Wednesday, October 7, 2015

Thoughts on profligate spending

Question: I once remember you stating a paradox of human behavior that can exist, and forgive me if I don't word it correctly, but I believe it was around the time of when oil first starting going over $60 a barrel [in 2005].  You mentioned that people's habits of buying SUVs hadn't changed, and paradoxically had increased, that during poor economic times, people sometime buy even more expensive items or waste their money in a more egregious way - does this ring a bell?

Answer: It sounds like an observation I made many years ago, and yes, I still believe it still holds true.  An example of that would be the nationwide mini gambling mania during the Great Recession of 2009-2010.  You may recall that there were a lot of “Internet cafes” creeping up everywhere in just about every city.  These were actually casinos where people could gamble at video terminals 24 hours a day, 7 days a week.  Many of them were jobless and really couldn't afford to gamble, but they did it anyway.  

I think it was Bob Prechter of Elliott Wave fame who first noted that gambling crazes are actually most common in the early stages of bear markets/recessions.  He explained that while stock speculation is all the rage in bull markets, people also like to gamble away their money in bear markets since the primary purpose of the bear is to destroy capital.  Plus, people still have the speculative impulse in the early stages of a bear market, a carry-over from the previous bull market phase.  Eventually, though, if a bear lasts long enough it will destroy even the gambling and reckless spending impulse until people are afraid of spending money for any reason.