Tuesday, October 22, 2013

An Inconvenient Truth - To fix the economy we should shutdown the stock market

I'll get to the subject in a second.  First, a little primer on the lunacy that has overtaken the stock market.  Today the delayed September jobs report was far weaker than expected with just 145,000 jobs created (mostly temporary, trucking and sales).  HOWEVER, the stock market read that as "the Fed can't cut off the juice until March so RALLY ON!!!".  Then at 10am a better than expected construction number came out and that sent the computers into an absolute frenzy!  So bad news - buy, good news - buy, no news - buy.....

I've seen this play out before in 1999 and 2007 and I think we remember what happened in 2000 and 2008.  This will not end well, but it's probably a 2014 story.

This actually leads me to my original idea for today's post.  I'll preface this by saying that my theory could never, ever be put into practice because there are too many people that make too much money off the stock market to abandon it.

However, I believe that it is true that in order to fix our economy we should close our stock market indefinitely.

This seems counter intuitive when you hear every day (as you will throughout the day today) that the "STOCKS SURGE TO NEW RECORD HIGHS" because of X, Y or Z.

However, the great untold story of this bull run is not that it's Fed driven (that's pretty well known at this point) or that it's the most hated rally ever (also well known) but rather that any growth in earnings has come almost exclusively from cost cutting for four years. Sales growth has been almost nonexistent for many segments of the economy but lower borrowing costs and lower labor costs have allowed companies to continue to post stronger earnings (although that trend is faltering in the current quarter).

So, why does this matter?  Well, if Microsoft really wanted to compete with Google they'd be hiring 10,000 new employees to work on new projects, instead they sit on piles of cash.  Apple could be hiring engineers to build the next great ithingy, but instead the sit on mountains of cash.  This is basically the dilemma for every major global company today.  If you invest in the future, your short-term results will suffer because your revenues are flat to declining.  If you defer investing in the future you are rewarded every 3 months with a rising stock price.  What's a CEO to do?

In an ideal world we'd take every company in the world "private" overnight by eliminating daily trading of stocks.  This would enable companies to act like private companies and make smart, strategic long-term decisions.  Think about the difference in the way Wegman's is run versus Walmart - Wegman's invests in it's employees and while this is expensive over the long-term this leads to a better experience for the customer and the employee.  However, Walmart can't make that same commitment because they need to show earnings growth every 3 months.

If the stock market took a 10 year breather we could allow companies to think strategically once again.  However, this is just a theoretical exercise because it could never happen in reality :(


1 comment:

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