Animal Spirits and Over Extended Markets

Animal Spirits and Over Extended Markets


Cognitive Dissonance



Animal spirits is the term John Maynard Keynes used in his 1936 book “The General Theory of Employment, Interest and Money” to describe the instincts, proclivities and emotions that ostensibly influence and guide human behavior, and which can be measured in terms of, for example, consumer confidence. It has since been argued that trust is also included in or produced by "animal spirits". – Wikipedia


Voltaire is alleged to have said "To learn who rules over you, simply find out who you are not allowed to criticize." Those are wise words indeed and the subject of a future article. For now, though, I wish to modify Voltaire slightly to express my own point of view.

“To learn what controls us, simply find out what we don’t wish to discuss…at least not directly.” – Cognitive Dissonance

I attempt to view us silly humans as would a space alien orbiting Earth in order to observe our terminal insanity from a safe distance. While I freely admit disassociating myself from everyone else is nearly impossible (I can’t just flip a switch and stop thinking like a deeply conditioned and biased human) I still give it the old college try. If at first you don’t succeed, try, try again.

Or to quote Einstein, “The definition of insanity is doing the same thing over and over again, but expecting different results.”

I just love that one.

I have argued ad nauseam (see Einstein’s quote above) how the things we don’t say are far more important than those we do. Nowhere is this more obvious than the words and phrases we use to avoid speaking directly about a subject while still (endlessly) talking about it. For example, while it’s reported Eskimos have 50 different words for ‘snow’, I honestly think humans have at least 100 words (setting aside differences in language) to describe sex and the sexual act.

There! Did you see that? Instead of saying “copulation”, “sexual intercourse” or dozens of other words commonly known to mean “sex” I used the phrase “sexual act”. While it can be competently argued that softer, kinder words should be employed when speaking to mixed or “polite” company, the degree of over reach employed by us to avoid speaking directly about this subject is glaringly obvious even to the culturally blind aliens circling above (or walking among) us.

My personal favorite is when the phrase “sleeping together” is used to describe two (or more) people (presumably humans, though you have to wonder when those pesky aliens will want to get in on the act) engaged in the “sexual act”. I suspect sleep is the last “thing” on their minds, but what do I know? I’m just a silly human who doesn’t speak publicly about a perfectly normal and natural human activity.

<Snicker, I did it again>

On the other hand, our propensity to avoid uncomfortable (or complicated) subjects creates a golden opportunity for those with ulterior motives to manipulate our thinking and actions. Our complex and convoluted relationship with money, work, self worth, dependency and markets illustrates this better than just about anything else I can think of.

The financial industry and many others depend upon information asymmetry to rake in obscene profits and ill gotten gains. Simply stated, the markets don’t move, they are moved. And they are moved by those who maintain a significant edge over “dumb money” such as you and me via first access to (sometimes fake) information which is used to manipulate money and the markets.

And while one might successfully argue that in the (distant) past this type of theft and manipulation was limited to “rogue” traders and dishonest higher ups, this is no longer the case today. Corruption has been institutionalized and permeates every aspect of business, markets, regulators and government. The perfect example of this theft and corruption is the exponential proliferation of HFT, or High Frequency Trading.

Extremely fast computers connected directly to the electronic markets “trade” securities at lightening fast speeds, constantly seeking out and ripping off dumb money while wrestling with other HFT algorithms over minute pieces of the pie. Making a buck or two on a trade doesn’t sound like much until you realize its done millions of times a day. Some of the methods used by these computer algorithms are considered illegal if used by you and me, but are perfectly legal when employed by smart money and their machines. It’s a small club and we ain’t in it.

Before one decides to be insulted by the term “dumb money”, making money, even large amounts of money in the markets, doesn’t make you or me “smart money”. It just makes those who do so smarter than the average bull or bear. Smart money, traditionally defined as those with inside knowledge who can and do use it to their (exclusive) advantage, conveniently leaves out the part where those who are considered smart money sometimes (but not always) manipulate the markets.

And this is where “animal spirits” come into play, one of those phrases used in polite company to discuss something we don’t wish to talk about directly. Despite all the confident assurances spouted by the high priests of finance about price to earnings ratios, credit quality, free cash flow, dividends and so on, the one thing more than all others that influences the price of just about any stock, bond or other security is the ratio of people who want to buy it compared to those who want to sell it.

It’s that simple.

In a market crash, a LOT of people are trying to sell compared to those few who are actually buying. The dropping price of the security reflects that sentiment. Vice versa, when the price is going up, there are more buyers than sellers. There may be a millions reasons why someone wants to purchase a stock or bond, but the primary reason is they wish to increase their wealth by doing so. No one buys with the intention of losing money…except, of course, those who wish to manipulate the market and losing is simply the first step to making money.

