The Most Random Of The Random

In his influential 1973 book, A Random Walk Down Wall Street, Burton Malkiel posited the so-called “random walk” theory of markets.  The “random walk” theory contends  that the stock market efficiently incorporates all existing information and investor expectations into the current price of a particular stock.  That theory meant that past movements of a stock’s price couldn’t be used to predict its future movement — which would inevitably occur due to random movement and unexpected events.

gsed_0001_0016_0_img4111Investors, this week we seemingly saw the random walk world, in all of its utterly random glory!  Except this week, the “random walk” was more of a Frank Gallagheresque drunken stagger, as the market lurched drastically in one direction and then in another, with enormous one-day swings up followed by enormous one-day swings down.  The result is a stock price chart that looks like the oscillations of a radio wave or an indecipherable EKG readout.  And interestingly, for all of the thrashing about from one day to another, the bellwether Dow Jones Industrial Average ended the week up slightly from where it began.

What does it all mean, for those of us who have some part of our retirement savings in the stock market?  Should we listen to those who try to explain why the market is moving as it is on a particular day — while recognizing that you can find stock market analysts who will take virtually every position on the explanatory spectrum, and that most of the confident predictions about what the market is and will be doing turn out to be wrong?  Under the random walk theory, it’s not possible to predict what will happen to the stock indices on Monday, or by the end of next week, or during the next month.  Future events that are unknowable — like the process of collecting more information about the true nature and risks of the coronavirus, whether an effective vaccine is developed, and whether people continue to have panicky reactions to the coronavirus, or come to accept it and move on with their lives — will be determinative.

A significant part of investing, in my book, is acceptance — acceptance of what the market is, and also acceptance of what your role is.  Everyone I know who has tried to time the market, or made drastic decisions because of their conclusions about what would happen next, has paid an unfortunate price.  Small investors are never going to have better, or faster, information.  The best course in my view is to assess your own goals and recognize whether you are a long-term investor, or a short-termer.  If you’re a long-term investor, who isn’t going to be needing those invested retirement savings for years, where else are you going to put your money?  Put it under the mattress?

Merry Market

If people seem merrier than normal this holiday season, here’s one potential reason for that:  the stock market.

846-06112288For all of its other issues, 2019 has been a banner year for the stock markets.  One recent estimate calculates that, worldwide, stock markets have gained more than $15 trillion in value this year, and the United States has led the way, with the major U.S. stock indexes all achieving double-digit gains.

That’s good news — very good news — for most Americans.  Although the stock market once was the province of the wealthy, the advent of 401(k) plans, mutual funds, and other investment devices have broadened the base of stock market investors.  According to one recent survey, more than half of all Americans own stock, either directly or through an ownership interest in a mutual fund, and that number is growing.  The increase in the number of investors obviously has helped to fuel the run-up in the markets — according to the law of supply and demand, increased demand means higher prices — but it also means that more Americans are enjoying the fruits of the strong market performance.  Whether it is retirees who are thrilled to watch their nest egg grow, or working people who are seeing their 401(k) investments making an earlier retirement a possibility, many people are now touched by the stock market — and when the markets go up, they’ve got a smile on their faces.

And it’s pretty clear, too, that a stock market surge runs in parallel with strong economic performance.  There’s a chicken-and-egg element to what causes what, but clearly growing stock portfolios make investors more optimistic and willing to spend — and their spending, in turn, helps to fuel job growth, better corporate performance, and better stock performance.  That may be part of the reason retail sales this year were very strong, with analysts estimating that Saturday’s sales set an all-time, single-day record.

Of course, markets go up, and markets go down, and a downturn is inevitable.  For now, though, many Americans are very much enjoying the stock market roller coaster ride.

40 Years Of 401(k)

Last year, 401(k) employee retirement savings plans hit a venerable milestone — the 40th anniversary of their creation.  401(k) plans were born during the Carter presidency, with the passage of the Revenue Act of 1978, which established Section 401 of the Internal Revenue Code.

stk27434sigThe language of the statute is the dense, definition-filled content that tax lawyers love, but the concept of the 401(k) is simple:  workers can salt pre-tax money away in protected funds and invest it, thereby enjoying some tax savings and having a vehicle to save for retirement.  Many employers offer 401(k) plans as a part of their benefit package and facilitate the program through payroll deductions.  According to the Investment Company Institute, in 2016 there were almost 555,000 401(k) plans in the U.S. and more than 55 million Americans were active participants.  The ICI also reports that, as of the end of the third quarter of 2018, 401(k) plans held $5.6 trillion in assets — up from $2.2 trillion in 2008 — and represented 19 percent of the total amount of U.S. retirement assets.

