WOW and The Paradox of Wall St.

8:45am That jobs report was worse than I expected. 533k? I think I have been clear with all my short positions on the indexes exactly where I stood on how the jobs report was going to be. If you had to pin me to a number, I would have guessed 500k. That is not an independent economic analysis. Although I have a degree in economics, there were PhD's out there who were forecasting 300k in losses. My guess would have been based on some of the worst numbers out there that truly smart people (not me) were forecasting.

I have been short and will continue to be short for the time being.

Here is the paradox of Wall St. right now:
The vast majority of people are only sophisticated enough to make money when stocks go up. Therefore, they have only half the tools to make money in the market. Most are also either confused by, or entirely uninterested in, the market in general. These factors have made Wall St. trillions (literally) of dollars over the decades.

The brokers prey on the lack of sophistication and lack of interest in the markets. It is an easy sell because they can trot out all the statistics about stocks being the best performing asset over long periods of time. While the stats are true and correct, there are these economic anomalies - like the one we are currently experiencing - that simply throw their logic out the window. Someone who invested in the S&P index 10 years ago is now essentially back to where they started if you strip out the effects of dividends. That is a lot of wealth to evaporate in the space of a couple of months. That is a lot of credibility that needs to be restored.

So here is the problem. It goes back to some of Nash's work at Princeton. He argues that economies work most effectively when people act in their own self interest AND the interest of the good of the group. So here we are. For everyone to get wealthy via the stock market again, trust needs to be restored. People will need to act in a self-interested way by having faith in the markets again. This will be of ultimate benefit to the group (all investors) because asset values begin to rise as people begin to buy again. We just need to get to that point. And I am not sure we have gotten there yet.

The psychology of the market is such that most of the bad news is already expected but there needs to be some faith that it isn't going to get even worse. I am not sure we are at that point yet. Is the psychology better? Yes. Are we back to having full faith in the market yet? Not so much.

Yes, there are going to be people that will shun the market forever because of some of the losses they have endured. That is unfortunate. But, at the end of the day, to paraphrase Dr. Jeremy Siegel, "Where else are you going to go?" Do you put your money in treasuries that yield less than 3%? Do you put your money into real estate? Do you try to catch the falling knife of commodities? Do you stuff cash under the mattress and lose out to inflation?

Ultimately, most of us will head back to the equity markets. But it will take a long time to get the trust back that Wall St. built its empire on. The question is when do you take that leap of faith? Until next time, stay low risk..