[Note: This post is for education and entertainment only. Investment decisions should be made on the basis of suitability and risk tolerance and with the help of a professional.] Investors and planners should be aware of an important phenomenon called the “wealth effect.” The wealth effect occurs when asset prices rise, causing investors, savers, or property owners to feel wealthier. As a consequence of feeling more secure, they revise their spending and business investment budgets higher. Those higher levels then drive jobs, earnings, and asset prices still higher and the process feeds on itself. Sound simple? It is. [pullquote align=”full” cite=”” link=”” color=”” class=”” size=””] When asset prices go down, however, the wealth effect works in reverse: people don’t feel as wealthy, they don’t spend as

One of the more overrated developments of the digital revolution is the concept of “big data” or “data mining.” In the last decade, computing power and easy access to inconceivable amounts of data have combined to create the ability to find meaning in vast amounts of correlations, interpolations, extrapolations, and so forth. According to economist and scholar Dr. Horace Brock of SED, Inc., the tendency toward induction, or using data to project future trends, is a major flaw in today’s research. An example of induction (using oversimplified variables and hypothetical values) might be as follows: “In the past 100 years, we never went into recession within 12 months of having 5% unemployment, therefore, because unemployment was just 5 percent in December, our chances of recession

While most would dismiss the view that the US today is governed as a theocracy, it is not an entirely cynical viewpoint . I do not refer to the resurgence of evangelical Christianity; I suggest that the US believes in and is governed by its unshakeable faith in Capital. To borrow the language of the bible, it is all about Mammon. One proof that free-market capitalism is practiced and preached is the offerings given to share buybacks last year by corporate America: it was an obscene one trillion dollars. When you consider that most of those shares are below their average price for last year, you could say the capital was at least grossly misallocated. Unfortunately, the incentives are perfect for them: buybacks offer high

I am beginning to see Michael Lewis, author of the book that formed the basis for the film, as one of the most important authors of the 21st century. I have only read a few of his books, but I already know him the way I know other very good writers: when I read his books, I despair at the excesses and folly he makes accessible and visible (not everything he covers is simple or overt), and I take hope and inspiration while his protagonists (real people) act as proof that conscience and virtue are still at large in the world. The full title of his book is The Big Short: Inside the Doomsday Machine. It has as a backdrop the events leading up to

People who know I used to be an investment advisor do not ask me whether they should buy or sell. Most people want to know why the market is doing what it is doing. And they are right to ask that; if the cause is seen as temporary, they would probably hold. If the cause appears to be more fundamental or “secular,” they consider reducing exposure to falling stocks. Okay, so why is the market falling? The single biggest reason stocks are falling right now, is because China’s economy is stalling out. Some context first: China has been the fastest growing major economy in the world for years. Their contribution to global growth has eclipsed even the US for years now because even though their

[Important: This post is for education and entertainment only. Investment decisions should be made on the basis of suitability and risk tolerance and with the help of a professional] Anyone who makes predictions about the stock market without admitting that they could be very wrong is either a liar or a fool. And anyone who listens to predictions about the stock market is hoping to get an easy solution to a very difficult problem; there is no such thing. I know a man who invested a year’s earnings (six figures) based on a conversation at Starbucks. My best guess is that he’s still down over 75% eight years later. Investing takes work and self-study (I don’t mean studying by yourself; I mean knowing yourself). Having

(Disclaimer: The following piece is educational and entertainment only. It does not constitute advice of any kind. Investment advice should only be taken in the context of an individual (or household) examination of suitability and risk tolerance by a professional advisor.) If there is one strategy that is anathema to the vast majority of investment advisors, it is electing to reduce exposure to stock and bond investments and increase holdings of short-term CDs or “cash.” There are several reasons they hate this: They usually don’t get paid when you go into cash: advisors typically do not charge a fee on cash holdings. Their bosses don’t like this either. One of the commandments (there probably aren’t ten of them) of modern investment theory is that you

If you don’t follow the stock market, you might not know that after a few weeks of declines, global stock indexes surged north for five days (if it stays up today). You might not even think that it was unusual, unless you watch the market daily, as I do.  Let me assure you: After twenty years of watching and sometimes trading the markets, this is some very odd stuff! Though I have seen about five market “bubbles” (and nearly as many crashes) in my career, I am still amazed when I see markets do things they are not supposed to do. When I am amazed, I become curious. I want to know “Why?”  And even if I have to resort to conspiracy theories to get

The Burj Khalifa in Dubai, begun in 2004 and completed in 2009, soars skyward for more than half a mile. You can make a lot of comparisons between the fact that we erect structures and edifices ever taller and ever more dazzling in that they soar skyward from progressively smaller bases, and the fact that we use financial engineering to try and create greater asset wealth from an existing economic base of activity. The two concepts are certainly related; the use of lighter and stronger materials and the application of better science have helped us overcome natural forces that thwart our attempts to build Olympus on Earth. And it’s also true that financial engineering has made our economies more efficient; the advent of derivatives, which