Bubbles

The stock market is a boom and crash creature. The fact that investment and stock value climb upward and then quickly adjust downward is not a failing of the market, or a failing by investors or money handlers. It is the nature of mass investment. With this incontrovertible law of monetary physics in mind, let's take a look at the current state of the stock market.

America teetered on the precipice of default more than once in the last two years, a first in the history of American bond issuing. As a direct result, the country's credit rating was downgraded by the rating agencies.  The world is still reeling from a series of revolutions across the Arab world, most of which are ongoing in some form or another.  Meanwhile, Austerity continues to exacerbate the Euro crisis, driving youth unemployment in Spain, Greece, Ireland, and elsewhere into the 50% range. The divide between the rich and the rest worldwide is yawning to record levels, with the wealthy coming out of the 2008 Crash several times better than they went in and the median level of income stagnating in some places and falling in others. Remember the Sequester? The $1 trillion spending cuts package devised by Congress to be so awful that it would have to motivate a budget compromise, that would enact essentially random, across-the-board cuts to all federal spending? It went into effect in March with little public discussion of correcting it.

There we have it: a prolonged global recession yielding deep political and economic instability as meaningful recovery is hamstrung by inept government oversight. So naturally the Dow broke 16,000 for the first time in history this morning.

How could this be? Because the market is riding an epic bubble. Because investors are pushing stocks, a skin-deep measure of company value, well beyond any price that could be considered rational. Because the simple logic that you buy low and sell high is easy to circumvent when it's convenient. Because, as Forbes put it last month in an article titled Why Stocks Are Undoubtedly Experiencing A Massive Bubble: "investors and becoming conditioned to ignore risks."  And because, as legendary hedge fund manager Jeremy Grantham recently wrote in a piece warning of an impending pop, investors "must never, ever be wrong on [their] own . . . this creates herding, or momentum, which drives prices far above or far below fair price."

What does this mean for you, the Layman Law Blog Reader? If you have money in the market it's probably time to cash out. If you don't, make sure you have a good grip on your pants.