Within the lexicon of business terminology, there is a popular phrase entitled “too big to fail” that is frequently used to describe large industry players that are kept afloat by the government when they are faced with financial ruin. The theory behind these bailout initiatives is that liquidating a major industry player will result in a total market collapse. These claims are very difficult to substantiate since the government frequently uses this rationale to justify its arbitrary actions, but never seems to allow one of these failing ventures to go into liquidation like a normal business.
In practice, the ‘too big to fail’ phenomenon exists to perpetuate vested interests by artificially maintaining the status quo. Unfortunately, this phenomenon also applies to political movements as well. When individuals or movements are viewed as ‘historic’ or ‘symbolic’ there is frequently a sentiment that it is ‘too big to fail’ and that any level of incompetence or power obsession must be overlooked to avoid failure for the favored parties.
What we have seen is that attempts by government to manipulate the market frequently create much larger problems than those that were originally set to be ‘solved.’ In these situation, there is an endless litany of excuses that serve as the convenient justification for the expansions of government power that are necessary to protect businesses and individuals that are deemed ‘too big to fail’ by the powers that be. Ultimately, we will find that the price of this massive government power grab is paid by the producers that make the country run. As these initiatives compound on top of one another over time, the ranks of the producers will contract as fewer people find it profitable to engage in business. Similarly, the ranks of the idle masses will rise as the number of people seeking free entitlements expands.
It is inevitable that a ‘breaking point’ will be reached at some time in the future where the burden foisted on the backs of the producers will be too great for them to bear. The optimal situation would be for a political reversal to happen before that point comes so that the wanton damage being inflicted on the country by the power obsession of its leadership is stopped. In the interim, prudent investors should seek to pursue strategies that will allow them to profit from the government irresponsibility so that their wealth will not be totally destroyed before control of the government is returned to more responsible hands.
Bullet Points & Quotes
Many large companies are deemed “Too Big to Fail” and are bailed out by the government in spite of their poor performance and bad decision
This is done to prevent a perceived market collapse from the liquidation of major market players
This phenomenon also extends to incompetent politicians deemed “Too Big to Fail”
The cycle of bailouts only creates more problems and a larger government
At some point, the cycle will break and the government will not be able to pay for its spending promises
Quote: Never ascribe to malice that which is adequately explained by incompetence. Napoleon Bonaparte
Keeping an Eye on Wall Street: Financial Market Update
*From The Chart Store Weekly Chart Blog for the week ending July 10, 2009
Analysis of the S&P 500 in relation to its 40 week moving average and Bollinger Bands indicates a decrease in volatility, as the values are settling closer to the mid-point of the calculated trading range. The July 10, 2009 closing price of $879.13 represents a ratio of 25.9 times the forecasted earnings per share over the next four quarters. This valuation ratio is beginning to approach the historical rates of valuation for the index, but may still be overvalued when accounting for the current level of market volatility and the probability for a ‘double dip recession’ that is likely to result if the recent monetary expansion creates inflation, which pushes real economic output back into recession. At the Financial Freedom Report, we still believe that market sentiment reflects an overly optimistic outlook relative to the economic realities in the current market. Thus, we do not see the stock market as an attractive investment at the current valuation levels.
Note: Bollinger Bands are a technical analysis tool that can be used to measure the highness or lowness of the price relative to previous trades. Bollinger Bands consist of a middle band being the simple moving average, an upper band at a multiple of the standard deviation above the middle band, and a lower band at the same multiple of the standard deviation below the middle band.
The Solomon Success Team
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The Creating Wealth Team
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Tags: too big to fail