Do not be over-concerned about stock markets
By Luis F Molina Page 1of6
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Countries (people, enterprises and governments) must not pay attention to any stock market (SM) when trying to foresee actual economic behavior or trends, because SMs are not useful for gaging the economy.
To begin with, SM participants have no capability for knowing what will happen in the real economy:
With all due respect and consideration, I must mention that most SM participants buy and sell shares motivated by fear or in ignorance (or both) and fearful or ignorant behavior are not good guides, while few SM participants just have some knowledge on influencing in SMs with basis on unreliable price trends which inflame fears or unrealistic expectations. But SM participants, in general, have no special knowledge about the real economy and, thus, are not the best advisors on economic matters.
Besides, SMs have no actual connection or relationship with real economy matters:
SM participants are called “investors”, but they do not invest in the economy: The shares they buy and sell are just titles which mostly represent investment already made –sometimes investment made a long time before. Therefore, SMs price fluctuations do not bear direct effect on the level of actual investment in the economy. Even Initial Public Offerings (IPOs) often are shares of investment already made in the real world. So, SM traders normally just buy and sell rights to papers which do not add or take a penny out of the real economy.
Quite often, SM participants do not take informed decisions when rushing to buy or sell shares:
Virtually, all information about stocks and other securities traded in the SM (balance sheets, marketing strategies, management policies, etc.) is available similarly to all. But that information is seldom used consistently when deciding to sell or buy. Fear, ignorance and greed overpower rational conduct.
Besides, not even the high volume traders (people or trading institutions) know more about the real economy behavior or trends than the great economists.
SM participants cannot predict better than the great economists:
But even the great economists –I must mention it with all due respect and consideration, unenthusiastically venture discrepant views between themselves when facing uncertainty on economic behavior or trends and, thus, the great economists show that they are unable to gauge the economy as to foresee it with useful certainty –mainly because economists tend to be too scientific and so contact with the real big but simple, predictable things about human behavior and the economy is lost.
SM traders are less capable of usefully guessing about the economy and they do not represent nor reflect the overall feelings and attitudes of the real-world consumers and investors –because traders live their world with feelings more like those of gamblers in gaming clubs than the real-world dwellers of homes and work places.
SMs live thanks to some self-defeating characteristics:
A healthy economy, like the US economy is most of the time, is based on several good things -bold entrepreneurship, hard and efficient work and several principles and values, including efficacy on keeping inflation low –because inflation is a cancer of the world´s economies and must be avoided.
But, as a comparison, continued increase of prices of shares is regarded as the ultimate good goal in the SMs. But this goal of constant inflation for the benefit of all in SMs is unrealistic -it cannot be achieved –it actually cannot go for very long (adjusting for overall inflation in the economy): The Dow, the Dow Jones Industrial Average (DJI), for example, has kept oscillating between 11300 and 10800 for 5 years (from August 21, 2006, to August 15, 2011), with the lowest at 6600 and the highest at 14000 during these five years. It is unrealistic to expect that share prices would rise (at adjusted values for overall inflation in the economy) for an unlimited long period of time benefitting most traders.
On the contrary, the operation of the SM requires price oscillations to generate earnings:
The successful operation of SMs requires price oscillations to generate earnings –and losses, and the wider and erratic the fluctuations are the better. Without much people losing money in SM, there would not be sizable profits. But in the real economy all can increasingly profit continuously.
SM traders do not appear to actually care about Earnings Per Share (EPS) [(Net Income of the Company – Dividends on Preferred Stock) / Average Outstanding Shares], and EPS are the real-world retribution to buying shares: SM traders do not seem to care that the Price-Earnings Ratio (P/E Ratio) [Market Value per Share / Earning per Share (EPS)] reach unrealistic levels. What most traders (fearful, naive or manipulative) seek are speculative gains from buying cheap and selling expensively –that is simply all.
But the price of a violin, as a comparison, does not have anything to do with how good it can actually sound:
Similarly, the amount of money paid when transferring a soccer player from one team to another team does not have any effect on how the player will perform: Prices in SMs can get very, very low, whereas the factories, the shopping malls, the corn fields, the banks, and all other real things in the economy continue intact, the same, regarding their operation and results -while the SMs can plummet by fears, foolishness and manipulation.
