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Criminal defense in Austin Texas.

Ridiculous, Unsustainable Bubbles, and The Uptick Rule

Posted By on December 9, 2008

The Wall Street Journal today has the kind of article that always makes me a little crazy.

Charles R. Schwab argues that it’s short sellers who’re responsible for falling prices, and something called the “uptick rule” is needed to make them go away, so that stocks can go up again.

I think he’s wrong on both counts.  But that’s not the issue here.

It’s the all-too-common assumptions that 1.) the stock market is like a giant piggy bank, where you go to stash your money, so it can grow.  And 2.) that higher prices are always better.

Both are wrong.

First, the market is not a piggy bank.  No money is saved there.  There is no money “in” the market.  (Despite people’s use of that phrase.)

So when Schwab writes, “more than $2 trillion in retirement savings has been wiped out,” he’s wrong.  Money is transferred through the market.  It isn’t stored there, and it can’t be lost or made.

The reason is that for every buyer there’s a seller.  What that means is that regardless of whether stocks trade high or low, the sum total of money is the same.  It just changes hands.

Some people make money, and some people lose money, but the sum of all transactions is always 0.  (Minus fees, of course.)

The market transfers money, it doesn’t create it or destroy it.

Which leads to the second point.  When people talk about retiring and living off their portfolios, what they’re really talking about is a transfer of wealth from the next generation, to them.

Of course they, like all sellers, want prices to go up.  Conversely, anyone looking to buy should root for prices to go down.

But the thing is, the two sides cancel out.

“For the sake of our children and grandchildren,” Mr. Schwab writes, “and to avoid a needless future repeat of a bad situation, it is time to restore the uptick rule.”

But if he really wants to help his children and grandchildren, he should advocate lower prices, not higher ones.

And if he wants to a needles future repeat of a bad situation, he should be rooting against ridiculous unsustainable bubbles, not for them.


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