Topic: Economics
Why Wall Street Really Matters "Main Street over Wall Street" is what the President and his advisors are telling us is best. Wall Street is the barometer of our economic future. It should not be ignored.by EJ Moosa
(libertarian)
Monday, February 23, 2009
During the campaign for the presidency, Barack Obama and his advisors emphasized Main Street over Wall Street. Mr. Obama has also recently stated in press conferences that he is not concerned with the performance of Wall Street. Mr. Obama does not understand that Main Street and Wall Street run parallel routes in our society. Main Street and Wall Street always end in the same neighborhood.
To understand what Wall Street is telling us, Obama needs to understand what Wall Street really represents. I am not speaking of those nefarious investment products such as derivatives, mutual funds comprised of other mutual funds, or any other exotic investment mixes. I am speaking as specifically as I can about stocks in companies such as GE, Home Depot, Lowes, Apple, Wal-mart and others.
The price that people are willing to pay for a stock is based in a large part on the future earnings potential of that stock. If the future profits of that stock are less than the current price, the theory holds that the price will decline. If the future profits of that stock are greater than the current price, then people are willing to purchase that stock and hope to earn the difference as a profit.
For example, General Electric is trading under $9 per share. So, today, the expectation is that GE will not earn more than $9 in profits in today's dollars in the future. During the last year, GE traded above $38. For GE, the prospects are one-fourth of what they had been.
Since Obama won the nomination of the Democratic Party, we have effectively seen the prospects of the future earnings potential in America nearly halved. The plan to help out Main Street is not helping Wall Street. Leaders can ignore Wall Street for a short time, but they cannot ignore Wall Street indefinitely. Both streets end up at the same destination in the long run.
One can argue about Wall Street and the malfeasance that has occurred. But Wall Street is the best barometer we have of the future economic prospects of our nation. And that barometer is telling us that the future prospects are getting worse, not better. The malfeasance occurred around the edges of Wall Street, and has tainted it to be sure. But the core of Wall Street is based on solid principles. Investment on Wall Street is investment in America.
Perhaps it is unfair to imagine that national leadership that has never run a business enterprise will understand what Wall Street means to America, other than a source of tax revenue, and a place to blame the ills of society upon. It is unfair to imagine that leadership that has gotten it's investment via forced taxation rather than voluntary investors would understand how it is different. Wall Street is more than high priced brokers and speculators. It is the sum of all of us who have invested here, in our brokerage accounts, in our savings accounts, our retirement accounts, and our health savings accounts. It is what we have invested in hard assets for the future. Wall Street is thousands of investors determining where to invest rather than 100 senators and 435 congressmen being encouraged by one president.
What Wall Street is telling us is that our future prospects are just over half of what it was last summer, based on the current direction. That is not the change we needed. The change we need is to alter this path we are on. Knowing when to quit is what separates those that are successful from those that fail. Obama should quit this path before our economic prospects are gone.
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Can you please provide some specifics in your article. as to what measures you are anxiously awaiting that'll boost Wall Street?
You say Wall Street is the barometer of Main Street. Let's take this as a given for a moment, then what do you propose should be done when barometer reading is showing low pressure - fix the reading (Dow), create an artificial high pressure around the instrument (pump money into WS) or embark on a healing process for the pressure conditions (MS) to build back up?
Since 2001, everything was done right for the Wall Street to rally - low interest rates, nonregulation, offshoring, managing dollar at a height - and indeed it did rally and rally big - But was it really reflecting strength on Main Street? If it did, we wouldn't have this crisis, right? Your arguments would imply that upto 2008 the previous Govt actually did a Great job (since the barometer showed such a great surge!).
Some specifics please that you are pushing for to get the stockmarket up.
There are always two ways to go high, one is building the staircase (or airplane, if you please), the other is Dope. I too have money in stocks but I don't want my 401K to "recover" on any dope handed out to WS.
First, eliminate the "Mark to Market Rule". This rule only allows companies to value assets at the last reported trade, and not as the sum of future cash flows(an alternate method of valuation). This would cost nothing, can be implemented immediately, and would have immediate results. Google "Mark to Market" and read what Newt Gingrich and others have written on this topic.
Second, eliminate the scheduled increase in minimum wage set for July 2009.See this article: http://www.nolanchart.com/article5985.html
If the minimum wage increase is implemented, many small businesses will have had to endure over a 40% increase in labor costs. Were this to be a 40% increase in fuel costs, we would have already heard the scream.
