Saturday, March 14, 2009

How the Dirty Side of Investing Works

Can we stop it with the plunge protection team conspiracy theory?

There is a conspriacy theory out there that states that a secret group within the govt works to help stop plunges in the stock market. Theya re the PPT: plunge protection team. Can we please look back on the bear market earlier this decade and then the bear market since fall of 2007 to say that no, there is not a PPT, and if there were, it would not have allowed the sudden drops in the stock markets? I love conspiracy theories, but this is one that has a giant hole in it: experience. If a PPT existed, market crashes like we have seen would not be allowed.

A counter to this conspiracy theory would be another conspiracy theory. It has been joked that financial ways of gaining wealth are like good parties. The rich always know where the good party is first and by the time everyone else shows up the cops come and break it up. My counter conspiracy theory is that the market is allowed to plunge sot hat the rich and powerful can buy up stocks on the cheap, which they will gladly sell to you once a bull market has begun. On the way up, for every buyer there is a seller and on the way down, for every seller there is a buyer. The rich buy when yuo need to get out, hold stocks and when they need to offload them, reap their gains and invest elsewhere, they sell them to you and me. Look at real estate, foreign currency, stocks, bonds, etc. By the time the little people learn about it, the big gains are gone and the probabiliy of getting burned is much higher.

Here's a perfect example: anti-US dollar bets. Look at the chart on this page titled "Dollar Index Through 1998-2008 that's on the right hand side halfway down. As you can see the USDX had a peak in 2001 and collapsed over 7 years to hover around 70 in spring of 2008. Did anyone know how to take advantage of this from a casual investor standpoint? Nope. No one really talked about it either. The media was too hyped up talking about the Dot Com bubble burst and then the real estate gains made by small time people. By the time the media mentioned the falling dollar and the possibility of a dollar crash, the dollar had already slow motion crashed from an index value of 120 in 2001 to around 85 in 2007. More products like ETFs and forign currency cds popped up to allow smaller investors to jump in. Once again, this jumping in of smaller investors pushed things a bit more in the current direction. Just when supermodels were demanding payments in euros (Gisele), NYC wine merchants were accepting euro bills as payment and rappers were flashing 500 euor bills (Jay-Z), the market had topped and the sudden panic in all financial markets and proof of problems abroad shot the USDX up 20% over the course of 6 months. You had access early, big players. Who had access later, small players. Who might have been screwed by this reversal because they got in later? See my point? This happens in a variety of investments and will never stop. This sort of ties into the Von Mises theory of early receivers, late receivers and non-receiviers when splitting up winners and losers of inflationary economic booms.

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