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The Stock Market: An Amazing Driver Of Emotions

18 January 2011 9 Comments

It’s truly amazing how impactful the stock market can be on emotion and behavior.  Unfortunately, our leaders realize this and they are willing to sacrifice a currency in order to inflate asset prices and make people feel better versus making them actually better off.

What am I talking about?  I’m talking about the wealth effect.  When stocks are higher, people feel wealthier and thus they spend money.  If you subscribe to the economic theory that consumption is what drives an economy, well, then this would be a good thing.

Yesterday was MLK day.  Kids were off school.  Where I live, it was also a rainy day.  I went to a mall food court nearby my work for lunch and the mall was absolutely slammed with people.  The kids being off and the weather had something to do with it, but at the same time, people were shopping!  It made me realize that Ben Bernanke’s master plan is actually working to a degree.

Shopping and spending fell off a cliff a couple years ago.  Why?  Well, because people were freaked out.  Were people in a worse situation two years ago than they are now?  In most cases, no.  It was all about emotions and sentiment.

A financial crisis and stock market crash gets everyone so freaked out that they stop spending.  It literally halts the economy.

So what has changed since then?  Well, essentially the Fed has printed a few trillions dollars to plug the holes on bank balance sheets and to “jump start” the economy.  Is the real economy any better off?  Maybe a little bit but in other ways it is worse.  There is more debt and unemployment remains high.

So, the reality is that the main reason people are spending money is because the financial and stock market crisis is a couple years in the past.  Because enough time has passed to where people have forgotten about the financial crisis, people are spending money.

What happens if another “crisis” hits?  The same thing will happen.  People will stop spending and go into survival mode.

If you were smart, you’d be in survival mode right now.  If you think another crash or crisis is inevitable, you should already be in survival mode.  If you think that the economy is not better and that all the issues have just been kicked down the road to be dealt with another day, then you should be in survival mode.  Not spending mode.

Which mode are you in?  Why?  What are the catalysts for this mode?  What is the basis for your view of the economy?  These are important questions and I hope you have honest answers for them.


  • Lovely Leverage said:

    Definitely survival mode. I think North America as a whole is largely employable, but no jobs.

  • Arthur Garcia said:

    I am in survival mode. I think you hit on a good point here – the wealth effect. No one (media) really talks about this and it makes perfect sense. Think about it, if the government reported the true rate of inflation, all the countries holding US dollars would be looking to get out.

    My strategy for fighting the "wealth effect" or another crisis is to get educated and understand WHY these things happen. Further, I want to know how to be on the offensive side of the table when everyone else is just trying to survive.

    I am in chapter 3 of "crash proof 2.0" the author talks about the "wealth effect". I'd be interested to get other folks thoughts on the book.

  • 20smoney said:

    Arthur I read the initial version of crash proof. I think for the most part Schiff is right on about the macro stuff. His timing on certain things has got him in trouble and brought out the critics, but on macro economics he's dead on.

  • Barstoolfinance said:

    My primary concern is preserving my capital. I routinely buy small amounts of no – commission etfs in long term focused accounts on market down days to ensure I do not miss a rally. I will likely consider selling a portion of these gains soon.

    I routinely look for opportunities in the market and make small purchases, such as stocks driven by commodities that I think will have a strong year that are currently down for one reason or another.

    The majority of my monthly savings, however go to savings accounts. I am not confident enough in the economy to be investing large amounts. I'd rather have the money saved for an ideal opportunity.

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