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By yttire
October 6, 2008

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You invest in stocks to participate in the overall growth of the economy, to provide capital into a risky situation so that you can grow that capital into more capital.

Stock investing is predicated on the notion that you are taking on risk to gain return, and that your analysis of the company and the market they compete in will give you some ability to foresee their likely future growth prospects.

However, as recent events have demonstrated, there are other players gaming with the whole system which means that your assessment of a particular company and its market niche actually has little bearing on the companies prospects.

When you are investing into a risky situation where someone else is gaining on the upside of possible risks instead of yourself and by providing capital you are only playing the sucker, then it is no longer such a good time to be a stock investor.

The S&P 500's return over the last decade is less than a percentage point in growth. This is not because the underlying economy did not grow- it did. It is not because the businesses that comprise the S&P 500 did not grow- they did. It is because another player has made such large side bets and already pulled the upside money off the table in banking bonuses, CEO pay, and other payoffs to the gamblers who have reduced the gains of everyone else down to zero.

In essence, we the investors have been providing capital for another to gather the gains from, while we sit on the sidelines and are effectively pushed out. It has been a brilliant play by a few to take away the wealth of the many.

You can attempt to claim that this is a minor market correction which will come back into congruence in a year or two. But the grim reality is that the money has been cleared off the table- both personal and federal debt levels are at extremely high levels. Reducing these debt levels will require less capital poured into future growth and infrastructure advancement. Bailing out and stabilizing the huge financial firms is going to entail even further advancement of public debt.

You must understand in this situation that you as a taxholder are beholden to this debt, and it is now showing up on your balance sheet. If you have been investing in the S&P500 for the past decade you are not up 1% point- you are down a large position because of the increase of your portion of this part of the national debt which has just risen on your behalf. Your position is down, majorly.

Yet how is this possible if the economy has been growing over the past decade? It is possible because the hedge funds have been cleaning money off the table year after year. Where did you think the money came from, out of thin air? It came from your pocket, which is now reflected partially in a decimated stock market, and partially in a ballooning public debt for which you are going to foot the bill.

Is this the end of stock investing?

Of course it is not, but as long as we have a system which encourages huge derivative bets the money will be continuously cleaned off the table until the bets go south, and we all offer to foot the bill so our entire economy doesn't collapse. In an effort to maintain the few assets we have left, we throw more and more money into stabilizing the ship, even though our risked capital return has already been creamed off the top by others.