anything close to a short-term bottom, we need to see true panic. That means a big flush where folks are willing to sell at any price.”

For my fellow East-Coasters who are braving the winter storm while I brave stranger (yet warmer) things in the Far East…

If you happen to see the scenario pictured below, you’ll know the panic is strong. And, yes, it’s time to get on fleek. (To be honest, I’m still not sure I know what that word means.)

Today, as you’ll find below, we’ve invited Agora founder Bill Bonner to show you the hidden reason why stocks are plunging.

First, though, check out our quick note about why you shouldn’t fear the panic… but fall in love with it.

[Ed. note: If market volatility scares you, don’t let it. As you learned yesterday, irrational fears be damned: There’s a way to cash in on the chaos. “I love it when traders panic and the VIX spikes higher,” Zach Scheidt, editor of Income on Demand, admitted recently. “When this happens, the amount of income we can receive from our ‘perpetual income strategy’ moves higher as well.”

“Thanks to the VIX moving higher, we’re in a period where our income opportunities are becoming even more lucrative than normal. In fact, we should be able to double our income during this special period.”

Last time the VIX soared, Zach showed his readers how to pull quick payments of $517 on Sept. 17… $520 on Oct. 1… and $600 on Oct. 8…

“During these two months alone,” he wrote, “we collected $8,836 in instant income payments — well above our average monthly income of $2,978 last year.”

Want to get in before panic hits and the getting’s good again? Click here to see if his perpetual income system is right for you — before snowmeggedon hits the VIX.]

The Hidden Reason Why Stocks Are Tumbling…

By Bill Bonner

LONDON — Whew!

We have to be careful not to say anything controversial today. Otherwise, we won’t be able to keep up with the mail. (Catch up on Bill’s controversial essays about the Oregon situation here and here.)

What other people think matters. People get upset — even homicidal — over ideas and myths, not reality.

Catholic, Protestant, Shiite, Sunni, Democrat, Republican, land rights in the West… captured U.S. soldiers… racial slurs… the master race… Manifest Destiny… terrorism… global warming — there is no idea so bogus it can’t be the cause of a government program or a massacre.

Thoughts — like viruses — enter the brains of humans and take control of them.

Then, acting as though they know what they are doing, people try to “improve” the world around them. They tax, kill, argue, torture, demonstrate, seize public land, write letters to the editor, and call up Rush Limbaugh.

Ditto to that!

Worthy Causes

The cause is always a worthy one, of course.

And there are always people to blame… people standing in the way of a better world.

They must be forced to wear seatbelts and sign up for health insurance – for their own good.

The Johnny Rebs must be kept in the Union. Incomes should be more “equitable.” Trade should be fair. Hey, what about the Declaration of Independence? And don’t forget to free the Holy Land!

What you think is what you get… no matter how absurd. And then, reality imposes itself, and you get something else altogether, often the exact opposite of what you wanted.

Reality doesn’t care what you think. Thoughts hardly matter. Reality happens whether you want it or not. Nobody threatens his weatherman when the temperature falls; everyone knows it’s not his fault.

The sun shines. We grow old and die. Three aces beat two pair.

So, what are markets? Myth? Or reality?

Answer: They are both.

In the short run, they are myth spinners. If everyone believes the economy is healthy and prices will rise, they probably will rise… at least for a while.

But in the long run, reality sets in.

No matter how many people expect — and want — prices to continue to go up, at some point, they will go down.

No amount of wishful thinking can erase debt, create profits, or stop markets from going up and down. There is always some truth that overrides delusions, myths, and groupthink.

Poverty, Misery, and Quasi-Slavery

Think back to the all the 20th century experiments with socialism and central planning; Russia, China, and Venezuela come to mind readily.

Did they lead to the workers’ paradise that the proles were promised? Did they create the rational, productive, and fair economies that people expected?

Nope! They led to poverty, misery, and quasi-slavery for millions of people.

Even the most fantastical myths have real consequences. Pity the poor virgin; she dismissed a myth as “superstition.” Then, they tossed her in the volcano anyway.

Then when the grumbling volcano grew silent: “Look, it worked,” they said, giving each other high fives until the hot ash fell on their heads and the burning lava covered their feet.

One of the most surprising and disturbing myths today is the myth of “terrorism.”

This is not to say that there aren’t real flesh-and-blood terrorists. But they are hardly a serious threat to the U.S. or to its people.

And “going after terrorists” doesn’t necessarily make you safer… as the invasion of Iraq proved in spades.

But the power of the myth is so strong that every Republican presidential candidate believes it will take him to the White House.

The politicos ride the myth; then the myth rides them.

From Dream to Nightmare

Take Hitler’s myth that Germany had to build up its army to wipe out enemies on all sides and gain “living space.”

At first, it seemed to make sense. Then the myth began a trend. And the trend took on a life of its own.

Soon, there was no stopping the Nazis’ “security industry” — led by Hitler himself.

His Thousand-Year Reich stormed over Europe for six years. Then it met its own horrific apocalypse. The dream had brought its own nightmare. Germany was bombed, defeated, destroyed. The supposedly invincible Wehrmacht had provoked the Red Army; once roused, the Reds were unstoppable.

Reality was grim. Roughly 1 out of every 10 Germans — more than 7 million of them — died in the war. The invading Soviet soldiers raped thousands of German women… and countless others committed suicide to avoid this fate. And Germany’s Jewish population was almost totally wiped out.

Investing in a myth can bring the same perverse results. Investors piled into stocks after 2009 because they believed a potent myth: The Fed had “saved the day.” Bernanke was a hero. We were on the road to recovery.

The more widespread the belief came (and let’s not forget that it was supported by the Fed’s EZ money), the more stocks rose… apparently confirming the truth of it.

But the higher the stock market went… and the more debt increased… the more the whole shebang wobbled and lurched.

Now, investors may get what they least want: a deep and extended bear market.

[Chris’ note: “There are certain windows of opportunity that show up periodically (usually only once or twice a year) in which income investors can double the payments they receive from the markets,” Zach wrote recently. We may be entering, dear LFT reader, one of those windows. Again, the last time the panic set in Zach’s readers pulled in a windfall of income checks: Click here to make sure you don’t miss out this time.]

Until tomorrow,

Chris Campbell
Managing editor, Laissez Faire Today

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