The Cost That’s Never Counted

As Bastiat would put it… [Morning Reckoning] February 15, 2024 [WEBSITE]( | [UNSUBSCRIBE]( The Cost That’s Never Counted Asti, Northern Italy February 15, 2024 [Sean Ring] SEAN RING Good morning Reader, It’s hard enough counting the stuff you can see. And you’d think it’d be damn near impossible to count the stuff you can’t see. But that’s not so. [Frédéric Bastiat] Nineteenth-century French economist Frédéric Bastiat, as imagined in Midjourney With a bit of elbow grease and forethought, you can calculate the accounting (seen) cost of a particular action and the economic (seen and unseen) cost of that action. This is one of the most important skills you can develop. If you’re a parent, this is the one skill that, if your child learns it, will almost guarantee a high minimum level of success in life. I’m talking about the ability to calculate opportunity cost. [Click here to learn more]( [Financial Fallout Expected]( “Please head to your nearest economic shelter” - Former Pentagon Advisor What you’re about to see is a [disturbing new message]( from Jim Rickards. One that references a biblical warning made nearly 4,000 years ago. And points to an [economic nuke]( set to hit the markets just a few short weeks from now… If you’re worried about the state of the U.S. economy, and the strength of the U.S. dollar… [I suggest you watch this message now…]( Then head to your nearest financial fallout shelter. Because once this crisis hits…it will already be too late. [Click here to view]( [LEARN MORE]( What is Opportunity Cost? Opportunity cost is an economic concept that refers to the potential benefits an individual, investor, or business forgoes when choosing one alternative over another. In simpler terms, it's what you give up to do something else. This idea is crucial because it helps people understand the actual cost of their decisions, not just in terms of money but also in terms of forgone opportunities. Here are three examples of opportunity cost: - Investing in Stocks vs. Holding Cash: If you decide to invest $1,000 in the stock market instead of keeping it in a savings account, the opportunity cost is the interest you would have earned on that $1,000. On the flip side, if the stocks do well, the opportunity cost of not investing could be the gains you missed. - Going Back to School: If you choose to return to school full-time, the opportunity cost includes the salary you're not earning by working during that time and any career advancement opportunities you might miss. - Spending Time: If you spend the evening working on a project instead of going out with friends, the opportunity cost is the enjoyment and relaxation you would have experienced during the night out. Opportunity cost is about trade-offs. It helps you make more informed decisions by allowing you to consider what you're potentially giving up. If you’re struggling with grasping the concept, let my French friend Freddy help. The Broken Window Fallacy The Broken Window Fallacy is a concept introduced by the 19th-century French economist Frédéric Bastiat, illustrated in his essay "Ce qu'on voit et ce qu'on ne voit pas" ("What Is Seen and What Is Not Seen"). The fallacy begins with a scenario where a vandal breaks a shopkeeper's window. Some people (perhaps Paul Krugman) argue that the broken window has a silver lining because it generates business for the glazier (the window repairer), who will presumably spend his earnings elsewhere, thus stimulating the economy. However, Bastiat points out that this viewpoint is myopic because it considers only the immediate effects (what is seen) and ignores the broader implications (what is not seen). The shopkeeper must spend money repairing the window instead of on other goods or services that the shopkeeper might have preferred, such as buying new stock, investing in another project, or saving for future needs. The economy hasn't gained a new window; it merely replaced one already there. The real cost includes the opportunities foregone due to the money spent on repair rather than on something else. The relation to opportunity cost is direct and profound. In the Broken Window Fallacy, the opportunity cost is what the shopkeeper sacrifices as a result of the window being broken. It's the value of the opportunities lost—the goods or services the shopkeeper cannot now purchase or invest in because the money had to be used to fix the window. Bastiat uses this parable to illustrate a broader economic principle: true costs consider both the seen and the unseen, including what has been foregone or sacrificed. This underscores the importance of looking beyond immediate, visible effects to consider what other opportunities could have been pursued with the same resources. In summary, the Broken Window Fallacy cautions against the notion that economic activity alone (like fixing a window) is a sign of economic health. It emphasizes understanding opportunity costs and recognizing that resources spent in one area are resources that cannot be spent elsewhere, highlighting the importance of considering the full range of economic consequences of any action or policy. If you’re a parent or grandparent, let’s take the argument to the kids. The Stanford Marshmallow Experiment The Stanford Marshmallow Experiment is a famous psychological study by psychologist Walter Mischel at Stanford University in the late 1960s and early 1970s. The experiment focused on delayed gratification, or the ability to wait to obtain something one wants. In the study, a child was offered a choice between one small reward (a marshmallow) provided immediately