Some people raise questions about the 401(k) option, arguing that its availability has helped to produce the virtual disappearance of employer-funded pension plans, in which the employer totally funded the plan and, in many instance, provided the employee with a guaranteed retirement benefit.  I think that’s wishful thinking.  Even at the time the 1978 legislation was passed, many American companies were looking to cut costs, and guaranteed pension plans were disappearing into the mists of history.  Most of us have never worked for an employer that offered a true pension plan.  To be sure, 401(k) plans are based primarily on employee contributions, not employer largesse — although in many cases employers offer some kind of match to employee contributions.

Unless you’re an investment advisor who pines for the long-lost days of funded pension plans, though, you’re probably grateful that Congress was far-sighted enough to create the 401(k) option 40 years ago.  And it’s not hard to argue that 401(k) plans are, in some respects, superior to pension plans.  The 401(k) option gets the worker directly involved in her own retirement planning; employees have to elect to participate in the plan, after all, determine how their contributions will be invested, and then have their contribution withheld from their paychecks.  The 401(k) mechanism makes that as painless, relatively speaking, as withholding for federal and state taxes and Social Security contributions — because it comes out automatically, most people don’t notice it.  And then, after a few years, workers realize that they’ve actually made progress in starting to save for retirement, and for many people that realization opens the door to additional efforts to save, invest, and get ready for the retirement years.  The 401(k) option has made many Americans take personal responsibility for their own financial affairs, rather than relying on a company pension plan to do the trick.

And you can argue that 401(k)s have had a broader benefit, too.  So much automatic saving has to be invested somewhere — principally in the U.S. stock market.  In 1978 the Dow was well below 1,000; now it stands above 25,000.  No one would argue that 401(k) plans have been solely responsible for that run up, but there is no doubt that they have contributed to buy-side pressure that has helped to move the stock market averages upward, which has the incidental benefit of helping all of those 401(k) participants who’ve put their retirement savings into the market in the first place.

Happy anniversary, 401(k)!  Beneath that Tax Code jargon lurks an idea that has been helpful to millions of Americans.  I’d say we need to give credit where credit is due:  the 401(k) is one time when Congress did the job right.

Blue Chip Gone Bad

In the not too distant past, General Electric was one of the most valuable companies in the world.  GE was the bluest of the blue chips, the maker of light bulbs and everyday appliances, a company so solid and trusted and reliable that it was a standard holding for retirees who bought it because it paid an old-fashioned quarterly dividend.

ge-led-bulbs-led11da19-870-h-64_1000Now, GE’s stock price has plummeted to less than $10 per share, its its renowned quarterly dividend has been reduced to a penny per share, and there’s actually talk on Wall Street that GE debt — which is now rated at BBB — could be reduced to junk bond status.

What happened? Many things have contributed to GE’s abrupt fall.  The company has a lot of debt, some of it generated back when GE had a AAA rating.  The debt has put GE into an increasingly leveraged position as the company’s stock price has fallen, which in turn has put pressure on the trading price of GE bonds.  The company’s lines of business have experienced some down years, and prior management was viewed as too slow to respond to the challenges facing the company.  To address the problem, GE has shifted to new management, which is trying to sell off assets to improve the company’s capital structure, boost the stock price, and keep the company off the junk heap.  And, as GE sheds assets, new management will have to figure out what the company is and where it is going, long term.  GE can no longer get by on its reputation.

GE’s current plight is another example of how the American economy moves quickly, and if companies don’t move with it they can be left behind.  As recently as 2005, GE’s stock market price made it the most valuable company in America.  Now, it’s fighting for survival.  And in boardrooms throughout the corporate world, CEOs should considering this cautionary tale and asking themselves:  “What should I do to keep my company from becoming the next GE?”