Third, if the objective is stimulus, then implement a Federal tax credit for all of those with Social Security Numbers. Allow families to use that credit as they see fit. We do not need additional levels of government administering any more programs.
Fourth, allow inefficient businesses to fail. They are deflating the earnings of efficient businesses that must continue to compete with them.
Posted By: Jahfre Fire Eater
Date: 2009-02-24 18:24:19
Hi EJ,
I'm not going to bust you over the barometer because I took it as symbolic of a gauge, not a metaphor.
I will attempt a shallow metaphor by describing the stock market as a tachometer, or maybe as a pressure gauge on a main coolant pump at a nuclear reactor plant.
Any way you measure it our economy has been jacked up on government steroids for decades. Over-revved, over extended and over heated on purpose, for political gain. Only an idiot would doubt Obama will continue this trend. The fool.
I agree with you about the stimulus plan not helping Wall St. Setting policy in support of moral hazzard is never going to help any situation. The stock market decline is the only help Wall St. needs. It needs to lay off the juice, it needs price to reflect value, rather than reflecting wild speculation.
I expect the DOW to drop by 50% from where it is today, or more, before the P/E ratio indicates traders are interested in value, not speculation. The DOW is an elastic yard stick. My guess about a bottom is no better than anyone else's but my stipulation is that it is measured from the same DOW listings as today.
The only question that depends on Obama's administration is if we go there fast, slow or directly. Personally I'm hoping for FAST so I'll still be young enough to recover once the government has milked us dry or just plain enslaved our labor with debt and protectionism.
I see Obama as an intelligent fool. He puts a lot of mental energy into his foolish plans and he really believes with his hand on the wheel and foot on the pedal he can drive us out of danger.
Some might say Obama merely exudes a confidence and competence that offend me and paint me as jealous. Others might say Obama is arrogant and evil and paint me as naive.
I call Obama the fool because he didn't notice that this economy went over a cliff and Bush handed him the wheel half way down. His only plan is cartoonish. He's frantically rolling down the window so he can toss money out to cushion the landing...and it flutters away on the breeze by the cubic yard. Wait till he looks in the back seat and sees the vehicle was vandalized, stripped bare from his seat back. The only money he has to toss out is credit....that isn't a cushion, that's a pungi stick.
I'll never under estimate the "luck of the fool ." Maybe a war will spring up and save his legacy....hmmm, it's happened before. FDR's only problem was he waited a decade too long to start building tanks. I don't think it will take President Obama half that long.
Thanks for the comments. I won't disagree with much of what you say. But I will take issue that our economy has been jacked up for decades.
Corporate tax rates were well over 50% and higher up through the 1980's. Lowering tax rates improved the economic prospects for all. We all hear about the individual tax rates and what Reagan did, but it seems to be forgotten that corporate tax rates were so high that most businesses today could not even exist in that scenario.
We also forget about the massive deregulation we have had in industries ranging from Telecommunications to Wall Street to Trucking to the Airlines to Banking to you name it. Government controlled it, government told you what you could charge. Government told you if you could expand.
So, in my opinion, we have never had a truly deregulated environment. But, instead of being happy with the progress we had made, the government wanted to eek out that little bit extra by juicing the housing market so that they could take credit for how much better they made things in America because EVERYONE could afford a house.
I would not label Obama an intelligent fool. He is an intelligent Marxist, and he understands language well enough to know that he has to lead us down the path, until we reach the point of no return. Punitive tax rates, unrealistic expectations for what government will do for you, and the need for additional power to make that happen, along with destroying private free enterprise will get us down that path faster, as you expressed.
Obama did not get where he is on his own. Soros and others are likely to be still pulling the strings of this gifted orator. Obama may not know it, but then again he may not care. Only time will tell for certain.
Thanks. I agree with some of your ideas, and some not fully. You have a good argument against the "Mark to Market" rule for preparing Bank balance sheets. However, it still needs to be mandated for the purpose of calculating a Bank's "bonusable profits". If the current market value of a Bank's assets is below their investment cost, then its management will have to take (or not take) profits accordingly. The Bank might not be planning to hold such assets forever for all their future cash flows and the market value might not have recovered upto the point of their sale.
I see the high minimum wage as a dampner to economic activity as well. Manual labor is so expensive that one ends up doing oneself many things for which external help could have been sourced if only the rates were reasonable. From gardening to plumbing to what have you.
