Musings on the stock market and interest rates

Although I don't always see eye to eye with Jim Kunstler, I think he really hit on something in one of his posts earlier this month. In particular, this...

"In healthier times, finance was but one part of the economy, the means for raising capital investment to apply to productive activity. For the past two decades, we have allowed it to become an end in itself." Link.

Earlier this summer, as part of my ongoing work on my Business degree, I was required to take a couple of courses in finance. Those courses were a real eye-opener, to say the least. By the time the semester was over, my opinion of the modern finance world pretty much matched Mr. Kunstler's views above: somewhere along the way, companies changed their mission from that of making money by creating quality products for sale to customers, to making money by creating ephemeral on-paper "wealth" for their investors. It's to the point now where I'd have to say that for many companies, the product is no more than a secondary consideration - merely the means to accomplish their first priority of increasing their stock prices and thereby their ability to borrow and leverage. In other words, they are no longer in the business of selling things, they now are in the business of being in business, which is a totally different subject all together.

I think this obsession with stock prices has contributed much to the decline of quality in this country. In a business climate where a percentage point or two difference in profits can send your stock reeling one way or the other, the bottom line has become god. CEO's are now the untouchable high priesthood of this god. Want proof? Look at their salaries and pensions - and look at their severance packages when they fail to deliver the promised rains and bumper-crops. Where else on earth, except maybe politics, are people so richly rewarded for being failures?

So what do I think this means for those of us living mostly on the outside of the ongoing mass hallucination? Well, for one thing, higher prices and scarcity now and possibly for the foreseeable future as hallucinated wealth bubbles, like the sub-prime mortgage bubble, start to collapse one by one in a chain reaction. Companies are already beginning to fold as their paper wealth is decreased by stock price cuts to the point where they cannot service their own leveraged debts and therefore are force to admit they are insolvent. Fewer companies means fewer goods and services available, higher prices from reduced competition, fewer jobs to be had, and collateral damage via unpaid invoices to suppliers and other creditors. If you carefully sniff the air, you can probably already smell the scent of carrion wafting from the direction of the markets.

Unfortunately for us, we've allowed our country to become reliant upon these markets to tell us who we are. It drives everything these days, even interest rates. I know the Fed is supposed to control interest rates in order to control the economy, but this is not what I see happening now. If it were, the Fed would not be planning an interest rate cut next week for what appears to be the sole purpose of staunching heavy bleeding from the market. But they are, so I say that this cart-leading-the-horse is proof that things have gone too far and the stock market is now controlling interest rates by default. Put a big enough financial gun to the Fed's head, in other words, and interest rates will change. That is control, for all intents and purposes.

On a related note: if you've never really looked into what sort of "investments" are being made these days in the stock and commodities markets, you really should. If you have had little to no exposure to it before prepare to be a bit shocked and disillusioned. One of the ladies in my class said it well, I believe, when she exclaimed after our professor's lecture on short-selling that next time she got a hankering to go to Vegas, she'd simply get online and try a making few short sells. She felt this would give her just as much gambling thrill as the casinos, but require less hassle and expense for travel, and she wouldn't have to drag her unwilling husband along with her! (Yes, she was serious.)

Like gambling, the stock market is highly reactive to and even driven to a large extent by perceptions and magical thinking. Perception, while not always grounded in reality, is unfortunately a major component in speculative investment. A large part of the investment scene right now is rife with speculation investment in all its amazing permutations. This is worrisome because should perceptions change, speculation bubbles burst, and the stock market collapse, so will our economy. They have, in many important and frightening ways, apparently become one and the same.