Dow And Up And Dow Again

I don’t know what’s harder to read about right now:  political news, or the stock market.

dreamstime_xl_29871962-customSince I don’t want to lose any readers, we shan’t be talking about political news.  But checking out what’s been going on in the stock market recently is equally stomach-churning.  October has been one of the worst months in the stock market in a very long time, generating talk that we’re in the midst of a dreaded “correction.”  Even after springing back up by more than 400 points yesterday, the Dow Jones Industrial Average is still down almost 6 percent this month, making it the worst month since August 2015.  The news for the S&P 500 has been even worse:  in October its down almost 8 percent, its worst month since May 2010.

And for those of us who aren’t working on Wall Street, the movements of the markets seem random and inexplicable.  Stock are down, then up, then down again — sometimes, all on the same day.  On Monday, the Dow surged upward, then plummeted, and ended up covering more than 900 points in its abrupt mood swing.  You read the reports on the markets that try to make sense of the movements — on Monday, for example, the stated culprit for the downturn was concerns about new trade actions with China, and on other bad days it’s those nefarious “profit takers” — and you really wonder if anybody knows why the markets move as they do.  And this shouldn’t come as a surprise, either:  after all, the markets are the sum of the actions of millions of individual investors, mutual funds, trading bots, institutional investors, portfolio traders, brokerage firms, foreign investors, and countless other actors.  It would be an unusual day, indeed, when all of the disparate participants in the market are motivated by the same news to take the same actions on the same day.

So, what’s a small investor to do?  I think the key is to not overreact, and to realize that investing in the market is supposed to be a long-term thing.  The little guy is never going to have the information the big players do and can’t plausibly time the market or anticipate the abrupt movements.  If you’re in the market long-term, don’t get distracted by the sickening plunges or the big climbs, because you’re really focused on what’s happening over the course of years.  And if you can’t take a long-term view, maybe you shouldn’t be in the markets at all.

Ignoring that stock market app on your phone helps, too.

On The Roller-Coaster Ride

If you’ve got some of your retirement savings invested in the stock market, as many of us do, the last few days have been unnerving.  The market had an historic run up, and then it went down again.  Yesterday, where the Dow Jones Industrial Average at one point had dropped 1600 points, was an especially wild ride.

704254-001When the market behaves like this, what’s a normal investor, who’s not an insider or a financial kingpin, supposed to do?  You can get dizzy just reading all of the different views of what is “really” going on.  Some people say it’s just a predictable correction after years of historic gains.  Some say the Trump tax cuts have overheated the economy and the market is reacting to that.  Some say we’re long overdue for a bear market.  And some say the Federal Reserve Board hates President Trump and his focus on the stock market as a proxy for his presidency and just wants to bring him down low.

(The last theory, in which the Fed would be intentionally manipulating the market for overt political purposes, is especially troubling — and even in these conspiratorial times, seems pretty unbelievable.  To buy that theory, you’ve got to conclude that the Fed’s dislike for President Trump is so powerful that they are perfectly willing to take actions that torpedo the retirement portfolios of millions of individual investors just to give the President a black eye.  Could bureaucrats really be so disdainful of average Americans?  Call me naive, but I find that incredibly hard to believe.)

So what’s really happening here?  Beats me!  My guess is that the run-up has been so significant that there are lots of people out there who thought it was time to take their profits, and the downward movement caused by those sales then triggered some market-decline benchmarks that automatically produced further sales and caused the sharp fall — but that’s just a guess.  Maybe somewhere on Wall Street somebody knows the real answer for sure, but I doubt it.  The stock market is so complex, so huge, and so prone to human reaction that it’s difficult to explain these downward spikes.

So, to put the question again, what’s a little-guy investor to do?  If you think saving money for retirement is prudent — if you don’t, you probably wouldn’t read this post in the first place — and you need to find a place to put your money until the retirement day comes, there really aren’t many alternatives to the stock market that can produce a meaningful return.  Most of us aren’t offered opportunities to invest in real estate deals or development projects, and we probably wouldn’t be comfortable having a big chunk of our money invested in such illiquid things, anyway.  Bond yields are low, and banks pay next to nothing on CDs.  So where else are you going to put your money?  This reality suggests that basic, brute economic forces are going to continue to make the stock market a preferred investment option for people and businesses, not just in the U.S. but also abroad.

