Stocks go up, go down: does it really mean anything?
An investor asked God, “Is the stock market an intrinsically woven part of the universe You created?”
And God said, “Only if you believe I wanted to create a new sucker every minute.”
In the wake of the Brexit vote, and in many other cases where an event is said to be “negative,” stocks plummet. Major media promote these downward actions as evidence that “something bad has happened,” and the “economy is suffering” because of it.
On the other hand, if the general trend of the stock market is up, and “new highs” are reached, media claim the economy is “recovering” or “in good shape,” or “booming.”
Indeed, the movements of the market are used as critiques of political and economic choices and happenings. “X policy-move shouldn’t have been taken, because look at what the market reaction was.”
We need to examine all this blather.
First of all, and this is the big one: what is the connection of the stock market to the companies whose stocks are being traded?
Is the whole landscape of buying and selling stocks intimately tied to those companies?
What is really going on?
Many people believe the sale of stock benefits a company. This is true when a privately held company goes public by issuing stock in what’s called an initial public offering (IPO). During the limited time period of the IPO, money from the sale of stock does go back to the company issuing it, and that money can used for company growth. Yes.
Later, the company can issue more stock in what’s called a follow-on offering, and then, too, money from the sale of the stock goes back to the company.
But…by far the greatest amount of activity in the stock market is the simple buying and selling of shares…and none of the ensuing profits and losses accrue to the companies whose shares are being traded. It’s a pure casino operation.
***This casino operation does nothing to benefit the companies in the way of adding cash to their assets.
The casino is all about trading, perception, prediction (and of course, price manipulation). “What do I think other people are thinking about Stock Z, and what should my response be? Should I buy Stock Z, should I sell it short (bet it goes down)?”
The ups and downs of stock prices have nothing to do with the “health of the economy,” whatever that is supposed to mean. The ups and downs occur according to what investors are willing to pay for a stock or what they are willing to sell it for. In the casino.
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None of the action really reflects the condition of the companies whose stocks are for sale. None of the money from buying and selling reverts to the companies. It’s all gambling, all the time. That’s all.
If a company reports a loss of profits for the current year, yes, its stock price may go down. But that merely means stock investors believe it should go down and are willing to pay less for the stock (at the moment). However, the price of the stock might go up, even on the heels of a loss of profits. Or the price could stay the same. Whatever the price does has nothing to do with the condition of the company. It only reflects what casino players believe, because they are the buyers and sellers.
This is hard for some people to understand. They want to imagine that the stock market directly reflects the condition of the companies that issue stock. Wrong.
The market reflects perception of the bettors, plus manipulation (which isn’t the subject of this article).
“Let’s see. I think that other people think that I think stock A is going to go up. They’ll buy it, so I guess I should buy it…”
Perception of other people’s possible perception. That’s the market.
Of course, much of the trading these days is done automatically, by computers belonging to large investment funds. But that doesn’t change the basic reality—the buying and selling are removed from the companies whose stocks are being passed back and forth. Therefore, whether the prices go up or down has nothing to do with the financial health of those companies or the economy in general.
This stock market casino operation, its ebbs and flows, are fodder for media, who pretend the latest down or up is “how the overall economy is reacting to world events.” This is nonsense.
The overall economy does not equal the performance of the stock market. The performance of the market doesn’t equal the state of the overall economy.
Consider what can happen to a large retirement pension fund. The fund takes in money from employees. It will later pay back that money, plus “bonuses.” Meanwhile, the pension fund invests a great of the money it is holding in the stock market. It buys a variety of stocks and sells them and buys them and sells them. So if those stocks plummet and stay down, and the pension fund isn’t willing to ride out the storm in hopes that the fall will eventually turn into a rise, the pension fund will sell off those stocks and end up losing much money. It gambled in the casino with other people’s money, and it lost.
But even here, the basis of the loss was an incorrect perception/prediction about what was going to happen in the casino. It wasn’t about actualities of the economy.
