Sunday, December 9, 2012

On The Fiscal Cliff, Ignore Wall Street

As the "fiscal cliff" negotiations drag on, the media has focused on the impact going over the cliff, curb, slope, or whatever other cartographic descriptor one chooses, will have on Wall Street. You remember those folks, right? The Treasury Department handed them hundreds of billions of dollars to "rescue" themselves and they thanked the taxpayers of America by essentially going right back to the dodgy trading practices that put them on the brink of liquidation while squeezing the little guy. Yeah, them. 

Anyway, journalists discuss the Dow Jones Industrial Average (DJ or DJIA) as a convenient shorthand for "Wall Street," but outside the circles of the Business desks of most newspapers, the small universe of IB and hedge funds and some of the savvier day traders, most Americans have little understanding of what the DJIA is and why it's silly to tether ourselves to its daily fluctuation as a means of pressuring governmental officials to reach a "grand" bargain. 

The first thing you should know is that the DJ is only made up of thirty stocks - yes, you read that right, thirty stocks. And these are not just any stocks, but the bluest of blue chip corporations, with valuations in the tens of billions of dollars. Among the companies that make up the DJIA are familiar names like Coca-Cola and General Electric, McDonalds and Microsoft, ExxonMobil and Disney.  The idea that failing to reach a deal on tax rates or budgetary matters will impact the Minnesota Mining & Manufacturing Company (you may be more familiar with it as 3M, maker of the Post-It), a company founded in 1902, with $29 billion in yearly revenue and that has been a DJ member since 1976, or Procter & Gamble, which manufactures and sells everything from Tide detergent to Gillette razor blades, was added to the DJIA in 1932 and founded in 1837 (!) is asinine. 

Second, fluctuations in the market have <gasp> happened before, and because of far more destabilizing events, including Pearl Harbor, 9/11 and most recently, the collapse of Lehman Brothers, an event that threatened to cascade through the entire financial system, leading (or so we were told), to complete financial ruin, the end of Western democracy and, quite possibly, the Mayan apocalypse. Whether any of that was true or not we will never know, but what we do know is that tax rates resetting to where they were when Bill Clinton was President combined with modest current cuts in federal spending (journalists lazily report the 10 year "cost" of sequestration without noting that the year-to-year "hit" is pretty modest) might result in some short term pain, but guess what? People have had their taxes raised before. In fact, taxes go up every year, (and for some of us) quite painfully, in the form of higher property taxes, among other ways additional revenue is squeezed from citizens.  While going over the cliff/curb/slope might result in some short-term "uncertainty," the business community had about as-friendly-as-they- have-had-since-the-1920s regulatory environment and tax stability from 2001-09 and private sector hiring was close to net zero. 

Moreover, even when the DJ has been hit with huge losses, they were, relatively speaking, temporary. Consider that the DJIA, which hit a low of 6,547 on March 9, 2009 after absorbing nearly 5 million job losses in the span of six months (2008Q4/20091Q) now sits, less than 4 years later, at 13,155, a 100% bounce back from that nadir. Similarly, a crash in October 1987 dropped the DJIA to 2,156, but four years to the day later, it had risen by roughly 50% to 3,061. In other words, a temporary hit to the economy far less severe than meltdowns of the financial industry are unlikely to precipitate any long-term damage to the vaunted DJIA.

Finally, and to me, most importantly, the idea that major decisions about the future of our country should be predicated on not wanting to "offend" Wall Street is anathema. I'm fairly certain that United Technology (added to the Dow in 1939), IBM (1979) and DuPont (1935) among the other components of the Dow, are going to continue generating ungodly amounts of profit regardless of whether a deal is struck between the President and Congress before December 31st. It is far more important for the American people, and especially the middle class and those who do (and will) rely on social safety net programs in their golden years, to have their interests protected, even at the risk of a short-term hiccup in an investment vehicle that has returned, to pick one random time period, a nearly 400% return on investment over the last 20 years.  There are many important interests involved in what is happening in Washington, D.C. right now, but the health, wealth and well being of those 30 blue chip companies are not among them. 


  1. Excellent analysis. I just finished reading "Freefall" by Joseph Stiglitz. This is a recap of the whole economic crash caused by Wall Street banks and aggravated by the overly generous and blatantly incompetant responses of both the Bush and Obama administrations. It ought to be a textbook in the high schools.

  2. The DJ has become the mafia. What they are saying is "nice economy ya got would be a shame if something happened to it". Their scum.