Tuesday, December 2, 2008
Less Than 50 Days And Counting
I listen to too much TV news, and I know it, but at least I am painting while I am listening, so it is not entirely a waste of my time. As I have commented before, the TV news programs on cable do not employ economists to host these shows and therefore we hear a lot of nonsense. It is nonsense in my opinion anyway. So, lets talk about the market and monetary policy for a moment.
The stock market took a big hit yesterday losing its most points in a single day. But the question to ask, is it the largest percentage drop in history? It really does not make any difference. The people that make a market in a given stock, means that they are offering stock and buying stock of those companies that they are making a market in. As sellers enter the market, the market maker lowers the bid price that they will pay for the stock. If there are more sellers than buyers the bid price at which the market maker will pay for your stock will continue to drop. When buyers enter the market in large numbers or more stock of a particular company is being bought than sold, the price of that stock goes back up. There are also investors selling short stock they do not have a position in. That means that the stock market rules permit an investor to sell shares of a company that they believe is priced too high and believe is going to go down in price. This aspect of selling short adds volatility to the market. When it appears that the market is going to go back up, the short sellers have to sell their short position, also known as covering their short position. All of this activity adds volatility to the stock market. The important thing to remember is that good companies get battered in the stock market during turbulent times, but they are still well run companies. There are a number of these companies out there. They do business around the world and provide excellent products and services the world over. When the economy gets back on track, these good companies will improve their share of their markets and return even better earnings than before the economic crisis which we now can officially call a recession. This blog is not for giving out advice about what to do with your money or investments. It is to discuss, through my 66 year old left-handed Jewish brain, what I see and make of things after a few years working with this stuff. Years ago, an older gentleman I knew said that during periods of stock market volatility, that you ride it out like a ping pong ball in a storm. There is a lot of bouncing around, but when the storm is over the ping pong ball is still there. There are good reasons to believe this is true.
Money and monetary policy. The U.S. dollar is still a very stable currency. Why? As a history student, I had this idea that to really understand an historical event, it was necessary to look at more than just the event itself. Let me try an example: Woodstock, the music event of the 1960’s. To just look at what took place on the few days at Woodstock without understanding the culture of the whole ‘60’s movement would not make much sense. The events leading up to Woodstock are as important in understanding Woodstock as Woodstock itself.
Now look at immigration to the United States and what do you see? People are still coming to this country and trying to get in any way they can. What does this all mean? Quite simply, the United States is still the place to be. When the flow of people starts the other way, then I think it is time to be worried. The political and military strength of the United States is what is ultimately behind the value of the U.S. dollar. Yes, the dollar goes up and down in value on the currency exchange markets, but these are fine tunings to current monetary conditions. No one is getting out of the U.S. dollar in any big way. The wealth of this country, both physical and intellectual is enough to cover the value of our currency. When you add in our political stability and our military strength, this country is a long long ways from being valued correctly in the markets. A lot a nonsense passes for knowledge, but do not be fooled, this country is coming out of this recession and help is less than 50 days away.