When I was working in the stockbroking industry a long long time ago, I could not help but be blown by the sharp contrast between a UK fund manager and an American fund manager.
When I started out, we were doing with good old British traditional macroeconomics. We asked questions like: Where does the GDP growth come from in real terms? Is it investment driven (quantity) or is it really from productivity growth? Are you sure that it is not money sloshing around playing havoc on values that we are mistaking nominal value for real value? Is the money supply growth too much? Is the money supply growth coming from the system itself such as by an increase in the speed of lending, and that it is not coming from central bank - worse still, the central bank buying the debts of banks!? The central bank was even furiously trying to stabilise the money supply by buying foreign money inflow - in a process called sterilisation. I think this phrase has not been used since. Are there product innovations and is the market strong? etc.
At some point, we felt that the economy was really doing well beyond its capacity to absorb the amount of cash that everyone was throwing into the stock market. So, we got our clients to bail out. British clients. What saved the stock market for the day were the new American clients.They were very fresh. They just had one simple rule of thumb to go by - the real interest rate. If the real interest is positive - if the nominal interest rate is higher than the inflation rate - then the situation is considered not inflationary. There was then much game being played with the concept of the core inflation rate - you'd got to take out the "insignificant" elements like food prices because they did not impact the production of goods and services, etc. Much capital was made out of these little mental games, so long as there was money pouring into the market. Of course, until some smart person shouted "Fire!" and everyone rushed to exit through that one small door and, of course, the devil was there waiting to shut the door. The devil was playing with fire; "if I get burnt, so should you too!"
So, it amazes me how on earth can the world live with the idea that it is okay to the real interest rate is now negative as the nominal interest rate is near zero (for the saver) and inflation is far higher than that thanks to China. Of course, there will always be the market operators who will happily tell you all kinds of stories everyday just to make you feel looked after because you have all this money and are bored. I worked with this colleague who was a senior (one of the bosses) and a dealer. I heard him said to his client: "The stock looks good. There is inflation everywhere and prices are going up and this will be very good for the P/E. Buy." I didn't think he was even an economist.
So, to all of you out there trying to earn a living selling stocks, or out of a job and punting stocks just to feed your family, I wish you all the best. You are doing what I have given up. You are brave. This blog not just this post, in fact, is just a little help I am trying to give to people like you who are caught in the deep end of things. This is a side view which I have the luxury to paddle, to alert you to other things which you may have overlooked in your haste. I think the limits to foolish is define by the extent of one's greed.