or two small rewards (two marshmallows) if they could wait for about 15 minutes, during which the experimenter left the room and then returned. The study observed how long each child could resist the temptation of the immediate reward and wait for the larger, delayed reward. Follow-up studies also examined how the children's ability to delay gratification correlated with their future success in various areas of life, such as academic achievement, health, and personal finances. Relating this to opportunity cost, the marshmallow experiment illuminates the concept regarding self-control and evaluating future benefits versus immediate satisfaction. The opportunity cost of choosing the immediate marshmallow is the extra marshmallow that could have been obtained by waiting. The children who waited effectively decided that the opportunity cost of the immediate gratification was too high compared to the potential future reward. This experiment illustrates a broader principle in economics and psychology: individuals often face choices that involve trading off immediate benefits for greater long-term gains. The ability to evaluate and act in favor of long-term rewards, despite the opportunity cost of forgoing immediate gratification, is a crucial aspect of decision-making and significantly impacts life outcomes. Now that we’re on a first-name basis with opportunity cost let me tell you about my X experience. Ze Germans on X I came across this tweet on Wednesday: [pub] Credit: [@bizlet7]( I cracked up. I’m sure that tweet was made up, but nevertheless, I was in stitches. But it illustrates opportunity cost at the national level perfectly. For Germany, allegedly, they’ve got all these nice things. (Many Germans on the thread complained about their suboptimal healthcare and late Deutsche Bahn trains.) But let’s suppose all this is true. What has Germany given up for this? Essentially, it has given up its sovereignty, safety, and control by being a US vassal. That’s the unseen. The counterargument is that it gained the “world’s greatest military” as its ally (the seen). For the US, it’s got Germany under its thumb (the seen). But what could the USG have spent that money on (the unseen)? Hospitals? Libraries? Giving your money back to you? Wrap Up Opportunity costs are everywhere and occur every day in your life. Calculating them over time will help you and yours make better decisions. If only our politicians did the same. Bastiat once wrote, “The real cost of the State is the prosperity we do not see, the jobs that don’t exist, the technologies to which we do not have access, the businesses that do not come into existence, and the bright future that is stolen from us. The State has looted us just as surely as a robber who enters our home at night and steals all that we love.” That puts things in perspective. All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com X (formerly Twitter): [@seaniechaos]( [ALERT: U.S.A. Declares “Act Of War” On China.]( According to the New York Times… The White House recently declared an “Act Of War” on China. It’s all here… …in U.S. Docket No. 220930-0204: [Click here to learn more]( This government document CHOKES OFF China’s access to the [world’s most important technology]( …and it could have a direct and immediate impact on your wealth. Friend, let me be perfectly clear: The White House BANNED China from securing this devastating technology… But YOU can still potentially make a fortune from it. [To see how to prepare for this “Act of War” — and the technology behind it — go here immediately](. [LEARN MORE]( In Case You Missed It… Here’s What Happens When Semiconductors Jump the Shark Greg Guenthner, Editor [Greg Guenthner] GREG GUENTHNER Good Morning Reader, If you’re anything like me, you came into February feeling seasonally bearish. Let’s set the scene… Stocks were starting to stall out at the start of the month following a powerful melt-up rally that the mega-caps and semiconductor stocks were beginning to monopolize. The market was exiting its strongest six-month period. Investors were getting skittish about the potential (or lack thereof) of a March rate cut. And earnings season was looming large, threatening to derail any stock that failed to impress picky shareholders with strong guidance. Of course, the market doesn’t care about our feelings. Instead of stumbling, the mega-cap rally broadened out. Smaller stocks started to gain traction. The tech-growth names that failed to keep up in January abruptly reversed to the upside. Earnings came in hot, pushing stocks higher into the stratosphere. The bulls were charging back into town and nothing could stop the stampede. Perhaps the most maddening rally of them all comes courtesy of the semiconductors. NVIDIA Corp’s picture-perfect breakout above $500 in early January was a sight to behold, rewarding traders with a double-digit move the week the stock finally cleared resistance. But the stock kept rallying. And rallying. It hasn’t quit yet. Heck, it hasn’t even paused. The rally that began on an otherwise ordinary Monday in January immediately started spinning into a parabolic nightmare for the bears. The stock has now gained more than 50% year-to-date, just shy of Valentine’s Day. NVDA isn’t the only stock to jump the shark, either. Other semiconductor stocks have gleefully followed in its wake, posting their own parabolic runs that have helped launch the VanEck Semiconductor ETF (SMH) to a year-to-date gain of 20%. We’re also seeing some of this froth trickle down to the tech-growth names. For example, recent IPO Arm Holdings (ARM) earned the distinction of “Most