Sunday, April 5, 2009

Dow 7000, FTW!

Long time, no always sounds better in IMs than it does in a post. Anyway...a certain person who shall remain nameless pointed me in the direction of another person who shall NOT remain nameless, his name is "HowTheWorldWorks". OK...stop laughing, he's widely recognized as an expert debater...stop laughing, this is serious! Have you got that out of your system now? Good.

Now...I'm just a Z-list blogger, while he's debating with YouTube celebrities like The Amazing Atheist, and Thunderf00t...but, he's talking philosophy, economics, investing and politics. OK...he stuck body parts into a hornet's nest.

This one is a favorite of mine...simple, short, and so full of Epic Fail. So...where does the Fail Begin? First, he shows ignorance about the stock market, and the economy at about 0:01 in the clip. Sure, the Dow Jones Industrial Average of 30 stocks dropped below 7000. So, lets start at the beginning, the use of the Dow 30 was a bad choice, it's the most famous index, but not representative, but...either way, I'll give you, it was an ugly market.'re blaming Obama for that horrible market? If you are the genius debater you claim to be, then you would have realized that basing your opinion on the short term fluctuations of the market is pretty stupid.

First, we have to remember that, as Benjamin Graham said, "In the short-term, the market is a voting machine, but in the long run it is a weighing machine", what does that mean? The market is subject to short-term radical changes based on the mood of the participants (like a never-ending game of "American Idol"). I mean, really, was the NASDAQ worth something like 5000 points in 2000? No, it wasn't, we were sucked into the euphoria of the bubble and bought stocks at insane prices, like voting for them. But, in the long-run, a stock's value comes down to what it can earn for the shareholder, weighing their prospects as an investment.

In the current market, we're having a hard time determining the value of a stock, because, in many cases, determining the value of the underlying assets is impossible. At least, during the technology bubble, we could determine the value of a company (servers and offices had a value that could be determined), in this wreck, we have no way of determining the actual value of many of the most badly damaged companies. Remember, we had leverage on top of leverage, hedge funds that were levered up
(and operations that were effectively hedge funds), buying CDOs and CDSs and CDO squared (each of which already was levered), so a small drop in the value of the underlying asset becomes a massive drop in the value of the derivatives of it, which mostly wipes out the holders of the derivatives (the hedges and similar groups).

So, why did all this happen at that time? Why a stomach churning 25% drop in the S&P 500 Year-to-Date? Why not? I see absolutely no fundamental reason for the market to have been so high in 2007-8, since all the forces that have caused the 2007-2009 crash were active and visible during that time (although, the scale of the forces and the way they've formed a self-reinforcing recession/depression was not immediately obvious). It happened at that time, because that's when the mood struck the market to sell things, there may have been some catalyst that provoked it, but I will leave that argument to the historians.

Now, we've handled the first...say...five seconds of this video. Let's skip ahead to about 3:55 when we return to the adventures of Dow and Dumber. First, he says the drop is due to the massive spending by President Obama, whom he says has spent more money in the history of the world. Just stop there, he hasn't "spent" money, heck, he's barely had time to make plans to request to be allowed to spend money. Second, he says the stimulus is supposed to jump-start the Dow and boost the economy short-term, here, he seems to confuse the financial system, and the economic system, and while they are connected and they do affect each other, they are separate things (and frankly, the financial system deserves no stimulus). The stimulus plan's effect on share prices most likely won't be felt until companies start announcing contracts paid for by the plan, and yes, the plan takes time to go into effect. But it will be a more useful stimulus over the long-term than certain previous plans where the Treasury just sends out a check.

Now...when you wrote this, the Dow had just dipped below 7000. Now, we're over 8000, if I were stupid and deceptive, I'd argue that the 14% increase from the low was the result of the stimulus plan working. But I'm not stupid or deceptive. I notice you haven't commented about the Dow's level recently? (By the way, I put some money in my 401k on March 6, 2009, I'm happy with a swing like that, that's change I can believe in :-D)

I actually think we will be going lower again, though, but that's not because of President Obama's policies, things were set in motion years ago that would lead to this, even back in President Clinton's day with the Commodity Futures Modernization Act, a moribund SEC, OTS and CFTC. These things were all visible from 2006 or even before, but they only started to fall apart in 2007. Now, these problems in the financial system are dragging our economic system down. Good luck all, we'll need it.