Market Volatility

by New Norm

What is happening?

  • The value of all businesses are being artificially depressed.
  • Uninvested money is being used to buy depressed stocks.
  • Stocks will rebound and the owners will sell at at least a 20% profit.
  • Companies will fail.
  • Tariffs will make opening new business attractive.
  • New businesses will get tax breaks in the future.

How does it affect the average person?

  • They sell stocks to finance losing a job until they get a new job.
  • They are forced to buy domestic goods at higher prices.
  • Devaluing the dollar making it easier to for the US to pay off debt.
    • This increases inflation, increases credit rates and increases returns on bank accounts.

Here's my reasoning...

Imposing  tariffs on imports to the US has sparked a trade war. Business owners hate taxes, for good reason. Investors are stakeholders in business, so they follow suit and vote by trading stocks. This sends a message to the government. I predicted the stock market would lose value equivalent to the net tariffs levied on imports, at the time it was about 20%. Within a couple of days, this had occurred.

What does this mean? If you understand value and how "selling short" works, basically the BUYERs (use cash to make a purchase) of the stocks sold are betting the value of the stocks will go up, then they'll sell them and realize the gain (get cash from the sale). The net effect is moving money from sellers to buyers of depressed stocks. This is confusing, but in essence, market volatility provides an opportunity to fleece unsophisticated or desperate stockholders.

Remember, it's a market. Somebody has to sell... so if I lose a job and have little hope of finding a new one for a long time, I'm going to sell my stocks to finance my living expenses. I can keep my house, buy groceries and look for a job. Basically, nothing changes except I work at getting a job vs. working at a job. (Trust me, I've done this multiple times, it sucks). This situation makes a massive number of stocks available that are undervalued.

This sets the stage to get money sitting in bank accounts (there's trillions of dollars uninvested in the US) into the market. The stocks are worth less than the value of the company that issues them, so the money coming off the shelf is poised to grow at some point in the future. This could be a week, a month, a year or a decade before the investor gets a better return than leaving it in a bank account (or bonds). When they get the return they are looking for they'll sell.

Today tariffs are forcing a recession and inflation (a bad combination, basically a recipe for a depression). The global markets trying to head this off because the US has the largest economy in the world. It is roughly equivalent to the Chinese market. Chinese don't like to deal, basically it's my way or the highway. The US hates this. The US will make deals. So, tariffs force countries to make "a pilgrimage" to the US to cut deals.

What deals benefit the US? Something that creates a NET export. Energy is easy, manufacturing is hard. It takes billions of dollars and sometimes years to build a factory that is capable of exporting goods on the world market. China's government subsidises industries to corner the market. They recently did it with steel. So, how and why would someone create a business based in the US?

The how is, they need a lot of money... selling stocks they purchased at a discount generates cash in the future. So, they have money. When they start spending it to build a business and run it, they need tax cuts to keep the profits. In order to have profits, you need a good margin on a sales of goods. Most US companies won't make a product that has less than a 40% margin. Profits come out of margin, taxes come out of profits. Using cheap labor and goods is necessary to obtain a 40% margin. This means, US workers will need to compete with foreign workers somehow. This means US workers need to work for less than they do today.

The reason an investor (i.e. the why) would create a business in the US is to take market share from other companies. They can be US or foreign companies. Companies that are in business today are at a huge disadvantage. They need to spent their cash for operating expenses. This not sustainable. Many will fail. When a company fails, a void opens up in the market. The strong companies (even a new company) will fill this void. Thereby, gaining market share.

This situation is not new. Between 1880 and 1910, all of the wealth in the US moved into the hands of a small number of business owners, i.e. Rockefeller and others like him. When they exhausted domestic markets, they needed to obtain business from foreign markets. This isn't easy, so tariffs were levied. Europeans and Asians are a lot of things, but the wealthy likes money and they want to keep it. So, they fight each other. When economics doesn't work out (the great depression) they start using people to fight the war. Think WW I and WW II.

Who benefits from a war? Robber barons and the weapons industry. Nothing stimulates production like building stuff with government money, borrowed from banks using IOUs and blowing it up, then repeat the recipe. Stupid for the people paying the bills (taxpayers), excellent for people making stuff that blows up.

That's why someone would force market volatility.