Tuesday, November 20, 2007

Pondering the DOW

I can't tell you how often I have looked at the DOW chart above trying to figure out what the crazy growth that exploded around the mid-90's means. By what measure is this an indicator of national prosperity? The conclusion I've drawn is that it's not. All it measures is the wholesale buyout of assets due to 'cheap money' now available at historically low interest rates. Kind of like giving in to that new plasma TV at Best Buy because it's "no money down and no interest", except on a much bigger scale. Buyers (both foreign and national) have been leveraging cheap, plentiful money (due to a combination of low interest rates and loose lending practices) to accumulate assets.

This has nothing to do with the "success" of supply side economics, nothing to do with tax cuts, nothing to do with the IT boom, and nothing to do with the real estate boom (except in that real estate was yet another asset in over-demand due to cheap, available money).

IF lending practices tighten due to subprime fallout and IF the weakening dollar brings higher interest rates, investors could dry up or start looking to other markets.

If this is true, and if the days of cheap, available money are coming to a close, so will the jacked up demand value of the DOW. Which isn't necessarily a bad thing... it's much healthier for the economy in the long run if the DOW adjusts to reflect the real value of the company portfolio it represents. I wish those companies had been busily re-investing more of their windfall in the US economy during these happy times but so it goes... to Argentina, China, India, etc.

I guess that's a post for another day.

Disclosure: Not an economist. The last econ course I took was in high school, 1985, so take it with a grain.


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