Can anyone explain the stock market to me?

Our trade deficit is out of control.  Our national debt is out of control.  The dollar is dropping against most currencies.  Oil is at an all-time high.  The housing market is weak.  The mortgage market is in disarray. 

And, until two weeks ago, the stock market was hitting record highs.

In the last two weeks, it appears the market finally noticed the economy really isn’t doing that well.  A rather sudden “correction” is well under way.

Does anyone have a clue what “forces” actually influence the market?  I know the “experts” don’t.  Dozens of times the market has reversed course mid-day and the headlines give the same reason for the market going down as they did for it going up.  For example, we’ll get lousy news on employment.  The market will go up and the “experts” will say it’s because the bad news has eased inflationary concerns.  Later in the day, the market will go down and the “experts” will say it’s because the bad news means the economy is in trouble.

Given that a substantial part of my retirement money is in the market I’d really like to know what is going on here.  Anybody have any bright ideas?


25 Responses

  1. Simple, Don: most of those danger signs you cited aren’t really danger signs at all. Trade deficit and dollar strength are buckets in a well — if we run too much of a trade deficit the dollar starts to slip, making imports expensive and exports more attractive, which alleviates the trade deficit. The national debt is not only not “out of control” it’s in better shape than it has been in a decade. Oil’s up — but it’s a smaller piece of the cost of living than it once was. The housing market isn’t so much “weak” as returning to normal after a galloping speculative bubble. Ditto mortgages.

    I won’t say everything is roses and sunshine, but we’ve been hearing about this “bad economy” nonstop since January 2001 and frankly I no longer believe any economic news in the mainstream media.

  2. You run a horrendous trade deficit with the grocery store, BW. And if you recently bought a house, using a mortgage, then your “household debt” just went through the ceiling. But, if you’re still working and bringing home a paycheck, things are going pretty well, I’d guess.

    Economic ignorance is rampant in our country, because nothing sensible is taught in public schools. And reporting on the economy is often done by graduates of public schools with no particular knowledge of economics or the market – in fact, many of them have been indoctrinated AGAINST markets in those same public schools. It’s remarkable how often dire reports on employment, or productivity, or profits, etc. are reversed later, as better data comes in.

    No one knows where the market is going tomorrow, because it’s subject to a lot of things that affect people’s emotions — they read something scary, and sell….or they get excited and buy. But, over the long term there is no safer place to have your money than in the American economy. I’m feeling reasonably confident about my own retirement stash — with the only big storm cloud on the horizon being the Democrat plans to increase capital gains taxes, and to take oil company profits to research alternatives, and to redistribute income from rich to poor, etc. Nothing will kill our economy faster than removing the rewards for investment and risk taking.

  3. The stock market is a miniature weather system modeled on Chaos Theory. Direct causation is thus very rare. 9/11 style events for example would be a direct causation point of origin.

    Essentially, like clouds of water vapor, there is a certain inertial to the stock market because it is composed of people (mass). People create networks and thus almost any particular event could cause a leader of a certain network to tell his people to “sell” or “buy” or anything in between. There are impersonal networks and then there are the stock brokers and the decisions they make. Then there are the individuals that own huge stocks and if they sell, that can cause an avalanche somewhere else.

    It is not really events people should look at but rather people. What do people perceive? Do people perceive a profit to be gained from buying or selling? How much influence do these people have over others? Is there any possibility of a rout (so called panic attack that causes mobs to form)?

    Nothing will kill our economy faster than removing the rewards for investment and risk taking.

    Ah, but this will cement the status quo of rich folks such as Kerry, Heinz, Paris, Kennedy, etc. A static economy is an economy from which those with money, the Left, can decide the fate of millions. Without having to go through messy voting mechanisms such as raising up dead people or illegal immigrant votes.

  4. Here’s an example, DQ — remember the “negative savings crisis”? Maybe not, but it was big headlines for a news cycle or two….well, forget it.

    The economy is going to get better (in the media) if the new President is a Dem. And homelessness will disappear, there will be no corruption in Washington, and the meaning of “is” will no longer be clear. Get used to it….unless sanity sweeps over the American electorate.

  5. To add my voice to the chorus, DQ, here’s a relationship between our the trade deficit and national debt that most people don’t understand: national debt is not like personal debt. Here’s an example – we pay China in $-US for “stuff”. China accumulates $-US. They have to spend it somewhere and, ultimately, that has to be in the $-US dollar economy of the U.S. So, they either buy our national debt securities or invest in companies. We get their stuff at cheap prices, they get paper, we get our $-US back. Thus does a trade deficit help fund our national debt and help keep interest rates low (without a trade deficit, the Federal Reserve would have to raise interest rates to attract foreign investors in treasury notes).

    The current market activity is simply a correction exacerbated by psychological fears regarding the price of oil and the home mortgage situation. These, too, shall correct. The overall economy is very strong and, on average, stock prices are not overvalued.

  6. The stock market naturally goes up when more workers come into the market. More workers mean more production, means more demand, and means more supply. China, India, and Iraq thus have high growth rates and are bringing new demands on the world economy. You can always rely upon more people consuming more stuff, compared to say reliance on every internet company producing a profit. There’s always the top percentage working in the hierarchy. Most businesses fail while only a select few succede. The more demand there is, the more businesses succede because the more niche markets there are and with less brutal competition over limited markets.