But you’ve got to recognize that the stock market is a long-term investment, and it’s going to be a roller coaster ride.  When you’re on the coaster, it’s pretty hard to get off on the highest hill, and you don’t want to exit the car and move onto the tracks at the bottom, either.  You just hold on, scream when the cars start that big downward move, and feel your pulse racing until the end.  Or, you can simply close your eyes, recognize you’re on the ride and there’s not much you can do about it, and focus on other things until your circumstances make you a short-term investor and there are true decisions to be made.

Who knows what this current jittery period will bring?  It’s time to hang on tight.

Investing In Space

Let’s say your modest portfolio in the stock market has had a good run over the past year or so, and you’re looking for a new investment opportunity.  Let’s posit, further, that you think Bitcoin is a curious bubble that’s going to burst someday, and that you’d rather put your money into a company that produces something more tangible and more futuristic.

Well, what about space?

fh-onpadSpaceX is racking up a number of impressive accomplishments.  Last month SpaceX successfully tested its Falcon Heavy Rocket, and it is moving forward on launching what it calls the most powerful operational rocket in the world.  The Falcon Heavy launch is set for next week, on February 6, from the Kennedy Space Center in Florida.  The successful launch of the Falcon Heavy would join other stellar (pun intended) SpaceX accomplishments, like being the first company to launch a rocket with payload into space and then land the rocket back on Earth, and being the first company to relaunch an already used rocket.  SpaceX also built the first private spacecraft to dock with the international space station, and it’s shown it can reuse the spacecraft, too.  If you’re trying to make space a commercially viable enterprise, developing reusable rocket technology and reusable spacecraft technology, to hold down the cost, is a crucial first step — and SpaceX looks like the leader in taking that step.

But here’s the thing:  you can’t invest directly in SpaceX.  It’s a private company, and its founder Elon Musk has said he won’t take it public until the company has started to make flights to Mars.  Why?  Because Musk is afraid that if the company goes public before then, there’s a chance that the stockholders will pressure the board to focus on things other than colonizing Mars — which is Musk’s goal and is bound to be more expensive and difficult than, say, establishing Moon exploration bases or mining asteroids for precious metals.  It’s not an unreasonable fear on Musk’s part.  So if you want to own a piece of SpaceX, you can only do so indirectly, by investing in Alphabet, which owns a piece of SpaceX as well as parts of Google, YouTube, and other things.

Okay, so SpaceX isn’t currently available for the intrepid investor who wants to get into the space exploration game.  Are there other options?  It’s not easy to determine, because a lot of the companies that are touching upon space issues — like Boeing, for example — are better known for producing other objects.  But you can start to get a sense of what’s out there by looking for lists like this one, on potential investment opportunities involving space, or looking for articles about company announcements related to space activities and then figuring out whether they are publicly traded.

It’s not easy for the casual investor.  What we really need is for one of the stock exchanges to create a “space index,” just like there’s a Dow Jones “transportation index.”  The index would identify the space-related public companies, mutual funds would be established to invest in each of the space index companies, and those of us who’d like to put our money in the heavens could buy into the mutual funds.

Hey stockbrokers!  How about giving investors interested in space some help here?

The Dow Hits 20,000

Yesterday the Dow Jones Industrial Average reached a new high, passing the 20,000 level.  The NASDAQ index and the Standard & Poor’s 500 index also are at all-time highs.

gomez3It’s an interesting milestone, and one that is very pleasing to the millions of Americans who have money invested in stocks or mutual funds.  Investment in the stock market — especially through managed mutual funds — is one way the average American can put money away for retirement and (we hope) earn a decent return on our savings.  Over its history the Dow has been pretty dependable in that regard, overcoming periodic drops and crashes and showing significant long-term increases both in absolute terms and on an inflation-adjusted basis.  That’s why, if you’re taking a long-term view, financial planners will tell you that the stock market is the best place to put your money.

These days, of course, there aren’t many alternatives for the average folks.  The interest rates on CDs are a pittance, and the returns offered by municipal bonds and corporate bonds that used to be the bedrock of retirement planning aren’t very attractive, either.  Investing in stocks in “emerging markets” seems pretty risky, too.  Those are all forces that help to explain why the stock market has been on a prolonged bull market run that has seen the Dow triple in value since it hit its low point in the dark days of March 2009.

