July 14, 2019 - Freedomain Radio - Stefan Molyneux
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| Hi everybody, it's Stefan Molyneux from Free Domain Radio. | |
| I hope that you're doing very well. | |
| This is True News, current events clarified from Free Domain Radio. | |
| Number 3, October the 20th, 2008. | |
| This is called the supercharged stock market. | |
| This is actually adapted from an article that I wrote in August of 2007. | |
| So let's start with a little metaphor, a metaphor that will be quite tasty. | |
| Let's say that a farmer comes to you and asks you for advice about his chickens. | |
| He says, And they just keep dying on me. | |
| There's a disease, they get crushed, they suffocate, they asphyxiate, and you're like, whoa, that's pretty intense. | |
| What's happening? He's like, well, I keep them in a 12x12 shed. | |
| I don't know what the problem is. | |
| It's ventilated, it's warm enough, and they just keep dying. | |
| You say, well, how many do you keep in the shed? | |
| He says, oh, about 12,000. | |
| And in this way, the mystery of the chicken deaths may well be explained. | |
| You could sensibly observe, well, if you force all those chickens into a tiny shed, they're not going to do very well. | |
| And this is a useful metaphor for the stock market as a whole, which I'm sure we will be able to explicate as we go forward. | |
| So, sorry to go over the basics. | |
| The stock market, basically what is it about? | |
| Well, originally... The stock market is a mechanism by which companies can sell shares in order to raise money, to build new plants, to expand the workforce, to expand markets, to advertise, to do marketing campaigns, to buy capital equipment so that they can grow their business. | |
| And that is a very good thing. | |
| I'm a big fan of the stock market. | |
| I did get some perturbed emails from people thought I was down on the stock market. | |
| No, the stock market is essential. | |
| In fact, von Mises said that the one thing you could differentiate a centrally planned from a market economy was the existence or non-existence of a stock market. | |
| So I'm big on the stock market, but that's not quite what we have now, and that's the difference. | |
| So, when a company wants to go and raise capital, they'll go and talk to people who are hopefully knowledgeable about the industry. | |
| And most people who invest in companies in a free market scenario are knowledgeable at least about the industry, if not the company, if not the people involved. | |
| They can remain involved in its growth. | |
| They could be advisory. | |
| They could be a stockholders' association that can Keep the company in line and so on. | |
| So these are people who are involved. | |
| They're in it for the long haul. | |
| They know the industry. That is what is called an investor in the stock market. | |
| And they have ways to quantify risk, which is really their knowledge and their involvement. | |
| Now, there is another kind of person who floats around injecting money into the stock market. | |
| Again, I don't have any problem with this kind of person either, not that you'd care if I did, but this person is called a speculator. | |
| Now, a speculator does not have... | |
| Deep knowledge of the companies or the industries that he's investing in. | |
| This is the kind of guy who invests on trends, graphs, mathematical formulas, or tips, or general guesses about the market. | |
| Ooh, the population's aging, maybe I should invest in adult diapers. | |
| That kind of stuff. Does not have a deep knowledge of the industry, or the company, or the people running it. | |
| Not exactly a dart thrower, but not far off from that standpoint. | |
| So... An excess of chickens. | |
| 12,000 or more chickens into a tiny shed. | |
| What do I mean by that? Well, let's have a look at this graph. | |
| This is dollar trading volume versus gross domestic product U.S. 1926 to 2008. | |
| So the average ratio is 20-30%, right? | |
| So the GDP, you get a stock market turnover of 20-30% dollar trading volume. | |
| So if the GDP is $100 billion, you know, $20 billion might turnover in the stock market on any given year. | |
| Now, since the creation of fiat money and the Fed in 1913, which, of course, was responsible for funding the First World War, it would have been impossible without it. | |
| We had the huge boom of the 1920s, which we can see here. | |
| Then, of course, it declines and it stays very low through the war and then slowly edges up to 5%, 6%, 7%, 8%, 9% of GDP throughout the biggest economic boom in history, which was post-war period to the end of the gold standard in the early 70s under Nixon in the United States. | |
| When, by the way, poverty was diminishing one percentage point a year, which it has since stopped doing since the introduction of the welfare state. | |
| It's a great tragedy. Ah, but you see what then, what begins to happen is we start to see, as you can see here in the early 1980s, we begin to see this huge increase, massive increase. | |
| We blow over the average. | |
| We blow over 100%. | |
| We blow over 200%. | |
| We blow over 300%, and we get close to 400% turnover. | |
