With the current economic fiasco slowly unfolding around the world, what is needed is the perspective and understanding to hepl the uninitiated cut through all of the fog and misinformation surrounding the news with which we are inundated on a daily basis. So this post is to offer just that - the quick and dirty truth to what is going on.
The First Rule to remember is this: The daily ups and downs of "the market" have absolutely nothing to do with he economic health of the country or the world. The stock markets or commodities markets are merely a vast money making machine used to "score" monies from the many (us) to the few (insiders) - period. It has absolutely nothing to do with raising capital or any other honorable endeavour. Anyone who tells you otherwise is either lying or stupid or more likely both. This concept was more eloquently stated by Dallas Mavericks owner Mark Cuban in this interview. I know little of Mr. Cuban, but when a man is right, he's right. I have know and understood this for some time, so it isn't an idea I stole from him. It is only the fusillade of "business news" which overwhelms us every day which keep our common sense at bay and tries to keep us in the game. Just think of the excitement around a "hot" craps table, which only serves to keep the other players putting down their chips to understand this media and Wall Street driven set up.
The Second Rule (or maybe corollary to the first) is this: Once Upon A Time, businesses were run by people who cared about their long-term success, the first rule did not apply. Stock prices (and thus the markets) were driven by a clear understanding of long term stable growth. Great investors got wealthy by picking, buying, and holding good, sound stocks and holding them long term. Stock prices were based on that expectation - not on whether they could be "flipped" in a day - or minute - for a quick profit. As a result, the aggregate stock prices, reflected as "the market" was a relatively accurate reflection of the health of the business and industrial base - and the economy at large. No Longer.
The Third Rule is: Since the markets are now truly disconnected from the economy at large, they are able to assume any value. These values have no relationship to reality at all. As a result, over a period of years they have assumed astronomical values, as every trader was constantly on the prowl for someone to whom he could "flip" a stock for a quick turn. Like a mad bidding war at an auction, the items were selling for many many times more than they were worth. Now we find ourselves in a situation where we have a worldwide work of fiction in place of sound economies. This is why the markets, and the economic news lurches from one crisis to another - because there is no truth to any of it, it is subject to the least rumour or hint or tease of information.
The Fourth Rule is: Until the fiction of the current stock and investment market are replaced by sound economic forces, policies, and information, nothing else will matter. That means that all of the crap you read about "euro-zone bailouts" or stimulus, or bull markets, or "opportunities" is just that - crap, feces, poop, choose your personal favorite fecal slang. That is because until then, capital is just "chasing the flip" for lack of a better term. And the misallocation of capital is the prime issue behind the funk we are in and until that is fixed, nothing else matters. Think of this as a deathly sick hospital patient, whose treatment options are all but gone. All that can be done is to "make them comfortable" and hope against hope that they will recover. That's where we are now, in a worldwide, government-driven quest to "make us comfortable". That's because that's all there is for them to do. When the markets slow down and the prices and volumes stabilize, then and only then can any economic health begin to take hold.
Well, there you have it. The First Four concepts in my version of Real Econ 101.