Juggling Dynamite

Another excellent reason to dramatically reduce our use of oil. Out of sight, doesn’t mean the damage has evaporated, see: Lost and found: 10 million ‘missing’ gallons from the BP oil spill, turn up on the sea floor:

“It’s now been almost 5 years since over 200 million U.S. gallons of oil were spilled over an area of around 68,000 square miles, and we’re still picking up the pieces.

The latest mystery that was finally solved involves about 10 million gallons of crude oil that government officials and BP cleanup crews couldn’t account for until now…

It was known that a portion of the oil from the spill had settled on the Gulf of Mexico sea floor, but only a small fraction had been found so far, with 70% of the oil remaining “missing”. But a new study published in the journal Environmental Science & Technology found up to 10 million gallons of crude that settled at the bottom of the Gulf.”

The trouble with being an equity investor today is that valuations make no sense.  For a current update see:  Market action suggests abrupt slowing in global economic activity. Here is the bottom line:

“With median valuations for the average stock higher now than in 2000 on the basis of price/revenue, price/earnings, and enterprise-value to EBITDA; with numerous historically reliable valuation measures more than double their pre-bubble historical norms; and with the S&P 500 now beyond the peak valuations of every market cycle on record (including 1929) except for the final quarters surrounding the 2000 bubble, understand that stocks are no longer an investment but a speculation.”

The facts are what they are and can’t be changed by hope or prayers.  So those buying and holding equities at current levels are doing so on some thesis over than ‘investing’.  Perhaps they believe that central bank interventions will succeed in perpetually maintaining animal spirits and lofty prices.  Perhaps they believe that big banks and HFT trading will maintain stocks at ‘permanently high plateaus’.

Whatever the thinking to justify participation, the activity is clearly gambling–betting on the luck of a win–not investing in assets that are valued for longer-term success.

Of course, it is widely known that– fleeting lucky runs notwithstanding–gambling is a losing game that eventually ends in capital destruction. But most gambling in equity markets today, are neither prepared nor expecting to lose money.  This is a multi-trillion dollar problem of mismatched speculative assets with real world expenses and liabilities that need to be paid.  This game cannot end well.

This 15 year chart of the NASDAQ composite since 2000, offers perspective on the rarefied bubble-highs today achieved for the second time in market history. Second time a charm or a nightmare? Depends on whether one is betting on permanent highs or mean reversion. We know which one the odds favour…

Don’t look now, but the bankers are losing control of the ‘Greeks are lazy spendthrifts’ narrative.   Excellent piece from Charlies Hugh Smith, see: Greece just blew up the Empire’s death star of debt:

Impaired debt and defaults result from imprudent underwriting and lender incompetence/ greed. Since when did it become accepted policy to reward imprudent lending, incompetence and greed?

Classical Capitalism is very clear on what should happen to lenders who ignored risk management; they get destroyed. As imprudently issued loans default, the losses pile up and the lender become insolvent. At that point, Capitalism kicks in and the management is fired, the stock goes to zero, the lender’s assets are auctioned off and the creditors are issued whatever remains after wages, taxes, accounts payable, etc. are paid.

There’s nothing complicated about it: Capitalism requires the discipline of losses being taken by those responsible, the firing of incompetents and the destruction of imprudent lenders….