The real economy does not need to be steered by the fears, ingenuously and manipulations which are the essence of the functioning of the SMs:
The SM could literally even cease to exist and not much would happen to the real world. Just imagine that the NY Stock Market was closed for good –how would the end of transferring property rights of shares in that SM affect actual production and trade of goods and services? The change is that companies would need to modify their ways to access the type of financing obtained by selling shares to the public: Buyers of shares would need to deal directly with the issuing companies or would need to directly contact holders of shares to offer to buy or sell. Trade would be slow but the companies would anyway place their shares and get the money needed for operations or actual investment.
But SM traders do not claim they can predict in the real economy:
Ask any SM “investor” if he / she can predict economy behavior at a given moment, and he / she will say or will show that he / she cannot. That “investor” will also tell or will exhibit that he / she does not really care nor needs to be able to predict the economy. What SM traders –big or small, manipulative or naive, care about and will try to do is to predict stock prices direction and trend –just that, in front of real or apparently perceived economic events. That´s all they care about. They do not have any capability or desire to glimpse about how employers and consumers will act in the real world.
I am writing this on August 22, 2011, after two weeks of erratic and wide price fluctuations in SMs around the world:
During these two weeks, the Dow, for example, had its lowest at 10719 and its highest was 11483, but began on August the 8th at 10809 and it was 10898 on today August the 22nd. Fluctuations have occurred in both directions, from one day to the other, which the media considered wide and threatening.
Should any country (people, enterprises or government) assess and react in the real economy with basis on those irrational SM fluctuations? Making a comparison with small plane instrumentation, should countries (people, enterprises and governments) bumpily follow constantly the uneven indications of the Vertical Speed Indicator´s needle´s rapid, little or large variations (comparable to immediate individual apprehensions or optimisms in the SM) or should the countries mainly guide themselves with the smoother track of the Altimeter (analogous to medium-term and short-term numbers in the real economy)?
The media gives the SMs functions and predictive capabilities which SMs do not have:
Traditionally, it has been mainly the media which has given the SMs functions and predictive capabilities which SMs do not possess. But, not surprisingly, the media seldom ask SM traders for their opinion: The media interviews other people about their guesses on economic matters –Is it because the media knows that SM traders do not know much about the economy?
Changing shares from hand to hand should have a neutral effect in the economy and in the lives of the people who do not play in the SMs. As I already mentioned, the changing of ownership of shares is not an economic investment -it is just a sort of gambling. If it did not exist, it would not hurt GDP. But, since it is a right that must be preserved, SMs are fine –provided that the sort of gambling in the SMs is played without disturbing other people.
To play in a SM is a risky but voluntary endeavor. It is normal to lose in a SM:
It is normal to play and lose in the SM. It is similar to buying lottery or gambling in Las Vegas. It is a risky but a voluntary endeavor. Remember that there is no hard work involved once you begin risking in the SM. Also, if somebody sells, somebody buys; and, normally, the losses of somebody eventually will be the earnings of other. It is not possible that the market always grows and nobody loses money in it.
Once we see SMs as they are really mostly operated (as mechanisms to risk at trying to get other people´s money), we are less inclined to artificially and erroneously link SM to the real economy. In this way, we will find it easier not to pay attention to SMs, and, thus, less unnecessary disruption, artificially induced, into the real economy would occur.
The biggest real thing in the economy is GDP -which is made up by consumption, investment, government expenditures and exports less imports, by selling goods and services; whereas the variation of the market value of a share does not add to or subtract from the net increase on GDP:
Normally, the profit made from selling or buying a share benefits the trader but that money does not directly benefit the company that issued that share and, thus, the overall economy is not benefited either –the trader eventually sees an increase on his / her net worth while another trader eventually sees a decrease on his / her net worth.
Similarly, normally, the loss gotten from selling or buying a share hurts a trader but that lost money does not directly hurt the company that issued that share and, thus, the overall economy is not hurt either -the trader eventually sees a decrease on his / her net worth while another trader eventually sees an increase on his / her net worth.
Repeating, there cannot be a permanently climbing market that benefits most traders:
A plummeting market can hurt most traders, while there cannot be a permanently climbing market that benefits most traders. Overall prices (let´s say the Dow, for example) cannot increase much for very long because of P/E Ratio constraints. SM prices are fueled by fear, ignorance and manipulation in the SMs, while dividends (the real-economy retribution to owning shares) are made in the real economy through the successful sell of goods and services.
