Thursday, November 19, 2009

More on economic literacy, and the reality of the situation

Yaknow why I check the Dow every day?

To see which way the sheep are going to be running tomorrow, so I can avoid their trail of shit.

Just take a look at the mishmash of crap in this article from Bloomberg; actually explaining nothing, just kinda throwing random facts at the wall to see what sticks; and showing just how divorced from anything real or rational both market moves, and the people who predict and report on the market, really are.

The DJIA, and more generally the stock market, are NOT indicators for the health of our economy.

In fact, the New York Stock Exchange is not a rational equities market by any stretch of the imagination (and thus any indicator based on it, is even less reliable); and the DJIA isn't even a rational or reliable indicator it it's value.

What the market (and the Dow) are really about, is psychology. They've always been psychology. They always will be psychology.

"Market plunges 300 points in two days"... yeah... after climbing 500 points in 7....

Actually, today the market dropped 200 points, then came back up by a hundred for a net down (not actually a loss really) of 93. The "explanation" linked above shows what happens when you try to explain market pscyhology, as if it was rationally driven. You end up shoehorning data into your causality slot, whether it fits or not, just so you don't have to say "it's based on merest whim".

But there's a larger point there; that I think most people who derive the sum total of their financial knowledge from the major news media (meaning, sadly, most people) don't really see or understand.

"The Market" is not the economy, and the economy is not the market. They are correlated, but not directly.

You know what it takes to be successful in a speculative market?

Step 1: Do what the other guy is going to do before he even knows he's going to do it.

Step 2: Stop doing it, and reverse yourself, before the other guy stops

They call it being in front of the trend.

Successful (at least in the short term. In the long term... read this speech from Warren Buffet...) investors don't invest based on how they believe a company is doing; they invest based on how they think the public, the press, and the other players in the market will react to the data they receive about the company, AND the companies related to it

Let me explain that last bit. One company could be reporting "good numbers" but two other companies in "the sector" (other companies in the same industry) could report "bad numbers"; then every company in the whole sector will go down because of the publics perception of risk; even the company that reported good numbers.

Most people are not smart investors. That, in fact, is why speculative markets even exist.

I am making a distinction here. Speculating in a market does not make a market speculative. If that markets moves are clearly based on rational responses to reliable and relevant data, that is a rational market.

Rational markets, require that all (or at least the large majority of) participants be informed, rational actors.

The stock market in America today, is NOT a rational market.

That first presumption, that the market is populated with informed actors, is so obvious and false as to not really require any explanation.

Most people don't even know what the DJIA IS, or what it means; they only "know" that when it goes up "it's good" and when it goes down "it's bad" (which in and of itself isn't really true, or at least not necessarily).

The DJIA, or "the Dow" stands for the Dow Jones Industrial Average... only it isn't an average at all. It's the sum total of the weighted prices (it's corrected for stock splits and the like, and higher priced stocks are given more weight in the average than lower priced stocks, regardless of market capitalization) of 30 stocks, picked by the Dow Jones company. Those companies are changed "as market conditions warrant", and have changed many times over since the index was created in 1896. Not coincidentally, it was created by one of the founding publishers of the Wall Street Journal.

Here's a link to the current list:

I've explained this to literally hundreds of people, who either look at me like I was a green headed martian; or they simply don't believe me.

It is simply against all "common sense" to these people, that this magic number, which is seemingly so important, and is supposed to be reflective of the performance of our economy; is essentially arbitrary, and completely divorced from the actual performance of the economy, or even of the companies that make up the index themselves.

Yes, taken over a an extended period, the long term trends in the economy, and the long term trends in the Dow, tend to correlate; but on any given day... or even in any given year, the DJIA may be completely divorced from the economic reality of the nation as a whole.

In fact, it is right now.

"The Dow" briefly touched just under 14,000 in 2007, before plunging to under 7000 (6547 actually) in the early 2009... where it had last been in '97 (two weeks later is was back up another thousand points of course, and three months after that another thousand).

How about this one. Any idea what the last "worst crash ever" was, back in '87?

The DJIA dropped from it's then historical peak of 2709 to 1766... which is actually what the all time PEAK had been less than two years before in 1986. As it happens, we went back over 2662 by 1990.

Ok first of all, 2700 to 14,000 in 20 years... Huh... Yeah and in the BIG crash of '29 it was 380. Not 3800, 380... and over the course of 3 years it crashed all the way down to 42. Not 4200, not 420... 42 . The DJIA it didn't see 380 again until 1956, and didn't hit 1,000 til 1966.

Does anyone actually believe that in less than 80 years, our economy grew 33,333%

No, of course not.

Does anyone really think the economy lost 50% of its value in a little over a year, either in 87-88 or 2007-2009? Well, obviously the people in the market didn't, because in the '87-'89 crash the market was back above it's peak in two years; and here it is late November of 2009 (7 months from the low), and we're back up over 10,000.

Neither does the federal government; reporting essentially null growth nor loss, from the stock market peak in 2007 to today (actually they report 6% growth, but that's not in constant dollars).

But.. But... This is the worst economy since THE GREAT DEPRESSION!!!!

No it isn't.

Not even close.

It's not the worst economy... it's not even the worst stock market. In real, constant dollar terms (2000 indexed), we're down about 3% from our peak.

On a constant dollar basis, our GDP peaked in Q2 2008 at $13.4153 trillion.

As of Q3 reporting results, we're down 3.4% from that peak (projections for Q4 are all over the place so I'm ignoring them right now).

Ok, but it IS actually the biggest constant dollar percentage decline we've had since WW2 right? We haven't had a constant dollar decline bigger than a percent between then and now?