Unfortunately, some Americans who might have shared in the Dow’s run-up got out of the market right as it hit its low point.  Gallup has determined that, in 2016, only 52 percent of Americans adults have investments in the stock market, down from the all-time high of 65 percent in 2007.  Obviously, many of those people bolted when the market crashed in 2008 and 2009 and they’ve never come back — perhaps because they are too afraid of another crash, or perhaps because they were so hurt economically by the Great Recession that they simply aren’t in a position to invest.  Those who rode out the sub-prime storm, kept their heads, and kept their investments benefited.  It’s a classic example of why anyone who invests in the stock market can’t try to time the market and has to take a long-term view that follows a long-term plan.

20,000 is an artificial milestone, of course, and we’ll no doubt see downturns in the future — but the stock market remains an important way for the average people to build their retirements and plan for the future.  For those who are in the market, 20,000 is a welcome number indeed.

Another Bank On The Brink

The Masters of the Universe on Wall Street, and in financial capitals around the world, will be holding their breath today.  They’re waiting to see what happens to Germany’s mighty Deutsche Bank, the latest big bank to fall into crisis and roil the international markets.

deutsche-bank-1If you are unfortunate enough to own Deutsche Bank shares, you know what I mean.  The value of its common stock has fallen more than 65 percent in the past year, and a credit rating agency has moved its outlook to negative.  The Department of Justice has demanded that Deutsche Bank pay $14 billion to settle an investigation into residential mortgage-backed securities, although the Bank hopes to negotiate down to a lower payment figure.  Deutsche Bank has been removed from  European blue chip stock index because its share price has fallen so far, so fast, and now there are reports that some hedge funds are moving holdings out of Deutsche Bank to other banks.

Why should we care?  Because earlier this year the International Monetary Fund issued a report that found that Deutsche Bank “appears to be the most important net contributor to systemic risks in the global banking system.”  “Systemic risks in the global banking system” — there’s a phrase that should send shivers down your spine.  The bank has substantial exposure in derivatives . . . and equally important, it has significant connections to the big banks in America, Great Britain, China, Japan, and other countries around the globe.  In our modern, globalist world, that’s just how the huge financial concerns work.  That means that any serious problem at Deutsche Bank will have a ripple effect in America — an effect that is already being felt in the markets here.

So once again we are faced with the prospect of a big bank that has engaged in risky behavior teetering on the brink, with calls for a national government — in this case, Germany — to come forward and say that it is ready to step in and rescue the bank from the consequences of its own actions.

Sound familiar?  Hey, I thought this was supposed to have been fixed in 2009.

 

Losing $9 Billion In A Day

Monday was a crappy day in the stock market all around the world — but it was crappier for some than for others.

rsz_istock_000017344562_fullBloomberg Business reports that yesterday, the world’s five richest men lost a total of $8.7 billion — and when you’re talking that kind of coin, you might as well ignore that paltry $300 million and round that figure up to $9 billion.  Jeff Bezos’ holdings alone fell $3.7 billion in value, Amancio Ortega lost $2.5 billion, and Warren Buffett, Carlos Slim, and Bill Gates saw their net worth drop between $730 million and $870 million.  Yikes!  You could buy a professional sports franchise with that kind of cash.

Imagine, losing billions of dollars in a single day.  And we think we’ve got problems when the market tumbles, as it did on Monday, and our 401(k) portfolios drop, and we wonder whether the bottom is going to fall out of the market again, as it did in 2008 and early 2009.  At least we’re not measuring the money that has disappeared in billions, with a “b.”

We shouldn’t feel too sorry for Jeff Bezos, though.  Even after losing $3.7 billion, his net worth is still a hefty $56 billion, and he had a pretty good year last year — his net worth increased by $31 billion in 2015.  Ortega is even more in clover, because his net worth after his $2.5 billion loss is still a staggering $70.4 billion.

It’s hard to imagine one person having so much money.  It makes you wonder:  for these guys, when the market plummets, does it hurt to lose a billion dollars in a day?  Or is it really more like Monopoly money is to us?

In The Blink Of An Eye

At kitchen tables all over America today, husband and wife Baby Boomers are drinking coffee and talking soberly about their retirement plans.  They’re doing so because those plans may have just changed in the blink of an eye, as the stock market has shed a big chunk of its value in the last few trading days and they have seen their nest eggs take a big hit.

