May 25, 2025 | Why the ‘Wealth Effect’ Is a Giant Crock of Shit

Of all the nutty ideas in investors’ heads these days, none is crazier or more pernicious than the mass delusion that grotesquely inflated asset prices have made tens of millions of us rich.  As equity shares and residential real estate prices have risen higher and higher due to Fed stimulus with money conjured from nowhere, Americans have basked in the so-called wealth effect.  ‘Easy Al’ Greenspan could be their patron saint. An egghead with a PhD in economics, he often spoke of inflated home values as ‘wealth’ — i.e. money in the bank. He should have known better. Investors paying homage to Greenspan would have been at their giddiest recently when Microsoft shares opened $31 above the previous day’s close. Because the software giant is a $3 trillion company, the biggest in the world by capitalization, this added about $273 billion to investment accounts holding Microsoft shares. The total amount of bullshit wealth produced by the price gap has climbed much higher since, because the short-squeeze that goosed MSFT initially has continued to this day. At last week’s $460 high, the tally of vaporous ‘wealth’ injected into the system by MSFT’s scripted explosion was $492 billion. The actual figure is probably at least five times that, or $2.4 trillion, since Microsoft’s steep run-up has dragged the entire stock market along with it. The effect was most pronounced in the lunatic sector, which is sometimes referred to as the Magnificent Seven by the clowns who invent the news each day. The group includes Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla, and the orgiastic performance of their shares, far from being ‘magnificent’, should be a source of embarrassment to civilization itself.

Surfing Sea Waves

You don’t have to be a chartist to see that this won’t end well. Stocks tend to fill gaps on charts eventually, and this one, a vast helium bagful of unearned wealth, cries out for a rebuke.  It’s not just Microsoft, either. If you deconstructed the bull market since 2009, you would find that most shares achieved their biggest leaps almost solely on opening-bar gaps. As I have pointed out here many times before, it is short-covering by bears that accomplishes the heavy lifting needed to power stocks through previous peaks and thick layers of supply. Just look at the chart above. The sea waves between early 2024 and April represent enormous quantities of shares changing hands. Anyone who bought MSFT during that period was underwater when the stock broke down in early March.  Lo, on May 1, most of them awoke with their losses canceled or even reversed.  Nice work if you can get it. This happened on a gap that started and ended in literally no time, with almost no actual shares changing hands.  It occurred faster than the blink of an eye as the stock effortlessly leapt above the offers of millions of sellers seeking only to exit losing positions for ‘even’. If you think this shell game is a sound model for growing a society’s wealth, or that any of it will endure when the fever breaks, you are in for quite a shock.

Rick Ackerman May 25th, 2025

Posted In: Rick's Picks

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