News & Views from 465 California Street

The Tyranny of the Dow

Clint Reilly
Apr
7
2009

Now that the Dow Jones Industrial Average is creeping up, so is my skepticism. I don’t know about you, but I’m tired of the stock market dictating public policy in our country.

When the Dow doesn’t like what it hears from President Barack Obama, Congress or Treasury Secretary Timothy Geithner, it falls down like a baby in a snit. When it hears something positive, it’s a hippie high on marijuana.

I’m sure the following imaginary announcement would precipitate a 1,000-point drop:

“Consumers have decided to pay off their debts. They are eschewing the mall and spending more time at home playing Monopoly and riding bikes. The car is in the garage to conserve energy.

“Buyers have gone on a national spending strike to repair their personal balance sheets and save for their kids’ college tuition. And guess what? After seeing their life savings evaporate in the stock market, people on Main Street are tucking their money under the mattress.”

Such thrift would terrify the Dow.

Let’s go back in time to the months and days preceding the second Iraq War when the Dow was swooning.

According to the Wall Street pundits, the market simply wanted “clarity,” or visibility into the future. It was not so much concerned that America was launching a land war in the Middle East.

The irascible Dow just wanted to know one way or the other if war was going to happen. Sure enough, the Dow shot skyward along with the first U.S. missiles.

What about the hot love affair between former Fed Chairman Alan Greenspan and the Dow? Whenever the market went into a prolonged pout, Greenspan offered red roses in the form of lowered interest rates. Low rates and loose lending fueled the Dow’s relentless upward spiral.

Stock values created new wealth, but lower interest rates also fueled the housing boom, the explosion of personal debt and the sub prime mortgage crash. By appeasing the Dow, Greenspan printed counterfeit prosperity.

How can policymakers listen to a manic- depressive Dow that pounds the table every day for simple answers, infallible formulas and unequivocal road maps? We know that the truth is complex, recessions can’t be fixed in a day, and the future’s windshield is fogged up.

A lineup of money managers – the same alleged gurus who just lost half of their clients’ net worth – now scramble to predict the Dow’s rise or fall on CNBC.

Commentator Maria Bartiromo is a broken record asking, “Has the Dow bottomed?”

The capitalist sages counsel patience. But the buy-and-hold strategy of investing for the long term has just consumed the life savings of millions of Americans and dashed the dreams of multiple generations.

According to Lawrence Summers, Director of the National Economic Council:

“$50 trillion in global wealth has been erased over the last 18 months. This includes $7 trillion dollars in United States stock market wealth…and $6 trillion in housing wealth caused by an abundance of greed and absence of fear on Wall Street.”

I say this: Ignore the Dow, Mr. President and Mr. Treasury Secretary.

Consider the fate of all those fired CEO’s who squeezed their companies dry for quarterly earnings and failed to invest in the future. How absurd are 120-day benchmarks? They’re great for executives who are rewarded for driving up their company’s stock price. But think about the millions of Americans who lost their jobs because their firm’s executives had no long-term vision.

We should ignore the Dow’s tantrums and be afraid of its euphoria.

It’s time for our leaders to make the painful but critical choices that will bring back invention, creativity and entrepreneurship – not quick fixes and 24-hour elixirs.

Now that GM has ceased to be a symbol of American ingenuity, can the new aphorism be, “What’s bad for the Dow is good for America”?

Comments (7)

  • I found your recent columns regarding bay area newspapers, and the
    tyranny of the dow to be right on the money. As newspaper subscribers
    our family has noticed the financial pressure that has caused changes
    in content, but we are avid newspaper fans and the Mercury news
    remains a favorite.
    I also work for a small investment advisory firm and am well aware
    of the constant pressure the media, and the politicians bring to the
    dow. I couldn’t agree with you more.

    Thank you,

    Jim

    Posted by: Jim | April 7th, 2009 at 10:06 am

  • I rarely read the newspaper these days, getting my news (for what it is
    worth) from sound bites and Yahoo.

