Tuesday, December 10, 2013

What do stock market indices measure?

On both sides of the Atlantic, there is a tendency in the popular media to see stock indices (FTSE, S&P, Dow) as some indicator of the health of the economy or measure of our collective wealth.

But the implications can be misleading.

What's really being measured (and I leave out the tricky ways in which the individual stock prices are weighted in creating the index) is the current level of settlement between buyers and sellers.

Some will then extrapolate the index to value the entire market. But this is absurd, for if everyone was looking to sell and nobody wanted to buy, shares would be worth nothing. Conversely, if everyone wished to buy and nobody wanted to sell, the price would be pretty much limitless.

What stabilises the market is the degree of participation, and so we are also given figures on the volume of trading. But even this information is misleading, because thanks to computer-based high-speed buying and selling, and the huge amounts of almost interest-free money made available to banks to gamble with, the market may make us misread the shouting of a few for the murmurs of a crowd.

I've been on the loookout for evidence of what the rich are doing. Some say they are holding a great deal of cash - but then, they've captured most of it over the last 30 or 40 years anyway, as middle incomes stagnated but (the face value of) the economy grew.

Others think they're not trading stocks but simply holding - remember that after 1929, members of Chicago Stock Exchange pasted the walls with apparently worthless stock certificates, only to steam them off again five years later.

If you are truly wealthy, as I said recently, you needn't be concerned about buying and selling your shareholding, so long as you haven't borrowed  money to do it. That last is what stuffed the market in 1929 - a great banking crash - and we've had that again, but this time government have authorised unbelievable amounts of fiat money to rescue the perpetrators.

If, as it's said, 82% of individually-owned stocks are held by just 5% of the population, who also have lots of cash,bonds and real estate, then the only reason to sell is because you think you'll make a bit of a killing rebuying at bottom. But you don't have to do it.

Pension funds are in difficulties, but if they are not defined-benefit the pensioner bears the risk; and if they are, then it'll be what a shame, force majeure, you're not going to get what you thought. Even now, in the UK, the retirement age for state pensions and state-employee occupational schemes is being racked upward and calculations of benefits under the latter quietly rogered in ways the average worker can't understand (or is too busy to examine) until too late.

So it seems to me that the figures we need to watch are those relating to inequality, because of the threat to social cohesion when promises start to be broken and expectations disappointed. That's when we'll find out if we are truly "all in this together".

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A K Haart said...

"Others think they're not trading stocks but simply holding"

That may be so - just let the dividends roll in. Maybe they have gone back to basics - utilities, forestry, farmland, food, gold, property etc.

Paddington said...

As I've said many times, the current economic system has put so much wealth into the hands of a few that they simply cannot spend enough. That is the only reason why we haven't has massive inflation. But middle-class people are beginning to be really hurt by subtle price increases. In the US, the increases are medical care and education, and those are not subtle at all. If it really hits the fan, even the very rich will be hurt, as the infrastructire collapses.