More tax breaks are just another way of making available liquidity in the market. But without sufficient ideas out there for investment the additional liquidity goes right into stockmarket, commodity and property speculation. This is exactly what happened through the early 2000s after the dot-com bust. Might as well, tighten tax loopholes, collect more and investment in social sector that is crumbling - from schools to roads to bridges.
Like most people, I do agree with "let inefficient businesses fail". But also be ready to make exception where an entire industry is getting wiped out due to sudden plummet in its demand (due to the economy suddenly getting off steroids) - in such scenarios the Govt can help them merge and downsize to the New Economic Reality. I think this is the path Obama will take. Of course, an industry that has fully outlived its utility to society cannot be saved at all.
BUT Wall Street expects FULL Bailouts. When Obama refuses, market slumps: Like every dose of fresh dope that the addict is denied, brings him further down to the natural equlibrium. I think your indictment of Obama on the basis of market going down is not fair. He is only letting it correct, I would have expected a backlash from true freemarketers if he did the reverse: Pumped unfettered liquidity into the market, if he did Full-on Banking bailouts by buying their junk at their "face" values and made them artificially go up on fresh Dope.
Who exactly is Wall Street in your response? Competitors of GM and Chrysler do not want bailouts for their competitors. Those that have selected the right stocks to be in do not want the competitors of those companies to have bailouts. People who "short the market" do not want bailouts.
Second, the market\'s prospects are 1/2 of what they were, with the bailouts. Stocks even in healthy, profitable companies have fallen despite the bailouts.
The only people that want the bailouts are those that are going to lose their jobs, those that have invested in the companies that take the bailouts(and even that is not 100%), and the politicians who want to say that they have helped save jobs and kept these businesses in business.
The automotive industry has been in trouble for decades. Ford, GM, and Chrysler were all way down in price before the sudden slowdown in sales.
Please let me know how you define "Wall Street". It will make my understanding of your position much better.
Posted By: Jahfre Fire Eater
Date: 2009-02-25 06:30:39
Hi EJ,
I won't try too hard to defend my opinion here except to specify that I consider the first injection of government steroids to be President Nixon's closing the gold window. Removing all illusions that our currency was tied to a tangible asset and replacing that with nothing but faith is where I my "decades" statement comes from.
Marxist/Fool, tomato/tomahhto :-) my characterization of Obama as the fool certainly is not an attempt to close the topic. There are many ways of looking at foolishness. Believing that proven bad policy will suddenly become effective and constructive policy is foolish, regardless of the political paradigm from which the policy arises.
One of the things I see many people do is to believe that Obama's goal is to save the economy, but that his methodology for doing so is flawed. I would like to challenge those who belive so, to ask themselves what if the goal was merely to break America so it can be rebuilt to their liking?
What steps would need to be done to strip the assets from all that have them?
What steps would need to be done to get government cotnrol of private business without firing a single shot?
What can be done to convince people that capitalism was the cause of their pain, and that government could fix it?
What can be done to give people housing they need despite their ability to pay for it?
If it was YOUR objective and goal to destroy our way of life, what would YOU do?
If that was the objective, and to get as far along that path as possible, I would like to suggest getting control of banking was a great first step.
Now we just need to collect all the guns in the hands of private citizens so we can control the backlash. Eric Holder is capable of just that.
Posted By: Jahfre Fire Eater
Date: 2009-02-25 08:35:15
Well, I never claim to be the brightest or most inventive guy. So, if it was my objective to destroy our way of life I would follow Bin Laden's example. As I pointed out in my article, "The War on Terror is Over!"
Bin Laden didn't have to control our banks to accomplish this. All he had to do was give our government justification for doing so. If he could provide justification that would get the American people behind the war on terror in a BIG way, he knew the rest would follow. Why fight an enemy when you can easily fool them into self-destruction? He has played our leaders, media and the general public like a violin because he knows how irrational responses follow from fear.
I don't think any of our leaders have the goal of destroying our nation. I just think that will be the ultimate consequence of their belief in destructive policies in response to Bin Laden tactics. Again, the word "fool" is hard to avoid when pointing out how our country is doing exactly what Russia did when Bin Laden pulled the same trick on them. These people act as if they were completely asleep during the 70's and 80's. Or else they just enjoy repeating documented mistakes, with GUSTO!
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