The Federal Reserve (which is as about as Federal as Federal Express and has no reserves, but rather “prints” money out of thin air) is a perfect example of an entity that manipulates the market in various ways, including making losing trades and purchases solely to move the market.

On the other hand, there is really only one reason to sell a security; the desire to either stop losing money if an asset is presently dropping in price, or to sell with a profit before they lose money.

Again, it’s that simple.

Fear and greed rule the markets. This is your animal spirits in action, where logic and reason are over-ruled by fear and greed. Of course, this can’t be discussed openly and honestly, particularly among the manipulators or their cheer-leading sycophants, because to do so would expose the various markets for what they really are, casinos where the house (the smart money) always has the advantage and the games are rigged.

This doesn’t mean you can’t or won’t make money in the stock/bond/real estate markets. Only that you are constantly being ripped off in large and small increments. Like to slow drip, drip of a leaking faucet, it all adds up to big money over years and decades.

The dumb money is the prey and the smart money is the predator. The key, at least from the smart money point of view, is not to spook the dumb money into fleeing the market. Thus all the sincere and confident declarations from the smart money and their minions (often the high priests of finance aka government “officials”, “expert” PhD’s, CEO’s and other company insiders, high level money managers, brokers and dealers, mainstream media etc.) about how reasonable this price is and how that price will surely go up.

Ever wonder why you rarely see an outright “sell” recommendation coming from Wall Street? Or if you do, it’s announced long after the price has cratered and your wallet is that much lighter? Or why you’re constantly assured the best way to “win” (aka make money) is to stay in the market and hold on tight through all the bumps and sickening drops? You know, for the long term?

They can’t steal your money if you aren’t in the game. Or more accurately, they can’t steal your money if you aren’t in THIS game. There are plenty of other ways various private and governmental entities nickel and dime us to death, the primary methods being fees and taxes. There’s plenty of evidence out there showing we “pay” at least half of our total income to taxes, many of which are buried under the covers and hard to find.

There’s a saying with regard to social media. If it’s free, you are the product. This same sentiment can be applied in spades to free Wall Street advice, though even the stuff that isn’t free is garbage. You and I, the dumb money, are the product, served up daily to the elite insiders and manipulators.

I started managing money back in 1990. And even though I am technically retired from the field, I still manage a substantial amount of private money. Therefore my head is still in the game. What I see is the beginnings of the blow off phase, where dumb money rushes into the market out of a fear of missing out. “We” dumb money are the buyers and “they” smart money are the sellers.

In fact the so-called insiders, in this case the upper level executive officers of public companies, are on average selling their own stock at levels rarely seen over the last decade. And they are selling precisely when the public at large is jumping head first back into the markets AND when public companies are buying back their own stock at record levels.

Imagine that. Public companies are allowed to borrow money (or use available cash, which they rarely do these days) to purchase their own stock on the open market which is then retired (permanently removed from circulation) thus pushing down the available supply of their own stock while making all the profitably numbers/ratios of the stock look that much better. In decades past this practice was considered illegal; a technique to…wait for it…manipulate their own stock price.

This, combined with dozens of various other manipulative techniques, is how a massive confidence game is run. Those who have made a huge unrealized paper gain (aka a bundle) must find someone (affectionately described by the smart money people as the “greater fool”) to actually purchase the greatly appreciated asset they hold (stock, bond, derivative, ETF, private company, real estate, whatever) in order for them to turn it into actual cash.

This process of selling to the greater fool usually begins when it has become glaringly obvious to anyone without their head up their assets that the confidence game is just about at its limit and will soon collapse from exhaustion.

Remember, until a financial gain has been converted into actual cash, thereby enabling it to be converted once again into anything they want, it’s all just paper gains. Another technique is to use the inflated value of the security to buy something else using various leveraging methods. The point is you and I must be willing and able to purchase what they are selling, either directly through our own available cash or through our managed-by-someone-else mutual funds, 401(k)’s, private and public pensions etc.

However it works, it’s important to understand one thing…if you are reading this article, you and I are not one of them.

Those who manipulate us require, no need, us to stop thinking, go slack in the brain and allow greed and the fear of missing out to run rampant. Logic and reason must be banished from our hearts and mind and the animal spirits must be let loose.

Of course, we don’t actually call it that among ourselves. We call it investing in the markets at all time highs after the longest bull market in history.

Makes sense to me. I’ll put it all on red. What about you? Come on, you know you want to. Better do it now before it’s too late. That’s it, let those animal spirits roar.

Oh, and one more thing. Just because you have little or no money in the market doesn’t mean you can ignore this confidence game. When it explodes, and they ALWAYS explode, everyone is going to be hurt.



Cognitive Dissonance

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