    The more stable businesses that are produced, the less the stock market fluctuates downwards.

    The world going into a recession as it did after Clinton, is the thing to watch out for. Elimination of oil production would do that in a jiffy. Which is why Iran and Saudi Arabia hold far more influence on international politics than they should.

    He who controls Arrakis controls the galaxy.

  7. No.

    However, I do believe that the pressure on the stock market is upward and that this will continue and, perhaps increase, for one reason; Our current system of retirement financing, e.g. 401k plans, IRAs, etc. There is a constant influx of new money looking for a home. This should continue so long as the tax laws remain as they are. Gee, I hope I am right.

  8. I meant no in answer to the original question.

  9. Hi DQ, My husband has been interested in the market for several years. He highly recommends two books that will take the mystery out of it: The Wall Street Jungle and The Wall Street Gang. Both were written by Richard Ney. Bottom line – it’s all controlled by insiders (“specialists”) who manipulate the prices for purposes of their own, and use the news of events as excuses for what they do. Ney refers to them as “pirates.” Just passing this along. I’m not the stock market maven in the family.

  10. Well, if Judyrose’s husband is correct, those “pirates” have my profound gratitude….my Dad was broke in 1980, due to a fight with the IRS that he lost (surprise, surprise), and he’d “invested” in gold mines and oil wells up until then. (Anyone know what’s with those docs and dentists? Why are they such good marks?)

    Anyhow, once Ronald Reagan (God bless him) cut the tax rates, and my brother got Dad a real retirement plan, investing in the American Economy, it only took 14 years for the folks to accumulate enough for retirement — in KY, not CA, but hey!

    So, I say “Thanks, Pirates (insiders, whatever) — keep it up.”

  11. By the way, if you want a data-based look at the U.S. economy, Larry Kudlow is generally a good place to go – the following is from today’s The Corner…National Review Online:

    Money-Good [Larry Kudlow]

    Wall Street stabilized today with a triple-digit Dow gain as of this writing. All those Bear Stearns rumors on Friday were totally over-baked and hyperactively alarmist. The firm is money-good, and its daily security positions are being financed by its top lenders, including Citibank and J.P. Morgan. What’s more, the two credit rating agencies, Moody’s and S&P, gave Bear Stearns a positive and sound outlook with respect to liquidity and credit. S&P downgraded because of the possible likelihood of lower earnings over the medium term. But S&P said liquidity is fine. All the negative speculation and rumors about the firm are just wrong.

    Meanwhile, I still believe the Goldilocks economic scenario is alive and well. Jobs came in at 120,000 for the private sector, and if government teachers had contributed 30,000 as usual (probably due to a statistical estimating error, they didn’t), then the jobs report would have met consensus.

    Unemployment has essentially been unchanged at 4.5 percent to 4.6 percent for a year. Weekly jobless claims are low. Wages are running ahead of inflation. The ISM report suggests at least 2.5 percent real growth. The global economic boom continues as commodity indexes are holding the high ground. In the U.S., business loans are growing about 12 percent.

    Second quarter profits are running 15 percent on a market-cap basis, 11 percent on a net income basis, and 9 percent for continuing operations. Those profits are two-to-three times higher than consensus expected. Corporate bond spreads and yields are normalizing, but sources tell me that new money is coming in from petro countries and China to bottom fish cheaper corporate loans. All of which are money-good.

    The sub-prime mortgage virus is still the biggest issue and no one can be sure how large the total damage will be. But with a global boom abroad and Goldilocks at home, the stock market is in better fundamental shape than so many commentators would have us believe.

    Call it money-good.

    08/06 03:46 PM

  12. Thanks for the comments. Think I like the positive spin of the last one best, even if I think he’s looking at the world with rose colored classes firmly in place. Judyrose, I appreciate the suggestion but I think there are limits on what the specialists can do (although they can make large fortunes by small manipulations, over the long haul I think they are captives of supply and demand). Trimegistus, with all due respect, I don’t think it is all that simple. The accumulation of dollars in foreign hands is a very real problem. Someday, those dollars have to come out, resulting in inflation and foreign ownership of American businesses and real estate. Not good, and not good to give the Chinese and others that kind of leverage over us. Also, don’t confuse the national debt (which is at record highs) with the deficit (which is still way too large, but is lower than it has been since the Clinton years). BTW, does anyone know how much spending is not reflected in the deficit because it is considered off-the-books and goes straight to the national debt? I’ve heard the war has been financed that way, among other things. Thanks for the help.

  13. In addition to DQ’s question, I’d like to add another: Can anyone identify the parties that own our national (govt) debt, and what interest we are paying on it? A comparison of the size of the national debt vs the size of the consumer debt (credit cards vs other forms of debt) would be helpful!

  14. Mike Devx, people all over the world own our national debt. When I was a kid I owned part of it in the form of War Bonds. Now, people own treasury bills and other gov’t debt instruments. I always own some mutual funds that deal in the bonds and other instruments issued by the state of Virginia (dividends are tax free–but lower than taxed ones). One way to look at the issue is that when foreigners are buying our debt instruments it is an expression of faith in the United States government. Folks generally do not lend money to risky borrowers.

