Institutionalized Speculation

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"I'm not crazy! You're the one that's crazy!"
-- Suicidal Tendencies, Institutionalized

It's been a tough year since what I like to call The Autumn of the Massive Collective Pants-Soiling. Have we grown up, sobered up, or started building a healthier economy? I think not. Welcome to the world of institutionalized speculation.

Investors, policymakers, and the public in general seem just as ready as ever to dismiss the importance of business fundamentals, and no less voracious in their appetite for risk. Is this further fallout from the year of moral hazard? Garbage stocks triumph on Wall Street. Government bailouts reward businesses for failing. And as Uncle Sam doles out the cash, a confederacy of wusses starts whining for its own share of the largesse.

If we're not careful, we may soon forget that real corporate performance and good economic sense are the way things ought to be done. If so, the systemic mess we've created could become business as usual.

The government as speculator
Companies like GM, AIG (NYSE: AIG  ) , Fannie Mae (NYSE: FNM  ) , Freddie Mac (NYSE: FRE  ) , Bank of America (NYSE: BAC  ) , and Citigroup (NYSE: C  ) helped get us into our current mess. They took on way too much risk, manically participating in a speculative and debt-bloated bubble environment. Still, the government has poured ample cash into these zombie losers to keep them alive, even though they basically failed by the market's true standards.

Some observers have even praised the government for making a "profit" off its own "investments." True, Uncle Sam may have done well with short-term paybacks from the stronger recipients of its handouts, but the payments it made to weaker players could accrue far greater losses. Some economists and critics also point out that even with their newly acquired taxpayer cash, many financial companies' balance sheets are still full of toxic assets, even a year after the market crashed. In short, we can't be sure that the specter of financial insolvency's truly behind us.

The government's already amassed $7.4 trillion in debt. Over the next 10 years, that figure will swell to a total of $9 trillion. These daunting numbers should prompt people to confront the question of our nation's long-term fiscal security. Instead, folks seem distracted by emotional arguments over issues like health care, or the soothing assurances of our economy's supposed green shoots.

Follow the leader
Worse yet, individual investors still follow Uncle Sam's lead by bidding up even the most damaged stocks, gullibly convinced that last year's troubles are a distant memory. Many of the names I mentioned earlier have recently ranked among Wall Street's most actively traded stocks.

It's bad enough when people pile into stocks that are already saddled with debt and faced with major challenges. For example, Sirius XM (Nasdaq: SIRI  ) remains very actively traded, despite its longtime difficulties in actually turning a profit. So does Crocs (Nasdaq: CROX  ) , whose auditors warned earlier this year that the shoemaker may not be able to continue as a going concern.

But investors' appetite for risk-riddled companies doesn't seem to stop there. Apparently, even long-failed Lehman Brothers' pink-sheet shares have been recently trading. So have shares of bought-out Washington Mutual and doomed "old GM." And that's just plain nuts.

Caught up in bailout fever, some investors may be entirely forgetting that healthy fundaments are the key to a sound investment. Indeed, why should they worry about such things, if someone else will always come along to patch up even the most bloated, failure-prone beasts of the corporate world? I can't decide whether moral hazard's truly dead, or whether we're seeing its dire effects more clearly than ever.

We need to start saying no to goodies our nation can't afford, even if they feel good or might "help" in the near term. Cash for Clunkers, for example, definitely boosted new-car sales for a few months. But in the long run, it only saddled a whole new crop of already cash-strapped consumers with the additional burden of car payments -- and subsidized those dubious purchases at taxpayers' expense.

Change in attitude
Our economy still needs to correct its bubbly excesses. Replacing private debt with public debt won't help -- we need to dig ourselves out of that particular hole, not make it deeper. Unfortunately, investors' and policymakers' recent actions only seem to be building speculation, short-term thinking, and irrationality into the system, providing perverse incentives for people to behave in downright nutty ways.

Many of the efforts our country's making now will only set us up for greater hurt down the road, including higher taxes and inflation. With our national debt at nosebleed levels, and nationwide unemployment near 10%, we can't afford to make these mistakes -- especially if our bad policies ultimately end up pushing more companies out of business.

The government should let failure fail. If it has to do "stimulus" (personally, I still believe such efforts do more harm than good over the long haul), I'd rather see the money spent on long-term initiatives. Expensive, silly programs designed to create short-term improvement, or further cash infusions into companies clearly not worth keeping alive, are the absolute worst way to go.

Likewise, "investors" who throw money into speculative, walking-dead companies aren't only helping perpetuate insanity -- they're also running a huge risk that their own money will be vaporized. (As for all those bankrupt companies, speculators will see their capital vanish, once the creditors get paid, and the greater fools now buying their shares finally disappear.) Those who consider themselves investors need to do real homework, and invest in strong, cash-rich, forward-looking companies.