    Today, waiting for a repair guy to show up I picked up the San Jose Mercury
    News and happened upon your “Tyranny of the Dow” piece. WELL SAID!

    I’ve been saying to anyone who will listen and plenty that wish I would shut
    up that Wall street is the number one enemy of Main street. That indeed our
    new President should be encouraging Americans to cut up their credit cards
    pay off their debt and stop spending. Drive your car less and keep it
    longer.

    I have never and still don’t believe that government spending more (stimulus
    package) can help in the long term.

    Has our moral code gone so awry that we cannot see what was clearly obvious
    to our grandparents? They saved for a ‘rainy day.’ Refinancing the house
    to pull out equity never was an option for them. Credit was with the local
    butcher not Citibank.

    Thank you for making the point. I hope I’m not the only one that read your
    column.

    Chuck C

    Posted by: Chuck | April 7th, 2009 at 2:19 pm

  • I always read your columns and enjoy them immensely. Your column “The Tyranny of the Dow” is right on target. I often wondered — when the Dow kept swinging up and down at every little whim — if I made the right choice in investing my retirement money in Wall Street. Thank God I have a trustworthy and reliable broker and financial manager who did all the right things with my investment — diversification, dollar cost averaging, etc. — still, my investment has spiraled, by Wall Street’s sometimes senseless moody swings and the financial mess. This was “hard earned money” which I saved through a retirement plan during all my work years. If I had to do it all over again, I wouldn’t gamble my life savings on Wall Street. Like a spoiled bratty kid, Wall Street goes on a tantrum if it sees or hears anything it dislikes whether it makes sense or not.
    Please continue writing your column. As a regular newspaper subscriber, I thank the San Jose Mercury for featuring newsworthy columns in its newspaper.
    Vic

    Posted by: Vic U | April 7th, 2009 at 3:22 pm

  • Thank you.

    Posted by: Don Nguyen | April 7th, 2009 at 3:38 pm

  • It appears you have been hurt by the decline of the Dow. May I suggest you change your “buy and hold” to “buy and rebalance”. A person of your age should probably be in the category of 70% bonds and 30% equities, both of which should be broadly diversified.
    Congress lit the fuse to the economic meltdown when it passed the Community Reinvestment Act which scolded banks who dared deny mortgages to persons who could not afford them (Barney Frank led the charge). It added fuel to the fire when Clinton repealed the Glass Steagal Act thereby allowing banks to sell insurance, securities, and snake oil. Then it eliminated the up-tick rule which allowed naked short selling. Then it directed Fannie and Freddie to buy and sell worthless sub-prime mortgages world wide.
    The Dow merely reflects congressional misdeeds. To ignore the Dow is to stick one’s head in the sand. Would that the President does not take your advice.
    Respectfully……….Hank R

    Posted by: Hank | April 7th, 2009 at 4:31 pm

  • I thought yesterday’s column was your best yet. Keep up the good work.

    Posted by: Mark | April 8th, 2009 at 9:42 am

  • I read your article the other day about the Dow controlling our financial and political lives and couldn’t agree with you more. I get so irritated in seeing the swoon when it goes down or the euphoria when it rises. I’ve long felt that the day traders and major players, among others, manipulate the financial markets strictly for their own benefit and couldn’t care less about their fellow human beings and their welfare. No amount of money is enough for them. I am not as articulate as you nor as knowledgeable as to the ins and outs of the stock market, but I don’t believe the average person really can count on a 10% return on his or her investment even if they keep their money in the market for many years. The ups and downs are rather volatile and occur fairly often, and when one loses a somewhat significant sum in one of the bear markets it takes years just to get back to the original investment, let alone increase its value. I know one shouldn’t be in the market if he or she cannot afford to take the risk, but it seems to me more oversight is needed. Hopefully the new administration with institute some given the state of our economy.

    I enjoy your columns and generally agree with most of them. Keep them coming.

    Dorothy

    Posted by: Dorothy | April 10th, 2009 at 5:17 pm

Add a Comment

 

Home   |   Blog   |   Legal   |   Contact