| Massive, massive spikes. | |
| Of course, there is the dip based on the stock market decline in the early 2000s. | |
| But this is a huge, huge issue. | |
| There has been a huge, massive, fundamental and foundational influx of dollars into the stock market since the early 1980s. | |
| Now, I know that some people think it's like, oh, I see the government behind every problem. | |
| Oh, look, I have rheumatoid arthritis. | |
| It's the government crawling up my leg. | |
| But when you see something this fundamental, the first place you want to look when you see a society-wide change is the only agency. | |
| That can affect society as a whole instantaneously through the mechanism of violence, law and coercion. | |
| And that is the government. | |
| There's no other agency that can affect society as a whole relative to the power and reach of the government. | |
| So this is the first place you look. | |
| So, if this theory is true, then we would look for government legislation that would begin to herd money into the stock markets around 1980. | |
| Well, look at that. We do. | |
| 1980, we see the start of 401k plans, 403b plans around that time, 457b and f plans, and all of these... | |
| Are tax breaks for putting your money into investments. | |
| Now some people put them into government bonds, thus guaranteeing themselves future tax increases because it's not like the government makes any money. | |
| All it does is print and borrow and steal. | |
| But a lot of people, because inflation is to such a degree that the government bonds often only keep pace or slightly better than inflation, We'll put their money into the stock market. | |
| So here we begin to see this hurting process, and it takes a little while. | |
| It certainly has a bump, but it takes a little while. | |
| Of course, there was a recession in the early 80s, so it takes a little while. | |
| Then it truly begins to go nuts. | |
| Now, in the late 90s, we see the Thrift Savings Plan, which injected eventually $224 billion into the stock market, representing over $3 million. | |
| And I say investors, they're actually speculators, because when you put your money into a 401k plan and somebody manages it for you, you have no idea what companies are... | |
| I mean, you know what companies are being invested in, but you don't know the industry, you don't know the company, you don't know the people. | |
| That's why everyone gets turned into a speculator when their money gets herded like lemmings into the stock market. | |
| And there's tons of other things that you can look at that have herded money into the stock market since the 80s, but this is the fundamental thing... | |
| Huge amounts of money are just being jammed into the stock market. | |
| It's like blood boosting for an athlete. | |
| It's just wildly disorienting. | |
| Here's another example of what's happened. | |
| This is futures speculation relative to the actual production of, here we see wheat, corn, oats, barley, and rye. | |
| And, you know, number of bushels versus production that are speculated on, it's greater than production. | |
| And speculation is betting upon the future price of an item. | |
| And so we can see that there's been a mild increase in, actually not a mild, a fairly large increase in crop production, but an absolutely huge increase in the speculation, right? | |
| So a little over 20,000 in 1884 to 88, a little maybe 220,000 in 1966 to 1977, 125,000 in 2002. | |
| Again, we see this massive increase in In what is going on in the stock market. | |
| There's tons of graphs that you can find about this, but I don't want to bore you. | |
| I think you kind of get the point. | |
| This is some additional data. | |
| The amount of money that 401k plans have herded into the stock market is just staggering. | |
| It rose from $105 billion in 1995 to $14 trillion in 2005. | |
| Was that a hundredfold increase in 10 years? | |
| A hundredfold increase. | |
| This massively distorts the stock market and it distorts the decisions that executives make, which I can tell you from some personal experience as well. | |
| The U.S. Teachers Union, some other non-profit groups in their 403B accounts, they have estimated $607 billion invested. | |
| Again, this turns every teacher into a speculator. | |
| We've also got the excess in unemployment insurance, pension plans, we've got direct investment, government subsidies, and now This $700 billion to $1 trillion probably end up being closer to $2 trillion investment, direct bailout investment from the government. | |
| So again, this is just massive amounts of money being herded into the stock market. | |
| So what happens? What is the result of all of these chickens in the shed, so to speak? | |
| Well, because around, and this is not just in the US, this is around the world, governments are forcibly injecting trillions and trillions of dollars into the stock market. | |
| This creates just absolutely wild instability, short-term focus, day trading, because you've got so much money chasing too few stocks. | |
| It's actually tough to find good investments. | |
| Microsoft had this problem in the 90s. | |
