Understanding Bullshit: The Stock Market
Maybe this makes me unsophisticated, but I don’t think about the stock market that much. (Ok, at all). I know that many people think it’s the central nervous system of our economy. And I know its estimated worth is around $30 trillion dollars. I also know that when it takes a dive, the lives of millions of Americans are wrecked, ruined (and in a word: fucked). I also know that whenever this happens, the powerful millionaires (and billionaires) who caused said destruction have a tendency to grab their money (along their well-coiffed dogs) and run for the hills. (Sometimes our government even has to step in to make sure these bourgeois shitheels get all of their money without having to share in the devastation they’ve dispensed to the lower classes.) But, in my day-to-day life, I don’t think about the stock market. So maybe I shouldn’t care that the entire thing is a gigantic fraud. But I do care. (And you probably should too).
When it comes to stocks, there are two ways of making money. There are capital gains and there are dividends. Dividends pay you (cash) on a regular basis and capital gains don’t pay you anything unless their stock price goes up. This category of stocks is where the problem starts.
In the case of dividends, there's nothing wrong with those per se, because they come from the profits of the underlying company itself. But the issue is with capital gains, the whole buy low/sell high gamble that's promoted 99% of the time on CNBC, financial news networks, and is also the focus of a lot of financial research. The issue with capital gains is that they come from other investors. When one investor buys a stock for $100 and then sells it for $110, that extra $10 (or actually the full $110) they're getting is not coming from the company. It comes from another investor, who will then need to sell it to yet another investor. Why does all this sound familiar? (Oh, that’s right. It’s the exact definition of a Ponzi scheme).
A Ponzi Scheme, for those who haven’t heard the term: is “a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for early investors by acquiring new investors. This is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers.” Both Ponzi schemes and pyramid schemes eventually bottom out when the flood of new investors dries up and there isn’t enough money to go around. At that point, the schemes unravel. (The Ponzi scheme is named after a swindler named Charles Ponzi, who orchestrated the first one in 1919). But don’t take it from me, take it from someone much more versed on the topic.
Tan Liu, former financier and current statistician, is the author of the book The Ponzi Factor: The Simple Truth About Investment Profits, in which he explains how many of today's perpetually dividend-less companies traded on the public market are merely operating as ponzi schemes. As a result, a substantial amount of the market capitalization of our stock market is actually "phantom wealth" that doesn't truly exist. And will vaporize during the next financial crisis as investors prioritize cash flows in-hand over the promises of starry-eyed CEOs. (Which is easy to understand once you realize that since the NASDAQ and the NY Stock Exchange have a combined value of over $30 trillion...This means investors believe they are entitled to $30 trillion in real money. But there is only $1.6 trillion of cash circulating in the US economy, and $3.8 trillion in existence in the entire US economic system).
The stock market (Ponzi Scheme) can also be referred to as: “stock printing.” Just like the strategy of printing money is currently being used by many countries to fight the global recession, including the US. (Only it’s not called money printing. It has many names: stimulus checks, bailouts, the Federal Reserve buying corporate bonds/stocks, etc.). Money printing is creating money out of thin air. It devalues the money that you have in your savings account, making it worth less (and acting like a hidden tax you didn’t know you were paying). Stock printing is the same thing. Only instead of printing money, companies create stocks out of thin air.
An all too common (read: naive) argument I repeatedly hear about stocks however, is that the reason certain (most) stocks don’t pay dividends, is because they are reinvesting those profits in the growth of the company. But as Tan says: “there is no evidence that backs up this statement.” There is no transparency to show you that the money you could be getting paid through dividends is actually being reinvested for your benefit. Not sharing profits with investors is nothing more than an excuse, according to Tan, and it’s an easy way for them to get rich off people who buy their stocks.
In modern times, you almost never receive the profits of the business. Dividends are rarely paid out, and they don’t usually amount to much when they do. Plus, the company is not obligated to pay you anything for your stock ever.
Here’s an example concerning Google from Tan Liu’s book:
A share of Google can trade around $900, but Google explicitly states in writing that the par value of their stock is only $0.001. Google also says that they do not pay their investors any dividends, and their class C shareholders have no voting rights. So, if you own a share of Google you will not receive any money from them, you won’t be allowed to vote on corporate issues, and Google isn’t obligated to pay you anything more than $0.001 for that share you bought for $900.
If a company like Google went bankrupt tomorrow, what would you get if you owned their stocks? “Nothing.” The gut-wrenching reality is that you own nothing. You own a slip of toilet paper that you might be able to convince someone else to pay you for.
Most investors are not financially literate enough to understand that they own literally nothing. They don’t seem to understand that they are simply gambling. And they don’t know that their profit relies on everyone still believing that the fraud is real. The money you make from most stocks (if you make money at all) is coming from other investors pumping new money in. And if there aren’t new investors willing to buy your stock, then you’re just fucked, standing there with your thumb up your ass (which is an odd expression if it’s supposed to mean the person is doing nothing; in fact, it sounds like they are involved in a very significant, and personally intimate, event). Investors are just cannibalizing each other for profits.
More and more stocks are created everyday, which is fine (assuming that the stock market doesn’t suffer a sudden cardiac arrest). When stocks start going down or have a prolonged downturn then things get real. And that’s when you may wish that you challenged your beliefs about money and investing a little earlier. (Remember: The stock market is a Ponzi scheme. A Ponzi scheme is the stock market).