Reply #24: What Mr. Market can learn from Mother Nature

[54anickel]

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The insanity is everywhere
Financial insanity is rampant. Folks are speculating in houses, with many having more than one real estate investment due to the financing that’s available and the belief that real estate is now bulletproof. Insanity pervades the stock market generally, and Internuts/single-digit midgets (with no real businesses) specifically. The fact that Google (GOOG, news, msgs) could have a $50 billion valuation is one sign of the times.

If one looks at credit spreads, they are also at record lows. And then I see Fannie Mae (FNM, news, msgs) trading at around $70, barely flinching despite the discovery that the company manipulated its earnings. Whatever people think of the mortgage giant’s business prospectively, it won’t be the same as it’s been in the past. So, I just shake my head and say, there’s not one pocket of insanity -- it’s everywhere.

Coming back to the earthquake/tsunami analogy, I continue to believe that our stock market is the financial equivalent of an 8.0-plus earthquake waiting to happen. The fact that it has not happened doesn’t mean it won’t, any more than the fact that the Indian Ocean was earthquake-free for so long meant it was immune to this enormous tragedy. Furthermore, I also believe that the speculation I have been detailing over the course of the last couple of years has only guaranteed that whatever damage is slated to befall the stock market has only gotten bigger by the month.

So, the question you have to ask yourself is: If I knew that a place was vulnerable in the not-too-distant future to an earthquake and tsunami, would I go there? Most likely, the answer would be: “Of course not.” Similarly: If I knew that a financial market was prone to epic dislocation, would I aggressively allocate money to that market? My guess would be “No.”

However, the timing of such events is very hard to predict. The longer markets do well (especially in the face of bad news), the more people believe that nothing bad can ever happen. (Of course, sometimes markets “defying” bad news means the news is going to get better. However, when the news doesn’t improve after a market has gone up, the stage is set for disaster.)

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