| They were making so much money, they couldn't figure out what they could invest in productively. | |
| Now, This also, this massive amount of money chasing relatively few stocks, it creates a real distortion in the concept of value, which is so important to understanding what's going on in the stock market today. | |
| So, of course, ideally, value represents an actual and potential demand for goods and services, right? | |
| So whoever makes Depends, if the demand for Depends is going to go up and there's a perception it's in demand now, it's going to go up in the future, then that is the value of the stock as represented by the actual demand for the goods or services in question. | |
| But in a supercharged stock market, value represents It's no longer what is the market demand for the company's goods and or services, but it becomes, what can I sell the stock for right now? | |
| The value shifts from being a reflection to the market demand to the stock market demand for the stock itself. | |
| It's a very, very important shift, and it has strong effects on executive ethics. | |
| So, this corrupt value, because stocks no longer represent the demand for a company's products or services, but rather for its stock, the focus of CEOs begin to change. | |
| As I mentioned in the first of these current events shows, I co-founded, grew, and sold a company in the late 90s, the software company, during the heyday of the tech boom. | |
| I've been in the boardrooms where this stuff is floating around, and it really distorts people's thinking. | |
| So rather than building value for the long term, CEOs and executives end up chasing stock prices in the short term because normally people who invest in a company are in it for the long haul because they know the industry. | |
| So they're not going to buy stocks and then sell stocks in the same day or the same hour or the same week or the same month or often even the same year, but they're in it for the long haul. | |
| And so the only way that the value of those stocks can be maintained is by building value in the long term. | |
| But when you have trillions of dollars chasing relatively few stocks, stock prices go up and down. | |
| They're day traded. They come, they go. | |
| You've got trigger programs, computers automatically buying and selling. | |
| It's chaos. | |
| It's madness. | |
| And it really shifts. | |
| The CEO's focus from building value in the long term to chasing stock prices in the short term. | |
| So this excess money that's in the stock market is jumping around from stock to stock. | |
| So the temptation to misrepresent earnings and sales projections, what's also called stuffing the pipe, which is where you sell a whole bunch of stuff now, which actually eats into your future sales, so that you can report higher earnings in the moment without people understanding that the mountain you're building now is the valley that is your next quarter or your next year. | |
| They also pursue short-term pump and dump strategies where they will go out and pump up a stock and then buy a stock, pump up a stock and then sell the stock or go out and just do these tours where they talk about these amazing, wonderful opportunities so the stock price can go up, so they can dump it. All of this stuff really begins to distort executive thinking because people respond to incentives and in a corrupt environment like the modern stock market, It's not good. | |
| Because everybody's looking for that quick hit, that quick fix, that quick, massive spike, or even reasonably decent spike, executives who tell the truth about shortcomings often get punished, whereas those who cover them up all too often are rewarded. | |
| And so we see this increase in, quote, corporate corruption, but it is a response to the supercharged stock market. | |
| That doesn't mean that these people are all saints, but it does mean that we have to understand the context of That they're operating in and how that context is different from a couple of decades ago. | |
| So, what happens? | |
| Since enormous, quote, value can be rapidly created through the manipulation of perception, of the perception of the value of the stock, not as a stock price as a real reflection of the company's value, executives can now become rich in months or years rather than having to patiently build value over decades, which was more the norm in the past. | |
| The long-term value of, quote, good character, of honesty, of plain dealing, and so on, thus goes down, while the short-term value of rhetoric, flashy marketing, fancy manipulations, insider tips, releasing stuff, like all of that manipulation of the stock market, you can make millions or more through that kind of stuff rather than patiently building the value of a company over the long run. | |
| And because of the supercharged stock market and the amount of money that can be made by too much money chasing too few stocks... | |
| The executive salaries continue to rise because the, quote, value, which is not real value, but the illusory value that they can provide increases, right? | |
| And we can see this very clearly. | |