Well, not exactly... You see that 3.4% is from the peak to the today. If the Q4 predictions are anywhere near correct, the 2008 annual, to 2009 annual, will be a decline of just about 1% plus or minus a couple points.

So when was the last time the economy was this "bad"?

Try Q3 of 2006, which was at that time the all time historical high. Or if the Q4 projections are right, 2007, which was ALSO the all time historical high.

Actually... that's when we hit that 14,000 DJIA peak... And as it happens, with the DJIA hovering a little above 10,000 at the moment, we're right back where we were in 2006.

So, the economy is as "bad" as it was in 2006 or 2007... Which pretty much everyone at the time considered a huge boom...

In fact it WAS a huge boom. Our GDP made the biggest jump since the GDP has been recorded, of 11% in one year (remember, this is in adjusted constant dollars, not "inflated funny money").

Starting in q3 2006, we had a two year boom (actually a bubble) both in stocks, and in GDP; and now after a year of correcting, we're back exactly where we were from about 2002 through Q2 2006.

Not only are we not worse off than we were 10 or 20 years ago, we're far BETTER off.

In real dollar terms, our economy has doubled since 1989... pentupled since 1969...

Umm... Ok well... the dollar isn't worth what it was... Right?

Yeah, I'm talking about inflation adjusted dollars. That doesn't fly.

Umm... ok, but the GDP per capita has fallen so we're all poorer than we were right?

Nope. Not even close.

US population in 1989 was 247 million, with a constant dollar GDP of 7.030 trillion; or $28,462 per capita.

US population est. today is 305 million, with a constant dollar GDP of 13.1 trillion; or $42,951 per capita.

And, as I keep reminding you, this is all in constant dollars. That means it's adjusted for inflation.

In constant dollars, we have just about 1.5 times the GDP per capita we had in 1989

However, if you looked at the stock market, it's 5 times what it was in 1989...

Disconnect much?

Ok, but that's the economy as a whole, what about individuals?

Using purchasing power dollars (normalised for both wages and inflation) we've "only" improved about 30%, not the 50% GDP has; which means that the "average person" can buy 30% more for each hour of labor than he could in 1989.

Yes, it's not the 50% that we saw in per capita GDP, which means that yes, income disparity has increased somewhat.

Everybody got richer, but the rich got richer than the poor did.

Actually... that's mostly inaccurate too; because it was primarily investors who got richer; and the majority of investment capital comes from the middle class, through mutual funds and other retirement accounts; and from pension funds (which are primarily for who the press likes to call the "working class" as if nobody else worked).

Not exactly the "rich get richer, poor get poorer" narrative the left wants to portray, which is why they harp so much now on "growing income disparity"; while ignoring the fact that the poor are genuinely better off than they were, with more income, and more purchasing power than they had 20 years ago.

So yes, we've devalued the currency through inflation; but wage increases, and productivity gains, have MORE than compensated for that.

Basically, we've made every slice of the pie cost more, and you're getting a smaller percentage of the pie in every slice; but it's MUCH bigger pie, and you got a bigger raise than the cost per slice increased; so you can actually afford much more pie for every hour you work today than you did in 1989.

So, ignore "the Dow". It's basically pointless and meaningless as any real indicator of anything other than what a speculator should NOT be doing (i.e. he should be doing whatever the other guy ISN'T).

Ignore the geniuses who tell us that we've lost a third, or half, or two thirds, or whatever wild ass number they make up... of our purchasing power through fiat money.
Note: this is not to say that current and projected fiscal policy won't change that soon.

The reason we have been able to maintain, and actually increase purchasing power (and therefore standard of living), even with significant inflation; is that we have simultaneously both increased wages, and improved productivity.

If we continue on our current debt financing path, along with health care "reform" and other spending programs, and our current weak dollar fiscal policy, as the fedgov plans; we ARE going to see MASSIVE inflation, without compensating wage or productivity growth.

This inflation WILL cause a large decline in both purchasing power and GDP; resulting in real declines in standard of living and overall economic power of the nation. It will also force huge rises in interest rates, freezing credit markets, causing a great deal of economic contraction, or at best stagnation; and likely far more job losses.

Specie currency not only would not solve the main problem (growth, or the lack thereof, inflation, and deflation), it would make it worse.

Specie currency is NOT inherently table as so many people believe (against all evidence and logic. In fact the more evidence showing how unstable it is, the more they take that as evidence of its value, strengthening their conviction. It's because they fundamentally and to their core believe in the inherent value fallacy); it is simply more difficult for governments to arbitrarily manipulate.

Specie currency and eliminating the federal reserve, the usual prescription these people give, would solve the problem of the government manipulating the currency through fiscal policy, and no other; and induce MANY other problems.

If you really want to know how things are really going, look at REAL unemployment (those people who actually want a job, and are looking for one, but don't have one), constant dollar wages (or purchasing power dollars), and constant dollar GDP.

Unemployment... that's a tough one.

Is unemployment bad right now? Yes.

How bad historically?

We have no idea.

The way numbers have been collected and tabulated has changed so much over the years, and the data so manipulated by governments and those with an agenda on both sides, you can't trust any of it.

What we can say, is that we've lost maybe a 1-3 percentage points of purchasing power, and maybe 3 percent more of our population are our of work than they were two years ago, when we were at an all time historic peak, that just so happens to have been a speculative, inflationary, and insupportable bubble...

So we've corrected, and we're back to about the same as we were 3-5 years ago; which is better than it was 10 years ago, 20 years ago, or 50 years ago...

And that's not really that bad.