What's behind the Dow Jones's 'new high'

Justice Litle - Mon 09 Oct, 2006

...Even though the Dow just hit a 'new high', more than 70% of the stocks that compose it are well and truly under water...

 
 
"Crisis has been averted. Everything is Super."
 -The Simpsons

Sad but true: inconsistency and short-sightedness are virtues on Wall Street.

To be a successful talking head, forget about logical arguments. Sound bites and bullet points are the way to go. The key is not consistency, but opportunism; the goal is to make the facts say what you want them to say.

Take oil, for example. If the price of oil is going up, that is bullish because it indicates strong global demand. If the price of oil is going down, that is supposedly bullish too because it acts as a tax cut for consumers. Never mind that the second argument contradicts the first. If rising oil is bullish because it indicates healthy demand, then shouldn't falling oil be negative in terms of weakening demand? There are many more subtleties to consider here; the point is that for the talking heads, just about anything oil does is good news. In fact, just about anything at all that happens is good news. To the man with a bullish hammer, all the facts are nails.

The Dow Jones's 'new high': Watch out

When there is an excuse to strut and crow, watch out. Consider the recent Dow high so many are jazzed about. Clearly a sign of how wonderful things are going, right? Maybe not. Richard Russell, editor of the Dow Theory Letters since 1958, recently noted, "21 of the Dow stocks (71%) are 20% off their all-time highs and 17 Dow stocks (57%) are at least 30% below their all-time highs."

Hmm. So even though the Dow just hit a 'new high', more than 70% of the stocks that compose it are well and truly under water. More amusing still, we last saw these 'new high' levels in January 2000 or so. So the Dow is like a man who took a tumble down a flight of stairs, and has taken nearly seven years to climb them again. And of course, if you are a long-term foreign investor, your Dow investment is still a big fat dud. The dollar has given up much ground this decade, making index measurements a rubber yardstick. Hurrah! Celebrate!
Champagne for everyone.
 
In my opinion, we'd all be better off watching cartoons than the big financial networks. These what-me-worry pundits are little more than bobble head dolls, tilting their heads in the direction du jour. They are paid to chatter, not to think.

To understand how a talking head sees the world, imagine a racetrack where you are allowed to change your bet mid-race. If Deuces Wild starts nosing ahead of Miner's Daughter, you can switch your bet to Deuces. If your nag stumbles and Farmer's Folly takes the lead, you can switch to Farmer's Folly. It doesn't matter that they are completely different horses - or, for the sake of the analogy, completely disparate arguments. The talking head's goal is to win the race by hook or by crook, even if that means throwing consistency out the window. Of course, 'winning the race' in this context has everything to do with making the pitch and looking good...and nothing to do with consistency or providing information of value.

The Dow Jones's 'new high': Sucker high

I titled this missive 'Sucker High' because I think that is what Wall Street is on right now. All these people jumping for joy are in danger of being just that:
suckers without a sense of perspective. The classic kind who are ecstatic when they make a little money...only to give it back in the long run. These suckers cheer on the talking heads, nod obliviously when the horses are switched, and never really seek to understand the game.

The global economy is complex. There are many factors constantly at work. Some factors are more important than others, some are trivial, and many cancel each other out. This makes it devilishly hard to figure out what's really happening.

But this reality has been abused by Wall Street, in a sort of post-modern fashion, to justify the notion that anything can happen at all. Because it is hard to uncover the truth, talking heads make truth anything they want it to be; Derrida would be proud. Tortured statistics are used to bolster utterly ludicrous statements. Logic is debased regularly. A world in which the indebted consumer can borrow his way to infinity? A world in which cause and effect decouple, where consequences for actions cease to exist? Sure, why not - if the numbers can justify it here and now. Tomorrow they'll just make up something else.

As Jesse Livermore noted, the speculator's greatest and truest ally is underlying conditions. My argument is essentially two fold. There are long-term global growth trends on the one hand, bullish for energy and resources, and the Austrian endgame on the other, in which bloated Western welfare states must eventually open the printing presses.

There are two ways the current downdraft can play out. If we avoid a global meltdown - that is to say, if the developing world is able to stimulate domestic demand and wean itself off the American consumer in time - then demand for energy at the margins will not meaningfully decrease. Demand will in fact increase along with the new middle class in this scenario. Fossil fuel technologies and new alternative technologies will have to go full out to keep up with demand.

The Dow Jones's 'new high':  A crushing overhang of debt

Alternatively, if the American consumer drags the world down, then Western economies will ultimately cower under a crushing overhang of debt. If things get bad enough, forced liquidation will be required, as Ludwig Von Mises predicted a long time ago. The world then chokes on paper, and turns to hard assets for refuge.

There are a number of moving parts at work here, and they are all connected. For example, as the price of oil falls, the petrodollar support of US treasuries falls with it. Long-term interest rates have been held down by the hundreds of billions being recycled into US government securities, as oil-exporting countries awash in cash sought to park their windfall. If that ends, the "sting in the tail" could be higher interest rates...which in turn leads to Austrian endgame pressures.

Another critical relationship is the one between consumer debt and corporate profits. US corporations are bursting with cash, but that is because consumers'
pockets have been voluntarily emptied. The Financial Times notes a similar situation in China; it is not consumer saving, but corporate saving that makes up the bulk of China's war chest. The talking heads have never bothered to examine this curious point: the biggest run of corporate profits in history and the biggest run of consumer borrowing in history happened at the same time.
This is another monster imbalance, with ultimately ugly consequence, that doesn't get much press.

Those are only two of many considerations, of course.
There are many others. The important elements of the big picture don't flip and flop from week to week. They develop slowly over time.

My advice? Don't be cannon fodder. With all thy getting, get thee understanding. Go out there and shore up your mental position with knowledge. Sell down to the sleeping point if necessary, lay hold of your convictions, and then rebuild in a way that makes sense to you. But don't pay too much attention to the talking heads, the arguments du jour, or the sucker highs.


Regards,

Justice Litle
for The Daily Reckoning
 
  

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