IMG_20150823_083542The stock market analysts are talking about a market “correction.”  It doesn’t seem like the right word, does it?  A correction typically fixes an error.  It’s hard to think of a major drop in the stock market that causes hard-working Americans to lose a chunk of their carefully accumulated savings as fixing anything.

Why the sudden plunge and sell-off?  Is it China, or general skittishness, or a concern about American and global debt, or a belated realization that the economy still is weak, or just the backroom decision of some Wall Street titans to create some turmoil that might add to their profits?  The little guys will never know what spooked the markets, and whether we’re in for more of the wild ride this coming week.  We’ll just hold on tight and try not to panic and make things worse for ourselves.

In the meantime, we’ll all be drinking coffee, scratching figures on notepads, and talking about what this means for us.  We’ll tighten our belts and shake our heads and work a little longer and think about how this might change our little corner of the world.

What else can we do?

At The Whim Of Immense Forces Beyond Your Control

Trying to save for your eventual retirement these days can be a pretty wild ride.  Everything we read tells us that we simply cannot count on our chronically underfunded Social Security system to provide the principal source of our retirement funds, even though we have been contributing to it for decades.  So, you need to “save and invest” to provide an alternative, supplemental source of funds.  But where to invest?

Bonds and other debt instruments offer only a modest return these days, and no bank pays much in the way of interest on savings accounts anymore.  That leaves investing in the stock markets — where, unless you are an insider, for the most part you invest your savings on a wing and a prayer and often feel that your money is out there at the whim of immense forces beyond your control.  It’s not exactly a warm, confident sensation.

The last few weeks have brought this ever-present feeling up to gut-punch level.  The U.S. indexes have dropped like a stone, shedding a significant chunk of their value, and the end of trading day stories about the declines can only offer speculation about why — and whether more declines are in the offing.  Then this week China surprisingly decides to devalue its currency, which has roiled the markets even more and caused more declines in global stock values.

Why has China done this?  Who knows?  China’s regulation of its economy remains a black box, and it seems clear that, when it comes to China, geopolitical factors beyond simple market forces like the law of supply and demand are influencing its economic decisions.  When China’s stock market experienced some sharp declines recently, one news article mentioned that a sign of the underlying issues was that the stock market hadn’t increased, as expected, on the Chinese Premier’s birthday.  When trading on stock markets is expected to be influenced by politician birthdays, you know you’re not exactly operating in the kind of world conceived by Adam Smith and his invisible hand.

So, what should the non-insider individual investors do in the face of these massive forces whose inexplicable decisions threaten to slash the value of their nest eggs and crush their dreams of a warm retirement some day in the future?  In a world where there aren’t many good alternatives, you can only do what you always do when you find yourself on a wild ride — hold on tight, don’t panic, and hope that it ends sooner rather than later.  Who knows?  Maybe the Chinese antics will cause the global money interests to conclude that the regulated U.S. stock market, where politician birthdays don’t affect buy-sell decisions, is a good, safe place to invest, and thereby trigger a new bull market in the U.S. of A.

Greece Is The Word

If you’re somebody who has been saving for retirement and investing your savings in the financial markets, here’s a bit of friendly advice:  don’t check the markets today, or for that matter all of this week.  You’ll just be depressed.

The problem is Greece.  It defaulted on its repayment of loans from the International Monetary Fund last week, and yesterday its voters overwhelmingly rejected a referendum that would have imposed strict austerity measures.  Greece’s finance minister Yanis Varoufakis, who had opposed the austerity measures — he once said that “austerity is like trying to extract milk from a sick cow by whipping it” — then resigned with a flourish, saying that the referendum result would “stay in history as a unique moment when a small European nation rose up against debt-bondage.”

“Debt bondage”?  That’s a good one!  Try it on your bank the next time your mortgage or car payment comes due.

The problem for Greece is that there is no alternative to repaying its debts.  Greece is paying the piper for electing bad leaders who didn’t recognize the inevitable crash that was coming from constant borrowing to pay for a broken economic and pension system.  After defaulting on its IMF loan, Greece really has nowhere to turn for cash.  Who is going to loan money to an impoverished country where the citizens apparently don’t recognize their obligation to repay their debts?

