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Thursday, June 09, 2005 10:23 PM

Conspiracy Theories and Market Tops

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Does anyone recall some of the bizarre theories circulating around in spring of 2000?

When things started declining I remember hearing "They are just trying to steal your shares", and "They missed the big runup in JDSU and are pushing it down so they can get in". The counter-argument circulated in the chat rooms was "don't fall for it, the 'gorilla' is worth any price, just hang on". I am sure there were plenty of other conspiracy theories floating around and thinking back on it now, if there was a Wall Street conspiracy at all it was to get you to hang on and stay the course even though Henry Blodget, Mary Meeker, and others knew the stocks they were touting were worthless. I am not much of a conspiracy buff but if in fact there was a conspiracy, people were 180 degrees wrong about just what it was. JDSU fell from 153.42 to a low of 1.32 where it sits right now. As conspiracy theories go, just how successful were "they" at "sealing" your shares?

Fast forward to 2005. The new conspiracy theories just happen to be about Real Estate. According to this article, talk of bubbles in housing is a conspiracy by Wall Street to get you out of real estate and back into equities because "they are after your money".

That's hilarious. Investment U was laughing about it and so am I.

As for whether or not there is a bubble, "home sales as a percent of the economy are now at 17%. For the statisticians out there, that's 3.4 standard deviations from the mean. For the non-statisticians out there, speculation in home buying is literally off the charts. Said another way, it's not a Wall Street conspiracy that speculation in housing is at a statistical extreme; it's a fact."

Hmmm. Is the real conspiracy (if there is one at all) the exact opposite of what people think? Are real estate agents in conjunction with lending institutions encouraging people to buy houses or condos they know (or should know) their clients simply can not afford? Are they encouraging sucker investments just as Mary Meeker and Henry Blodget hyped garbage at the top? After all, do banks or mortgage lenders or real estate agents care what the aftermath is as long as they get their initial cut? Who does care as long as mortgages can be dumped off on Fannie Mae? Fannie in turn "guarantees" the mortgage (trillions of dollars worth) and repackages the stuff selling it to pension funds looking for extra bits of yield. It's a great system for banks because they know Easy Al will come to their rescue just as he has done many times before.

Nah, that can't be it. There are no conspiracies just paranoia. After all, "It's a totally new paradigm" and 3.4 standard deviations from the norm proves it. Now go buy that Florida condo before it goes up another $50,000 in "value" tomorrow.

Mike Shedlock / Mish

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