January 29, 2007

Wall Street Tackles the Mystery of the Good/Bad Thing

In one of the best movies ever made, Egon Spengler explains to his fellow Ghostbusters that they should not cross the streams when they’re shooting ghosts with those laser-fire-type things they carry on their backs.

Peter Venkman wonders: Why?

“It would be bad,” Spengler replies.

“OK, I’m a little fuzzy on this whole good/bad thing,” Venkman confesses. But once Spengler launches into an explanation of proton reversal or some such thing, Venkman wisely concludes that he really doesn’t need the details.

“That’s bad,” Venkman confirms, and with his summation indeed affirmed, the ghostbusting moves forward.

These guys would get along fabulously on Wall Street, where no one can keep straight what’s good and what’s bad. As the week of Jan. 22 concluded, stocks were down because of bad news. What bad news? Interest rates aren’t going to be cut, as had been previously expected.

Oh no! Why’s this?

Because the economy is growing faster than “previously thought.” (Do these people ever just wait and see?) The GDP is growing. Home sales are up. Orders on big-ticket manufacturing goods rose, especially for commercial aircraft. Earnings are good pretty much everywhere if your company isn’t named Ford.

Great news!

No! Horrible news! If the economy is good on its own, the Fed doesn’t need to cut interest rates, and if interest rates aren’t cut, investors are sad. So sad, that the Dow Jones industrial average fell 58.80, or 0.47 percent, to 12,453.76. The Standard & Poor's 500 index was down 5.15, or 0.36 percent, at 1,418.75, and the Nasdaq composite index fell 2.58, or 0.11 percent, to 2,431.66.

Remember those people who always tell you that investing is a long-term proposition that will succeed or fail based on the strength and viability of the companies in whom you invest? Well, the people on Wall Street don’t. Manufacturing orders up? Home sales up? Economic growth rocketing along?

Find me a ledge from which to leap!

Oh, and it gets worse. When the economy is growing really fast, the Fed starts getting nervous about inflation, and that’s when they usually raise interest rates. How is Mr. Wall Street going to deal with that?

Investing is a fairly simple proposition, unless you’re a professional investor. Because you, my friend, get paid to overthink everything. Manufacturing orders up? Is that good? I can’t decide! If I say it’s obviously good, like everyone else thinks, then what does anyone need an expert like me for? I have to explain to the masses that it’s really troubling!

If investors want to jump in and out of investments based on their inability to determine whether the day’s economic news is good or bad, fine by me. But maybe the rest of us should stop looking at movement in the markets as an indication of anything meaningful about the economy. Movement in the financial markets is driven by investment professionals, who know nothing about investing and even less about economics.

So how did they get there? Well, isn’t it obvious? No one would hire them to actually run a company. They don’t even know if orders are good or bad. They have to work somewhere. So have them stand around in New York throwing pieces of paper back and forth. They really can’t hurt anything doing that, and it doesn’t require them to understand anything. Which is good, because they don’t.

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