All of this would be a valuable economic lesson in unsustainable borrowing if Greece were just going down the tubes by itself.  The problem is that Greece is part of the European Union, and its problems therefore are Eurozone problems.  Now European leaders need to figure out whether they have Greece exit the EU — not exactly a ringing endorsement of EU political and financial stability — or extend still more credit to the Greeks, which probably isn’t going to sit well with voters in Germany and other prudently managed EU countries who wonder why they are picking up the tab for Greece’s problems.

All of which loops back to affect those of us who have saved and invested.  Financial markets hate uncertainty, and the Greek crisis has now become uncertain to the nth degree.  Today we’ll be seeing news coverage of closed Greek banks, crowds in the streets trying to find cash, and frowning finance ministers going to meetings in ornate European buildings — not exactly scenes that speak of financial stability.  So even though the Greek problem has nothing to do with the U.S., in our global economic system our financial markets will be affected just the same.

It will be a wild ride until the Greek problem is finally resolved, and there really is only one solution:  Greece will need to leave the EU, issue its own currency, and witness the worst hyperinflation seen in Europe in decades.  After its economic system crashes and its elderly citizens see their savings eaten up by inflation, maybe the Greeks will recognize that some austerity and continuing “debt bondage” really wasn’t so bad.

Becoming An Investor

When I was in junior high school, I took a class called General Business where the teacher taught us about the marvels of capitalism and the wonders of the stock market.  After I took that class, I had one goal:  I wanted to own some stock in a company.

I saved my pay from high school jobs and talked to Uncle Tony, who was a stockbroker.  He identified three stocks that were cheap enough that I could buy a decent number of shares, and I picked one called Vikoa, for a company that sold a product related to cable TV.  I figured cable TV, which we had at our house, was likely to grow and prosper.

It was a great day when my fancy Vikoa stock certificate, made out to my Mom in my name because I was under age, arrived at the house.  Vikoa’s stock was listed on one of the smaller exchanges, so every morning at breakfast I could check the listings in the Columbus Citizen-Journal to see how my investment was doing.  For a time, Vikoa seemed to thrive and its stock went up — so much so that I decided that I should make another investment, this time in a new restaurant chain called Pizza Hut that had opened near our house and made pretty good thin crust pizza.

The Pizza Hut investment turned out well and earned a profit, but not so much for Vikoa.  Its stock plummeted — in those pre-internet days, I never found out why — and ultimately it vanished entirely from the exchange listings.  I later got another stock certificate, for some fractional interest in a different company that apparently had bought whatever was left of Vikoa, then that company also went under.  My investment had failed.

I made money on one investment and lost my shirt on the other, but I was young and didn’t mind.  My investing days were over until I started working after college and law school and considered how to plan for retirement — and then the teachings from General Business class and the specter of Vikoa resurfaced.  I decided that rather than take a chance on a single company again, I’d just invest in mutual funds, where the fund manager picks the investments and keeps track of their performance.  That’s been my practice ever since.  The Vikoa lesson was one I didn’t need to learn twice.

The Stock Market, Like Pavlov’s Dog

Today the stock market has rebounded somewhat after a few tough days, although that result could turn on a dime.

What caused the stock market to plummet the last few days?  Poor sales by large companies?  Weak economic data?  Lingering concerns about an unemployment rate that remains too high and millions of Americans giving up on job searches?

Nah.  It’s because earlier this week Ben Bernanke may have hinted that the Federal Reserve is going to tighten its prolonged loose money policy and may actually reduce the amounts of cash it has been pumping into the economy.  Of course, whether the Fed actually is going to change its policy isn’t entirely clear.

It’s sad, really.  We’ve gotten to the point where the Wall Street titans and stock market wizards have become so addicted to the manipulations wrought by the Fed’s monetary policy that the market simply responds, like Pavlov’s dog, to the Fed’s opaque pronouncements.  Ben Bernanke sounds a bell, and the market starts slobbering like Fido expecting a wet can of Alpo to splat into his food bowl.

This should be a concern for all of us, especially those of us who are trying to save for retirement.  The stock market, where so many people keep their money, has become a one-note opera.  The overriding focus is on what the Fed will do.  Actual economic performance, actual company performance, and other “fundamentals” that used to be reflected in stock prices now are overridden by the aggressive actions of the Fed.

It’s not a good thing when the stock market is so easily manipulated, and when companies become so dependent on easy money.  The fact that it is an arm of the federal government that is doing the manipulating doesn’t make it any better.