Talking Economics – Dow at 12,000

By K. Russell Carlsson, Rogue Economist

I couldn’t get through a beer at the tavern last night without another friend or acquaintance spurting “Keith! The Dow hit an all-time high! It broke 12,000!” then asking me what it means. Therefore, I figure I should ink a column for the general public on the topic - if for no other reason than to get people out of my shorts when all I want is to drink a flippin’ beer.

So what does the Dow breaking the 12,000 mark mean? Short answer: Dick.

For all real-world economic purposes, the Dow is just a number. WARNING: Technical Terminology / Definitions Ahead! The Dow Jones Industrial Average (DJIA) is an artificial numerical gauge created with the intent to indicate general overall market health. It involves 30 blue-chip company stock prices all tossed into some unholy weighting-valuation equation which somehow vomits out this figure. Over the years, the companies included have changed, the weighting of the companies within the formula have changed, the stocks have split, etc., thus rendering the market barometer pretty much useless for long-term comparison purposes. The formula-tweaking keeps the figures close enough to be somewhat meaningful over a five-to-ten-year stretch, but with the Dow – as with any stock index - the phrase “all-time high” should always be read with air-quotes.

Another thing to keep in mind is the fact that only thirty really huge companies factor into the DJIA. The broader markets like the NASDAQ - or as I call it the NADSAQ, since it’s full of nuts - are still nowhere near their equally-meaningless “all-time highs”. (The NADSAQ closed yesterday at 2340.94, while its “all-time high” in January 2000 was 5048.62.) Thus, what Dow 12000 means at this point is thirty big companies have generally higher stock prices than they did six years ago.

How much higher you may ask? Not enough to bedew your Underoos over. The Dow hit its previous record in January 2000 at 11750.28. After six-plus years, yesterday’s close was 12011.73 – a difference of 261.45. To compare, if you were to put $11750.28 in a savings account in January 2000 that paid an abhorrently shitty 1% interest per year, that deposit would have been worth $12566.59 this morning – an increase of $816.31, triple that of the DJIA.

I can hear it: “But you’re talking about money, Keith, and we’re talking stock prices - they're totally different!” I acknowledge your complaint and shall respond in three parts.

(1) If you can buy stocks on the open market with something other than money, I’m all ears. Last I checked, E*Trade didn’t accept goats as a deposit on trading accounts.

(2) Let me tell you a dirty little secret about stock prices. Everybody’s got a different method of valuing stock prices. Even the simplest textbook share-value calculation method involves so much math that you’d probably start hitting yourself in the head with your mouse halfway through it just to get some sensation to return to your brains. Those goofball day-trading seminar fluffers use their own methods, professional analysts have *their* own methods, and monkeys throw turds at the Wall Street Journal. All of the above methods are equally accurate in predicting the actual market price of a stock. The facts-on-the-ground formula to calculate a stock’s value is the following: 40% current financial performance, 35% projected performance over the next ten years, 25% financial media bullshit. Considering that market players are relying on the financial media more and more for their forecasts (thus combining the last two factors), many a portfolio out there have a majority interest in the livestock and fertilizer market sectors, and *those* are the assholes moving - thereby determining - stock prices.

(3) Stuff your complaints. You asked for my insight, remember? I just want to watch the hockey game and drink my beer in my off-hours, dammit. Do you go to your bartender’s house in his off-hours and ask him to mix you up a Slippery Nipple? Didn’t think so… be glad I’m giving this info to you for free. Also be glad you remembered to call me Keith, or I’d be giving you something else for free - a marked increase in your Pow-Johnson Industrial Anguish.