The definition of insanity
Albert Einstein defined insanity as doing the same thing over and over -- but expecting a different outcome each time. I see exactly that sort of behavior in our economy today. Sure, it feels good when a short-term shot in the arm like Cash for Clunkers seems to work, or when you score a quick, lucky gain on a left-for-dead stock. But this mentality means you're ignoring the very real possibility of bankruptcy or insolvency down the road

One year later, I fear we're still overdue for some sober contemplation. We need an economy that's built to last. Institutionalized speculation won't get us there.

Alyce Lomax does not own shares of any of the companies mentioned. All she wanted was a Pepsi. Try any of our Foolish newsletter services free for 30 days. When dealing with zombie companies, the Fool's disclosure policy always aims for the head.

Read/Post Comments (8) | Recommend This Article (19)

Comments from our Foolish Readers

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  • Report this Comment On September 10, 2009, at 4:09 PM, questioner5000 wrote:

    You noted, "Companies like GM, AIG, Fannie Mae, Freddie Mac, Bank of America, and Citigroup helped get us into our current mess. They took on way too much risk, manically participating in a speculative and debt-bloated bubble environment."

    I can't comment on the rest of the entities you cited, but since BAC, itself, exited the last of its "sub-prime" market segments - - I think it was an RV or manufactured housing subsidiary - - in 2001, I assume that you mean that BAC "helped get us into our current mess", by stupidly saving the Government the trouble of taking over Countrywide Financial and Merrill Lynch.

    Frankly, from that vantage point, it seems that BAC actually provided the Government (and taxpayers) with a way to avoid getting into our current mess even further than they are now. Unfortunately, this occurred at the expense of BAC shareholders, (in terms of BAC's share price, the dilution of its existing shareholders, and the shareholders' massive loss of dividends).

    Maybe you and your fellow Americans can respond in kind by foregoing any repayment of TARP, or maybe by lowering the 5% to 8% Preferred Dividend returns you're earning off of the TARP loan. (Notice that? It's only a L - O - A - N, not a gift?)

    Or maybe you'll be nice and not extract the last drop of blood from those warrants you extracted? Or maybe, you'll forego that $500MM you're demanding, in return for your canceling the UNSIGNED and UNUSED backstop "agreement", (that was never agreed to by the parties)!

    Well ....... since none of those gestures are going to occur, I guess, as a BAC shareholder, I will simply accept the thanks that I'm sure you'll convey, on behalf of our grateful nation.

  • Report this Comment On September 10, 2009, at 6:01 PM, dstnewman wrote:

    Yadda Yadda Yadda... just another article mentioning Sirius XM to draw clicks...

    Pretty pathetic.

  • Report this Comment On September 10, 2009, at 6:32 PM, timd209 wrote:

    Another thumbs down article with a pathetic uneducated mention of SIRI.

    When will the fools stop?

  • Report this Comment On September 10, 2009, at 7:39 PM, ThongLover wrote:

    Yeah...i's bad enough when people invest in one of the best new technologies over the past decade that got beat up because of government/FCC manipulation, worst stock market crash in 50 is bad enough when people invest in that and gain 1100%...terrible...absolutely horrible.

    Come on...does anyone reading this REALLY think Sirius XM isn't going to exist as a profitable company in one, five or ten years?!? Come on...really?!? Sirius is as important as bread and milk to my daily grind...

  • Report this Comment On September 11, 2009, at 12:48 AM, 2humble2fool wrote:

    The people that should be institutionalized are the ones that pay for any of the MF garbage. If you are so convinced that you are right about all these companies, then why don't you just use your 'real money portfolios' the short them and just shut up! Nothing written here is any real help to any serious investor.

  • Report this Comment On September 11, 2009, at 12:56 AM, ET69 wrote:

    Gripe, Gripe,Gripe,

    Has it occured to anyone that if there had not been a gov. bailout that the entire world economy probably would have collapsed? The Great Depression would have looked like small change! AND it might yet! Be careful what you wish for you might just get it....I rather hope you do.

  • Report this Comment On September 11, 2009, at 11:25 AM, RADARTHREE wrote:

    As for pay to listen satellite radio, I think that replacing free radio with pay radio at a time when everyone looks to be spending less is not very likely. Everyone says it has better programming. This may be true, but how many people listen to radio much anymore? I can't at work. I'm busy with other things at home. That leaves the car. Everyone I know who loves this service commutes by car or spends a good deal of time in their car. Yet the retention rates of subscribers tell the story about how much you like it Vs. how much you are wiling to pay.

  • Report this Comment On September 11, 2009, at 6:35 PM, rfaramir wrote:

    Great article as usual, Alyce.

    "The government should let failure fail." Amen!

    And I agree with your beliefs (not the 'if it has to' part) in the sentence following it. Every time I think I've found a worthwhile 'stimulus' expenditure, a little thinking (or if it really happens, just watch) and I'm proved wrong. Government seems to never do anything better than the free market.

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