Wednesday, August 10, 2011

Thermostats or Thermometers ... My thoughts on the DOW, now!

A great friend taught me a very powerful analogy a few years ago about leaders when he taught me the difference in the role of a thermometer versus the role of a thermostat.   As I have watched this unfolding mess over the last few years and especially in the last few months, weeks, days and hours, I began to realize the massive swings and thus average down of the DJIA was, in reality, not the cause but the symptom.  Let me explain!

Most people, even if they pay any attention to the stock indexes, only react when the media creates a big hype on 200 point drop or a major event in the world, "caused xxxx to happen on Wall Street .." and we move on.  But when you look and seek to understand the many dots that comprise a portrait of the global economy, you begin to realize the real role of a major stock index to the economy; the same is true in the polar opposite direction for the value of gold pricing. 

The stock index swing, especially the big ones, and we are in the midst of some really big ones, is telling us that the index is the message and not the problem.  Most people, on the huge swings downward with retirements, investments, future linked to integratedly with those numbers, begin to view the Dow, S&P, DAX, CAC, FT and the other national major indexes as the problem. NOOOOOOOOOOOO!

The buying and selling of stock is not rocket science.  It is supply and demand pure and simple.  When investors are buying the market goes up and when they are selling the market goes down. Got it?  So why would an investor choose to sell an equity in a company?  They either need the money or they have lost confidence in the performance of the company or they have lost confidence in the business environment within which their company seeks to add value and create profit.  So the market index is only the MESSENGER of good or bad in the macro economy. 

Gold, the polar opposite, operates in the same logic. As gold price goes up, as it is jetting north now, it is because people, investors, have lost confidence in the macro environment, are selling off questionable investments in equity and either bank the proceeds or reinvest and invest in hard metals, especially gold, takes us back to the supply and demand principles.  So, therefore, from a global economic standpoint in which we all get to participate in one way or another,  when gold price goes up, stock prices are going down which means the confidence by the investor of equities has dissipated and people are trying to protect their future earning potential.  It is called desperation which is what the world is feeling even if that person does not actually own any equities.

So at the aggregate, which is where we are, the investing public has lost confidence in the national political leadership, called dysfunctional by many including me.  Investors are fearful, rightly so I believe, to be concerned but not panicked.  But panic it is for the scoreboard, the indexes plus CNN, MSNBC, blogs, the fringe nutcases that love to strike up the discordant sounds of fear and worry only stoke the fires of fear that are now gripping global markets.

So the thermostat, that which sets the temperature of the culture is, well broken. We call it Congress or the Presidency or the Fed or the whole lot of policy makers have become so polarized there seems to be a sense of "who cares" for it is so bad if we ignore it long enough, it will get better. It has to, right?  Thus, the stock indexes are the thermometers meaning they are only measuring the ambient temperature and they are telling us THE SYSTEM IS BROKEN ... FIX THIS, PLEASE!

The days ahead, I believe right now, will generally be worse and more fearsome than in the last few months. I have felt for three years the DOW was in a bubble and it is now correcting. I guess I was correct in  that belief but not proud of it by any means. 

I am still amazed that Congress is not showing any real sense of urgency and remaining on vacation. I sense the President is tired and realizes this thing is bigger and wider and deeper than he thought; again, look at the departure of the soldiers of his economic advisers leaving the ship beginning the Christin Roemer. Even Paul Volcker said it was just not worth it for he was not being used for his talents and capabilities and left. What a loss! 

We are in crisis but the only one I see taking command is the UK Prime Minister David Cameron with their issues, we created, in the UK.  I think our President and Congress should be watching the BBC and reading the Financial Times to see how the British are dealing, rightly, with their own crises.  I know you are tired of reading but I have had dozens of questions today from through the world asking my opinion of this situation so this is my rendering.  As I am wrapping this up, a great song I love to sing has a verse and chorus that sums it up I believe.

The song is titled: I KNOW WHO HOLDS TOMORROW:

I don’t know about tomorrow,
It may bring me poverty;
But the One who feeds the sparrow,
Is the One who stands by me.
And the path that be my portion
May be through the flame or flood
But His presence goes before me
And I’m covered with His blood
Many things about tomorrow
I don't seem to understand
But I know who holds tomorrow
And I know who holds my hand

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