07 October 2007

That Crazy Stock Market Invention

NASDAQ has doubled in the last five years. Here are some reasons that don't seem to be mentioned often.

1. Since George took office, the dollar has significantly fallen in value against most currencies. If a European investor were buying American stock five years ago, she'd have to first buy a U.S. dollar, paying about 1.05 euros per dollar. Today, she'd only have to pay about 70 (euro)cents for each U.S. dollar. A Canadian would have had to pay about $1.60 per U.S. dollar five years ago but only a dollar per dollar today. The net effect is that American stocks are discounted to foreign investors. Hugely. It's a 30 to 50% off sale.

1A. No country has done more to subordinate to the modern corporation than the U.S. Our corporations are hugely successful and we do a great deal to ensure their success. Investing in American companies is a great investment and still our best product. As our currency has fallen, foreigners are buying more of our best product, as most international economics textbooks would predict. This has helped stock prices to rise.

1B. Investing in American companies is a way to invest in the world economy. Companies like Intel and Microsoft get over half - considerably more than half - of their revenues from outside the U.S. To invest in the U.S. stock market is to invest in the global economy. The global economy is doing fantastically well.

2. There aren't that many investment options and there is an enormous amount of money to be invested. We're all capitalists now - it is not just Nathan Rothschild or JP Morgan with excess funds, looking to maximize returns. Today, almost everyone is saving something towards retirement in one form or another. Worldwide, there are over $20 trillion dollars in mutual funds, and that is just a subset of the investment total. Money might leave the stock market, but ultimately, there are not too many other places for it to go. A steady demand for investments has helped stock prices to rise.

2A. Companies are learning more about generating profit all the time. Company profits have steadily risen in the last decade or two and are likely to continue rising. Companies have not really been serious about profits, historically, and the potential gains in this area are still largely untapped. Stocks are still one of the most promising long-term investments available.

2B. The number of individual investors steadily increases as more people move beyond subsistence wages. This means that demand for good investments is steadily growing.

All this suggests that the stock market is still a place to put your money. (I write this Sunday night, suspecting that the latest news about job creation will, perversely, drive down prices on Monday. My concern is not with short term gyrations, though. I'm talking about investment options for the next five to twenty years.) The stock market will eventually be seen as one of the more incredible inventions of the modern world - an invention that not only generated wealth for millions and millions and millions of people, but has financed the creation of a slew of new technologies, products, and jobs. We have yet to exhaust its potential.


Eric said...

And now Dubai is buying 20% of NASDAQ...

Anonymous said...

I see the stock market as sort of a pyramid scheme. It takes money away from the people who worked for it and gives it to people who never even got off the couch. Not a bad deal at all, if you're one of the ones near the top.

But we can't all get rich off the backs of somebody else's labor, somebody has to do the actual work- and those are the people who should be reaping the rewards.

Ron Davison said...

and you reminded me of one more reason I forgot to mention: governmetns are beginning to invest in stock markets - big time.

if all we had was return to labors - and no capital - productivity would still be at the level it was when we worked with rocks.

Both of your comments deserve separate postings, really.

Anonymous said...

The idea of intellectual capital was a huge leap forward from the traditional building blocks of economic theory: Land; Labor; and Capital (the "factors of production")

Intellectual capital provides value and creates wealth, thus, those who create it get paid for it.

Ron Davison said...


I wonder if we'll ever effectively create an intellectual capital market - or is that simply the job market?