The rise and fall of a scam

Potential stock market crash?

The stock market party may end in a crash.

The stock market party may end in a crash.

I have been watching the stock markets rise with amazement against a climate of recession, austerity and rising debt.  At one point stock markets broke back through pre-credit crunch levels,  one would be forgiven thinking someone put Prozac in the drinking water of the money market dealers.  I have been looking for a scam, and though I am no expert I am sure I have spotted it.

Firstly, simple economics.  If there are more plumbers in your area than customers, plumber prices fall, if there is only one plumber and massive demand for their services, plumbing prices rise. The same goes for shares, if there are more buyers of shares than sellers, share prices rise, if more sellers than buyers, share prices fall.  The share prices are dependent on share demand rather than how well a company is doing.

Because the individual and business has run out of money, the credit sources turned off, spending has dropped off meaning many nations are in or are approaching recession.  Governments are running out of tricks to play to stimulate people to get spending again.  One approach used is what some call printing money, or officially quantitative easing (QE) where the governments get their central banks to churn out new printed money to buy assets from the private financial institutions and commercial banks.  The theory of QE is that the commercial banks then loan out the new money to individuals like you or to businesses, who will then spend the money, thus stimulating the economy.

What the governments and central bankers never figured on was that the commercial banks rather than lend out the new money, kept it, buying stocks and shares on the money markets instead.  QE created a buyers market for shares, more demand than supply, shares rise in price as a result.

As few businesses and individuals benefited from loans as a result of QE, their spending continues to drop.  Despite share prices rising the corporates in which the shares are traded in are suffering from lack of spending customers, their profits are cut or heading to loss.  Once the governments and central bankers work out that QE has failed they will stop using QE, this is when the stock markets turn into a seller’s market, with a potential serious market correction in the form of a stock market crash.

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12 responses to “The rise and fall of a scam

  1. I don’t know about the FTSE,but around here the cash segment has dried up.So few parties are taking delivery of stocks.So its all about punting on the price.The market operators are out with a vengeance. Its easier to manipulate prices in a thinly traded stocks.

  2. Love the photo. The whole thing would actually be funny, if it wasn’t so grossly sad.

  3. Well, that makes a lot of sense and just got me really, really worried. Oh crap.

    • The UK central bank admits today the possibility it may make a £8 billion loss on its QE to the UK taxpayer, which is a sign it will stop using this failing strategy.

  4. Even my 28 year old son mentioned to me the other day how the stock market is a fake predictor of the economy and that the market is bound to fall drastically in the near future. Yet, while some people have noticed the correlation between high stock market numbers and a depressed economy I see way too many people who are rubbing their hands in glee as their 401Ks go up and can’t see the impending doom.

  5. I am staggered at how many expensive housing developments are going up – Cambridge, ex Docklands, now Liverlpool. What recession?

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