Most SM traders are good citizens, but cannot be regarded as interpreters of consumers:
SM participants may be educated and intelligent and may have excellent principles and values. But their personal skills and attributes do not qualify them to be any sort of predictors of the economy. This task is not assumed even by economists.
Besides, SM participants are not people who can be regarded as interpreters of consumers. The average SM trader´s trading behavior does not emulate the average consumer´s behavior; so, the former cannot be seen as a predictor of the later.
SM participants are consumers of course, while a typical consumer may have some participation in SMs: for example, he / she may have 401K funds and his / her employer may grant him / her some allocation capability in a list of shares; but his / her consumption behavior in front of SM behavior is not similar to the behavior of the traders in the SM. Similarly, real investment decision makers in the companies, small or large, do not need to take real investment decisions based on the SM trader´s behavior: Business managers have a different set of factors to take business decisions. Alike consumers, real world investors do not act moved by fear, naive assumptions or speculation -the three dynamic forces in the SMs I mentioned somewhere above.
I could go on and on about this topic, but this is enough to propose a rational approach regarding the SM which actually does not have more than a trivial, unsubstantial relationship to the real economy. But too often, paradoxically, the economy is badly hurt because of disorientation when erroneously linking SM to the economy.
Please note that I am not saying do not pay too much attention to SMs, or do not pay much attention: I am suggesting not pay any attention to them.
What I said on my proposal to reactivate the economy via patriotism [OptimumAnswer.com/pageOnly-Hiring-v-Efficiency.html] applies to my recommendation of not to be concerned about SMs:
“Of course, I do not have empirical evidence on that. But, virtually there is no conclusive empirical evidence in economics. Fortunately, the basic, great issues on economics are straightforward: The economy is a reaction to human attitude; and, although human economic behavior appears to be too difficult to be modeled, it is also clear-cut if seen with common sense (“the less common of the senses”)… while [often] it becomes too complex when seen scientifically.
Intuition emanates from knowledge and experience, and the economist ought to value their own intuition. Who more suited than the great economists of the world to propose a solution if their recommendation is a reflection of their intuition rooted on their previous knowledge? I would humbly beg them to urgently proceed.
I hope the great economists (of whom I once dreamed to be like) would consider and adopt my straightforward and very effective solution. It cannot harm.”
Let´s stop following the SM to gauge the economy, because doing this harms the economy –it harms everybody. Let them be.
This is my recommendation for the advantage of all, respectfully presented.
Luis F Molina
[When getting my MBA in Minnesota, I took a course about stocks, and I have traded some in the SM. This allowed me to invent what I consider to be a really good system to select shares and mutual funds when overall rising trends begin. My system grades shares and mutual funds based on several factors including Beta values, P/E Ratios, historical value earnings and the G factor which is my secret element. But, this is just my own system to play a great game which is not a part of the real economic matters.]
PS: Since I had not much time available to write this recommendation, I was not able to summarize it and give it a better structure. I am presenting it virtually as it flew. I apologize for any discomfort this may cause.
Thanks.
Luis F Molina
August 22, 2011
An additional note:
Take a look at this example of SM wild instability, as compared to the stability of the economy in bad times and in good times:
August 23, 2011. There was not a reference to the writer:
“NEW YORK (AP) — The Dow Jones industrial average is closing with its biggest gain in nearly two weeks.
Investors were picking up beaten-down stocks Tuesday after fears that the U.S. would slip into a recession pounded the market over the last month.
The Dow rose 322 points, or 3 percent, to close at 11,177. That's its best day since it jumped 423 points Aug. 11. It dipped about 60 points shortly after the quake hit the East Coast in the early afternoon [today], but recovered within minutes.
The S&P 500 index rose 39 points, or 3.4 percent, to 1,162. The Nasdaq rose 101 points, or 4.3 percent, to 2,446.
Five stocks rose for every one that fell on the New York Stock Exchange. Trading volume was higher than average at 5.2 billion shares.”
Should this chaotic speculative behavior be offered as a guide for the expectations of consumers and real investors?
SM fluctuations and the economy are different stuff, they are dissimilar and they are not linked. The former is chaotic and the latter is stable (in bad times and in good times). But, if consumers and real investors are erroneously made to perceive that fears gripping SM “investors” signal real economic danger, then sinking SM prices will frighten consumers and businesses making them to spend and invest less.
But, as we know, SMs have no capability to foresee the economy, and, fortunately, as we know, we can pay zero attention to the SM and nothing bad would happen to the economy.
LFM
August 23, 2011