| In 1970, before the government began herding all this money into the stock market, CEOs would pay 28 times the average worker by 05, 465 times more. | |
| Now, yeah, there's more globalization, you've got to be better at stuff and so on, but even if CEOs have to be twice as good now, it does not explain this massive more than tenfold increase in the jump. | |
| But the jump is because they can make so much more money through this manipulation of the stock market. | |
| Why? | |
| Why? | |
| Why is all this happening? | |
| Well... Politicians really like this setup because it gives them enormous power over the financial sector, which has become completely dependent, or largely dependent, on the money that the government, quote, sends its way. | |
| I mean, they're always lobbying for increases in exemptions so that more people will invest so that they can make more money through this trading. | |
| So the whole profession has become insane and hysterical. | |
| And of course, it just attracts more and more people who don't necessarily have the long-term interests of their clients at heart. | |
| So let's say if government were to abolish 401k plans and refrain from taxing the associated income or say, well, you don't have to put it in the stock market. | |
| You can just put it in the bank or under your mattress and we're just going to exempt this much income. | |
| Financial services industry, as we know it, would simply collapse. | |
| So many people, now that it's, what, 80, 90, now that it's almost 30 years in... | |
| I mean, people have founded their entire careers. | |
| The whole demand for these people, people would be thrown out of work. | |
| There'd be chaos. There'd be, you know, company values would collapse. | |
| I mean, it's like heroin, right? I mean, they give you a taste and then they continue giving you increased dosage. | |
| Now, the whole system is dependent upon this massive influx, continual herding investment. | |
| And as we saw in the recent shows... | |
| The lack of value that's at the foundation of all of this is all propped up nonsense, right? | |
| When that becomes real, the government has to inject more fiat currency to prop up the values that the supercharged stock market has escalated to an obviously completely unsustainable point. | |
| And the longer they prop it up, the longer the recession slash depression is going to be. | |
| If we were free to make our own investment decisions, what is currently called the stock market would change almost beyond recognition. | |
| It simply would not look anything like it does now. | |
| You simply can't go from 20% to almost 400% of GDP being traded in the stock market and then back again to 20% or 10% or 15% without it just being completely different from what it looks like now. | |
| And of course, the financial services industry gives a lot of money to politicians in order to keep this Ponzi scheme, this scam going. | |
| And that's not very good. | |
| So, So, once more, it's absolutely essential, essential, essential that we understand what is going on at the coercive root, at the coercive base of society. | |
| Try not, try not, try not, try not, and help other people. | |
| Send this video around, please. | |
| Try not to blame the results of coercion, of this forcible herding of money into the stock market on freedom, on the free market, on laissez-faire. | |
| You could call it capitalism, but that word has become so debased as to mean the sort of corporate fascism that we kind of have now. | |
| What is going on in the stock market right now has nothing to do with the free market. | |
| If you force-feed someone heroin, they're going to be different than if you don't. | |
| And it's important not to mistake the personality, the natural self, for the results of this kind of force-feeding of drugs, this turbo-charging of the stock market through this coerced money that's herded into it. | |
| This is a manipulative and fascistic coercive casino. | |
| Of course, communism is the public ownership of industry and profits, of course. | |
| Whereas fascism is the nominal private ownership of industry, but the socialization of the profits through taxes. | |
| And this is a little different, though. | |
| This is a situation where the mafia is rolling the loaded dice. | |
| It's got nothing to do with a free market or anything like that. | |
| This is really about the socialization of risk and the privatization of what is called profit, right? | |
| Which is not real profit because it's all this manipulative shell game. | |
| But the risk is now being borne by the taxpayer, but the Wall Street corporations get to keep their profits and their bonuses and so on. | |
| It's a very, very different situation from a free market. | |
| And because the risk has gone down and the rewards have gone up so much, it is distorting everybody's thinking. | |
| And it all looks like chaos. | |
| And people are blaming this. | |
| On volunteerism, but it's so important to recognize what is really going on. | |
| In education in the 2008 Podcast Awards, I hope that you will drop by podcastawards.com in a week or two and vote for Freedom in Radio. |
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