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A Psychiatric Diagnosis of the U.S. Market: Schizophrenic Disconnect From Reality, Bipolar Mania, Psychotic Delusions of Wealth

July 27, 2016

If you think a delusional market is healthy, it's time for a psychiatric exam.


What diagnosis would an experienced psychiatrist offer when presented with the bizarre behavior of the U.S. stock market? We assume that the wild mood swings of greed and fear are "normal" for markets devoted to short-term profit and speculation, but the stock market's disconnect from reality is far beyond mere mood swings.

The stock market thinks it's solidly on pavement, but in reality it's like a car flying off a cliff: the Wiley E. Coyote moment is just ahead. There's nothing but air beneath the stock market.

Consider the reality of PE expansion from a price-earnings (PE) of 10 at the bottom in 2009 to 18+ today, while profits are stagnant. And what is driving this expansion other than a delusional belief that profits will magically reverse and log massive gains in the second half of 2016?

If we strip out "one-time expenses" and other accounting flim-flam, profits are plummeting. How else can we characterize this disconnect between stagnant sales (look at Apple, CAT, etc.) and "profits" that are one step away from outright fraud as anything other than delusional?

As global trade, U.S. rail traffic and other non-gameable measures of economic activity stagnate or decline, how can anyone connected to reality expect sales and profits to rise sharply?

The stock market is hitting new highs for what reason? The typical answer is: more central bank stimulus is on the way, the Fed/ BoJ /Bank of China/ European Central Bank have our back, etc. etc. etc.

But the reality is obvious to all: the returns on central bank stimulus have declined to near-zero. Trillions in additional stimulus are needed to just keep the delusional markets from experiencing gravity (see car photo above).

And how about the manic mood swings from panic in February (i.e. a whiff of reality) and the euphoria of new highs in summer? If this isn't the acme of bipolar delusion, then what is?

Perhaps the greatest delusion is the confidence that this ephemeral bubble "wealth" is actual wealth that can be counted on to fund pensions and insurance claims in the future. Pity the deranged souls who actually believe that stock gains based on fraudulent claims of "profit" and delusional expectations of rising profits as the dollar strengthens and the global economy implodes are "wealth" that can be considered permanent.

The only possible diagnosis of this stock market behavior:

1. Patient (the U.S. stock market) is suffering a schizophrenic disconnect from reality.

2. Patient (the U.S. stock market) is suffering from bipolar mania that leads to delusional beliefs in delusional profits and delusional central bank omnipotence.

3. Patient is suffering from psychotic delusions of wealth, akin to the delusion that the patient is ruler of the world, galaxy, universe, central banks are all-powerful, etc.

If you think a delusional market is healthy, it's time for a psychiatric exam.


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Recent entries:

A Psychiatric Diagnosis of the U.S. Market: Schizophrenic Disconnect From Reality, Bipolar Mania, Psychotic Delusions of Wealth July 27, 2016

Why Real Reform Is Impossible: We Can't Believe the Mighty Titanic Could Actually Sink July 26, 2016

How Do We Make America Strong Again? Start Telling the Truth July 25, 2016

If We Can't Be Honest, No Solution Is Possible July 22, 2016

Could This Rally Be a Head-Fake? July 21, 2016

Globalization's Few Winners and Many Losers July 20, 2016

We've Entered an Era of Rising Instability and Uncertainty July 18, 2016

"Helicopter Money" Won't Fix What's Broken July 15, 2016

What If the Consensus on Small-Scale Toolmaking and Agriculture Is Wrong? July 14, 2016

Why Helicopter Money Won't Push Stocks Higher July 13, 2016

The Unintended Consequences of the $15/Hour Minimum Wage July 12, 2016

Risk On/Risk Off: What Schizophrenic Markets Are Telling Us July 11, 2016


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"There is no security on this earth; there is only opportunity."
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"We are what we repeatedly do." (Aristotle)

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Smith's Law of Conservation of Risk: Every sustained action has more than one consequence. Some consequences will appear positive for a time before revealing their destructive nature. Some consequences will be intended, some will not. Some will be foreseeable, some will not. Some will be controllable, some will not. Those that are unforeseen and uncontrollable will trigger waves of other unforeseen and uncontrollable consequences. (July 8, 2014)(thanks to Lew G. for retitling the idea.)

Smith's Neofeudalism Principle #1: If the citizenry cannot replace a dysfunctional government and/or limit the power of the financial Aristocracy at the ballot box, the nation is a democracy in name only.

The Smith Corollary to Metcalfe's Law (The Network Effect): the value of the network is created not just by the number of connected devices/users but by the value of the information and knowledge shared by users in sub-networks and in the entire network. (CHS, 4/6/16)

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"Fraud as a way of life caters an extravagant banquet of consequences." (CHS 4/14/16)

"Creativity = problem solving = value creation." (CHS 6/4/16)

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