Irrational Depression

If you ask 40 people, separately, what is the correct price of something, then average the answers, you’ll get the right price. If you pose the question to a room of 40 people, you get an infomercial.

If you ask 12 people, separately, who will win the Academy Awards, then average the answers, you’ll probably get the right answer. If you put them together and ask the same question, you’ll probably get Jim Carrey.

If you ask a group of people, individually, how to handle a suicidal man threatening to jump off a building, and average the answers, you’ll probably get him down. If they’re all standing at the bottom of the building, they’ll wind up yelling, “Jump.”

So the solution to the present bear market is really very simple: Turn off your TV.

In the “live and direct” coverage of the stock market’s fall on CNBC, the only clear fact is that “experts” are panicking.

While morons like James Cramer cry that “maybe we don’t need 30 telecomm suppliers, maybe we need just 2 or 3” (ignoring the fact that the innovations nearly all come from the other 27), there’s been no rush out of mutual funds. Main Street is chilling.

Experts live with the market every minute of every day. Real people don’t. Worse, TV has put all the experts into the same virtual room. And just as their greed fed off one another a few years ago, driving the bubble upward, now their fear feeds off one another, driving the panic downward.

The fuel for the panicked selling is also easy to find. There’s a ton of margin debt out there. According to Ed Yardeni (who tracks these things), it stood at $200 billion in January.

Margin loans have a peculiar quality. You borrow money to buy new stock, based on the value of your old stock. When the value of the new stock goes up, you make a lot more money than you would otherwise. When the value of the new stock goes down, you lose a lot more.

Only fools and professionals should buy stock on margin. According to Yardeni, the amount of such debt peaked around March of 2000, at approximately $278 billion. In 1991, at the beginning of the bull market, it was at $25 billion.

When margin loans are called, stocks have to be sold at a loss. They’re usually the most liquid stocks the borrower has. Those are the shares, coincidentally, that have fallen most in price in the last few months.

How much does margin debt have to decrease before the fools are gone and the market is left with only bargains for savvy investors? I don’t know, exactly, but the late Carl Sagan would know exactly how to say just how much: billions and billions…

Now that you know what’s going on in the stock market, please turn off your TV and go back to work.

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