Wealth Shift: The Decline of Ethics in America
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Lesson #7 – Take Up A Hobby - Speculate

The Big Boys in this country have created all sorts of fancy ways of making money in the stock market. They have, in essence, turned the stock market into a casino. It didn’t used to be that way. Once upon a time, you bought a company because you believed in it. You researched the fundamentals and the business and knew it inside and out. You put your money in and you didn’t take it out as long as the fundamentals remained solid. The reason for the stock market was not to make short term wagering possible, rather it was a mechanism for facilitating the ”buy and hold” process.

How I wish we could return to those days, and I am an advocate for doing so. I know Warren Buffett, who drinks Coke and carries around a box of Sees Candy tucked under his arm at shareholder meetings, wishes we could. He has gone on record saying that the rapidly growing trade in derivatives poses a “mega-catastrophic risk” – a Wealth Shiftastic risk -and that there are highly complex “financial weapons of mass destruction” in play that are going to be the downfall of us all. (For the uninitiated, derivatives are financial instruments that allow investors to speculate on the future price of, for example, commodities and stocks, without actually having to buy the underlying investment.)

One of the biggest problems with speculation is that it leads to extreme volatility. And that, combined with poor business practices and unsophisticated legislation, is a recipe for disaster. The recent bubble in the housing sector (and the even more recent bubble in the commodities market), is a prime example of the kind of “boom and bust” cycle that is the hallmark of speculation. Think Average Joe isn’t participating in (not to mention exacerbating) the situation? Think again.

I remember being in Las Vegas in the summer of 2006 when my cab driver was telling me the story of how he and three other cabbies had gone in together to “cash in on” the boom in Las Vegas real estate. He told me that, miracle, of miracles, none of them had had to bring any money whatsoever to the table. In fact, they were getting the condo decorated for free as an incentive. For putting their signatures on an adjustable rate note for a mere $750,000, they were able to buy a two bedroom condo on the Strip. They had been told they would be able to rent it to companies who need an apartment for their executives when they attend conferences, etc. They had been told that it would be the best of all possible worlds – the high rental fees and the low interest rate on the loan would enable them to easily make the payments and have plenty of money left over at the end of every month! Not only that, but with the real estate in Vegas selling like hotcakes, in a few year’s time they’d be able to cash out and net at least a quarter of a million dollars each! What? Monthly cash flow AND capital gains at the end of the day? Gimme a pen. Where do I sign?

Las Vegas is now a shambles. When the interest rates went up and occupancy rates went down, all those folks like my poor cab driver had no choice but to default. After all, it wasn’t his actual home. And he was lied to, wasn’t he? The broker and the mortgage banker and all the other Wealth Shifters in the food chain had all lied to him. In their haste to make a fee they had never bothered to caution him that what goes up that fast can (and usually does) come down just as quickly.

And what’s with commodity prices? One day we’re being told that oil is heading for $200/barrel and the next it’s back trading at $32. Good god, it’s enough to give us whiplash. One day we want to do everything in our power to become energy independent and the next day we’ve forgotten the whole thing because gas at the pump is cheap again. Given variables as erratic as this, how can anyone in a position of authority chart a decent course for a country or a company? Not only that, but let’s say you control a key international resource (like oil) and you really wanted to collapse a particular country’s economy. You wouldn’t need bombs to do it. All you’d really have to do is tighten up on your production of that key commodity and then drive the price up with derivatives. (The fact that this hasn’t happened already only goes to prove we actually do have friends in the Middle East.)

New topic. Look at any company. See how many shares are short these days? That is someone out there who has borrowed some of the stock of the company to sell – betting that the company will not live up to expectations and the stock will go down in value. Sell short one day, cover the short the next – it all leads to unnecessary volatility and crazy, nutty fear. And like sharks who can smell blood in the water, short sellers become emboldened when their tactics work and companies start to flail. Yes, the financial institutions in this country are drowning, but do we really need short selling sharks out there chewing their limbs off, too?

Puts and calls are big money – if you are right. You don’t need the kind of money you need to buy an actual share of stock. By buying puts and calls, you can just sell the stock losses or buy the stock gains that occur within the option period. But the problem with trading options as a speculative way to make money is that you not only have to be right about a stock, you have to be right on time. And if you are wrong you can potentially lose everything. Unlike buying a stock on the belief that it will go, up and losing nothing but a little bit of time if it doesn’t happen as quickly as you wanted it to, people who trade options have to be prescient about timing, too. It’s an adrenaline rush, I’m sure. And, once again, it is an example of how the people in this country are treating the stock market like a casino – one in which only the professionals and the house stand to make any real money.

Ladies and gentlemen, place your bets. But first go to Vegas, get in a taxi, and ask the driver what he is buying. And then do the exact opposite.

Executive Summary: We may think we are so sophisticated in this country that we will no longer just grab the pickax and go every time someone yells “there’s gold in dem dere hills”. But while some of the Big Boys may be making money hand over fist with their complex financial instruments and company-cratering short selling, the rest of this country most certainly is not. But before we get all smug and start thinking how much smarter than the rest of the world we are because we know how to use things like short selling, credit default swaps, and fragmenting liquidity pools to make money, we also need to stop and think about how poorly we’ve understood the repercussions of unleashing such weapons upon the general public. Let’s never forget that, once upon a time, scientists at Los Alamos thought mushroom clouds looked cool.


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