Or: the stock market is not the economy
For many years I was in sales. I had sales managers, regional managers, service managers, all sorts of managers. And all of these managers wanted one thing: MORE. Always more.
And every once in a a while I would ask “Why?” Why are we driven for ‘more’. Will there ever be ‘enough’?
At the beginning the need for ‘more’ was in order to make the company viable. Fair enough. There are certain economies and overhead that only make sense if certain sales objectives are reached. We could all work together for mutual benefit. If the company succeeded, we all succeeded.
However, the answer to my question eventually became ‘The shareholders need a better return on their investment’. Decisions were made with ROI (return on investment) as the prime objective. It became about greed. There would never be ‘enough’.
And I look at the stock market, and I see the same greed. The same always wanting ‘more’.
There is a common fallacy that a rising stock market is a good thing. That rising stock prices mean a good economy. Nothing could be further from the truth.
First, we need to look at the concept of ‘stocks’ and their intrinsic worth. Stocks are the basis of capitalism. The word capitalism is based on ‘capital’, which, in most cases is money.
When an entrepreneur has an idea, and wants to start some sort of a business, there are usually costs involved. If the entrepreneur doesn’t have the money to finance the business themselves, they have two options: borrow money, or find someone who has capital to invest in the new business.
Borrowing money is always an interesting proposition, because generally lenders will want you to prove that you don’t really need the money before they will lend it to you. But it is a very straightforward relationship. The new business owner borrows the money, and the banks or credit unions will charge interest based upon the perceived ‘risk’ of being able to get that money back.
The second option – finding someone with capital to invest – will involve the selling of ‘shares’ in the venture. A share is a portion of the business.
Now, in theory, shareholders share the risk of the business failing. That’s why they’re called ‘share’holders. Over the years, however, the word ‘shareholder’ has morphed into the more popular ‘stockholder’. But essentially they mean the same thing. (The etymology is interesting, because stocks are things that they used to use to use in village squares for holding criminals up for public embarrassment & humiliation. But I digress.)
If the business makes money, the shareholder will ‘share’ in the profits of the business. These are called dividends, and are paid out on the basis of the proportion of shares in the company that an individual owns. So, if there are 100 shares in a company, someone who owns 1 share would get 1/100th of the declared dividends. Sometimes the company won’t declare any dividends payable, and the money stays in the company to further fund the company.
(I’m not going to get into the different types of shares, such as Class A, Class B, voting, not voting, because that’s just too complicated, and essentially I am a very simple person.)
So, now, let’s look at the intrinsic value of shares. The intrinsic value of the share is the value of the company itself, plus the return on investment on the portion of the business you have bought that is paid out in dividends. That’s really it.
So, what is the stock market? The stock market (or ‘share market’ I think would be a better name) is where shares are bought and sold. Companies who have lots of assets and are making money and paying regular dividends will be more desirable, and therefore the price of a ‘share’ in the company would go up. Companies that are mismanaged or losing money would have the value of their shares go down. A company that is well managed and paying regular dividends would have a stable share price.
This is all very straightforward.
But now we come to a new paradigm: the concept of continually rising stock prices.
Many people invest in the stock (or share) market, not to get dividends, but to later sell the stocks when they are worth more. This is the world’s biggest Ponzi Scheme.
A Ponzi Scheme is a sales scam where money that is invested by newer investors is used to pay off earlier investors. It looks like the investment is sound, because those ‘already in’ are making money. Little do new investors know that it is their money that is being used to make the scheme look viable. The Ponzi Scheme fails when ultimately there aren’t enough new investors to continue paying off the older ones. The newest investors are left holding worthless assets.
And this is what the stock market has become. A big Ponzi Scheme. Not a place to ‘hold’ shares and share in the profits of the company, but a place for speculation. Mutual Funds are the worst offenders. Someone is getting the dividends from those stocks held in the mutual fund, but most of the sales literature on investing in a Mutual Fund is focused on the rising value on those stocks on the stock market.
Which takes us back to the ‘capitalists’ aspect of this whole thing.
Capitalists provide the ‘capital’ needed to run a business and in return get a share of the business. If the business succeeds, the value of the shares will go up, and the capitalist can get a return on their investment in the form of dividends, or sell the shares for a profit, with someone else making the investment in order to realize the dividends.
Who are capitalists? They’re the ones with money. And what do they want? More money. So the stock market rising is good for the capitalists. But not necessarily for everyone else. Don’t have money? The stock market rising or falling has absolutely NO influence on your daily life.
So why do we look at the stock market and think that the stock market rising or falling has any bearing on our daily quality of life? Beats me.
What does have an influence on your daily life? Lots of things. Interest rates. Tariffs. Unemployment figures. Productivity numbers. But these are NOT the stock market. Matter of fact, the stock market reacts inversely to a lot of things that are good for the ‘non-moneyed’ people, because it means that the non-moneyed people are benefiting, and it might mean the moneyed people can’t make as much money. The stock market continually going up is just a big confidence game.
One of the money making strategies that moneyed people (ie capitalists) use is to strip assets from a company and pay out the money in dividends. The most recent example of this in Canada is Sears. Sears had a lot of assets tied up in property. Control of the company was acquired by someone who saw the value of those assets, sold them, realized tremendous profits by paying them out as dividends, and then left the company a hollowed out shell. The people who worked at the company were left with nothing, including an underfunded pension plan. Good for the capitalists, not so good for the economy. (Unemployed people tend not to buy things. Consumerism is the engine of today’s economy. But that’s another topic for another day.)
This ‘asset stripping’ isn’t uncommon.
Another common capitalist strategy is to buy (what capitalists call) an ‘underperforming’ company, and move production to someplace where production costs are lower. When production costs are lower, the profit goes up, and the capitalists realize greater dividends, resulting in a share price increase. So the share price goes up, but the people who don’t have money – the worker bees – end up unemployed because their jobs have been exported to someplace where costs are lower. The capitalists make money, the stock prices rise, but it isn’t really a good thing for the economy.
So, next time you read a news article about the stock market going up, or going down, or going sideways, remember: the stock market is NOT the economy. The stock market is people who already have money, trying to make more.