Overbought Stock on the Market” Monday morning after rallying another 35% following last week’s earnings beat (the stock shot up a modest 62% following its midweek earnings date). We’re even seeing bullish bets pile up across some of those slippery software and other tech-growth names ahead of a glut of earnings announcements this week. Just as the market looked like it was ready to slip, another wave of eager buyers has stepped in to bet that the good times will keep rolling… Stock Market Madness, Round 2 All this action is starting to remind me of January 2021 – when the massive TSLA gamma squeeze and subsequent meme-stock madness shocked the market. You might recall how the pandemic bubble unofficially topped out in February 2021 as these parabolic trades began to unwind… For the record, It took the rest of the market another ten months to catch lower. But the speculative runners mostly peaked in early 2021 following a massive surge of retail traders piling into a few concentrated trades. To be fair, the pandemic bubble was already getting long in the tooth as Covid lockdowns led to a new short-term trading boom. I don’t think we’re that far along in the cycle this time around – especially considering how painful the 2022 bear market was for just about every asset class. Maybe the market isn’t headed for a major correction just yet. But certain stocks are painfully overextended – and the averages could use a break. A pullback of 5%, 7%, or even 10% would be healthy for stocks in the long-run, even if it did freak out more than a few investors. Fortunately, we don’t have to sit on our hands as stocks fly a little too close to the sun this month. Just be sure to understand what’s unfolding in the market right now – and remember a few key rules: - The market will eventually punish the chasers The market has been rewarding bad and/or risky behavior lately, handing out profits to speculators who’ve chased these out-of-control breakouts above and beyond and reasonable entry level. Yes, entries still matter in trading! Unfortunately, some folks are going to learn this lesson the hard way when they become stuck in some of these stocks (Ahem, semiconductors) on a reversal day. We might already be seeing the start of a reversal emerging in the semis as I type. Imagine that! If you’re feeling the FOMO, just remember there will always be another opportunity. I didn’t buy NVDA in the $500s. But I know the stock will eventually consolidate. Even if that consolidation area occurs at higher prices, I can still buy at a safer point in the trend where I can set a mental stop at a reasonable level. That way, I know when I’m wrong without having to worry about my ill-timed investment dragging down my entire portfolio. To recap: Recognize that these stocks are overbought and frothy. Keep close tabs on the action. Then, make a plan where you would buy. More importantly, answer this question: Where would I need to sell if the stock reverses? - Parabolic rallies do not correct sideways I don’t care if we’re talking about Bitcoin or biotech stocks – a massive, parabolic rally will rarely level off and drift sideways. Major moves higher over a compressed time frame require backfilling. Or, in some cases, they give back most of the previous move and completely reset before moving higher again. We witnessed the perfect example of this phenomenon when the crypto mining stocks topped out in late December. Just three weeks after recording fresh highs, many of these names had retreated at least 50%. Anyone who bought near the top without a plan was left holding substantial short-term losses. These stocks have snapped back to attention this week following Bitcoin’s resurgence and push toward $50K. That’s great news to anyone who held through the January turmoil. But I do have a final word of caution if you think you can simply “HODL” your way out of trouble… Many of these parabolic rallies can take months to reset. Some even take years. You don’t have to dig too far back to find examples, either. Just check out some of those tech-growth rallies from 2021. Many of these stocks remain well off those highs almost three years later.You can’t always count on time to bail you out. Keep watch on the semiconductor names and other high-fliers this week. And don’t get too trigger happy attempting to play any type of pause in these rallies. These stocks will set back up again and offer much better entries for patient traders. I’ll take you through the charts[this morning at 11 a.m. Eastern on Top Trades Live!]( Be sure to stop by to see some of my favorite actionable trade setups for the week. [Click here to join me!]( Best, [Greg Guenthner] Greg Guenthner Contributing Editor, Morning Reckoning feedback@dailyreckoning.com Thank you for reading The Morning Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Sean Ring] [Sean Ring, CAIA, FRM and CMT]( is a former banker and financial educator and is the editor of the Rude Awakening. Sean has trained interns and graduates from Goldman Sachs, Morgan Stanley, Citi, Bank of America, Standard Chartered Bank, DBS (Singapore), the Abu Dhabi Investment Authority (ADIA), Bank Indonesia (the central bank), HSBC, Barclays, RBS, and BlackRock. He knows the global economy is being corrupted by forces that most people can't understand and has used his unique and worldly experiences to help people navigate the markets. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your The Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@dailyreckoning.com. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. 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