So when “titans of finance” and media analysts blather about how, for example, Brexit caused a sudden drop in the market, and how this is an indicator of the sudden negative state of the economy, they’re blowing smoke. Assuming the titans didn’t manipulate the market to make it fall in the first place (a risky assumption), in order to fabricate a “gloomy outlook,” the plummeting market says nothing about the economy, any more than an analysis of falling profits in a Vegas casino says anything about the general state of the US economy.
“Stocks fell today on reports of rising oil prices…”
One, the falling stock prices have no direct impact on the companies whose stocks are being traded.
And two, falling stock prices have nothing to do with the price of oil. They might be connected to gamblers’ perceptions of what rising oil prices mean (at the moment), but that’s all.
Let me give you a loose analogy. Let’s say, in a casino, there is a game called One to Ten. Depending on the flow of business, there are usually about 1000 people in a room in Vegas, and each person has to bet on a number between one and ten. You’re one of those people. When all bets are in, if you bet on the number most other people bet on, you’ll win 50 cents for every dollar you bet. So you think, “Most people will pick a number in middle. Five. So I’ll bet on five, too.” You do. And indeed, this time 350 people bet on five. The other 650 people bet on various numbers, but no other number between one and ten garnered 350 bettors. So you won. This time.
While this little operation was going on, media anchors were stationed around the room. They were quickly broadcasting tidbits about floods, hurricanes, military build-ups, political campaigns, polls, celebrity arrests, Hollywood box office receipts, new genetic research, a terror attack in Pakistan, fracking, school picnics, climate change, a man who ate 300 hot dogs in two hours, and so on. And these anchors are claiming that the result of the bet you’re involved in is definitely connected to these events. They’re insisting on it.
That’s a picture of the day-to-day stock market plus what media are spreading around about the market.
If it’s a measure of how the world is going, I’m selling orange groves on Saturn.
Here’s a final analogy. Bird droppings. You’re an investor, and you see there’s a trading market in bird droppings. You decide to put your money into this market.
The price of droppings goes up. You’re doing well.
One day, sitting at your lap-top in the back yard, you think, “Wait. These droppings are worthless. Of course, that doesn’t matter, but suppose a lot of other investors think that same thought I’m thinking right now. The price would go down. Are a lot of other people thinking my thought right now? Or are they going their merry way, buying more droppings because they see the price going up? Which is it?”
All around the world, other investors in bird droppings are having the same monologues with themselves.
Now, if enough of those people don’t care about the intrinsic worth of droppings, the market will hold. But if enough of them are worrying about what other investors might be thinking, they will sell their droppings, and the price will go down.
Prediction. Perception. Speculation about what other people are predicting and perceiving.
A share of IBM, once it has been unhooked from an IPO or a follow-on offering, has no more intrinsic worth than a package of traded bird droppings. People buy and sell that share based on what other investors might or might not be thinking about it.
“Power outages in three Eastern states have resulted in a severe depression of the bird dropping market. Analysts are worried and gloomy…”
They’re worried and gloomy because they’re supposed to connect world events to the market, in order to pick up their paychecks, and “worried and gloomy” is the easiest reaction to have.
If they admitted the power outages had no relation to, ahem, intrinsically worthless bird droppings, they might end up pumping gas in Death Valley or selling canned heat in the Sahara desert.
The author of three explosive collections, THE MATRIX REVEALED, EXIT FROM THE MATRIX, and POWER OUTSIDE THE MATRIX, Jon was a candidate for a US Congressional seat in the 29th District of California. He maintains a consulting practice for private clients, the purpose of which is the expansion of personal creative power. Nominated for a Pulitzer Prize, he has worked as an investigative reporter for 30 years, writing articles on politics, medicine, and health for CBS Healthwatch, LA Weekly, Spin Magazine, Stern, and other newspapers and magazines in the US and Europe. Jon has delivered lectures and seminars on global politics, health, logic, and creative power to audiences around the world. You can sign up for his free NoMoreFakeNews emails here or his free OutsideTheRealityMachine emails here.