    JudyRose. Sorry but I don’t buy your husband’s conspiracy fears. The U.S. government has a huge stake in preserving public trust in the stock market. No question there are some manipulators, always have been, but notice the number of prosecutions of high profile players in recent years. I think part of the problem is that media “Analysts” always feel that they have to give an instantaneous, learned opinion as to why the market moved in one direction or the other. Some of the stories they concoct are ludicrously fanciful. Sort of like some of the fabulist stories from Iraq that recently appeared in the New Republic.

    I have great faith in the power of the market–over the long term. I might just repeat the operative part of that statement; over the long term.

  15. Here’s a really interesting piece my brother sent that relates to what we’re talking about. First, a quote from near the end:

    “Recent events show that financial innovations meant to distribute risk can end up multiplying it instead, in ways neither regulators nor investors fully understand. Mr. Grantham, the Boston money manager, says his portfolios are behaving in ways he hadn’t expected.

    “Fed officials believe that even if their policies led to housing and debt bubbles, the strength of the overall economy shows that the policy was, on balance, the right one. Of course, that assumes the current problems don’t culminate in a recession.”

  16. One other thought about Trimegistus’ comment. Oil is at a record high and there are only one or two times in the last 50 years that it’s been a larger part of the cost of living. I’m tired of hearing the argument that, yes, it’s the highest it’s ever been in price, but if you control for inflation, it’s only the second highest it’s ever been. Are we really reduced to saying that just because something is not the absolute worst it has ever been, it’s just fine (or, in Trimegistus’ word, not really a danger sign at all)? Whatever happened to striving for our economy (and our life, and our country) to be the best it has ever been? If ever there was a sure sign of America’s decline, it is the drumbeat from it’s strongest supporters that things are not all that bad. Nobody, but nobody, is saying that things are the best they have ever been or that they ever will be as good as they were. As much as anything else, it is this death of optimism that is killing America.

  17. Hedge funds and other large funds drive the market. They make money when stocks, commodities, etc go up or down by either going long or selling short. Going long is “buying low, selling high”. Going short (through options) is “selling high then buying low”.

  18. Just in case we needed an example, under the heading “Wall Street Bounces on Fed Decision” on Yahoo Finance right now is an AP story that begins: “Wall Street searched for direction Tuesday after the Federal Reserve disappointed investors by maintaining inflation fighting as its highest priority although credit has become tighter for consumers and businesses.” Apparently, all those “disappointed investors” ran out and bought stocks, causing the market to bounce.

    What really happened is that the initial reaction was negative (which the story picked up), but the market then did bounce, which the headline writer (who came along later), picked up. Useless.

  19. The AP’s propaganda is never useless. Weak perhaps, but not useless.

  20. Stock market analysts are a bit like Darwinists – they look at stuff after it’s happened and then come up with a story to explain why….it can be hilarious if you attempt to rationalize all the stories.

    But, if history means anything at all, then the safest place for your money, *in the long term*, is the U.S. stock market. Plainly, diversification is good because none of us knows the future. But putting the money in the mattress because all those nasty hedge funds are manipulating the market for their own ends will make you poor and bitter. While the evidence is really clear that investing in the American economy will make you wealthier, and (presumably) happier.

  21. International Money markets also produce results. Look at George Soros. Not as popular as the stock market though. More restricted.

  22. Consider today’s drudge headline:

    “The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.” …

    “Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.”… “Beijing had the power to set off a dollar collapse if it choose to do so.” … “foreign control over 44pc of the US national debt had left America acutely vulnerable.”

    In #14, Oldflyer comments, “people all over the world own our national debt. When I was a kid I owned part of it in the form of War Bonds.”. I agree with Oldflyer that that would not be a problem in general. However, when other governments have accumulated vast dollar reserves AND have direct control over a large portion of the national debt – when it is not individuals but unfriendly governments themselves – then we have a national security risk. I think the scope of this risk makes uncontrolled illegal immigration on our southern borders look as dangerous as a mosquito.

  23. “As much as anything else, it is this death of optimism that is killing America.”

    – So right, DQ. This should be any Republican candidate’s campaign slogan.

    As several pundits have noted, bold headlines on the stockmarket’s fall, barely a few lines devoted to the rebound. The MSM has simply become a propaganda outlet for the Left.

  24. Danny and DQ, I agree. Completely. Let me repeat DQ’s phrase again:

    “As much as anything else, it is this death of optimism that is killing America.”

    Where did the can-do spirit go? Where did the optimism go? We should admit the problems that exist, sure, but there is a quality of endless complaining and whining, fear-mongering and arguing and quibbling for meaningless tiny advantages… all things that we should reject. We’re a Show-Me nation. A can-do nation. We see a problem, we fix it, breaking a few eggs along the way, but then we fix those too, eventually. But we focus on getting the damn job done, and done well and proudly. That is, we used to be.

  25. Ha..Ha…Ha….a year later what are you MBA’s saying now.

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