Does a Rising Stock Market mean the Economy is Growing?
The Stock Market is NOT the Economy
The media likes to report on the Dow Jones Industrial Average. The average person knows little about the Dow Jones. The Dow Jones Industrial Average is just a market index of the performance of 30 top Publically Traded Corporations across several industries. It’s just an average.
The problem with using the Stock Market as a Gauge for recovery is it’s based not on real tangible assets it’s based on perception of assets in combination with earnings both potential and realized. The price of a stock is based on speculation as much as it is on any tangible factors.
Take a company’s assets, throw in earnings from prior years, add to this the perception of earnings moving forward and determine a price. This is why the market fluctuates so much. While a stock share is in fact ownership you can not just cash in your shares at the local company you have ownership in… you must sell them on the open market. Thus you must find a buyer willing to purchase at a price you believe represents worth. And if the buyer BELIEVES the stock has worth they will buy. If not they will not.
So the perception of profit is not the same as profit. Our economy is based on PERCEPTION as nearly every publically traded corporation is operating on a heavy debt load. This is what allows companies to have bad years (And borrow) and good years and (And Save). Unfortunately corporations generally do not save, they try to operate at a profit of course, but when they do not they just borrow more. Our entire economy is based on borrowing. And the grim economic reaper that has destroyed the financial system has also driven Corporate America into the ground.
NEW YORK – The stock market suffered its worst setback in more than 10 months as investors rejected President Barack Obama's plans to restrict big banks and earnings reports that just weren't good enough.
The Dow Jones industrial average had its fourth big drop in five trading days Friday, sliding 217 points. Over the past three days, the Dow lost 552 points, or 5.2 percent, and over the past five days, it fell 537 points, after gaining 115 points on Tuesday.
Market speculation does not create jobs. The average person may have money in the market through a 401K, IRA, or Mutual Fund, but most people are not active traders. The average person is so far in debt and makes so little they do not have money to trade.
So when the Media reports the Dow Jones has fallen or risen what does it really mean to the average person? Nothing.
Doom and gloom… sure it sounds bad. But the Stock Market is not a measure of anything more than perceived value. Hard assets like homes, factories, and equipment are still in place regardless of perceived value.
Unfortunately when the perception of Corporate America drops; the value of Corporate America drops and people panic. And this drop creates a climate of despair where companies are slow to higher and quick to shed employees. This drop is compounded by a system of perpetual debt. Eventually the cycle runs it’s course and the market crashes.
Any market that is based on speculation and perception backed by nothing more than enormous borrowing and debt is doomed to crash.
Our economy requires those assets to be productive; people must be working in order to sustain a standard of living. Unfortunately the Stock Market doesn’t measure hard assets nor does it measure productivity effectively.
A better indicator of the real economy is the monetary system itself. And ours is in serious trouble. Problems in our economy start and the top then work their way down to the people. Money is the “blood” of the economy. Think of our Monetary System as the “Brains”, and Corporations as the rest of the body. If the body is not functioning properly we can take action to fix it if we catch the problems early on, but if the brain is failing there is no way anything you do to treat bodily systems is going to make a difference.
Based on our Politicians continual denial of the Federal Reserves primary role in the destruction of the Economy you can expect the stock market will continue to fall. I fully expect a major crash within the next 3-5 years.
If only December 21, 2012 really happens… then it just won’t matter.
Have a great day!
Expect a Major Crash in the Stock Market
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