The Stock Market Is Not The Economy
Europe is lost, America lost, London lost
Still we are clamouring victory
All that is meaningless rules
We have learned nothing from history
The people are dead in their lifetimes
Dazed in the shine of the streets
But look how the traffic’s still moving
System’s too slick to stop working
Business is good, and there’s bands every night in the pubs
And there’s two for one drinks in the clubs
And we scrubbed up well
Washed off the work and the stress
And now all we want’s some excess
Better yet, a night to remember that we’ll soon forget
All of the blood that was bled for these cities to grow
All of the bodies that fell
The roots that were dug from the earth
So these games could be played
I see it tonight in the stains on my hands
— Kate Tempest: Europe is Lost
I used to get stock options at work, and I used to watch the stock price. One thing I learned over the years was that the stock price of our company on a daily basis had very little to do with how the company was doing. Instead, it’s a reflection of the psychology of the investors.
After a good earnings call, the price would sometimes go down. After a bad earnings call, it would sometimes rise. Good news for one company can drive the stock price up or down for a different company entirely, based on how people guess it will impact their future.
Sometimes, activist investors push for changes which drop expenses in the short term with a very real impact to the future of the organization. These changes drive up prices as other optimistic investors follow the leaders.
Investors typically have no insight into internal politics. They know nothing about who are the low level leaders that get things done, or when those people leave. People are not cookie cutter drop in replacements. Existing employees have institutional knowledge as well as existing employee development can be lost.
The stock price will remain high as long as investors are optimistic.
When someone other than an economist talks about the economy, what they are often talking about is how they personally are doing. If your high paying tech job is doing well and your 401k is growing, then you likely believe the economy is doing well.
If you polled every American about the “economy”, you’ll likely find find that the number of people who are doing well right now is lower than it was last year.
Right now stock prices are at record highs while unemployment is up, the GDP is down, and the future of our country is uncertain. A second civil war seems like a real possibility to me.
Investors are optimistic anyways.
Why would that be?
I see a number of reasons.
- Investors have a very good reason to believe that the government will step in to prevent crashes.
https://www.washingtonpost.com/us-policy/2020/04/18/record-government-corporate-debt-risk-tipping-point-after-pandemic-passes/ 2. A large reduction in jobs that will not return is good for the bottom line of companies.
https://www.marketplace.org/2020/06/17/which-jobs-are-coming-back-first-which-may-never-return/ 3. COVID increased business for a number of tech giants that are favorites with investors.
https://www.washingtonpost.com/technology/2020/04/27/big-tech-coronavirus-winners/ 4. The government incentives investment in the stock market through IRAs and 401Ks, and penalizes people for access their own money when it’s needed in an emergency. 5. Politics has become a major money maker, funneling money away from other needs towards various industries which provide needed online infrastructure. 6. A failure of the government to support it’s own citizens in a time of need allows businesses to retain their workforce despite to the added health risk.
I don’t see how we can consider this a strong economy when the experiences of individual Americans are overwhelmingly negative and we cannot predict the human cost to businesses as key employees are lost.
If you are looking to provide a favorable life experience for as many individual Americans as you can, then our economic system provides perverse incentives.
We invest in companies that remove jobs through automation.
We reward companies for removing jobs.
Our government gives us tax breaks if we invest in them.
Our government penalizes us if we stop investing in them.
We allow people to create automated trading systems which use advanced algorithms to maximize return on investment through high frequency trading.
We fail to protect people from scams and predatory practices.
We don’t pay the people we depend on to support our way of life enough, while encouraging empire building.
We need to invest in people, not money.
We have learned nothing from history.