Questions on the “Markets”

The stock market had a crazy year in 2018. Several times there were huge swings in the market indexes. Any good investment adviser will tell you to ignore the daily ups and downs of the markets. But people are worried. Somehow Wall Street speculation has the power to crash the real economy. When the bubble bursts, like in 2008, severe problems result. Main street businesses go under, people are laid off, and retirement “nest eggs” disappear overnight. The economy can take years to recover.

Why does this happen? How can speculation crash the whole economy? Why do we let it happen?

Despite years of reading about business, investing, and economics, I have never found adequate answers to these and related questions. I have more questions than answers. In the next several articles I share my thoughts on the crazy, irrational “markets.” If you can explain the errors in my common person reasoning, please submit your comments to the Middle Wisconsin News editors.

In this discussion I will use the publicly traded stock market as my focal point. References to the “market” usually mean the stock market although there are bond, commodities, money, and real estate “markets.” All of them are highly speculative and have similar problems. But the stock market is the most commonly talked about.

Why is the stock market so important? The vast majority of businesses have nothing to do with the stock market. Out of the many millions of business in the U.S., only 3129 are currently traded on the New York Stock Exchange. The Nasdaq has about 3100 listed companies. The Dow Jones Industrial Average records the current average stock price of THIRTY companies! The S&P 500 tracts 80% of the total stock market value with only 500 companies. These stock market indexes only tell us what is happening with daily average stock price. They don’t tract sales, profits, or health of any company. It seems to me ludicrous to measure of the health of the entire economy with this small, limited sampling.

In the real goods and services producing economy many companies are not corporations and do not sell stocks. Even many corporations are “privately held” and do not offer stock to the public. Many large businesses, like Cargill, Johnson and Johnson, and Koch Industries, are privately held. Most businesses are small with 92% having less than 25 employees. So why is the daily flipflop of the stock market on every news broadcast?

Why are markets going up always good? We are told that price increases of assets like stocks, bonds and real estate are always good. Markets are “strong” and the economy is “growing” when these prices go up. Price increases of other things, like wages, are inflationary and bad. This is a blatant double standard. Nothing goes up forever but that is the goal of the speculative markets.

It should be obvious that price increases can be both good and bad. A house increasing in value is good for the home owners, if they want to sell. It’s bad because their property taxes increase as well. It’s also bad for home buyers. Increases in stock prices may make your retirement savings look good on paper. Your account has increased in “value”. But as you put more money into your 401K, higher prices buy you fewer shares. And when the inevitable crash occurs your account “value” disappears for no good reason. In the long run stability might be more valuable to most people than price increases.

Should we believe the talking heads? The business news pundits try to explain these wild swings with various rationales. We are told “investors” lost confidence, interest rates were up, or trade policy, “profit taking”, consumer spending, earnings reports, or some other lame excuse is responsible. But do supposedly smart, successful, business people panic over every blip in the economic road? I think none of these bogus explanations make any sense nor are they the real reasons for market volatility.

I understand that major, world shaking events, like a war, change in governments, or disruptions in foreign trade can affect the economy. But many of the excuses used to explain market volatility don’t add up. For example, interest rates have been very stable and extremely low for many years. Any “investor” who suddenly panics over interest rates has to be a paranoid moron.

Another problem with these phony explanations is that for every seller of a stock there must be a buyer! So for every worried “investor” there must be a confident one. For every seller bailing because of some economic woe there has to be a buyer wanting in on the bargains. With an estimated 49 million self-directed “investors” in the U.S. it is ludicrous to assume they all have the same motivations.

Why do we have market swings? It makes more sense that the markets go up or down because they DO. Market volatility is driven by many factors but gambling on the price, or future price, of a stock is probably the most important. The irrational, greedy, herd-mentality of stock price speculation has little to do with company profitability, market “fundamentals,” or the overall health of the economy. But it does drive price increases and the inevitable market crashes.

This is illustrated by the way stocks are traded. Currently most stock trading is done automatically by computers. Humans are not making rational decisions guided by changes in the economy or company performance. Rather high frequency trading programs flip stocks in fractions of a second. This is not investing in companies. It is raw speculation on the price of a stock. This is what causes volatility and problems for the larger economy.

Volatility is necessary for speculators. You can’t “buy low and sell high” without price fluctuations. Short term “profits” require market volatility. This creates huge problems for real investors who are trying to select good companies with good profits for long term gains. It creates havoc with retirement savings and pension funds. But it allows instant “profits” for speculators.

We need a stable economy and not a gambling casino. We don’t need irrational, wild swings in prices driven by speculation. Stay tuned. In the next several articles I raise more questions and suggest some solutions.